Not often is the public permitted the opportunity to see the chicanery and of the financial industry exposed. Yves Smith, in her timely new title Econned, takes us behind the walls of Jericho that the financial industry hides behind to provide us a rare glimpse of the predatory, criminal, or borderline criminal activity embedded in Wall Street’s behavior.

Econned makes a bold claim that the “hard science” of economics has conned not only their own devotees and policymakers but also the public. The public needs to know this information. That much is essential. For it is the public at large who are the true stakeholders, whose economic interests are negatively impacted by the policy decisions that have been made based on the hard science of mainstream economics.

The “hard science” of mainstream economics, as Yves Smith points out, is a bit of a misnomer or euphemism. Much to the detriment of the public, false assurances, misleading euphemisms and claims of mainstream economics are at the heart of shaping public opinion and influencing policies that produce bad socio-economic outcomes.

Simply by raising public awareness, Econned, can help point us towards producing better socio-economic outcomes in the future. At a minimum, Econned should be included in the curriculums of college social science and business classes and thoroughly discussed. But it would be best if Econned were also made accessible to students in high school curriculums.

Ms. Smith opens Econned with a quote from John F Kennedy “Belief in myths allow the comfort of opinion without the discomfort of thought.” If the hard science of mainstream economics can be falsified, as Smith sets out and does in Econned, then mainstream economics is but a myth, loaded with ideological opinions devoid of much credible thought. A harsh indictment indeed! This ideological mythology, asserts Ms Smith, has been both dangerous and destructive to society. “Phony precepts of neoclassical economics helped bring about the financial crisis by endorsing policies and practices that allowed financial firms to exploit customers, shareholders, and taxpayers on a scale heretofore seen only in banana republics” says Ms. Smith.

Unfortunately for the public, the economic policies pursued by our policymakers, the same ones which produced what mainstream economists call the ‘Great Moderation’ (an economy of almost uninterrupted and unfettered growth with nary a downturn or severe recession and only intermittent mid-cycle expansion slowdowns) has produced what Yves calls a Potemkin, or false and illusory, prosperity. Ms. Smith describes the Great Moderation as having been produced by policies akin to that of steroid-abusing body builders. Deprived of steroids, these bodies waste away. Unfortunately, a wasting of America’s prosperity has come to pass as the dangerous destructive side effects of these policies take over.

Flawed policies based on economic myths and delusions have landed the US and many other economies into the throes of the worst economic crisis since the Great Depression. In terms of orders of magnitude, while there are differences of degree, the economic outcomes are not terribly different between this so-called Great Recession with that of the Great Depression (just consider the persistent and prolonged high double digit underemployment rate in 2010 that won’t go away as one case in point). By another name, these economic outcomes could be called a form of ‘shock therapy.’

Turning our attention to the bad business practices and bad corporate actors that contributed to the magnitude and scope of the financial crisis, there was clear and widespread fraud and securities law violations, almost no one has ever been prosecuted or accused of any criminal wrong-doing. Time after time, at Congressional hearings, and elsewhere throughout media channels the language used by lawmakers and others simply describe the criminal behaviors of the past few decades as “mistakes.” The lexicon used by lawmakers and the media must change asserts Ms. Smith. “Until we learn to call looting by its proper name, it is certain to continue” she contends. These ‘mistakes’ need to be legally reclassified as ‘criminal behavior.’

Mainstream economists, Ms. Smith points out, have also suffered from, and continue to suffer from their own cognitive biases. They have been overconfident, and have placed “undue faith in their own models” in the face of overwhelming contradictory evidence.

Economics is a highly complex social science. While good models filter out the “noise” all modeling “entails the loss of information.” This is an inherent weakness shared by all modeling. The weakness is problematic, Ms Smith observes, “because what was discarded to make the problem manageable may have been essential.” Worse yet, people engaged in modeling might be the last to see the shortcomings of their own economic constructs causing them to “stop engaging in critical thinking about one facet of a problem.” The most serious flaw regarding traditional neoclassical economic models are that they assume stability and certainty. These conditions simply do not empirically exist in the real world.

