BYE BYE NEW YORK, HELLO DC

As I have said many times, the financial meltdown and the resultant economic doldrums came about because of erroneous valuation of assets. The core false valuation is that given to mortgage based assets, the so-called "toxic assets." I have now come to realize that all "models" used by those valuing these assets rest on prices in the property market. I will repeat, a mortgage loan is not property, which is the collateral on the loan.

Let me put it in another way. A typical mortgage loan over its lifetime will pay back a total of twice the sale price of a home. At no time during the course of the loan will an increase in the value of the collateral property increase income from the loan. Nor would it be any less because the value of the property falls. The loan held to maturity will yield income equivalent to twice the selling price of the home, no more, no less.

But here is where those valuing the mortgage based assets make their error. They assume that negative equity will pump up defaults at rocket rates making the loans dicey propositions. They do not believe that people will continue to pay on a home loan when the property is worth less than the loan balance. They forget that homes are also shelters so the payer has to measure paying on the loan against paying for other shelter, e.g. renting a place. And he knows that no matter how little the value in his home, it is still more than the residual value on a rental, which is zero. Thus the actual foreclosure rate remains relatively small, 3% this year when it was 1.5% in 2005. In other words the assumption that negative equity will cause rampant defaults is wrong, wrong, wrong.

While they are erroneous, the real estate models used to value mortgage based assets and other assets have devalued these assets to as little as pennies on the dollar. This has led to the stymied credit market and the economic tail spin.

I know, you say those doing the valuations are savvy financial people who have lots of experience on which to base their models. Well they are the same people who got us into the mess so their "expertise" is suspect. And I offer that the most public spokesman for my line of reasoning is Steve Forbes and I challenge anyone to say he, with his highly respected publication empire, is not an expert.

And this false valuation has led to wholesale dismissal of President Obama's stimulus plan and Secretary Gheithner's financial stability plan. In the case of the stimulus plan, they bleat that it is insufficient to turn the situation around. The American people themselves have little faith in the plan but thank God have faith in Obama. Geitner's plan has been dismissed by all financial "experts" because they say it cannot work with their false valuations and they are correct. The only way it works is to drop the false valuations and allow assets to be valued correctly starting with mortgage based assets.

Fortunately the Federal Government does not think like private investors who view all assets as items to be sold. The Geithner plan will work because the Federal Government can buy assets, be they the mortgage based assets or shares in General Motors, and hold them until the economy recovers. As I have pointed out, the Feds are borrowing at essentially no cost, so it will cost nothing to hold these assets. And when the economy recovers, the assets will bring much higher prices on the markets. Uncle Sam stands to make the biggest killing on Wall Street in the history of the USA.

So forget the financial gurus and concentrate on Federal Government actions. The private sector has dropped the ball and has no idea how to get back in the game. The main result will be that the nexus of our financial system, and thus the economy, will gravitate to Washington, leaving New York City without its main source of income. Hold on to your DC suburban home and get rid of your New York coop.