Wednesday, June 10, 2009


The results are in, Europeans demonstrated a clear turn to the conservative side of the political spectrum in electing the new European Parliament. The Conservative bloc will have a 100 seat margin over the Socialists. This was a real boost to the current conservative governments in Germany, France and Italy and a real blow to the socialists governments in Spain and the UK.

The elections also saw real gains for the "Green" parties and their bloc in the Parliament as well as the "ultra-nationalists" who are often called the "far right." Hard to see where they will wind up in the Parliament with most assuming that the "Greens" will align with the Socialists and the "Ultras" with the Conservatives.

One of the major reactions was to contrast this win for the "right" with the Democractic victory in the last US election. One Spanish journalist lamented that while the "US moves forward on a progressive path, Europe chooses to stagnate." Of course the writer's political bent is clear. But the contrast did receive much commentary.

So what to make of the outcome? Hard to say that the swing to the right was the result of the "Global Recession" since Sarkozy, Berlusconi and Merkel have been at the helm long enough to be blamed for the economic downturn. Never-the-less the UK and Spanish governing parties quickly blamed the bad economy for their losses.

The gains for the "Ultras" were probably spurred by the anti-immigrant mood in Europe. The recession is a two edged sword here since immigrants taking jobs while locals are losing them in major numbers has generated much of the anger. On the other hand, the recession has already caused the number of new immigrants to fall off dramatically.

The Conservative gain fairly assures that European Commission President Manuel Barroso of Portugal will be installed for a second term. The only glitch here is that his re-election will be held off until the Lisbon Treaty, which reorganizes the European Union government, is adopted. The Irish, who stopped the Treaty by voting against it in a referendum last year, now want to approve it.

All of this indicates that a new, more powerful central European government will start life with a conservative flavor.

Now when and where did we start using the terms "left" and "right" to define our political parties?

Leo Cecchini
June 2009

Tuesday, June 9, 2009


GM stands for “Government Motors,” the US Government comes out with new guidelines for executive compensation for companies slopping at the public trough, Jon Stewart of the “Daily Show” rails against Uncle Sam buying up failed businesses. The public is finally waking up to the salient fact of the “Financial Meltdown of 2008″ and “The Great Recession of 2009,” the economic upheaval has led to Uncle Sam becoming the largest shareholder in US private business and thereby acquiring even more control over the economy.

But of course readers of my blogs already know about this seminal event since it has been the theme of my series on the “New Economy.” I started by reviewing other definitions of the “New Economy” which included a service dominated economy, a global economy and an information/communication dominated economy. To these definitions I added, the “New Economy” means one in which Uncle Sam, who was already the single largest consumer, owned the central bank, and set the rules, has become the largest owner of the economy.

Let’s review that ownership. Uncle Sam already owned, or held the major share of, the traditional government parts of the economy - the military, cutting edge technology (NASA, NIH, CDC, etc), the road network, national lands, and, with his siblings the state and local governments, education, ports, public safety, and the lion’s share of health care. I realize I may have overlooked other parts, but you get the drift. To these he has now added the largest auto maker, the largest insurance company, parts of the major banks, and the mortgage industry. With President Obama’s health plan he will soon own most of the rest of the health care industry.

Wow! This should make every Libertarian and Republican froth at the mouth. And they do. Wait a minute, is Jon Stewart a Libertarian, or worse, is he a Republican?

While my political leanings are well known, usually compared to Attila the Hun, which is a great injustice, since he was a real socialist, if you doubt me, just check his administration, I am not concerned. In fact I applaud Uncle Sam expanding his investment portfolio. If the sovereign funds of such oil powers as Saudi Arabia, Kuwait and the United Arab Emirates are buying up the private sector, why not Uncle Sam? And the beauty of this is that, while sovereign funds must pay money for their purchases, Uncle Sam does it by giving a chit.
I was once a stockbroker and thus am very impressed by Uncle Sam’s portfolio - manufacturing industry, transportation, energy, finance, health care, education, security, communications, and, of course, Treasury bills. While others lament the debt he has incurred in acquiring this stake in the economy, I point to the reality that income from these investments could replace taxes to a large extent, and thus lighten, not increase, the burden on my purse.

Like it or not, we are into the “New Economy” in which Uncle Sam will have more control and say about what happens. Doubt me, just look at the new government guidelines for executive pay in such corporations as GM, Citibank, AIG, and more.

Leo Cecchini
June 2009

Sunday, June 7, 2009


I read an article the other day about how Africa is fairing during the worldwide recession. The author pointed out that Africa is doing better than one would expect, because of its new position as a main supplier of basic materials to the major emerging economies of the world, with Brazil and China leading the pack.

It was almost 20 years ago that I left my last foreign service job in Mexico. In my parting review of Mexico I noted that Mexico, as well as most of the rest of Latin America, was well positioned on the development train and that I had no real concerns about Mexico and the rest of Latin America for the future.

At the same time I noted in other writings that most of Asia was also well along the road to economic success. However, I said that Africa was still the problem child. I had also spent time in the 1980s working in Mozambique, South Africa and Namibia so had some idea of what was going on. I urged that whatever foreign assistance was available, that it be directed to Africa.

Well foreign aid was not redirected to Africa. But something more important happened. China found that Africa offered the raw materials it needed for its rapidly growing industry. The Chinese then set about establishing companies, joint ventures in the main, in several African countries aimed largely at producing raw materials.

China’s effort to obtain raw materials from Africa was clearly evident in its development of petroleum supplies from Sudan. And no matter where you go in Africa today you will find the Chinese busily building similar businesses.

Brazil is a different partner for Africa. It enjoys plenty of its own raw materials. But it is short of petroleum. Enter Petrobras and its explorations in Africa.

I am pleased to report that the fledgling cooperation between African countries and major emerging economies promises to be the engine of Africa’s economic future. I no longer fear for Africa’s future and believe it has joined its fellow developing states in Asia and Latin America on the train to a better economy.

Leo Cecchini
May 2009

Categorized in Uncategorized


I read an article by “Nobel Laureate” Paul Krugman in which he berates Americans for spending beyond their means by resorting to excessive borrowing and then chastizes the Chinese for not spending enough. I believe Mr. Krugman would have served us better if he had explored why this happens, rather than preach prudence to Americans and exuberant spending to the Chinese.

In my opinion the reason Americans have been happy to go into debt to buy is that they have confidence in their ability to earn more in the future and the underlying strength of the American economy. The Chinese spend less and save more because they do not have similar confidence. Of course the present state of the economy has gone a long way to undermining America’s confidence, but we are using record new debt to correct the situation in full confidence we will be able to meet future debt obligations.

More important it is important to understand the basic assumption of debt - you buy something on credit today that you will pay from future income, but you have the purchase today. The reverse would be to save today to buy tomorrow.

My parents used to say, “we don’t use credit, we pay cash for all we buy.” The net result is that our family missed out on some important items - no television, no automatic washing machine, no vacations. Of course my father conveniently forgot about having a mortgage on his home and a lien on his vehicle.

But let’s get real. The average new automobile costs $20,000. The median American household income is about $50,000. At a saving rate of 10% it would take four years to save enough to buy a new car, if the prices stay the same. The average home price is $200,000. Thus it would take 40 years to save to buy that house, and you can be sure the home price would be substantially more.

No, even the Chinese use debt to buy homes and cars. Buying on credit is a fact of life everywhere. The only question is the proper level of debt.

Krugman and most others blame the present recession on excessive debt. They keep crying that the credit house we built is collapsing around us. But hold the phone, we now know that 97% of bank loans are being paid on time. Hardly a cause for a major calamity. Moreover, the US Government is taking on unprecedented new debt to correct the slump.
No, the basic problem is that debt is part and parcel of our modern life but we are still uncomfortable with this fact.

Leo Cecchini
June 2009

Monday, May 25, 2009

The Economy and the Environment

President Obama has linked the environment to economic recovery. He is concurrently taking action to correct the economy and address environmental concerns.

I am writing this blog while sitting in my home in Mallorca, Spain with the tallest mountain on the east end of the island rising directly behind me and the Mediterranean 50 meters in front of me. The house is surrounded by a "Nature Park" or nature preserve. The setting and the views are spectacular in all directions.

I recall about 20 years ago the Spanish government being worried by pollution in the Mediterranean ruining their tourism industry, you see Spain's coasts are the main seaside resorts for Europeans. I am giving to calling it the "Florida" of Europe. Spain's concern was echoed by other Mediterranean countries and the concern led to joint action to clean up the Mediterranean.

My initial reaction to an attempt to clean up a whole sea was total skepticism, how can you clean up thousands of square miles of sea? Well the effort was not to clean up the whole sea, but to clean up the coastal waters. I am happy to report that the effort worked. Twenty years ago I would find lots of flotsom and jetsom when walking along the water's edge. At times the sea itself was clogged with sea nettles who are a sure sign of sewer tainted water. Now the water's edge is clear of all trash and the sea nettles are a rare sight.

My thoughts about the environment also brought to mind another instance in which I was a direct participant. While running a public relations company in Turkey two of my people, an American expert in public relations provided by the US side of the joint venture and a young Turkish woman recently graduated from Ankara's Middle East Technical Institute, came to me to present a proposal for clients. They explained that a group of Turkish companies was worried by threatned new government plans to impose high taxes on plastic bottles that were causing a "solid waste problem."

My immediate reply was to say that Turkey was too poor to have enough such bottles to be of major concern and that there were plenty of sink holes throughout the country where they could be disposed.

