Sunday, October 31, 2010

Time for a new Reformation

On October 31, 1517, on the Eve of All Saint's Day, a feisty Saxon monk named Martin Luther walked up to the church door of Wittenberg Germany and there nailed 95 thesis against the corruption of the Roman Catholic Church.  In doing so, he touched off one of the biggest social revolts in human history.

In retrospect, this seemingly minor theological dispute would hardly seem the stuff of social revolution.  After all, these sorts of church fights are depressingly common to this day.  But this fight was about more than theology.  The Church was selling "indulgences" (a key beef in the 95 theses) to fund the completion of the Vatican.  So while Luther was enraged over the theology of selling forgiveness for the dead, the rulers of Saxony were worried about the monetary drain those indulgences represented.

When the Catholics threatened to kill him for his "heresy," Frederick III of Saxony (often called "The Wise") took Luther to his Wartburg Castle at Eisenach and gave him protection.  It was there that Luther translated the New Testament of the Bible into German--thereby cementing his Reformation by providing a more universal access to the foundations of the faith.  Luther insisted his followers should read the Bible for themselves and come to their own conclusions through study.  This act alone would have MANY ramifications including a near-universal literacy rate for those areas that became Lutheran.

Luther's church fight would become revolutionary because it embraced economics and empowered the lower classes through literacy.  In doing so, he left a profound legacy.  I remember growing up as a Lutheran preacher's kid being taught that it wasn't merely enough to "get it right" theologically--your beliefs should also improve everyone's economic and social circumstances.  Hence my father, even though very conservative theologically, could also be a New Deal Democrat whose ministry provided social services for those struggling against their personal economic catastrophes.

Personally, I was sick to death of theological disputes by the time I was 15 but I never lost my passion for enrichment through reading or my love of progressive economics.  And since the study of economics was originally a branch of moral philosophy, I have long thought it quite appropriate to examine economic questions from a theological perspective.  And the place where theology and economics most logically intersect is the subject of debt.  As I put it in my speech to the American Economic Association in 1993:
So this is what we have come to: We know we are killing ourselves and our planet; we know there is a possible solution because we can see other humans perfecting one; and, we have millions of highly skilled unemployed whose lives would become infinitely better with useful work. 
Why can we not go to work to solve our dilemmas? We are told that there is no money. In fact, all the nations on earth are in debt! We are told there is no money for useful purposes now, and there will be even less in the future as governments are forced by the lords of international finance to devote more of their tax revenue to debt service.
And why are we all in debt? Because we decided that money was a video game, programmed it with the banking assumptions and economic ideas of the middle ages, and let irresponsible children play with the futures of whole regions of the planet. more
(I believe Dr. Martin would have approved.)

When the subject is debt, the ugly stepsister of debt--monetary policy, moves front and center because as it is currently done, money is almost always a function of the creation of debt.  Put simply, money is debt.  When money is debt, you have a host of related problems.

Saturday, October 30, 2010

Is education the answer?

I know this is Minnesota but the belief that just a little more education will solve our economic problems is well-entrenched.  And with an election close at hand, even conservative Republicans are promising full funding for public education.

It makes me cringe because I see very little evidence that more education will make more than a minor dent in the unemployment problem.  And since jobs and education are usually mentioned in the same sentence, an implied promise is being made.  Unfortunately, there is little evidence that more high-priced education will lead to anything more than greater debt and personal frustration.
Globalism Comes Home to Roost
America's Jobs Losses are Permanent

Friday, October 29, 2010

Nestor Kirchner R. I. P.

The climatic moment in the Wizard of Oz comes when Dorothy discovers that the Wizard is just this fraud with excellent theater props.  "Pay no attention to the man behind the curtain" says the Wizard as he is being uncovered by Toto.

L. Frank Baum, who wrote Wizard, spent his early working life trying to eek out a livelihood in the new state of South Dakota.  Whatever the man's politics, he was overwhelmed by the struggles that surrounded him and had to move on.  It was absolutely impossible for him not to have absorbed the agrarian critique of Robber Baron capitalism that saturated the atmosphere on the frontier.  As a result, Wizard would be been seen by many as this Populist fable.  Makes sense to me.

In this interpretation of Wizard, the Tin Man represents industry made idle by the Depression of 1893, the Scarecrow represents the sorry state of agriculture in the "internal empire" of USA, The Cowardly Lion is William Jennings Bryan, and the Wizard of Oz represents the power of the gold standard--the 19th century method for the money trusts to control everything.

What Baum is saying in this interpretation is that the power of money and the moneychangers is based on an illusion.  If you ignore or reject this illusion, their power is destroyed.  This is a wildly optimistic position to take and precious few people have had the courage to actually take it.

Nestor Kirchner of Argentina was one of those people.  As such, he is one of the tiny handful of people whose lives have changed the fortunes of countries and continents.  His leadership out of Argentina's greatest economic crises demonstrated how someone who understands the illusory nature of money can achieve great things.  When the austerity ghouls from IMF showed up, he said no.  From Wikipedia
Kirchner was a critic of IMF structural adjustment programs. His criticisms were supported in part by former World Bank economist Joseph Stiglitz, who opposes the IMF's measures as recessionary and urged Argentina to take an independent path. According to some commentators, Kirchner was seen as part of a spectrum of new Latin American leaders, including Hugo Chávez in Venezuela, Luiz Inácio Lula da Silva in Brazil and Tabaré Vázquez in Uruguay, who see the Washington consensus as an unsuccessful model for economic development in the region.

Thursday, October 28, 2010

Predators still screwing with the real economy

With the real economy still staggering world-wide, there are limited opportunities for the quick-buck artists to make investments.  So they turn to speculating on the basics.  The results are predictably bad.
Turbulence in the Markets
How Speculators Are Crippling the Copper Industry

Wednesday, October 27, 2010

Listening to the wind blow

I have an old barometer that I like very much.  It was originally a gift from my father to my mother about Christmas 1960.  We lived out on the prairie where the weather was quite changeable, the forecasts on the radio were always for large towns far away, and my mother worried a lot.  Now she could make up her own weather forecasts.  I helped my father shop for it and when it came, I helped my mother set it up and make it work.  I especially remember trying to determine the elevation for our little town so we could set it.

So I have been watching this thing off and on for almost 50 years and yesterday morning, it was lower than I had ever seen it.  Since there is no reason to doubt its accuracy, I started looking for storm news on the Internet.  I soon found this:
According to the National Weather Service, this is officially the strongest non-tropical low pressure system ever recorded in the continental United States, clocking in at 955.5 millibars (mb) as of Tuesday -- and the system is still deepening. To put that in perspective, an average Category 3 hurricane has a pressure between 950-960mb.

See how close those isobars are together?  That has always meant a lot of wind.  Thank goodness the air has been so warm and dry or we could have had a blizzard with 40" (100 cm) of snow blowing around.  As it is, we have been having intermittent rain squalls and winds strong enough to shake the house and rattle the windows.

Red line-new record low
Black Line-state record high
Fixed needle-low at house 28.78 (972 mb)
Movable needle-high 24 hours later 30.48 (1029 mb)
And as we say around here when the weather moves off the charts, "Thank goodness this climate change stuff is a hoax because AlGore is fat!"

Tuesday, October 26, 2010

Is this the end of bankster rule?

It should be!

There comes a time after a period of military rule when the troops are sent back to the barracks.  Military governments may provide order but they really suck at everything else so eventually they are "requested" by the other powerful actors in the society to return to marching, shoe-polishing, and whatever else idle troops do.

