The G8 countries, representing most of the largest economies in the world, are meeting this weekend in Italy. A principal topic of discussion will be current indicators of recovering economies throughout the world. A main point here will be if the several countries want to continue with their various economic stimulus programs, or pare them back, so as to not overheat the economies.

Amazing, six months ago we were teetering on the brink of an economic armageddon caused by a too large debt structure built on “toxic” assets. The only suitable comparison was to the Great Depression of the 1930s. The sky was falling and everyone was scurrying for cover.

In a few short months we now see that the situation was not so dire and perhaps we may have overeacted. But better to do too much than to do too little.

My hat is off to the key players from the Bush Administration’s Treasury Secretary Paulson to Fed Chairman Bernanke to President Obama and his Tresury Secretary Geithner. They engineered dramatically new and innovative government repsonses to the situation that changed and developed as they moved along. Flexible response was the key working idea and it worked.

And why did it work? Because the “Financial Meltdown of 2008″ and the resulting “Great Recession of 2009″ were created by erroneous valuations of securitized debt which had come to provide the largest source of credit for our economy and those of most other developed economies. We savaged the key source of credit for our economy based on false premises and in the process damn near destroyed it.

I say erroneous, because as of Dec. 2008 some 97% of the debts, on which the securitized debt assets are built, were being paid on time and foreclosures due to loan defaults never exceeded 3%. Certainly not good news, but hardly the stuff of major upheaval.

All it took was a steady hand at the tiller that recognized that the panic was narrowly based and provide government reassurance to offset the losses due to the overblown devaluations.

Thus our economy, as well as those of most other countries, is showing clear signs of recovery, after only eight months of action, when most pundits were predicting it would take a decade or so to correct the situation.

What makes me mad is that we could have avoided all this. For starters we should never have taken analysis of the securitized debt market as the sole benchmark of our economy’s health. And if we did, we should have made sure the analysis was correct.

Well we have gone though the wringer and we are back to having securitized debt as the main grease for our economic machine. This time it will be more carefully watched by the Feds, especially watching those doing the valuations of these debt assets.

Leo Cecchini
June 2009