Newt’s trying to set a story-line that suggests the market collapse we’re seeing today is a result of faulty regulations, and not underlying structural problems. In a few words, he’s saying don’t just look at collapsed prices. Think about what you could get for financial instruments if the markets were fine. To fix the problem Newt’s calling for another set of accounting standards because … well, it will help fix market prices.
Let’s see. At the end of each day, financial instruments are valued at the price they can fetch out on the open market … and that's a bad thing? It is according to Newt Gingrich. Here’s Newt’s explanation (Mumbo-Jumbo Fair Warning ... skip to the next paragraph, for my translation):
Because existing rules requiring mark-to-market accounting are causing such turmoil on Wall Street, mark-to-market accounting should be suspended immediately so as to relieve the stress on banks and corporations. In the interim, we can use the economic value approach based on a discounted cash flow analysis of anticipated-income streams, as we did for decades before the new mark-to-market began to take hold. We can take the time to evaluate mark-to-market all over again. Perhaps a three-year rolling average to determine mark-to-market prices would be a workable permanent system … It is not widely understood that the adoption of mark-to-market accounting rules is a major factor in the liquidity crisis which is leading companies to go bankrupt. But it is destructive to have artificial accounting rules ruin companies that would have otherwise survived under previous rules.Got that? Don't worry. I've put this through my "Newt B.S. 'O Meter." Here’s the English language translation ...
Newt Gingich wants to change the rules so we can revalue all the ugly financial instruments that are currently worth 20-30 cents on the dollar (if that). He thinks we should value these financial instruments on a three year average. You know, so the financial instruments, and the financial institutions holding them, don’t have to suffer the consequences of “impaired” values of a collapsed market. Best of all, no one gets their feelings hurt because they're sitting on trash (OK, I threw in that last one).
If you’re still having trouble getting a hold on Newt’s proposal, let’s try this. Assume you own a home with an average value of approximately $500,000 over the past three years. Today, the home is worth $325,000. According to Gingrich’s logic you should be able to value your home according to its three year average.
This might be enticing (and exciting) if Newt was talking about your home. However, Newt’s not talking about your home. He’s talking about the market instruments that got us into this mess! Under Newt’s plan the value of your home will still be sucking wind. And the market instruments that got us into this mess? Well, they’ll start going up.
But don’t worry, says the Newtster. Once the big guys start making money, the markets will stabilize, so you’ll win in the long run (if you've heard that story before you're not alone).
But let’s assume Newt was talking about the value of our homes. Can you imagine going to your bank, and then saying “How about an equity loan? My house is worth $325,000 on the market … but the average value has been $500,000 … so give me $100,000 … even though I'm up-side down and owe $400,000.” Or, can you imagine turning over your $325,000 house to the bank and telling them "It’s worth $500,000, so pay me the difference"? Better yet … well, you get the picture.
Does this make sense to you? It does to Newt, and a whole bunch of republicans too. And it’s all proposed in the name of deregulation … you know, to help markets function better.
This is the kind of republican-led deregulation proposal that got us into the market mess in the first place. Rather than look at the real problem (poor oversight, greed, and stupidity) Newt Gingrich wants to do some creative accounting …
And here’s the kicker. CFO.com is telling us that the nations’ chief financial officers are saying we don’t need Newt’s plan. A couple of turns of the screws have already helped.
Worst of all for Newt is that the investment community actually like the bailout plan. They also reject the notion of suspending current accounting methods - which Newt wants to do - because rock bottom prices will keep the government from paying too much for garbage in a bailout. They're actually looking out for America's financial interests.
I wonder who Newt's lobbying for these days ...