If ever someone had license to say 'I Told You So'…
Have you every heard of mark-to-market or fair value accounting? Me neither. But it amounts to this: a bank's assets should be marked down if they lose value. Seems reasonable, but there is a flaw when applying this logic to the mortgage market because it sometimes means writing down assets even when the debt is good.
The policy turned out to be so destructive in the past that Roosevelt suspended it following the Wall Street Crash. It was only in 2007 that economic wizard George W.Bush resurrected it.
To understand how this mechanism destroyed the world yet again, read Forbes' fascinating article in the WSJ.
The lessons of mark-to-market accounting weren't the only ones ignored in our recent race towards fiscal apocalypse.
In 1933 the U.S. Congress passed the Banking Act, known as the Glass-Steagall Act in order to prevent the kind of speculative bubble that caused the Wall Street Crash and the Great Depression.
The Act forced a separation of banks based on their business type (commercial or investment) and precluded bank holding companies from owning other financial institutions. The idea was to insulate investments from other kinds of financial risks.
Following its repeal in 1999, banks were able to affiliate with insurance companies and securities concerns, thus causing in large part the unholy mess in which we now find ourselves.
A contemporary New York Times article induces the modern reader to place a large palm over their face in shame. One of the very few dissenting voices of the time had this to say:
"I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010," said Senator Byron L. Dorgan, Democrat of North Dakota. [November 1999]
And here we are, ten years later.
Senator Dorgan, whatever his views on other issues, when it comes to this one, can rightly stick a fat cigar in his mouth, plant his feet on the desk, pause for effect with a match in his hand and say:
"Well, I told ya so, jackasses!"