Not So Dismal

Making Economics a Little Easier to Understand

Posts Tagged ‘Credit

Bailout 2.0

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From today’s Politico Arena question, which is “Bailout II: Does the New Plan Sound Better Than the Old? What else must happen?”

It’s “better”, but only insofar as it’s shoving open the credit markets.

One of the weapons that has helped most in the past few days is one that is hardly being mentioned: FASB, an accounting standards organization, released changes regarding mark-to-market accounting for illiquid assets, suggesting that it might be okay to value mortgage packages and other securities that simply aren’t being traded at their cash value, rather than at the bidding price. This is important because the bidding price is far below both the actual hold-to-maturity value of these securities and even discounted prices many companies might accept to simply get rid of them. If the change is enough to allow auditors the latitude to sign off on less paranoid financial statements, then we may see that many companies on the cusp of problems are, in fact, doing okay from a cash flow perspective.

But the crush of new money bursting through the gates remains a big part of this, to be sure. And that’s what should be most concerning: this money may be useful to break open the clogged pipes, but now the fear should be focused on when they burst. In other words, having hundreds of billions of new dollars in the market that aren’t really needed will lead to massive inflation, and sooner than many people think.

Written by caseyayers

14 October, 2008 at 8:34 am