:LPE:

Take a look at the reporting (TV, newspaper, other) on the financial crisis. Who are the experts they get on to talk? I don’t think I’ve seen one interview or source quoted from a non-bank economist. Bank economists are useful to quote as insiders, but they are heavily compromised and conflicted by their positions: they work for the banks that caused the problems, or will be gaining from a bailout, and so-forth. It is a little bit like getting a quote about the fire from the arsonist. Why not ask some arm’s length experts: academic economists, union or labour economists? They may have conflicts and agendas too, but at least they have *some* distance from the core issues, unlike bank economists.

Here’s an interesting piece of political economy. The head of a major insurer in Canada (and we might assume this for all large financial institutions) is criticizing mark-to-market or fair value accounting. His argument is that asset values (and liabilities) fluctuate from quarter to quarter, and do not give a “true” picture of their worth over time. He’s right — this is “volatility”. Banks and insurers and other companies do not want to have to “recognize” these emphemeral gains and losses, at least, not on a quarterly basis, which hinders planning and creates short-termism.

It makes sense. So, when should those gains and losses be recognized? That is the question. Every year? Three years? Five years? What is an appropriate amount of “smoothing” of gains and losses over time? Who bears the risk of smoothing? What gains can be made by smoothing?

For the past 20 years, the accounting profession has been trying get us closer to mark to market or fair value accounting to address the problems associated with smoothing — which is another way of pushing off the recognition of the true value of things. International standards are converging, it seems, on M2M, but the current crisis has put that aside for a moment.