The conclusions drawn from the flawed assumptions built into these models simply do not follow. They are a non-sequitur. When implemented in risk management or economic policies, these models produce destructive socio-economic outcomes. Market forces are not efficient self-righting systems tending towards equilibrium and stability as neoclassical economists assume. Market forces can oftentimes be highly unstable, inefficient, and inherently uncertain, particularly when excessive leverage is involved (errantly permitted by regulators).

Even where economic assumptions are not flawed, mainstream economic theory is seldom tested making it very difficult to either prove or falsify. Economic theory that can’t be validated or confirmed should be considered meaningless noise and only so much drivel. Unfortunately, modern economic theory is far from meaningless or irrelevant to the public. The economic constructs behind these theories drive policy and have and continue to negatively impact the lives of millions of people.

Ms. Smith’ is not alone in her harsh indictment of the dismal science. Even before the economic crisis hit in 2007, many others had written books in the 1990s with a dismal view of mainstream economic theory as can be seen from the titles, Against Economics, The Death of Economics, and The Crisis of Vision in Mainstream Economic Thought.

Economic professor Peter Dorfman asserts that “economic theory taken as a whole is culpable…even though every organ of [the] 1960’s-era orthodoxy is mortally wounded, the entire body strides vigorously forward.” Problematically, nobody has been listening to the critics.

And that is not the worst of it. Cherished but flawed ideologies put forth by neoclassical economic thinkers from the 1960s have been preserved and zombified by many of today’s prominent and mainstream economists. Prominent economists cling to the flawed theories of this dominant ideology as articles of faith. This would not matter so if these same walking zombies of economic thought did not continue to shape public policy in harmful ways. Even after the financial crisis of 2008-09, the response of policymakers, through TARP, FinReg and other legislation, has been to preserve and zombify the same institutions which embraced the economic ideology that created the disaster. In this sense, public policymakers have truly lost their way, making things that much more challenging for middle class Americans. To the extent that the financial reform response of policymakers preserves and perpetuates the same financial system that played such a large role in creating this crisis of epic proportion, policymakers no longer serve the public interest. This is something we should bear in mind when these officials are up for re-election in November 2010 and beyond.

NY Times journalist David Leonhardt wrote an article called Making Economics Relevant Again in 2008. However, economics have been all too relevant and in highly destructive ways to the lives of far too many people. The aim should be to make economics less toxic and less relevant to the lives of everyday people. Ideally, folks should be largely unaware of the influence of economic policy on their everyday lives.

In chapter 3 Yves Smith details the evolution of modern financial economic theory. She begins with a tidy quote from the maestro, Alan Greenspan who in recent years observed with hindsight acumen that despite the combined “best insights from mathematicians and finance experts” the “whole intellectual edifice [of modern financial theory] collapsed.” (The question I ask is why have we allowed bank lobbyists, lawmakers, and policymakers to put the Humpty Dumpty edifice back together again after the financial system collapsed in September 2008?)

Yves Smith then proceeds to detail in easy to understand language the entire history of the economic constructs and financial models embraced by these financial experts. Yves begins this discussion with the fair game of chance, normal or Gaussian distribution, efficient market hypothesis EMH, Sharpe ratios, Black-Sholes, CAPM, and VAR. These are our modern day financial models and constructs. They have all been built upon the flawed assumptions of normal probability distributions, rational and efficient market behavior, stability, and predictability. Because of these flawed assumptions, “financial engineers had erected an edifice on quicksand,” Ms. Smith asserts.

These flawed assumptions also helped encourage excessive leverage and risk-taking behaviors. These models led these financial engineers and innovators to be overconfident in their models; thus ignoring or overlooking significant tail risks, correlation risks and liquidity risks. In the end, these financial engineers, for all their so-called innovations, have all vastly misunderstood and grossly underestimated risk in a remarkable fashion. And from this vantage point they proceeded to build nothing more substantial than castles in the sand that were swept out to sea at the first sign of countercyclical adversity in 2007-08.

