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)
(And my favorite comment about this vicious nonsense. 
Austerity like cutting back on wars, war contractors, departments of surveillance, and military bases. Remove tax breaks for those who take salary in the form of dividends like hedgefund managers who only pay 15%. Invade the Caymans and end offshore banking whose only purpose is to evade taxes. End - cold turkey - the obscene auction in Washington. If we are going to have representative government, it must be free to represent. If it is just going to sell itself to special interests, then let the special interests pay for its upkeep. They don't work for us, why should we support them? Finance is a tax on us all. Shut it down, including the FED. Sure it will be a nightmare, but what we've got is a nightmare. The only difference is that if we bankrupt the bankers, we'll have a better life and economy to look forward to.
Tar. Feathers. Pitchforks.)
This is more than a failure of an economic paradigm, in order to make finance capitalism even APPEAR to work, the players eventually turned to naked fraud.
This Administration Still Doesn't Have A Clue About The Foreclosure Crisis
Bill Black, Benzinga | Oct. 19, 2010, 9:30 PM |Bill Black is Professor of University of Missouri-Kansas City.
Sheila Bair, who has chaired the Federal Deposit Insurance Corporation (FDIC) since her appointment by President Bush on June 26, 2006, has been the only top federal banking regulator willing to upset the industry she regulates. Reuters reports on her less than vigorous reaction to the disclosure of endemic foreclosure fraud.
"We have been told that this is a process issue - that all of the information is in the file, the problem is the person who needed to sign the affidavit had not been looking at the file before they'd done so. So we need to independently verify that," Bair said.
"Foreclosure is a very serious thing and it should only being undertaken after loan modification efforts are not feasible. And that the files are fully documented."
In addition, Bair urged banks to do "rigorous internal analysis" about the range of possible risk exposures.
"We need to get a full handle on all of these issues," she said. "If it turns out this is just a process issue then I don't anticipate the exposures to be significant.
"If it turns out to be something more fundamental then we'll have to deal with that. But I think we need to get all the information before we jump to any conclusions."
It does not appear that Ms. Bair, or any senior official in the Obama administration, has focused on the fact that it has been standard operating procedure, for several years, for lenders, CDO holders, and courts to “jump to any conclusion” necessary to foreclose on homes regardless of whether the loan was fraudulently induced by the lender and regardless of whether the entity foreclosing on the mortgage engaged in foreclosure fraud. more 
Not surprisingly as a past bank regulator, Black think we must come down hard on the crooks.
Foreclose on the Foreclosure Fraudsters, Part 1: Put Bank of America in Receivership
William K. Black and L. Randall Wray
Posted: October 22, 2010 02:08 PM
After a quick review of its procedures, Bank of America this week announced that it will resume its foreclosures in 23 lucky states next Monday. While the evidence is overwhelming that the entire foreclosure process is riddled with fraud, President Obama refuses to support a national moratorium. Indeed, his spokesmen on the issue told reporters three key things. As the Los Angeles Times reported:
A government review of botched foreclosure paperwork so far has found that the problems do not pose a "systemic" threat to the financial system, a top Obama administration official said Wednesday.
Yes, that's right. HUD reviewed the "paperwork" problem to see whether it threatened the banks -- not the homeowners who were the victims of foreclosure fraud. But it got worse, for the second point was how the government would respond to the epidemic of foreclosure fraud.
The Justice Department is leading an investigation of possible crimes involving mortgage fraud.
That language was carefully chosen to sound reassuring. But the fact is that despite our pleas the FBI has continued its "partnership" with the Mortgage Bankers Association (MBA). The MBA is the trade association of the "perps." It created a ridiculous on its face definition of "mortgage fraud." Under that definition the lenders -- who led the mortgage frauds -- are the victims. The FBI still parrots this long discredited "definition." That is one of the primary reasons why -- in complete contrast to prior financial crises -- the Justice Department has not convicted a single senior officer of the large nonprime lenders who directed, committed, and profited enormously from the frauds. more
Foreclose on the Foreclosure Fraudsters, Part 2: Spurious Arguments Against Holding the Fraudsters Accountable
William K. Black and L. Randall Wray
Posted: October 24, 2010 11:53 PM
Our call for closing down control frauds and stopping the foreclosure frauds typically meets with three objections. First, it is claimed that while there were some bad apple lenders, much of the fraud was committed by borrowers. Our proposal would let fraudulent borrowers remain in homes to which they are not entitled, punishing the banks that were duped. Second, the biggest banks are too important to foreclose. And third, it is not possible to resolve a "too big to fail" institution.
Who is Guilty?
Let us deal with the "borrower fraud" argument first because it is the area containing the most erroneous assumptions. There was fraud at every step in the home finance food chain: the appraisers were paid to overvalue real estate; mortgage brokers were paid to induce borrowers to accept loan terms they could not possibly afford; loan applications overstated the borrowers' incomes; speculators lied when they claimed that six different homes were their principal dwelling; mortgage securitizers made false reps and warranties about the quality of the packaged loans; credit ratings agencies were overpaid to overrate the securities sold on to investors; and investment banks stuffed collateralized debt obligations with toxic securities that were handpicked by hedge fund managers to ensure they would self destruct.
