Money and “Money”

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Econo-blogger and member of the Knights Who Say, James Kwak weighs in on the recent change in accounting rules for banks:

Investors and regulators are not idiots. They know what the accounting rules are. If banks claim they were forced to mark their assets down to “fire-sale” prices, investors can look at the facts themselves and apply any upward corrections they want. Now that banks will be able to mark their assets up to prices based solely on their own models, investors will [make] the downward corrections they want.

In other words, the fact that a thing has a certain value on paper doesn’t make that value a reality.  Market goods are worth what somebody is willing to pay for them, not what somebody’s model of that market says they’re worth.

Over the past 10 years, Wall Streeters invented a lot of models and created a lot of paper wealth based on them.  But none of it was real.  It’s still not real, but they can’t seem to comprehend that.  They think changing the accounting rules will suddenly make their paper wealth real.

We need our financial sector to come back to reality if we’re going to recover.  This is not a good sign that that’s happening.

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