And as for the economic outcomes, we find they too are not ‘normally distributed.’ For the banksters it has been a game of heads I win, and tails the taxpayer loses as the US government’s response was to reward the financial innovators with a taxpayer financed bailout. Then the financial innovators proceeded to award themselves with taxpayer monies with record bonuses in 2009.

The government’s flawed rational for the taxpayer bailout was that these firms were deemed to be too tightly coupled and too big to fail based on the fear-mongering opinions of the Federal Reserve chairman Ben Bernanke and US Treasury Secretary Hank Paulson. They ‘assumed’ the end of the world as they knew and understood it. They advocated the preservation of their Humpty Dumpty edifices, as any other reality would have been too horrific and painful to ponder. Thus another shot of steroids for the financial system was thus prescribed by the US government. In the aftermath, policymakers have rushed in to claim ‘mission accomplished,’ that all is well and will be well. Such reassurances that claim Nunca Mas, from the new US Secretary Treasury Timothy Geithner and other high-ranking officials that this financial crisis will never be allowed to happen again, ring false and provide cold comfort to taxpayers.

In Chapters 4 and 5 Ms. Smith turns her attention to the framework of the dominant economic theory that has influenced mainstream thought and economic policy over the past 50 years: ‘laissez-faire neoclassical economics.’ The father of neoclassical economics, Milton Friedman understood there were many flaws to the theories of neoclassical economics; namely, that most every assumption of neoclassical theory is largely counterfactual.

However, Friedman’s opinion was that the real test of a theory is whether it “works.” That is all that mattered. Beyond all the counterfactual assumptions, which border on absurdities when examined critically, one of the most harmful effects of this school of thought is that they have howled incessantly over the past 40 years whenever there was any attempt to regulate the so-called “free markets” of capitalism. The Friedmanites have systematically branded all government intervention and regulations as interferences that distort one of their primary missions; namely, to ensure unfettered “free markets.” Under Ms. Smith’s critical examination, what we find is an economic theory “riddled with holes masquerading as science,” driving policy for nearly three decades.

In Chapters 6 and 7 Ms Smith tackles how ‘deregulation’ of the financial industry paved the way for predation and looting. Friedmanites and ‘free-market’ advocates held two ‘fixed ideas’ above all else. The first proposition was that all regulation was unequivocally bad and always produces suboptimal economic outcomes. The second proposition is that “government is incompetent.” Thus deregulation and self-regulation were strongly endorsed by bank lobbyists. Over the past thirty years, lobbyists accomplished their aim.

However, it did not take Ms. Smith long to disprove and shred both those free-makret propositions as false. Yves simply points to vivid historical precedents: free-market doctrines have repeatedly and abysmally failed whenever imposed on society. As Friedmanites spread their free-market ideologies throughout third world countries between 1970-2002, we learned time after time that the social costs of free market principles were enormous and too high a price to pay.

Historian Eduardo Galeano described how ‘free-market’ theories worked out when applied: “People went to prison so prices could be free.” Galeano grossly understates the political suppression, torture and death that accompanied the implementation of these free market experiments on country after country. This has been going on without interruption throughout the world for more than 30 years. Author of Shocked Doctrine, Naomi Klein, goes to painstaking efforts to detail this ugly history more fully. Today, the countries now feeling the brunt of their free-market ideologies ‘shock therapy’ appear to be the developed countries in Europe and America. Fiscal austerity, high structural unemployment, and so much worse yet to come are features of the free-market ideology. So, it is highly relevant and critical that the public understand as fully as possible the dark side of free-market principles still wreaking havoc throughout societies today.

As the financial system became increasingly deregulated in the 1980s and 1990s, rather than fulfilling their social utility, the more predatory the financial system became. The financial system grossly exceeded their traditional role in society. A month before the 1994 Mexican Peso blew up, a former Morgan Stanley derivatives salesman observed: “You have to be criminal to be good at this business.” In short, you had to be a bad corporate actor to really succeed in the financial industry, and this has been the norm for more than twenty years, think back to Drexel Burnham Lambert and other bad corporate actors in the 1980s.

