Mark to Market Vigilantes

Mark to Market was not applied, as time has gone on after the credit crash, as it appears Basel 3 rules will be much less onerous than once thought. This will give the central banks the power to blow more bubbles, and QE2 was, as Bernanke has said, instituted partly to increase the prices of stocks. This is a brazen central bank statement, and it could come back to haunt the Fed later.

Mark to Market vigilantes were, of course, betting on the central banks, through FASB, to clamp down hard on the banks. They shorted the banks, not always to their financial advantage.

Mark to Market vigilantes are different from bond vigilantes in that they tend to see things in a deflationary light. They view deflation as the greater risk. They do not view inflation as a big risk, as the true value of the banks is likely insolvency. It is unlikely that these vigilantes are going to look now at the bond market as being a bubble, at least for now. But we have seen that in countries where austerity is applied with too tight a vice, yields skyrocket and bonds crash. How long until this happens in the US is difficult to ascertain.

If we are to believe the German Finance Minister, we must conclude that the Fed is at a loss of how to create demand for loans in society, which results in deflationary pressures. But if the minister is right, there will be little lending, and bonds will could eventually crash if QE is continued over and over, in QE3 and QE4. This QE is reckless and shows that the banks may be insolvent. The potential crash will raise the cost of government in the US to unsustainable levels. This could take awhile, so just look at the demand for treasury bonds in the days ahead.

Shorting the TBTF banks is risky, so, those who do this need to realize that the banks can be carried in an insolvent state for quite some time. Shorting bonds is risky as well, as in times of trouble people pile in to US bond markets when scared. When investors no longer trust that route our financial system could be in very big trouble.

Mark to Market was imposed upon the United States banking system in the midst of the credit crisis. That was bad timing. While the investor needs transparency, it appears that M2M could have been and was set up to be applied as early as 2004. I view with scepticism the plan by the Bank of International Settlements to wait until the bubble was raging and the subprime market was crashing to apply the standards. It is not that I am against the standards, I am just against the timing of the standards. Why didn't they stop the bubble in its tracks in 2004? Why didn't they make FASB implement these standards at the appropriate time which would have limited the upside to house values and all commodity values. Better yet, why didn't this bank enforce sanctions upon shadow banks, instead of nurturing the entities that blew the bubble that resulted in the meltdown, in the first place?

I am concerned now again, that FASB is about to impose M2M again! And this will likely make the inflation play irrelevant as we will again be facing a banking and lending crisis just when commercial real estate is tanking and just when Alt A and Option Arm mortgages are set to hit bigtime. For more on this coming even please look at my Basel 2 Website.

Note that while the timetable for implementation of higher capital requirements and a revamping of how capital is valued has been postponed, this does not change the deflationary aspect of this change coming between 2012 and 2019.

There are new vigilantes in town. Last summer, gold and oil rose as answers to those who believed that inflation was increasing. Now gold rises when there is a thought of deflation, as a hedge against uncertainty.

But the new vigilantes have a different idea. They are voting with their investment decisions on the fate of General Electric Corporation. GE is a company that does not mark the value of their real estate to market. They figure that the real estate is a long term investment and the value will bounce back. However, if the world was in a giant bubble that could pop for years and years, we may not get back to that valuation for years and years. This is the thinking of the GE vigilantes.

We can see that if someone thought that the Nasdaq would have eventually gone back to its peak of over 5000, reached in the dot com bubble, it certainly didn't. It went up to around 2400 in the real estate bubble but is down around 1300 now. So there is a rational reason for the bubble vigilantes to be active in discounting stock of companies that refuse to mark to market. While it is possible that the prices for GE's real estate could eventually bounce back, there is no guarantee of this.

The fact that these vigilantes are protesting lack of transparancy by GE is a bad omen for those who want to stop banks from marketing their untradable bonds to market. These pollyannas want to sweep the values under the rug and mark to estimate, which is ludicrous. Japan tried that with their banks and they lost a decade. The communists in the old Soviet Union tried to mark to model the value of consumer goods!

Indeed, the international banker types have proven themselves to be communistic, and they certainly have tried to take over the world with their off balance sheet accounting and toxic loans. These people are mark to model communists but are private fascists in practice as they continue to raid the taxpayer for bailouts!

If they ever succeed in outlawing the vigilantes we are going to be in a situation where no investment makes any sense at all!

The GE vigilantes will likely behave in the same way as they have done with GE with regard to banks that hide their untradeable assets under the mattress of mark to model, or mark to estimate. The government will be making a major mistake if it moves away from mark to market, especially in these deflationary times of massive deleverage.

The premise considered for fixing the bank asset issue for assets that no longer have a market because investors have abandoned them, is a false premise. The concept of having the government purchase the assets from the banks assumes stabilization of the value of those assets down the road. Yet, as we have seen in other bubbles, stabilization at some wished for price may not be a realistic goal. This is why the banks are in so much trouble. No one knows how big a hole we are facing in the future.

Buying the assets by the government at unreasonably high prices could cause a need for inflationary printing of money by the fed. This borrowing from the fed comes with the need to issue bonds. Today the bonds issued in Europe went badly, especially for 30 year bonds. The huge potential increase in bond offerings by the United States government could face diminished demand in the face of continued deterioration in the economy.

And remember those real estate vigilantes that are pestering GE? Well, these guys are not about to ignore the increasing risk of credit rating decline of the United States national debt as that debt becomes greater and greater.

These are bad times. Bubble economies are painful to unwind. They will not unwind overnight unless there are new industries on the horizon to motivate demand. And the killing of the middle class golden goose is a risk to that demand in the aggregate.