Thursday, December 4, 2008


Treasury Secretary Paulson in speaking about a new program for the Feds to underwrite mortgages in an attempt to revive property sales, said, "Recovery in the housing market is key to solving the financial crisis. Such a rebound would restore confidence in the banking system and support the value of troubled assets backed by mortgages." At last, the point I have been making is out in front of the entire public, mortgage based assets are being valued at the depressed prices of the housing market, which is an error. They should be valued at their long term or maturity value.

Paulson understands the accounting error being made, but instead of calling for these assets to be priced at their long term or maturity value, he seeks to raise the value of the property market and thereby raise the value of mortgage based assets, what he calls"troubled" assets. In other words, "If you cannot correct the error, use it to your advantage."

I would still prefer marking these assets to their long term value, which would not cost a penny of public funds. But Paulson's program has added benefit, not only will it raise the value of the property market, and thereby allow the mortgage based assets to be raised in value, it will also induce home sales, which, as a realtor I applaud. Increased home sales will also counter the rise in unemployment, generate increased demand for attendant goods and services, and, in the process, push the economy to better performance.

And this is a proven formula. The economic doldrums of the late1970s to early 1980s was cured when then Fed Reserve Chairman Paul Volcker dropped the Fed funds interest rates and by doing so caused a boom in home sales. The proof that this happened - in 1982 we had 1 million new home starts, in 1983, after the decrease in the Fed lending rate, we had 1.8 million new home starts. Not hard to see what drove the recovery in our economy.

I am thinking of establishing a new school of economics, "property economics." No, not a school to teach the micro-economics of buying and selling property, but a macro-economic investigation of how the property market affects the national economy.

Leo Cecchini

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