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  • An Increased Range of Tools to Fight the Economic Crisis

    The economic rescue package that the House will vote on tomorrow provides federal regulators with a broader array of tools to fight the economic problems facing the nation than the version that was defeated Monday. As the effects of the crisis continue to spread, these additional tools are likely to be increasingly important because it addresses the growing lack of confidence in the broad financial markets which extends well beyond the crisis with mortgage backed securities. The centerpiece $700 billion government purchase of troubled assets remains essential to get those assets off of financial institution balance sheets and to help restart the pricing process for them. However, it does not address the growing lack of confidence in banks or the exaggerated losses on bank balance sheets caused by an improperly applied new accounting rule. The new bill has tools to address both of these additional problems.

    The new bill raises the amount of bank deposits covered by FDIC insurance from the current $100,000 to $250,000. This addresses the fears of many larger depositors especially small business customers that their money would be at risk if their bank fails. Without such a measure, troubled banks would be plagued with the type of runs that helped to speed the failures of Wachovia and Washington Mutual. This is not a complete solution, but it should go a long way towards reassuring fearful consumers that their deposits are safe.

    The second new tool is the SEC’s agreement with the Financial Accounting Standards Board (FASB) to clarify the new mark-to-market (also called Fair Value) accounting standards that have been blamed for exaggerating the looses on banks’ and other firms’ balance sheets. Because firms are required to value investments at their current market value, and the market turmoil has made it impossible to accurately price many assets, firms have been forced to overstate their losses. The new agreement gives firms in unsettled markets more discretion in how they value assets, and should mitigate some of the exaggerated losses that have spooked depositors and investors. Provisions in the new bill reinforce the SEC and FASB’s decision to ensure that accounting standards are properly realistic.

    Together, these new tools and actions will help the plan to purchase troubled assets to deal with the spreading freeze of the credit markets.

    Posted in Economics [slideshow_deploy]

    2 Responses to An Increased Range of Tools to Fight the Economic Crisis

    1. Gene Laabs McDonough says:

      Much of the political infighting we have witnessed over the past couple of weeks, I believe could be reduced or eliminated by enacting two things. First, term limits of two terms for congressmen & women and second "ear marks" should be made illegal, or at the very least, give the president line item veto powers. Some how we must make the legislative process clean. It is corrupt in it's present form.

      How can the two changes mentioned be forced on Congressmen and Senators???????

    2. A. L. BLACK LOUISIAN says:

      Gene McDonough's comment is absolutely perfect!I could not agree more. Many of us in my little group have said the same thing. It is just too bad that we have no answer to the question about convincing our Congress "men" and Senators of this needed change!!!!!!

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