Someday a real journalist will write the story about how Rubin and his friends (Summers, Orzag, Furman, and Geitner) became dominate in Mr. Obama's economic thinking. It must also be suspected that Mr. Obama's exposure at the University of Chicago has colored his thinking on subjects economic and probably inclined him toward prevailing nanny state corporate ideology (privatize the gains, socialize the losses). So it appears at least we now understand how Robert Rubin earns all that money that Citigroup pays him.

This is slightly off topic, but the economists who was most frequently quoted by the Washington Post during the housing bubble, David Learah, is quoted from a link on Barry Rithholz's Blog (http://www.ritholtz.com/blog/2009/01/david-lereah-jackass/)
as follows:

"As chief economist for the National Association of Realtors, David Lereah was famously optimistic. Now a private consultant, he’s abandoned what he calls the “positive spin.”

Q: Were you wrong to be so bullish?
A: I worked for an association promoting housing, and it was my job to represent their interests. If you look at my actual forecasts, the numbers were right inline with most forecasts. The difference was that I put a positive spin on it It was easy to do during boom times, harder when times weren’t good. I never thought the whole national real estate market would burst.

Q: The NAR’s latest forecast calls for a slight increase in home prices next year. Thoughts?
A: My views are quite different now. I’m pretty bearish and have been for the past year and a half. Home prices will continue to drop. I think we’ll see a very modest recovery in sales activity in 2009. But we’ve still got excess inventories, a bad economy and a credit crunch that will push prices down further, another 5% to 10% more. It’ll take a long time to get back
to the peak prices we saw in many markets.

Q: Any regrets?
A: I would not have done anything different. But I was a public spokesman writing about housing having a good future. I was wrong. I have to take responsibility for that.

Its good to see the Washington Post continue its tradition of credulous, shallow, tendentious, and frankly stupid tradition in financial, business, and economics reporting.

A part of the story that doesn't seem to ge sufficient attention has to do with just how investment firms have "lost" so much money: the mark-to-market rule. Can you explain why this isn't the root of the problem? Why are firms being required to write down the full value of assets that would in all likelihood fetch at least some cash even in a barely functioning market? Why did we need TARP to force the SEC to apply its own rules sensibly? What am I missing? And where's the media coverage of this issue?

Dean, re: the "question" in the last paragraph of your post ... Is there really any question about it? You're joking, right?

Michael, I would love to understand why people think GAAP is the problem. Are bankrupt companies realizing asset sale prices above book value? Do bankers wait for GAAP statements to decide whether to provide credit?

Anyone who relies blindly on GAAP statements deserves to suffer, but it does provide a framework for truth much better when it is allowed to strive for honesty.

I've never liked Obama very much, even though I voted for him, but I'm more disappointed than I expected to be this early on in his policies--and not just his economic policies.

It appears that Obama has decided NOT to end welfare as we now know it.

Erich, let me hazard an explanation.

Financial institutions are required every business day to specify the value of their assets according to their market value. This is the gist of the M2M rule (FAS 157). While the trigger of recent problems has been the collateral required on contracts, there hasn't been a useful examination of the value of these securities. The idea that they are utterly worthless (approximate market value for M2M) is only true if the value of the mortgage paper is also zero—but that cannot be the case.

So, compelling firms to write down the value of these assets vastly exacerbates the leverage problem, but more importantly it prevents cash injections or other techniques from solving it by preempting a functional market. One of GAAP's central functions is to maintain a functional market, and this rule does the reverse.

Dr. Baker:

Are you confusing tax credits with tax loss carrybacks?

"There are relatively few companies that could benefit from this tax break since most companies will not have losses so large that they would need more than two years of tax payments to balance them against."

So you have ESP? The 2008 tax returns are not filed yet.

Not up to your usual standards.

save_the_rustbelt

If a corporation carries back the Net Operating Loss four (or two) years and files amended returns for those previous years, they will in a sense get a "tax credit." They will be refunded taxes paid in the past because they will be able to report lower taxable income for those years. As you point out this isn't technically a tax credit, it is really a reduction in the amount of taxable income to a corporation. You are both correct.

Dr. Baker,

Under current law, I think a corporation can exercise the option to carry forward the Net Operating Losses to future years. This isn't mentioned in the article.

The thing I don't understand is why there is no question about the continuation of the accelerated depreciation write offs available to businesses that this plan apparently proposes continuing. Bush started this in 2008 and used it to encourage past economic activity. This was a center piece for his plan to rebuild New Orleans and other "GoZones" with these same accelerated depreciation write offs.

These depreciation write-offs enable a business to reduce their taxable income in the current year. This can even lead to a Net Operating Loss. However, this means that there will be higher taxable income in future years and larger capital gains when assets are sold.

