It’s unsurprising that Sam Zell, devout foe of Sarbanes-Oxley and I figure most government control of business and the financial markets, is going against the conventional wisdom and blaming an excess of government regulation for the credit crisis–specifically, fair-value accounting. David Roeder of the Sun-Times is having none of it. But the question’s pretty interesting, and actually pretty important, though it might not be clear why. John McCain has made the same criticism, incidentally.

Anyway: fair-value accounting, or mark-to-market accounting, pretty much means that the value of an asset is based on its value in the current market. Sounds simple and acceptable, right? Not quite.

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.

Well, what that means is that in the worst-case scenario, you get worst-case scenario prices. But we might not be in the middle of a worst-case scenario for very long. Going back to me, if I lose my job or quit, then my IOU isn’t worth much, since I can’t pay you. Maybe it’s still worth something, since I have a college degree and a skill set, and maybe you could sell that IOU for, say, $2,000 to someone who’s willing to bet I get a new job. But if I get a new job first, the IOU’s worth closer to $10,000 again.

So… what is that IOU worth? What does it make your assets worth, and I need an answer now? Kind of hard to say, right?

So Zell is arguing that you can’t just take into account the present, completely trashed market, because he thinks we’re not headed towards total apocalypse, and fair-value accounting actually put us into a spiral in which undervalued assets make other assets undervalued, and so on, and he’s not alone. Roeder says that you can’t just let people like Sam Zell make shit up because they’ll take you to the cleaners, and he’s not alone. Helicopter Ben seems to think we can split the difference, I think, but I’m already way above my pay grade.

I have no idea what the right answer is, and I apologize if my latest obsession is boring (broadly: making the articles I read make sense to myself and trying to get some content out of it), but that’s the background to Zell’s latest sermon. Also, Roeder’s point on him trashing the media is well-taken, since he runs a newspaper.

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.'”

As he goes on to note, this is all sort of important–which is really my main point–because we’re all probably going to be on the hook for $1 trillion + by the time this is done. And it’s damned hard to figure out what happened, unless, like, you read blogs. Which I think was my other point.