There is no reasonable definition of a coup d' etat  that does not cover the behavior of the banksters in the past 30 years.  Military governments can only dream of the power that banker-institutions have wielded over sovereign nations.  And for whatever reason the bankers were accorded this power, it IS time for those folks to go back to their barracks as well.

Monday, October 25, 2010

What to do now?

The absolute first thing that needs doing is a clear-eyed assessment of how bad the problems facing USA actually are.
27 Signs That The Standard Of Living For America’s Middle Class Is Dropping Like A Rock
Michael Snyder Oct. 16, 2010 
If you still have a job and you can put food on the table and you still have a warm house to come home to, then you should consider yourself to be very fortunate. The truth is that every single month hundreds of thousands more Americans fall out of the middle class and into poverty. The statistics that you are about to read are incredibly sobering. Household incomes are down from coast to coast. more including the 27 signs
And the pros who pull the serious levers of the economy say that we must prepare for MUCH worse.
Economists Say US Must Prepare for "Savage Austerity"
Howard Davies, chairman of the London School of Economics, and Willem Buiter, chief economist at Citigroup Inc., talk about the potential impact of additional quantitative easing by the Federal Reserve on the U.S. economy. Davies and Buiter say "Savage Austerity" coming to America as they talk with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg) (warning: contains SAVAGE neoliberal idiocy)

Sunday, October 24, 2010

Michael Hudson on debt repudiation

Every since the disaster that is neoliberalism got rolling in the 1980s, folks of good will have discussed various forms of debt restructuring.  At first, these discussions were limited to the poorest of the third world nations that had gotten themselves into terrible economic fixes usually because of some horrible and utterly corrupt dictator. Now it seems the sort of corrupt government and economic policies once associated with places like Haiti can be seen in good old USA.  And so we see a smart guy like Hudson discussing why debt repudiation should also come to USA.

Saturday, October 23, 2010

The foreclosure fraud story gets more interesting

The foreclosure fraud story would not be getting any traction if this was only about some poor homeowners suddenly out on the street.  No, this story gets traction because INVESTORS are feeling cheated.
Banks Sold the Same Mortgage Over and Over to Investors
By: David Dayen Tuesday October 19, 2010 10:28 am 
Apparently, Bank of America has admitted in a court filing that they sold the same mortgage loan in multiple pools to investors. In layman’s terms, say I own the FDL News Cupcake Food Truck and you come up to buy a cupcake. I sell it to you, and then I sell the same cupcake to the guy behind you, and the guy behind you. As you all wait for your order, you talk to each other and realize that you were all sold the same cupcake. So who actually owns it?
That’s directly from the court document, saying that many loans and other mortgage-related assets “have been double- and even triple-pledged to various constituencies.” It would be impossible to designate ownership in that scenario unless the trustees of the mortgage pools took back all the loans and assigned them again.
You’re talking about the same mortgage loan sold two or three times to different people. In the hustle to get as much paper out the door as possible, all kinds of fraudulent occurrences like this happened. more
You got that.  Bank of America--the very same bank that got its big start rebuilding San Francisco after the earthquake of 1906--apparently was watching The Producers when it came up with this "brilliant" scheme.

Even so--it seems like the banksters have figured out a way to feel blameless in this catastrophe.  They will simply try to shift the guilt to someone else (Otter's defense of his frat house in Animal House?)  This is a large problem when you think about it but never fear, this is 'Merika--there are still people who think the invasion of Iraq was a good idea, after all.  Apparently if you package the bullshit in a pretty enough package, some fool will buy it.
Foreclosures and Guilt: The "Home Loan Moral Hazard Scorecard"
Richard (RJ) Eskow
Consultant, Writer, Senior Fellow with The Campaign for America's Future
Posted: October 18, 2010 02:25 AM
Jamie Dimon and the other mega-bankers who derailed the economy have a new PR campaign to sell you. They're saying that families who can't pay their mortgages must bear the blame -- all the blame -- for the foreclosure crisis. That means the public should just ignore banks' widespread lawbreaking in the registering and transfer of property titles. For the bankers who would appoint themselves the nation's moral arbiters, It's always somebody else's fault.
Not that we should be surprised. After all, the Mortgage Bankers Association, which calls itself "the voice of the real estate finance industry," did a short sale on its Washington DC headquarters which left CEO John Courson uncharacteristically speechless. It seems he didn't want to talk about how he walked away from the loans he took out to buy that building. But before the cat got his tongue, Courson managed to lecture homeowners on their "legal obligation" and the terrible "message they would send" by walking away from their mortgages.
Morality and law for thee, but none for me. more
Don't Believe The Bank Lobby: Foreclosure Fraud Is Bad For Homeowners And The Economy
By Zach Carter
October 18, 2010 - 4:51pm ET
The bank lobby is spreading a host of silly myths about the foreclosure fraud outbreak in an effort to downplay the scandal and minimize concerns over potential bank losses that have emerged in the blogosphere. Housing Wire’s Paul Jackson spouts most of them in his post today. Jackson does acknowledge a host of major problems for banks that have been recently highlighted by the blogosphere, but he’s still spreading serious misinformation on foreclosure fraud and its potential effects. Banks routinely rip-off borrowers in the foreclosure process, and the blogosphere's uproar over foreclosure fraud is more than justified.
First, the agreement. Jackson agrees that there is enormous potential for investors to bring fraud cases against banks and win them. He calls them “real concerns, many hundreds of billions of dollars worth of concerns.” The blogosphere has done a terrific job highlighting this, with Felix Salmon shouldering most of the burden.
Jackson’s real critiques are pretty weak:
“‘Robo-signing’ is a procedural issue. Period . . . . Until someone can provide consistent and repeated evidence suggesting that the information contained within ‘robo-signed’ affidavits is factually incorrect — not just some of the time, but most of the time — the end result of this mess is nothing more than a very public, brand-damaging, headline-making procedural blip . . . . If false debt amounts were being pushed by banks onto the courts en masse, you can bet all the apple pie in America that every single one of us would have heard about it by now, too.” more
But the banksters aren't fooling everyone.  Their behavior is so odious, they may be losing the local shire reeve (sheriff).  This is bad because the sheriff is their "muscle."  Without their muscle, a bankster is merely a dullard with an ugly tie.
Sheriff takes hard stand against foreclosures
The sheriff for Cook County, Ill., which includes Chicago, is refusing to enforce foreclosure evictions for Bank of America, JPMorgan Chase and GMAC Mortgage/Ally Financial until they can prove those foreclosures were handled legally, CNBC is reporting.
Today's announcement by Sheriff Thomas Dart comes after GMAC and Bank of America, the country's largest mortgage servicer, announced rollbacks from foreclosure moratoriums, the news organization says.
Dart's office released a statement indicating that Bank of America, GMAC and JPMorgan Chase account for approximately a third of the 3,700 eviction orders filed with the Cook County sheriff.
"I can't possibly be expected to evict people from their homes when the banks themselves can't say for sure everything was done properly," Dart's statement read. more
And of course, if the sheriff isn't evicting, whole large options open up.  The whole world is ripe for a debtor's revolt, but the conditions are especially favorable in USA.
Up the Revolution!: Arise Ye Homeowners of America, You Have Nothing to Lose but Your Mortgages!
Tue, 10/19/2010 - 23:09 
Dave Lindorff
Investors are calling on B of A buy back $45 billion in mortgage bonds it acquired and sold after it took over Countrywide
See, that was our other bastion for retirement. All these years, Americans have been fed this comforting myth that our homes are our castles, and that the best investment we could make in life was to invest in the “American Dream” of home ownership. Then Wall Street, having already stripped the industrial base down to the concrete pads, looked around and saw this huge pile of real estate ripe for the taking. They couldn’t just steal our property outright, though. After all, we all had these deeds on file with the local county Deeds Office. 
But we all had mortgages. And they figured out a way to steal these. They created derivatives, called Mortgage Backed Securities. They took our mortgages and they chopped them up into little pieces, which they then bundled into tranches and started trading like bonds. These tranches were designed to have varying risk levels, which they accomplished by putting “good” mortgages--those that were expected to be repaid regularly--with “bad” mortgages--those likely to default. But since it’s really a guess whether any particular mortgage, good or bad, is going to default, they didn’t really put individual mortgages into individual tranches. They put them all into an electronic data base called MERS, for Mortgage Electronic Registration (sic) System, and then shifted them, or pieces of them, around as needed when they wanted to create a good tranche or a bad tranche or a mediocre tranche. 
This meant that they had to deliberately sever the chain of ownership of the repayment note formerly attached to those mortgages--because it’s the note, which is signed at a closing, that actually entitles the holder collect payments on a mortgage, or to foreclose on a defaulted property. 
Get this now: What I’m saying here is that the banking industry deliberately broke the chain of ownership on all the mortgages that have been securitized, not just on those famous subprime mortgages you’ve been hearing so much about.
In other words, if you, like most Americans who are not renters, own a home and have been dutifully paying off a mortgage, it’s almost certain that your local bank, which issued that document now in your safe deposit box and on file at your county’s Deeds Office, no longer holds the note. It has long since been lost, perhaps even tossed into some shredder, and so nobody has a clue who has a right to foreclose on your home. In fact, nobody does have that right. more

