BOE — Suspending Mark to Market is “Moral Hazard”
Adam Posen, member of the Bank of England’s (BOE) monetary policy-setting committee, responded to a question from a Dallas audience, “If you have mark-to-market only suspended on the downside, you have the mother of moral hazard.” The question to which he was responding was whether the requirement for fair-value accounting exaggerated the recent financial crisis.
Mr. Posen was speaking at a conference on the euro. He also claimed that suspending mark to market was an invitation to “accounting games,” and that “The lesson from history is, avoiding mark to market tends to make things worse.”
Mr. Posen is an American and a former deputy director and senior fellow at the Peterson Institute for International Economics in Washington. He has also been an economist at the U.S. Federal Reserve Bank of New York and he has worked with the European Central Bank as well as the BOE. In 1999 he co-authored a book on inflation targeting with Federal Reserve Bank Chairman Ben Bernanke.
Posen’s right. If you have mark-to-market, it should go both ways. But it is aimed at the wrong target. Lack of capital and liquidity caused the run on the credit markets. Too much leverage. Let’s fix this first.
I misspelled my name in the prior post: Domenic Savini
Thank you.
Sir/Madam –
I am happy to see the intellectual honesty that M2M should ride up as well as down the escalator. That being said, I don’t think the real issue is whether or not to recognize (as earnings) changes in the fair value of these securites, but whether this information is adeqautely disclosed via the footnotes to the financials. Investors, creditors, regulators can all “do the math” for themselves if the amounts are clearly shown in the notes. Adeqaute disclosure over recognition should be the overriding consideration.