James Lockhart’s successor as director of the agency that regulates Fannie Mae and Freddie Mac will hold much of the US mortgage market in his hands when he takes the helm.

Government-backed mortgage financiers Fannie and Freddie own or guarantee 73 per cent of new mortgages in the country and 56 per cent of all existing single-family mortgages. The companies were taken into their regulator’s “conservatorship” last autumn, after mounting mortgage losses eroded their capital cushions and raised fears of collapse.

The government has pledged up to $400bn of taxpayer funds to keep the two companies afloat.

The replacement for Mr Lockhart, who on Wednesday announced his resignation, will thus have a central role in shaping the future of the giant mortgage financiers and of the US mortgage market writ large.

The White House has said it will unveil a plan for Fannie and Freddie when it releases its 2011 budget in February.

An administration official said it was still considering a long list of options for the so-called government-sponsored enterprises (GSEs) and that “no one option is under strong consideration at this time”.

Edward DeMarco, chief operating officer at the Federal Housing Finance Agency, will serve as acting director until President Barack Obama’s administration appoints a permanent successor. Fannie and Freddie have tapped $85bn of the Treasury’s lifeline so far, while the Federal Reserve has bought more than $1,000bn worth of their debt and mortgage-backed securities to try to push mortgage rates down.

The GSEs have also become the engine of government policies to modify or refinance mortgages for struggling borrowers, helping to fuel further losses at the companies.

Fannie on Thursday reported a $14.8bn loss for the second quarter and asked Treasury for a further $10.6bn of bail-out funds.

Many are asking how the government plans to extricate itself from such heavy involvement with the housing market when the crisis subsides.

One option could be a gradual wind-down of their operations and liquidation of their assets in a good bank-bad bank split. Other options include incorporating the GSEs’ functions into a federal agency, breaking them up into many smaller entities, returning them to their previous structure or conversion to a public utility model.

Fannie and Freddie were for decades shareholder-owned companies with a public mission to ensure the broad availability of mortgage financing.

The administration official said: “It should come as no surprise that the Administration is thinking through GSE reform, a commitment we made to Congress in the regulatory reform white paper, but we are in the preliminary stage of the process, the systematic development of options has not taken place and no decisions have been made.”

In an interview this week – just days before he announced his departure – Mr Lockhart said he was against nationalisation of the GSEs and that, while the old government-sponsored model could be made to work, “it would have to be structured a lot differently”.

Regulators would need power to restrict the size of their portfolios and make them conserve more capital, particularly “countercyclical capital” which would make them set aside more in the good years and less in the bad, said Mr Lockhart. This would also dampen housing bubbles.

“If you want to keep the 30-year mortgage… and you want to keep the money flowing in from the rest of the world to help fund our housing market, then you have to have a very robust secondary mortgage market,” said Mr Lockhart.

“You have to decide what you want that market to look like and how much government involvement you want in it. But you really have to draw the line very sharply, and it wasn’t in the past.”

Alternatively, he suggested they could be privatised and perhaps broken up into smaller chunks, but made to buy insurance from a government-run “catastrophe insurer” which would pay out if they incurred “giant” losses, but would leave them on the hook for smaller ones.

Mr Lockhart was wary of what legislators would ultimately come up with, however.

“It’s difficult to create those kinds of things up on Capitol Hill,” he said. “I don’t see a lot of appetite for nationalisation, but I think there’s going be a lot of tension between the ‘put it totally in the private sector’ [camp] versus the new GSE model.”

Defunct investment bank Lehman Brothers will get 325,000 euros ($459,100) for losing its role on a big European mortgage bond after the bank collapsed.

The payout, for being replaced as security agent on the 1.1 billion euro Windermere XIV securitisation, could eat into the returns for holders of the bond’s riskiest slice, Windermere said in a statement to holders of the commercial mortgage-backed securities (CMBS) on Wednesday.