Friday, October 22, 2010

Banking isn't rocket science

As it is becoming increasingly clear, the banking business is awash in fraud.  Thousands of banksters should be going to jail for their crimes--crimes against ethics, crimes against economics, and now crimes against established property law.

But so far, we haven't thrown them in jail.  In fact, we have given them large piles of money and encouraged them to return to their lives of crime.  The question is why.  I actually do not have a clue because if I were in charge, those thousands of arrests would have already happened.  But I also have been alive and observant in this society for over 60 years so I do have some theories.

1) We have become accustomed to having the financial community call the shots on the economy.  We have been led to believe that they are the experts in the matters of money so they should be heeded.  We have been taught to believe that moneylending is this ultra-difficult task (else why are bankers paid so much--actually there are hundreds of jobs more difficult than lending.)  We have been led to believe that if we were to allow the control of moneylending to pass into the democratic control of mere mortals, chaos and anarchy would ensue.

2) We have a mean streak of Calvinism in USA.  The Calvinists teach us the rich are the ones chosen of God to lead our communities.  The poor are that way because of some occasion of sin.  Bankers are rich.  Therefore an attack on bankers is an attack on God's design for the social order.

Actually I have many more theories but these are the big two.

We lead off with a reminder of just how corrupt banking has become.
INSIDE JOB: New Documentary Exposes How 'Banksters' Continue To Steal Our Money

And then we have this sweet little piece showing how the good people of North Dakota prove every day that they are perfectly capable of running a fine bank democratically.

Thursday, October 21, 2010

Getting serious about energy planning

There is an interesting note in today's Swedish Local (a fluffy news site by Nordic standards but much more serious than your typical USA newspaper.)  It is an announcement that a Swedish-state-owned energy company named Vattenfall is going to invest in a large offshore electrical generating system.

Vattenfall's Lillgrund wind farm
With 48 turbines, Lillgrund is the third biggest wind power farm in the world.
Generating electricity in salt air is a maintenance problem I wouldn't
wish on my worst enemy.  We'll see if the Swedes / Germans make it work.
These folks have a lot of experience with the sea.
Vattenfall invests in North Sea wind farm
Published: 21 Oct 10 14:36 CET
Swedish energy group Vattenfall said on Thursday it would invest about one billion euros ($1.4 billion) along with Germany's Stadtwerke Munchen (SWM) in a 80-turbine offshore wind farm in the North Sea.
Vattenfall said building of the site, some 70 kilometres off the German island of Sylt, near Denmark, would start in 2012 and be completed in 2014. 
The farm is set to have a capacity of 288 megawatts, enough to supply power to 500,000 households, making it one of the main offshore projects in the world.
The "Dan Tysk" joint venture will be held at 51 percent by state-owned Vattenfall, and at 49 percent by SWM. 
In September, the Swedish company inaugurated what is currently the world's largest offshore wind farm off the English coast.
Vattenfall, which has been widely criticised in Sweden for running heavily polluting coal plants, especially in Poland, said last month it would implement a new strategy aiming to reduce carbon dioxide emissions.
The company is Europe's fifth largest electricity producer and its largest supplier of urban heating.  (My note: More commonly called District Heating or even cogeneration in USA, this method for improving energy efficiency is extremely underutilized in North America.)  
The idea of any state-owned energy company sounds preposterous to the ear of a USA citizen.  And the question naturally arises as to whether such an organization would be any more enlightened than say privately owned, Duke Energy.  Like almost anything that intrudes on the subject of energy, Vattenfall has a history that has some environmental ugliness attached.  Let's start with their mix of power sources.
Vattenfall generates Electricity by hydropower (24%), nuclear power (28%), fossil fuel (47%) and smaller proportions of wind power (1%), biofuel and waste.[5]
Main areas of operations are electricity, heat and transmission. Vattenfall supplies energy to 4.8 million customers in the Nordic countries and northern Europe. How the power and heat is generated is based on the particular conditions in each country. Conditions vary due to differences in natural resources and history. In Sweden and Finland, conditions allow Vattenfall to rely mainly on hydro and nuclear power. The available sources in Germany and Poland are mainly based on fossil fuels.
Vattenfalls wind power generating increased by 117% during 2007, with the Lillgrund wind farm off the coast of Malmö, Sweden, being taken into operation, with 48 turbines and a total installed capacity of 110 MW and a generation output equivalent to the electricity consumption of 60,000 Swedish homes. Most of Vattenfall's wind power plants are in Denmark and Sweden, including the worlds largest offshore wind farm at Horns Rev off the Danish coast of Esbjerg, which is 60%-owned by Vattenfall. Vattenfall also operates one of the biggest wind farms in Poland. In 2008, a number of wind power acquisitions were made in the UK[6], Thanet[7] and Kentish flats .
Hydrolectric power produces essentially no carbon dioxide or other harmful emissions. It now supplies about 715.00 megawatts or 19% of world electricity[8]. Vattenfall, in Swedish translates to Waterfall, has 92 water power stations in Sweden and 10 in Finland. Three Vattenfall hydropower stations in Sweden have managed to fulfill the tight criteria set by Finnish EKOenergy ecolabel and Swedish Bra Miljövalecolabel.[9]
Biomass. Vattenfall has some 30 biomass-fired heat and combined heat and power (CHP) Plants and is one of the worlds largest buyer and users of biomass.
Nuclear power relies on Nuclear fuel which is used for approximately five years in a power plant before it is replaced. Uranium is extremely rich in energy; one kilo of uranium equals the energy in 90 tonnes of coal. Vattenfall currently operates four Nuclear power plants, two in Germany (Brunsbuttel Nuclear Power Plant and Krummel Nuclear Power Plant, both located near Hamburg) and two in Sweden (Forsmark Nuclear Power Plant and Ringhals Nuclear Power Plant).
Coal is the most widely used energy source for electricity production in the world. Vattenfall operates coal fired plants in Poland, Germany, the Netherlands and Denmark.
That folks, is diversity!  Whatever one thinks about Vattenfall's nukes or its brown coal power stations in Poland, this is obviously a company that thinks long and hard about how energy can be supplied over the long term.  And unlike the energy companies most of us know and loathe, Vattenfall actually seems to respond to public criticism.
Vattenfall's 100-year plan for a low carbon emitting society
Vattenfall has proposed a framework leading to a low carbon emitting society. The most pressing need is to create a credible, stable and predictable long-term global framework defining how reductions will be achieved. To address this challenge, Vattenfall has outlined a global adaptive burden-sharing model for a low carbon emitting society.
The model is built on the following principles:
  • All countries should participate - participation is a part of being a member of the global community.
  • Emission allowances are allocated to each country in relation to its share of global GDP.
  • Emission caps should be binding.
  • No poor country shall be denied its right to economic development - no extra cost burden on the poorest.
  • No rich country shall have to go through disruptive change.
  • Richer countries pull a larger weight (emission caps do not embrace countries until they have reached a certain economic level; poorer countries with caps get higher allocations compared to richer countries).
  • There shall be a level playing field. The proposed framework shall not change relative competitiveness.
  • The system shall be robust. As new knowledge is accumulated parameters may change, but not the principles underlying the system.
Is Vattenfall perfect?  Hardly.  But are they a company that is evolving?  Yes Indeed!  At real economics, the willingness to grow and evolve is by FAR the most important quality a person or company can have.  And as such, Vattenfall is exactly the sort of company I had in mind when I coined the term elegant technology.

