H.L Mencken was right, democracy is the greatest show on earth. Yours truly has been following the financial meltdown and political process as a spectacle to behold. This is better than the West Wing.
However the most depressing thing that strikes me about this spectacle, is the intellectual shallowness of most of the leading participants. From the President down to Joe Average, the level of economic idiocy is truly astounding. What is so distressing is that the aforesaid morons, through our political process, determine the economic course of state. Is it any wonder that we are having a meltdown.
I suppose its no suprise, that one of the most 'stupid' solutions to the current crisis should come from the very orginisations that distinguished themselves so well in the regulation of the idiot bankers. Apparently the FASB has now decided that the troubled assets don't have to be marked to market. The wise public servants have determined that we are having a firesale--it's been going on for eighteen months--and the prices that the market is paying for the "troubled securities" are under what they are truly worth. According to wise at the FASB, the current accounting rules significantly understate the value of these assets and hence adversely affect the capital position of the banks. As I understand it, the FASB has implicitly said that the assets should be marked at a value that they would represent in an "orderly market".
What the hell is an orderly market?
I presume it means a market that gives me the price that I want for my asset.
Now Suppose I have a Milli Vanilli Cd which I would like to sell, and that currently, the CD is selling on the open market for 5 cents. I actually think in a few weeks people will be looking back nostalgically at the Eighties and that there will be a demand for Milli Vanilli songs, therefore true value of the CD will be about 30 dollars.
How do I price the value of my asset? What is fair market value? Clearly what the FASB allows is for the holder of an asset to determine the market value of the asset independent of what it has been trading for on the open market. This is just plain dumb and they type of stuff that frightens off intelligent capital. More opacity at a time when no one trusts each other in the banking system.
How the hell do you read a balance sheet when the value of assets is determine by what management thinks is a fair value, as opposed to what the asset is trading for in the open market? Do think there is likely to be a conflict of interest?
I suppose with march of postmodernism through the humanities, it was only a matter of time till it crossed over into the weakest of the "sciences"; economics and its handmaiden, accounting. If various and conflicting readings of the "text" are equally valid, and truth is a construct devoid of any metaphysical basis, it should be no suprise that when reading a balance sheet the numbers put down can mean anything we want them to mean.
It certainly makes investing in this kind of market a very interesting proposition.
Wednesday, October 01, 2008
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