mark to market

The unemployment numbers released this morning confirm the other data we saw earlier this week: the economy is shedding jobs at an alarming rate. Unemployment has now reached 8.5 %, and will undoubtedly get worse in the next few months. Here is the government press release: Employment Situation Summary

We have now lost over 5 million jobs since the recession began back in late 2007 with 3.3 million in just the past five months.

There is nothing pleasant to say about this figure. It is easily the worst since the 1981/82 recession, and at the current rate of increase we are well on course to break through the peak of 10.2% reached back then.

This employment picture only reinforces the view that we have a very long road ahead of us before we can truthfully call the recession over. Recent ‘bright’ spots now appear to be exceptions and respites rather than the beginning of a sea change. Stock market analysts are always too ready to call the storm over – they make their money by peddling optimism – so I would caution against paying them too much regard. Nonetheless the downward spiral will end sometime of its own accord, there is just so much damage to inflict before the inevitable pent up demand results in our reaching the bottom.

At the rate of decline we appear to be in I still maintain that the recession will end late this year or the beginning of next. With the crucial determining factor being the impact of government policy. As you are all aware I think Obama has been timid so far in his anti-recessionary moves. So the odds are that the decline will last on the longer side of my expectations, with unemployment possibly topping out around 11%.

One side effect of such a prolonged downturn is on the infamous ‘stress tests’ being run on our major banks. Remember that these tests are designed to test the bank’s insolvency under various, and presumably, trying conditions. To my knowledge none of the tests, even the most pessimistic, has an 11% unemployment rate in it. So those stress test seem to avoid too much stress. In that case some severely impaired banks may pass the tests whereas they should fail. That implies an increased number of ‘zombie’ banks, and a weak recovery.

Not good news, however we look at it.

Addendum:

While I am hinting at the administration’s soft attitude towards baking, I should note the change announced by the Financial Accounting Standards Board who earlier this week watered down the asset valuation standards to allow alternatives to mark-to-market accounting.

This may seem arcane and dull, but it could have profound economic impact.

By allowing the banks to choose an alternative asset valuation method the new FASB ruling will increase earnings by some of the banks by as much as 20%. This is because the banks will be able to revalue, inevitably upward, some of the toxic assets they had previously taken a loss on. Unfortunately this means that bank earnings and balance sheets will now be even more opaque – investors and government regulators will be less able to tell the true net worth of the banks simply by looking at their balance sheets.

Needless to say I think this is a retrograde move which could not have come at a worse time. I agree that mark-to-market can cause a radical undervaluation of assets fro which there is no clear market and so an alternative appears to be a good idea, but allowing each bank to invent its own valuation model merely creates confusion in a market already confused enough.

The FASB move is testimony to the enduring lobbying ability of the big banks.

Not are they too big to fail, but apparently they are too big to regulate, legislate, or otherwise tell what to do. That cannot be healthy for the economy.

And so add this to my growing list of things I wish the administration had the gumption and the courage to do.

Break up the banks!!