I've watched a video from Ted Talks entitled "The real truth about the 2008 financial crisis", where the speecher (Brian S. Wesbury) expresses his ideias on how the economic cycles arise and associates them to mark-to-market accounting. However, something he said makes me wonder: if mark-to-market was banished between 1938 and 2007, how could Enron use it to deceive its investors as it did in 2000?


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I found out that Wesbury himself talks about that in its book It's Not as Bad as You Think: Why Capitalism Trumps Fear and the Economy (here):

What many people do not realize is that mark-to-market accounting was in place during the Great Depression. Milton Friedman blames it for causing a majority of bank failures in the 1930s. It was finally suspended in 1938 by a commission of experts put together at the direction of Franklin Roosevelt. Between 1938 and 2007, only trading firms used fair value accounting. Banks marked only some of their assets to market prices. Loans and many investments were held at historical cost unless there was a major change in their performance.

That answers the question: we think on Enron as a company of the energy sector, but they actually were a trading firm as well, and those firms were allowed to use the so-called "fair value accounting". However, according to some reports (e.g., here), Enron decided quite arbitrarily which of its assets should be maked to market, not only the commodities it traded.

Wesbury also remarks that "the suspension of the accounting rule in 1938 coincided with the end of the Depression. The U.S. economy did just fine between 1938 and 2007. During those 69 years, there were no panics or depressions". In the aforementioned Ted Talk, he also emphasizes the role of the interest rates into the 2008 economical crisis.


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