Floyd Norris has a go at bankers who want to dilute mark-to-market accounting this morning and he makes some good points.
However, just as an exercise, imagine what it would be like if all homeowners were forced to mark to market the value of their homes, and post cash collateral in cases of negative equity.
In a sense, some owners marked to market in the US by using home equity loans to withdraw cash when values were at their peak in 2005 and 2006. And everyone behaved somewhat as if they were rich because the market value of their homes had risen.
Nonetheless, the freedom of homeowners with long-term mortgages to sit tight when the value of their homes falls, rather than realising losses, does help to cushion the blow of a swoon in asset prices.
Of course, households are not banks and do not have shareholders and bondholders, so there is probably no good reason for them to mark to market their assets. Still, it makes you think.