The cost to Windermere, a special purpose company set up for the securitisation, of the replacement is estimated to be 700,000 euros, of which about 325,000 euros will be paid to Lehman Brothers International (Europe), the issuer said.

The payment to Lehman will be made “as a contribution to its costs in relation to the termination of its role”, it added.

PricewaterhouseCoopers, administrators to Lehman in Europe, said it would receive the payment and add it to the pot of funds to be distributed to the bank’s creditors.

The cost of replacing the security agent, an administrative role within the securitisation structure, may end up jeopardising payments to bondholders, Windermere added.

“Payment of the security agent’s replacement costs is likely further to affect the ability of the issuer to make payments in full of interest in respect of the notes,” the issuer said.

On Aug 7 rating agency Standard & Poor’s downgraded tranches of four Windermere bonds where Lehman acted as security agent, including Windermere XIV, due to uncertainties about the cost of replacing the failed bank.

Bank of America asked for a temporary restraining order, debarring Colonial from selling certain proceeds it received from Freddie Mac (FRE.N) (FRE.P) in return of mortgage loans, and certain other loans that the company held, which were owned by Ocala Funding LLC, court documents show.

Bank of America, which was the collateral agent for the Ocala Funding loans, sought an emergency injunctive relief in a complaint filed with a U.S. federal court in Florida on Wednesday.

Colonial held the loans as a custodian, agent and bailee through bailee letters, but even when the bailee letters were terminated, Colonial refused to return the proceeds and the loans to Bank of America, the U.S. banking giant alleged.

Colonial said last Friday it faces a criminal probe by the U.S. Department of Justice on accounting irregularities at its mortgage lending unit, and warned it may be put under receivership. [ID:nBNG433906]

It had also said the Alabama State Banking Department may appoint the Federal Deposit Insurance Corp as receiver or conservator for its banking unit after Aug. 12.

However, Alabama banking regulators said their scheduled meeting on Wednesday with Colonial Bank (CNB.N) had been canceled, but did not cite any reason. [ID:nN8C121593]

Colonial has been badly battered by the credit crisis, as higher charge-offs and rising foreclosures in the bank’s Florida construction-loan portfolio continue to strain its balance sheet.

The company operates 355 branches in Florida, Alabama, Georgia, Nevada and Texas and has over $25 billion in assets. If it fails, it would be the largest failure this year.

Indeed, when it comes to living space, people in the South East of England have to endure some of the most cramped conditions in the developed world.

Research by the Commission for Architecture and the Built Environment (Cabe), a government advisory body, has found that owners of new homes in the South East do not have enough space to prepare food easily, to have friends round for dinner or even to find a quiet place to relax.

Moreover, more than 50 per cent of people living in flats, bungalows and houses built between 2003 and 2006 said that they did not have enough storage space; 47 per cent did not have enough room for all of their furniture and 44 per cent said that there was not enough space for children to play safely in the kitchen while a meal was being prepared. Almost three quarters had nowhere to keep three small recycling bins to separate out household waste.

The findings will add to pressure on housebuilders to switch to building larger homes, after they came under fire for supplying too many small flats in high-density urban developments during the property boom.

The Government, too, is likely to be under pressure to set minimum space requirements for all housing. Boris Johnson, the Mayor of London, began a campaign last year to rid the capital of so-called “hobbit homes”, but plans published last month by the Greater London Authority apply only to publicly funded schemes.

Richard Simmons, the chief executive of Cabe, said: “This research brings into question the argument that the market will meet the demands of people living in private housing developments. We need planning authorities to ensure much higher space standards before giving developments the go-ahead.”

The average newly built home in the UK is smaller than in any other European country, at 76 square metres, according to the most recent figures, compiled in 2004. In Japan, the land of the micro-home, the average property was 94.8 square metres in 2003. A typical new-build in Australia is 239 square metres.

