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At the annual meeting of American Economists, most everyone refused to admit their failures to prepare or warn about the second worst crisis of the century.
I could find no shame in the halls of the San Francisco Hilton, the location at the annual meeting of American economists. Mainstream economists from major universities dominate the meetings, and some of them are the anointed cream of the crop, including former Clinton, Bush and even Reagan advisers.
There was no session on the schedule about how the vast majority of economists should deal with their failure to anticipate or even seriously warn about the possibility that the second worst economic crisis of the last hundred years was imminent.
“No one questioned their contribution to the current frightening state of affairs, no one humbled by events.”
I heard no calls to reform educational curricula because of a crisis so threatening and surprising that it undermines, at least if the academicians were honest, the key assumptions of the economic theory currently being taught.
There were no sessions about why the profession was not up in arms about the deregulation of so sensitive a sector as finance. They are quick to oppose anything that undermines free trade, by contrast, and have had substantial influence doing just that.
The sessions dedicated to what caused the crisis were filled, even those few sessions led by radical economists, who never saw turnouts for their events like the ones they just got. But no one was accepting any responsibility.
I found no one fundamentally changing his or her mind about the value of economics, economists, or their own work. No one questioned their contribution to the current frightening state of affairs, no one humbled by events.
Maybe I missed it all. There were hundreds of sessions. I asked others. They hadn’t heard any mea culpas, either.
Here’s what mainstream economists overwhelmingly—with only a few exceptions—ignored or believed was acceptable and even healthy economic behavior that contributed rather than detracted from prosperity:
• Wall Streeters paid themselves enormous bonuses based on rising market values of investments, not on revenues actually made. The bonus system has been based on the preposterous assumption that the value of an investment set by traders in financial markets rationally reflects the true future value of that asset almost all the time.
• Investment banks took on $25 to $40 of debt for every dollar of capital in order to maximize their returns. It was assumed that these smart people wouldn’t do this if they didn’t know how to manage their risk.
• Financial firms that were not regulated or overseen by the Federal Reserve or any other Washington watchdog agency lent four out of five dollars of lending to business and consumers. Economists as a group raised no concern and in truth went along without serious questioning.
• Average Americans took on record amounts of debt compared to incomes, which was said to be just fine because it was supported by high stock prices and, when that bubble burst, by high house prices.
• The earnings of financial institutions rose to more than one-third of all American profits. This only proved how valuable finance was to the economy and that manufacturing was simply old hat.
• Hedge funds could justifiably charge two percent of assets each year and take 10 to 20 percent of profits because they were excellent at finding anomalies in the otherwise efficient market. Meanwhile, economists assumed there was no manipulation or inside information involved, of course—or undue risk taking. Furthermore, economists believed this sector required no special regulation because it only had sophisticated and rich people as investors like those who participated in Bernard Madoff’s funds.
• House prices reached record levels compared to incomes. But this was because of innovations in finance that reduced interest rates substantially. That, after all, is why the Wall Street MBAs who made these innovations, like complex mortgage-backed obligations and credit default swaps, supposedly deserved all that money.
• Financial deregulation freed MBAs to make the brilliant technical innovations. I could find no single mainstream academic economist who criticized financial deregulation in a systematic way since the 1990s until only very recently. Two veteran Wall Street economists, Henry Kaufman and Al Wojnilower, were partial exceptions.
• A key economic price like the oil price, which rose to $145 a barrel in August and has reached about $40 today, was supposedly not unduly influenced by speculators. Markets are usually fair and, to repeat, correctly anticipate the future, right?
• A high dollar, as long as it is set freely in the currency markets, is just fine. It merely reflects the strength of the U.S. economy. No mere human mechanism could set a more economically efficient price.
• The record trade deficit, caused by the high dollar, was tolerable because overseas investors invested in America with their excess funds. Their confidence in America was again further indication the economy was strong, despite the ever-shrinking manufacturing sector.
• Low rates of unemployment were proof the American economic model was working. In light of this, stagnant or falling wages in the 2000s was not an indication of economic failure—just a reflection of American competitiveness.
