Saturday, April 11, 2009

Megan McArdle on mark to market

Megan McArdle posts some thoughts 0n mark-to-market accounting and sees the cyclical problem of basing capital requirements on them.
The problem with things like reserve ratios is that while in theory they should be countercyclical, in practice they aren't. A nice fat stack of reserves should enable you to better weather downturns. But of course, as long as they're required reserves, you can't actually touch them. If the government required you to carry $300 in your wallet at all times, you wouldn't have plenty of spending money; you'd have no spending money, unless you carried a lot more than $300.

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