Causation is in the eye of the liberal beholder

The stock market had a massive rally on Thursday and was up slightly today in spite of the release of discouraging unemployment figures. Two pieces of significant news might have helped account for Thursday rally: the agreement reached between President Obama and other world leaders to reform the world financial system and/or the decision to loosen the “mark-to-market” accounting rule.

No one really knows which of these two factors was more influential, or even whether either or both played a significant role. Yet the Washington Post gives the credit to the “hard-fought pledge to repair [the] world financial system.” And it fails to entertain the possibility that the new accounting rules played any role, even though many major investors favored the change on the theory that mark-to-market (which values assets based on current market prices) forces banks to overstate losses under certain circumstances during a financial crisis.

The Washington Post’s story on the world leaders’ plans to tighten regulation and increase lending is typical over-the-top cheerleading for the new president. The Post apparently considers it a near miracle that leaders with no great love for “the Washington consensus” (i.e., vigorous capitalism), such as Obama and Sarkozy, would agree in principle to move away from that consensus in the face of an economic crisis. Whether the market was that impressed is another question.

By contrast, the Post’s story about “mark-to-market” oozes with skepticism. The opening sentence calls the easing of this rule “a controversial step likely to increase some banks’ reported earnings but also heighten suspicions that companies are concealing problems.” The rest of the story is pretty much downhill from there. It fails to mention that the new regime contains some safeguards. Banks, for example, are not allowed to presume that all transactions within a market are distressed just because a market for an asset is inactive.

And, in contrast to other reports, the Post does not draw a link between the easing of mark-to-market and the stock market rally. It seems that only reforms the Post favors can produce beneficial outcomes, even for a day.


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