When borrowers can’t or won’t pay them, then they have no choice but to take a hit. They have some choices about the timing and accounting of the recognition of the hit, but the hit is going to be taken, regardless.

Mark-to-Market accounting is necessary to relieve the system.

No, it really isn’t.

Mark-to-Market accounting is necessary to relieve the system. The bad stuff is flushed away to allow new more productive capital into the market. Keeping the bad stuff in the market only strains the productive economy.(Japan) Allowing banks to defer write downs only encourages hording, and keeps uncertainty in the market.

Do you really think the banks are going to allow themselves to “take the hit”? I thought banks were in the business of making money, not taking hits.

That’s a fundamental mistake.

What the superbears get wrong is that deleveraging can occur, and in fact is occurring now, via much of the debt is being charged off, modified, and discharged through bankruptcy.

The decision early in the crisis to avoid mark-to-market accounting for bad mortgages was made precisely in order to allow these writedowns to occur gradually and in a more orderly fashion, deferring them to a later time when the lenders could take the hit to their balance sheets. Bad private debt does not necessarily need to be paid with cash.

Much of that debt isn’t being paid, and will never be paid. In fact, write offs are not an option but a necessity, because the destruction in asset value that occurred during the financial crisis literally destroyed much of the cash available to pay such debts. “Strategic defaults” were inevitable, as borrowers began to realize that there is no point in servicing debt that could not be paid without destroying every other aspect of their lives.

Anyone who understands the financial system should have seen this coming, as expecting all of this debt to actually be paid is the proverbial blood-from-a-turnip problem defined. Anyone who believes that we can’t fully recover until all of the debts have been paid by their borrowers simply doesn’t get it.

She has already admitted that she was wrong on the consumer discretionary call. She said that she did not foresee people not paying their mortgages and spending the money on other nonsense instead. In my opinion it’s hard to blame her for that. Or to blame someone for a bad call when the government and the TBTF banks change the playbook whenever they please.

Very well said

Maybe for her new landlord’s sake her predictions will finally come to pass.

That would still not make her “right,” from an investment business perspective- it is way too late for that, since in this business being that early versus being plain wrong knows no difference- i.e., anybody actually investing for a living would most likely be out of business by now, from following her advice over the last more than twelve months.

Exhibit A here is consumer discretionary (see XRT, RTH, etc…) stocks, one of the very top-performing sectors over the last year, and only one for which Meredith predicted utter disaster about this time last year.

Predicting the future is very difficult, but that doesn’t stop people from trying.

The onset of human hubris, on the other hand, as in when respected sector analysts start believing their own press, and begin fancying themselves
macroecomonic prophets, is all-too-predictable…

You would receive an equal distribution of new legal tender too.