Wednesday, October 20, 2010

William Black details news media's failure to cover fraud

Back in the dark days of the Bush reign of terrifying incompetence based on unapologetic ideological purism, Dan Froomkin used to cover the White House in a blog for the Washington Post. Froomkin's blog was one of the few islands of sanity in a country that had pretty much gone stark raving mad. Soon after Obama was elected, the Post dropped any pretense of being "liberal" and hired a bunch of wrong-wing loonies to ru(i)n the place. One of the very first steps the loonies took was to kick Froomkin out. Fortunately for us, The Huffington Post hired Froomkin. Yesterday, he interviewed criminologist and former savings and loan regulator William Black, who provided a stunning listing of the many forms of financial fraud that have been and are being committed, and which the mainstream news media just are not providing proper coverage of. Black lists nine frauds, so be sure to click through to read the entire post.
1. The astonishing amount of mortgage fraud (literally, millions of cases annually) and how it hyperinflated the bubble and led to the Great Recession.

2. The fact that these mortgage frauds were overwhelmingly due to consciously fraudulent lending practices in which the CEOs of seemingly legitimate entities used accounting tricks as their “weapon of choice" to report higher profits and get bigger bonuses. (George A. Akerlof and Paul R. Romer got it right in the title to their 1993 article: Looting: The Economic Underworld of Bankruptcy for Profit.)

3. The disgraceful lack of prosecutions which has resulted from regulators virtually ending the practice of making criminal referrals and the pathetic March 2007 "partnership" that the FBI entered into with the Mortgage Bankers Association (the trade association of the "perps") that led the FBI and the Department of Justice to (implicitly) define out of existence fraud by the lenders (and to conceive of them as the "victim" -- which they are, but only of their controlling officers). Bush administration attorney general Michael Mukasey in June 2008 notoriously refused to create a national task force against mortgage fraud based on his claim that mortgage fraud was analogous to "white collar street crime."

Story continues below

4. The "echo" epidemics of fraud set off by the primary epidemic of accounting “control fraud". The fraud designed by CEOs in turn kicked off an epidemic of fraud among loan brokers and appraisers. Reporters should explore the concept of the Gresham's-style dynamic in which bad ethics were a competitive advantage and drove good ethics out of the marketplace.

5. The massive foreclosure fraud we are seeing now as another "echo" epidemic. To optimize their accounting control fraud, lenders gutted underwriting. That led to "fraud in the inducement" (
vis a vis borrowers), endemic documentation problems, and an extraordinary numbers of defaults. The process required tens of thousands of real estate financing personnel to commit fraud on a daily basis as their core function. Some of these people are unemployed, but many are in the industry and are presently engaged in loan servicing. Now that their job is to foreclose on properties, there is no reason to expect that they would suddenly become honest, and they haven't.

Read more.

Finding solutions for the real economy

The outlines to a transition to what I have long called Elegant Technology are pretty clear--solve the energy problems associated with an over-reliance on fossil fuels and close the industrial loop so that no toxins escape into the environment.