That homeowners would default on the nonprime mortgages was a foregone conclusion throughout the industry -- indeed, it was the desired outcome. This was something the lending side knew, but which few on the borrowing side could have realized. more
Bank Holiday is Best Solution for Epidemic of Mortgage Fraud
by L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute.
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.
Indeed, the largest financial institutions were run by their management as what my colleague Bill Black calls “control frauds”. That is, the banks used accounting fraud to manufacture fake profits so that they could pay huge bonuses to top management. The latest data out on Wall Street bonuses show that these institutions are still run as control frauds, with another record year of bonuses paid by cooking the books. The fraud continues unabated.
This is the biggest scandal in human history. Indeed, all previous scandals from around the globe combined cannot even touch this one in terms of scale and scope and stench. This is the mother of all frauds and it will be etched into the history books for all time.
Many have called for a national moratorium on foreclosures. Even some of the banks that have been run as control frauds have voluntarily stopped foreclosing. And yet President Obama, ever the centrist, has taken sides with the Securities Industry and Financial Markets Association, which warns that “it would be catastrophic to impose a system-wide moratorium on all foreclosures and such actions could do damage to the housing market and the economy”.
No, it would expose the securities industry, itself, as the chief architect of the biggest scandal in human history. more
While Black would call the gendarmes, James Galbraith has some other ideas that are at LEAST as valid.
James Galbraith: What Obama Could Do Now
Jamie Galbraith responds to the question: What can Obama do now, without the need of 60 votes in the Senate, to address our current problems?
  1. The President should announce that cuts in Social Security and Medicare benefits are off the table for the lame-duck session, and thereafter. He should point out that the mandate of the Bowles-Simpson Commission, which is published on their web-site, did not authorize it to opine on the finances of the Social Security or Medicare systems. For this reason alone, should the Commission include recommendations to cut Social Security benefits (such as by increasing the nominal retirement age) for the alleged purpose of maintaining balance in Social Security finances, the President should urge Congress to refuse to take up such a recommendation.
  2. The President should name a commission of independent experts to recommend within three months concrete steps to reduce unemployment significantly by 2012 — that is to say, practically immediately — including jobs/investment programs and steps to reduce the size of the labor force, including through work-sharing, increased vacation time, more attractive early retirement under Social Security and access to Medicare at a younger age.
  3. The President should direct Jacob Lew, Director of the Office of Management and Budget, to suspend the use of the present baseline macroeconomic forecasts and to impanel a commission of inquiry into the models and methods underlying medium-range forecasts, to best determine how those models and methods should be modified (a) to take account of the experience of the financial crisis, and (b) to correct major inconsistencies and mutually improbable assumptions in the long-term forecasts.
  4. The President should name Damon Silvers to the position shortly to be vacated by Larry Summers. more
And while USA is obviously not Iceland, we have here a discussion of how they would address their major property / bank meltdown.
Here's Why Massive Mortgage Write-Offs Could Be The Only Way To Save Iceland's Middle Class
Dian L. Chu, Economic Forecasts & Opinions | Oct. 23, 2010
The Icelandic financial crisis has been ongoing since 2008 when all three of the country's major commercial banks collapsed after they failed to refinancing their short-term debt and a run on deposits in the U.K.
In July, I talked about how Iceland is totally not a post-crisis miracle as Paul Krugman claims, but just how are things now with Land of Fire and Ice?  
Some of the scary economic figures, courtesy primarily of the plunging Icelandic króna: 
Inflation has soared 41 percent from January 2007 through September this year (see screen print from Bloomberg)
Real disposable incomes slumped 20.3 percent last year
Real wages fell 10.1 percent from the beginning of 2007 through August this year
63 percent of the nation's mortgage is underwater
40 percent of homeowners are "technically insolvent"
$2 Billion Mortgage Write-off - Who Will Pay?
Bloomberg (clip below) reported that Iceland government last week proposed a debt relief bill to write off up to 220 billion króna ($1.99 billion) in mortgage loans. This is after about 8,000 protesters gathered outside parliament demonstrating their anger over rising homeowner insolvencies. 
Most of Iceland’s mortgage debt is inflation-linked. So, what that means is that the principal has gone up 41% in three years, while everything from wage, income to real purchasing power has gone the opposite direction.
This debt relief sounds all nice and dandy, but the problem is a write-down of almost $2 billion is equivalent to about 8 percent of total assets at Iceland’s three biggest banks, their 2009 balance sheets show. 
Moreover, Iceland’s pension funds, which hold most of the bonds behind the nation's mortgage debt, said they will try to block proposals. If the banks are forced to take a flat write-off, the government most likely will need to cover the loss of pension funds, i.e. taking on more debt. more

Iceland to Present Legislation to Wipe Out Personal Debt
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