Why Are We Looking To Those Who Never Saw The Storm Coming For Answers Now?

Lots of people out there who have differing opinions than mine on the markets, the economy, etc. Just a few observations: Home sale prices, including foreclosures, as we now do, makes the decline in home price data look far worse than past recessions. More importantly, in 2007 FAS 157 was put in place - this was the mother of all negative changes in accounting policy and effectively a change of calculation for bank capital - not good. Point being, changes in calculations, policies and market rules happen and we have to react to them and assess the impact on the system. Economists could (and do ) debate these sorts of issues all year, but I'll stick with the data we've got and hold my view on where this recession ranks so far vs. prior ones. Time will obviously tell if we double-dip or how strong the recovery cycle will be........

Another point I'd like to make is every - yes every one - bank is insolvent if you can create a run on it. So leverage was most likely too high at 25:1, but at 15:1 it's still insolvent if there's a run. So unless we want banks to only loan the capital they can have on hand - and end up with usury rates again - we need to consider that the banking system is a system built on trust, faith and key rules. If major changes occur that negatively impacts trust and faith, the value and liquidity of the system will almost certainly be jeopardized. Believe me, we definitely DO NOT want a banking system based on banks or lending institutions only lending the capital on hand...

Also, during much of the 1930s, banks used m2m accounting. In July of 1938 the Fed announced a suspension of m2m and asserted that bank assets should be valued on long-term safety and soundness. Around this time they also instituted the uptick rule. Not coincidently, it wasn't long before the markets started acting much healthier and investor confidence was restored. We've been here before, and frankly it's sad we didn't remember the lessons of the past - in more ways than one. Hopefully we'll go at least another 70 years or so before we repeat them again....