I then looked at the details of the situation. I found that the problem was specific to one town in Turkey, Bodrum, a seaside town known in ancient times as Halicarnassus, the home of Herodotus, the universally acclaimed "Father of History." The town was also the site of one of the Seven Wonders of the Ancient World, the tomb of King Mausolus which gave the world the word, Mausoleum. The Mausoleum is long gone but you can see a full scale reproduction in New York City, General Grant's Tomb looking over the Hudson River. It is also the largest tomb in the USA.

But I digress. By 1990 Bodrum had become a popular seaside resort for foreign visitors and Turks with the foreigners staying in the newly built hotels and the Turks spending the summers at their phalanxes of new cookie cutter "villas." In season the town was chock a block with tourists.

Bodrum has a climate like that of Southern California, it never rains but when it does, "it pours, man it pours." These periodic floods served to sweep the town clean of all debris and trash carrying it out to the Mediterranean Sea. This should have been the end of the story but a popular treat for visitors to Bodrum was to take trips in glass bottom boats from which they could see the remains of sunken ancient Greek ships that were the backbone of Greece's commerce based economy.

Imagine looking through a boat bottom to see 2500 year old wrecks resting on the sea floor. And see those ancient amphoras that held wine and olive oil. And see those plastic bottles emblazoned with Hassan's Bleach, Hikmet's Detergent and Coca Cola. What, how did these modern bottles wind up among the amphoras of the sunken wrecked ships? Well the rains washed the bottles out to sea where they filled with water and sunk to the bottom with many falling among the wrecks.

Eureka I said, we are not dealing with trash pollution but "visual pollution." All that had to be done was to keep the bottles from being washed out to sea and spoiling the sight of ancient ships on the sea floor. We devised a PR campaign featuring bottle collection centers where people could bring their plastic bottles to be properly disposed of. The centers also took in glass bottles and other refuse since all was subsequently dumped into the sink holes. It worked.

These personal experiences with enviornmental concern led me to a clear realization, action to save the environment comes when problems threaten your pocketbook. I fear that President Obama will not have much luck with his environmental plans until he can show clear damage being done to our economy. It is no accident that he has linked the two. But he must make the link clear and urgent.

Leo Cecchini
May 2009

Sunday, May 17, 2009


Yes, the title is what I say is Italian for that famliar expletive for false information. Of course it is only this Italian-American's invention.

In his last item one of my colleagues writing in another blog site lays bare the truth of the "Financial Crisis of 2008" and "Great Recession of 2009." He writes that the largest US banks are not undercapitalized. More importantly, he notes that 97% of their loans are fully performing and thus only a small percentage of their securitized assets are "toxic," which is contrary to the conventional wisdom.

I have repeatedly stated for the last eight months that there was no real reason for the meltdown. The error came about when the "Wunderkinder," who created the securitized asset boom, got nervous about stagnant property sales. They translated the slump in the property market into destruction of the securitized assets built on mortgages and other loans. I kept saying that this was an error, foreclosures were never above 3% of the mortgages and that the assets built on these were being grossly undervalued. I should have used my colleagues number and stated that the glass was 97% full instead of 3% short.

Of course even a 3% default rate is cause for concern, but not sufficient to cause the massive panic that led to our current sorry state of affairs. To put it succinctly, we overreacted and in the process sunk our economy.

Fortunately some steady hands at the main tiller, Paulson, Bernanke, Geithner and others, steered the economy back to stability. We now see that our banks are sound and never did have the level of threat that was feared by many.

While the financial system is sound, the panic did ruin the economy in general. Securitized assets were erroneously marked to a non-existent market that resulted in massive devaluations that in turn ruined bank balance sheets and forced credit to dry up. Credit dried up, consumption went down. Consumption went down, unemployment went up.

While a sound financial system is necessary for economic recovery, it cannot do the job itself. We have to get people back to work and that is the aim of President Obama's stimulus package.

We were fed alot of "bullasheet" and it wrecked the economy.

Leo Cecchini
May 2009

Saturday, May 16, 2009


I read an interesting article about how Norway has survived the current recession by saving and not spending. I had the chance to observe and learn about all of the Nordic peoples while at our embassy in Finland. I came to some short descriptions of each: Swedes viewed themselves as the leaders and trendsetters of the group, Danes saw themselves as fun lovers, far removed from their status as the most savage and barbaric people 1000 years ago - the Vikings, Finns wanted nothing more than to top the Swedes, and the Norwegians lived the motto of Gold´s Gym, “No pain, no gain.”

To understand how Norwegians came to this state, one has to remember that the country became independent only at the start of the 20th Century and at that time was one of the poorest of the countries in Europe. This nation of fishermen, lumbermen and farmers expended much blood, sweat and toil in building one of the highest standards of living in the world.

But a funny thing came in the 1970s, Norway found great reserves of oil and gas in its territorial waters. By now the country had already achieved one of the highest income levels in the world. Finding petroleum was the icing on the cake.

Fearing that the easy money from oil and gas exports would undermine their carefully built stolid pursuit of the good life, Norway chose to husband much of its petroleum income. The practice paid off. While all the world is desperately going deeper into debt to overcome the recession, Norway is simply dipping into its reserve funds.

Perhaps the Norwegians will now be able to lighten up a bit and be more like their fun loving cousins the Danes, who also enjoy a high standard of living, but spend less time at Gold´s Gym.

Leo Cecchini
May 2009

Tuesday, May 12, 2009


Well the report is in, the 19 banks given a “stress” test by the Feds are all able to survive and continue as key financial institutions. Ten need to build up their asset bases and nine have adequate funds. The result was seen even before the report was released, financial shares on the stock exchanges rose like rockets at lift-off.

One thing not revealed in the public information about the tests was the role played by lifting the “mark-to’market” rules. While nothing was specifically said about this, clearly the banks would not have been able to perform so well if they had not been able to revise valuations of assets to “long-term” or “maturity” values, instead of marking them to notional markets.

Proof of how fast the banks have recovered enough to lend again, I am in Spain where its largest bank just issued a new Euro 1.5 billion securitized debt bond based on mortgages. Say what, aren’t these the “toxic assets” that caused the recession? Well yes, they are, but, as I have said all along, we now know that traditional sources of credit are not sufficient for our “New Economy.” We need securitized debt to regain where we were in 2007 and go beyond, even in Spain.

A major hurdle has been crossed. Now to the Obama stimulus plan.

Leo Cecchini
May 2009

Wednesday, May 6, 2009


Well no sooner did I write the last blog titled "Time to Invest" the mavens came out of the woodwork to confirm my notes. One guru on CNBC even pointed to my own portfolio as the best way to go, i.e. Bank of America, Citibank, Freddie Mac and such.

But none was as impressive as the coments from Jimmy Buffet's dad Warren at his annual meeting of his investment firm. He too spoke about investing in financial stocks. His most memorable line, however, was that, "if it takes a computer or calculator to determine how good a stock is, then I don't buy it."

For all of this last year I have been constantly hammering at the "wunderkind" with their electronic Ouija boards givine erroneous values to securitized debt and other derivatives, structured products and so on. People kept saying how could they be wrong, they are highly educated financial professionals. Well Buffet has called them out and they are now exposed as glib charlatans hiding behind the "smoke and mirors" of their trade.

By the way the stock market is rocking and rolling.

Leo Cecchini
May 2009

Monday, May 4, 2009

Time to Invest?

There are signs that the economic recovery plans are kicking in. Credit is once more available for housing and other purchases. The Obama stimulus plan is coming on stream. Banks seem to be back on the hale and hearty list. For many now seems to be the time to strike and get in early on rebounding investments. So what do I advise?

PROPERTY. I have been flogging "short sale" and foreclosure low priced rental units. "Short sale" is a term invented to describe properties sold for less than the value of their mortgage balance with the bank taking the loss. I can sell you one of these for as little as $40,000 for a unit that has a gross monthly income of $800. That means $9600 for the year less taxes and insurance of maybe $3500 or a net of $6100 or 15%.

SECURITIZED DEBT. The bad boys of the recession are back and selling very well. The easiest way to get in on the action here is to buy Fannie Mae and Freddie Mac. You should also look for products from the TAFL program of the Federal Reserve Bank.

SILVER. Funny, lots of people like to hold gold in their investment portfolio. And commodities should do well over the balance of the year. I prefer silver. While gold doubled in value over the last five years, silver trebled in value.

STOCKS. Put your money in financial shares - banks, lenders, investment groups. They took the biggest hit during the recession and promise the biggest gains in the come back.

ANYTHING GREEN. The corporate world has glommed onto the environmental movement and sees "green" to be made in being "green." Check energy technologies, no matter how far fetched, since all will get development funds. Recycling companies loom large. Another good choice is transportation that provides more efficient use of fuel, e.g. railways.

BIOTECHNOLOGY. With stem cell research now open for Federal funding and waiting cloning in the wings any group engaged in this research should see a renewal of interest.

EDUCATION. Private education led by online universities is booming. Start your own school or put your money into one.

Maybe a bit early for the faint of heart but definitely the time for the steely nerved investor.

Leo Cecchini
May 2009

Tuesday, April 28, 2009


Over the last week while visiting friends and family in California I have come to more clearly see the exquisite humor in what has happened over these last several months due to our faltering economy.

