Mark-to-Market

I read an interesting post by Kevin Drum that I think is filled with inane language that solves nothing.

Why not instead require higher capital ratios in good times (which would reduce leverage and slow down credit expansion) and lower capital ratios in bad times (which would reduce fire sales and encourage banks to expand credit)?

He even states that banks themselves are "so good at lying about the quality and value of their assets, we're better off with a system that gives them as little leeway as possible when it comes to recognizing losses".

Why not be more specific.

How about, we let those financial institutions that are covered by the demands of capital ratios use another mechanism. If instead of immediate mark-to-market we instituted a counter liability on the balance sheet that is amortized (say for 10 years or the life of the asset) and made the liquidity adjustments correspond to the amortization. This would clearly announce that the market has a valuation that differs from that on the balance sheet, but mitigate the immediate impact on the income statement. IF these valuations were adjusted quarterly, then titanic adjustments would not be so devastating to the actual cash liquidity of the entity.

Jim Coburn