Green shoots or reinflating the bubble?

15 04 2009

Green shoots

Obama is now seeing green shoots and the process of talking up the US economy has begun. This is a fairly transparent attempt to change the psychology of the recession from negative to positive, as in the worst is over. It is not possible to predict when the downturn will flatten out or when the economy will begin to grow again. What is possible is to predict  that if the main problems which underlie the recession are not addressed than any recovery will only presage the next crisis. The prospects for addressing these underlying problems do not look good.

While on holiday I met and had a long conversation with a Hedge Fund Manager. He  was quite the most pessimistic person about the economy that I have met, so far. He considers the entire UK economy to be a ‘dead man walking’. As a consequence he is busy converting his personal wealth into gold.

He introduced me to the phrase ‘mark to miff”.  Two weeks ago in the US the Financial Accounting Standards Board (FASB) bowed to pressure from the financial sector to abandon the ‘mark to market’ way of valuing financial assets. ‘Mark to market’ forces banks to revalue their assets every three months, which during the credit crunch has forced a continued downgrading of the value of banks.

My Hedge Fund Manager friend called this ‘mark to miff’. In other words a final abandoning of any pretence that the asset values of banks bear any relationship to the real world. The conclusion we should draw is that our leaders can see no further than trying to reinflate the asset price bubble which burst to create the current crisis.