Economics and Accounting

Apparently there is an old journal of Economics and Accounting in its approximately 50th volume. Never knew. Here are two papers on mark to market:

"Do accounting measurement regimes matter? A discussion of mark-to-market accounting and liquidity pricing" by Sapra Haresh (The University of Chicago, Graduate School of Business), published in August 2008.

Abstract

Using a model with banking and insurance sectors, Allen and Carletti show that marking-to-market interacts with liquidity pricing to exacerbate the likelihood of financial contagion between the two sectors. In this discussion, I lay out the main ingredients of their model and explain how they interact with liquidity pricing to generate financial contagion. I then discuss some limitations of their model and propose an interesting extension.

Here's another one also from last month

"Mark-to-market accounting and liquidity pricing," by Franklin Allena, , and Elena Carlettib (Wharton School, Penn and Univ. of Frankfurt, Germany), published August 2008.

Abstract

When liquidity plays an important role as in financial crises, asset prices may reflect the amount of liquidity available rather than the asset's future earning power. Using market prices to assess financial institutions’ solvency in such circumstances is not desirable. We show that a shock in the insurance sector can cause the current market value of banks’ assets to fall below their liabilities so they are insolvent. In contrast, if values based on historic cost are used, banks can continue and meet all their future liabilities. We discuss the implications for the debate on mark-to-market versus historic cost accounting.

Both are on the printer and queued up into my impossibly long stack of papers I need to read to get up to speed on this shizznat.

Nobel Predictions

Here's a link to Thomson Reuters' predictions (ht to TC, who ht'd to GM. H to the tizzo). My picks are in there, but are listed under the 2006 and 2007 predictions. Of course Tom Sargeant. Forgot about him and his rational expectations (thus proving rational expectations is wrong or I'm just very forgetful). Any of their predictions would be well-deserved. Marty Feldstein would be great to see win it.

Is it Sarbanes-Oxley's Fault?

Yesterday, I overheard some colleagues talking about the current financial meltdown, and they were saying that part of the blame rests squarely at the feet of the Sarbanes-Oxley Act, and specifically for its requirement that firms use mark-to-market accounting. I will be trying to learn more about this over the next week or so, as while I've heard a little rumbling about mark-to-market, I've not heard nearly the rumbling as I have towards CRA, Greenspan, Fannie Mae/Freddie Mac, and predatory lending among mortgage lenders. How exactly, though, would mark-to-market accounting cause a financial crisis like this? Here's what one commenter says.

Also of immediate urgency is for regulators to suspend any mark-to-market rules for long-term assets. Short-term assets should not be given arbitrary values unless there are actual losses. The mark-to-market mania of regulators and accountants is utterly destructive. It is like fighting a fire with gasoline.

Think of the mark-to-market madness this way: You buy a house for $350,000 and take out a $250,000 30-year fixed-rate mortgage. Your income is more than adequate to make the monthly payments. But under mark-to-market rules the bank could call up and say that if your house had to be sold immediately, it would fetch maybe $200,000 in such a distressed sale. The bank would then tell you that you owe $250,000 on a house worth only $200,000 and to please fork over the $50,000 immediately or else lose the house.

Absurd? Obviously. But that's what, in effect, is happening today. Thus institutions with long-term assets are having to drastically reprice them downward. And so the crisis feeds on itself.

The WSJ also reports on the growing opposition to the rule in light of these problems.

Update: Mark Thoma has a lengthy post about it here with links to others. This is definitely something that I hope will get hashed out thoroughly.

A Prelude to Tonight's Debate

Treacher got his dirty little hands on Ifill's questions for tonight's debate.

Mayor Palin, Barack Obama is a handsome, charismatic demigod. How many boxes of Kleenex will you need after your crushing loss?

Senator Biden, what is your favorite color? And if you have time for a follow-up question: Why?

Mayor, you talk funny and you own a tanning bed. Why haven't you released Trig's birth certificate?

Senator, have you seen those pictures of Obama in his swim trunks? If not, I have them right here.

Mayor, what are the names, ages, and blood types of all 71 members of the Belgian Senate? And why are you unwilling to admit that your inability to instantly produce any and every fact I demand makes you unfit to stand in the way of history?

Senator, you've spoken at length. Could you please continue?

Mayor, which is your preferred method of stifling dissent, banning books or burning them? Since it's both, please explain how you can deny the accusation that you're a fascist, which I am making now.

The Price of Revenge

Is the public wanting revenge on Wall Street? If it is, then it's only because they believe that revenge is relatively cheap. If they learned how expensive it was - incurred in the form of high unemployment and declining household wealth and income - then they would probably respond to the higher price by wanting less of it.

Why'd They Vote No?

Ian Ayres shows us the real reason Representatives voted against the bailout. A vast majority voted no if they were running for re-election this year. That is, they voted no if their jobs were at risk, and otherwise voted yes. Colleagues in my department said the same thing to me on the way out yesterday. Our representative voted for it, but his job was not at risk this year.

Awesome Comic List

Kottke linked to this great comic book list. It's more of a list of categories - comic categories that you should have in your life. It includes Archie Andrews, which made me smile deep inside. I still remember the day, like it was yesterday, when I realized my feelings for Betty Cooper were far different than any I'd ever felt about a girl in my life. I was 7, on the bus ride home from school. Here's what he says about the Riverdale gang.

8. A Little Stack of Archie Comics

I always think people should own a few Archie Comics, as some of them are very good and even the very bad ones teach us something about the way comics of a certain kind have become commercialized and formulaic over the last half-century. The core five-member cast make-up and their relationships to one another is one of the best set-ups anyone's ever figured out for situational comedy, and two of the pairings within that group of five -- the iconic Betty and Veronica duo and the underrated Archie and Jughead team -- work almost as well on their own. Don't shy away from Bob Bolling's excellent Little Archie comics as part of your array.

I was always partial to Dan DeCarlo's work on Archie. Then last year, while at a comic book store, I stumbled across a metric ton of old erotica comics that DeCarlo did - stuff straight out of Playboy, in fact. Never knew, but in retrospect, if I had to guess, I probably fell in love with a Dan DeCarlo drawn Betty Cooper that day.