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Everyone is having a hard time finding financing in this economy. But what’s not clear is exactly why that’s happening and why it’s worse than it should be. The culprit is mark-to-market accounting.

Mark-to-market accounting is the practice of assigning value to an asset (like a house) based on the fair market price of similar assets currently being sold. It has been a part of U.S. Generally Accepted Accounting Principles, a “common law” pronouncement under the federal government’s Securities and Exchange Commission and the Public Company Accounting Oversight Board, since the 1990s.

In a liquid market — one where assets can be sold without significant loss of value and buyers are readily available — this kind of accounting makes sense. But liquidity isn’t a constant. When we have the opposite — an illiquid market — mark-to-market accounting serves to devastate an already foundering economy.

Imagine a bank. In an illiquid market, it is holding a lot of assets that it is unable to sell, and the agreed-upon value of these things drops because buyers are not available. These assets can be real estate, packages of loans, mortgages, etc.

Even though this bank may have exactly the same assets as before, it must report a decline in capital. That’s called an unrealized loss. The bank’s lenders, such as investors and the Federal Reserve, then will not allow it to borrow as much as before based on the lower capital. Therefore, its customers can’t get loans. There goes the new pool.

Consumers can’t borrow, so they can’t spend. Values go down on already existing products because assets can’t be sold, and the whole process becomes a vicious cycle. Mark-to-market accounting is simply inapplicable to the kind of market we’re in now, but there isn’t much of an alternative.

One exception exists in accounting law: A public accounting firm can agree to vouch for a higher value of a company’s assets, even if they’ve been artificially reduced by outside circumstances. That’s helpful, in theory. The reality is, this rarely happens. These accounting firms become liable once they offer an opinion, and therefore are hesitant and quite conservative in this process. It’s a false fix.

This kind of unhelpful legislation is the fault of those in government who do not understand the full ramifications of these silly accounting laws. To me, that is nothing short of reckless. You could compare it to the recent pool legislation introduced by lawmakers unfamiliar with our industry. This arbitrary idea of mark-to-market accounting is what caused the Lehman Brothers collapse, the largest bankruptcy in corporate history which, in my opinion, could have been avoided without a government bailout.

Mark-to-market accounting most likely will be reevaluated and fixed — but not until this current crisis is behind us.

The politicians charged with that task don’t want to give this topic any more attention than is necessary until it is out of people’s minds. The logical solution: limit liability for public accountants, creating a real exception for an illiquid situation where mark-to-market accounting can be devastating. There must be new parameters for attributing value, whether positively or negatively.

So how does our industry help this along? We must educate ourselves. Track down people with educated opinions, availing yourself with a wide spectrum of knowledge. Inform yourself and share those opinions with others. Instead of more government intrusion, an educated public will demand real solutions. And that will lead to greater economic growth.