Fixing Financial Mess a Matter of Steps : Mark to Market Change

(From the Heritage Foundation)

A step toward a financial fix

Even as Congress debated a modified version of the $700 billion Wall Street rescue package—263 representatives voted this afternoon in favor of the plan, which the Senate approved Wednesday—the government was taking steps to address the ongoing financial crisis.

On Tuesday the Securities and Exchange Commission and the Financial Accounting Standards Board clarified their "mark-to-market" accounting regulations, an important step towards cleaning up the financial mess.

"It sounds like a small thing, especially when compared to a $700 billion rescue plan," Heritage Foundation experts David John and James Gattuso write, "but it is a significant step toward addressing the causes of the credit crisis."

The original rule, they explain, meant "that firms should value their assets based on their current market prices rather than at the price the firm originally paid for them."
But while this is generally a good idea, it can spell trouble when assets are hard to price or lack any trading value whatsoever. In short, it can distort the view of a firm's financial health, since it can make a company's assets appear smaller.

"By itself, of course, the notification [of the mark-to-market change] does not solve the financial markets' problems," John and Gattuso conclude. "But it is one among many steps that can be taken to address the current crisis."

Do these other steps include ever-more regulation, as the Left argues? Hardly.

Heritage economist J.D. Foster writes in the Los Angeles Times that intrusive government policies won't prevent calamity: "Europeans have been rather smug about our troubles, but they're now looking at failures of their own major financial firms, nationalization of their banks and threats of a banking panic.

It turns out their heavier regulatory hand was no defense against the current crisis. Nor did their regulators fare better in ferreting out the gathering dangers."