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Originally Posted by wiphan
I agree but what if you don't have to sell? Say your the bank that did things the right way, made the right loans and the performance of your asset is great. According to mark to market you need to devalue your asset even though you don't want to sell, don't need to sell it, and the performance of the asset is fine. Ultimately you are forced because you don't have the cash any more to back it due to devaluation and since your competitors had to sell their assets at a discount with little demand then it is devalued further and sold at a bigger discount and the cycle continues......
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your explanations helped a bit. if you assume the problem is temporary illiquidity i understand you can solve it by accounting slight of hand.
but what if the illiquidity is more than a short term issue? what if the financial instruments held are so complicated, involving multiple insurance contracts on multiple mortgage pools where you don't really know if anyone has the money to cover losses on the motgages or, if they do, what amount? what if the problem of valuing the assets is a gordian knot and that's why the market treats them like plutonium?
before now the housing crisis has been generated by bad loans to people that shouldn't have been able to purchase a home. we're just now starting into the 2nd phase where people that had good loans they could afford will face forclosure due to job losses.
what if, instead of coming out of the recession towards the end of the year, we're accelerating deeper into it? how long does the slight of hand work? in that scenario does changing accounting rules work or is it just another way to kick the problem down the road another 6 months?
what if housing keeps going down?
this, by the way, is why i think fears of hyper-inflation are so laughable. the house is on fire and people are worried about water damage when the fire department arrives.