Quote:
Originally Posted by aceventura3
I selected "Mark to Market Accounting" primarily because our current crisis is mostly physiological or self-induced. Under normal circumstances if there is a loan on an asset, and the asset declines in value it is a non-event unless there is a need for a forced sale. If the market gets flooded with forced sales, prices fall further in a frenzy of panic selling. So, given leveraged financial institutions with assets on the books that declined in value and then the need to "mark to market" affecting reserve or capital levels, prompting forced sales and then more forced sales and more forced sales, you end up with a "crisis". If some of these financial institution had an opportunity to operate normally during the normal market correction the situation would have been much more orderly.
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I agree with you, but I think the current thinking is that the banks have to have enough cash on hand in order to prevent the bank from failing in case of a run of people pulling out all of their savings.
They learned there lesson in the 30s, but I'm not sure that is what is happening today. The FDIC didn't insure your savings back then, so if I saw a bunch of these banks failing and people losing all of their savings, I would be pulling my money out too. Causing a real big problem.
But, they should look at the regulations. Should these banks be able to be so extended that they are forced to sell at whatever price? Would it limit their ability to make money and stimulate the economy? And how likely is a 1930s style run on the banks now that the federal government insures people's savings?