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Foreclosure Fraud: We Need to Fix the Banks Again

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By Marshall Auerback, a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator. Crossposted from New Deal 2.0.

It’s time to put the perps of this scandal in jail.

Yves Smith, Bill Black, and Mike Konczal have already done yeoman’s work in seeking to explain the lender fraud scandal in the securitized mortgage market and its possible legal ramifications. Here, I’d like to restrict my discussion to the optimal government response.

President Obama recently used a pocket veto on a bill that would allow foreclosure and other documents to be accepted among multiple states (and therefore make it difficult for homeowners to challenge foreclosure documents prepared in other states). But I worried that this action was not sincere. My concern was that, following the midterm elections, the Administration would eventually come up with some grand “compromise” solution, which would in effect give the banks everything they wanted.

In retrospect, it appears that even that was too favorable an assessment. Per the Washington Post:

The Obama administration does not support a nationwide moratorium on foreclosures at this time, Federal Housing Administration Commissioner David Stevens said Sunday in an e-mail response to questions.

“We believe freezing foreclosures for all banks in all states, whether we have reason to believe them to be in error or not, is simply not the prudent step to take in this fragile housing market,” he said. (Our emphasis)

Banks 1, rule of law 0. In effect, the President is making the argument, “If we penalize people for not following the laws as they existed at the time, it will have really bad repercussions. So everybody gets a mulligan.”

Additionally, the Administration seems to be buying the prevailing spin that the foreclosure problems are merely the product of “sloppy paperwork”, rather than recognizing this disaster as a case of rampant, systemic fraud. That deserves punishment: fines and jail time, not additional government support.

Most of the current administration proposals are misguided because they continue to be based on the twin presumptions that big banks only face a liquidity problem, and that if this problem can somehow be resolved, the economy will recover. This is a fundamentally flawed view. Using any honest measure of accounting, the big banks are insolvent. The latest debacle illustrates that big banks cannot and should not be saved. They do not hold the key to recovery; if anything, their rampant criminality demonstrates that they are a barrier to a sustainable recovery. Since they were given their handouts, they have been working assiduously to resurrect the bubble conditions that led to this crisis. (Not to mention paying out huge bonuses in the process — this year $144 billion, a record high for a second consecutive year, according to a study conducted by The Wall Street Journal.) Your tax dollars at work!

As Randy Wray and Eric Tymoigne presciently wrote over a year ago:

The best approach is something like a banking holiday for the largest 19 banks and shadow banks in which institutions are closed for a relatively brief period. Supervisors move in to assess problems. It is essential that all big banks be examined during the “holiday” to uncover claims on one another. It is highly likely that supervisors will find that several trillions of dollars of bad assets will turn out to be claims big financial institutions have on one another (that is exactly what was found when AIG was examined — which is why the government bail-out of AIG led to side payments to the big banks and shadow banks). There probably are not ‘seven degrees of separation’ — by taking over and resolving the biggest 19 banks and netting claims, the collateral damage in the form of losses for other banks and shadow banks will be relatively small. Government lending, guarantees, and purchases of bad assets will be much smaller if we first consolidate the balance sheets of the biggest players, net the assets, and shut down the institutions. This will help to downsize the financial sector and reduce monopoly power. Moving forward, policy should favor small, independent, financial institutions.

In addition, it will be necessary to increase supervision and regulation of the financial sector. This can start with 3 simple measures, which were suggested to me by Bill Black (who was a long-time S&L investigator):

A. Replace every top banking regulator other than Sheila Bair and the head of the SEC. The regulators have to serve as the “sherpas” for any successful effort to prosecute and prevent frauds — they do the heavy lifting and serve as the essential guides for the FBI. Two of the major banking agencies did zero criminal referrals. None has made putting the crooks in prison even a weak priority. Put new leaders in place who believe in regulating and jailing. End the instructions to regulators to view bankers as their “customers.” The only client is the American people.

B. End the FBI’s “partnership” with the Mortgage Bankers Association (MBA), the perps’ trade association. The MBA has convinced the FBI that the lender was always the victim, never the perpetrator. That’s why, along with regulatory failure, we have no top executives convicted, as opposed to over 1000 in the S&L debacle.

C. The Department of Justice needs new leadership. Do what we did in the S&L crisis. Create a “Top 100″ priority list to ensure that we go after the elite criminals who caused the greatest wave of white-collar crime in world history — and the Great Recession.