I have repeatedly commented on how the Federal Government has taken on an even larger role in the economy. Already the largest consumer, it will be even more so with the new budget that will increase Uncle Sam's take from 20% to over 25% of output. Already the central banker, the Federal Reserve System, Uncle Sam now owns a substantial share of the private banking sector. Already the rules maker for the economy, Uncle Sam will now engage in a round of enacting even wider controls over the financial sector. And of course the new role for Uncle Sam, the single largest stock holder in corporate America.

I have reduced this event to a terse comment, "What it took the Bolsheviks a sea of blood to do in Russia, Uncle Sam has done for peanuts." What I mean is that the Bolsheviks seized the means of production by force, while Uncle Sam is doing it for a rather small price.

I say small price because Uncle Sam is doing all this with money borrowed at small cost, in the main for less than 1% interest. And his capacity to borrow is not yet exhausted. I calculate that he can double the national debt without causing serious harm.

So what do we have. Uncle Sam is borrowing funds from the private sector at ridiculously low cost and he is using the funds to buy up the private sector. In other words the private sector is funding the Federal Government to buy it out. As I said, I find this to be exquisite humor.

Leo Cecchini
April 2009

Monday, April 20, 2009


President Obama has stated that economic recovery and future progress must be addressed at the same time as our energy supply and environmental concern, especially global warming. In fact he has linked the three as integral parts of the same problem.

I have no problem with global warming, the earth has been on a warming trend for the last 10,000 years. Now I say this as someone who lives at 18 inches above sea level on an island and has a second home so close to the sea that it is caked in salt residue after strong storms. I know hurricanes, having lost parts of both homes to hurricanes. The island I live on was actually the product of a hurricane in the early 20Th Century. I live my talk and I repeat I am not afraid of global warming, in fact I welcome it since the earth is basically a cold place.

I find that my friends are about evenly split between those who state unequivocally that global warming is a problem and we better do something about it immediately and those who deny that global warming is even occurring. Both sides have plenty of ammunition and supporters. Neither one has won the battle for public opinion. The average Joe is worried by cries that the sky is falling but is equally concerned that stemming global warming will cost him an arm and a leg.

As far as I am concerned the debate is over. The corporate world has now embraced global warming and is using it as the best marketing tool since the American dream of owning a home and a car. We are now constantly barraged by ads urging us to be "green." WalMart proudly announced that it intends selling millions of new light bulbs that use much less energy. Auto makers are flogging ad nauseum their "hybrid, electric, and new fuel" cars. We are urged to eat food grown without chemicals. In fact we are urged to eat less, period.

I wonder how the avid environmentalists view their cause being usurped by the very corporations that they held up as the villains causing all the ecological disasters. How will they deal with a march to global purity led by such bad guys as Exxon, DuPont, Dow, and so on? Talk about unintended results.

Leo Cecchini

April 2009


A reader raised an interesting point, while he finds my articles to give "lucid" explanations of the current economic drama he believes that most readers do not understand financial markets. In looking at how to better explain the way the financial markets work I struck on an idea, why not use the market for diamonds as a way to describe the mechanism?

Diamonds are valued by the familiar "4 Cs" - carat, clarity, cut and color. Let us consider carat or weight and clarity to determine the "intrinsic" value of a diamond while we can consider cut and color to determine the "subjective" value of a diamond.

The carat or weight of a diamond can be accurately determined by a scale. Turning to a mortgage we can call its carat or weight to be its balance due, times its interest rate, times the period for repayment of the loan. This can be readily and accurately calculated.

The clarity of a diamond means how clear it is of imperfections or flaws which can be readily seen with a microscope. Such flaws and imperfections determine the potential for the stone to break and can be accurately measured. Turning to mortgages we can consider "clarity" to be determined by defaults and foreclosures which can also be accurately measured.

The color of a diamond can range from white to blue to lemon to "root beer." The demand for certain colors changes over time and this the value goes up and down according to fashion. Likewise the cut of a diamond can be of several types with demand for a certain cut affecting the value. At present the most sought after cut is the "Leo" diamond (no, I had nothing to do with this, unfortunately). The point here is that cut and color constitute "subjective" valuation of a diamond that can change over a wide range.

Subjective valuation of mortgages has to do with perceptions of their reliability. Thus they are subject to variable measures, rather than constant measures. Last year sub prime mortgages were consider to be the weakest mortgages and their values were smartly reduced, no matter what the "intrinsic" value may have been. Now prime rate mortgages are causing concern and they are being devalued smartly.

Another subject valuation stems from the fact that no one knows the full scope and scale of "securitized debt" built on mortgages. At first we panicked and cut valuations to the bone. However, as we get a better handle on this pile of "toxic assets" we are able to better value them.

I have argued since last summer to drop the "subjective" values derived from "mark-to-market" rules and value mortgages and mortgage based assets to their "intrinsic" value. This was done on April 2 of this year. This change will lead to banks increasing the values of their mortgages and mortgage based assets and thus allowing them to lend again.

P.S. More notes on diamonds:

1. Diamonds are found throughout the world, from the frozen wastes of Canada and Siberia to the steamy jungles of the Congo to the deserts of Namibia to the gentle hills of Arkansas.

2. The main suppliers of diamonds are South Africa and Botswana where they are mined and Namibia where they are culled from the desert sands.

3. For the last 100 years the supply and thus value of diamonds was controlled by the De Beers organization owned by the Oppenheimer family of South Africa. De Beers has now changed to a market strategy of being the "supplier of choice" in the wake of intense competition from Russia and Australia.

4. I once met the late, legendary patriarch of the Oppenheimer family, Harry Oppenheimer on a visit to Washington DC. I caught his attention when in response to his direct question I said I was negotiating the entry of the first American mining company into Mozambique, his back yard.

5. The diamond market rests squarely on its symbiotic relationship with love and marriage. If the demand by women for a diamond as the visible symbol of their marriage should change to some other stone, the market for diamonds would, get ready, drop like a rock.

Leo Cecchini
April 2009

Thursday, April 16, 2009


I should have published this item yesterday but better late than never.

I find the subject of taxes fascinating. If I had not been a diplomat I would most likely have had a career in taxes. Not the most glamorous of professions, in fact an often reviled one. Jesus Christ was reproached for "consorting with prostitutes and tax collectors." But a career with as secure a future as a mortician.

And taxes are the talk of today. I even saw President Obama's tax return spread around on the internet. Most likely you have just sent your return in.

My first thought is what my old tax teacher, who was one of those venerable professors who literally wrote the book on the subject, at least the one we used in his course, who said one warm afternoon, "There are two elements of a good tax, first they collect sufficient revenue and second they are easy to collect." Notice, he did not mention equity, fairness, income distribution and such. Just raise enough to pay the bills and don't waste time collecting them.

Well we know that taxes in the USA today do not raise sufficient funds, we pay allot of public expenses with borrowed funds. We also know that taxes in the USA are not easy to collect, just ask the current head of the IRS, Treasury Secretary Geithner. This has led to endless debate about improving our tax system, indeed it was a core feature of President Obama's election campaign.

I am partial to "taxes" raised by government monopolies. At different times governments have raised funds through government monopolies that sold goods, such as salt, matches, and tobacco to the public. This allows the government to raise taxes whenever it wants and it is easy to collect. However, it is difficult to control, since smugglers have always managed to steal some of the income.

A similar process was that of the Soviet Union. It owned the "means of production" or most of the industry in the country. It took its "taxes" from the sale of the products made. These "taxes" would have been profits in a capitalist system.

In general, however, taxes is a complex subject. I hear many Americans complain about the complex US tax code, they want a simpler formula. I reply that a thick tax code is the tax payer's friend, while a simple tax code favors the collector.

This complexity is made even more so when taken to the international arena. As a diplomat, I had to examine tax systems in other countries and at times help negotiate tax agreements between the USA and other countries. Let me assure you that there are more angles on taxes throughout the world than there stars in the sky.

So what to do? I personally go for the so-called "flat tax" that Steve Forbes used as his banner for his campaign for president a few years ago. As with all income taxes, it is a "direct" tax, rather than an "indirect" tax such as sales taxes. As income goes up, your tax payment increases, as opposed to a consumption tax.

It is generally calculated that for a flat tax to raise sufficient funds in the USA it would be about 15-17% of income. Interesting to note, Vice President Biden's joint tax return for 2008 showed that he paid about 17% of his adjusted income in federal tax. President Obama and his wife paid about 30% of their $2.5 million income in taxes.

Of course the complaint about the flat tax is that it is "regressive" which means it places a higher burden on low incomes than it does on high incomes, i.e taking 15% from an income of $20,000 means more hardship on the payer than taking 15% from an income of $1 million. But remember under our current tax system something less than 50% of income earners pay no tax. So the flat tax need only be applied to the wealthier half of the population.

Now I am sure some will also consider my comments here to be facile and I will admit that they only touch the subject. But when we do go about reorganizing our tax system let us keep in mind the words of my old tax teacher, "Make sure it collects sufficient revenue and that it is easy to collect."

Leo Cecchini
April 2009

Wednesday, April 15, 2009


I have received comments from two readers who disagree with my take on the economy. One says he doesn't agree with anything I say another finds my comments on consumption to be "facile."

I am amused when fans of President Obama dump on his policies. In case I did not make myself crystal clear I support the president's policies except for a couple of technical problems. The president in his address on the economy yesterday noted the initial success of the Feds several programs to revive the credit market, which I have carefully explained in my columns, and fully support. He also emphasized the need to get his stimulus program up and running as soon as possible, which I have also described and support.

