Accounting rule to blame for US crash, says top US economist Brian Wesbury

Mark-to-market accounting implicated in financial meltdown

Barney Frank: former chairman of the House Financial Services Committee ensured mark-to-market practice ended. Photograph: Charles Dharapak/AP

Barney Frank: former chairman of the House Financial Services Committee ensured mark-to-market practice ended. Photograph: Charles Dharapak/AP

Thu, Jul 3, 2014, 01:00

The economic crisis sparked by the subprime mortgage market in the US was the fault of an accounting rule, guests heard a US economist argue over dinner in Dublin on Tuesday night.

Brian Wesbury, chief economist with First Trust Advisors, Illinois, which has more than $85 billion under supervision or management, and is a former chief economist for the Joint Economic Committee in the US Congress, said the subprime market was not big enough to cause the “inferno” that developed.

The real reason was mark-to-market accounting. Banks were marking to market mortgage-backed securitised loans, a spiral began that caused the market to freeze.

Interventions by the US Federal Reserve, including cutting interest rates and the introduction of Tarp (its asset purchase programme), had little effect. But then in March, 2009, Barney Frank (inset) called in the accounting standards board and told it the mark-to-market rule was going to have to change. “And, boom, it was over,” said Wesbury.

Frank, a Democrat and former chairman of the House Financial Services Committee, didn’t end the rule to end the crisis, but rather because he was cheesed off with Secretary of the Treasury Hank Paulson using the rule to bully the banks. At least, said Wesbury, that’s what he suspects. Wesbury made clear that he was a Milton Friedman fan and blamed government, not Wall Street, for the crisis. Tarp, and quantitative easing, have done nothing to assist the US economy.

He showed graphs plotting US corporate profits against the S&P 500, which, he said, when interest rates are taken into account, show the stock market was not overvalued in 2007, was 63 per cent undervalued in 2009 and is still undervalued. Corporate profits are driving the market and are in turn being driven by huge gains in productivity, largely technology-driven.

He took issue with the argument that investment was below what it should be when account was taken of the enormous recent strides taken by technology. The level of investment is not below what it should be. Companies don’t need to spend the same quantum of money to get the same “oomph!” from their computers.

Asked by economist Alan McQuaid, of Merrion Capital, if he was saying that the US Federal Reserve was “incompetent,” Wesbury replied yes, before later saying that a better description might be “political”. Everyone liked to be in charge of a bigger balance sheet, he said.

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