Bloomberg (emphasis added):
Myron Scholes and Robert Merton shared the 1997 Nobel price for economics, and they are now united in calling for banks to give more accurate valuations on their illiquid assets….Banks that oppose new accounting standards on asset values want to conceal depressed prices, Merton wrote in the Financial Times yesterday. He composed the column with Robert Kaplan, a professor at the Harvard Business School along with Merton, and Scott Richard, a professor at the University of Pennsylvania’s Wharton School.
From the FT comment by Merton (emphasis added):
Legislators and regulators fear that marking banks’ assets down to fair-value estimates will trigger automatic actions as capital ratios deteriorate. But using accounting rules to mislead regulators with inaccurate information is a poor policy. If capital calculations are based on inaccurate values of assets, the ratios are already lower than they appear. Banks should provide regulators with the best information about their assets and liabilities and, separately, allow them the flexibility and discretion to adjust capital adequacy ratios based on the economic situation. Regulators can lower capital ratios during downturns and raise them during good economic times.
Bank regulators (FDIC and the Federal Reserve) don’t listen to Nobel prize winners much – they don’t have enough political clout and are not usually big hitters in the banks that control them. The regulators are obviously in cahoots with the banks to “conceal depressed prices” – so it’s inaccurate to think that the regulators are “mislead”. The banks and the regulators will, of course, fight Merton’s and Scholes’ suggestions to the death – perhaps (in a financial survival sense) literally…
From Mr Eric Keetch.
Sir, In a sleepy European holiday resort town in a depressed economy and therefore no visitors, there is great excitement when a wealthy Russian guest appears in the local hotel reception, announces that he intends to stay for an extended period and places a €100 note on the counter as surety while he demands to be shown the available rooms.
While he is being shown the room, the hotelier takes the €100 note round to his butcher, who is pressing for payment. The butcher in turn pays his wholesaler who, in turn, pays his farmer supplier.
The farmer takes the note round to his favourite “good time girl” to whom he owes €100 for services rendered. She, in turn, rushes round to the hotel to settle her bill for rooms provided on credit.
In the meantime, the Russian returns to the lobby, announces that no rooms are satisfactory, takes back his €100 note and leaves, never to be seen again.
No new money has been introduced into the local economy, but everyone’s debts have been settled. Is this “quantitative easing”?
So…is it? Of course, the sucker is the hotelier who is stuck with coming up with €100 out of savings that he thought he had received as income. If QE is designed to trick us into paying off our own debts, we guess it’s working. Alas, the picture of QE is more accurate than even planned as QE is designed to trick us into spending on new consumption – not reducing our exisitng debts…on that score it seems to be failing so far…
