Mortgage Mess Was Preventable and is Correctable

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Editor’s Note: Dean Baker hits the nail on the head with this article. His point is that the whole thing was easily preventable, it was predicted by a fairly large group of people with varying expertise and that the mainstream media, political forums, legislative bodies and executive branches did nothing to even investigate the problem, much less try to stem the tide of impending and obvious chaos being cased by the banks.

His beef comes in attacking the book review in the New York Times where the  basic theme is “who could have known?” The answer is that plenty of people did know and nobody close to the levers of power did anything about it. Part of that comes from our education system and part comes from lack of training of people who do the actual regulating. If they truly understood finance and economics, the answer was obvious.

Alan Greenspan understood the problem but thought that the solution was the “free market” system that would automatically correct the malfeasance of the banks. He was wrong and he admits he was wrong. But he also says that neither he nor a hundred PhDs at his disposal understood the circuitous PONZI scheme that was covered over by a claim of securitization of loans that was false. If they didn’t have enough information to understand it, why didn’t they get it. It was certainly available. And how is it that Federal Reserve experts are now claiming they didn’t understand the plot when so many other people DID understand it?

That said, the question is correction. How to make restitution to our economy, our investors, our homeowners and our consumers and workers? Again the answer seems to be to let the free market work itself out. It failed spectacularly the first time. How could anyone arrive at that policy conclusion? But they did and the press is buying it.

This is really not so difficult. The economy needs stimulus and the stimulus must go to the consuming class of people who are dubbed “middle class” and “poor” who basically spend all of their money, which is what fuels our economy. The FACTS are that they don’t have the money or the credit to sustain any economic recovery. No amount of “free market” thinking is going to correct that.

The only thing that can save us from another recession is to put money in the hands of those who will spend it. That is where ideology comes in to interfere with practicality. The ideologues say that giving a gift to the middle class simply converts us to a communist or socialist state. And I suppose that has a grain of truth in it. But what if the the money is restitution for losses attributed to outright fraud, and not a gift?

We already know enough to make the required correction and to justify it without changing our economy or society into anything other than a democratic society based upon a mostly free market economy (when it isn’t cornered by bullies, which is where antitrust comes in). The banks cornered the market on money and real property using lies, deceit and forgery, fabrication, surrogate signing and pure intimidation. The facts are in on that and so we know that the origination of the loans, the assignments, the allonges, endorsements were all a sham.

And so we also know that the robust foreclosure scheme has corrupted title all over the nation. Isn’t the correction obvious? If someone is defrauded by Madoff or Dreier or Stanford or whoever, they get a receiver to collect up the assets that remain and return it to the people who have been defrauded. It is common practice. The only place where it is not being used is in the biggest case of economic crime in human history.

The banks diverted the money, stole it, gambled with it and where they won they kept it and where they lost they got it from the Federal government or pitched the loss over the fence to the investors who advanced the all the money. They diverted the documentation, just like any common crook, from the investors and the REMICs to their own controlled affiliates so they could claim “ownership” where they traded on assets that did not belong to them.

The answer is simple. As Iceland and now Ireland are discovering, holding the banks accountable and decreasing household debt, is both right and the only practical solution. The money that the banks made should be clawed back. The assets of the mega banks should be used to make the investors whole as though they never bought those bogus mortgage bonds. Yes, that would lead to the inevitable conclusion that the homeowner-borrowers would have their debts wiped out and no foreclosure wave would be coming. But if played right, the tax on the benefit to homeowners could replenish the US Treasury far more than any plan they currently have on the table.

So homeowners don’t get a free house and the banks stop getting free houses. The US Treasury and the US taxpayers get the relief they deserve and the country can go on. Then there is the question of criminal prosecution. If we don’t hold the bankers responsible for their malfeasance, why wouldn’t they do it again at the first opportunity. BY this point in the savings and loan scandal of the 1980’s more than 800 people were serving prison terms. Why not now?

from Dean Baker

The story of the housing bubble is an incredible tragedy. The collapse of the bubble has wreaked havoc on the lives of tens of millions of people by leaving them or family members unemployed, destroying savings and costing millions their homes.

