Oct. 9 (Bloomberg) — Markets recognize desperation when they see it. That's the best analysis of shareholders' reaction to the $700 billion rescue law.

Ripping open the package Treasury Secretary Henry Paulson offered, investors sought reform. Instead they found short-term gimmicks, cash and earmarks. The grab bag means trouble, unaddressed, is still down the road. The markets' conclusion: Might as well get it over with by selling now.

The sell-now attitude may be coming out of the experience of the nation's last great banking crisis, that of the savings and loans. That crisis started in the late 1970s and early 1980s, when interest rates skyrocketed; in 1981 the prime rate passed 21 percent. The thrifts were lending at low rates and had to borrow at high rates. They quickly were rendered insolvent.

Overregulation played a role: the government put a 5.5 percent ceiling on passbook savings accounts. Meanwhile, smart kids were earning much higher rates in money-market mutual funds. Real estate and a bust, then as now, played a role.

At first, policy makers thought they could solve thrifts' challenges merely by allowing them to lend at higher rates. As author Martin Lowy paraphrases in his chronicle of the thrifts' misadventures, "High Rollers," the Treasury viewed the trouble thusly: "The problem is basically a liquidity problem caused by interest-rate regulation. If rates are deregulated, the S&Ls will be able to attract funds." The emphasis on liquidity, as opposed to solvency, sounds almost Paulson-esque.

Reliance on Goodwill

In stepped Washington, and the accountants at the now-defunct Federal Savings and Loan Insurance Corp. They coerced healthy institutions into absorbing sick ones. The device in this instance was goodwill, an accounting maneuver that turned a financial shortfall into a paper asset. The name also reflected the desperation of the alchemists. It was almost as if they were saying: "We can wish this problem away through moral suasion."

The technique was based on the faith that the books of the thrifts would look better — eventually. This is rather like the argument that softening our "mark-to-market" accounting rule will buy time for mortgage-backed securities to prove they can be worth something more, later. In 1980, as the S&L troubles were building, lawmakers also raised deposit insurance to $100,000 from $40,000 and gave the thrifts new powers to expand the range of their investments.

Suddenly, S&Ls seemed profitable, at least for a moment in 1983. As Lowy reports, between 1981 and 1982 more than 200 such supervisory mergers took place, creating total "goodwill" — paper value at best — of $16 billion. By 1985, Lowy estimates, S&Ls actually had only half the capital the industry and regulators pretended they had.

Postponed Implosion

The effect was merely to postpone the needed implosion, for, as today, the structural problem of thrifts' inherent insolvency hadn't been addressed. There followed the stories we remember better than that obscure accounting term — the failure of the Texas thrifts, Silverado, Lincoln and CenTrust.

Right now on YouTube there's a video circulating about John McCain and his improper interventions on behalf of Lincoln and its chief, Charles Keating, in the 1980s at the Federal Home Loan Bank Board. McCain and four other senators were pressing the regulator to hold off on taking action against Lincoln.

And so an S&L snafu that could have cost the taxpayers that $16 billion ended up costing hundreds of billions instead.

The Accounting Route

What about now? In the shadows of a financial debacle that reminds us of the early 1980s, many at first found the argument that accounting was the problem this time compelling. The valuations that mark-to-market methods suggested were so brutal. Many of us, yours truly included, were attracted, at least initially, to the idea that mark-to-market should be softened so that book values of securities reflected the life of the loan.

But my own conclusion, and probably that of many shareholders, is that, upon reflection, we see too many similarities to the old goodwill to be confident. Accounting alchemy can be criminal fraud — Jeff Skilling at Enron Corp. — or it can be "only" political fraud.

Among a million other things, the bailout law reiterates that the Securities and Exchange Commission has authority to fiddle with the definition of mark-to-market. This week's declines by stock markets aren't emotional. They are the prudent actions of a crowd crying "fraud" and anticipating the inevitable.

(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations and author of "The Forgotten Man: A New History of the Great Depression," is a Bloomberg News columnist. The opinions expressed are her own.)

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