I’ve been fascinated by the argument that eliminating or suspending “mark to market” accounting rules will end the financial crisis on the cheap.
Wikipedia has a good explanation of mark to market accounting.
Matthew Yglesias posts a simple explanation of mark to market.
Paul Kedrosky argues that changing the accounting rules won’t solve anything, which is my general impression as well.
Here’s the argument in favor of suspending the rules from Brian S. Wesbury and Bob Stein.
Update: Andrew Leonard (one of my favorite bloggers) weighs in on mark to market.
Update: Here’s Kevin Drum on mark to market.
October 1, 2008 at 1:15 pm
Dropping mark-to-market seems like another way to just move the mess under another carpet that will need to be cleaned up again after the next mess caused by inaccurately valuing assets.
October 1, 2008 at 1:21 pm
Honestly one of the biggest problems in the market is uncertainty, and suspending the rules is not going to help with that at all.
Lender: “How much are your assets worth?”
Borrower: “As you can see here, they have $100 written right on them. That’s what they’re worth.”
Lender: “Get the hell out of my office.”
I imagine that getting a “stated income” mortgage is pretty tricky right now, and the accounting standards prior to mark to market were pretty much the equivalent.
October 1, 2008 at 1:35 pm
I don’t think mark to market should be eliminated, but it only works if there is a market. We are seeing cascading failures because mark to market is forcing an irrationally low market value on assets backed by real property. I would think temporarily setting a floor on the mark to market value of securities backed by real property to be a percentage of the value of that real property would be a good compromise.
I certainly think mark to market is a great idea (especially since we don’t want any more Enrons happening). However, it has been a part of negative feedback loop we are currently experiencing.