And we must get back to a fiscal policy that genuinely helps to sustain job growth and rising incomes — this, in turn, will stabilize the economy. The costs of increased fiscal stimulus are dwarfed by the costs associated with an irrational reliance on monetary policy gimmicks such as “QE2“. Fiscal austerity drains aggregate demand and induces reliance on PRIVATE debt. Today, a large number of Americans still suffer from high private debt levels and correspondingly sluggish income growth. Their ongoing reliance on the banks is becoming the 21st century equivalent of indentured servitude. With higher levels of debt comes higher levels of financial fragility and instability and then economic busts. With recessions we don’t just experience extended losses of income. The accompanying costs manifest in the criminal justice system (rising crime), the health system (rising mental and physical illness), the family court systems (rising marriage and family breakdown), etc. The sum of these costs dwarf all other economic costs. And we should not forget that human lives are destroyed by prolonged recessions — dignity is lost, self-esteem disappears and the children who grow up in jobless households inherit their parents’ disadvantage.

If borrowers can meet their payments, lenders will receive their funds and will return to profitability; there will be less need for future bailouts. A full employment policy is also a financial stability policy. With a fully-employed population, you have consumers able to purchase goods with rising income. If they decide to expand those purchases or increase investment in a business via debt, they are better able to service it because a fully-employed person or a businessman with booming sales is far more able to service his debts, which means less write-offs for the banks and therefore less need for bailouts.

Amazingly, this is not only sensible economics, but also good politics. Yes, there is no question that some borrowers were overextended and probably took on mortgages they couldn’t afford. But to use this as a reason to avoid the issue of fraudulent foreclosures strikes me as a colossal red herring. To be sure, one should not generally support the principle of abrogating loan agreements via strategic defaults, for example. But when the other contracting party is exposed as a rampant predator/fraudster, it changes the moral calculus considerably. If one ignores fraud, or downplays its significance here, it undermines the rule of law, the very basis for modern democracies. What’s the “cost” associated with that? The fiscal austerians and defenders of bailout packages such as TARP (yes, I’m talking to you, Tim Geithner) ought to factor this into their calculations the next time they drone on about what a great “success” these programs have been, based on a bogus measure on how “little” it ended up costing the US taxpayer.

Wall Street bankers turned homeownership into an “investment”, so owners ought to treat it like one — walk away from bad investments. Business people do it every day and no one admonishes them about morality. But if we are going to sanction borrowers for strategic defaults, then it seems wildly inconsistent to avoid the issue of fraud, as well as recognizing that eliminating it (or significantly mitigating it) is the only basis on which we can construct a sound financial system going forward.

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67 comments

  1. Rick Halsen

    M’kay. You know this article all sounds very plausible, near wonderful even. But let me just interject a titch.

    We get to this little wrinkle from Mr. Auerback……..

    “A full employment policy is also a financial stability policy. With a fully-employed population, you have consumers able to purchase goods with rising income.”

    Yup. Sounds real good ya know. In the parlance, even a no-shitter.

    Yup well, well that’s where there’s a little sand in the vaseline it appears. Ya see, we’ve pretty much shipped pretty dang much all the middleclass high-paying jobs to Calcutta. And ya know that since now that we’re predominantly a services (McDonald’s Manager Trainees) and financial engineering (Wall Street Banker derivatives expert) economy, we really got some catching up to do to get that high-paying job equilibrium back without taking any lithium to get there.

    Now I agree, we can and should jail every defrauding little basturd out there. But that still won’t fix the crux of the problem here and unfortunately you don’t have a specific solution either. But hey, who does?

    Reality, Mr. Auerback. Reality.

    But I’ll give ya a B+ for effort with some added homework bonus questions to get it to an A.

    1. Marshall Auerback

      Thank you, Rick. I’ll work very hard to get an A from you in the future, now that you have kindly agreed to be my teacher going forward. Can you provide an email address so that I can send you drafts for preliminary comments? Will you also provide some homework assignments to ensure that I have the proper information to get the coveted A grade from the Halsen Academy?

      1. Rick Halsen

        Your current homework assignment, Mr. Auerback, is to solve the dilemma of how to grow back middleclass incomes (without inflation gimmickry mind you) commensurate with sustaining its current standard of living within an emerging global economy.

        The Halsen Academy will throw its considerable weight towards you being awarded the Nobel Prize if you come up with a plausible solution. I say we just continue your education publically online as you progress in your assignments.