The problem, as we can plainly see, it that these simple ideas aren't so simple to produce in practice.  Worse, in USA, we have a culture dominated by Predators who are actively trying to destroy the folks and institutions who could build a new post-petroleum society.  So far, this means that we are likely to miss out on any possible new economic boom.
Economist Warns against Blaming China
Yuan Revaluation 'Won't Allow the Americans to Export More Goods'
American politicians are calling for China to revalue its currency to help out troubled US exporters. But in an interview with SPIEGEL, a leading German economist has warned that America first needs to make products that people want to buy.
SPIEGEL: China's currency reserves have grown to a breathtaking $2.65 trillion (€1.9 trillion) and the imbalance in world trade is growing larger all the time. Can arevaluation of the yuan, as the US is calling for, halt this trend?
Rolf Langhammer: It would be welcome -- and also in China's own interest -- if the yuan exchange rate was more flexible than it has been up to now. China's recent moves in that direction (i.e. the small revaluation since June) are far from sufficient. I would caution against overblown expectations, though. It would hardly be possible to eliminate the global imbalance in that way.
SPIEGEL: Why not?
Langhammer: A weak dollar won't automatically allow the Americans to export more goods. We shouldn't be under any illusions about that. In many cases, companies that are based in the US can't survive on the global market because they don't have innovative products or the qualified workforce required to develop them. more
OK.  That was a bit harsh.  But is it true?  Well, it's obvious that we will need to replace our airline links because nothing is more dependent on petroleum than aircraft.  So what exactly do we know about building electrically powered high-speed rail?  Well, not much.
Obama's High-Speed Train Revolution
Foreign Firms Hoping to Ride US Rail Boom
By Mary Beth Warner
Siemens, Bombardier and other rail engineering firms have high hopes for the US market because the Obama Administration plans to promote the development of high-speed rail networks. Germany's Siemens will showcase its Velaro ICE trains in Florida this week ahead of a bidding process in the state.
The high-speed Velaro trains, built by Siemens, can travel up to 250 miles per hour (403 kilometers/hour), but in Florida this week they were brought in by truck. The special tracks along sunny Interstate 4 haven't been built yet, and the gleaming cars are just a teaser of what may come. If the German company succeeds in its plans, the trains will one day whisk passengers from Tampa to Orlando, and from Orlando to Miami.
Florida is on the verge of accepting bids for its proposed high-speed rail lines, and Siemens wants a piece of the pie. The company is showcasing its Velaro line of trains, which it has sold in Spain, Germany, Russia and China, at a special event at Tampa's Museum of Science and Industry on Thursday, and will be touring the train cars around the state in coming days so residents and officials can see them first-hand, and be greeted by local celebrities, such as Ronde Barber, the captain of the professional football team the Tampa Bay Buccaneers.
The effort is a first step along the road to achieving a high-speed rail network in the United States. Last year, the Obama Administration outlined 13 possible high-speed rail corridors throughout the United States, from Florida to California. It is a broad agenda for a country that covers a third of a continent and is home to more than 300 million people, many of whom are dependant on their cars for transportation.
All Eyes on Vast US Market
European and other foreign manufacturers are eagerly lining up to dive into the US market -- 38 companies have officially registered interest in Florida alone -- but they have to contend with an uncertain future, filled with bureaucracy, politics, and, most of all, a need for more money.
"Certainly, the question which is dominant in the entire market is, 'Hey, what's going to happen in the American market?'" Edzard Lübben, head of Siemens' high-speed train business, told SPIEGEL ONLINE.
The proposal has a down payment of $8 billion from the federal government, with another $3 billion possibly on the way -- all part of Obama's stimulus plan to address the financial and economic crisis. Still, the planned route in California alone, which would run from the Los Angeles to the San Francisco-Bay Area, is expected to cost $45 billion, according to official estimates. Estimates for all of the routes combined range in the hundreds of billions of dollars to $1 trillion.
"Right now you can see that if no significant additional sources of money are found, most of the projects won't happen," Lübben said. If the plans were realized, the potential exists for Siemens to provide 100 or 150 trains, which would be a huge market for the company, he said. more
OK.  How about solar?  After all, wasn't most of the original research for solar cells done for the USA space program?  The nation is littered with prime solar sites.  We should be leading the way here--right??
U.S. Solar Market Booms, With Utility-Scale Projects Leading the Way
Industry report says solar installations could increase tenfold by 2015
By Stacy Feldman
Oct 13, 2010
America could add 10 gigawatts of solar power every year by 2015, enough to power 2 million new homes annually, industry and market analysts have claimed in a new report.
The Solar Energy Industries Association andGTM Research, a Cambridge, Mass.-based market research firm, said the figures represent a tenfold surge compared to 2010, which is on track to set its own record.
A full gigawatt of solar may get installed this year for the first time, the report, U.S. Solar Market Insight, said—a roughly 150 percent leap from the 441 megawatts added last year.
One factor driving the boom is the ramp-up in large utility-scale photovoltaic (PV) setups.
"I would say we're going to look back on 2010 as the year that the utility-scale market really emerged," Shayle Kann, a managing director of GTM Research, told reporters in an Oct. 12 telephone press conference.
In the first half of 2010, over 23,000 PV systems were added, compared to about 28,000 in all of 2009. This includes an "unprecedented" 22 utility projects, the authors wrote.
"It's hard not to be very bullish on the market," Kann said.
Another factor propelling growth: The global financial crisis, among other factors, triggered a decline in solar panel prices. "This enabled the U.S. market to continue growing despite financial turmoil," the report said.
All Eyes on U.S. Market
Tom Kimbis, director of policy and research at SEIA, said the eyes of the world are on the U.S. market. Investors are "hoping it will be the engine of growth over the next five years for the global market."
But for now the nation still appears to be in fourth place. It made up 6.5 percent of global PV installations in 2009, behind Germany, Italy and Japan. more
We're number FOUR!  We are finally getting around to actually installing some major solar systems.  The bad news is that we are importing virtually all of the hardware.  And why is this so?  Perhaps because we now have a culture that cannot accurately value the ability to make sophisticated products. This has not always been true--we once had the companies that produced innovative goods.  Now we sell off these jewels without so much as a proper goodbye.
Sweden's SKF snaps up US firm on heels of strong results
Published: 19 Oct 10 11:55 CET  
Sweden's SKF, the world's biggest maker of industrial bearings, announced strong third quarter results on Tuesday, as well as the purchase of US-based engineered lubrication systems maker Lincoln Industrial. 
"The acquisition of Lincoln Industrial combined with our existing business will significantly improve our ability to further support our customers with even better solutions and give us a better geographical coverage," SKF President and CEO Tom Johnstone said in a statement.
SKF announced the purchase alongside strong third quarter results. Sales rose 16.1 percent in the third quarter to 15.47 billion kronor ($2.32 billion) from 13.32 billion kronor last year. Net profit nearly tripled to 1.43 billion kronor from 483 million kronor in 2009.
The company continues to expect "significantly higher" demand for its products in the fourth quarter.
SKF describes Lincoln Industrial as "a leading supplier of lubrication systems, tools and equipment" including hose reels and grease guns. more

