Financial crises are caused by wrong market price and the mark-to-market accounting method should be replaced by a correct solution of value, which determines what the price should be based on the expected future income, and not blindly follows the past data, even when the market has crashed.

The financial crisis occurs because the market price is wrong. Market participants using incorrect method of valuation will produce an incorrect market price. The market price will be correct when all the market participants, including, particularly, the government use the correct solution of value. However, the current market price is determined by incorrect solution of value.

The most common incorrect solution of value is the market comparison approach. It role in the financial crisis can be explained by the parable that “The blind follows the blind, until everyone falls off a cliff.” In theory, the price depends on the future expectation, not the past market price, which can be used only when future expectation has not changed, but future expectation will continually to change to infinity in time.

The correct solution of value uses an income approach where the inputs to the valuation system are obtained from market comparison. Only the price should not be compared to past prices; the price depends on the future income. The mathematically rigorous solution of value is disclosed in the patent “Quantitative Supply And Demand Model Based On Infinite Spreadsheet” (Pat. No. 6,078,901).

The calculated price based on the solution of value is generally different from the market price, which oscillates around the calculated price. The solution of value predicted the Savings and Loan Crisis publicly as early as 1984 when the market price became over-valued where the market price was appreciably greater than the calculated price. It predicted the Subprime Woe and warned the Federal Reserve in June of 2006 that the rising interest was approaching the decreasing, due to the increasing interest rate, investment rate of return, which should be greater than the interest rate in order for investors to borrow.

Even being wrong, the market price is the main hindrance to the public acceptance of the correct solution of value. The textbook definition of the market price that the price is what a buyer is willing to pay is only correct if the buyer is using a correct solution of value. During the Savings and Loan Crisis, nearly all the real estate appraisal authorities endorsed the correct solution of value and abandoned the three traditional approaches to appraisal, but the Crisis was solved politically with over $100 billion of money from the taxpayer.

Being mathematically rigorous, the solution of value is a non-violable law of nature in social science. Only mathematics can expose our blind faith in the market price. Nature is trying to teach us the non-violable law of nature, namely, the solution of value by punishing us with repeated financial crises. If we still refuse to replace the mark-to-market standard of accounting with the solution of value, admittedly a revolutionary change, we would again suffered in vain in the current financial crisis. 3/23/2009

In a nutshell, I would agree with you rather than Weil if and only if The-Too-Big-Too-Fail Boys could be trusted with the instrument you propose. They can’t. They’ve proven they can’t be trusted. End of story.

As a Democrat myself, I can complain about the Republicans all I want but the fact remains, the Democrats hold power and it is only because of pressure from Democrats that this loosening is being rushed to implementation. At the end of the day, loosening mark-to-market will only allow the fraud that is the current financial system to be perpetrated, er, I mean, perpetuated.

More:

Correctly Political Action Alert: Can We Stop The Deepening Fraud of “Unobservable Inputs”?!?