        Resolutely yours,

        Dean Halsen

      2. Doug Terpstra

        Thanks, Marshall: A+. Current conditions require Marshall Law. Halsen is understandably cynical; we all are; you can’t easily rebuild an economy that’s been systematically dismembered, looted and hollowed out over decades. But you have to start where you are, and right now, since investment banksters have abdicated, good government and smart public investment is the only place to start. Right on target.

        One point I don’t understand: Black’s recommendation to replace every top banking regulator ‘“other than” Sheila Bair and the head of the SEC.’ Of course this is all academic, but why not beheadings all around once we establish Marshall law? The SEC seems to be nothing but a Goldman Wall Street protection racket. Didn’t they also just slap Mozilla of Countrywide with a cost-of-business fine, and still no criminal referrals? As someone else asked recently, when did Eric Holder pass away?

    2. TC

      I think Hansel makes a relevant point in basically saying “fiscal stimulus” that effectively is playing into the growing fascist, public-private partnership relationship here in the U.S. is not going to prove an effective means of reversing such decimation of the physical economy as has occurred over many decades, thereby satisfying Auerback’s otherwise laudable, full-employment objective.

      The scale of investment in physical economy required to meet a full-employment goal is in fact of a magnitude that strongly supports resurrection of a Bank of the United States purposed to finance such capital-intensive infrastructure projects whose impact is purposely directed (by Congress) to create a platform assuring dramatic increases in efficiencies conducting commerce. Certainly, the long-term will of the people of the United States that its economic posterity be served by its government would be best affected by an institution practically tending to objectives whose achievement will require a concerted focus lasting decades.

      Were this investment instead treated as a mere, temporary, budgetary expense (as “fiscal stimulus” implies), then its durability stands to be more easily compromised in Congress. Contrarily, were a bank created as a manifestation of the will of the people of the United States that its government be organized in ways that practically lead the nation forward — in this case providing means for financing essential investment in productivity-enhancing infrastructure — then we affect a necessary dynamic whose staying power is more greatly assured.

      I am convinced that, without a national bank, Hansel’s cynicism will prove prescient.

  2. attempter

    These are all fine ideas in themselves, if we actually had a lawful republic (which everyone implicitly admits we don’t).

    On the other hand, if it were possible to do any of these decent reforms, woudln’t it also be possible to just go all the way and solve the problem?

    For example – I like the idea of a banking holiday for the 19 biggest banks and all shadow banks. I agree it would affect mostly themselves and be far less damaging to the real economy than allowing them to stay open. (Which is the same argument we’ve been making since Septomber 2008.)

    So in that case – why make it a “short” holiday? Why not a permanent vacation? Shut them down and never let them reopen.

    The short holiday itself looks impossible under this system, and if things weaken to the point that it becomes possible, then it’ll also be possible with just a modest extra effort to go all the way.

    (That’s true not just regarding the banks but in every other area of policy as well.)

    Wall Street bankers turned homeownership into an “investment”, so owners ought to treat it like one — walk away from bad investments.

    I love the sentiment. Again, why be half-hearted about it? America’s bad investment here goes way beyond just some bad apples committing technical fraud. (The banks say it’s just affidavit sloppiness while reformers say fraud is a much greater problem. That’s true. But from a wider perspective than that, this legalistic fraud is a small part of the much greater problem of an entire system which is nothing whatsoever but organized crime, systemic legalized fraud and robbery – destructive and worthless.)

    1. Rick Halsen

      Hey look man, we gotta have some criminals and criminality running the show for Pete’s Sake. I mean a lot of us are far from being saints and if you close down all the criminal institutions how in the hell is anyone gonna make a living?

      I mean shit man, if we try and turn ourselves into a 330 million person virginal convent here people will just go freakin nuts.

      Reality, man. Reality.

      But look hey the reality is that it’s just gotten outta hand and the pendelum needs to swing back towards the middle – or ya know pretty close to it ’cause like I said we’re just not geared for a life of pious righteousness yet.

      1. DownSouth

        Rick Halsen said: “But look hey the reality is that it’s just gotten outta hand and the pendelum needs to swing back towards the middle…”

        This comment is about as quixotic and divorced from reality as any I’ve ever read on this blog.

        “The pendelum needs to swing back towards the middle,” you implore, as if that happens by magic.

        Well sometimes the pendulum doesn’t swing back.

        Inherent in your comment is the assumption that “the middle” is some natural equilibrium state, that everything always returns to that state.

        Your assumption is false, as any cursory examination of history, or the current situation in Mexico, would demonstrate. Sometimes a new equilibrium is established, one of corruption, lawlessness and brute violence.

