Leveraging Ourselves out of Crisis—Again!
Aida Sy And Tony Tinker
Few professions can claim to have instigated—almost single-handedly—a worldwide recession. Yet the breakdown in accounting controls and financial reporting are primary constituents of the current economic meltdown. The housing-market bubble involved the excessive use of leverage finance. These high-risk practices could have been prevented by the proper application of accounting controls and financial reporting. Yet it would be a mistake to reduce the crisis to a technical accounting failure. Rather, the context of this failure “necessitated” the accounting failures. The relevant antecedents lie in a conjunction of three contradictions of capitalism: a profitability, a realization, and concentration and centralization crisis. Only when contemporary accounting practices are located in this institutional, social, and historical context does it become clear why accounting practices failed. The basic ingredients of the present crisis are not new. Leveraged speculation began before, during the crash of 1929, and has reappeared several times in different guises—aided and abetted by lax audit and financial reporting practices. Today’s “remedies” are mere palliatives that are not adequate to solve the problem. The current restructuring of the financial institutions is only a short-term displacement of the problem. It merely defers and transforms the present crisis into new institutional forms that may be too big to save.
There is a time-honored banking maxim: “Never borrow short to lend long.” For banks, borrowing short involves using low-cost, immediately