The simple reality is bad enough, but what makes matters worse is that the whole episode was entirely preventable. As early as 2002 it was possible to recognize that house prices had sharply diverged from their long-term trend without any basis in the fundamentals of the housing market.

Since we had just seen the rise and collapse of a $10 trillion bubble in the stock market it should have been apparent to economists that our economy can generate large bubbles. The collapse of that bubble had thrown the U.S. economy into a recession, from which we were having considerable difficulty recovering, so it should have occurred to economists that the collapse of the housing bubble would also be bad news for the economy.

At least a few of us did recognize the housing bubble, and the dangers it posed at the time, and did everything we could to try to warn the country. For this reason it was somewhat shocking to see a book review in the New York Times by Noam Scheiber, an editor at the New Republic, that longed for the day when we will have people who can use data to identify housing bubbles before they grow so large as to pose a serious danger to the economy.

The personal slight is beside the point; the issue is that our elites are being allowed to construct an alternative reality that absolves them of responsibility for the ruined lives all around us. The reality is that people in positions of authority chose to ignore the evidence of a rapidly growing bubble and those trying to call attention to the dangers it posed. Instead we have Scheiber giving us the “who could have known story?” His case is that the dynamics of the bubble were just too complicated for people to grasp given the tools available at the time. The people who clearly warned of the bubble, using data, simply did not exist in Scheiber’s universe.

If it were just Scheiber saying this on a rant somewhere, he could be easily dismissed as a crank. While he is a prominent writer on policy and politics, prominent writers say ridiculous things all the times.

But this was not just a random rant. It was a book review in the New York Times, by far the nation’s most prestigious newspaper. It is a paper that employs fact checkers and prides itself on accuracy. Would the NYT allow a book reviewer to bemoan the fact that no one had questioned the existence of weapons of mass destruction in Iraq prior to the war?

And the bubble warners were not entirely below the NYT’s radar screen. In fact, several NYT reporters had picked up on warnings of the housing bubble (here and here). In fact, Paul Krugman, perhaps the most famous economist in the world, used his NYT column in 2002 to warn of the dangers posed by the housing bubble.

Given this history, how can an ill-informed book reviewer get away with making what is obviously an untrue assertion in an NYT book review? The simple answer is that Scheiber’s “who could have known” story is quite comforting to people with power in this country. The people in positions of authority who ignored the warnings of the dangers of the housing bubble would like the public to believe that there were no such warnings. It is much easier for them to act as though the state of economic knowledge was too primitive to allow them to see a bubble than to acknowledge that they simply did not feel like paying attention to the warnings.

It is important to their legitimacy to maintain this fiction, since with virtually no exceptions the people guiding economic policy today are the same people who ignored the growth of the bubble in the last decade. If everyone recognized the enormity of their failure they would be less likely to heed their calls for austerity: for example the cuts in Social Security and Medicare that virtually everyone in the higher circles of the policy establishment agrees are necessary.

That is why it is necessary to keep reminding the public that the policy elite blew it. The tools of economics were entirely adequate to see the housing bubble and the dangers that it posed to the economy. The problem is that the people who controlled economic policy at the time found it convenient to ignore the evidence. They still do.

