The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy's Only Hope

11Fair-Value Accounting and Wealth Destruction

 

THE MOST UNNECESSARY CAUSE OF THE FINANCIAL CRISIS WAS FAIR-value accounting. Fair-value accounting, as currently interpreted, had been enacted only two years before the financial crisis. There have been accounting systems for at least 5,000 years (since the Egyptians). Therefore, the overwhelming burden of proof is on those who defend fair-value accounting. The only serious previous experiment with fair-value accounting was in the 1930s. It was abandoned at that time because Roosevelt believed that it was contributing to the Great Depression.

Fair-value accounting sounds reasonable on the surface. The idea is to mark all assets and liabilities to market at the end of a reporting period, typically ...