The Mark-to-Market Bull Market

Why are the Dow industrials up some 13 percent over the past six trading days? Here is my theory: Depression 2.0 seems off the table.  Great Recession? Sure. Lost Decade? Maybe. But not even a minor repeat of the 1930s. And why is that? For starters, a bit of common sense about the mark-to-market accounting rules which have been contributing mightily to financial crisis. Ed Yardeni opines thusly:

There are those who claim that M2M has been a minor contributor to the negative feedback loop that has exacerbated the financial crisis. I don’t agree. Here is the latest example: The Federal Home Loan Banks recorded a combined loss for the fourth quarter of $672 million--mainly the result of write-downs in the value of “private label” mortgage securities. The banks say they plan to hold these securities until maturity and don't expect to realize major losses on them. But accounting rules require them to mark the securities to the estimated market value at a time when very few investors are bidding for such assets.

But now companies may be getting some needed wiggle room to apply a cash flow value to certain hard-to-value assets rather than using the last transaction as the key benchmark. Yardeni says that if the new FASB guidance happens, "companies could use the new guidance when issuing their first-quarter financial statements. If so, then earnings should get a boost from the rule change." And as Larry Kudlow rightly puts it:

I suggested that not one more dime of government money is necessary for the banks. Instead, the marriage of the cash-flow valuation of bank assets and the upward-sloping Treasury yield curve will do the trick. Net interest margins are rising as banks purchase money for near-zero interest and loan it out at profitable rates. And the new mark-to-market reform will allow banks to hold their toxic assets for several more years and work them out — just as they did back in the 1990s.

This also seems to be the Warren Buffett plan, by the way.  Why doesn't Team Obama seem to realize this? Maybe because the administration is filled with technocrats and academics -- not that they are not fine Amerians all -- who lack real-world business experience.