Mark-to-Market Accounting is Not the Primary Cause of the “Crisis”

Friday, September 26, 2008
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But suspending the rules can be the solution.

A question about mark-to-market accounting, from a fellow Austrian, sparked me to put together a few thoughts on this topic.

SFAS (Statement of Financial Accounting Standard) 115 represents the rationale for fair value accounting. Note that a recent FASB (157) came out (2006), and this FASB contains some pretty elaborate guidance as to how MTM (mark-to-market) is supposed to be done by us accountants.

My thought is, and has been, suspend the MTM accounting rules, because that is a far better alternative than having Main Street be liable for nearly $1 trillion in debt. The securities could be valued some other way, perhaps according to their discounted cash flow.

Another alternative that is being widely floated is to extend the FHA insurance program across the bad loans, thereby providing lenders a guarantee that loses would be minimal, which would then have the effect of making these mortgages marketable. The taxpayer is going to get soaked, no matter what, and they are far better off taking on a guarantee, or perhaps even some welfare-based assistance for the worst of the debtors, as opposed to bailing out Wall Street unconditionally, and taking on its “toxic” assets.

Too many commentators, however, are “blaming” the accounting rules for the “crisis,” which is incorrect. Austrians – along with assorted contrarians, libertarians, and free-market fellow travelers – understand the underpinnings of this mess, hence the difference between us and the rest of ‘em. Indeed, troubled assets have no true “fair value,” however, in a perfect (libertarian) world, these companies would all be left to drown because there is no “crisis” as they’d have us believe, and by allowing bankrupt companies to go down the tubes, we’d all be better off in the times ahead. The only foreseeable”crisis” is that the injudicious, wealthy statists on Wall Street will lose their wealth, positions, and power. This is why the politicians are rushing to take on a very complex issue in a very short span of time.

But suspending the MTM rules is not what the wealthy bastards on Wall Street desire in the end. What they want is a bailout, future guarantees, and statist policies that will benefit them at the expense of the rest of us. They want to reap gorgeous millions, billions, in good times, and be bailed out in bad times, when losses loom. With this so-called “crisis” and rushed bailout, they hope to plant a precedent that will establish a permanent insurance policy for their mismanagement and recklessness going forward. Perhaps that’s why the politicians disregard this very doable option of suspending the mark-to-market rule?

Wall Street has got their man – Hank Paulson – installed as the head of the US Treasury, and I predict that going forward there will never be another Treasury head from anywhere other than the deepest bowels (literally) of Wall Street.

Here is a collection of some recent articles that I have read on the topic of mark-to-market accounting – some are good, some are not so good, and some are pure statist. Not everyone is right, or exactly libertarian, or even sympathetic to the free market, but they may be of interest to some folks.

- AEI (Peter J. Wallison): Fair Value Accounting: A Critique

- Slate (Daniel Gross): The Mark-To-Market Melee

- John Berlau (Competitive Enterprise Institute): Maybe the Banks Are Just Counting Wrong

- Steve Forbes: How to Cure This Sick System

- William Isaac: How to Save the Financial System

- Video, Brian Westbury, First Trust Chief Economist

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