• The Federal Reserve can always save the day, as Milton Friedman taught us. Just add more reserves and believe in Ben Bernanke, whose mentor was Friedman. So now Bernanke is adding reserves far beyond anyone’s imagination, just like Friedman said he should do, and the economy is in ever-deeper trouble.
Of course, there were objections to these trends by some academic economists. Robert Shiller of Yale was upset both about high stock prices and then high housing prices. Dean Baker, co-director of the Center for Economic and Policy Research in Washington, was long vociferous about over-speculation in housing. Nouriel Roubini of the NYU Business School warned about financial collapse, as did Jim Crotty of the University of Massachusetts at Amherst, who insisted, correctly, that Wall Street traders and bankers mispriced risk. There were a handful of Wall Street analysts who were concerned and some made money by betting the other way.
But the exceptions were partial at best, and they prove the rule. What most economists can't seem to acknowledge is that they have been overcome by free market ideology over the past thirty years. Such ideology is especially beneficial to wealthy vested interests. But economists are purportedly dedicated to objective empirical and statistical analysis. Ideology has little part in the work of these serious empiricists, but surely there was no buttering up of the rich and powerful that provide jobs and grants.
Only with the near collapse of the economy are economists changing their tunes slightly, accepting the need for regulation and Keynesian stimulus. But they will probably not change their deepest assumptions about how markets work, or about when they should and should not be given free reign. They will make no bigger place for government than to adjust a little more for “market failures.” They will go back to tinkering with those models, not transforming them, and even make them fit the current crisis without blinking an eye.
As I say, at least they now believe in Keynesian stimulus and are a little more skeptical of Friedmanism. Be thankful for small changes, I suppose. A few will fight for a larger shift. Among mainstreamers Shiller and George Akerlof at Berkeley are leading the charge. A lot of pertinent and important ideas are percolating among the liberal fringe. If there were some humility at the San Francisco gathering I’d be more optimistic these voices could prevail. Government has a central place in the economy, after all, as the Obama administration is about to demonstrate. It is not merely an option of last resort. In general—and I think the above examples of dereliction of duty make it just fine to generalize—mainstream economists are a long way from getting that fundamental idea.
Jeff Madrick is a contributor to The New York Review of Books and a former economics columnist for The New York Times. He is editor of Challenge Magazine, visiting professor of humanities at The Cooper Union, and senior fellow at the Schwartz Center for Economic Policy Analysis, The New School. He is the author of several books including Taking America (Bantam), and The End of Affluence (Random House). His latest book is The Case for Big Government (Princeton University Press).
Tracy Quan's latest novel is Diary of a Jetsetting Call Girl, set in Provence and praised in The Nation as a "deft account of occupational rigors and anxieties before the crash." Tracy's debut, Diary of a Manhattan Call Girl, and the sequel, Diary of a Married Call Girl, are international bestsellers. A regular columnist for The Guardian, she has written for many publications including Cosmopolitan, The Financial Times, and The New York Times.
Joe Mathews is a journalist, an Irvine senior fellow at the New America Foundation, and a contributing writer at the Los Angeles Times. He previously served as Justice Department reporter for the Wall Street Journal and as a city desk reporter at the Baltimore Sun. He is the author of The People’s Machine: Arnold Schwarzenegger and the Rise of Blockbuster Democracy.
Gerald Posner is the award-winning author of 10 investigative nonfiction bestsellers, ranging from political assassinations, to Nazi war criminals, to 9/11, to terrorism (www.posner.com). Posner lives in Miami Beach with his wife, the author Trisha Posner.
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Amanda Fortini has written for The New Yorker, Slate, Elle, and New York, among other publications. She lives in Los Angeles.
Jeff Madrick is a contributor to the New York Review of Books and a former economics columnist for the New York Times. He is editor of Challenge Magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.
Jeff Madrick is a contributor to the New York Review of Books and a former economics columnist for the New York Times. He is editor of Challenge Magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.
Jeff Madrick is a contributor to the New York Review of Books and a former economics columnist for the New York Times. He is editor of Challenge Magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.
by Jeff Madrick
Jeff Madrick is a contributor to the New York Review of Books and a former economics columnist for the New York Times. He is editor of Challenge Magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.
