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MikeDC's avatar

My instinct is that there are better ways than mark-to-market, because M2M will require continual adjustment, complication and volatility. There's a lot to be said for keeping a system simple and straightforward. Minimize the points of failure and you minimize the possibility for mistakes.

Shouldn't a bank be sophisticated enough to do adjust? Sure. Just like a driver should be able to drive in bad weather. But we know that bad weather causes more accidents, even among good drivers.

In this respect, isn't the SVB failure mostly a failure due to the government's policy of inflation? SVB took measures to compensate, and maybe they were too blasé about it, but at a basic level what happened here is that people who got a helicopter drop of money put it in the bank. This blew up the bank and forced them to buy lots of low interest bonds. Then, the depositors started withdrawing money faster than the bank managed its bond portfolio in the face of rising interest rates.

Should a good bank be able to navigate that situation? Probably. But it's obviously a challenging condition for banking. To follow the metaphor, it's a patch of ice that someone was going to hit.

So maybe what we should be thinking about, rather than dramatically changing banking regulations, is changing our policy choices to something more sustainable than "monetize the debt and give away as much money as the federal government possibly can".

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Jay's avatar

Mark-to-market accounting can cause problems for non-financial companies. Suppose I bought $10 million worth of equipment 5 years ago. It might be machine tools or a lithography machine or a fleet of busses or whatever, but it's tangible capital assets that I use to produce goods or services. Suppose I expect the equipment to last 10 years, so I've been sticking $1 million in bonds per year as a sinking fund for the replacement. If interest rates go up enough, mark-to-market accounting reduces the value of my bonds and might make my company seem insolvent, even though the bonds are as good for their purpose as they ever were. I'm fine, because my long-term assets aren't backing short-term liabilities. Actually, my position has improved a bit since the next batches of bonds will be cheaper.

Financial regulators are constantly having to choose between making rules that work for financial institutions and hoping they don't screw up the real economy too much, making rules that work for real companies and hoping they don't screw up the financial system too much, and making two sets of rules and trying to police the borders between the domains.

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