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Two Approaches to Troubled Economic Times

Discussion in 'Off Topic Threads' started by JBrooks, Jan 9, 2009.

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  1. JBrooks

    JBrooks TS Member

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    With which of these do you agree?

    1. " In this present crisis, government is not the solution to our problem; government is the problem. From time to time we’ve been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else? All of us together, in and out of government, must bear the burden. The solutions we seek must be equitable, with no one group singled out to pay a higher price."

    2. "It is true that we cannot depend on government alone to create jobs or long-term growth. But at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the cycle that is crippling our economy, where a lack of spending leads to lost jobs, which leads to even less spending, where an inability to lend and borrow stops growth and leads to even less credit."

    Vote 1 or 2.
     
  2. Fast Oil

    Fast Oil TS Member

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    3. None of the above
     
  3. halfmile

    halfmile Well-Known Member

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    The problem was solved previously but our leaders went right sby it and did something else.

    Let the market kill the bad guys, and have a short sharp recession instead of a long painful depression.

    They made a wrong turn at Bear Stearns.

    2: Spend less than you take in, and cancel the earmark procedure completely.

    3. Eliminate lobbying, make it punishable by prison terms.


    There, now, wasn't that easy?

    HM
     
  4. pendennis

    pendennis Well-Known Member

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    Halfmile - Lobbying is constitutionally protected free speech. Every citizen has a right to petition government for redress of grievances. Lobbying is just a formalized version of the petition process. The Supreme Court has ruled as much, and would never elimnate it.

    While lobbying has become bastardized as a form of free speech, it's no more corrupt than the rest of the wheeling and dealing done in DC every day.

    The citizens of this country are as guilty as any PAC or lobbying group. They vote for those who have promised them money at someone else's expense. This has been the warning from republicans since before the founding of the U.S.

    Dennis
     
  5. School Teacher

    School Teacher Well-Known Member

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    4.

    I suspect that one of many causes of our current financial mess is our archaic accounting system by which we measure profit and loss. I am not an accounting guru but I did major in accounting in college and took several economic courses. Here is one of several issues that puzzle me.


    An automobile company makes millions of vehicles yet still operates at a loss. On its financial statement, it recognizes a loss and possibly a reduction of assets and net worth.


    Yet, the community including cities, counties, schools and the state gain revenue from sales taxes on vehicles sold, property taxes on vehicles, license fees, income tax on workers salaries and so on. The workers spend money in restaurants, stores, etc. and keep their excess cash in checking accounts and savings accounts. The bankers make money as do realtors, entertainment venues, and barbers and so on.


    The problem is that although the automobile company recognizes a loss, the community benefits, probably more than the automobile company lost.


    Maybe we need a different method of accounting than that we adopted from 16th century monks who developed double entry accounting.


    Maybe the “Mark to Market” rule needs to be re-examined.




    Ed Ward
     
  6. pendennis

    pendennis Well-Known Member

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    JBrooks - I'd vote for number 1, since #2 is directly from Obie's speech yesterday.

    He is delusional. No one in history has ever been able to break the business cycle.

    Ed - The mark-to-market" rule works only if you have a very long term to measure the revaluation of the assets. Sarbanes-Oxley created this problem, forcing it onto companies previously using cost-or-market valuations.

    I totally agree that accounting rules need to be changed. However, until the corporate tax code in this country is discarded, and we go to a value-added, or sales tax-type code, this is how corporations must operate. We tax our corporations at the highest rates in the world, and they, in turn, spend billions of dollars trying to legally abate their taxes. We've created an entire industry of tax avoidance. We also double tax stock dividends.

    While the money is important, to the politician it's all about staying in office and expanding his power.

    Dennis
     
  7. texasaggie2000

    texasaggie2000 Member

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    Dennis - I could be wrong, but I am fairly certain that Sarbanes Oxley had nothing to do with mark to market accounting, but more to do with accounting controls and procedures. Also, the biggest issue with mark to market accounting is generally trying to determine the appropriate fair value to mark an asset to, this can be far more difficult than it may appear.

    school teacher - The accounting system is not to blame for the automobile companies losses. While I agree that there are some archaic accounting rules, for the most part they do a good job of capturing revenues and expenses, and therefore profits. Thus, if an automobile company cannot make profits from its units, market forces dictate that it go the way of the dinosaurs. Taxes collected from these goods are a net zero to the community economically, so you really cannot take this into account in the analysis and according the economic theory, those jobs at the automobile plant that pay workers who then spend the money elsewhere, etc. will be replaced with other jobs as the resources used by the automobile companies are reallocated.