To fully appreciate the full extent of predation, looting, fraud, securities violations, and other malfeasances as well as the government’s ongoing complicitousness (legalizing, backstopping, and incentivizing the financial industry to gamble with other peoples money (OTM), loot ‘go for broke’), you really must read the rest of the story as told by Yves Smith in Econned. The further Yves delves into the underbelly of the beast, the darker and more unseemly the story becomes. It is far darker than you can likely imagine. When all is said and done, there is nothing to be proud of here. The legacy Wall Street, policymakers, lawmakers, and regulators left behind is ultimately one of shame.

This is a story that must be read and understood as far and wide as possible, because even after the passage of financial regulation in July 2010, the reckless behaviors of Wall Street continue largely unabated, not in spite of the new financial regulation reform bill, but because of it.

Yves Smith is also publisher of NakedCapitalism.com, one of the top ranked financial-economic blogsites out there. Someone once said that it’s not what you read, but who you read that matters. Yves shares freely everything that she knows about current and past events on her blogsite, and I promise you it is substantial. Personally, I faithfully read Yves Smith’s blog every day. What I learn when I read Yves Smith is simply amazing. I promise that when you read Econned, you too will be reading not only a highly relevant title, but one that will endure as a timeless title in the annals of our financial and political history.

Cheers!

John Bougearel is author of Riding The Storm Out, another book on the financial crisis that forewarned  the road to economic recovery will be long and arduous and that the socio-economic outcomes may be much less or something other than what our top officials claim they will be.

“However, Mr Summers said it would be “pennywise and pound foolish” to skimp just as the kindling wood of recovery starts to catch fire. He said fiscal policy comes into its own at at time when the economy “faces a liquidity trap” and the Fed is constrained by zero interest rates.”

Tim Congdon, from the International Monetary Research, argues that “fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be incfreased easily by quantitative easing.”

Congdon and others are watching the M3 money supply in the US contracting at an accelerating rate. They cite that the contraction in M3 has already reached the Depression era levels, and given its acceleration is virtually certain to contract further.

The worry is that the contraction in M3 and other measures of money supply will lead to deflation, given that the inflation rate is already quite low and interest rates are already at zero, the margin for error in avoiding a classic Irving Fisher style “debt-deflation” spiral is incredibly small. Because rates are already at zero, we have no debt-deflation “firebreak” that Greenspan argued is so necessary to maintain back in 2003.

The spike down to 1056 today in the SP500 was related to bank trading desks (who says their trading desks are benign, remember this day when they report Q2 earnings and so-called trading profits in July 2010 and when future crisis arise) unwinding their overleveraged positions. They (the banks) really are jackasses with regard to categorically understating and underestimating risk via their VAR models and such. Excuse me, but the same assholes who assumed stability in financial markets before the credit crisis still haven’t learned jack shit yet about mkt instability!

A day like today should put lawmakers on notice that banks should no longer be allowed to use risk management models that assume stability (more likely they will stick their heads in the sand). Assuming stability in risk modeling only sets up fingers of instability in the financial system (physicist Mark Buchanan illustrates these power laws exceedingly well in his book Ubiquity). Instability was introduced into the financial markets in 2010 when various central bankers and policymakers (ECB President Trichet chief among them) did not just roll over and do the bidding of the chicanerous banking industry. For more background on assuming stability, understating and underestimating risks in the financial markets see Yves Smith’s timely new title Econned. From Bloomberg:

Bank Default Swaps Surge as Moody’s Raises Sovereign-Debt Contagion Alert The cost of protecting European bank bonds from default surged to the highest level in 13 months as Moody’s Investors Service said lenders face “very real, common threats” from the region’s fiscal crisis. “The risk is for the banking sector because they’re the ones that own most of the government bonds and in cases of extreme crisis banks rely on governments to bail them out,” said Juan Esteban Valencia, a London-based credit strategist at Societe Generale SA. “If governments can’t issue at relatively normal levels, it’s going to be very difficult to bail out banks and that means banks are getting hammered.”

