All key economic organizations now agree that the financial freefall that caused the “Great Recession” came to an end in the second quarter of this year. I wrote that this had happened back in April and May stating that the pivotal date was 2 April 2009. The Organization of Economic Cooperation and Development (OECD) that represents the richest countries in the world now says that recovery in the world’s economy has begun in this quarter, the third quarter. I also reported this some weeks ago.
While I am happy to see that my predictions have come true, the swift recovery, the “Great Recession” seems to have lasted only 6 months, from the, “greatest economic calamity since the ‘Great Depression’,” supports my contention since last year that this was an avoidable event caused by erroneous devaluations of major financial instruments. I said that the disaster should never have occured, since the real value of the devalued assets was far higher than the depressed prices coming from panic driven analists. If there had been real major problems in the economy, we would not have been able to correct the situation so quickly.
Fortunately for the USA and the rest of the world we were blessed by having the right people in the right place at the right time. Hank Paulson, Ben Bernanke and Tim Geithner understood what had happened and took the right measures to curb the financial chaos thereby setting the stage for economic recovery. They litterly bet the entire ” US farm” on the underlying strength of the economy and the financial assets that had been savagely devalued. In doing so they took alot of heat but they persevered and saved the day.
Now how risky was that bet? To reiterate a subject that I have beaten to death, the economic firestorm was ignited by analists devaluing securitized debt and its ancillary product credit default swaps by as much as 90%. What they did not realize was that this source of credit had become the principal source of credit fo the economy and in doing so killed the credit markets. This in turn shook the whole financial industry and in turn the economy itself.
As I have stated ad infinitum, the devaluations were erroneous. The massive defaults on mortgages on which the devaluations were predicated never occured. The foreclosure rate due to defaults on mortgages never exceeded 3% of all mortgages. Thus the Feds had a 97% chance that their bet would work. Well 97% certainty is very good in the world of high stakes gambling and the Feds won.
Yes, I understand that unemployment is still high. However, blame it on the erroneous valuations made by panicky analists, not on the debt instruments themselves. Securitized debt still remains a very good investment since it yields a high return with 97% certainty. No other investment comes even close to such a high return to risk factor. I hope we have learned our lesson.