OpEd: Markets: Reflection: "Mark to Market"----Fed Chairman Speaks

One of the questions that was asked by Sen Shumer today of Ben Bernanke, Chairman of the Federal Reserve was how to deal with markets that there is no price valuation for? Mortgage assets are valued at "fair valuation" and not "Market valuation". Shumer then asked why they could not use a rolling average 6 months backward bringing nostalgia....this was a technique used in the past for projecting the enrollment of some school districts by using a rolling average looking backwards when looking forwards---and this technique has been dismissed as ineffective.


One of the interesting things in retrospect about the crash of 1986 is that many stocks did not open after the crash, and for purposes of margin valuation, they were left at the last price that was traded. This was significant in that these positons of a portfolio thus were not liquidated at very low prices or contribute to liquidation on accounts that were heavily margined or under pressure. Thus----a trading halt is one technique that is used to slow down the impact of panic.

Recently the Feds asked lenders for a 30 day suspension on foreclosures, and one of the Presidential candidates, Hillary Clinton, asked for a suspension in foreclosures until a plan can be formulated. Such a suspension was used in the 1930's. Clearly the federal government is responding too slowly to this spreading problem and the failure to freeze these foreclosures could lead to a larger market panic.

Similarly, the Federal Reserve Chairman, Ben Bernnake mentioned at the very end of his remarks on Wednesday that he will submit rules for tighter mortgage lending practices that will outlaw banks pressuring appraisers for certain favorable appraisals as a condition of future business. It is hard to believe that there are not laws currently on the books that could be used to prosecute these violations. Posing that he needs additional authority is really just a method of delay.

In addition Mr. Bernanke mentioned an inquiry into abuses in the credit card industry. This investigation is going to happen way too slowly to be effective. In his own PhD thesis Mr. Bernanke wrote that speed was the key to avoid the cascading effects of a market event. A model credit card agreement with legislated language and format for rate disclosure may be required. It seems just a lot of hot air at this time.

After two days of testimony the Fed Chairman appears willing to forecast lower rates that will not be delievered to borrowers, predict a weaker economy and higher unemployment, and seems willing to allow the non-action of policy makers to drive prices of homes sharply lower midst the rising pain of unemployment and and rising foreclosres.