        1. Rick Halsen

          “This comment is about as quixotic and divorced from reality as any I’ve ever read on this blog.”

          O yee of unrealistic and somewhat distorted mind. For one thing, we’re not Mexico. At least not yet.

          Now what I mean here of course is that these corrective actions should happen in increments in order to not cause further chaos. Sure we could jail every malfeasing basturd up and down the chain, and sure we could shut down every TBTF financial institution right now, but what would that really accomplish? I can tell you what it would accomplish: complete market turmoil, political mayhem, and disruption of society to the detriment foremost upon the middleclass is what it would accomplish.

          The pendulum return towards the middle even in the face of this current debacle can be swung back incrementally and still accomplish the same thing. From the least disruptive beginning vantage point, we should start from the middle again to see where we are and where we need to go. Look, the reality is if you try and dismantle everything that’s wrong and FUBAR’d too damn fast not only do we cause ripples at home but we damn well can cause tsunamis elsewhere.

          Take Denninger for instance. Now his heart and mind is in the right place but hot damn he wants to obliterate and incarcerate right now everything and everyone. Well ya see that’s just unrealistic – or should I say just a titch too self flagellating.

          Now I will throw this out. The incremental steps to get back to the middle equilibrium vantage point here must start at the state level. The Feds must also get their funding boot off the necks of the states so that the states can enact these incremental changes without willful political suicides (willful political suicide is of course oxymoronic in nature). Again, reality.

          We all agree I think that the rule of law foremost must return in order for markets and social structures to work better than they currently are. How we return to there is almost as important as the end result.

          Prof. Halsen

          1. DownSouth

            We may not be Mexico yet, but if you were calling the shots, it certainly wouldn’t take us long to get there. For if a person were to set out to craft an apology for disaster capitalism, she certainly couldn’t do much better than this little jewel from Professor Halsen:

            Sure we could jail every malfeasing basturd up and down the chain, and sure we could shut down every TBTF financial institution right now, but what would that really accomplish? I can tell you what it would accomplish: complete market turmoil, political mayhem, and disruption of society to the detriment foremost upon the middleclass is what it would accomplish.

            And Professor Halsen’s assertion that “we should start from the middle again to see where we are and where we need to go” sounds like something straight out of Obama’s negotiating book. The intention here of course is to stake out a position in the middle, giving away the middle ground before negotiations even begin.

            And I wouldn’t count on too many NC followers accepting your claim that your beliefs and opinions, which can best be characterized as a mystical journey into some supernatural fantasyland, represent “reality.”

          2. Doug Terpstra

            Indeed. How’s this for timid, tentative incrementalism:

            “We believe freezing foreclosures for all banks in all states, whether we have reason to believe them to be in error or not, is simply not the prudent step to take in this fragile housing market” FHA

            Whether they’re in error or not, we shouldn’t be too hasty about stopping banks from throwing fmailies under bridges. Let’s not insist on the rule of law too quickly here; that might lead to actual investigations, possibly even indictments, and our prisons are already overcrowded from the drug war. It could prove destabilizing to the hallowed market gods.

          3. Rick Halsen

            Downsouth sez….

            “The intention here of course is to stake out a position in the middle, giving away the middle ground before negotiations even begin.”

            Who the hell said that? I didn’t say that. You obviously don’t understand politics, and pretty much don’t understand what it takes to govern. If you want to get things done you govern from the middle. Does that make you some kind of a despot? No it makes you a smart politician. Something you don’t know about because you’re obviously not that smart. You’re one of those “it’s my way or the highway” types. Well it isn’t realistic in a republic such as ours, ok?

            Get off your know it all diatribes and learn something from the pros.

          4. DownSouth

            Rick Halsen,

            Perhaps nowhere does the defactualized world you live in become more manifest than in your illusory self identity image.

          5. Rick Halsen

            Downsouth….

            Blind altruism will cause you great disappointment. Things are not the way you want them to be in the world. That sentiment however does not change reality. It is you that is in an altenative universe probably borne from not enough time on the streets, too much time studying from books and watching tv, and sipping cafe lattes with snooty intellectuals at the local Starbucks.

            Just because it ain’t the way you want it or think it should be doesn’t mean the ways things work will change overnight to accomodate your vision of perfect utopian ethical harmony.

            RH

  3. purple

    One wonders what the rationale is for a private banking system when it can’t perform its core function of effectively allocating capital.