Tuesday, October 19, 2010

We sure are a bunch of wusses

One of the things the "left" has believed as an article of faith is that if conditions got bad enough for the average peon, why then, they would rise up and DEMAND change. Well, things should be bad enough now...
The U.S. is the Most Overworked Developed Nation in the World – When do we Draw the Line?
Submitted by G.E. Miller on Tuesday, 12 October 2010
We, as Americans, work too many hours. If you don’t believe so, check out the following data points that compare us to our peers around the world.
American Work-Life Balance
According to the Center for American Progress on the topic of work and family life balance, “in 1960, only 20 percent of mothers worked. Today, 70 percent of American children live in households where all adults are employed.” I don’t care who stays home and who works in terms of gender (work opportunity equality for all – it’s a family choice). Either way, when all adults are working (single or with a partner), that’s a huge hit to the American family and free-time in the American household.
The U.S. is the ONLY country in the Americas without a national paid parental leave benefit. The average is over 12 weeks of paid leave anywhere other than Europe and over 20 weeks in Europe.
Zero industrialized nations are without a mandatory option for new parents to take parental leave. That is, except for the United States.
American Average Work Hours:
At least 134 countries have laws setting the maximum length of the work week; the U.S. does not.
In the U.S., 85.8 percent of males and 66.5 percent of females work more than 40 hours per week.
According to the ILO, “Americans work 137 more hours per year than Japanese workers, 260 more hours per year than British workers, and 499 more hours per year than French workers.”
Using data by the U.S. BLS, the average productivity per American worker has increased 400% since 1950. One way to look at that is that it should only take one-quarter the work hours, or 11 hours per week, to afford the same standard of living as a worker in 1950 (or our standard of living should be 4 times higher). Is that the case? Obviously not. Someone is profiting, it’s just not the average American worker. more
Yet where are the protests?  Why is the "outrage" such as it is, not being manifest in anything more than some corporate-sponsored "teabagging?"  It's not like we are a bunch of Frenchified "surrender monkeys."  Are we?
Defiant millions take to the streets in battle over Nicolas Sarkozy's cuts
The return of students and workers in mass protests made the right shiver. But there was no battle of the barricades
Lizzy Davies
The Observer, Sunday 17 October 2010
As protesters marched on the historic Parisian site of proletarian revolt, 17-year-old Romane scowled at the rain-filled sky. "At least this is proof we're not just here for the good weather," she said. On her jacket was pinned a placard scrawled with marker pen. "Carla, we're like you," it read. "We've been screwed by Sarko too."
Nicolas Sarkozy had feared that the rentrée – the time after the holidays when France returns to normal – would be warm, encouraging protesting masses on to the wide, Haussmann-designed boulevards, and he was right to be worried.
Languishing in the polls and engaged in an almighty battle to push through his flagship pension reform – taking the retirement age from 60 to 62 – the man once cast by some as the Gallic Margaret Thatcher is facing his most testing showdown with the notoriously bellicose unions.
The demonstration that drew people out in their hundreds of thousands was the fifth since last month, and Tuesday will bring another. Last week the protest movement snowballed, with strikes that closed schools, led to flights being cancelled and stopped trains. Fuel refineries halted production and parts of the country are already suffering shortages. more
French Truckers Block Roads as State Pledges Fuel Supplies
By Gregory Viscusi - Oct 18, 2010 2:59 AM CT
French truckers blocked highways and officials said they’d use police to prevent strikers from cutting fuel supplies as the standoff hardened over President Nicolas Sarkozy’s plans to raise the retirement age to 62.
The government said it won’t give in to demands that it suspend parliamentary debate on the change and keep the minimum retirement age at 60. Sarkozy’s ministers sought to guarantee fuel, saying police would be deployed to ensure access to storage sites as refinery strikes entered a second week.
‘When there is a blockade, we will take the necessary measures,” Industry Minister Christian Estrosi said on RTL radio today. “We respect the right to strike, not the right to put up blockades.”
Unions have called for a day of protests tomorrow, to be accompanied by the fourth national strike in two months. The Senate is scheduled to complete passage of the pension bill the following day. France’s eight major unions will meet on Oct. 21 to decide how to continue their movement.
Le Parisien newspaper reported today that 800 of 13,200 service stations were having trouble being supplied. Television stations throughout the weekend showed long lines at service stations and carried interviews with exasperated motorists. more
Why even the freaking Brits seem likely to do something!
Half of public sector workers are 'prepared to strike' over pay cuts
State workers are prepared to strike in the event of a pay cut and changes to their pensions, a major report revealed.
By Louisa Peacock
Published: 8:08PM BST 17 Oct 2010
Public sector workers face a worsening of their pension arrangements under the Coalition's spending cuts
Some 49pc of state workers surveyed by the Chartered Institute of Personnel and Development agreed with the statement "workers have to do what's necessary to protect their jobs and if that disrupts public services, that's the price of living in a democratic society", compared with just 27pc of those in the business world.
Pay cuts were the main reason why staff would down tools, the survey found. Other austerity measures which would provoke a strike include a proposed reduction in pension benefits, pay freezes and job cuts. Public sector workers are facing a pay freeze and a worsening of their pension arrangements under the Coalition's spending cuts, to be unveiled this week.
The survey also found that unionised private sector workers would also consider industrial action. Of 2,000 unionised staff across the public and private sector, 49pc would walk out over a proposed reduction in their salary – nearly twice the number, 26pc, who said they would not take part in a strike. more
Then there is tiny Iceland--one of those few places where dictionary-definition democracy still flourishes.
Iceland to Present Bill to Wipe Out Personal Debt, Minister Jonasson Says
By Omar R. Valdimarsson - Oct 13, 2010 5:40 AM CT
More than 5,000 people protested outside the Reykjavik-based Althingi last night, according to a police estimate, as Prime Minister Johanna Sigurdardottir presented her key policy objectives to lawmakers. Photographer: Haraldur Jonasson/Nordicphotos/Getty Images
Iceland’s government will this week present a bill allowing debtors to walk away from obligations that exceed asset values and to nullify personal bankruptcies after four years, Internal Affairs Minister Ogmundur Jonasson said.
“All Icelanders can see that our society is currently in turmoil,” Jonasson said in an interview in Reykjavik. “We’re therefore required to sit down at the table and offer solutions; I don’t anticipate that the people running financial institutions will disagree.”
Prime Minister Johanna Sigurdardottir’s coalition is holding talks with the lenders today to thrash out housing market reforms after about 8,000 protestors gathered outside parliament last week to show their anger over rising homeowner insolvencies. The International Monetary Fund, which is leading Iceland’s $4.6 billion bailout, estimates that 63 percent of the island’s loans are non-performing.
Jonasson, who spoke in an Oct. 11 interview, says he favors a proposal put forward by the Interest Group of the Homes, which represents households demanding debt relief. The lobby group wants lenders to forgive about 200 billion kronur ($1.8 billion) in mortgage debt. more

Monday, October 18, 2010

Wall Street's Newest Crime: Tax Lien Investing

Just when you think it can't possibly get any worse. . .

The New Tax Man: Big Banks And Hedge Funds
by Fred Schulte and Ben Protess, Huffington Post Investigative Fund

Nearly a dozen major banks and hedge funds, anticipating quick profits from homeowners who fall behind on property taxes, are quietly plowing hundreds of millions of dollars into businesses that collect the debts, tack on escalating fees and threaten to foreclose on the homes of those who fail to pay.

The Wall Street investors, which include Bank of America and JPMorgan Chase & Co., have purchased from local governments the right to collect delinquent taxes on several hundred thousand properties, many in distressed housing markets, the Huffington Post Investigative Fund has found.

In many cases, the banks and hedge funds created new companies to do their bidding. They gave the companies obscure, even whimsical names and used post office boxes as their addresses, masking Wall Street's dominant new role as a surrogate tax collector.

In exchange for paying overdue real estate taxes, the investors gain legal powers from local governments to collect the debt and levy fees. At first, property owners may owe little more than a few hundred dollars, only to find their bills soaring into the thousands. In some jurisdictions, the new Wall Street tax collectors also chase debtors over other small bills, such as for water, sewer and sidewalk repair.

Some states allow the investors to tack on as much as 18 percent interest and a passel of legal fees and other charges. When property owners fail to make full payment, the investors can sue to foreclose - in some states within as little as six months.
Read more.

Corrupted Economists

One of the best books on economics to be published in the past decade is the 2006 book Financialization and the World Economy, edited by Gerald A. Epstein of the Political Economy Research Institute of the University of Massachusetts at Amherst, one of the few institutions dominated by the kind of heterodox economics thinking that has consistently opposed the ever tightening stranglehold of Wall Street and the financial markets on the real economy. Recently, Epstein fired back at orthodox economists by openly discussing how economists who defend the overweening role of Wall Street and the financial markets often have a sizable personal financial stake in companies involved in the orgy of speculation and usury those markets have become. (To put it in context: back in the 1960s, there was roughly $1.50 of financial trading for every $1.00 of GDP in the U.S.; by 2000, there was over $50.00 of financial trading for every $1.00 of GDP.)

Conflicts of Interest and the Financial Crisis: It’s Also the Economics Profession, Stupid!

by Gerald Epstein

Even the Queen of England could see that the economics profession messed up big time in the lead up to the financial meltdown. On a visit to the London School of Economics in 2009 she asked why economists’ failed to foresee the crisis. After a “serious” study, a group of eminent economists’ said economists had a “failure of imagination”, suggesting, perhaps, the need for more envisioning courses in Economics PhD programs. Paul Krugman pinned it mostly on economic theorists’ obsession with mathematical beauty and elegance at the expense of true understanding, what he called “mistaking beauty for truth”.
A more sensible answer begins with the observation that most of the economics profession was utilizing the wrong theories — theories based on efficient markets and rational expectations – rather than the much more informative ideas based on Keynes, Minsky, and those of my colleague James Crotty, among others (see the discussion at the Institute for New Economic Thinking) who see financial markets as inherently unstable and bankers in need of serious constraints.

