Harking back to the much-maligned concept of “regulatory forbearance” that was a hallmark of the S&L debacle, Holman W. Jenkins Jr writes in today’s WSJ that in the current context, “flexibility about bank solvency would better serve the public interest.” Jenkins points out that Tim Geithner’s plan does nothing to allay market concerns and he endorses the idea of dropping mark-to-market accounting:
The larger difficulty of yesterday’s plan is the idea that government somehow can solve the problem of thousands of idiosyncratic, out-of-favor assets on bank balance sheets. Banks are much better suited to that work, given time and relief from the pressure of regulatory writedowns. In time, too, the market for such assets will recover based on real confidence and risk appetite, not government bribes, especially if spared fears of accounting-induced firesales.
Dropping mark-to-market is no miracle cure, but it would reduce the pressure on banks and regulators to make irrational choices about the disposition of questionable assets. Banking might even regain some of its appeal for equity investors, who might see an attractive bet that bank-held assets are oversold — that is, if they don’t have to worry about unpredictable regulatory actions. Real confidence is organic: not something that can be conjured from Mr. Geithner’s promise that Mighty Mouse is here to save the day.
Check out John Berlau’s post yesterday that dealt with just this point.