Mr Cabe said that lack of space was a particular problem for low-income households. In 2006, when the Government last compiled the figures, the average household, old or new, measured 91 square metres. In deprived areas, that figure fell to 83. Insufficient demand for small flats has led to price falls of up to 40 per cent for such property in the downturn.

Steve Turner, of the Home Builders Federation, said: “In an ideal world, everyone wants space for a grand piano, but if you increase the size of homes without more land becoming available, the cost to the end user will go up, which contradicts the aim of offering affordable housing.”

Pressure to build as many new homes as possible has resulted in overcrowded developments, as well as smaller homes. The average number of new dwellings per hectare in the England has risen from 22 in 2002 to 44 last year, according to official figures.

We cant see a recovery to the new housing market if the builders cant give the consumers what they want.  People need to feel comfortable in their homes and the builders will need to adapt to their needs.

I hope  people get the word out,

Sandy Hutchens

Posted by Sandy Hutchens

New accounting standards effective at the beginning of 2009 will impact the accounting for mergers and acquisitions (M&A). The new standards, effective for all acquisitions consummated in the first fiscal year beginning on or after December 15, 2008 (for calendar year-end companies, beginning in 2009), will have an impact on deal negotiations and deal structure, in addition to accounting implications.

Fair Value Accounting
The focus of the new accounting standards is the use of fair value accounting. All assets acquired and liabilities assumed in an acquisition are to be measured at their fair values at the date of acquisition (called the acquisition method). By contrast, the former standards, although they applied fair value accounting, focused more on an accumulation of costs related to the acquisition (called the purchase method).

Transaction Costs
M&A transaction costs typically include payments to investment bankers, attorneys, accountants, appraisers and other advisors. Previously, these costs were capitalized as part of the overall purchase price for an acquisition. Under the new standards, these costs will be expensed as incurred (negatively impacting earnings in the prior period) because these are considered incremental costs to the transaction and not a component of the fair value of the business acquired.

Restructuring Costs
Under the new standards, costs to restructure the operations of an acquired company can be recognized as part of the acquisition accounting only if certain conditions are met – that is, the acquirer’s restructuring plan must be in place at the date of the acquisition. The cost of these restructurings will be charged to earnings in the post–acquisition period, not recorded as a liability at the time of acquisition.

Earn-Outs
(Contingent Consideration)
Previously, earn-outs were considered part of the acquisition cost. Under the new standards, earn-outs and other contingent consideration are to be recorded at fair value at the date of the acquisition, regardless of the likelihood of payment. Subsequent changes in the fair value of most contingent consideration will be recorded in earnings. However, if the contingent condition is classified as equity, it would not be adjusted for changes in fair value in subsequent periods.

In-Process Research and Development (IPR&D)
IPR&D will continue to be measured at fair value at the acquisition date. However, these assets will no longer be written off as a one-time expense immediately after the acquisition. Instead, IPR&D will be capitalized and recorded as an indefinite-lived intangible asset, subject to impairment until completion. Abandoned projects will be written off as an expense.

Acquisition Date and Valuation Date
The acquisition date is the closing date of the M&A transaction. If equity securities are issued as all or a part of the purchase price, these will be measured on the closing date of the transaction, rather than the announcement date. Therefore, changes in the value of the acquirer’s stock after the announcement date and before closing will have an impact on the amount of the purchase price for accounting purposes.

Adjustments to Acquisition Accounting
Companies will continue to have a one-year period of time to recognize adjustments to the provisional values that are recorded. However, the new standards require that prior period financial statements be revised to record any material adjustments of the estimated provisional amounts recorded at the acquisition date, likely increasing due diligence efforts.

In summary, fair value accounting is pervasive throughout the new standard. The resulting changes, which may not appear dramatic at first blush, are indeed significant.

Mortgage-backed securities (MBS) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. Mortgage loans are purchased from banks, mortgage companies, and other originators and then assembled into pools by a governmental, quasi-governmental, or private entity. The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool, a process known as securitization.