    That is my way of going around the block to get next door...but in short, what you are describing is really more of an economic problem, not an accounting problem.
     
  8. highflyer

    highflyer TS Member

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    We are living in a new era in American history in two ways. We have a government that for the first times thinks government can and should stop the normal business cycles and prevent anyone from ever going through hard times. They think they can insure prosperity for all. It isn't going to work. Second, the masses have discovered that they can vote themselves others money collected and redistributed by the government. Once discovered that will never change and will lead to an inevitable decline in the standard of living and loss of freedom for all. For the first time it is insured that our children will not enjoy the freedom and prosperity that we have enjoyed. I am glad I lived when I did.
     
  9. pendennis

    pendennis Well-Known Member

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    Texasaggie2000 - Embedded in Sarbanes Oxley was the requirement that corporations be valued at mark to market. It ended the practice of using time and intrinsic value to valuate a company. It expressly put the value of the company at market, which leads to de-valuation at times of economic uncertainty.

    Mark to market was used in the MBS business, and was done so, since there was no other method available.

    As investor confidence went in the tank, valuations plummeted, driving down stock prices.

    While SOX brought some tranparency, it also caused a huge number of corporations to de-list publicly, and go private. It also stifled some companies from going public. Far more companies have gone private, than have gone public, as a result.

    Dennis
     
  10. texasaggie2000

    texasaggie2000 Member

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    Dennis,

    Keep in mind, I am a little slow (note that I went to Texas A&M) but I am a little confused on what you mean by the fact that "Embedded in Sarbanes Oxley was the requirement that corporations be valued at mark to market."

    Valued by whom? The financial statements presented by public companies are still presented using GAAP, which for the most part requires historical accounting if I remember correctly. For instance, a large railroad company does not revalue its locomotives, track, etc. at each reporting period for changes in fair value. Oil and gas companies do not change the values of their pipelines, rigs, etc. for changes in commodity prices. Walmart does not change the value of thier buildings and structures at each reporting period to reflect changes in fair value...do they? I am aware that certain financial assets and related derivatives can be subject to mark to market accounting, but I believe that was a product of FAS 138 and FAS 157.

    During my brief tenure in public accounting, I don't recall SOX having a material impact on GAAP, but I could have mis-understood the regs, that is why I am requesting clarification, I find your thoughts very interesting.

    I would also like to see the actual numbers of companies that de-listed and went private as a result of SOX. While I do not doubt that some did, I am very curious what the actual numbers were. Further, what difference does it make if a company is public or private? You are simply talking about captial funding, not production and profitabilty.

    Far more companies have gone private than public...I believe this has long been the case, far before SOX was around, and I do not quite understand how this is actual a detriment for SOX.

    No slam intended, I have been away from all this stuff for a while, so I am curious about your statements.
     
  11. pendennis

    pendennis Well-Known Member

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    School_Teacher - I worked for one of the Big Three for over 38 years, the first 25 in accounting and finance.

    Accounting is driven directly by tax, financial security, safety, and fuel economy Federal laws. Yes, certain carlines operate at losses, but that's due mostly to fuel economy laws. We had to build a lot of unprofitable cars, so we could produce profitable vehicles which weren't so fuel efficient.

    Not one decision is made without considering the legal and tax consequences. Unprofitable carlines would be eliminated in a heartbeat if Uncle wasn't there with mandates.

    Dennis
     
  12. Bruce Specht

    Bruce Specht Well-Known Member

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    J Brooks, to which theory do you subscribe? I for one have real concerns about our country becoming more socialistic by haveing government intervention. That said, greed and a lack of comon sense have created a large part of the monster we're feeding. A CEO shouldn't make billions a base ball player shouldn't either and a factory worker, is that job worth $71.00 per hr? Who are we kidding? We need to actually try "fical responsiblity" certanily in government and in each of our owm microeconomics. How long can we produce a car a minute and expect there will be buyers for each of these cars? Why do I let myself be talked into taking a mortage that I know I can afford? Send the oil cartel a message, "drink you oil and eat your sand' drill here drill now. Don't create more beauricratic political jobs monitoring business (Car Czar) have the watch dog groups already in place do what they have been paid to do!
    Based on past post and responses I know we agree on many issues I'm guessing we're on the same page here.
     
