Accounting and Pragmatism I

Are accounting rules of any broader significance than just something for accountants to follow? do they themselves constitute data for the science of economics? or are they arbitrary, subject to erasure and thus re-writable at will?

I've been thinking about this recently because of an argument I got into at a message-board site about the Bush adminsitration's bait-and-switch over the TARP legislation of 2008.

As some of you will of course remember, the crisis-created coalition of Bush and Pelosi sold to the public and both houses of Congress a Troubled Assets Relief Program. The idea was that the government would buy up certain positions of the Wall Street banks, positions that typically involved both assets and liabilities, and that in the circumstances of the crisis involved way too much of the latter, too little of the former.

But even as Congress was voting on TARP, on October 3, 2008 [a month before Obama's election, and less than a week after Congress had rejected a slightly different draft of the same bill], the Treasury under Paulson was preparing the actual plan which was at variance with the sales pitch.

Hank Paulson officially or publicly "changed his mind" on October 8, but that was just for presentation. It had always been bait and switch.

The new plan was to use the authority granted under the broad language of TARP for a purchase of equity. It was preferred equity, i.e. non-voting stock, and the fact that the government wasn't giving itself votes was a figleaf whereby this could be distinguished from the more blatant nationalizations of, say, a Hugo Chavez. Still, it was stock. Equity. Ownership. TARP had turned into TERP [and Chavez only half-jokingly welcomed Bush as a new comrade.]

Anyway, I made this point on the message board and expected no argument. It is easily ascertained history, and the distinction between assets on the one hand and equity on the other is clear to all educated folk who have opportunities to use such words. So I thought.

Strangely enough, I did get an argument on the subject.

A fellow I will call, arbitrarily, "Tom," disagreed with me. He said, "The preferred shares the government received did not represent an ownership position. Preferred shares are a type of debt instrument not equity." I was flabbergasted.

More tomorrow. Including the connection to pragmatism.