I’ve been watching the cable news channels a lot lately, and I try to catch a little Fox News every now and then just to see what the other side is thinking. Lately, their stooges have been plugging the elimination of something known as Mark to Market accounting, and many interview subjects from CNN to MSNBC have also mindlessly repeated this idea to TV anchors. Sadly, they haven’t yet asked anyone what Mark to Market means. Even Rachel Maddow recently let her Republican guest throw out the idea without so much as asking for clarification. If the media won’t do it, I might as well give it a shot. Here’s a brief explanation of the Mark to Market function, one which should immediately turn you off to any politician or TV personality who thinks it should be repealed:
Mark to Market accounting basically says that you value an investment at its current market rate. If you buy 5 shrares of a stock at $100 per share, but the price drops to $50 a share, the investment is valued at $250, not at $500. This is a little piece of logical accounting that says that something is only worth what you can sell it for. Without Mark to Market accounting, the person holding this stock, say an investment bank, can say that it is worth virtually anything, regardless of whether or not this value could realistically be achieved in the current market. Potential buyers would be on the wrong side of an informaton mismatch. The reason that many psycho-capitalists want it repealed is that it basically lets entities fudge the books, hide poor investments, and jerry-rig the finances of any corporation. If, for example, these rules were not in place, even during this economic crisis, investment banks could fabricate a misleading value of their bad debts, arguing that in the long run they may be worth significantly more than they are now. John Maynard Keyes’ response is particularly apt here: in the long run, we’re all dead.
In my opinion, this crisis is entirely a product of smoke and mirrors: selling people on mortages they can’t afford, selling other banks on buying up bundled mortages as securities, inflating the value and long term health of a market that otherwise has no more room to grow. We can all recognize a house of cards when we see one collapse. Its insane that the media isn’t calling “bs” when the people who de-regulated us into this mess come up with an idea that will make it more likely to recur in the future. Realism is a necessity in finance – people’s homes and retirements are at stake. I’m not an economist by any means, but I’m pretty sure that tactics that disguise bad news now in the hopes that it turns into good news later are almost always bad. Mark to Market rules should not be repealed.