But, until now, there has been way too little focus on the answer actually given by the Professor to whom the Queen originally directed her question. He reports: “…she asked me: ‘How come nobody could foresee it?’ I think the main answer is that people were doing what they were paid to do, and behaved according to their incentives, but in many cases they were being paid to do the wrong things from society’s perspective.” (Guardian, 26 July, 2009 )

And as we like to remind our students, economists are people too.

Charles Ferguson’s new movie, Inside Job brings to the fore this crucial point: Financial economists who missed the build-up to the crisis and who are now urging mild reform are not simply blinded by their love of beauty, but also, it seems, by their love of money. Ferguson reminds us of Larry Summers’ long-standing advocacy of financial de-regulation, while pulling down more than $20 million from the financial-services sector between 2001 and 2008. Glenn Hubbard, Chairman of George Bush’s Council of Economic Advisers and an advocate of financial de-regulation, was paid $100,000 by the defense to testify in the case of the two Bear Stearns executives charged with fraud by the U.S. government. And, according to Inside Job, economists routinely get paid to provide testimony and write papers favorable to the financial industry.

Read more.

Was all this fraud necessary?

There is a VERY good argument to made that this wave of fraud that has engulfed the mortgage business is in fact, the only way these folks could have made any money.  Think about it--the finance business is so large it dwarves virtually any other business on the planet including the production food and energy.  Yet to suggest that all this usury is somehow necessary to the functioning of the real economy is utterly absurd.  In fact, the overwhelming evidence is that these moneychangers are actually harmful to the real economy.

So if your so-called "service" is unnecessary or harmful, and there are literally dozens of folks who will replace you should you disappear, the idea that you can prosper without resorting to cheating falls into the realm of the highly unlikely.  (Of course, the LAST folks to admit that they are so unnecessary that the only way to survive and proper is to cheat will be the moneychangers themselves.) 

If the sanctions on cheating are weak, eventually everyone must cheat to survive.  After all, the number ONE reason why regulated capitalism outperforms deregulated capitalism is that well-written rules, effectively applied, make it possible for honest business folks to survive.
The Five Stages of Grief, MOTU (masters of the universe) Edition
By: Peterr Saturday October 16, 2010 9:00 am 
As happens in the life of a pastor, I’ve been doing a number of funerals lately. I’ve been dealing with people who are terminally ill, grieving families, funeral homes, church musicians, neighbors, friends, and the folks who prepare the meals for the mourners after the funeral. To take a break from all of this, I’ll check out the news. You know, something absolutely different, like what’s happening with the banks around the mortgage meltdown. Something to get my mind off of all this death and dying.
And I realized that what’s going on with the MOTUs isn’t at all different.
It is exactly the same thing I see with these people in my parish who are dying and with their grieving families. Back in 1969, Elisabeth Kübler-Ross described a pattern of behavior that many people exhibit around death and dying:
  • Denial — we’ve got no problem here . . .
  • Anger — it’s not my fault; someone else is to blame.
  • Bargaining — maybe we can work out a deal . . .
  • Depression — nevermind, it’s all hopeless.
  • Acceptance — OK, I’m dying.
The death of major failed institutions like Enron, Bear Stearns, Lehman Brothers, WorldCom, and AIG was greeted by their compatriots in the MOTU universe with denial: “This could never happen to us. We’ve got better judgment. We’ve got better people. We’ve got more smarts. We’ve got better technology. We’ve got . . .” To the MOTUs on Wall Street, the death of IndyMac, Washington Mutual and hundreds of other banks in the last three years is proof of the inadequacy of those other, lesser bankers.
The MOTU refrain of “We survived, because we’re better than they are” is actually true, in a way. Bill Black would say that what they’re better at is not getting caught:
My research specialty is “control fraud.” These are frauds led by those that control seemingly legitimate entities and use them as a “weapon” to defraud. Financial control frauds’ “weapon of choice” is accounting. Lenders optimize accounting fraud by following a four-part recipe:
  • Extreme growth
  • Making bad loans at high interest rates
  • Extreme leverage
  • Trivial loss reserves
The [Senate Banking] Committee’s findings show that WaMu’s business operations followed this recipe. The result was what Akerlof & Romer described in their classic 1993 article – “Looting: Bankruptcy for Profit.” This is also why I titled my book: The Best Way To Rob A Bank Is to Own One. more

Yes, Fortune, Wall Street Fraud Is A Problem
By Zach Carter
October 15, 2010 - 12:01pm ET
A lot of frequently credible publications have been pumping out drivel lately blaming borrowers for the ever-widening foreclosure fraud scandal. Fortune Magazine has the latest of these blame-the-borrower narratives. It would be nice to be able to dismiss this kind of nonsense as mere journalistic laziness, but at this point in the crisis, blaming the borrowers is an act of willful ignorance.
The Fortune scribe resorting to this grotesque journalistic vice is Fortune's Duff McDonald. McDonald's argument? Pretty lousy. He openly acknowledges that he hasn't done his homework:
"I find it very hard to process the notion that the onslaught of foreclosures in this country does not have more to do with a failure of conservative financial planning than with some insidious criminality by lenders . . . . I'm amazed that the country has congealed into the belief that every single borrower who signed a mortgage document has an escape hatch that somehow puts blame on their lender when they can't pay their debts . . . . I am at a loss to understand how so many individual homeowners signing loan documents for debt they could ultimately not afford were somehow the victims of a crime."
Four years after the subprime meltdown began, Duff McDonald still hasn't bothered to investigate fraud in the selling of mortgages. I'm getting pretty tired of writing thisstatement: In 2004, the FBI warned of an "epidemic" in mortgage fraud, 80 percent of which is committed by lenders. There was an entire Congressional hearing devoted to fraud at Washington Mutual. Loan officers and mortgage brokers are perfectly capable of falsifying a borrower's loan application, and they're perfectly capable of telling a borrower they're getting a great 30-year fixed-rate mortgage while selling them a subprime mortgage with exploding payments, adding a zero to the value of the house, or anything else. That's fraud, it's illegal, it happened all the time, and it was perpetrated by handsomely paid financial professionals. more

Is Wall St. Imploding, Again? Krugman: It's "very, very bad." 
by bobswern
Fri Oct 15, 2010 at 01:10:26 AM CDT
It's all there in Friday's NY Times. The lede atop today's business section of the gray lady tells us: "Mortgage Mess May Cost Big Banks Billions." And, it sure is beginning to look like this was the week when the ongoing U.S. foreclosure fraud crisis pivoted from bad to worse. In fact, while the "retail" side of this matter is what's capturing all the headlines; and, that chapter of the foreclosure mess will certainly cost the banks many billions, the real, "big money" story, IMHO, is about what's slowly (and much more quietly)unfolding in the Wall Street investment community.
I used the word, "unfolding," in the opening graph, but the proper word, IMHO, is "unwinding." (In fact, I think I'll refer to it as "The Great Unwinding.") Because that's what is, apparently, likely to happen as far as our nation's markets are concerned, with regard to Wall Street-issued, mortgage-backed securitizations (MBS'), as well as a significant amount of the paper created, sold and/or held by ourgovernment-sponsored enterprises, a/k/a the "GSE's" (a significant chunk of the many trillions of dollars in mortgages currently held by Fannie Mae, Freddie Mac, et al). Much of it stands a good chance of being "unwound," wherein banks will be forced to take back, and/or provide "refunds" for, significant amounts of paper (a report--see blockquote, below--was widely-circulated on Wall Street on Thursday, indicating that this could cost Bank of America, alone, more than $70 billion) that they had originally sold to investors and the GSE's.
This process could take up to a decade to fully play out, according to one of the quotes in the Times' business lede.
The paper does a better job of explaining this--and Krugman tops it off in his op-ed column, "The Mortgage Morass," today--than I ever could. more