This essay is absolutely ridiculous. If a bridge collapses, does it make sense to blame physics professors or the engineers who built the bridge? The analogy applies perfectly here, and if the author doesn't understand the difference between economics professors and economics practitioners then he shouldn't be writing about economics.
So the answer is stronger central government? What's next after that, five-year plans? See you at the tractor factory, comrades.
Perfect piece as far as I'm concerned. It does explain a few things. I remember Reading Annual Reports as a kid and they were pretty straightforward. The double speak that appeared right around 1984, interestingly enough, is in fact what caused Markets to derail. Annual Reports became Cheerleading Shows and provided very little 'information' and instead a great deal of speculation about the 'future' of their company. When Congress tried to reign in these ideas, and others, with Sarbanes-Oxley, Businesses rebelled 'en force.
Annual Reports have been a waste of time for so many years, I simply ask not to receive them, or if they arrive by error, they go straight into the wastebasket. This is a very sorry state of affairs to be sure and a clear sign of our need for Reform.
What amazes me about the Economics Profession is that they know so little. Can anyone in the economics profession tell me exactly 'where' CDS's are traded? If that market ever existed, where is it publically traded? Who the market maker is in these Securities? It might be important to know something like that.
Lastly, we have a rabble of 'professionals' out there in fields like Law Enforcement, Economics, Courts, Accountants, even Football Players who shoot 'hisself'. The problem simply being that they are a complete disgrace and seem never to know it themselves. Kind of like Paris Hilton. I am glad to see that all of the nonesense is ending and I am afraid that, true to form, nothing less than a full blown Economic Depression is what is needed to instill some sense of propriety. I just hope that it doesn't end in another World War, like it did the last two times these things happened. People do have to eat, or did someone forget about their neighbor again why they were screaming there is no God?
There is a huge jump from what is being proposed by Jeff or the new administration and 5 year plans, so I suspect that is not "next". If the stimulus package doesn't work at least that is equivalent in effect to the current administrations dole of taxpayers money to the rich which certainly isn't working.
By the way Jeff, I'd like to add another major mistake that I'm sure the current batch of economists promulgated and that is; replacing me with someone that would work for half the salary in India or Shanghai. Didn't anyone think that my lack of a job might impact our local economy negatively? I'm not sure what the long term thinking was that said removing all decent paying jobs from the US would be good for Americans.
By the way, I suspect that the reason the batch of economists that you interviewed and observed were probably in shock and therefore not able to recriminate themselves. Supposedly economists are a staid and sober bunch that progress very slowly and therefore the why's and wherefores that would point a few fingers and possibly solutions haven't caught up to them just yet. You have to imagine what it must be like to have the burden of the current financial collapse on your shoulders. I'm sure many of them must feel like snails that have been squashed by a big rock.
Also, in an effort to be more of "the man" economists may have taken the position that their theories and essays are important and should be used to drive financial regulation (or the lack thereof) and innovation. So, along with the authority and power, comes the responsibility and that takes us back to the snail under the rock image.
Of course, and this is the crux of the matter, their theories are all good and possibly useful if used by careful, well intended people to benefit all of us. What actually happened is that the theories were cherry picked by people in power to support personal agendas that may not have included benefitting the rest of us. I can't say that this is unusual, to paraphrase a cliche: if you don't study history you are bound to repeat it. The misuse and abuse of theories and statistics has been a passtime of those in power for a long time. Maybe it's time that the economists started another branch studying how economic theory can be abused to the benefit of some and detriment of others. There are certainly many practitioners to be studied and probably even some simple additional economic theory abuse theories to be developed that could be tested out (hopefully prior to mass adoption by the financial and political communities).
Anyway, several decades ago we decided to roll the dice with trickle down economics, and now we are seeing the result of over indulgence in that single theory. I can only hope that the current batch of economists and politicians will pick another theory and possibly a much more conservative approach to applying it. Oh, yes, transparency would be nice too.
