The housing disaster’s most important proximate cause is bad loans. One cause of that is the house price falling below the loan value. Loans were made on expectations of a continuing bubble of house prices rising, but instead they fell.

Mark to market worries many, but it should not. Mark to market accounting requires writedowns of assets that have lost value. The stock market mostly knows and/or estimates such losses even if the banks do not mark to market. Postponing mark to market won’t change the market value losses or the bad loans. Eventually a mark to market has to be written off either to book value or to a loss reserve account. Banks want to postpone this so that they do not show up as insolvent, which would mean they would need to restore capital or go under, as the realized losses might trigger some debt covenants. Postponement is a means for the existing management to stay around for a longer time. Ex post postponement (changing the rules after the fact) is a way for the managers to put one over on the debt-holders and prevent them from gaining a degree of control over the insolvent bank. Postponing mark to market of the assets gone bad will not resolve the banking system’s insolvency.