Andy Kessler defends mark to market accounting in Forbes:
Thank you, sir, may I have another? As the stock market gets spanked,down 40% in a year and a day, there is a silver lining. We Americans get our lumps out the way, and start a new life. Much has been made of the “mark to market” rule and its role in the credit crisis, but it probably has saved us from 10-plus years of gloom and doom.
Kessler’s argument is that it is better to take the losses now on loans that will eventually go bad. That assumes that the loans really will go bad of course, but I think he’s basically right. Japan let their banking system stagnate for at least 10 years after their bubble popped; the stock market and economy still got beat up pretty bad, it just took a long time. Better to get it out of the way:
It may have been catastrophic if, like Lehman Brothers (nyse: LEH – news – people ) in 2008, Long-Term Credit Bank had failed in 1991, with reverberations throughout the Japanese financial system and probably the world. Their stock market may–would–have crashed, dropping, uh, 50%. But the government could have bought the bad loans, recapitalized the banks themselves and not lost the last 18 years of global growth to China.
So as hard awful as a Dow dropping like a safe onto Wall Street and Main Street is, cheer up. It’s almost over. The gunk is getting cleared out. No pain, no gain.
The market is working. We may not like the consequences, but the alternative is many years of stagnation. We’ll get out of this quicker if we just bite the bullet and get the write offs out of the way.