For some reason our elected leaders, along with a significant, although shrinking, number of financial-market professionals, have fought strenuously against any alteration of the mark-to-market accounting rules set down by the Financial Accounting Standards Board (FASB). Congressman Barney Frank (D., Mass.) clearly stated that these rules were untouchable on CNBC on February 11. “You certainly don’t want Congress legislating accounting [rules],” he argued.

Why is that? Congress makes rules all the time. It tells us how much water our toilets can use, sets gas-mileage standards, says where we can drill for oil, and passes massive new regulatory legislation (see Sarbanes-Oxley) when it sees fit. Why are mark-to-market accounting rules untouchable?

Don’t get me wrong. I don’t think Congress should legislate nearly as much as it does. But how and when did the accounting profession become infallible? After all, despite the cold accuracy of numbers, most accounting rules only estimate reality.

If the computer on your desk is more than three years old, accounting rules for depreciation say it is worth nothing — whether or not it still works. If fuel prices fall, and an airline stands to save billions in fuel costs over the next few months, current accounting rules do not allow it book those lower costs as savings today.

Similarly, mark-to-market, or fair-value, accounting is just one way to keep the books. These rules force financial institutions to “mark” the value of assets to “market” prices, and then take any gain or loss through their income statements and onto their balance sheets. There is no allowance made in this process for whether markets are liquid or illiquid, whether prices reflect true underlying cash flows, or whether panic is in the air and the prices available are fire-sale prices.

This doesn’t mean fair-value accounting is 100 percent wrong. It’s not. But it is extremely pro-cyclical — indelibly tied to the business cycle. When the market is going up, bank capital is boosted and banks lend more. And when the market is going down, fair-value accounting rules cause bank capital to shrink, which forces banks to pull back from taking risks. That’s the story of the past year.

Fair-value accounting as we know it today is based on rule FAS 157, which was implemented by the FASB in 2007. But it has a longer history than that. Fair-value accounting existed in the 1930s, which was when we had the Great Depression. In 1938, President Roosevelt suspended those rules, and between then and 2007 the economy had no panics or depressions. Maybe its time we put fair value through the shredder once again.

Nevertheless, some observers believe fair-value accounting should be retained, and that the prices of so-called toxic assets in the market are reflective of “real” value, no matter how low those prices go. They argue that home prices will fall significantly farther and that more foreclosures will occur. Therefore, they reason that market prices for toxic assets (no matter how low) reflect reality.

The problem is that all this is forecasting. Proponents of fair-value accounting believe current market prices are correct, and that anyone who wants to price them higher is “marking to myth.” In reality, these pessimists want to “mark to model.” Their models say the world will get much worse. So no matter how low the price for any security drops, they believe that drop is most likely justified.

This is where a larger and more systemic error is created. Since mark-to-market accounting reduces the capital position of our banking system, it impacts the broader economy. The accounting rules themselves create a self-fulfilling prophecy, setting off a vicious economic cycle. Capital contraction harms lending, which in turn hurts the economy, which in turn lowers the prices of assets, which then reduces capital even more — starting the whole cycle over again.

If our economy is to recover, this cycle has to end. Here are three ways it can be done: 1) Write every asset down to a rock-bottom level, where the odds of further mark-downs are near zero; 2) Have the government buy all the bad assets, or flood the system with so much money that it takes away the risk of further markdowns; or 3) Through Congress, the SEC, the Treasury, or the FASB, alter or suspend mark-to-market accounting.

The first option is the nuclear option. The second option, which has been engaged to a degree by the Treasury and Federal Reserve, is taking an awfully long time to come to fruition and is very expensive. And there’s also no guarantee that the Treasury and Fed will ever get it right.

That leaves option three. But don’t count on the FASB to support any change in the rules. The accounting profession likes fair-value accounting because it protects it from making any decisions that might put it in jeopardy. As long as auditors can point to “market” pricing, accountants can avoid having to make and defend judgment calls. So no matter what Barney Frank argues, Congress (or some aspect of the government) must make this call.

The good news is that there finally seems to be some movement on this issue. The mark-to-market question came up during hearings in both the House and Senate in recent days. Congressman Frank and Sen. Chris Dodd (D., Conn.) have both discussed it with reporters. And even the financial media is starting to see the light. After 12 months of avoiding the topic almost entirely, and deriding anyone who brought it up, CNBC is now giving it airtime.

Hopefully sanity prevails and the members of Congress who see the harm in fair-value accounting start pressuring the Treasury and SEC to push changes on the FASB. This is the quickest and cheapest way to help stop today’s financial-market problems and their ruinous impact on the economy.

– Brian Wesbury is chief economist at First Trust Portfolios L.P.