    1. Richard Kline

      So purple, the core function of a bank is to make its stockholders money. The ancilliary function of a bank is to allocate capital. The core function will never be jeopardized to advance the ancilliary function, whilst the ancilliary function will be instantly suspended if it jeopardizes the core function. This is a salient reason why banks must be closely regulated. Best to call a spade a spade, methinks.

      1. Hubert

        Objection, Richard:
        The real core fuction of a bank is to get money out of it those ruling the bank; in most cases this is management. And if accounting control fraud is de facto legalized or simply disregarded (LEH, Citi, ML, AIG, Countrywide and a dozen more of them) they will take out salary, bonus, stock options, escort services- whatever. The stockholders are bagholders, camouflage to the whole enterprise.

        1. DownSouth

          I’d just add one more little twist.

          The legal protections in existence for stockholders are in reverse correlation to the proportion of stockholders that are little people, i.e. 401(k)s and pension plans.

      2. Anonymous Jones

        Ah, one of the rare times I have a quibble with Richard! Banks are chartered and subject to specific regulations because they are not supposed to be run like other institutions.

        What I mean to say is yes, the core function from the perspective of the *shareholders* of the bank is to make money. But there is a preliminary step *before* there are any shareholders (and any *bank* for that matter), and that is the chartering by the sovereign (or regulator appointed by the sovereign). From the perspective of the sovereign, the charter is granted on the premise (or at least arguably *should* be granted on the premise) that the bank use this special right to help allocate capital efficiently before focusing on any other shareholder needs.

  4. Glen

    Good post.

    Very disappointing performance by President Obama. I still don’t understand his end game:

    The President that presides over the corruption and destruction of America?

    The President that finally crushed due process, property rights and the rule of law?

    At first I thought Obama was going to end up being a Democratic Herbert Hoover. Now, I’m not so sure, but he seems to be shooting lower than that. Sort of a pathetic place in history.

    1. Richard Kline

      So Glen, Obama is on par with James Buchanan, with only Andrew Johnson, Warren Harding, Dubya Bush, and John Tyler below him. My bet is that Obama slots between Harding and Bush, but he could end up snuggling against Tyler. I don’t think Barack has the willful gumption it takes to reach that level, though: he lacks the ambition to exceed.

      1. Koshem Bos

        He excels in the oral tradition and the “we want to have a beer with this guy.” (long forgotten metric in presidential elections.) We have no excuse; he was the weakest candidate in the primaries of 2008. As the biblical husband of bat Sheva did: we walk and cry.

    2. guttersnipe

      Obama was rushed up through the ranks to Prez so fast that he learned nothing and gained no experience at governing rationally, if that was the intention. His election to Prez was anti-climactic, he achieved the brass ring but didn’t know what to do with it. Now we have to suffer through the full term with an incompetent, lying boob at the helm and at least two years of insufferable progressive dems controlling congress at a watershed moment in US history. The outcome cannot be good IMHO.

  5. Paul Tioxon

    There is a general strike planned for the entire United States. The Chamber of Commerce has declared a moratorium on the economy and withdrawn its capital. The uncertainty of the future due to a Democratic President with 67,000,000 votes and now, health care reform, nationalization of the student loans for college and an increase in Pell grants, no one making $50k/yr paying taxes, finreg and a Liz Warren led Consumer Protection Agency, democratic upgrade of union certification elections, withdrawal on schedule from Iraq, 99 weeks of unemployment benefits, 2 women appointed to the Supreme Court, Why, at the rate this guy is going, pretty soon we’ll be talking about real money, and that dog just don’t hunt from where they’re seeing things. The $2Trillion in cash currently on strike is being parked in a hedge fund specializing in going short against democratically controlled republics around the globe. Check back for more info in November.

    Meanwhile, capitalism still dying, Wall St still looking for a replacement for pools of subprime mortgage loans or synthetic CDOs. Let’s fix the banks, that’ll solve the problem.

    1. readerOfTeaLeaves

      Great comment.

      And:

      To be sure, one should not generally support the principle of abrogating loan agreements via strategic defaults, for example. But when the other contracting party is exposed as a rampant predator/fraudster, it changes the moral calculus considerably. If one ignores fraud, or downplays its significance here, it undermines the rule of law, the very basis for modern democracies.

      It certainly appears that certain parties are shorting democracy. And dismissing rampant fraud as a ‘mere liquidity problem’ is just a pr move to cover the short.