  13. School Teacher

    School Teacher Well-Known Member

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    Dennis:


    Early in my career, I worked for a "Big 8" CPA firm (the one with the double doors) for 5 years and was a CPA. After the first year, they made me a computer programmer so I worked on the side that became Accenture until I left and began a career in Information Technology. That said, I am not an accounting guru.


    My comment was that the current accounting rules do not take into account the real contribution that a manufacturing business makes to the community. By this I mean that one manufacturing job often creates multiple other jobs in the community. To that end, even if the manufacturing company operates at a loss, the community benefits. Assuming that the loss is not too great, it may be to the community’s benefit to forgo taxes or even provide a subsidy (low cost loan, funds for training) to keep a company in business


    As to “Mark to Market”, is this not the same as valuing an investment at the lower of cost or market? My understanding is that when the value of a Mortgage Backed Security is in question, it must be valued at zero even though it is backed by real estate.


    One of the reasons that I have heard for the collapse of the Roman Empire was its numbering system. True, they had great architecture and substantial engineering achievements but can you imagine doing complex calculations in Roman numerals? Thank God that the Arabs came up with Arabic numerals, the concept of zero and negative numbers and algebra. They also gave us value of 360 degrees in a circle.

    Is not our current accounting system a lot like Roman Numerals? Do we not need to take into account the true economic benefit that a company creates, not just its profit or loss based on archaic principles?

    Ed Ward
     
  14. halfmile

    halfmile Well-Known Member

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    Dennis, when a lobbyist thinks it is a poor day when he can't give away at least a million dollars, that's a little more than "redress of grievances"

    I would call it Baksheesh. More commonly known as bribery.

    I am not saying abolish it, but get the bribery out of it. A company seeking an advantage sends a few million to washington through lobbyists and the consumer pays the freight. That make him accessory to the crime but he doesn't know it was commited.

    I guess a river of greed can't be made to flow uphill.

    HM
     
  15. pendennis

    pendennis Well-Known Member

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    School-Teacher and TexasAggie2000 - That's the problem with the mark to market concept. The valuation of an asset can't be at zero. There is always residual value (scrap, etc.). The example of MBS' are a prime example. The underlying asset is the real estate and home. Never have they been zero. What drove the MBS to "zero" value was the inability to redeem them in the near term. In accounting, I was taught that real estate, land, buildings, etc., were all long-term assets. The MBS' are treated as a short-term security, more in the view of a junk bond, than that of a long-term asset. This is the upshot of turning people's homes into just so much lumber, plaster, and brick.

    Mark to market also allows the use of algorithms for valuation. If the market is down, and there isn't enough prior valuation history, you end up with worthless assets, as happened starting late in 2007 and 2008. Because of the valuation method, lots of assets went for fire sale, and even zero values. When was the last time that land, unless it was the Love Canal, worth zero?

    According to a study by the Wharton School, three times the number of companies delisted from American exchanges in the first year of SOX, than in the prior year. Only ten foreign companies were listed on the NYSE.

    SOX has a fixed survey cost, and as such affects smaller companies much more than larger ones. Some estimates have put the compliance cost as high as one trillion dollars. That's a lot of money which could be used for product development and quality improvement, and it absolutely stifles business growth.

    Best,
    Dennis
     
  16. texasaggie2000

    texasaggie2000 Member

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    Dennis,

    Thanks for the Wharton study, I always wondered what the numbers were. I would disagree that SOX has a fixed survey cost...I did compliance work for a long time related to SOX and different companies paid different amounts depending on a ton of things (ex. nature of the business, number of locations, volume of transactions, foreign operations, etc.) but the trillion dollars does not surprise me.

    Keep in mind though, there is an inherent cost to the lack of having these types of controls and transparency in financial reporting, ask the folks that held Enron stock what they would have paid for these types of reporting controls (while I am not sold that SOX would have prevented an Enron, in theory it was designed to assist in that).

    As to mark to market, I am a little confused in your statements. You claim that MBS are treated as short term securities but the valuation of the MBS was driven down because of their inability to be redeemed in the near term. If they cannot be redeemed for cash in fairly short order, they should be treated as long term assets, which I believe most financial companies did on their balance sheets. Junk bonds could be treated as either short term or long term securities depending on their duration just like MBS. Junk bonds were junk because of the credit rating of the issuing company, not the duration.

