Kenneth Scott and John Taylor have an explanation for why it’s proving so hard for the several approaches the federal government to induce financial institutions to get “toxic assets” off their books. It’s the complexity:
Despite trillions of dollars of new government programs, one of the original causes of the financial crisis — the toxic assets on bank balance sheets — still persists and remains a serious impediment to economic recovery. Why are these toxic assets so difficult to deal with? We believe their sheer complexity is the core problem and that only increased transparency will unleash the market mechanisms needed to clean them up.
Everything they say may be true but I think there’s a simple explanation. As long as the assets stay on the books at something above their actual value, the books look a lot better than they really are and the institutions’ managers don’t have to admit they screwed up.
I think there should be closer scrutiny of the affected institutions’ books. I doubt we’ve heard the last of mark to market.
