Tuesday, November 26, 2013

Mark-to-unicorn

Great phrase from John Hussman found here. He's talking about accounting, but I think it goes well with Sowell's comment from my previous post, regarding the manipulation of reality. Hussman writes:
In hindsight, the crisis ended - precisely - on March 16, 2009, when the Financial Accounting Standards Board abandoned FAS 157 “mark-to-market” accounting, in response to Congressional pressure from the House Committee on Financial Services on March 12, 2009. That change immediately removed the threat of widespread insolvency by making insolvency opaque. [italics mine] My impression is that much of the market’s confidence and oversensitivity to quantitative easing stems from misattribution of the initial recovery to QE. This has created a nearly self-fulfilling superstition that links the level of stock prices directly to the size of the Fed's balance sheet, despite the absence of any reliable or historically demonstrable transmission mechanism that relates the two with any precision at all. 

The FOMC certainly had a part in creating a low-interest rate environment that provoked a reach-for-yield and a gush of demand for securities backed by mortgage lending of increasingly poor credit quality (I’ll note in passing that new issuance of “covenant lite” debt has now eclipsed the pre-crisis peak largely due to the same yield-seeking). Still, it may ease the burden of power to consider the likelihood that the actions of the Federal Reserve – though clearly supportive of the mortgage market – were not responsible for the recovery. One can thank the FASB for that, provided we’re all comfortable with the reduced transparency that results from mark-to-model and mark-to-unicorn accounting.
Balzac said in the 19th century, behind every great fortune there is a crime. Today, behind every great obfuscation there is a purpose.