Most MBSs are issued by the Government National Mortgage Association (Ginnie Mae), a U.S. government agency, or the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), U.S. government-sponsored enterprises. Ginnie Mae, backed by the full faith and credit of the U.S. government, guarantees that investors receive timely payments. Fannie Mae and Freddie Mac also provide certain guarantees and, while not backed by the full faith and credit of the U.S. government, have special authority to borrow from the U.S. Treasury. Some private institutions, such as brokerage firms, banks, and homebuilders, also securitize mortgages, known as “private-label” mortgage securities.

Mortgage-backed securities exhibit a variety of structures. The most basic types are pass-through participation certificates, which entitle the holder to a pro-rata share of all principal and interest payments made on the pool of loan assets. More complicated MBSs, known as collaterized mortgage obligations or mortgage derivatives, may be designed to protect investors from or expose investors to various types of risk. An important risk with regard to residential mortgages involves prepayments, typically because homeowners refinance when interest rates fall. Absent protection, such prepayments would return principal to investors precisely when their options for reinvesting those funds may be relatively unattractive.

Sandy Hutchens shows how the Mortgage-Backed Securities work.

It said that while “economic activity is likely to remain weak for a time”, it had begun to “level off”, suggesting the worst of the recession is over.

The central bank added that the current low levels of interest rates will likely continue “for an extended period” to aid the recovery.

Its comments come amid growing signs of an upturn in the US economy.
While US unemployment rose again last month, the 247,000 job cuts were far fewer than analysts had expected.

Other recent official figures showed that US consumer spending had risen in June for a second successive month, while worker productivity had increased at its fastest annual pace for nearly six years in the second quarter of 2009.

In addition, figures on Wednesday showed that US exports had risen by 2% to $125.8bn (£76bn) in June, a sign that the manufacturing sector was improving.

Analysts broadly welcomed the Fed’s comments.

“It is not all that surprising, it acknowledges a lot of what we have been seeing, that conditions are stabilising and the recession may be ending,” said Mark Vitner, an economist at Wells Fargo.

Stimulus measures

The Fed and the US government have carried out a number of measures to help stimulate the US economy since the end of last year.

The main two have been President Obama’s $787bn economic stimulus package, which was signed into law in February, and October’s $700bn Troubled Assets Relief Program for the banking sector.

In March, the Fed also announced a $1.2 trillion programme of buying government debt to boost lending and promote economic recovery – a policy known as quantitative easing.

US interest rates were cut to the current level of between 0% and 0.25% in December last year, where they have remained ever since.

Before then rates had fallen steadily from a high of 5.25% in September 2007.

Sandy Hutchens is happy The Federal Reserve decided to keep US interest rates on hold at between 0% and 0.25%.

The victims of the convicted Ponzi schemer Bernard Madoff are hoping for a big take because they’ll share the proceeds, but whether the luxury properties will fetch as much as estimated is still an open question.

The FBI valued Madoff’s duplex on Manhattan’s Upper East Side at $7.5 million, according to court filings. But appraiser Jonathan Miller of Miller Samuel has doubts.

“The press coverage has been calling it a $7 million Park Avenue duplex,” said Miller, “but from what I’ve seen so far, I’d call it a fairly modest place.”

For one thing, it’s not on Park Avenue. The address is 133 East 64th Street, which puts it at the corner of Lexington, a block east.

Miller, who has seen the floor plan, also notes that though the rooms are ample, they are not huge. Still, there are four bedrooms, formal dining room, library and a big living room.

But will the connection with Madoff stigmatize the property? Often, real estate associated with crime or criminals is devalued. But celebrity often brings higher prices. Is Madoff more like Manson or Madonna?

“I’ve found that buyers in New York in this price range are blasé about celebrity connections,” he said. “Many buyers at these prices are celebrities themselves.”

