Meltdown DiagnosticsDaniel Gross takes readers' questions about the financial crisis, nationalization, and his new book, Dumb Money.

(Continued from page 2)

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2. When will employment numbers improve?

3. When will the Dow top 12,000 again?

I am down six figures in investments losses and $150K in house value (built in 2006.) I sleep at night but I worry like crazy. Please frame up the timetable and do not use the phrase "I don't have a crystal ball." Thanks.

Daniel Gross: Zen master—I'm sorry but I don't have hard and faster answers to your questions. And those who say they do suffer from an excess of confidence.

Credit is flowing—it's just on tougher terms and might cost a little more.

Employment numbers? I think the thing to look for is not so much an improvement (i.e. new jobs) but a decline in the pace of job destruction. My best guess is that'll happen in May or June.

Dow topping 12,000? Beyond human capabilities to divine such things.

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Laurel, Md.: If our holding of Citi grows to 51%, can we vote to move its credit card operations out of Delaware, so it would be subject to the usury and fee limits in the other states?

Daniel Gross: Interesting question. But probably not. The holdings would be managed by some government body that would probably not solicit the views of individual taxpayers.

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Chicago, Ill.: I've heard Ben Bernanke say that Lehman Bros couldn't be saved, because there simply wasn't a buyer. And TARP hadn't been set up, so the USG couldn't step in and bail it out. There were no options except to allow it to fail. Is this true?

Daniel Gross: Well there certainly wasn't a buyer for Lehman Brothers before it went bankrupt. And TARP had not been set up. Could the government have taken more extreme examples in the absence of TARP to shore up Lehman and stop it from going down. I suppose that between the Fed and Treasury they could have cooked something up. But there wasn't much of an appetite for that at the time.

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Olney, Md.: Could you explain the controversy over "mark-to-market accounting" and how it factors in to the banks' problems? The former head of the FDIC is saying that this method of accounting is poorly-thought-out, does not work during a down-turn, and it is a major cause of the situation the banks find themselves in. The analogy seems to be something like this: what if the average citizen were legally obligated to contribute enough cash to your 401(k) to top it out at its 2007 highest-point?

Daniel Gross: yes. Mark to market says you have to value assets at their market price every quarter. That's easy when the asset is a stock, because it's traded every day and we know the price. When assets aren't very liquid—a house, an office building, some funky mortgage investments—that's more of a challenge. Especially when the market for those assets has broken down. Basically, the banks are saying that if they're forced to assign a market place to a lot of these toxic assets, the price will be irrationally low. And it will be so low that it'll force them to take a big charge, and their creditors and investors will suddenly realize that the banks don't have the proper amount of assets underlying all their debt. And that could lead to a death spiral. In addition, if banks mark their assets to a non-functioning market, it would then force everybody else who holds similiar assets—insurance companies, pension funds—to do the same, and to register losses. Another thing: mark to market requires you to register a loss, or a decline in value, even if you don't have any intention of selling the asset. Say you have a house that you bought for $500,000 last year. Now the market says it's only worth $400,000. But you don't plan on moving any time soon, and in fact, plan to hold it for ten years, at which point, it's likely to be worth a lot more than $400,000. So what's the point of marking it to market. .

The flipside is this: these banks had no problem marking things to market when prices were irrationally good. Also, if you were an investor, how much confidence would you have in a bank that doesn't mark assets to the market.

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Laurel again: I disagree that the 20s left no infrastructure. That stock bubble was based on new consumer products like cars, radios and refrigerators that basically created modern suburban life once the distractions of the Depression and World War were over.

But the gist of my question is whether we can right-size our "gilded" housing market; which is under political control of the very voter/homeowners whose economic interest are to NOT allow those over-sized houses to be occupied by as many people as could reasonably fit there.

Daniel Gross: the housing market is in the process of being right-sized. the typical size of a new home built in 2008 was about 15% smaller than the ones built in 2007. The market is doing a lot of this work for us. It just takes a lot of time.

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Anonymous: Hey Dan, why does Obama and co seem so hostile to the word nationalization? The FDIC does it all the time. The financial system needs triage. The insolvent ones should be shut down and the salvageable ones need to be restructured and recapitalized. This needn't take more than a couple years. Unless we abolish mark to market this is our probable fate anyway, so why delay and create even more uncertainty?

Daniel Gross: Interesting you should ask. I wrote my Slate column yesterday about that topic: http://www.slate.com/id/2212319/

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Ottawa, Canada: What are your thoughts about Canadian banks and the regulations that control them? They are still very profitable and none have failed.

Daniel Gross: don't know that much about Canadian banks.

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Evanston, Ill.: Hey Dan, Should the Congress pass a law requiring that any bank that secures assets hold a substantial portion of that security on their own books? Without such a realignment of incentives I don't think any amount rating agency regulation or central bank purchases/guarantees will revive the market in a healthy way.

Daniel Gross: That would go a long way to preventing a recurrence of what we just went through. And you're right about the incentives.

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