John Allison

“One of the basic requirements of the law of supply and demand is that there must be a willing buyer and a willing seller. During the chaos created by the random type of government policies just described, this basic condition did not exist. As a simple example, suppose my home is on the market for $600,000. With the huge uncertainty created by government decision makers during the financial crisis, the few buyers that are out there are looking for a fantastic deal and will pay only $300,000 for my house. I will not sell my home for $300,000. I do not owe anything on the home, and I can easily afford to wait until the market calms down. However, under fair-value accounting, my house would be valued at $300,000, and if I were a bank, I would take a $300,000 loss on the house through my income statement. This outcome is inconsistent with the law of supply and demand. Under this economic law, there must be a willing buyer and a willing seller for a market price to be established. “The fact that Tom Brown had to sell his house for $300,000 because he was in severe distress does not mean that I have to or will sell my house for this price.

One of the basic principles underlying accounting models is that “businesses will be valued as going concerns. In other words, the assumption is that the business will continue to operate. Fair-value accounting is inconsistent with this concept, because it effectively assumes that the business’s assets are being liquidated under stress.

Fair-value accounting was a major cause of the liquidity problems in capital markets. Public companies would not purchase economically valuable assets because of the accounting risk. I personally was involved in decisions where poor economic decisions were forced on us by accounting policy.”

Excerpt From: John A. Allison. “The Financial Crisis and the Free Market Cure:  Why Pure Capitalism is the World Economy’s Only Hope.” McGraw-Hill, 2013. iBooks.

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