Aren't there additional ways to help businesses in these difficult times that don't just benefit the cronies at the top?

Rick Kane,

Someday a real journalist will write the story about how Rubin and his friends (Summers, Orzag, Furman, and Geitner) became dominate in Mr. Obama's economic thinking

Obama doesn't have any economic thinking.

"Why are firms being required to write down the full value of assets that would in all likelihood fetch at least some cash even in a barely functioning market?". Isn't this a contradiction - if the assets would fetch some cash shouldn't that be reflected in the current market value?

I suggest that the real root of the problem is not the accounting method, but that the market for stocks of financial institutions like investment banks is based not on real productive assets but essentially on expected profits from speculation. The problems of mixing speculation with commercial banking were recognized in Glass-Steagall but of course this was thrown overboard. Basically, speculators were allowed to pretend that their assets were "as safe as houses".

Changing accounting and other market rules, or enforcing existing rules, is just a bandaid. Speculators must be quarantined so that they do not have the power to mix themselves up with the real economy.

Thank you, Rick, for mentioning the realtor's association. The real estate industry has not received much media attention as to how years of aggressive selling and artifical price inflation is really at the root of our current financial mess. This country has been living off of paper profits in home equity without any correlation to actual value. Housing values have been distorted as part of the American dream to get rick quick.

As a realtor of more than 25 years and an MBA as well, I can tell you that, despite the common wisdom, it is usually sellers---rather than realtors---who drive up prices. Anyone who has sold properties knows that it is the rare seller who does not believe that his/her home "is most decidedly worth more than the one down the street that sold last month." In my experience, the realtor who proposes the highest sales price is usually the one who gets the listing. Those of us who do our best to give sellers an acccurate appraisal of their home's worth are often left out in the cold.

In the new age of frugality, this will change, however. And I will happily welcome the more realistic sellers into my fold, if they so choose.

Harvard alum Iris Mack, MBA/PhD communicated with Larry Summers’ office to express her concerns about how her HMC boss Jeff Larson used derivatives to manage an HMC portfolio. Larson eventually left HMC to start Sowood hedge fund with hundreds of millions of dollars of Harvard alums’ donations. Sowood was one of the first hedge funds to blow up during the subprime mortgage derivatives crisis.

Dr. Mack communicated with Summers’ office regarding such derviatives trades. Perhaps, she could have saved Harvard alums hundreds of millions of dollars if Summers had bothered to continue to hear her out before forcing her resignation. There is a wealth of information describing this derivatives whistleblowing case: correspondence between Dr. Mack and Summer’s office (emails, faxes, snail mail, phone records, etc.); legal documents; reports from FBI and DOJ interviews, etc.

Given all this, you have to wonder whether Summers was either too
(a) corrupt and wanted to coverup up something(s) at HMC.
(b) arrogant to think that Dr. Mack had anything of value to tell him about mathematical finance and derivatives. Please recall Summers’ comments about women and math. Also, please note that Dr. Mack has a doctorate in Applied Mathematics from Harvard and a Sloan Fellows MBA from London Business School.
(c) incompetent to understand what Dr. Mack was trying to warn him about regarding derivatives trades in HMC portfolios.

Did Summers try to silence Dr. Mack the way he, Rubin and Greenspan tried to silence Attorney Brooksley Born of the CFTC?

skeptonomist,

you are quite right that the main culprit is leveraged speculation. Still, accounting rules are an important contributing factor, and one which might have altered the course of events. Mark-to-market has been interpreted (owing to odd SEC "clarifications") as dictating that firms calculate the value of their assets using market inputs in a situation where the market is more or less frozen. While it is true that in such a case an asset is difficult to sell, the rule compels the holding firm to treat this as the final word on the asset's value. This would be like forcing a homeowner to write down the entire value of her home because there have been no sales in her neighborhood lately—and to pay off the balance of her mortgage immediately to satisfy the bank's lien. Such a rule is techincally feasible, given that the value of any asset is only what the market says it is. But imposing such a valuation in effect puts an end to the market.

Under current law, these losses will eventually get carried back as they are claimed two years at a time in future years. The change Obama is proposing, and all kinds of business lobbies such as the NAM and the Chamber are pushing, would simply move those future carry backs to the present. So no additional monetary benefit is being offered, it is simply a timing issue. They would get these breaks in future years anyway. The theory is if you give it to them now it will provide stimulative effect instead of spreading the benefit over several years in the future. So I don't think this is necessarily a sop to the banks as Dean Baker suggests. It may not be a good idea, but it is not as simple as he makes it seem...

Good post,thanks a lot.There is not a question of whether there are enough people to possibly be trained to practice medicine. There is only the question of whether you want one more doctor or one more derivatives trader.

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