Perhaps many too many leaders of the family of humanity today live arrogantly and greedily in our planetary home. They appear to take pride in their unsustainable behavior. Certainly, we will "have our cake and eat it too," they say. They own fleets of cars, fly around in thousands of private jets, live in McMansions, exchange secret handshakes, frequent exclusive clubs and distant hideouts, and risk nothing of value. They will live long, large and free, so they say. Please do not bother them with the problems of the world. They choose not to hear, see or speak of them. They hold much of the world's wealth as well as the extraordinary political/military power great wealth purchases. If left to their own devices, they will continue to self-righteously exercise their 'inalienable rights' to conspicuously consume whatever they desire; to recklessly dissipate Earth's resources and expand economic globalization unto every corner of our natural world and, guess what, beyond; to carelessly consent to the unbridled global growth of human numbers so that where there are now 6.7 billion people, by 2050 we will have 9 billion members of the human family and, guess what, even more people, perhaps billions more beyond 2050, if that is what they wish. They are the self-proclaimed Masters of the Universe. They enjoy freedom and living without regard to human limits and Earth's limitations. They adamantly eschew any talk of the personal responsibilities that come with the exercise of personal freedoms or any discussion of the existence of biophysical boundaries. They deny good science or consider it junk. Climate change is a hoax to them.
Many too many of our leaders and all of the self-proclaimed Masters of the Universe among us choose to deny the existence of "limits to growth", even though abundant scientific evidence of the existence of such boundaries is available. Please understand that these 'Masters' do not want anyone presenting them with scientific evidence that they could be living unsustainably in an artificially designed, temporary world....a manmade world filling up with gigantic enterprises, virtual mountains of material possessions, ill-gotten gains, phony profits and filthy lucre.
Scientists appear not to have found adequate ways of communicating to the family of humanity what people somehow need to hear, see and understand: the rapacious dissipation of Earth's limited resources, the relentless degradation of the planet's frangible environment, and the increasing risk of destroying Earth as a fit place for human habitation in our time, when taken together, appear to be proceeding at breakneck speed now, moving toward the precipitation of a catastrophic ecological wreckage of some sort.... unless, as a matter of course, the world's colossal, artificially designed, soon to become patently unsustainable global economy continues to speed headlong toward the monolithic 'wall' called "unsustainability" at which point the unbridled expansion of the runaway global economy crashes before Earth's ecology is collapsed.
Who knows, perhaps we can still realistically and hopefully hold onto the expectation that behavioral changes by many members of the human community will encourage others, even the Masters of the Universe, to go forward from this time and place toward the achievement of new goals: restricted and "right-sized" rather than unbridled and ever larger-scale production, restrained rather than outrageous per human over-consumption and the regulation of human population growth..... changes that save both the human economy and God's Creation for our children and coming generations.
Steven Earl Salmony
AWAREness Campaign on The Human Population,
established 2001
http://sustainabilitysoutheast.org/index.php
The greatest bit of economic nonsense of the last fifty years in economics: that there is such a thing as a free market. It's not the fact of government participation that matters; its how the government participates.
We listened too long to Milton Friedman and not all to Karl Polanyi.
Why aren't professional economists hanging their heads in shame, indeed? I've long thought of economics as a severely flawed discipline, ever since I read the IPCC report about global warming by that British economist (blanking on his name right now) who called global climate disruption "the biggest market failure in history," or words along those lines. Since then I have discovered the neonatal field called "ecological economics." Ecological economics is a movement that seeks to have professional economists take into account the real-world relationships between money, people, materials, energy, work, and natural resources. Ecological economics attempts to assign value to things like rain forests (what is clean air worth to you?), wetlands, (clean water?), forests (topsoil, lack of landslides?), and so on, in order that we can have a true accounting of the costs of doing business on this earth. For example, a classical economist will tell you that by opening a factory in location X, you will create y number of jobs and z amount of tax renevue--a net gain for the local economy, right? But an ecological economist will ask, what is there right now? A field, a forest? What will we lose if we build the factory? Furthermore, what outputs will the factory create? Who will pay for clean-up of any pollution that happens? Basically, it's an attempt to more accurately represent reality.
