In theory, of course, this means that values would end up fluctuating more in response to market fluctuations, which would lead to further market fluctuations and thus more value changes, etc., etc. etc. In reality it is doubtful that this state of affairs would lest into perpetuity, as eventually investors would become used to the new schema and reactions would grow more measured. And even the initial volatility that has been observed might not indicate a problem. Moyer (2008) claims that in discounting existing capital and management, fair value accounting practices replace objectivity in financial analysis with fear. What this claim in essence boils down to us that fair value accounting practices demand values to be assessed solely on the current state of affairs rather than on potentials. Clearly, management and capital are only as valuable as what they are able to produce; an assessment of value based on their capabilities necessarily calls for a prediction, which will necessarily be subjective. The "fear" that Moyer refers to is an uncertainty regarding the future, and though stock analysts have consulted with psychics in the past few have claimed outright to have certain knowledge of the future. Current fair market value is truly the only objective measure of an asset's or company's worth, and though it might not be fully accurate for failing to take...

Values were made to match the actual circumstances of the market, and though this resulted in a substantial loss of wealth it was without question a more accurate representation of the various companies and their assets. Critics can bemoan the fair value accounting methods as responsible for the destruction of wealth, but the fact is that empty paper wealth always ends up deflated one way or another. Previous housing bubbles, the dot.com burst, and numerous other incidents all stem from the same desire to make wealth work without real assets, and for the most part it simply doesn't.
References

AICPA. (2009). "FAQs about fair value accounting." The American institute of certified public accountants. Accessed 2 October 2009. http://www.aicpa.org/MediaCenter/fva_faq.htm

Moyer, L. (2008). "How fair is fair value accounting?" Forbes. Accessed online 2 October 2009. http://www.forbes.com/2008/06/24/accounting-banking-sec-biz-cx_lm_0625sec.html