We have lost seven trillion dollars of value in our nation's real estate values in the last three years. Banks, insurance companies, and other financial institutions have had to be propped up with tax payer money as their portfolios have taken the value hits. Yet we have had 347 banks close since 2008 with 700 more at high risk, while only 11 failed from 2002-2007.
Why? Is it all because people were allowed to buy houses they couldn't afford? Yes and No. Yes, that is what lit the fire, but that was just the kindling, the fire is an accounting system put in place by Congress in 2007 called Mark to Market. In my opinion it took a bubble burst that should have set us back for maybe an eighteen month mild recession and created the second great Depression economically.
It artificially deflated values and continues to drive them down further and further. This started with the foreclosure rates going up 100% due to sub-prime loans. However, keep in mind that 100% represented changing our normal foreclosure rate of 2.5% to 5%. How can an extra 2.5% foreclosure rate create a complete crash of our economy? It was due to Mark to Market that pretends that a financial institution's assets are valued at what they could sell them for that day. When a new price comes in that becomes the new standard. Let's say you live in a stable neighborhood that all homes are valued about 400,000.00 but a neighbor has a gambling problem takes out a 125% mortgage on his home and then blows it in Vegas. The home sells at Sheriff sale for 200,000.00, in the real world it would be an anomaly and no factor in how other homes were valued, but in a Mark to Market world it would set all the others at 200k, at least in the bank's portfolio.
This artificial devaluation is what caused the Toxic Asset cancer that destroyed banks and insurance companies. They have to keep a prescribed balance between outstanding loans, assets, and cash on hand, if they get out of balance the Feds shut them down. Once their asset column took an artificial hit they had to add cash on hand to stay open. At first banks would sell their assets at even further reduced rates to other banks trying to raise cash. Then, because of Mark to Market that new lower price reduced the assets of both banks by setting it as the new mark. Thus Toxic Assets. This caused banks to quit buying each other's assets, shutting down trade. The TARP money that we wondered why the banks were not lending was used to build up their cash on hand to keep the Feds from closing them. The sad part is this was all make believe numbers.
At the beginning it was the sub-prime loans that shouldn't have been made that started it. However, today, that is long past. It is good solid loans that are falling due to the borrowers loss of jobs, loss of equity, loss of incomes even if they still have a job. We are dealing with a real unemployment rate of about 18% when you factor in the number of people who have been unemployed so long as to no longer qualify for unemployment checks. Today, the loss of jobs and loss of equity are what is holding us down.
Since we are in the situation we are in today from our government following the pattern that Franklin Roosevelt used to drive us into a deeper and longer Depression, why not continue to follow his idea of removing us from Mark to Market as he did in 1938 when he came to realize that it was a major factor in the Great Depression and holding us in it. Yes, the last time we used Mark to Market was from the late 20s through 1938, ironic isn't it?
How about this, why not change to a Rolling 5 year average as our mandated accounting system for our financial systems where short term anomalies will not create free falls in the banks? Why are we not at least looking into this?
For more on Mark to Market this is a blog I wrote a couple years ago.