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Let the Market Be


Doing nothing is first step to recovery.


There were two interesting articles I read over the weekend from the Financial Times, click below to read them.

The first article explains that the SEC is "mulling" putting pressure on FASB to suspend accounting rules that require institutions to mark their exposures at prices that reflect reality, where buyers actually want to buy and sellers want to sell. This is called a free market. Apparently free markets are the problem now, so suspending them is the answer.

The second editorial rightly discusses the destructiveness of such thinking. Hiding our heads in the sand will not make the real problem go away: we must address the fact that we've lived beyond our means for years and that has resulted in 100 ways too much debt. The only way to deal with it is head on, by accepting the fact that we have already borrowed too much from our children's future and can afford to borrow no more .

But those that truly understand the derivative risk and how to deal with it are not being called upon. Unfortunately we're allowing those that have created the problem, from government bureaucrats who drove insane monetary and fiscal policy to the salesmen in charge of large wall-street firms who pushed risk management to the side in pursuit of profits, to come up with artificial solutions based on flawed logic to rule the day.

I will say this now: the Fed's balance sheet is a mere fraction of what it would take to effectively deal with this solvency problem. The cost of a massive fiscal response, the creation of a trust to buy the debt that no one wants to have anymore, would be born by future taxpayers directly through higher taxes and current taxpayers indirectly through a lower dollar and higher cost of living. The relative size of the trust created to handle the savings and loan mess was tiny compared to what would be necessary here; the cost to taxpayers of that trust was diluted over years while the cost to this trust would be immediately palpable to the middle class.

Integrity to me means the strength to do the right thing. When soldiers are sent into battle what would be the long-term repercussions if they turned and fled? They certainly would live for another day, but the action would embolden the enemy and probably mean long term defeat. They know this, so they fight bravely even though it may mean their very lives. They show the greatest integrity when it means the most. In dealing with the greatest debt bubble of all-time we cannot afford to retreat even though it may be painful in the short-run. Will there be any long term investors left if they don't believe in the integrity of markets?

We are rapidly losing market integrity. We need bureaucrats to just get out of the way and let the market exact its justice: those that made really bad financial decisions should lose their money. Those that were prudent and saved their money will be there to pick up the pieces and buy cheap assets. Once the debt is destroyed down to the point where the level of savings versus debt in the economy is balanced, recovery will occur.

If we abandon integrity now we may truly destroy the capital markets for good.

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