Financial History Repeating Itself

Back in March I reviewed a financial history book called Devil Take the Hindmost. In that post I listed how America 2008 was starting to look like Japan 1990. One of the items I mentioned was in regards to accounting.

2. Central bankers turned a blind eye to banks that wouldnt write down bad debt.

The Big Picture is reporting that FASB is delaying the Off-Balance Sheet Rule for a year. Ritholtz is a student of financial history and one of my financial mentors. He brilliantly states:

The longer they wait, the worse it ultimately will be. The long Japanese Recession (1989-2003) was caused by precisely this refusal to take the markdown, and engage in all manner of delays, excuses, procrastinations. Eee-diots — This only will make it worse!

When the people with capital to invest no longer trust the accounting, they withhold further investment. Without new investment you aren’t going to pull out of a recession.

One of the reasons America has always been an economic superpower is because we’ve always held a high standard when it comes to accounting and protecting the interest of investors. We make mistakes, but those mistakes are recognized and ultimately fixed.

Today FASB stated that we know the books are cooked, but we are going to turn a blind eye. This is banana republic accounting. And it is one of the reasons I don’t hold a single long position in any stock right now.


Add yours

  1. Banana Republic accounting and communist finance. FNM and FRE are publicly traded companies with both equity and debt held by investors who got greater interest than t-bills, because there was supposed to be greater than zero risk.

    Now they are back-stopped with tax-payer money. Our money …and the real irony is that the largest debt-holders are China and Japan …so US taxpayers are sending money to asia to cover their bad investments.

    Are you annoyed yet? Unless you don’t make enough to pay income tax you should be.

    Good post though MAS. Bernanke has said that ALL Japan needed to do was to come clean with their bad debt and they would have solved their problems much more quickly. So what is Ben doing …tons of auctions which allow the banks to continue to hide their bad debt for much longer.

    Tougher than it looks apparently…

  2. I found this by Ben on Japan:

    “Economically, however, it is important to recognize that the role of an independent central bank is different in inflationary and deflationary environments. In the face of inflation, which is often associated with excessive monetization of government debt, the virtue of an independent central bank is its ability to say “no” to the government. With protracted deflation, however, excessive money creation is unlikely to be the problem, and a more cooperative stance on the part of the central bank may be called for. Under the current circumstances, greater cooperation for a time between the Bank of Japan and the fiscal authorities is in no way inconsistent with the independence of the central bank, any more than cooperation between two independent nations in pursuit of a common objective is inconsistent with the principle of national sovereignty.”

    So his recipe book states:
    1 – if INFLATION be a strict parent
    2 – if DEFLATION bend over

    The FED is clearly in DEFLATION panic mode now. That analysis seems to be missing from the major financial media.

    Thankfully we have MISH.

  3. >> That analysis seems to be missing from the major financial media.

    I would restate it as …our major financial media seems to be missing. 🙂

    I read The Economist (British) …everything else I read on blogs. The American media tells us what their corporate masters/sponsors want us to know. All we get is a constant stream of bumper stick slogans:
    – Subprime is contained.
    – Alt-A is contained.
    – Prime is contained.
    – We are starting to see the bottom in (add your favorite asset class here)
    – They (pick bank) will need no more capital infusions.
    – All real estate is local.
    – Real Estate never drops in value.
    – Buy now or be priced out forever.
    – Buy and Hold is the best strategy.
    – The emerging markets will decouple.
    – The Fed is concerned about inflationary pressures.
    – It’s different this time…

    All lies.

  4. Agreed.

    Understanding financial history is a more valuable skill than reading a balance sheet.

  5. Oh, I almost forgot my favorite bumper-sticker quote from Q1 2008:

    “We are looking over the valley to the 2nd half.”

    The implication of course that we would launch into a new bull market in the 2nd half of 2008.

    This is just brilliant marketing!
    – The imagery of the wilderness.
    – The implication that you will miss your chance if you sell your shares now.
    – The clear vision of the rise on the other side.
    – The market as a forward looking mechanism.

    Of course we now know that H2 is probably going to be a train wreck …

    Anyway, the first time I read that line I thought to myself: “What a truly brilliant bit of misinformation …wow!”

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