I don't know whether ecological economics could have helped foresee this current crisis, but I do believe that the fundamental mindset is less likely to be co-opted by the interests of the filthy rich. Ecological economics will show that the current system is untenable; it is a linear system, and we live in a closed system (excepting, of course, the regular inputs of energy from the sun, which is really no exception at all since it is the foundation of all life). That fact is inescapable. We might think we've jumped out of the restrictions that limit all other forms of life on this planet, but we should wait a couple generations before we make the final determination.
Just a little rebuttal here...
Mikestain wrote:
"This essay is absolutely ridiculous. If a bridge collapses, does it make sense to blame physics professors or the engineers who built the bridge? The analogy applies perfectly here, and if the author doesn't understand the difference between economics professors and economics practitioners then he shouldn't be writing about economics."
The crucial question to ask here is, "Were the engineers who built the bridge that collapsed applying the lessons they learned from their physics professors correctly or incorrectly?" If they were applying their lessons correctly, then you should absolutely take up the issue with their professors, and that is perfectly analogous with the situation at hand.
Furthermore, I believe that if economics professors incorporated the laws of ecology into their models, they would have a much more accurate representation of reality, much more testable models, much more robust powers of prediction, etc. They could apply the laws of ecology, much the same way bridge engineers apply the laws of physics.
This is one of the most radical suggestions that I have ever heard. Change the curriculum for Economics 101 and 102? Too many intelligent young people say "I don't understand economics". What a joke. They just don't understand the relevance of neo-classical malarkey plus math. The best thing that could happen to our universities is to get a more diverse economic curriculum. Has anyone read Hodgkinson's "A New Model for the Economy" textbook?
I just want to say I joined this sight when it first popped up and I really like it. But Banjo1 has made comments on all of these articles and they are negative, republican talking points. If he just go around inciting people, how come I can't call him a D bag? I mean didn't the republicans go extinct yet? Or I guess you can't go extinct if you don't believe in evolution.
Banjo1 tells it like it is in this blog....my first one....I haven't read his others. However liberals usually have a time dealing with time tested facts. They always want to depend on "the government" as the answer. To be informed go to fee.org and read the "Myths of Great Depression" for facts.
mikestrain said...
This essay is absolutely ridiculous. If a bridge collapses, does it make sense to blame physics professors or the engineers who built the bridge? The analogy applies perfectly here, and if the author doesn't understand the difference between economics professors and economics practitioners then he shouldn't be writing about economics.
Thanks dude, you totally proved the author's point, lol. There is a huge difference between the laws of physics and the laws of economics. The laws of physics are set forth by the universe itself and codified in the behavior of every unit of matter and energy. The laws of economics are set forth by man, a fallible and very limited creature. The author is commenting on the arrogance of the economists who fail to even consider that their perfect theories and observations may not be quite so perfect. No one is saying that this crash invalidates the entire discipline of economics but it does suggest that there may be some tweaking that needs to be done. After all, the laws of physics prohibit matter-less mass but apparently the laws of economics completely allow value-less assets.
I have been asking this question for years, being acquainted with business graduates who espouse philosophies that fail to take into account the realities of the market and real people's lives.
IMHO business schools need to take some responsibility for the subsequent actions of their pupils. They are merely the symptom of the underlying failed economic theories.
To fail to incorporate reality into a theory is to render it inoperative, something only too well borne out by our current financial crises.
It's not just dollars, folks.
People actually are part of the bottom line also.
Since at least the Great Depression the field of economics has been a tug of war between Keynesians and Classicists, the Keynesians having dominated for perhaps the first 40 years and the Classicists for the other half. Each fought the conventions of their day and because they were right in their time assumed their policy perscriptions would always be correct. Now we have come full circle and one again a younger generation of Keynesian economists is rising through the ranks fighting against the (now) stale ideas of the Classicists. I suppose we are doomed to repeat this pattern of a rising and declining dominance of opposing but interdependent schools of thought every 80 years or so.
Among the Classicists, at least Feldstein and Greenspan seem capable of reexamining their convictions. Greg Mankiw however is still pushing supply side solutions to a demand side problem. In the New York Times recently he seemingly intentionally missinterpreted the implications of a working paper by Christina Romer to push his now anachronistic policy prescriptions. He seems as unreflective as the president he once advised.