See article on original website

Fixing the Housing Market So It’s Safe to Buy or Hold

Reality in Iceland: prosecution and letting the chips fall to the table
August 27, 2012. Neil F Garfield. Mainstream media and in particular Krugman and Ritholz have echoes what Simon Johnson and I have been saying for years. It’s not a question of theory or ideology. It’s a question of reality.
Citizens of Iceland were not in the least bit interested whether the “conservatives” or the “liberals” had compelling ideological arguments. They wanted jobs, economic stability, and decent prospects and opportunities. Citizens of Iceland were not interested in the concept of change or even change in government.
They wanted their society fixed, after being used and thrown under the bus by Wall Street using Icelandic banks as a conduit for international exchange of derivatives that turned out to be worthless. The Banks tried throwing Iceland under the bus, but Icelanders defied the power and wealth of the world’s largest banks and executed simple policies that followed the advanced thinking and analysts all over the world, past, present and future.
Bill Clinton was asked by many how he managed to take an ailing economy and turn it into a booming source of innovation with giant government surpluses. His answer was “arithmetic.” When I was a security analyst and investment banker on Wall Street the primary theme was that before investment, underwriting, or performing any act or making any decisions we had to start at the beginning — the fundamentals. Money may be hard to define but it is easy to measure.
At the end of the day if you taken more real money than you have spent, then you have more money at the end of the month. If some thief steals from you, your wealth drops. If someone claims to own your property and doesn’t own it, your wealth remains unchanged — but Wall Street, bucking the obvious proof in Iceland, says otherwise.
Wall Street says they can “borrow” the identity of homeowners and use it to create the equivalent of bank notes that can be accepted as cash equivalents as long as they dress it up with triple A ratings, and insurance companies that cannot pay for the loss and wouldn’t even if they could because the offer to buy the credit default swap, the insurance and other hedge products were based upon blatantly false premises.
Iceland simply did arithmetic and they continue to do arithmetic. They are reducing household debt, letting creditors suffer the risk of loss that was part of their contracts but now they don’t like their contracts. In Iceland too, the Banks demanded bailout money to save the financial system. But Icelanders rejected that on both legal and moral grounds.
They were not going to reward the perpetrators of fraud tooth further detriment of their victims, they would prosecute them and punish them for breaking the key laws and premises of a stable society — accountability to and for the truth.
They were not going to further burden the victims of the crimes with taxes to reward the perpetrators and their counterparts, they were going to provide as much restitution of wealth as possible and necessary to stabilize an economy that was crashing.
The financial system did not crash and burn as Wall Street had sternly predicted to the Bush and Obama administrations in the U.S. With more than 7,000 smaller banks ready and waiting pick up the pieces. They did not debase their currency and their prospects by saddling future generations with the mistakes of remote greedy bankers. They took the money that existed and disregarded the fake money, the ” cash equivalents” created all over the world allowing the shadow banning system to collapse under it’s own worthless weight. Nothing bad happened.
What did happen is that Iceland now enjoys normal economic growth, sharply declining unemployment and underemployment and does not consider trading paper whose value is based upon false transactions to be part of a their GDP. Produce real goods and services while in the U.S. And other “advanced ” superpowers they have turned themselves into paper tigers. While financial services went from 16% of U.S. GDP before this mess, it now counts for half. Arithmetic: if those shadow banking transactions are worthless then our real GDP is 34% less than what we are reporting.
In Europe where they have their heads partially in our sand, they are trying to sit on two chairs with one ass. They too understand that nothing trumps reality but the people who run government here and abroad are simply making far too much money pretending that shadow money is real money. The real value of our stock indexes is around 7500 for DJIA.
The facts are that housing is still in the dumps even if some reports show “signs of life.” to allow Foreclosures to proceed when the creditor had an undocumented c,aim without any real mortgage lien is absurd, bit it is done everyday. It isn’t a matter of defective documents, it is a matter of no documents, while the banks stole the identities of the pensions funds and homeowners for their own personal Profit,  and buried the losses until they were done trading worthless paper. THEN they gave the “ownership” of the worthless paper and the loss to the investment funds that thought they had purchased them years ago under rules that were never followed by Wall Street.
The foreclosures must end because they are illegally based upon a chain of paper without any money transactions (consideration). The “completed” Foreclosures should be disallowed because the transactions on which they were based were void for lack of consideration wherein the signature of the homeowner was procured by fraudulent premises and promises.
The real money transactions should be documented and the real loan status should be disclosed so that homeowners and investors can come to reasonable settlements and modifications without regard to the consequences to Banks whose continuing fraud is causing the U. S. And Europe without applying basic emergency procedures to stop the bleeding.
The loans are not secured by perfected liens and the principal loan origination was outright theft from investor-lenders and homeowners. But they could be secured and people could pay for the real market value of the deal they were tricked into, if we simply go back and do the arithmetic — and play fair.

