When the Dow Jones drops 778 points in one day, as it did yesterday, it’s a good bet that even people who aren’t generally tuned into economic news will start paying attention. If that’s you, then you’ll probably hear the phrase “mark to market” at some point and wonder what it means.

Here’s the short answer: It means you’re getting close to understanding what’s at the heart of the current financial meltdown.

Mark-to-market is an accounting term (warning: much financial geekitude ahead), and it’s based on the worthwhile proposition that companies involved in things like commodities and securities should value those assets at the current market price — rather than the price they paid or the price they hope to someday get. That’s a fundamentally sound approach, but like many well-intentioned rules it can have a unpleasant consequence. That’s what we’re seeing now, and it’s the fuel to this economic fire.

Everyone understands that the current problem was caused by the bursting of the housing bubble and the resulting wave of loan defaults and foreclosures, which then rippled through the securities markets. Financial institutions suddenly found that the mortgage-backed securities in their portfolios were worth less than they thought. Problem is, such securities don’t all rise and fall in step. Some of them might be worth only 20 cents on the dollar now, while others might be still relatively valuable. But in the current climate, those securities are radioactive — meaning there is almost no market for them. Thus, they all get marked down to next to nothing, meaning financial institutions have to value their portfolios of mortgage-backed securities at that level regardless of their actual worth. That can push companies that were teetering, but still alive, over the edge.

To help you understand how mark-to-market can wreck things, consider this example (which was cribbed from this recent article in Forbes): Suppose you bought a $300,000 house a couple of years ago, investing $100,000 of your own money and borrowing the rest. Your job is stable, your income is more than sufficient to pay the $200,000 mortgage, and you plan to live in the home for years to come. But when the housing market collapsed, similar homes in your neighborhood started selling for $150,000. It would be bad enough that your $100,000 equity had evaporated. But if mark-to-market rules applied to mortgages, you would immediately be required to come up with $80,000 for the bank — $50,000 for the remainder of the vaporized value of the home, and another $30,000 for the 20 percent down payment it wanted. And remember, you weren’t in financial difficulty until then: You were paying the mortgage and had no plans to sell. But suddenly, you’re facing disaster.

That’s what happened to many financial institutions. They had mortgage-backed securities in their portfolios, and yes, those securities lost value. Unless a firm actually tried to sell them, however, it was only an accounting adjustment — or should have been. But in practice, that adjustment to the books can be all it takes to nudge a company into insolvency.

(1) It’s interesting how two separate news articles, published on the same day in papers a continent apart, used the same Orwellian description of the new debt agreement between McClatchy Newspapers and its lender. The Sacramento Bee, McClatchy’s flagship California paper, reported that the company’s negotiations with its lender had helped it “win greater financial flexibility.” The Raleigh News & Observer’s story about the same event for its North Carolina audience announced that the negotiations had resulted in McClatchy “winning concessions” from its lenders. So what exactly did the victorious negotiators from McClatchy win? Well, the company now has to (a) pay more interest on its loan, (b) cut its dividend, and possibly eliminate it altogether, (c) accept a reduction in its credit line, and (d) pledge all of the company’s assets to secure the loan. In return, McClatchy essentially got nothing more from its lender than a little time while the company looks for ways to keep afloat. If that’s winning, I’d hate to see what losing looks like.

(2) Paul Newman’s death was widely noted over the weekend, but almost nothing I read explicitly pointed out the obvious: Newman may have been the last movie star who actually deserved the admiration of the public. The fawning attention given to most celebrities is out of proportion to anything they’ve done to earn it. In fact, the more you learn about celebrities the less appealing they usually turn out to be. Not so with Newman. It was easy to admire that his private life was exactly that — private — and his choice to maintain a certain distance, both culturally and geographically, from Hollywood. Furthermore, he didn’t wear his politics on his sleeve, was married to the same woman for 50 years, disdained the trappings of stardom, and gave away huge sums for good causes. But for all his rejection of a star’s life, he was a hell of an actor. You always got good value for whatever you spent on a ticket to one of his movies.

(3) Who’s the one person who may come out of the current Wall Street crisis with his reputation improved? Eliot Spitzer. As you may recall, before Spitzer became best-known for being the country’s highest-profile john he was the scourge of financiers and corporate heavyweights who pushed the boundaries of ethical business practices. Sure, he was a thug and a bully with a badge. But among the things Spitzer helped fix was the less-than-arm’s-length relationship between investment banks and the analysts who appraised (and recommended) their deals. The long-term judgment of history may yet work in Spitzer’s favor.

Let me pose a politically incorrect question: How is it that the big guys who helped create the mortgage crisis get heaped with blame and scorn, while the little guys who are at the root of the whole mess get sympathy and money?

One inconvenient fact that’s been largely overlooked is that this crisis didn’t crash down on ordinary citizens. It crashed up on Wall Street titans. We think of economic cataclysms as events that have their origins in the corridors of power, and then cascade down onto the heads of the innocent. But that’s not what happened in this case. Instead, millions of regular Joes took on more debt than they could afford, or didn’t bother to understand exactly what they were getting into when they signed for adjustable-rate mortgages, and their troubles trickled up. It took a couple of years, but that trickle eventually turned into a tsunami — which then swept away Wall Street.

Nonetheless, a guest column in my local paper yesterday wasted no time in establishing the victim narrative in its plea for a bailout of the little guy. Here’s the first paragraph:

Amid the headlines about huge stock market losses and collapses in the financial services sector, it can be easy to forget the human face of the problem that our nation now confronts.

Only later did it grudgingly acknowledge reality:

Certainly, some of these consumers might have been irresponsible in taking on more debt than they could handle. The vast majority, however, were simply trying to buy a piece of the American Dream.

I haven’t seen anything suggesting that the “vast majority” of the people facing foreclosure were careful with their personal finances and are truly victims of circumstance. I suspect that exactly the opposite is true — that the majority of people caught in the housing squeeze are those who (1) applied for, and got, “liar loans;” (2) agreed to adjustable-rate mortgages because that allowed them to buy more house than they could actually afford, and gambled that they could refinance or sell out before the interest rate adjusted up; or (3) speculated in real estate during the boom years, and simply got caught holding property when the bubble burst.

Whatever the case, the word “victim” isn’t the first to come out of my quiver of descriptions.

Don’t misunderstand me. This isn’t a brief on behalf of corporate big shots. I’ve got no sympathy for them. They played the game, earned obscene piles of money, and however this crisis shakes out none of them will be going hungry. But neither am I buying into the oppressed-masses storyline.