Market Reform Update

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MARKET REFORM UPDATE….Dean Baker is unhappy with the SEC’s decision to ban short selling in financial stocks:

So where does the SEC get off banning shorts? Has it determined that bank stocks are undervalued? How did it make that determination? Does it ever determine that stocks are overvalued and therefore ban buying?

….If the issue is price manipulation, it is hard to believe that this is the first time market actors have manipulated prices. If they have the ability to do it on the down side now with financial stocks, then presumably they have also manipulated stock prices on the upside on other occasions. Why is the former worse than the latter?

Point taken. I probably agree, though I don’t think I object to temporary restriction during panics. For a more impassioned defense of restrictions on short sellers, “Mad Money” senior writer Cliff Mason has you covered in comments to yesterday’s post on the subject.

On another subject, Jon Taplin believes that one of the financial reforms we should insist on once the immediate crisis is resolved is to do away with mark-to-market accounting. He quotes William Isaac:

Fair Value Accounting dictates that financial institutions holding financial instruments available for sale (such as mortgage-backed securities) must mark those assets to market. That sounds reasonable. But what do we do when the already thin market for those assets freezes up and only a handful of transactions occur at extremely depressed prices?

….When there are temporary impairments of asset values due to economic and marketplace events, regulators must give institutions an opportunity to survive the temporary impairment. Assets should not be marked to unrealistic fire-sale prices.

This is an old controversy, and I won’t pretend to have a sophisticated opinion about it. Still, I’d be careful about “reforming” this. Mark-to-market is a basic matter of transparency, and overall it helps prevent financial abuses by keeping banks from hiding worthless crap on their balance sheets. Our goal should be to prevent (or ameliorate) panics in the first place, and if we do that then mark-to-market is a feature, not a bug. I’d be inclined to move very slowly on this one.

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