President Obama made it clear in his speech that we need to crank up consumption in order to put people back to work. Now I know that the Republicans are calling the stimulus plan "excessive" government spending that will really not put anyone back to work. The also drag out the bugaboo about future indebtedness burdening our progeny. I see the Republican strategy as simply one of shoring up their position for the next election. If the president's plans work they will say they worked because Republican amendments and additions made them better. If they fail the Republicans will be able to say to the voters, "We told you so."

I mentioned in a previous article that I was surprised by the many Obama supporters who oppose his "excessive" spending. I also mentioned that while the president enjoys strong support from the public his programs do not.

So I say to those who commented on my economic views that mine are exactly the same as held by the Obama team and I did not vote for them. And while I am certainly in no position to implement my suggestions, the president and his people can, and will.

Leo Cecchini
April 2009

Tuesday, April 14, 2009


One of the major initiatives of President Obama's plan to correct the economy is his overhaul of Medicare and Medicaid. All agree that the nation's health care is too expensive. We get the same level of health care as is received in Western Europe but at about 2.4 times the cost in Europe.

President Obama wants to get better return on the government's dollar from its expenditures on Medicare. He then points the finger at everyone's favorite whipping boy, the health care insurance companies, e.g. Blue Cross. He believes we can get more for our Medicare dollar by curbing the insurance companies.

Well his plan is what I call "penny wise, pound foolish." As a cost saving measure the president wants to do away with what are called, "Medicare Advantage" plans. Essentially for a fixed payment from Medicare, usually so much per participant per month, the health insurance company agrees to pay for all medical care for the participant. Obama sees a problem here, Medicare pays a fee for the participant, but the participant may not use any health care, or much less than the fee paid. Thus Medicare is paying for a service that is not used.

The problem is that the Obama administration does not understand basic insurance. What it is actually paying is an insurance premium to the health care insurer who then agrees to cover all "losses" which in this case means health care expenses.

What the Obama team also does not understand is that by paying the insurance premium they limit Medicare's exposure for that participant to the premium. If there were no such plan Medicare would have to pay the participant's medical costs, up to very high limits. Thus not paying the premium would in effect set Medicare up for unlimited losses, the very reason we use insurance.

Moreover, the health care insurer provides a limit on the cost of medical care. Those medical services that agree to its fee structure only receive what the insurer will pay. And this is a great savings. My latest medical service procedure was billed by the physician and his group for $5110. Blue Cross paid $2320 and I had to pay $120 in co-payment. In short Blue Cross saved Medicare $1768 and me about $1200.

Clearly the real culprit in sky-high medical costs are the health care providers, not the insurers. In fact the insurers are the only reason that health care costs have not gone even higher. Doing away with the very effective "Medicare Advantage" plan will simply insure that health care costs rise even faster, instead of bringing them under control.

Leo Cecchini
April 2009


A response to my last item about the philosophy of the economy causes me to reflect on the concern about the environment. I am constantly amazed at the hubris of many "environmentalists." They really believe that mere mortals can do more damage to the world than cosmic forces. I suggest they see the latest "end of the world" film, "Knowing," which has mankind destroyed on earth by a massive solar flare. Or perhaps they could reflect on the billions of years of earth's history and the many times it was totally altered by cosmic forces.

Yes, we all want to live in a comfortable, safe, sound environment. I doubt anyone would say no here. The real question is economics, what are the costs and trade offs to achieve a particular environment. It comes as no surprise to me that the best book I have seen on the subject is the one done by a Danish economist named Bjorn Lomborg and titled, "Cool It." Lomborg does not deny that the earth is getting warmer or that man's activities has added to the warming trend. Instead he focuses on the results of the warming and the appropriate response to these.

A central point Lomborg raises is the concern about rising temperatures causing more deaths due to heat. He says yes, this will occur. But that has to be compared to the many more that will not die because of reduced cold. He notes that in Europe about 200,000 die because of excess heat each year while some 1.5 million die from excess cold. For Britain he shows that a 3.6 degree F increase in temperature will mean 2000 more heat deaths but 20,000 fewer cold deaths.

Lomborg's main concern is that the funds and energy being demanded for stemming the rising temperatures could be better used for other major problems that cause more harm to mankind. In short, he views the situation that of an economist, does the end justify the cost?

I go a bit further. I say global warming cannot come too soon. The earth is a cold place. The average temperature of the earth is 60 degrees F or 15 degrees C. At this temperature the unprotected human corpus expires in a matter of minutes or a few hours. Indeed, the largest use of fossil fuels goes to keeping the body warm - building shelter, heating those shelters, manufacturing clothes, producing food and so on. Therefore, upping the average temperature will actually reduce our need for fossil fuels.

My problem with many "environmentalists" is a lack of perspective. Yes, the earth is getting warmer, where's the news, it has been doing this for the last 10,000 years. The issue is what changes will this bring and what is the best way to handle the changes. As Lomborg and I maintain, lowering the deaths from hypothermia is a change for the good and needs no response.

Leo Cecchini
April 2009

Monday, April 13, 2009


Well the economic story is moving past the technical debate about how to stop the downward spiral and start moving up again. We are now into a philosophical debate.

The cover story on the latest issue of TIME magazine was a piece by an author who has apparently made his mark as a latter day Savanarola, the 15th Century monk who tried to cleanse Florence, Italy of excess. Savanarola got rid of the Medicis but was soon burned at the stake for heresy. The TIME writer preaches against the excesses of our modern society and believes the current economic downturn will be the genesis of a more prudent society.

I fundamentally reject notions that we are engaged in excess consumption. In my book there is no excess demand, just short supply. What is wrong with all families owning their own home? What is wrong with wanting a modern home with the attendant conveniences? What is wrong with wanting quality education? What is wrong with wanting more leisure time to enjoy life? What is wrong with wanting to travel and explore the world? What is wrong with wanting good food? And on and on.

Again, my definition of economics is "the science of meeting the perceived needs of the people," with the operative word being "perceived." I eschew the endless debate about what constitutes the "proper level" of consumption. If the consumer wants it, how do we provide it? Of course I leave out demands for illegal items.

The salient feature of human history has been the desire to provide more for our heirs than we had for ourselves. We want a better world for our children. The difference between me and other economists is that they prefer that the parents determine what constitutes a better world, I leave it to the kids to determine what they want.

I expect to see more such talk about how to formulate our revived economy. But this is good, since it means that the bottom has been reached - "Been down so long, looks like up to me."

Leo Cecchini
April 2009


Well the New York Stock Exchange is again bullish, further evidence that suspending "mark-to-market" on April 2 is having a positive effect. But restoring the flow of credit is only half the battle. If we had taken this step last fall we may have avoided the economy's nose dive, but we did not and we now have to deal with widespread unemployment. Yes, restored lines of credit thanks to suspending "mark-to-market", Government action, e.g. the "TARP", the "TALF", are doing their work, they will induce consumption and thus production and thus employment. But we let the problem go too long and this road to recovery will be too slow for the public to accept.

No, we have to get President Obama's stimulus program moving fast. I hear many say that only a small portion of the stimulus will be spent on direct consumption, e.g. building new roads and schools. They complain that "transfer" payments, e.g. extended unemployment payments, are indirect consumption that may or may not occur. Give me a break, someone on unemployment will not use extra cash to pay for essentials? Do you really believe that this person will invest the extra pay in a CD?

The formula is fundamental and easy to understand, inject more funds into the economy, extra funds mean higher consumption than before the injection, higher consumption means higher production, higher production means higher employment. Again, I am not concerned about how the funds are spent, I leave that to those examining quality, I deal with quantity. Just get the money out there as soon as possible.

Leo Cecchini
April 2009

Thursday, April 9, 2009


I reported last week the lifting of "mark-to-market" rules that I have been asking to do since last August. Now I see a rearguard action by the doomsayers based on the difference between "liquidity" and "involvency." The naysayers also warn that, while lifting "mark-to-market" rules have corrected the values for mortgage based assets, we still have problems with securitized non-mortgage debt.

During the "Financial Meltdown of 2008" and the "Great Recession of 2009" I have seen a constant debate between those involved about the exact nature of the financial crisis. Some say it is a lack of "liquidity" and others say it is a matter of "insolvency." Both arguments have merit.

The exact problem is that those valuing the securitized mortgages and the credit default swaps used to insure these investments, variously known as "securitized debt, derivatives, or toxic assets," were obstensibly marking their value to the "market." However, since there was no established market for these assets they marked them to "models" based on the property market.

As the property market went flat and then south, those doing the values devalued the mortgage based assets as much as 90%. This in turn savaged the balance sheets of those holding the assets. With their balance sheets out of kilter the holders, banks and other financial groups, had to borrow to compensate for the lost value of their mortgage based assets. But their balance sheets did not allow this borrowing. So for the "liquidity" crowd the problem was the inability to borrow and for the "solvency" crowd the holders were bankrupt since assets were clearly worth less than debt.

On April 2 the Feds lifted the "mark-to-market" rules that allowed valuations of the mortgage based assets to their maturity or long term value instead of the "market" that did not exist. It has worked immediately. I heard one expert say yesterday that the mortgage based assets had been corrected. However, he warned that there are still problems with non-mortgage securitized debt, essentially student loans, auto loans, credit card debt, and commercial debt that has been bundled and sold as "securitized debt."

