Mark to Market Accounting as a Magnifier of Financial Crises

The main objective of this chapter is to provide an analysis on whether mark-to-market accounting magnifies financial crises. Even though the results of numerous studies on this topic offer various conclusions, the majority of them conclude that fair value accounting, or mark-to-market accounting, does not cause financial crises. Most studies that had similar conclusions dealt with the 2006-2008 period, whereas we focus our research on period from 1881 to present day. Primarily, we will point out the historical context of the implementation of mark-to-market accounting and consequences it had. We consider the long term relationship between United States (US) GDP and the S&P 500 index values and key historical developments to conclude that implementation of mark-to-market accounting contributes to creating of asset bubbles and assets overestimations. Even though mark-to-market accounting does not cause financial crises, it does magnify fundamental procyclicality which is inherent in efficient markets