4/11/2008: French Minister of Finance on mark-to-market

Excerpt from This crisis demands that we act, but not overeact
By Christine Lagarde, French Minister of Finance

The impact of writedowns of structured instruments on balance sheets and profit and losses through fair value may lead to a vicious circle where mark-to-market losses trigger fire sales, which in turn generate further market losses. Some have argued that a temporary change in accounting rules would be necessary. Once the turmoil is over, we will need to assess the “pro-cyclicality” of fair value accounting. Under the present circumstances, changing the thermometer to reduce the heat is not the way to go. However, the difficulties in valuing certain assets in severely stressed markets should be acknowledged and rapidly tackled by standard setters and supervisors in order to help financial institutions and auditors better address this challenge.

Sabaziotatos says:

Ms. Lagarde says "not to change the thermometer to reduce the heat." But, the rest of her comments imply that the thermometer is broken.

Imagine a "pro-cyclical" thermometer. With such a thermometer, the higher/lower the reading from the thermometer, the higher/lower the underlying heat would become, thereby influencing the reading from the thermometer, thereby influencing the underlying heat, and so on.