The Current Crisis
Interesting Times Are Here Again
Doubly so if Barack Obama follows the lead of Gordon Brown.
WASHINGTON — Somewhere in his very interesting Journals 1952-2000, the late historian, Arthur M. Schlesinger, Jr. erupts with the observation that history is unfailingly interesting. Over the years I delighted in disagreeing with Schlesinger, but on this I am in hearty accord. History is always interesting. Even when not much is happening, history is interesting.
Today there is a lot happening and observing history now is more interesting than usual, but even a few years back when sophisticates were droning on about “globalization” history caught my attention. The year was 2003, and I was sitting in on symposia at the Yale Law School. A recurring topic was “globalization,” and most of the soi disant liberal intellects were for it. As globalization seemed to be a capitalist tool, I was amazed by their sanguine acceptance of it. It was sooo materialistic. Did the assembled sophisticates not realize that there might be a downside to globalization? I heard few caveats.
Well, the present globalized economic crisis suggests that there has indeed been a downside, namely the worldwide freeze on credit. It has led to recession in many of the world’s leading economies. What will be done about it? Will the incoming American president know how to take action?
President-elect Barack Obama is a man of many firsts, some of them auspicious. One of his firsts, however, is not so auspicious. Mr. Obama is America’s first motivational speaker to be elected to the presidency. He has absolutely no executive experience, though during the recent presidential campaign he insisted that running a political campaign was an executive position. Well, if that be the case, he has at the age of 47 only really run one competitive political campaign, his race for the presidency. His 2004 U.S. Senate race was against a stand-in Republican candidate, Alan Keyes, a sometime radio host with no roots in Illinois politics and no prospects for victory. State senator Obama’s seasoned Republican opponent, Jack Ryan, had been forced to withdraw owing to a sordid scandal. In earlier state senate campaigns, starting in 1995, Mr. Obama had no competition at all. And his effort to unseat Congressman Bobby Rush in 2000 was an abject failure.
Naturally our country’s first motivational speaker has no experience with economic policy. All that we do know about him is that he seems to be a man of the left, a community organizer whose answer to economic setbacks is government largesse. Economic growth, he says, “comes from the bottom up,” which is not very reassuring when those at the bottom are broke. Who from Mr. Obama’s leftish background might serve as a model to him in this time of globalized economic crisis?
My candidate is Britain’s Labourite prime minister, Gordon Brown. He has been a leader — some might say the leader in pointing the way to worldwide economic recovery. Brown recognizes that the major problem facing the world is a credit freeze. Banks and other lending institutions need liquidity to resume lending.
Prefatory to last weekend’s G20 summit Brown had taken the lead in persuading other countries, specifically the United States, to do something to inject capital directly into banks and other lending institutions. With that capital they can resume lending to consumers and to businesses so global growth can resume. Brown, who was the Chancellor of the Exchequer (comparable to our Secretary of the Treasury) under Prime Minister Tony Blair, has learned a great deal about international finance. Unlike the wrongheaded measures taken in the 1930s to deal with economic collapse, Brown’s prescriptions recognize that the present problems demand globally coordinated fiscal and monetary policies. He sees the need to help banks cushion their losses and amass cash reserves to resume lending and economic expansion. Such has been Brown’s example as leader of the UK’s Labour government that there is reason to believe President Obama will follow his exhortations as reiterated at the recent G20 summit.
Yet here in the United States there is another policy the Obama Administration might adopt. Suspend the accounting policy of “mark to market.” Because of this policy banks and lending institutions have had to mark down their assets, thus devaluing on their books the capital that they have available to lend out. Many of these institutions have healthy cash flows. Yet because they are faced with (hopefully temporarily) devalued assets they are hindered from making loans, and the consequence is the lending freeze that has put the economy into recession.
It will be interesting to see in the months ahead how the new government endeavors to get the economy going again, but then history is always interesting — right, Professor Schlesinger?
About the Author
R. Emmett Tyrrell, Jr. is the founder and editor in chief of The American Spectator. He is the author of The Death of Liberalism, published by Thomas Nelson Inc. His previous books include the New York Times bestseller Boy Clinton: the Political Biography; The Impeachment of William Jefferson Clinton; The Liberal Crack-Up; The Conservative Crack-Up; Public Nuisances; The Future that Doesn’t Work: Social Democracy’s Failure in Britain; Madame Hillary: The Dark Road to the White House; The Clinton Crack-Up; and After the Hangover: The Conservatives’ Road to Recovery.
Letter to the Editor View all comments (16) | Leave a comment
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JC Allen| 11.20.08 @ 8:06AM
My question is WHO will be able to get a loan without a sufficient form of any employment? It's great to pump the banks up, but all we're doing is flushing it down the proverbial toilet which is fitting since yesterday was World Toilet Day...
