Editor’s note: James DeLong is a senior fellow at the Competitive Enterprise Institute. Local Tech Wire welcomes submissions for its “Say Something” section. Send submissions to Managing Editor Rick Smith (rsmith8@nc.rr.com).

WASHINGTON,Charles McKay’s Extraordinary Popular Delusions and the Madness of Crowds has been a classic since its publication in 1841. Nonetheless, it is always unnerving when the book’s insights about the power of mass irrationality are re-confirmed. This happened twice in the past decade, first as the stock market soared, and right now, as mobs led by noose-wielding journalists and politicians hunt down corporate executives.

No one has a good word for fraud and thievery, but these terms are being thrown around without many specifics about the actions involved. When one reads the news stories with a focus on, “but what, exactly, did they do?” answers are elusive.

The Anderson prosecution, assumed to be a cinch, fell apart. The jury convicted only after the judge gave a dynamite charge, and even then it seized on a lawyer’s email that no one thought important, and that most lawyers say was perfectly proper. News about problems at other companies is long on generalities and scant on specifics.

Mass amnesia has set in about the vigorous debate that went on throughout the nineties over whether the stock market was irrationally exuberant. In the end, the many pessimists were discredited and silenced. The optimists raked in all the money. Now, suddenly, it was all because the accountants misled us.

This is nonsense. The fundamental problem is that two-thirds of the value of modern companies is based not on physical assets but on intangibles – know-how, intellectual property, customer lists, trade secrets, synergistic interactions among employees, first mover advantages, network effects, and so on. No one knows how to assess these values. The Brookings Institution is thinking, and the Financial Accounting Standards Board recently responded to “hundreds” of professional articles worrying about the issue by commencing a project, “Disclosure of Information About Intangible Assets Not Recognized in Financial Statements”.

FASB has another major project on Issues Related to the Recognition of Revenues and Liabilities, which it calls “the most important — and the most difficult — that standard setters and accountants face.” Recognition-timing issues are involved in most of the current deluge of earnings restatements (including the WorldCom affair), so examining the FASB’s nine-page list of conundrums is instructive.

Given the inherent difficulties, every accounting choice is vulnerable to attack now that the stock market has fallen. The assumption that we can magically impose “bright line” standards on the chaos of reality is risible, as is the thought that mistakes about the timing of revenue recognition caused the telecom crash. The idea that standards could be developed by the U.S. Congress, progenitor of Amtrak, the Post Office, the telecom regulation fiasco, the savings and loan disaster, the social security Ponzi scheme, the disappearance of the Native American trust funds, and endless other travesties belongs in the category of black humor.

Standing athwart a lynch mob is a dangerous spot, so the Administration is temporizing. It is making clear that it will attack real fraud. But it is also resisting pressures to adopt ill-thought measures that would do long-term structural damage. For example, proposals that stock option grants should be treated as expenses deserve resistance; they present intractable conceptual and practical problems, and would damage venture capital and high tech industries.

The Administration’s approach is sound. Boom times always attract charlatans, and the prosecutors should find enough real criminality, provable under historic legal standards, to keep the gallows busy and the mob happy, while the simple mistakes fade away. Then the serious thinkers can get on with the job of improving standards of disclosure and transparency to meet the needs of the information age.

CEI: www.cei.org