Each week, thousands of Americans lose their jobs, their homes, or both. Thousands of other Americans do not have access to loans because banks are hesitant to take further credit risks. Many of these banks are not lending because their balance sheets are overloaded with devalued, toxic assets. As a result, the credit markets are frozen and the trading volume on Wall Street has come to a virtual halt.

And all of this is a result of one arcane accounting rule: mark-to-market. Mark-to-market requires financial analysts to value an asset at the “last sale” market value. This results in an effect known as procyclicality, because when the market is trading higher, the value of assets is priced at a correspondingly higher rate. However, when the market is down and stocks are trading pennies on the dollar—or when there is no meaningful market at all—analysts have to mark the value of an asset at a lower, even fire-sale rate.

For more than 70 years, we have recognized that mark-to-market is a poor system for estimating the value of financial assets.

For more than 70 years, mark-to-market was broadly recognized as a poor system for estimating the value of financial assets. As far back as 1938, regulators from the Federal Reserve identified the negative impact of mark-to-market rules. As a result, President Franklin Delano Roosevelt immediately moved to suspend mark-to-market.

Mark-to-market was reinstated in 2007. The change was primarily a reaction to the push for more transparency in the accounting system, following the Enron accounting scandal. Ironically, the mark-to-market rule has prioritized flawed transparency over accurate, holistic evaluations.

As our country faces the worst recession since the 1930s, it is tragic that we have reinstated the same accounting system that plagued FDR’s administration. Our economy cannot withstand another year, fiscal quarter, or day under the mark-to-market regime.

In fact, Congress recently conducted an important hearing on the impact of mark-to-market accounting. In our written testimony, we called on Congress to immediately move to repeal mark-to-market accounting. Mark-to-market continues to plague our financial services industry and has done more to exacerbate the current financial crisis than any other financial regulation.

Despite the glaring problems of mark-to-market, the Financial Accounting Standards Board (FASB) has resisted any significant change to the mark-to-market requirements. For this reason, Congress should quickly pass the Federal Accounting Oversight Board Act of 2009. This act will create the Financial Accounting Oversight Board—which will bring together the chairman of the Federal Reserve, the secretary of Treasury, the chairman of the SEC, the chairman of the FDIC, and the chairman of the Public Company Accounting Oversight Board—so that the FASB is no longer the sole decider of accounting rules.

Once enacted, the Financial Accounting Oversight Board should quickly repeal mark-to-market and provide an accounting system that is countercyclical, meaning it does not value assets based upon the day-to-day whims of the stock market. With a more accurate accounting system, financial analysts would be able to incorporate the current and anticipated future cash flows of all performing assets, so financial institutions would not have to take such drastic write-downs. Moreover, this reformed accounting system should give financial analysts more flexibility in valuing assets that are not regularly traded on a market—such as the case with certain derivatives—and for those assets that are intended to be held to maturity.

If anyone has any remaining doubts about the destructive impact of mark-to-market accounting, just listen to testimony of William Isaac, former chairman of the FDIC, who recently told Congress, “I believe firmly that if the SEC and FASB had suspended this MTM [mark-to-market] rule nine months ago…our financial system and economy would not be in anywhere near the crisis that they are in today.” We cannot afford to wait another nine months to let our economy degenerate further.

America’s economy can no longer withstand an accounting system that is so shortsighted and defective. We believe that two reforms—repealing mark-to-market and enacting the Financial Accounting Oversight Board—will lead to an immediate improvement in the credit markets. At the same time, congressional action will give relief to banks on Main Street, which will in turn improve lending access for individuals and business, thus driving up economic growth.

Newt Gingrich is a senior fellow at the American Enterprise Institute and was Speaker of the U.S. House of Representatives. Emily Renwick is his research assistant.

Image by Darren Wamboldt/The Bergman Group.