M Beeman| 11.20.08 @ 8:57AM
Absolutely right about Mark to Market!!!!! I'm an accountant, and have been helping to lead companies for many years as their top financial brain. One comment which I have heard many times in my career goes something like this, "Well, you can't let the accountants run your company." What is meant by this is that, typically, accountants possess a very limited view of the business universe. Their prescriptions can sometimes hinder a company's progress, and, while their ideas should be taken very seriously, they should be a part of a more complete package of information informing business decisions.
Here's what has happened in this crisis: everyone borrows money using some type of collateral base. When you buy a house, you are using the value of the house as collateral for the loan (mortgage) you recieve from the bank, so that you can purchase the house. Once the purchase is complete, and over time, you own a portion of the house, while the bank owns the rest, really. Banks typically bundle their ownership of many houses together, then they, in turn, borrow money from other institutions, based on the collateral that they own (your's and other's houses). When the value of your house drops, due to the accountants' new rule to record assets at market value (Mark to Market), rather than at traditional book value, the banks have a problem. They have already borrowed, say, 85% of the total value of the houses they own from someone else, so that they can lend out more money to the guy who wants to buy your neighbor's house. But, when the value of the collateral base decreases (market value drops), they now have to pay back to their lender some of what they have borrowed, because their loan agreement restricts them to borrowing a maximum of 85% against their collateral base. This situation has caused the international credit problems we face today.
The answer to the problem in the U.S.? As Mr. Tyrell says, get the accountants out of the way. Remove the Mark to Market rule, which was enacted after the Enron debacle, and everyone's collateral base immediately restores to what it was before the drop in value, and banks don't have to pay back anything to their lenders.
This action of removing the Mark to Market rule would also provide more market stability, as well. It's very difficult for anyone to predict what market value will be in the future. Will the value of your house continue to fall, or will it rise in the future? Returning to traditional book value of assets puts some predictability back in the market, as it's fairly simple to predict the future book value of assets. This would bring market stability back.
Either the Financial Accounting Standards Board, who enacted the Mark to Market rule, should rescind the rule immediately, or Congress should pass a law ordering the rule rescinded.
Gazinya| 11.20.08 @ 10:14AM
I am somewhat perplexed by Mr. Tyrells' and Mr. Beemans' article and comment. Before the 'Bailout' I first heard of the 'Mark to Market' on television. I couldn't understand why that was in place to begin with but I just figured that the first thing to do was to axe the 'MtM' rule. Now I'm reading that the 'MtM' is still in place. Geez. Another thing I don't get but to me anyway, I would have thought to 'help main street' the banks would be forced to cap credit card intrest to 6% to allow holders to pay down debt. Keep maximums low for low wage earners. Discontinue cards to people until the debt to earnings levels out. Am I being too simple?
Terrence O'Donnell| 11.20.08 @ 1:44PM
I have been employed in the securities industry for over thirty years and understand "Mark to Market." It's also easy to understand why this rule was detrimental to bank balance sheets when enacted after hundreds of years without it. Bankers did not prepare for the current eventuality because they had no experience with this to craft their risk plans. The real question remaining, though, is how realistic is it to remove the requirement? Why wouldn't a bank creditor want to know 'where the bodies are buried?' Methinks it's too late to unring this bell.
Marc Jeric| 11.20.08 @ 4:10PM
Mark to market? If the bank is forced to do so, how come the home owner is not allowed to do so with the value of his home mortgage in order to reduce his monthly payments?
Daphne Kenward| 11.20.08 @ 9:18PM
Gordon is just another Puppet in the system to fool the masses. People need to take charge of their own life cut up those credit cards chuck them in the bin change their names move house or better still leave the country.
The most these crooks can hope for is keep frightening people using the CIA and who ever else they can to try and start a War, after all they will have a huge number of Unemployed people to send to war, save paying them unemployment benefits. It's over the game is up and the worthless dollar printed at will by a crooked cartel of people from Europe to destroy the economy, the Chinese is left stranded with a bundle of worthless currencies the best they can do is use it to buy up prime properties in America.
Google secret Rulers of the world 1-29 you may find out what is going on.
Jason | 11.21.08 @ 2:47AM
Obama's inexperience and ignorance are compounded by the fact that his concern for the health of the economy is secondary to his interest in advancing his leftist agenda.
http://rightklik.blogspot.com/
bluecollarbytes| 11.21.08 @ 10:21PM
I see "hope" in some of Mr. Tyrrell's words. Maybe Obama won't be as bad as he could be.