It is the accounting system that failed us, I think.
The money appears to be going into paying off the liability as the value or cost of it, depending on what side of the balance sheet you have a stake in, is increasing by credit default swap betting.
This will be effecting our future, at a time, when the president is assuring everyone that we won't get screwed again by banks, the way we were, it appears we are getting screwed by banks more now than before, even, while Obama speaks, by using this accounting lingo which can lead to accusations of being incoherent.
Assets = Liabilities - Equity, so do bad Assets mean, bad betting practice related to someone else's liability?
So what does a clean balance sheet mean? No liabilities that can be bet on through asset default swaps?
How much is this bail out money going into paying off liability, before the cost of liability increases through the betting on credit default swaps?
And AIG, and the role of betting on credit default swaps, is this what is called bad assets? Bets on liabilities that have not defaulted yet.
And now if GM defaults, to clean up its balance sheet, what role does the credit default swaps take, do they grow in monumental proportions, and on whose balance sheet?
And for example, is GM's liability part of Aig's bad assets.
If Obama is bailing out GM, than Aig's problem might get worse, if that is the case, this may explain why they might let them default, forcing them into chapter 11 proceedings, to get a clean balance sheet for GM, and the gain on the "bad" credit related to asset default swaps?
So whose income statement gets to claim this gain? I know it is not mine :(.
I meant forcing them into chapter 11 proceedings, to get a clean balance sheet for GM, and the gain on the "bad" credit related to asset default swaps for AIG?
Even with Madoff, we were relying on an Accountant to audit the funds properly. Enron the same thing, of course in Enron's case they had huge accounting firms, and their issue was exploiting ESO's.
Again it was the lack of accounting that failed us.
America was built on building products, not on creating a casino style credit default swap betting strategy, based on great companies going broke.
What did they think was going to happen?
Or another scenario, AIG, and the role of betting on credit default swaps, that don't default, while someone, maybe banks betting they will default, or diversifying their risk, and giving the risk to AIG, and maybe they maybe the clean balance sheet mean, this debt paid for, but without the added increase caused by betting on failure.
This is not economics anyway, which is my point, it is I guess at one point, a way companies were managing their risk, and then turned into speculation, maybe the oil derivatives went crazy, as the price of oil went up, to the point where people could not pay for gas for gas guzzlers, which GM is famous for.
So the derivative market and the credit default swap market, reacted to war related risks, they were not designed to react to, possibly with unintended results.
So the demand (ok economics does play a role of course) for these things made them more expensive, and the risk was probably very high, not just to the lender but to the debtor.
Thus a collapse, as more was being taken out than being put in, that is accounting.
I meant: and maybe the clean balance sheet means, this debt is paid for, through a fixed rate, without the added risk of the rate or cost of capital increasing caused by betting on failure through the increasing demand of the asset default swap products.
What did they think was going to happen?
Financial behaviour, is what goes on on the Balance Sheet.
I think one problem is how finance and accounting are separated. They are separate degrees, most big companies have accounting and finance departments on different floors, and one making transactions, the other one is accounting for them, while they all say they care about the client, the reality is the market rules, which is assumed to be efficient, so the mark to market rule, in theory was not supposed to be harmful. But it is possible that that rule was making it easier to short bank stock, where there was more profit from betting on failure than on success. So what did they think was going to happen?
[Take the case of the Federal Home Loan Bank of Atlanta. Following the mark-to-market rules, it wrote down the value of its portfolio of mortgage-backed securities by $87.4 million in last year's third quarter. Its actual projected loss on the securities: $44,000. For the fourth quarter the bank recorded a further $98.7 million loss on the securities.
That result makes no sense when the bank doesn't trade such assets. However, if the current market value declines significantly and stays down for an extended period of time -- a condition known as other-than-temporarily-impaired -- mark-to- market has been required, a bank spokesman said.
A writedown might still be required under the changes FASB approved yesterday. Yet auditors can now use "significant professional judgment" when valuing illiquid securities. That's what they should have been allowed to do all along.
