A chorus of voices led by the every popular Noriel Roubini is crying this week that the economy is not really recovering. For these Cassandras all we see is unwarrented optimism among investors in stocks. This noise comes from those who have yet to understand the actual reason the financial system froze up and in turn brought down the whole economy.

Let me reiterate my mantra, “One man’s debt is another man’s asset.” This is a hard thing for the average layman to understand. The asset is the loan that will pay the creditor a certain amount of money over the life of the loan that is more than his original investment, i.e. lending the money. The collateral that may be involved is not the asset. In the case of mortages the value of the mortgage to the lendor remains the same, no matter how how high or low the value of the collateral property may be. If the property increases in value the creditor will receive the same amount from the loan. Ditto if the price goes down.

The only critical factor is the certainty that the loan will be repaid. By the end of 2008 over 97% of all bank loans were being paid on time. However, panic caused by our failure to understand the full extent of securitized debt, its size and its nature, caused valuators to smartly devaule these assets, thus destroying the balance sheets of those holding these investments.

As long as these voices continue to value debt assets to erroneous banchmarks, e.g. the property market, they will continue to see no possible recovery in the economy. However, as I pointed out, recovery began in April when we lifted “mark to market” rules and allowed those holding securitized debt to value these to their maturity, or long term value, instead of a market that in reality did not exist.

So what do I see? As long as we allow financial institutions to value their securitized debt to the maturity value we will move forward. Any change in this condition will nip the recovery in the bud.