I’m a fan of Dave Ramsey. I respect him for the advice and commentary he gives, being straight-forward with his opinions, simple in his direction.

Dave really blew it on Tuesday, though.

On the way home from work yesterday, I caught the middle part of his show. He was on his soapbox, going on one of his rants against the government and stupid politicians. His rant was specifically about the $700 billion bailout of financial institutions proposed by the White House that Congress is currently debating. This proposal basically involves the government using tax payer money and debt instruments to buy what are essentially junk bonds full of sub-prime mortgages (some in foreclosure, some not). He railed against this bailout package, saying that putting us so much farther debt was not the solution. I would agree - this is not the solution.

However, while it is a bad idea, it’s probably not as disastrous as some may think. The markets will turn around and the government will make money on these bonds down the road. Still, I do not feel this should be one of the steps the government should be take to get us out of this latest financial situation. Honestly, I think they should keep their hands out of things. Let me keep my own money and I’ll take care of myself, thank-you-very-much.

Dave went on to discuss other solutions, and it was at this point that I couldn’t believe what I was hearing. One of the solutions he presented was proposed by the economist Brian Wesbury and basically boils down to temporarily changing a law to unfreeze the markets. This law he is referencing involves the mark-to-market accounting practice. I won’t go into much detail about this practice (you can read more about it here, here, here, here, here or search Google) but it boils down to how a company values it’s assets, either at the purchase (book) value or the present (market) value. On several occasions, Dave said that mark-to-market accounting was a result of Sarbanes-Oxley, which was enacted after the Enron collapse in an effort to make companies be more ethical and accountable. (Leave it to politicians to enact laws to make people be ethical…)

I am not an expert on this, but I have read Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron and watched the documentary of the same name. My accounting professor last semester worked at Enron for a short time and talked about the company often in class. From these, I know that mark-to-market accounting was not a result of Sarbanes-Oxley, but rather the other way around! Mark-to-market was actually used in practice well before Sarbanes-Oxley and in fact is what led to fraud and the eventual downfall of Enron!

“Under [CEO Jeffrey] Skilling, Enron adopted mark to market accounting, in which anticipated future profits from any deal were tabulated as if real today.” *

This caused the company to look like it was worth more than it really was, that it had more cash and other assets that it really did, which led to a steadily increasing stock price, which forced them to keep up the inflated numbers year after year. But, I’m digressing. Back to Dave…

One caller tried to point out that Dave’s historical information regarding mark-to-market accounting was wrong, but Dave quickly dismissed him. Unfortunately, the caller mentioned Wikipedia as a source of information, to which Dave flat out said it had bad information (nope, it’s right). Seriously, it would have taken Dave and his producers seconds to verify this information (which should have been verified before being mentioned).

Still digressing…putting this mistake aside…

The idea behind the proposal is to suspend this mark-to-market rule. Currently, the rule makes these financial institutions put these sub-prime junk bonds on their books at their current market value, which is very low right now because of a small percentage of sub-primes ARM mortgages being in foreclosure causing all, even those that are current, to be lumped together as bad; think one rotten apple in a basket of mostly goods ones. Suspending this rule will allow the institutions to keep the bonds on their books at their “true” value, which in turn will make their books be in better shape, raising stock price, investments, etc. Consider - the bonds have lost value, not the houses behind them.

Dave has much more detail about this proposal on his website.

Fundamentally, this make sense. It wouldn’t cost anything to change a rule, it would help thaw the markets and allow it to move back to stabilization on it’s own accord. Exactly what we want!

But wait a second here…changing a rule temporarily just because it’s stopping something from working right? That doesn’t sound good. In fact, it sounds downright…I can’t think of the word, but it’s not something for which I would want to have a precedent set, especially by our government! Isn’t this the type of thinking and action that has led to so much trouble in the past, not only in the US but around the world? There are tons of rules I would like to temporarily suspend! When do I get to pick which ones to put aside?

The idea is novel and outside-the-box and I like that kind of thinking. It certainly beats massive debt that will be handed down to our great-grandchildren. But at what cost do we start bending rules?

Well, there’s my rant…yeah, I should have been doing homework instead…yay, procrastination!