Tuesday, March 25, 2008

McCaintradictions (JM)

When John McCain talks about the economy we should all shudder. A lot. He made some remarks today, that I bring to you via Jonathan Martin over at Politico, that were dubious at best.

Problem: The other part of what happened was an explosion of complex financial instruments that weren’t particularly well understood by even the most sophisticated banks, lenders and hedge funds. To make matters worse, these instruments - which basically bundled together mortgages and sold them to others to spread risk throughout our capital markets - were mostly off-balance sheets, and hidden from scrutiny. In other words, the housing bubble was made worse by a series of complex, inter-connected financial bets that were not transparent or fully understood. That means they weren’t always managed wisely because people couldn’t properly quantify the risk or the value of these bets. And because these instruments were bundled and sold and resold, it became harder and harder to find and connect up a real lender with a real borrower. Capital markets work best when there is both accountability and transparency. In the case of our current crisis, both were lacking.

Alright, so I am willing to buy in to this idea. Accountability and transparency are important, what McCain says here is ostensibly correct.

Solution: I am prepared to examine new proposals and evaluate them based on these principals. But I think we need to do two things right away. First, it is time to convene a meeting of the nation’s accounting professionals to discuss the current mark to market accounting systems. We are witnessing an unprecedented situation as banks and investors try to determine the appropriate value of the assets they are holding and there is widespread concern that this approach is exacerbating the credit crunch.

Whoa... seriously, for those of you who aren't financial market nerds allow me to translate. Basically, what McCain has proposed is akin to saying that because the police department has a crippling lack of transparency we should get rid of internal affairs. Mark to market accounting basically forces companies to value their holdings based on their current price, rather than at some speculative future price. The practice of valuing holdings based on speculative price was instrumental in disasters like Enron and WorldCom. It eviscerates transparency because it varies the ways in which owners of complicated financial instruments can account for those instruments and present them to the market. In other words, John McCain's solution to overly complicated market instruments is to make them more complicated. Sigh...

1 comment:

g thomas said...

Not only that, but the "values" of these equities are in no way inherent, they're reflections of the market they're part of, which is a dynamic and complex system running itself (with some human perturbation) at a level above that at which accountants operate.

This isn't about the books you keep, it's about the way markets run.

McCain may have an edge on the war, but he clearly doesn't "get it" at all where the economy is concerned.

The stuff he said in the first paragraph you quote is pure textbook stuff he was almost certainly fed by some staffer. There's a huge gap between that and the idea that accountants serving on some board will be of help.

What he would need to make his consultations useful, no, merely plausible, is economists, and perhaps then they would have to be one-handed as well.

But economists are analysts, not fixers, so McCain's whole notion is fatally flawed.