Today, the Wall Street Journal published two excellent letters on the mark-to-market regs that banks are under. IMO, too little has been written about this by economists. The second letter tells a horror story; the first makes a constructive suggestion for getting mark-to-market out of the capital regs that banks are under.

That’s the first punch. The second is a commenter who replied to a post by Alex Tabarrok in which Alex pointed that bank “nationalizations” are part of a bankruptcy process. The commenter, Andrew, wrote:

Great post, but don’t normal business[es] only go bankrupt when they actually can’t pay the bills, not just when some people call their balance sheet insolvent?

Andrew doesn’t mention mark-to-market, but this is clearly what’s going on: mark-to-market regs can lead regulators to say that balance sheets are insolvent even in the extreme case that all borrowers are paying their regular payments. An aide to my Congressman, whom I talk to occasionally, told me that this is what a banker in the Santa Cruz area told the Congressman was going on with some of his bank’s loans on properties that mark-to-market had declared to be underwater but on which the borrowers had not missed a payment.