I do not see any real problems caused by securitized non-mortgage debt. There is no market to mark against since, as with the securitized mortgages, there is no established market for trading these. But more importantaly, no one is valuing securitized non-mortgage debt to "models" based on the values of the underlying item, i.e. no one is valuing auto loans to the current prices or sales of autos. I suppose one could devalue student loans by saying that graduating students face a more difficult job market and will be less likely to find work. But this has not yet been done. So, unlike the securitized mortgages, there will be no panic devaluing of securitized non-mortgage debt.

No we have passed the first major hurdle. Now to implementing the Obama Stimulus Plan. More on that later.

Leo Cecchini
April 2009

Thursday, April 2, 2009


Well it has taken me since last fall to get the authorities to take action but here it is, the Financial Accounting Standards Board, FASB, has modified the "mark-to-market" rules allowing banks and others to value their "securitized debt" holdings to "models" instead of the "market." I use parentheses since the "markets" they were using were actually "models" based on the property market. The "models" they will now use are the long term or maturity value of the assets, reduced by actual losses.

I expect this to cause an immediate effect on the balance sheets of those holding "securitized debt" instruments. However, given the severe decline in the financial system, it may take some time for these improved balance sheets to translate into increased lending.

The other immediate effect will be to reinforce the Feds move to revive the "securitized debt" industry. Again, the Feds are pouring $400 billion into Fannie Mae and Freddie Mac to generate more mortgages that will be "securitized." The Fed TALF Program will also generate some $ 1 trillion in "securitized debt" based on non-mortgage loans, e.g. student loans, car loans and credit card debt.

While all of this is good, we will still need President Obama's stimulus package to jump start the stalled economy. Taken into account the combination of the various plans to revive the credit market and the direct stimulus to the economy, I would expect the US economy to be back to 2007 levels by the end of this year if not sooner.

Leo Cecchini
April, 2009

Monday, March 30, 2009


President Obama leaves soon to confront his counterparts among the G 20 countries. I say confront because in the main they have complained about Obama spending too much money to cure the economic crisis. We have the remarkable situation where leaders of such countries as Germany are calling the US too “socialist.”

I have stated several times that I support all of the President’s efforts to revive the economy except for the one to improve the personal balance sheets of property investors. I have also pointed out that all of these programs, except for the actual Budget for 2010, are being funded out of borrowed money, not current tax revenues. I also detailed the Feds’ borrowing potential and set it at up to $28 trillion, while the current national debt stands at about $11 trillion. To complete the basic equation I said the Feds are paying about 1% interest to borrow these funds. I do not view this as having borrowed and spent too much nor do I see this changing.

Yes, we will have to repay the borrowing and will do so most likely with new borrowing. But as I also said, the US has been in debt since 1791 and we will be so for the duration of the Republic. I also noted that the Feds have acquired some valuable assets with these borrowed funds and in all likelihood the future earnings from these will repay the borrowing, or at least a substantial part.

So I say to the Europeans who complain about Obama spending too much, why not do the same? Your economies are even more distressed than is ours. Do you plan to wait until your economy rises in the wake of a revived US economy as in the past, or will you work with us to improve the lot of all?

As for the natterings of the present EU President, the President of Czechoslovakia, thank God he is in a rotating position and will soon rotate out.

Leo Cecchini
March 2009

Sunday, March 29, 2009


Treasury Secretary Geithner's discussion of greater Federal control over the financial sector and his suggestion that the Feds should be able to seize any major financial group that is in danger of bringing down the entire economy is generating lots of controversy. As for seizing large financial institutions, the Feds have already done this by acquiring Fannie Mae and Freddie Mac,the insurance giant AIG, major stakes in GM and Chrysler and looking to take on more. Technically the Feds have not "seized" these key enterprises but bought them, or at least a major stake in them. How the Feds manage their new portfolio is open to discussion, but their ability to do this is no longer a question.

As for new rules for the financial sector, I have already outlined how the Feds will restart and manage the "securitized debt" market. We have come to learn that in order for our economy to operate at the level it achieved by 2007, it must have "securitized debt," as well as "traditional" sources of credit.

Until 2007 this market worked well as a private activity with no visible market or specific set of government rules. However, no one had a complete understanding of how large this source of credit had become, how it operated, who owned what and so on. In the absence of a visible market and a clear understanding of the total construct of securitized debt, valuations of the assets, the bundled loans that were sliced up and sold as "securitized debt," were done by "models" that used related or even tangential factors to make their valuations. I am given to calling these models, "electronic Ouija Boards," since they are no more reliable a device.

The securitized mortgages, which accounted for the largest part of all securitized debt, were valued against the property market. As soon as the property market started to falter, the securitized mortgage debt was devalued to whatever level the model used determined. Those using the models did not wait to see defaults and foreclosures due to non-payment of mortgages as the reason to employ the models, in fact the models in general do not even take these factors into consideration. They worked solely on the value of the property market.

I see those who point to greedy Wall Street mavens as the cause of the financial crisis, or aggressive mortgage brokers, or lax Federal regulators and other "bad guys." However, the decline in balance sheets of major lenders was caused by those using their imperfect models to drive down the value of mortgage based assets and thus leave the holders with "over leveraged" assets.

As contradictory as it may sound, the Feds are starting to revive the securitized debt market in order to restore our economic health. Many say this means using the same "toxic assets" again and this will lead to even more economic upheaval. However, they overlook the main issue. As a totally private sector activity we had no idea how large the securitized debt market was and how it operated. Under Fed leadership and control, the market will be visible and readily understood by all.

Leo Cecchini
March, 2009

Monday, March 23, 2009


I was at a dinner for my old Foreign Serice class Sunday where I heard two kinds of comments that gave me some pause. Some said the US economy had gotten too large and we were living beyond our means. For these the best remedy for the current economic plight would be for the economy to contract to something more in line with what we can afford. On the same path, but somewhat different, were those who were skeptical of the President's efforts to get us out of the mess with increased government spending. They do not want to pump up demand at this point since excess demand is what got us into this position.

As I have said before I do not get into arguments about what constitutes the appropriate level of consumption. I define economics as the science of satisfying the perceived needs of the people with perceived being the operative word. One man's necessity is another's excess.

I do support President Obama's multiple efforts to revive the economy with one exception, I do not support using public funds to improve home owner's equity. This is the idea behind the plan to force write downs of mortgages to lower present values of property. Yes, help stop foreclosures, but no, do not use public funds to improve an individual's property sheet.

I leave it to others to determine the "correct amount of consumption." However, I fully support the President's efforts to bring the economy back to its previous level and go beyond that.

Leo Cecchini
March 2009

Sunday, March 22, 2009


Three things have occurred in this last week that give substance to what I have been trying to describe this last year. First is the hoorah over the now government owned largest insurance company in the world, AIG, granting bonuses of some $160 million to the very people who overbought securitized debt and oversold credit default swaps. The public is outraged that the firm used part of its $170 billion in funds injected into it by the Feds to pay the bonuses.

This rather simplistic populist rebellion speaks to an early demonstration of what I call the "New Economy," which means one in which Uncle Sam is now the largest shareholder in the private sector. These funds were not "given" to the firm, they were used to essentially acquire it by the Feds. In the words of Congressman Barney Frank, "we own the company, we can now say who gets paid and how much," or something to that effect. I have been pointing to this development as the major effect of the "Financial Meltdown of 2008" and the "Great Recession of 2009."

One commentator has cast aspersions on this development calling it an unholy alliance of the elites of government and capital akin to the corporate state of Mussolini. Well call it what you will, the movement is well established and we are headed toward greater control of the economy from Washington instead of New York.

The second development is that it has become clear that the devaluation of "securitized debt" or what I call mortgage based assets, began well before the uptick in foreclosures due to non-paying mortgages. The "wunderkind" put their "models," which I am given to calling, "electronic Ouija boards," to work as soon as the property markets went flat, not even south, to devalue these assets to the point they left their holders with destroyed balance sheets. This in turn left them unable to issue credit.

Thirdly, we have all come to learn that we need more credit than is available from traditional sources. In other words making our banks and other financial institutions healthy will not cure the credit problem, we need to revive the "securitized debt" market. And the Feds are already doing this, witness the massive infusion of funds into Fannie Mae and Freddie Mac to issue mortgages and "securitize" these. Next is the "TAFL" program in which the Feds will "securitize" non-mortgage loans.

If I were a believer in conspiracies I would probably see all of this as some plot put together by socialists to take the economy out of the hands of the private sector and put it into the hands of government. But I know that socialists are not that good, witness their failure in Russia. No, it is like Topsy, "it just growed."

Leo Cecchini
March 2009

Sunday, March 15, 2009


Well time to review what we have learned:

FACT: The US economy needs "securitized debt." Traditional sources of credit are not sufficient to make the engine run.

FACT: "Securitized debt" and the insurance on them, "credit default swaps," constitute what is called "toxic securities."

FICTION: These assets are being "marked-to-market." There is no market for them and they are being marked to notional values derived from "models" based on property markets.

FACT: Marking the "securitized debt" and "credit default swaps" erroneously, i.e. to notional values, has destroyed the balance sheets of those holding them, e.g. AIG Insurance.

FACT: The Federal Government is trying several methods to restore healthy balance sheets to the lenders.

FACT: The "TARP" program served to avert a total collapse in the financial system by restoring some of these balance sheets.

FICTION: The "TARP" has thrown tax money down the drain.

FACT: Through the "TARP" Uncle Sam has acquired a massive stake in our private financial institutions.

FICTION: President Obama's stimulus plan is a massive tax money giveaway.

FACT: President Obama's stimulus plan will save jobs by spending money.

