Because of a rule change, banks can now overvalue assets and falsely inflate earnings reports, all to increase lending and fool us into thinking the economy is getting better so we’ll spend, spend, spend
In a stunningly foolish act, a nonprofit board that has authority over public companies’ accounting standards on Friday quietly got rid of a rule that requires banks to value their assets at what they’re currently worth. Instead, banks can now boost their books by valuing their assets at what they estimate they will be worth when the economy gets better.
Seriously. The Associated Press describes it this way:
“The changes, which apply to the second quarter that began this month, will allow the assets to be valued at what the banks project they might sell for in the future, rather than in the current, distressed environment.”
The relaxing of the rule came from the Financial Accounting Standards Board, which is granted the authority over accounting standards by the Securities and Exchange Commission.
All I want to know is, can I get some special treatment too? I want to refinance my home. Maybe I can get my appraiser to inflate the value of my home by 20 percent, since I have a hunch that, sometime in the future, it will be worth that much more than it’s worth now.
Not.
Better yet, I think I’ll call up the company that administers my 401(k) and tell them I want to cash it in, plus get another 20 percent because, someday, it will be worth 20 percent more than it is today.
Right.
Slamming shots in the morning
Seriously, though: When I first put a link to an article about this rule change on my Facebook page on Friday, N.M. Public Regulation Commissioner Jason Marks responded with this comment:
“Allowing banks to over-value junk assets will help the economic crisis the same way that slamming a few shots first thing in the morning cures a hangover,” he wrote.
That’s exactly right. This will lead to overvalued assets and falsely inflated earnings reports from banks. Some will honestly project what they think their assets will be worth based on what they predict the economy will do, but who really knows what the economy is going to do?
Others will simply lie. This gives them the freedom to do that (as long as they don’t admit that it’s what they’re doing). All of them — the honest and the liars — will be biased in their estimates of what the economy will do because of how their estimates will affect their own financial stability.
Trying to fool Americans
With this change, Washington and Wall Street are essentially saying that’s OK, because they want banks to start lending more. By trying to make that happen with this change, they’re attempting to fool Americans into thinking the economy is better than it actually is so they’ll spend money they don’t have on things they don’t need, all in the hope that such wasteful spending will fix the economy.
It’s dishonest, at best, conspiratorial at worst.
And the rule change assumes that the question is when, not if, the economy is going to rebound. Personally, I’m still stuck on the latter, and this newest move isn’t helping boost my confidence in Washington, Wall Street or the direction of our nation one bit.
We need to take steps to actually improve the nation’s economy, not come up with new tricks to make it appear that it’s improving. The economic crisis is a long-term problem that requires long-term solutions including paying down debt and reducing our dependence on foreign oil. There is no quick fix. There’s no magic trick.
Allowing the banking system — the lifeblood of the economy — to say its assets are worth more than they are is foolish. Are we really trying to build another house of cards? Has the last even finished collapsing yet?