Euro Slides Against Dollar as ECB’s Trichet Doesn’t Calm Greece Concern The euro tumbled the most since the collapse of global credit markets in 2008 after European Central Bank President Jean-Claude Trichet failed to ease investor concern the Greek fiscal crisis will intensify. “We call for decisive actions by governments to achieving a lasting and credible consolidation of public finances,” Trichet said with Axel Weber concurring.

And Geithner is up to his usual good no good lobbying for the big banks: Geithner Rejects Calls to Separate U.S. Banks From Risk-Taking Activities U.S. Treasury Secretary Timothy F. Geithner rejected calls to separate banks from risk-taking activities, saying it couldn’t prevent future financial crises. Geithner, for all his smarts, is either clueless or an out and out prevaricator. By the way, Geithner promised we would never have another financial crisis on NPR radio in December 2009 because he had the political will to prevent that from ever happening again. How well did Geithner, our beloved financial stability watchdog, do today with his Nunca Mas policies?

Believe it or not, the Great Unwind is over now, at least for the time being, unless Trichet and other policymakers continue to leave European banks in the lurch. Then perhaps this could turn into a 1987 Black Monday. Assuming the European banks are not left in the lurch much longer, there won’t be much else to see.

Much like the scene of a crime, police officers will be milling about to remind us folks to move along…and that there isn’t anything left to see. And the media cover-up appears to already be underway so that the public will never know the real story of banks categorically understating and underestimating risks. NYSE Euronext Says There Were a `Number of Erroneous Trades’ During Plunge NYSE Euronext said “there were a number of erroneous trades” during an almost 1,000-point plunge in the Dow Jones Industrial Average.

This sort of media coverage is essential to preserving the mistaken belief that everything in the financial system is A-OK except for occasional computer glitches (which shouldn’t even be plausibly possible if the safeguard parameters are really on these trading platforms as they are supposed to be). God forbid anyone exposes the reality that when overlevered banks that chronically underestimate risk get in real trouble, shit like this happens in the financial markets. Every risk asset class in the world gets sold but the safe havens. One day, perhaps only a few years from now, not even US Treasuries or US dollars will be considered safe havens any longer. Oh Brother, Can You Spare a Yuan?

Returning to the stock mkts, after the SP500 spike below the 2009 yr high at 1128, the 2009 yr close at 1111, and the Nov 27 Dubai World low at 1167, the SP500 snapped back to form a price base between 1103-1106 and 1132. Essentially, this is the 1111-1128 price band between the 2009 yr high and close.

Clearly, the spike low looks like a V-spike. On a one-minute chart, it looks a bit like the 1998 LTCM V-spike on the daily chart. After the LTCM meltdown, the SP500 snapped back to double top on Dec 8 98 and Jan 5 1999. A brief 5 day 50% retrace to the LTCM low ensued, bottoming on Jan 12 1998, then rallied to new highs. The reason for mentioning the 50% retrace following the V-spike double top in Dec 98-Jan 99 is that a 50% retrace off this afternoon’s double top at 1136 would target 1095.

For our purposes, this suggests that any other spike through the bottom of the price base that set this afternoon between 1103-1111 (1111 = the 2009 yr close) is apt to act like a balloon under water in the next several days. Key off the 2009 year close at 1111 expecting a price base to be built around it in the coming days.

I can’t believe that Dodd just said “this legislation won’t stop the next crisis from coming”

What a total jackass Dodd has been and always will be!

Jon Stewart retort to Dodd: “You can’t short your own reform bill.”

Later, and more disturbingly, CNN correspondent Christine Romans who summarized Lehman’s bankruptcy examiner report as “Lehman imploded because of a lot of mistakes that had been made.”

As Naked Capitalism’s Yves Smith has repeatedly pointed out and I quote from end of Chapter 1 in Yves new book Econned: “Until we learn to call looting [fraud and other criminal activities of banksters, policymakers, and lawmakers] by its proper name, it is certain to continue.”