FICTION: The Feds are wasting money trying to revive Fannies Mae and Freddie Mac (now owned by the Feds).

FACT: The Feds are providing funds to Fannie and Freddie to revive their "securitized debt" activities and thereby provide the credit needed to revive the economy.

FICTION: The Feds "TALF" plan will buy up worthless loans.

FACT: The "TALF" plan will buy up non-mortgage loans and issue these as "securitized debt."

FICTION: Uncle Sam is wasting tax payer money to the tune of $2-3 trillion.

FACT: Uncle Sam is borrowing money at cheap rates, maybe an average 1%, to buy up assets that will probably pay back more than their cost over the next 10 years.

FACT: The unintended result of the "financial meltdown of 2008" and "recession of 2009" will be to give Uncle Sam even more control over the economy. Already the largest consumer, 20% of the output to rise to 30% by 2010, the central banker, Federal Reserve, and rules maker, Uncle Sam is now the largest single owner of the private sector. Enter the "NEW ECONOMY."

Friday, March 13, 2009


I see frequent commercials on TV with Muriel Siebert, the "First Lady of Finance," crowing that her firm has never invested in "derivatives" or "structured products." Well this is like a commodities trader saying he has never invested in futures.

We have all, except for perhaps Ms Siebert, come to realize that "securitized debt" has long since become the dominant source of credit for our very advanced economy. Without it, we falter. And we know this, because this is what is happening now, lack of credit has reduced consumption, reduced consumption has caused lower production, lower producton means people lose their jobs. Perhaps the best example is the auto market. GM is not the only maker in trouble, Toyota has also asked the Japanese government for help.

If everyone followed Ms Siebert and refused to invest in "securitized debt" there would be way too little credit to revive the economy. In sum following her lead would lead us to an even worse situation.

No, we must allow the Feds to put more funds into Fannie Mae and Freddie Mac to allow these engines of the mortgage industry to issue, collect and "securitize" more mortgages that will in turn revive the housing market. We must allow the Federal Reserve to implement its "TALF" program that will buy up non-mortgage loans including auto loans, student loans, commercial loans, credit card debt and so on. "TALF" will buy these loans, bundled them and sell them as "securitized debt." If this is not done, say goodbye to recovery, no matter how much stimulus President Obama puts into the mix.

Again, if we follow Ms. Siebert's lead we guarantee failure. Funny, while she eschews "securitized debt" she shills "tax-free" municipal bonds. As if not buying "securitized debt" does not do enough to frustrate the recovery, she wants to deny the Feds funds to do anything. I guess she was Herbert Hoover's advisor too.

Leo Cecchini
March, 2009

Thursday, March 12, 2009


Perhaps my articles describing how the present economic slump is forcing the Federal Government to take an even larger role in the economy have been a bit too heavy on financial details for the average reader. But there is one lesson that all should understand.

Until now Uncle Sam has been the largest consumer of our economic output, central banker, and rules maker for economic activity. To this he has added becoming the largest investor in the private sector (he is already the largest investor in the public sector with state and local governments being the others). Uncle Sam now owns the core of our mortgage industry, the largest insurance company, shares in the principal banks, and shares in the auto industry. No doubt he will add more to his investment portfolio.

And if Uncle Sam was the largest consumer of our economic output before, the planned national budget will see his share of consumption rising from 20% of our output to 30% of our output. To put it in my quaint phrasing, “we all suck from the public trough, it’s just that some have longer straws.”

So what does mean for the most pressing issue of the day, how do I keep my job or get a new one? The answer is obvious, if you are in a federal government job, you are assured of continued employment. If not, then get one as soon as possible.

Contrary to the contraction in employment in the private sector and even state and local government, Uncle Sam is hiring like the straw boss at a new construction site. Who is he hiring? For starters he needs many more economists and financial people to oversee his new investment portfolio, restructuring of the financial regulations systems, handling his new “securitized” debt activities, and spending massive new amounts of money.

But expansion of the federal work force will go well beyond these. Uncle Sam will need people specialized in the arts to monitor and control the Stimulus Fund expenditures on the arts. He will need educators to guide his massive commitment to increased funding of schools. In my own bailiwick, Uncle Sam will hire 800 new diplomats, an increase of perhaps 20%. The list is virtually endless.

Any job seeker today will do well to check with federal government employment as soon as possible.

Leo Cecchini
March, 2009

Wednesday, March 11, 2009


Yes, the title is a double entendre. Let me explain.

I have steadily called for junking the “mark to market” rule for valuing mortgage based assets or securitized debt, the so-called “toxic” assets. These include mortgages bundled and sold as bonds and the infamous credit default swaps, a type of insurance for the bonds. There is no market for these instruments at this time. In the absence of a market those doing the valuations use their various models and Quija boards to determine values. The most prevelent model is to value mortgage based assets to the depressed value of property in the most depressed markets. I have asked that these assets be valued at their long term value, i.e. the mortgages held to maturity, minus the still small foreclosure rate now at 3%.

Those insisting on “mark-to-market” rules base their defense in predicting that if the assets are not valued this way, investors will not buy any. Well investors are not buying them now, so what would be lost?

Well the “mark-to-market” defense has been hit with two big blows. Fed Reserve Chariman Bernanke now calls for “fine-tuning” the “mark-to-market” rule. He does not want to suspend the rule, but rather adjust it to give a more accurate value to the assets. I modestly suggest he use my proposal, mark mortgage based assets to their maturity value, minus actual foreclosures.
At the same time well known Congressman Barney Frank has come out forcefully to change the “mark-to’market” rule and restore the “uptick” rule for selling shares short, i.e. selling shares at today’s price that you will deliver later, when the prices are lower. This is the classic bear market strategy, i.e. it works when stock values are declining steadily. The uptick rule serves to prevent short sales driving stock prices down too fast and too far.

These calls to battle will lead to a quick overhaul of these, and other rules, causing the plummeting stock market, and the economy itself, to fall faster and further than they should. Bernanke also called for major new Federal control over the financial markets.

So now our financial market will operate under revised and new rules which will yield a much changed market that I call, “Market 2.” Clever title, no?

Leo Cecchini
March, 2009
Categorized in Uncategorized

Monday, March 9, 2009


If you haven’t noticed by now it should be abundently clear that the private sector hasn’t a clue how to recover from the economic slump in which we now find ourselves. The only “White Knight” with a lance long enough to slay this “dragon” is Uncle Sam. You might ask, “How can the government solve the problem when the best minds in the private sector are not able to come up with a solution?”

To understand why the Feds can succeed when “market economics” fail you have to go to the fundamental difference in how the Feds hold assets and how the private sector holds assets. The private sector borrows money to make investments and the return from the asset must be at least enough to cover the cost of the borrowing in order to make a profit. If the assets decline in value to less than what one owes he is technically bankrupt, i.e. liabilities exceed assets.

“Securitized” debt,the so-called “toxic” assets that have led to the economic slump, are mortgages and other loans bundled and sold as bonds with each bond representing a share of the total group of loans. In this they resemble mutual funds where the fund buys a group of assets and sells a share in the total amount to investors. The theory of combining these investments into packages to sell in pieces is that it distributes your ownership over a large group of assets instead of just one or two. This increases your chances for gain and reduces the potential for loss.

However, while mutual funds are traded on open markets, ”securitized” debt does not have such a market. In the absence of a visible market, “securitized” mortgages, have been devalued to the depressed value of the property market. However, the mortgage is not the underlying property. While the home may have dropped in value by 30% or more, the mortgage has only lost value due to foreclosures and defaults. Since foreclosures stand at 3% of mortgages and defaults stand at 7%, valuing these mortgages to the property has greatly exaggerated the loss.

So much for how the private sector holds assets. The Federal Government has a different position. The Federal Government does not borrow against the value of its assets, it borrows against the “full faith and credit” of the country itself. Since his ability to borrow is for all intentions unlimited, Uncle Sam can afford to hold assets as long as he likes. In short Uncle Sam can hold these assets as long as he likes without having to watch market conditions, since he has no intention of selling the assets nor do their value affect his ability to borrow.

But Uncle Sam does have to watch his earnings from the assets, since if they do not pay his low costs of borrowing, the deficit will have to be made up by taxes or additional borrowing. Fortunately the average return on the assets he has acquired and expects to acquire is still higher than his cost of borrowing, so he will not have to raise taxes or increase borrowing in the future to pay for a shortfall in earnings.

Now that we see the difference between how the private sector and the public sector, meaning here Uncle Sam, view assets we can now understand why the Feds can now propose curing the economic malaise by cranking up “securitized” debt again. This crisis has made everyone understand that the only way we can obtain the vast amount of credit required to drive our massive economy in today’s world is through “securitized” debt. Say what you will about how these debt instruments are “toxic” and so on, they are needed to make the engine work. To state it bluntly, the so-called “toxic assets” that are blamed for our ecomoic slump are now required to make the economy revive.

To reiterate, private owners of the debt instruments have to match these holdings or assets against their liabilities in order to see if they are still solvent. They do this by seeing what price they fetch in today’s market. The market now tells them that these instruments have lost allot of value. Thus they are judged to be not “solvent.” Uncle Sam has a different test, he only has to show that the average return on the assets, NO MATTER HOW THEY ARE VALUED, covers his small cost of borrowing to buy the assets.

