Buried in Friday's $2 trillion upward revision to the 10-year deficit projection (officially from $7.1 trillion to $9 trillion) that leaked not-so-quietly after the close of trading, was word that the '09 deficit will be $250 billion less than forecast. These are funds set aside for additional bank bailouts that have not yet been needed.
- The White House budget office will also lower its deficit forecast for this fiscal year, which ends September 30, to $1.58 trillion from $1.84 trillion next week after removing $250 billion set aside for bank bailouts.
How did this happen? What does it mean? And what are the costs for perpetuating illusion?
If you remember from this Spring, 'whistle by the graveyard' demanded Congress. And FASB quickly complied with a change to fair-value accounting rules, specifically FASB 157. Soon after, banks began to report greatly improved profit numbers for the 2nd quarter, no small coincidence.
Some could make the case that FASB has begun to exhibit some backbone of late, but I find it hard to believe that once the banking oligarchy and its lobby kick into gear that Congress will allow this new proposal to be passed.
This is the fleeting, ephemeral upside to becoming Japan and losing the next decade -- we get to lie about asset values. Less support from taxpayers is required, for now. But don't forget the whole point of being Japan is that every few years for the next 10 (at least), we will be committing additional funds for bank bailouts.
The workout is merely being prolonged. Drip, drip, drip. Kick that can as far down the road as the mighty leg of ignorance can deliver.
Examine the simple steps. Suspend mark to market; allow banks to make write-ups on entire asset classes. Profits are then improved (created), and banks are able to raise private capital. Dumb, private money chasing ghostly bank balance sheets is preferable to forced taxpayer investments, so I admit the changes haven't been all bad in the short term.
However, I still believe, like Jim Chanos, that we needed regulatory capital forbearance and not an outright gutting of FASB 157. And I'm haunted by the spectre of a Japanese style banking slogfest that could last decades. The bad assets are still there, they've just been forgotten.