Signs of life.(THE ECONOMY)(United States economic conditions)(Editorial)

HAS spring arrived? Stocks, especially bank stocks, are up. The velocity of money, which dropped calamitously during the financial panic of the fall, continues to pick up. The Fed's loose money is having its expected stimulative effect on the yield curve (even if it is also storing up some future trouble). There has even been a rare outbreak of good sense in liberal-run Washington. Fed chairman Ben Bernanke, House Financial Services Committee chairman Barney Frank, and Democratic economic guru Warren Buffett have all endorsed the relaxation of a particularly onerous regulation of the financial industry.

The problem is the interaction of new "mark to market" accounting rules with capital-adequacy standards. Those rules, adopted in 2007, can be expected to have perverse effects in both booms and busts. During booms, overvalued assets exaggerate financial companies' capital cushion and thus allow them to lend too freely. During busts the devaluation of assets leads to a downward spiral in which fire sales are needed to meet capital standards, driving prices downward for the next company--which then has to sell assets to meet its capital requirements. The rethinking of this policy in Washington is long overdue.

Pollyanna is not writing this editorial. Even if the economy has hit bottom, there will be ...