But in a similar recent case, the link may have hurt. When the condo of disgraced — though less famous — financier Marc Dreier sold at auction, it went for $8.2 million — 21% less than it cost two years ago. Still, a few dozen people scrambled to buy the property even though a comparable 3,000-square-foot condo sold for 50% less in May.

The 3,000-square-foot Montauk beach house could fare better. It’s on an acre-and-a-half prime lot on a bluff above an ocean beach. And, it lies closer to the water’s edge than could be built today thanks to earlier zoning regulations that were less stringent.

Based on tax assessments, some reports value the four-bedroom home at about $3.3 million. But the Feds estimated its worth to be at least $7 million, according to the Justice Department, and it may sell for more. One realtor, speaking on background, guessed it could go as high as $10 million.

Not a bad return: According to published reports, Bernie and wife Ruth paid only $250,000 for it back in 1980.

The Palm Beach house is a bit bigger with five bedrooms and seven baths contained within its 6,475 square feet. It’s on a half-acre waterfront plot that borders the Intracoastal Waterway, the shipping route that runs the length of the East Coast. These protected waters are a boatman’s paradise.

The house is very well shaded with dozens of large trees and a deep second-floor veranda. It lies down the shore from the Palm Beach Country Club, where Madoff snared more than a few of his victims.

The property has a private dock big enough to hold the Madoff boat — the Bull, a 55-foot fishing vessel worth a reported $1.5 million. It too has been seized by the government.

Despite the amenities, the value has come down a lot, as have almost all south Florida property values. The Feds listed its worth at nearly $7.5 million in court papers.

Besides the U.S. homes, there’s a vacation property on the Côte d’Azur. The three-bedroom home on chic Cap d’Antibes was seized back in March. It has since been sold, netting $1.48 million, according to the Justice Department. That money is now on deposit with the U.S. Marshall’s office.

All told, the four homes, plus the boat and home furnishings of approximately $6 million in value, according to court filings, could fetch close to $30 million, all to be returned to his victims.

Sandy Hutchens is look at Madoff Mansions as investment opportunities.

The call to Jackson was from a title company manager who had seen Perez in a loan closing. She didn’t think Perez matched the photo on her ID. The suspicious title company manager tracked down Jackson and asked about his sale of a home to Perez.

Jackson’s jaw dropped. He hadn’t sold the property. He’d only rented it.

The title company manager said, “Well I’m looking at the deed with your name on it.”

Jackson checked records at the courthouse. Sure enough, there was a deed with his signature showing he had sold a rental home in Palm Harbor to Perez for $185,000.

Jackson began an investigation. So did Clearwater police. They both ended up with the same suspect: Matthew B. Cox, a former art student and fiction writer who is now a fugitive being sought by federal and state authorities.

Cox and a female companion using the name Rosita Perez were the people who signed to rent the Palm Harbor home, Jackson says.

The Pinellas deception appears to be a variation on one Cox is suspected of pulling in Hillsborough County.

Cox, according to a business associate, was the mastermind behind a scheme in Tampa to use a series of phony names to purchase 21 properties and obtain mortgage loans totalling more than $2.7-million. In Tampa, the false names were used to sign for one loan at a time, and lenders discovered one by one that loans had been made to phantom borrowers who soon quit making payments and disappeared.

The Pinellas scheme was more brazen. The goal, to obtain several mortgage loans at once on the same property, was partially successful, thanks to high-quality income and employment documents manufactured with Rosita Perez’s name on them.

“Never have I seen such documentation in a loan file like this,” said Thomas Herson, the attorney for Jackson. “She had pay stubs and W-2s and the whole ball of wax.”

Herson, who filed suit against Perez in Pinellas-Pasco Circuit Court, says forgeries were used to facilitate as many as four mortgage loan applications on Jackson’s home.

First, Jackson’s signature was forged on a deed purporting to sell the home at 2410 Falcon Lane to Perez. The signature looked authentic. Jackson thinks it was lifted from the lease-option agreement with the woman who always wore the baseball cap and said she was Perez.