While Uncle Sam can hold “toxic” and other assets without regard to the market for these assets, private investors, under present valuations, cannot do this. This why I have asked to suspend the “mark-to-market” valuations while private investors are forced to hold securitized debt instruments because at today’s “maket prices” they would lose their shirts if they sell them. This would put private investors on the same footing with Uncle Sam, i.e. hold the assets without regard to the market and focus on long term earnings from the assets. In the case of mortgage based assets this means the balance due on the loans, times the interest rate, times the duration of the loan, minus a 3% loss to foreclosures. Unfortunately this has not been done.

If it were not such a terrible problem I could find some humor in the situation. The way to save the economy is to go right back to creating massive amonts of “secritized” debt or “toxic” assets, the very thing blamed for the chaos. However, this time it can work without the problems caused by market valuations because the “securitized” debt will be controlled by the Feds. No, Uncle Sam will not become the sole holder of “securitized” debt, he will simply be its nexus and thereby in a position to make it work better.

To conclude with my constant reference to the “New Economy,” or one in which the Federal Government will play a greater role, this new development will add to making Uncle Sam’s control over the economy even more complete.

Leo Cecchini
March, 2009

Tuesday, March 3, 2009


Well now we have Uncle Sam borrowing up to $3 trillion to fund the TARP, TAFL, Financial Stabilization Plan, Stimulus Plan,and so on. The borrowed funds are being injected into the economy to stop the bleeding and start the rebuilding. But no matter what he does, the body economic seems to slough off the effort and continue its nose dive.

And the dive is steep. Our concern with home foreclosures due to bad mortgages has turned to foreclosures due to loss of job, a much more serious problem. The only hope to stem job loss is President Obama’s Stimulus Plan that will put people back to work. Keep your fingers crossed.

At the same time the players have now come to finally recognize what I have been saying since last summer, you cannot revive the financial sector without dropping the “mark-to-market” rules. The balance sheets of all financial institutions were damaged by marking assets to markets that did not exist. Instead of marking to markets they were marked to models that were no better than notional ideas. These models have devalued assets well below any realistic value. FDIC Chairman Sheila Bair complained that 98% of all banks holding 99% of all bank assets have sound balance sheets but all are being devalued by these notional ideas. This has been the crux of the financial meltdown.

Uncle Sam has sought to build markets to which assets can be accurately valued. However, this has proven to be a difficult process and in any case too slow to correct the situation soon enough. Now we hear a chorus of calls for temporary suspension or a hiatus in marking assets to the market. The importance of this is that suspending this practice will allow balance sheets of financial institutions to recover lost ground instantly.

So here we are some $3 trillion of new Federal debt and nine months of wandering in the wilderness coming back to the reality that we have to value our assets at more realistic values. My particular call is that we value all mortgages and mortgage based assets at the maturity value of the mortgages minus the actual foreclosure rate. In this one case the value of the assets would increase by an average of some 25%. The total value of mortgages on owner occupied homes is some $13 trillion thus a 25% up tick in valuation would add $3.3 trillion to the balance sheets of those holding those mortgages.

If you drop “mark-to-market” rules for ”securitized debt,” originally valued by various observers at some $15 trillion, and further, to the “credit swaps” issued to insure these securitized debt instruments originally valued at $55 trillion, we can see a massive upward valuation in balance sheets, on an order far beyond Uncle Sam’s ability to borrow and spend.

Perhaps even more important, the new efforts by the Feds revive the “securitized debt” industry depend on correctly valuing the new financial instruments that will be created. Uncle Sam is feeding $400 billion into Fannie Mae and Freddie Mac to issue new mortgages that the two now government owned operations will bundle into bonds and sell as “securitized debt.” As a complementary effort the Feds will open the new “TALF” plan to buy up and securitize other loans including auto loans, student loans, credit card debt, and certain commercial debt. No sense doing this if ”mark-to-market” rules make these new instruments crash and burn at takeoff.

I believe it is a damn shame that we have had to go through all this trauma brought about by erroneous valuations of assets. When there is no market, it is foolish to follow “mark-to-market” rules. All this does is allow “wunderkinds” to pull out their electronic Ouija boards to value assets and in the process destroy the economy. It is long past the time to get a firmer grip on valuations of assets. But maybe not too late


The Government has announced the details of the plan to bring home values more in line with the debt owed on them, you know, correct the many homes that are financially "underwater," (we used to use the term "upside down"). To be specific, the balance due on the mortgage is more than the value of the house on today's market. As I said before this is a very difficult process and there are few who are able to actually do it. But let's go through the numbers.

There are about 60 million homes in the USA that are owner occupied or some 68% of all homes. Of these two thirds have mortgages. The total value of these homes is estimated at some $20 trillion. Of the total about 8.3 million have negative equity, i.e. they are "underwater."

The latest plan is to reduce the monthly payment on the "underwater" loans to 31% of one's income. This can be done by reducing the interest rate or reducing the balance due. Reducing the interest rate is relatively easy, Uncle Sam can subsidize the interest rate to allow a reduction. But reducing the balance due is a goal just short of finding the "Holy Grail."

Using the numbers I cite above, and they are best estimates, not hard and fast facts, we can see the Government attempting to write down some $2.6 trillion in mortgage balances. The plan is to get the lenders to share this cost with the Feds. I fear, however, that any write down will require the Feds to compensate for the loss. Of course, there is a new Federal Law being considered to allow courts to mandate write downs of mortgage balances. The consequences of this are too dire to contemplate. Let's say for the moment that Uncle Sam will have to shoulder any write downs of loans. If the average write down is 30% that would mean an expenditure of some $800 billion. Still another big chunk of change for Uncle Sam to borrow.

I see two killer problems with this plan. First, just how does one insure that the cost of the home - mortgage, taxes and insurance - is less than 31% of income? I can see every Tom, Dick and Harry busily hiding income to show a lower income stream and thus force a loan write down. And if you think this doesn't happen, remember how many people created "phantom" income when they had to show sufficient income to get a mortgage in the first place. (The 31% rule is that used by the Federal Housing Authority, FHA, to give a loan.) The issue here is fraud and I see widespread fraud being committed to comply with this measure.

The second problem with this plan is that it will be seen as being inherently unfair to those who continue to pay their home costs without this relief. I can see Harry looking across the fence at Tom who gets his home costs reduced by one-third. Both bought their homes at the same price, at the same time with the same mortgage terms, taxes and insurance. However, Tom's income is less than Harry's, or at least that is what he is showing. Now the Feds will pay part of Tom's mortgage so that his house costs no more than 31% of his income.

Will Harry be mad, you betcha. Especially if Tom works alongside of Harry at the same job. The difference is that Tom and his mortgage advisor are smarter at hiding Tom's income. Harry will see this as a ruse to use his tax money to pay part of Tom's mortgage. And he will be right.

Of course I am simplifying the process. It is far more complex than any mortgage business done to date and is fraught with mistakes as well as the certain fraud. Moreover, if those granting mortgages got us into this mess, why turn to them to get us out? They don't have the capacity to do the job, so as far as I am concerned, the plan will be a dismal failure.

I fear that this plan could undermine the entire Obama recovery effort. I see the downside far outweighing potential benefits. I would urge the Obama team to reconsider this plan. Stay with working to prevent foreclosures, don't go to correcting personal balance sheets.

Leo Cecchini
March, 2009


I am watching the Senate grill Fed Chief Bernanke about his injections of funds into the economy in an effort to restore bank balance sheets to a sound state and prime the consumer pump. I am appalled by the shallow understanding of the situation shown by most of the members of the Senate's banking committee. Here is one worrying about his local banks not having access to the TARP funds when they do. Another worries about banks receiving money but are keeping on their failed executives. And other such trivia.

In spite of their shallow knowledge of the subject in which they set the standards, the Senators did have one question that was worth answering - how large a Federal debt can we support? Bernanke responded by pointing out the familiar fact that our federal debt to national income ratio at the end of WWII was debt amounting to 120% of GDP. He said we now have a ratio of 60% and said that we should try to keep it at that level. But he also said there is no way to know what the maximum debt could be since it depends on willingness to buy our debt, which means essentially Treasury Bills.

Bernanke did not mention it, but the debt is now owned in the main by the US Government itself, mainly through Social Security purchase of T-Bills. Foreign ownership accounts for about 25% of the debt, with China and Japan owning about 20% each of that 25% and the UK about 10%. The rest is owned by various investors.

The question of how large a debt we can support may be answered in several ways. First, the US central government debt as a share of national income ranks 23rd among the major national economies of the world. Using this yardstick, and it is the IMF's ruler, we have a long way to go to reach our limits to borrowing.

Another way to measure national debt would be to compare it to personal debt. The average American family has a debt to income ratio of over 100%, thus the national debt has not yet reached the level of personal debt. One should also note that the standard rule for issuing a new prime rate mortgage is that the home should not cost more than three times the buyer's income, e.g. someone with $100,000 income can buy up to a $300,000 home.

The rule I use in assessing a company's cash flow is that the firm's indebtedness should not exceed one year's gross income, e.g. a million dollar a year cash flow means you can borrow up to one million. I do not know if others use this same rule but it has served me well in providing accurate cash flow analysis.

Using the available measures - historical, international comparisons, personal indebtedness, business indebtedness - it would appear that the national debt can be 100% of GDP without causing alarm. Adding the expected up to $3 trillion that the Obama administration plans to spend this year to revive the economy to the current $11 trillion in national debt, we should wind up with a national debt to national income ratio of about 85%, which is within the 100% guideline.

