06 April 2009

McArdle on the new Mark to Market FASB rules

So... YOU are a bank. You own some stuff. How much is that stuff worth? What you paid for it? Something else? Or is it worth what you could get if you sold that stuff?

As my sister says, Well.

The third choice passes the smell test, the common sense test, and the intuitive test: something is worth what you can sell it for.

Problem: houses that banks own are often worth a lot less than they were a little bit ago. Therefore, banks have less money. Therefore, they can lend less money. Therefore, the economy slows down and may deflate.

Ach, du lieber!

So, with the encouragement of .... God alone knows who... the financial accounting standards board (FASB) has agreed that banks can value property at what they think they can sell for in the future.

Obviously, this is fraught: "Gee, Joe, maybe some demented kazillionaire will walk down the street and give us the full value for the house. Look, a flying pig!"

Well, as Megan points out, banks are still required to back out the difference in the notes of the prospectus.

As Megan further points out, if you're too damn lazy to read, you're either too damn lazy to invest or your deserve screwing yourself.

And none of this has been covered in the financial press. Which is why you should read Megan!

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