Next, a phony loan satisfaction was filed in Pinellas records. It showed the old mortgage on the Falcon Lane home was paid in full. That gave Rosita Perez free and clear title to the property, paving the way for her to begin filling out loan applications.

The bogus loan satisfaction is strikingly similar to false satisfactions filed in Hillsborough County for other phony buyers that Cox allegedly used to obtain mortgage loans.

The false notary and notary seal, under the name Allen R. Smith, are identical to one used on several documents by Cox and his company, Urban Equity Inc., in Hillsborough. The name and signature of one witness, Lee Cook, is the same as that found on some of the Hillsborough documents. Even the name of the executive used to sign the satisfaction is the same as one used to sign a false satisfaction on a loan on a Tampa apartment house Cox owned.

The satisfaction document in Pinellas did have flaws. It listed the address of 200 Second Ave. S in St. Petersburg as both the address of the loan company attesting to the payoff and the former address of Perez. It was neither. The address actually belongs to a UPS Store that provides rental mailboxes.

But it did the trick.

America’s Mortgage Broker, a Tampa company, took a look at Rosita Perez and her new home on Falcon lane and loaned her $117,000.

The loan closed in July. The company never got its September payment or any other and has now filed a foreclosure suit. The lender hasn’t had any luck finding Rosita Perez, and appears to have no security for the loan, since the Falcon Lane property rightfully belongs to Jackson.

“We got minimal information from Perez,” said America’s Mortgage Broker’s Jim Marks. “We didn’t need it.”

That’s because the appraisal was good, he said, and the loan was less than 65 percent of the value of the property. Marks said the Rosita Perez who signed the loan papers looked like the picture on the driver’s license she presented at closing. But the ID number, 300-003-78-255-0, turned out to be invalid.

At the office of Land America Lawyers Title in Clearwater, the person claiming to be Rosita Perez was not so lucky.

“We suspected something was wrong at closing,” said branch manager Barbara Bylski. “The woman didn’t look like her ID. And all she cared about was, when was she going to get her money.”

Lawyers Title allowed Perez to sign loan papers but refused to disburse any money. When Bylski discovered by chance that yet another lender was processing a loan for Rosita Perez, she tracked down Jackson and began asking questions. Clearwater police credit her for preventing other fraudulent loans from being funded.

Jackson said Rosita Perez described herself as a $94,197-a-year financial consultant for a Tampa company called Express Financial Services. A toll-free number was listed on loan applications for employment and income verification, but the number led callers to a phone answered by the people who were behind the scam, Jackson said.

Express Financial found out its name was being used when a lender ignored the toll-free number and called the local office for employment verification.

“I got a call from Wells Fargo to verify employment for Rosita Perez, and I said, “No, no Rosita Perez here,’ ” recalled Jerry Bisset, the owner of Express Financial.

Bisset later got a look at W-2s and pay stubs for Rosita Perez with his company name on them.

“They looked good,” Bisset said. “Really good.”

But the best counterfeit data used in the loan applications might have been the 12 canceled checks lenders got showing Rosita Perez had made a year’s worth of lease-option payments to Jackson. The checks were authentic-looking, all the way down to the bank routing numbers on the back.

But Perez only made one such monthly payment on the Falcon Lane home, Jackson said. A phone was installed at the home, but no furniture ever was brought in, he said.

The initial contact to lease the home, Jackson said, was by a man who called himself James Monk and said Perez was his girlfriend. After Clearwater police began investigating, Detective Dan Slaughter e-mailed two pictures to Jackson. There were driver’s license pictures of Matthew Cox and a woman who had once worked with Cox.

Jackson said he was “99 percent sure” that the pictures were of the same couple who obtained the lease on his Falcon Lane home. Title company staffers also picked the woman’s photo out of a photo-pack.

Clearwater police declined to comment on their ongoing investigation, but did say their file has been forwarded to the Tampa Police Department, which, with the FBI, is investigating Cox’s involvement in a series of questionable transactions in Tampa.