But there is a dimension to this debate that transcends the debt to income ratio. The national debt is backed by the "full faith and credit of the Republic." This is the same backing for the bucks in your pocket. Does the "full faith and credit" of the USA mean one year's GDP, or more? The critical question here is, how long will the debt holders hold the debt? If they hold it ad infinitum, there is theoretically no limit to what Uncle Sam can borrow.

The other relevant question is how much does it cost Uncle Sam to carry his debt? I have pointed out that at present the Treasury is issuing bonds that pay less than the inflation rate, some with 1% interest. In other words it will cost Uncle Sam probably less than $200 billion a year to carry this expected debt of $14 trillion, a small part of the Fed's budget expected to be some $3 trillion in 2009.

There is another factor to consider. What are the alternatives for foreign holders of US national debt? Fortunately for the USA, unfortunately for the investor nation, there are insufficient alternative instruments available in which to place these funds. They have to hold US national debt.

What does all of this mean? First, Fed Chief Bernanke was correct in saying it is hard to see how far US national debt can go. If one uses debt service ratio, i.e. how much does it cost to pay the debt, Uncle Sam has a very long way to go since he is only paying 6% of his current income to pay the debt. Assume we let debt service reach 12% of the national budget we could have a national debt of twice what it is expected to be in 2009 or $28 trillion.

If I were the Fed Chairman I would respond that we are at a high debt level now, but we can support a much higher debt. I believe President Obama should keep this in mind as he presents more programs to save the economy.

Leo Cecchini
March, 2009

Tuesday, February 24, 2009


Most attribute the "The Financial Crisis of 2008" to "securitized or collateralized debt" or bundled mortgages which allowed credit to grow far beyond previous systems. These comprised the so-called "toxic assets" which the Feds now call "legacy assets." I use the term "mortgage based assets."

Well guess what, we will now go back to using "securitized debt" to revive the economy. The first will be securitized mortgages. Uncle Sam now controls Fannie Mae and Freddie Mac and thus over half the mortgages in the USA. The Geithner Plan calls for putting $400 billion into these two organizations to push home sales. These new funds will be used to, you got it, bundle new or reworked loans into securitized debt to be held by Fannie and Freddie or sold on with Fannie and Freddie guarantees.

To complement this move the Federal Reserve will now open its, "Term Asset Backed Security Loan Facility," (TABSLF). It will use this to buy up non-home loans, e.g. auto loans, commercial credits, credit card debt. It will then bundle these loans and sell them as "securitized debt."

What's that you say, we are headed right back to where we started the bust, "securitized debt." Yes we are, but with a big difference, the Feds will be in the driver's seat. Presumably the entire process will be transparent and valuations will therefore be more precise. More importantly, Uncle Sam will hold most of the debt. Again, he does not have to sell these bonds and can hold them to maturity. That means that the assets will not have to be "marked-to-market," but valued at long term or maturity values, the very thing I have been demanding from the beginning.

The rest of the world has now learned what I, and some others, have recognized for a long time, the US economy has been enjoying strong growth over the last two decades because of the innovative new ways of creating credit. Unfortunately the market analysts were not able to correctly value these new debt based assets. They valued the mortgage based assets on the property market instead of the mortgages themselves. By valuing them at the property market they devalued them by at least one third. If they had valued them to the mortgages themselves they would have devalued them by the actual loss to foreclosures, i.e. less than 3%. The result has been the "financial meltdown" followed by the "economic crisis."

We have come through a laborious process to arrive at the same place we were up until about a year or two ago. But again, this time Uncle Sam will be controlling the process, so it should be more sound.

Of course the bottom line is the "New Economy," or an economy in which the Federal Government will have even more control over its progress. As I have said repeatedly, Uncle Sam already was the central banker, rules maker and largest consumer of the economy. Now he owns the mortgage business, the largest and growing share of banking, the largest insurance company, much of the auto industry and more. His next big buy will probably be the health sector since no one else can put it on a financially sound basis.

Yes, we have a "New Economy" in which the private sector will be even more dominated by the public sector. I suggest you make your personal plans accordingly.

Leo Cecchini
February, 2009

Wednesday, February 18, 2009


President Obama has unveiled his program to save our homes. The focus of the program is to stabilize home values, thus stabilizing the value of mortgages based on those homes, thus stabilizing the mortgage based securities. Whew, sounds like a complex, round-about route to doing what I have been demanding in my articles. I suggested simply revaluing mortgages to "maturity" values, instead of the "market."

But the Obama housing plan does have popular appeal. It is being sold by talking about saving your home, instead of such exotica as stabilizing values of mortgage based securities. It should sell well.

As for the details, there are parts that will work and parts that could be disastrous. First, the workable parts. Under the plan Uncle Sam will pump up to $400billion in new funds into Fannie Mae and Freddie Mac, the two mortgage giants that house over half the mortgages in the USA. Uncle Sam now owns these two outfits. This is almost a no-brainer, put more money into the two mortgage giants and mortgages will be more readily available. This program will do much to help.

I also like the provisions to forestall foreclosures. Several actions designed to do this have already been adopted by the government and private lenders in the last year. The Feds will do well to increase this effort by providing funds to make them work.

I have problems with the plan to combine public and private funds to lower the payment on mortgages not in danger of foreclosure. The intention is to help people with "underwater, upside down, or negative equity" situations, i.e. the house is worth less than the mortgage on the house. The plan calls for bringing the payment to less than 31% of the home owner's income. Not hard to see where this came from, that was the FHA rule used by mortgage brokers to give the loan in the first place, be it an FHA loan or otherwise. Of course this will help those who have seen their income go down or their mortgage payment go up smartly. But the vast majority of loans have not seen their cost go up and home owners, by and large, still see the same income.

The real problem with this measure is that it allows for substantial fraud. We all saw fraud in issuing mortgages. The fraud typically came in determining what constitutes 31% of a home owner's income. The fraud in issuing the loan involved including "phantom" income. The fraud in this new case will involve excluding unreported income. The way it will happen is that the mortgage broker will tell his client to hide income that does not show up in public records. Anyone in the middle of doing his taxes knows about this. If you need advice, just ask former Senator Daschle.

The next problem with this also comes from the complexity of melding public and private funds. The private lender will try to maximize the Feds payment for any loss due to bringing the loan payment to the magic 31% limit. Redoing one of these loans will take very skilled operators and there are very few of these. I can see mountains of complaints and infractions of law in this process.

As bad as this proposal may become, it pales in comparison with the idea of allowing mortgage balances to be decreased to the present value of a home. Again, a mortgage is not property. This could open a Pandora's Box of every mortgage holder trying to dump part of what he owes. The way it would work is to allow judges to decide that mortgage balances excess to home values are "unsecured" debt. Ridiculous. Mortgages are backed by promissory notes that say the borrower pledges all his resources to paying the debt, not just the collateral property. A very dangerous move.

While I have problems with some of the program, in sum this could be a good PR program. "Save our homes" has a good ring to it. But as I have said all along, ending foreclosures will not correct the mess, since the foreclosure rate is not really high, about 3%. It may help the individual home owner, but it is too uncertain and too late to correct the credit freeze. It could also cause even larger problems.

Leo Cecchini
February, 2009


Let's review the cost of the massive federal government effort to revive (save?) the economy. First is the TARP plan adopted last fall at a cost of $700 billion. Now we have the Obama Stimulus Plan with a $789 billion price tag. The new Financial Stability Plan speaks of spending up to $1 trillion to buy up undervalued assets. This adds up to maybe a total cost of some $2.5 trillion, a sum equal to one-sixth of the US GDP (total output for the year) or just short of the current federal government budget.

Next let us remember that all of this cost will be paid from borrowed funds, not current income. In other words Uncle Sam's famous "national debt" will increase by maybe $2.5 trillion. The national debt now stands at some $11 trillion which is equal to 75% of the GDP.

What's that you say? We will burden our children, grandchildren, in fact our entire lineage with debt. Guess what, the United States of America has been in debt since the day it was born. In 1791 US Government debt amounted to some $75 million. We usually measure the size of the national debt against our national income. The highest point reached on this scale was at the end of the Second World War when US debt was equal to 120% of GDP. The USA has always been in debt, and will continue to be so for the duration of the Republic.

Back to the recovery plan cost. Uncle Sam will borrow up to $2.5 trillion. But at present the cost of this borrowing is relatively small, maybe 1% interest per year. This is because everyone is putting his funds into Treasury Bills that are considered as "good as cash" since they are backed by the Republic itself, just like the bucks in your pocket. So the actual cost of the borrowing will be $25 billion per year, a very small cut from the Federal budget for 2009 of over $3 trillion.

Let me make it perfectly clear, the cost of the recovery effort will be relatively small, less than 1% of the federal budget per year. I would suggest that the Obama team highlight this fact when it makes its pitch for public support.

As interesting as this may be it does not reveal the truly fascinating aspect of this process. As I have been saying for the last six months Uncle Sam is buying up the private sector at little or no cost. It took the Bolsheviks a sea of blood to do this in Russia. Uncle Sam is doing it for peanuts.

I can hear the chorus now, "socialism." Well if this be "socialism," so be it. The private sector has withdrawn from the battlefield leaving Uncle Sam to soldier on alone. Yes, the Financial Stability Plan calls for joining private with public funds to buy up undervalued assets. But I fear that the private sector will put few funds into this plan. Private investors ain't doing it now, so why expect them to do so in the future?

Where does it all end? I repeat that this is fascinating stuff. We are in the midst of creating a "New Economy" and no one really knows what the final product will be. Stick with me on this amazing journey.

Leo Cecchini
February, 2009