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Let’s say I owe you $10,000. Is that IOU worth $10,000? Well, I have a job, so maybe. But I work in a risky business right now, so my job security isn’t like that of, say, a Supreme Court justice. That means if you tried to sell my IOU to a friend so you could get some money right away, maybe you could only get like $8,000 for it, because everyone thinks my job is doomed. On the other hand, if I had a long criminal record and talked about how I liked to kill people, maybe you’d only get $500 since I’d clearly be spending much of my life in jail.
So: One of the problems with the Enron collapse was that smart, diabolical financial wizards figured out ways to dramatically inflate the value of assets based on some golden tomorrow in which they’d be worth way more than any realistic value, like if you said my IOU was worth a million dollars because I have great earning potential and maybe I might pick up a gambling problem and would be a source of income to you. So the SEC enforced accounting practices designed to curb that–fair-value accounting. Now, under current regulations, my IOU would be “exactly” what you could get for that as determined by math wizards.
Update: Bonddad has a compelling and thoughtful take: “Mister ‘I had no idea 0% interest rates and lack of regulatory enforcement would lead to this’ [that would be Alan Greenspan] who stands as the architect of a failed Ayn Rand policy perspective that is ruining the country fast should be beheaded, his head bronzed and placed on a pike sitting outside the NYSE with a sign below it that reads, ‘Asset inflation does not equal real GDP growth.’”