Iceland Did It Right … And Everyone Else Is Doing It Wrong
http://www.ritholtz.com/blog/2012/08/iceland-did-it-right-and-everyone-else-is-doing-it-wrong/

Swindlers’ Waltz to the Sounds of a Crash

Government officials, perhaps influenced by spending too much time with bankers, forgot that if you want to govern effectively you have retain the trust of the people. And by treating the financial industry — which got us into this mess in the first place — with kid gloves, they have squandered that trust.

During the bubble years, many financial companies created the illusion of financial soundness by buying credit-default swaps from A.I.G. — basically, insurance policies in which A.I.G. promised to make up the difference if borrowers defaulted on their debts. It was an illusion because the insurer didn’t have remotely enough money to make good on its promises if things went bad. And sure enough, things went bad.
By making what was in effect a multibillion-dollar gift to Wall Street, policy makers undermined their own credibility — and put the broader economy at risk.
finishing the job has become nearly impossible now that the public has lost faith in the government’s efforts, viewing them as little more than handouts to the people who got us into this mess.
November 20, 2009
Op-Ed Columnist

The Big Squander

Earlier this week, the inspector general for the Troubled Asset Relief Program, a k a, the bank bailout fund, released his report on the 2008 rescue of the American International Group, the insurer. The gist of the report is that government officials made no serious attempt to extract concessions from bankers, even though these bankers received huge benefits from the rescue. And more than money was lost. By making what was in effect a multibillion-dollar gift to Wall Street, policy makers undermined their own credibility — and put the broader economy at risk.

For the A.I.G. rescue was part of a pattern: Throughout the financial crisis key officials — most notably Timothy Geithner, who was president of the New York Fed in 2008 and is now Treasury secretary — have shied away from doing anything that might rattle Wall Street. And the bitter paradox is that this play-it-safe approach has ended up undermining prospects for economic recovery. For the job of fixing the broken economy is far from done — yet finishing the job has become nearly impossible now that the public has lost faith in the government’s efforts, viewing them as little more than handouts to the people who got us into this mess.

About the A.I.G. affair: During the bubble years, many financial companies created the illusion of financial soundness by buying credit-default swaps from A.I.G. — basically, insurance policies in which A.I.G. promised to make up the difference if borrowers defaulted on their debts. It was an illusion because the insurer didn’t have remotely enough money to make good on its promises if things went bad. And sure enough, things went bad.

So why protect bankers from the consequences of their errors? Well, by the time A.I.G.’s hollowness became apparent, the world financial system was on the edge of collapse and officials judged — probably correctly — that letting A.I.G. go bankrupt would push the financial system over that edge. So A.I.G. was effectively nationalized; its promises became taxpayer liabilities.

But was there any way to limit those liabilities? After all, banks would have suffered huge losses if A.I.G. had been allowed to fail. So it seemed only fair for them to bear part of the cost of the bailout, which they could have done by accepting a “haircut” on the amounts A.I.G. owed them. Indeed, the government asked them to do just that. But they said no — and that was the end of the story. Taxpayers not only ended up honoring foolish promises made by other people, they ended up doing so at 100 cents on the dollar.

Could things have been different? Some commentators argue that government officials had no way to force the banks to accept a haircut — either they let A.I.G. go bankrupt, which they weren’t ready to do, or they had to honor its contracts as written.

But this seems like a naïve view of how Wall Street works. Major financial firms are a small club, with a shared interest in sustaining the system; ever since the days of J.P. Morgan, it has been common in times of crisis to call on the big players to forgo short-term profits for the industry’s common good. Back in 1998, it was a consortium of private bankers — not the government — that put up the funds to rescue the hedge fund Long Term Capital Management.