Repeatedly throughout this crisis, the powers that be are being allowed to frame the events leading up to, during, and after the crisis as mere “mistakes.”

The word “mistakes” should be banned from the lexicons of the powers that be who are rewriting the history of this crisis as just one big mistake, it is a dangerous,vague, inaccurate, and disingenuous word to the public.

To view the Senator Dodd and Christina Romans video clip:

Jon Stewart: In Dodd We Trust

From Bloomberg:

Wall Street’s contribution to the debate on how to curb global warming: Buy coal, sell solar.
While investors including T. Boone Pickens and Warren Buffett are pushing cash into green technologies, the tilt toward Peabody and away from First Solar is the widest in two years. It reflects a sense that government support for reducing air pollution may be waning, said Kevin Landis, whose Firsthand Alternative Energy Fund outperformed the solar index this year.

“Until government policies favor renewable energy over dirty coal, solar may seem too risky now for some investors,” said Landis, whose $260 million fund include SunPower Corp. and Suntech Power Holdings Co. “Coal may make sense short term.”

The rationale for increasing investment in renewable energies was undercut when the United Nations effort to extend limits on carbon dioxide emissions failed in December in Copenhagen. President Barack Obama’s energy and climate legislation has foundered in 2010 as Congressional members sidelined it to tackle healthcare.
UN-led talks failed to extend the 1997 Kyoto treaty’s carbon limits beyond 2012 for 37 regulated countries, undermining confidence at companies that they’ll need to own carbon-emission permits in future decades.

Elsewhere:

Lawmakers foot-dragging pushes back limits on emissions another 8 years U.S. Climate Action Delay Gives More Time for Carbon Capture, AEP Says – the goal of the coal industry is to prolong the use of coal

Senator Feinstein blames the stalled economy for failing to act legislatively on climate change bills. And in a stunning remark of contradiction said “Things like global warming are good when the economy is good and people are secure.”

According to a survey, however, American concern for global warming peaked at 40% in 2008. That concern fell to 32% in a Gallup poll this year. More remarkably, only 31% of Americans felt GW was exaggerated in 1997. That number has grown to 48% today. So, even as the evidence of global warming mounts, the effective propaganda campaigns of the skeptics/industry lobbyists etc are able to smear credible science to be less believable.

Americans Are Less Concerned About Climate Than in 2008, Gallup Poll Shows

In other climate-related news it looks like Asia will possibly leap 9-10 yrs ahead of the US on global warming legislation (even if it is flawed cap and trade models):

Obama Trade Goal Fights His Clean-Energy Plan at U.S. Export-Import Bank President Barack Obama’s goals of boosting U.S. exports and combating climate change are colliding as the U.S. Export-Import Bank expands financing for oil, gas, mining and power-plant projects.

Japan Cap-and-Trade Bill Wins Backing From Cabinet, Heads for Parliament Japan’s Cabinet has endorsed a climate-protection draft law today that would cap industrial emissions for the first time and thrust the second-biggest economy into the $125 billion market for trading carbon credits. (beginning 2011 possibly)

China May Start Its First City-Wide Carbon Cap-and-Trade System (beginning in June 2010)

Whalen goes on to inform us that the PWG was created in 1988 by President Reagan. The informal group allows the execs at the biggest banks to influence public policy in Washington. This groups is also sometimes referred to as the plunge protection team or PPT. A far more nefarious name is going to have to be given to this special group of criminals if they continue this sort of behavior to block FDIC reform efforts.

From Whalen:

The fact that the PWG is in league with the Fed and Treasury against the FDIC board is all you need to know about the politics of reforming private label mortgage securitization. If Barack Obama were really interested in reforming Washington, he would rescind President Reagan’s executive order and disband the PWG for good. Allowing the big banks which participate in the PWG to lobby financial regulators and members of Congress without any public disclosure is a national scandal and makes a mockery of any claim by Barrack Obama to be changing the business of Washington.

http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

Author of Riding the Storm Out: What Do Investors Do Now?