Banksters Lash Out as Wall Street Comes to Realization About Their Exposure
By: David Dayen Friday October 15, 2010 6:15 am 
That’s Josh Rosner on Parker/Spitzer talking about the mortgage bond fraud, which is just a part of all the separate and interlocking frauds performed by the financial industry over the last decade, which is swiftly leading us to a reckoning that could be catastrophic for the second time. L. Randall Wray calls it the biggest scandal in human history, and something he’s been aware of for the past several years.
We have long known that lender fraud was rampant during the real estate boom. The FBI began warning of an “epidemic” of mortgage fraud as early as 2004. We know that mortgage originators invented “low doc” and “no doc” loans, encouraged borrowers to take out “liar loans”, and promoted “NINJA loans” (no income, no job, no assets, no problem!). All of these schemes were fraudulent from the get-go. Property appraisers were involved, paid to overvalue real estate. That is fraud. The securitizers packaged trash into bundles that ratings agencies blessed with the triple A seal of approval. By their own admission, raters worked with securitizers to provide the rating desired, never looking at the loan tapes to see what they were rating. Fraud. Venerable investment banks like Goldman Sachs packaged the trashiest securities into collateralized debt obligations at the behest of hedge fund managers–who were allowed to choose the most toxic of the toxic waste—then sold the CDOs on to their own customers and allowed the hedge funds to bet against them. More fraud [...]
Now we know that it was not just the mortgage brokers, and the appraisers, and the ratings agencies, and the accountants, and the investment banks that were behind the fraud. It was the securitization process itself that was fraudulent. Indeed, the securities themselves are fraudulent. Many, perhaps most, maybe all of them.
The foreclosure fraud is merely the last link in this chain, the final fraud that the banks hoped could get these toxic assets (we didn’t know how toxic) off the books. They got caught. more

Sunday, October 17, 2010

It all comes back to usury

For over three decades, I have had a minor interest in trying to remember what the various large religions have to say about usury.  These days, I am reduced to remembering the teachings of my sliver of Protestantism (Swedish-American Lutheran with an elementary education by Mennonites) and hoping Google will bail me out on the rest.

But one thing is overwhelmingly clear--none of the religions that address the subject of usury likes it one little bit.  The only large exception concerns the Calvinist (Protestant Christian) embrace of usury--and that exception would prove extremely important because the English-speaking world is so culturally Calvinist.

Interestingly, when religions address the subject of usury, they tend to cite a higher authority or consciousness to validate their positions.  Religion, it turns out, is a poor place to turn for understanding about why usury is a bad idea even if there is no God.  That's OK!  Good old pragmatism and sixth-grade arithmetic tells us that usury is a bad idea because it makes economic calamities mathematically certain.

Usury also provides some "well DUH!" moments.  Here's an FDIC paper from 1998 that tracks the rise in credit-card-related personal bankruptcies following the decriminalization of usury in 1978.  Imagine if the same paper were written today!
Bank Trends, March 1998
Number 98-05 Diane Ellis 
(202) 898 - 8978 
The Effect of Consumer Interest Rate Deregulation on Credit Card Volumes, Charge-Offs, and the Personal Bankruptcy Rate
The rising level of credit card debt is often cited as one of the factors in the rising U.S. personal bankruptcy rate. Numerous theories have been advanced to explain the increases, including aggressive marketing by credit card issuers and a lack of discipline on the part of consumers. This paper argues that a 1978 Supreme Court decision ("Marquette") fundamentally altered the market for credit card loans in a way that significantly expanded the availability of credit and increased the average risk profile of borrowers. Marquette ushered in deregulation of usury ceilings on consumer interest rates by allowing lenders in a state with liberal usury ceilings to export those rates to consumers residing in states with more restrictive usury ceilings. The result was a substantial expansion in credit card availability, a reduction in average credit quality, and a secular increase in personal bankruptcies. The Canadian experience with bankruptcies supports this argument. This paper contends that a tightly regulated world, marked by restricted access to consumer credit and a low level of personal bankruptcies was exchanged for a deregulated world, marked by expanded access to consumer credit and a higher lever of personal bankruptcies. This argument implies that a return to the bankruptcy rates and charge-off levels that prevailed in the early 1980s or before may be unlikely.
The Effect of Consumer Interest Rate Deregulation on Credit Card Volumes, Charge-Offs, and the Personal Bankruptcy Rate
The U.S. personal bankruptcy rate has risen to a historically high level, from less than one per thousand population annually in the early 1970s to almost five per thousand population for the year ending September 30, 1997. An increase in outstanding consumer debt, particularly credit card debt, has been cited as a significant contributor to the increased rate of filing. One financial planner was recently quoted as saying, "I've never seen anyone come in with a financial problem that wasn't related to credit cards."1
Aggressive marketing by credit card lenders or a lack of discipline on the part of consumers often are blamed for the increase in credit card debt outstanding. These explanations in essence argue that behavior has changed: that lenders have become more aggressive or borrowers less prudent. Whatever the merit of these explanations, they leave unanswered questions as to when and why behavior changed.
Some industry experts have attributed the increases in credit card debt outstanding and personal bank-ruptcies to changes in marketplace rules rather than changes in lender or borrower behavior. One type of change to the marketplace rules occurred in both 1978 and 1994 when federal bankruptcy law was modified, in part, to increase the level of assets that could be protected in a bankruptcy filing.2
These legal changes, which made bankruptcy a more attractive option for debtors, sometimes are cited as reasons for the rising level of personal bankruptcies. Despite the intuitive appeal of this argument, there is some evidence that changes in bankruptcy laws may not be a primary driver of increases in personal bankruptcy rates. For example, Ellis (1998) provides evidence on the lack of correlation between state homestead exemption rates and state personal bankruptcy rates. Zandi (1997) points out that a similar increase in personal bankruptcies has occurred in Canada without any significant recent changes in the bankruptcy law.
Another significant change to the marketplace rules occurred in the late 1970s with deregulation of consumer interest rates. Both Ausubel (1997) and Rougeau (1996) focus on interest rate deregulation as the event that set the United States on a course of rising credit card volumes. Chart 1 illustrates that the dramatic rise in personal bankruptcies did indeed begin shortly after the Supreme Court's Marquette decision, which initiated interest rate deregulation. This chart suggests a relationship between interest rate deregulation and the increase in personal bankruptcies. The evidence alone is not sufficient to establish a causal relationship; this paper argues that such a relationship exists.
The argument advanced in this paper for the importance of interest rate deregulation as a driver of expanded credit availability and higher personal bankruptcy rates differs from those offered by Ausubel and Rougeau. Ausubel (1997) maintains that borrowers underestimate their use of credit cards and, therefore, the importance of credit card interest rates, which enables lenders to earn an extranormal profit on every good customer. He argues that the extraordinary profits made by credit card lenders have caused them to relax their standards and make credit available to poorer credit risks. Rougeau (1996) suggests that the absence of interest rate regulation allows credit card lenders to pursue unlimited profits by taking advantage of borrowers' weakness and desire to consume, which often reaches an irrational level. more
I am working on the idea of a video that explains why usury wrecks things and should be carefully regulated even IF you don't believe in sky gods and their definitions of sin.  An early attempt can be found at this link.  Yep, that's me in the movie.