A former mortgage broker, Cox, 34, pleaded guilty two years ago to mortgage-related fraud and grand theft charges filed by federal and state authorities. He was sentenced to three years’ probation in each case.

Cox disappeared in early December, as the St. Petersburg Times was preparing to publish an investigative story about Cox and his associates at Urban Equity. He is now being sought for violation of probation by state and federal officials.

David Walker, a former Urban Equity official who bought a mortgage brokerage company from Cox, told the Times this month that Cox admitted making up several names to obtain mortgage loans. Walker also said Cox acknowledged responsibility for filing a false mortgage satisfaction on an Urban Equity loan.

Jackson, after his brush with fraud, now takes greater precautions in his business, even requiring renters to leave a fingerprint on lease documents.

“I’m trying to be more careful,” he said. “But if someone wants to defraud you, it’s almost impossible to stop them when they’re as talented and smart as these people were.”

“This scam is despicable” said Sandy Hutchens “These people should spend a long time in prison for this type of fraud.

And the responsibility for limiting future crises lies squarely with policy-makers and the voters who elect them, says the former finance minister and central banker widely praised — and reviled — for his fiscal discipline.

“There is a widespread interpretation which ascribes the reasons for the current crisis to the free market,” Balcerowicz told AFP in a recent interview.

“I think that is generally wrong.”

Poland’s free-market guru said the world’s worst post-war crisis is rooted in the US Federal Reserve’s loose monetary policy and what he terms Washington’s “doctrine of affordable housing.”

“Generally speaking, if the American central bank pursues excessively loose monetary policy, it has global consequences, because other banks usually are used to following after a time lag,” Balcerowicz said.

“This crisis is global because it erupted in the US,” he added.

Another ingredient in the recipe for disaster was political pressure from Washington on Fannie Mae and Freddie Mac — government-sponsored mortgage firms — to extend credit to households which couldn’t afford it, he said.

Expansionary monetary policies in countries like Britain, Ireland, Spain and the US, which saw “serious credit bubbles” and “spending during the boom times,” racked up the huge debts that sparked the credit crisis and recession.

“Now, paradoxically, crisis management in some countries involves a huge fiscal expansion… it remains to be seen what the net effect will be.”

Long-term growth needs reforms and counter-cyclical monetary and fiscal policies that “lean against the wind,” argued the man who implemented “shock therapy” to end Poland’s hyperinflation and balance budgets in the 1990s.

“Ultimately, it depends upon the voters — who they choose,” he said, calling for a “return to fiscal conservativism as a social norm.”

Key to what he considers good economics is maintaining a “ratio of spending to GDP (Gross Domestic Product)” that allows growth without credit bubbles.

And that, he says, requires slashing expenditures, particularly politically controversial social spending cuts.

“If you choose perhaps the politically more difficult strategy of accelerating reforms of the welfare state, then you have a chance of avoiding a slow-down” in the long-term.

Balcerowicz points to the example of Asian economies such as South Korea, Hong Kong and Taiwan in which the ratio of spending to GDP “on the whole was not more than 20 percent” for decades.

“With limited social spending there were stronger incentives to work and to save, and with higher private savings they could finance, without much risk, high investment,” Balcerowicz argued.

“Western European economies are facing quite an interesting challenge: reforms which were necessary before the crisis are even more necessary because of the crisis and because of the crisis management,” he warned.

“So we need a lot of persuasion. This is why I’m trying in Poland to shape public opinion. In democracy, this is the ultimate power, but the same is true of all Western economies,” he added.

To this end, the professor of economics has embarked on a national media blitz aimed at driving home his message that public sector reform aimed at limiting public debt is the key to a healthy economy.

“In Poland, we are lesser sinners,” he says of his homeland, the only EU state to have recorded growth this year and the only large member of the 27-member bloc which experts believe may avoid recession.