FULL CYCLE

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