Furthermore, big financial firms have a long-term relationship, both with the government and with each other, and can pay a price if they act selfishly in times of crisis. Bear Stearns, the investment bank, earned itself a lot of ill will by refusing to participate in that 1998 rescue, and it’s widely believed that this ill will played a major factor in the demise of Bear Stearns itself, 10 years later.

So officials could have called on bankers to offer a better deal, for their own sake, and simultaneously threatened to name and shame those who balked. It was their choice not to do that, just as it was their choice not to push for more control over bailed-out banks in early 2009.

And, as I said, these seemingly safe choices have now placed the economy in grave danger.

For the economy is still in deep trouble and needs much more government help. Unemployment is in double-digits; we desperately need more government spending on job creation. Banks are still weak, and credit is still tight; we desperately need more government aid to the financial sector. But try to talk to an ordinary voter about this, and the response you’re likely to get is: “No way. All they’ll do is hand out more money to Wall Street.”

So here’s the real tragedy of the botched bailout: Government officials, perhaps influenced by spending too much time with bankers, forgot that if you want to govern effectively you have retain the trust of the people. And by treating the financial industry — which got us into this mess in the first place — with kid gloves, they have squandered that trust.

A Jail called Mandatory Health Insurance

A Jail called Mandatory Health Insurance

 

This is arithmetic not ideology. We make it ideology when we defy the numbers. We are already paying for full and complete coverage for all American citizens. In fact, we are paying 40% more than is required to give everyone complete health services. That we are paying for it and not getting what we are paying for (including a rebate or dividend on the many billions we are overspending) is testament to our ideology getting in the way of good judgment and concern for American citizens. It also gives you an idea on how and why the Pharmaceutical companies alone spend more than $5,000 on each and every one of the more than 500,000 doctors licensed in the United States, rewarding them with free samples, free trips, free seminars, free equipment, free supplies, and a host of other things that would make anyone other than a saint turn their heads.

 

In fact, it isn’t even ideology, it is myth. The myth is that American medicine is better than anywhere eels in the world. This is one of those myths that come from facts once holding morsals of truth. It is no longer truth. Our rate of medical advances is dwarfed by work done in dozens of other countries, our education is in a nose-dive, people are dropping out of the system, retiring early and otherwise getting out of the cancerous system we call our medical establishment.

 

We are already paying far more than we need to and far more than any other country in the world for the exact same medical facilities, medical care, medical treatment and medical prescriptions — AND we don’t have access without digging into the bottom of our pockets to treatments that are available, more effective and far less expensive than medical protocols in the U.S. because Big Pharma dictates those protocols through its absolute control of the FDA. And Big Pharma has a blank check from Big Insurance, because Big Insurance wants everyone to perceive the need to pay premiums for medial insurance. It’s like the credit card industry — they want to convert your assets into their fees without giving you anything of value in return.

 

Insurance is not the solution. It is the problem. Mandatory insurance locks us into the problem instead of heading for a solution. Wind down the need for medical insurance and the hold that Big Pharma has would likewise wind down. Putting people on the front line of what is available and how much it costs would put them “in the know” — instead of removing them from their sight the obvious tyrannies of the medical-insurance complex. This will create outrage. And outrage is what we need here — before we pass outrage and go straight to social unrest, riots, and other troubles that shake even the foundations of our form of government. We are corrupted and we the voters must make the changes that elected officials are unwilling to do. The only thing left that is made in America and for sale are our politicians.

 

Our insurance driven system causes us to spend about 40% more money than it would take to give full, total and robust health care to every man, woman and child in the United States. Instead, our citizens get partial coverage, no coverage and limitations on what therapies “qualify” for coverage — not on the basis of safety but on the basis of revenue production for Big Pharma, Big Insurance and Big medical. We need e little trust busting here like a hundred years ago. The corporate trusts, creating anti-competitive barriers to both older and newer treatments that are readily available, preventative care that would reduce the need for medical services and products, are literally ruining our lives.