Cash Flow
The change will make it harder for accountants to continue to protect themselves from lawsuits by using some trade, no matter at what low price, to determine a security's value. ..
...FASB wisely backed away from a tentative proposal to allow auditors to assume that limited trades in an inactive market were always distressed sales. That would have gone too far.
Now accountants are supposed to use their judgment in assessing the meaning of such trades. That's a big improvement over just using the last transaction price, as many auditors have been doing.
Recovering Writedowns
Now FASB has to deal with how banks deal with recoveries of previous writedowns due to other-than-temporary-impairment losses when there's evidence that loss is no longer there.
A March 27 letter sent jointly by the five federal regulators of financial institutions -- the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corp., the National Credit Union Association and the Office of Thrift Supervision -- urged FASB to add such a recovery to current earnings.
Since the losses were subtracted from earnings, that would be an equitable way for FASB to go -- and soon. ] excerpted from http://www.bloomberg.com/apps/news?pid=20601039&sid=ajc25z7IOrTk&refer=home .
I don't know economists were supposed to know how to predict this crash, when economic models assume efficiency and depend on full disclosure, at a time when all the rules were changing.
It seems to me that these financial product, have been manipulated, possibly inadvertently, to deflate, even degrade the price of stock, making it profitable to bet on stock's failure and not profitable to bet on it's success.
So what did they think was going to happen, the stock price possibly responded to the demand for products which were creating profit based on failure leading to betting down stock price of financials.
They all say it is about the client, but it is really about the market, while the client appears to be getting sc--wed, by the accounting process. Sort of like the way banks charge unfair fees for not having any money left, and the fee obviously act as the nails on the coffin, and of course blame the client instead of the process which is scr--ing the client.
[ "This latest piece of unsettling news heightens our concern that the current management team may not be able to successfully navigate this storm," Catherine Seifert, an insurance analyst at Standard & Poor's Equity Research, wrote in a note to clients.
"Longer term, we see value in the AIG franchise, but we expect current turmoil to limit upside in the shares and we would not add to positions," she added, keeping her hold recommendation on the stock.
A lot of AIG's problems are centered on collateralized debt obligations, or CDOs, which are investment products that are partly backed by mortgage securities. As house prices have fallen and delinquencies and foreclosures surged, the market value of many CDOs dropped sharply. ] http://209.85.173.132/search?q=cache:HeS0aM9jUC4J:www.marketwatch.com/news/ story/sec-reportedly-probing-aig-over/story.aspx%3Fguid%3D%257B269259F5-610 B-46AA-8D84-17F71D5830B4%257D sec-reportedly-probing-aig-over/story.asp x%3Fguid%3D{269259F5-610B-46AA&cd=1&hl=en&ct=clnk&gl=ca&client=firefox-a
It is like the way small towns put up barriers to driveways, giving new meaning to raising cost of entry into the market,
Of course such an action benefits the insiders, and it seems government is either bending rules or creating rules in favour of special interest groups, all the time, regardless of the public good the way hillbilly towns do, to keep outsiders out of the market.
And that is not how it is supposed to work in economics, monopoly creation is frowned upon.
Then people comment on the symptom of the problem, in this case, blame economists, call all the members of the whole industry dunces, sort of like when a person says "oh dear it so expensive to be in business dear" when obviously the barrier to the entrance of the business stops business from getting into the driveway, so the return on investment, will depend on divine intervention.
Then you will get lines like "what does return me."
Government is making rules that strangle business the way small town, with jethro bully type city halls do,
Then of course there was SEC not noticing Madoff''s fraud, as it appeared to take out around 60 billion dollars out of the capital market.
So what did they think was going to happen?
And of course agency theory doesn't explain everything either, but it does ask a good question, who do these people work for? Obviously not the client, so how can the public good be in the equation, or count for anything.
And then of course accounting, is the information system, that economists depend on to a degree.
Economists assume markets act efficiently, that is the assumption, what the economic models depend on.
And as an information system, it can be programmed to cause failure, which it appears did happen.
Thank you.
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