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 is an early demonstration of the attributes 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