Chris Whalen addresses evils of Mark-to-Market Accounting vs. the virtues of cash flow analysis in his March 8 weekly missive. (If you don’t already subscribe to his free weekly missive, please do). To read the full accounting of Whalen’s expose, go here http://us1.institutionalriskanalytics.com/pub/IRAMain.asp and scroll down two-thirds to the subtitle Bernanke Finally Fingers Mark-To-Market.

On Feb 24, 2010, Bernanke put his finger on a critical issue facing commercial real estate loans that will soon need to be restructured. The peak of that commercial real estate restructuring cycle is due in Q2 2012. And though Bernanke was not referencing other types of debt such as LBOs and M&As that also must be restructured in the next 1-4 years, the concept of using cash flow analysis is paramount towards mitigating the coming private sector debt restructuring cycle. From Bernanke: “commercial real estate loans should not be marked down because the collateral value has declined. It depends on the income from the property, not the collateral value.”

Whalen goes on to note that bank regulators have not yet picked up on the significance of using the cash flows and not the marked to market collateral values in determining the value of these existing loans that will need to be restructured. If and when bank regulators make this shift, and I think they will if the Chairman of the Fed is onto it now, this will certainly help mitigate the coming crisis. However, it won’t totally avoid the crisis because so many other overhanging issues.

First, the underwriting standards of all loans written in 2004-2007 were lax and “covenant-lite.” Without a doubt, many of these loans when they come up to be refinanced will not pass the smell test, and many loans will prove to be under or non-performing and likely fraudulently conveyed as well (though no fraud will be prosecuted because covenant-lite was all legal-beagles back then). The cash flows from many of these loans are apt to come up short, so, in these instances not even using cash flow analysis will help mitigate the losses in loan values. This will cause additional writedowns to be taken, defaults and bankruptcies in the private sector.

Secondly, as Rosner pointed out in “Securitization: Taming the Wild West” the credit mkts remain severely constrained and the securitization mkt largely remains frozen, as investors in these products have fled, due to the asymmetry of information, opaqueness and lack of standardization of contracts that still persist even three years after the credit crisis began. Without HUGE repairs to the flawed securitization mkts, access to credit for refinancing these loans will be practically non-existent. That in and of itself will be deflationary and create firesales, REGARDLESS of said cash flows from the existing loans. What I am saying is that using cash flows to determine loan values in 2011-2012 will still be insufficient conditions to gain access to much needed credit. As Rosner posited ”many of the problems in the real economy which stem from contraction in credit availability may be symptomatic of securitization market failures…To believe that real estate or the economy itself can find a self-sustaining recovery without first repairing this important tool of financial intermediation is unrealistic.”

Simply put, cash flow analysis is not a stand alone solution. Policymakers must also address and repair the flaws in the securitization model if they wish to see investors return to products in the credit mkts and ensure robust access to credit for borrowers that need to refinance their loans in 2012. The question is, can lawmakers make robust changes in the standardization of the securitization markets that are necessary to “support economic activity and productive growth” before the peak of the private debt restructuring cycle in mid 2012? Thus far, the weight of the evidence does not favor “prompt corrective action” being taken by lawmakers at all, let alone within a specified timetable, yet the need has been identified as urgent by Rosner: “There is an immediate need for regulators and policymakers to oversee the creation of a standardized market where assets can be securitized, priced, valued and consistently evaluated by investors. Short of prompt corrective action being undertaken to repair the securitization markets, the US economy will end up in yet another full blown credit crisis in 2012.  And the problem of facing another credit crisis in 2012 is that the US economy is no longer firing on all cylinders as it was when the first full blown credit crunch arrived in August 20007. With the US economy is trying to limp its way out of the most severe recession since WWII, it can ill afford another credit crisis at this time. Much work needs to be done on the Hill, let’s hope they are shovel ready and not leaning on filibusters and hiding behind partisan politics as excuses for failing to act appropriately! Their failure to act appropriately thus far after the financial crisis has been stunning  to say the least.

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