'Fix Accounting, Then Fix System' (Yves Smith)

Is the Superbowl on? I am reading naked capitalism instead.

Your humble blogger has been saying for some time that efforts to prop up bank asset values are prolonging the financial crisis, and the the various incarnations of “bad bank” plans inevitably entail buying dud assets at above market prices. That has the ugly side effect, which some no doubt see as a virtue, of letting banks that hold similar assets mark them at phony prices. The mechanism is different, but failing to write down bad assets is straight out of the Japan playbook.

The financial system grew too large by lending money to people and businesses who could not afford them (at least, if anything remotely bad happened, and bad things happening is part of the human condition). That means it CANNOT be restored to status quo ante (unless you are willing to see it fall apart again in short order). But the plans in motion seem to be an effort to do just that.

Instead, we need a program for shrinking and rationalizing the financial system. That imeans understanding how far underwater the system and its various components are. We then need to do triage: figure out which concerns are beyond repair, and how to wind them up, which are reasonable bets with some combination of cleanup, restructuring, and new capital, and which are more or less sound (ie, they may be impaired, but not enough to put survival in doubt) This process also involves making shareholders and when appropriate, bondholders take losses, and also developing mechanisms to write off and restructure bad loans (and lend to viable borrowers, but this is getting priority at the expense of the other steps).

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