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I have been thinking a lot about the economy and what has been happening on the financial markets.  For my few devoted readers, you may recall my post two weeks ago related to FAS 157 and why we are in a financial death spiral (READ IT HERE).

With that said, I want to go on the record early on my “superball effect” theory. The SE theory really is the inverse of the FAS 157 death spiral.  Since my hypothesis on the economy is FAS 157 and “Mark to Market” is the principal cause of the current banking crisis, it stands to reason that once the financial market start to improve, the same dynamics that caused the downturn will fuel an upturn.

Downturn:  Economy Slows -> Bank Assets Devalued -> Banks Write Down -> Financial Markets Slow -> Bank Assets Devalued -> Banks Write Down -> ad naseum

Upturn: Bailout -> Markets Recover Somewhat -> Bank Assets Raise in Value -> Banks Suddenly have more available funds to invest -> Market Improves -> Bank Assets Raise in Value -> Banks Suddenly have MORE available funds to invest.

Unless the incoming President really screws up the economy, I predict a complete recovery to pre-crash 2008 levels by October of 2010.  Regardless of who wins, this will happen.  When the encumbant President is taking credit for the dramatic turn around on the economy, remember, you heard the real reason here first!

Last night, I had dinner with several venture capitalist guys who are all a heck of a lot smarter on the financial markets situation and the proposed bailouts than I am.  Here was the crux of the conversation:

1) The largest issue with the banking crisis is FAS 157 (FASB is the Financial Accounting Standards Board and FAS is Financial Accounting Standard).  FASB is the organization that recommends and implements financial accounting  standards for all businesses is the US and is generally driving many international accounting principles.  They start with a recommendation and the allow for discussion on the recommendation, then in most cases the recommendation becomes a regulation.  Once the recommendation becomes a regulation, the regulation becomes part of GAAP (Generally Accepted Accounting Principles) and most companies implement immediately.    More on FAS157 below.

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