    I agree that in theory MBS are backed by the underlying assets which are real estate and the housing structures, but the real value of the MBS are the borrowers wherewithal and intent to repay the loan. The structure of many of these securitizations is such that what the investors are really buying is the stream of cash flows that comes with folks making mortgage payments, not an interest in the home itself. When this ability to pay is called into question, you get a lowering of the value of the MBS...and I believe they are rarely marked to zero, as they are marked to the expected recoverable cost (which would be roughly the expected value of the real estate if liquidated and the related expenses to do this). And even though real estate might not ever go to zero, it can be worth substantially less today than it was yesterday, especially when companies are forced to liquidate it in an illiquid market.

    We have clearly high jacked this thread, and have delved into areas much more boring than trap shooting, so I apologize to everyone who just got through this diatribe and now needs to take a nap. I do however think that a Neil Winston chart illustrating mark to market accounting would be appropriate here.
     
  17. grnberetcj

    grnberetcj Active Member

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    Trapshooting is only boring to those that loose!

    Economics is boring to those that are not self-directed/employed.

    Most new businesses fail due to the "6P Principle".

    Curt
     
  18. pendennis

    pendennis Well-Known Member

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    TexasAggie2000 - The market value of the MBS' were like margin accounts. At the end of the "day", their value had depreciated to the point where the margin had to be covered. The financial markets, in general, already were suffering from a lack of liquidity. The primary causes were the fact that housing prices weakened from a lack of sales, the job market started to shrink, and people increasingly defaulted on iffy mortgages. The Fed and the SEC, after shirking their responsibilities, finally decided that the financial markets needed liquidity.

    There was another study by the SEC which showed that companies having revenues in excess of $5 billion spent only about .06% of revenue on SOX compliance, while companies with less than $100 million in revenue, spent 2.55% of revenue on compliance. That's a very costly compliance cost for small companies.

    It's very difficult to parse this even partially. There are just too many input factors into why these markets collapsed. It would be fair to state, however, that the combination of SOX, MBS, softening economy, and lack of regulatory control, all "conspired" to create a perfect financial storm.

    Like you, my zeal for this subject has hijacked the thread. However, the study and interaction of political science, economics, history, and finance, make for very interesting reading. For me much more fun than the nuances of #7.5 and #8 shot.

    Best,
    Dennis
     
  19. jcallan

    jcallan TS Member

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    I vote for #1 over #2, but neither are very good and both dramatically simplify and evade the real problem.

    Our current problems can be traced all the way back to a law promoted by Phil Gramm and several others a few years ago. This law altered the way that derivatives and certain types of commodity financial instruments got treated in like-like swaps. In essence, a fast one was pulled when no one was looking.

    These types of financial ledgerdermain are complex and difficult to understand even in the best of circumstances. Suffice it to say that the key to the wealth getting wealthier is in one word: Leverage. The key to leverage is OPM or more familiar as "Other People's Money." Find a way to serve both and it becomes very attractive for those that understand these things.

    The law changed the regulations on certain types of financial instruments...typically only used with very large types of commodity positions or huge funds...and so everyone yawned and went back to juicier legislature. Little did we know what evil was just released.

    Out of this law came Enron, Worldcom, the death of Authur Anderson, the cratering of Freddie Mac, Fannie Mae, several broker dynasties and many large banks...not to mention the financial collapse of at least one country. Lack of attention and the bad wills of unintended consequences are what caused this debacle. Call it a Tipping Point.

    Was it the fault of government? Well, due diligence or more precisely the lack thereof is where the fault lies. Our elected officials are responsible for enabling executives to pursue leverage without oversight and to covertly use OPM (in this case all of our money) in highly leveraged and dubious financial instruments that had little backing underneath (none in the case of both Enron and Worldcom and virtually no ability to pay in the case of the packaged mortgages being traded by Mac and Mae).

    Fixing the regulation and repealing the swap law is a good start. This merely prevents the problem in the future. The problem with the economy is that it was pumped up on vapor and we just let the air out. Yep, when the air squirts out the whole balloon gets smaller and we all suffer. Should government fix it? Well, government is you and me...well at least you and I (and a bunch of generations of our children I wager) will pay for anything government does. The real question comes down to how much do you want to pay personally in order to fix what your elected officials help create, failed to anticipate and in most likelihood cannot dramatically alter?
     
  20. chuckles

    chuckles Member

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    jcallen, your analysis hit the proverbial nail on the head and "dead center perfect" IMO...

    The only fault is your summation that we the little people and or our children can actually alter anything in terms of "what we will pay for" as though we had a choice in the matter....we don't.

    thank you for posting...

    regards
     
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