 

Krugman, Clinton and the rest of those who subscribe to mandatory health insurance have it flat wrong on the numbers, the policy, and the purpose. Obama is a lot closer to the truth when he says we should NOT tie ourselves to the insurance model. Insurance is the problem, not the solution.

 

Under the Clinton plan we would be locked into the current cycle for the foreseeable future. Insurance companies would control how well we are cared for, what procedures are available (i.e., “covered), and perpetuate the medical fraud perpetrated on the public whereby spiraling higher medical costs for services, procedures and treatments are completely controlled in the lockbox created by the mighty triumvirate of Big Insurance, Big Pharma, and Big Medicine.

 

Under mandatory insurance the jail cell we are in would become a life sentence and the key thrown away. Transfer of wealth on the backs of those need help would continue on its merry way — a perfect Republican solution conceived in fear and deceit, servile to their own greedy agendas and creating cruel results but never brave solutions, to paraphrase Thomas Paine in “the Crisis.”

Mortgage Meltdown: Get Out of Jail Free Card from Paulson

Mortgage Meltdown: Get Out of Jail Free Card from Paulson

In the usual way of floating trial balloons before committing to anything, and without the whole hearted support from any of the many entities and people who have a dog in this fight, Paulson is “outlining” the proposal for “subprime relief.”

All information points to another intentional diversion from dealing with and getting disgorgement of money from hundreds, perhaps thousands of investment bankers, mortgage brokers, lenders, “retailers” and institutional sellers who converted assets to fees in a very simple scheme — churning, covered over by the complexity of “creative” derivative securities. 

Anyone can sell something if the cost is zero and the buyer actually thinks he is getting value. In fact, the sky is the limit because at no time is the market saturated with such a product. That is precisely why the “subprime mess” got so out of hand. And as Krugman points out today in the New York Times, we don’t know where or how how much toxic waste is buried. 

Paulson’s outline presents a plan that does little for the borrowers. It creates the illusion of a bailout when the investment world will not accept our word for anything (and so the illusion is doomed to failure). And the new wrinkle is that it puts the burden on the states and cities to do something about it, which in classical Washington political terms meaning that they are creating someone else to blame. 

Cities and states, already struggling are going to see significant declines in tax revenues and investment income, the value of investment funds and their assets specifically as a result of this mess. And it isn’t just a “subprime mess.” It is about the whole credit market. “Innovation” is just a code word for saying that we are going to create the illusion of money, everyone is going to buy into it because it looks free, and we will collect real fees while everyone else goes into the toilet.

And while we are all sleeping, CDOs and similar securities have been sold for 20 years based upon mortgages, credit card debt and dozens of other exotic theories of risk, none of which have any Triple-A merit but all of which have mysteriously been given the extremely high ratings as risk instruments. They have converted junk bonds to Triple A bonds with a stroke of the ratings pen. 

Meanwhile the co-conspirators, the U.S. Government and Wall Street innovators together with lenders with plausible deniability, and retailers of derivative securities that were sold not just deceptively but with outright lies and fraudulent ratings — they all get a free pass.

The sad truth is that investors are beginning to suspect that most of our market indexes are a hoax. They are probably mostly right. Vapor has been sold with the clothing of kings and queens. Unsuspecting people, government finance officers, financial institutions, fund managers, have been misled into destroying the value of what were real assets until they were invested into these exotic derivative securities, with the fraudulent ratings. 

The economy has been driven by consumer spending. Without liquidity offered by these exotic plans to lend money on credit cards and other consumer debt, whether securitized or not, the economy can’t run. Liquidity is drying up. Pumping more “money” into the system is not a long-term solution, it is a suicide pact for the dollar and for inflation. 

If we REALLY want to save our economy and its place in the world, we need to do something real, own up to the mistakes, hold the people who did it accountable, and make amends to the world as best we can. 

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