Free Liberal

Coordinating towards higher values

In the Arena, But Not of It

by Robert Capozzi

It is not the critic who counts, nor the man who points how the strong man stumbled or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena; whose face is marred by dust and sweat and blood; who strives valiantly...who knows the great enthusiasms, the great devotions, and spends himself in a worthy cause; who, at best, knows the triumph of high achievement; and who, at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who know neither victory nor defeat. -Theodore Roosevelt

John "Strangelove" McCain says he's a Teddy Roosevelt Republican. I think he's right about that, in a lot of ways. From where I sit, that's not a mindset I want in the White House. Globetrotting bull in a china shop. Tinkerer with the private economy, meaning you and me.

The quote above that McCain often cites is a good one. There IS something "heroic" about being engaged in the challenge of the moment. Today's challenge is the Wall Street credit crisis. The elites say: Just Do It. The purist know nothings: Do Nothing, Let It Be. And, btw, this is to be expected, and then they recite a long list of obscure and not so obscure root causes to what's seems to be happening in the arena at the moment.

Is it possible that both camps are correct and incorrect? I say, "Quite possibly."

Is it plausible that Hank Paulsen -- a sophisticated financial sage, to be sure -- could in a week's time come up with just the antidote to triage the patient? Jeez, that seems highly unlikely. Assuming Paulsen is not just bailing out his buddies, someone SO engaged in the arena lacks the perspective to rise above the crisis, find the right course of action, and bring it to us from On High, etched on a tablet of Truth. Let's get real!

Many of those who oppose this -- the partisans and the Know Nothings -- are using this crisis to exorcise their favorite theory: "It's all the Fed's fault." "It's greedy capitalists fault." These are valid opinions, but these opinions seem well out of the arena. Some are even suggesting lowering the capital gains tax rate as a solution to the crisis. While lowering the capital gains rate has much merit, it's not obvious how it solves the current challenge, at least in the short term.

There may well be a technical solution to the short term challenge. Boring and obscure, but the accounting rules changed a few years back to reign in an abusive balance sheet practice: Mark to model. There's no market for these mortgage-backed securities, so we'll guess what they are worth, is the upshot. It was replaced by the more standard mark to market practice. A good idea...value an asset at what the market says it is.

Unfortunately, the market for mortgage-backed securities has dried up. If these financial firms mark to market, they mark to $0. Since many of these firm's capital base is overweighted in these toxic securities, this could trigger massive sell-offs as a means to keep capital ratios solvent. This leads to panic and even more widespread bankruptcies. The arena is not a pretty sight.

Perhaps an accounting change is all that's needed to let the financial system find its equilibrium so that we can all get back to our pursuit of happiness.

I'd like to see cooler heads REALLY prevail during this episode of Life, but we shall see.

-RC