With a Grain of Piquant Salt:
I am seeing articles about how marking positions to market is contributing to the recession and how it should be stopped or amended almost daily in the financial press. But this is dangerous thinking, because if you cannot mark to market, then how did you manage to value it in the first place and if you did, who was the idiot who bought it without having the ability to value it on a mark to market basis? Because that is what it means. The value of transparency and mark to market goes way beyond some badly priced instruments. Mark to market provides one of the foundations of western civilization. How so?
The premise for current liberal democratic societies and western civilization rests on the belief that your behavior will be judged by your peers. Take the example of democracy where it is for the people, by the people and for the people. In other words, we get together on a particular day and then based on open and transparent ways and means, we elect one person or a group to represent us and rule for the next few years. Then again, we get together after that and again there is peer analysis and judgement, following which, we either keep them or get a new leader.
These leaders (Presidents, Prime Ministers, Members of Parliament, Members of Congress') then get together and think up with laws, which are again judged by our elected representatives who form another peer group. If most of the peer group judges the law as good or great, then it indeed becomes law. And if in the future the peer group of parliamentarians and leaders think the law has to be changed, then they change it according to the same process. If somebody falls foul of the law, you simply cannot just lock him up. One has to bring him in front of some judicial body and tell him why he needs to be locked up and refer to the right law.
But not content with that, we go and apply the judgement of our peers on our court cases. We have a judge who is more of a referee rather than a judge for the laws. When somebody is accused of breaking one of the above mentioned laws, he is brought to a court where he is judged by a group of his peers based on the evidence that is placed in front of them. And if the jury (peer group) thinks the evidence is not enough, then the defendant is let go or his sentence is reduced. This is not a theocracy where laws and rulers are up there in the heavens and only the clerics can judge. It is a man made world and only man judges man.
Similarly, mark to market is nothing but judging your investments against the consolidated judgement of your peers. If you have purchased an equity share, then after two years, you judge if the value is good or bad. You try to mark to market it, or look around and ask for the value of that equity share. If the judgement of the market is that the value is bad, well, then it is. And when you are thinking about your pension funds or your own investments, it is a good idea to regularly check the value of your investments.
So why is this habit of transparently checking the investment value suddenly getting hit on? Well, previously, you would not check the current market value, but you would book your investments based on the value of the investment on the day it was purchased. As you can make out, it is silly. Imagine your father purchased a piece of land in London in 1950 for '2000 and then gifted it to you fifty years later. The current market price of the land is '200,000. If I asked you about the value of the land, would you say it is '2000 or '200,000?
So this is what the accountants of the world united for and forced companies to do (pun intended). They forced them to evaluate their assets and investments based on the current market price, or in other words, forced them to do mark to market. And while the markets were going up, they were fine, it was when they started tanking (like now), that they started whining that mark to market is bad. Well, no, you have to take the good with the bad. And judgement of peers is not bad.
But I am curious why there is not much more noise about this. If I tried to remove or reduce a democratic judgement by jury then the most almighty hell will break loose (think about the reactions against Guantanamo Bay, the time to detain without charge in the British Terrorism Acts, the changes to election law, the question about Europe in so many European countries, the Florida voting problems in the previous US presidential elections and so on and so forth). But look at the issue about mark to market, besides the financial press (newspapers and magazines), nobody gets excited about this issue.
If you remove mark to market, then huge swathes of the economy will be in trouble, simply because we work based on trust and openness. Think of the land value example given above. Extend this out to any sector of the economy and if we do not know the current value of our assets (whether public, private, corporate or individual ones), then we will find out that our economy is in trouble because pensions, taxation, benefits, the public sector, the local council or municipality, the import and export of goods, the value of our currency all are directly or indirectly tied to the value of our assets.
The government cannot tax anything without a way of checking if it is correct. Say they want to introduce taxes to improve or build more railways. Afterwards they decide to privatize the railways. So how on earth will they value it, if they do not have an idea of the current value of all those assets involved? Your money went to buy assets, which are now being sold back to you. Our pensions could be reduced with no way of checking if that is right or wrong. And so on and so forth.
The fact that marking to market on certain products is causing the markets to sink is no justification whatsoever that it is bad. It is indeed good to clarify these reasons and bring them out in the open, otherwise we are looking at inflated values based on nothing more than some fevered statistical modeling and some bonus driven desires.
You would hate it if trial by jury is removed. You would hate living in a dictatorship. You would go to war to impose democracy on a country and you would lend tons of money to a country to develop its legal system, but nary a peep when your own economic and financial system is being undermined by attempts to remove transparent valuation of assets?
All this to be taken with a grain of salt!