      The rule of law is required only when property records and documentary evidence of ownership are actually expected to be valid. But in a world where the key levers of government parrot out terms like, “It’s a liquidity crisis”, forgeries are the new standard. Rule of law is expendible, as it apparently conflicts with the newFraudulentWorld OS.
      Bummer.

      1. attempter

        I don’t know what was great about the fraudulent recapitulation of Obama’s scam “achievments”, some of them like Iraq “withdrawal” not just fraudulent spin but flat out lies. (Even the AP refuses to go along with the lie that the US doesn’t continue to engage in combat in Iraq.)

        Just more despicable shilling and bootlicking.

        As for the quote, it’s morally correct that we owe nothing to a criminal and have the right to any and every self-defense action. But just to clarify:

        1. There’s no such thing as a “strategic default” for the non-rich. Even if one can afford to pay this month, the way our economic position is being liquidated no one can vouch with certainty for being able to pay next month. Anyone is always right to take that top-down-imposed, criminally generated, uncertainty into account.

        2. Walking away does not abrogate any contract. It’s exercising an option as per the contract. We’ve been through that a million times already, and I’m surprised Auerback remains ignorant of such a basic fact.

        1. Paul Tioxon

          Well Holy Moley, don’t corporations have a fiduciary responsibility to make money, increase share holder value and generally try to stay in business? It seems that the classic prosperity formula of reinvesting profits to expand the enterprise, bring on new personnel to handle the expansion and take over a greater share of the market is not happening. Why would a perfectly profitable business not follow the tried and true? What other interests would it be protecting or pursuing if not the profit motive?

          Hmmmm, could there be a political struggle going on that supercedes the fiduciary obligations? HMMMM? Could it be that the US Government under Obama is now actually, if only minutely, paying attention to the general welfare as well as the common defense? And that every penny going out the door to benefit citizens is not going to subsidize the special interests? It is clear from the signs at tea party protest, funded by radical capitalist terrorist networks, that some are calling it socialism. Well, in a republic, the very name means (res publica) the things of the public. That’s a socialist description of the formal social order of a nation that benefits its people, as opposed to a kingdom, owned by a monarch, that is, his to rule and hold dominion over for as far as the eye can see or the sun never sets upon, which ever is larger and more profitable.

          So, whenever a politician calls for change, or having hope and offers up even the tiniest of morsels to the people, he is taking food off of the plate of the business interests. And they fight back, like the Koch Brothers, and Mellon-Scaife and the financial backer of Glenn Beck, Huntsman, his fellow gold hoarding Mormon.

          Well, lets get back to contracts, because as we all know, bad people should not get away with breaking their contractual obligations, of course, unless they do a cost benefit analysis and find that it is more profitable to do so. In that case, break the contract, take the hit, it’s cheaper to do that some times. You know, the first loss is the best loss and it is a rational decision to cut your losses before the burn rate leaves you with nothing but ashes. It’s called bankruptcy. And, it’s perfect legal. I say, CALL FOR A NATIONAL DEBT CARTEL LEADING TO A CLASS ACTION BANKRUPTCY! 20 MILLION AMERICANS STRAPPING CHAPTER 7 DOCS TO THEIR CHESTS AND SETTING THEM OFF AT THE SAME TIME. VIVA EL LIQUIDACION!

  6. killben

    “Wall Street bankers turned homeownership into an “investment”, so owners ought to treat it like one — walk away from bad investments. Business people do it every day and no one admonishes them about morality”

    This is what I have been repeating all along. Enmasse strategic default. See how the government quivers. But this can be deferred now.

    Just ask Bank to produce the note! better still get together get a bunch of good lawyers and go for the jugular of the banks!

  7. Demented Chimp

    Its at this point i throw in the towel. Im going to New Zealand buy 10 acres of land, raise sheep, grow some crops ,put up a mini wind turbine. For an anglo saxon its the best lifeboat available.

    See ya

    1. wintermute

      Right on. I already have a property there. It is one of the last bastions of capitalism with a welfare element that works. Even the government has Austrian economists in positions of power.

      The general thrust of Auerback’s article is that the rule of law must prevail in the US. Obama is a lawyer himself and he knows the difference between sloppy paperwork and fraud. He knows fraud is rampant! He just finds it easier to send 20,000 men to Afghanistan to get shot up than to send the FBI to round up the top 100 US banksters and slap them in chains for the TV cameras. The latter is far far more important for the whole future of the country.
      It must be done now – before the Nov elections.

  8. F. Beard

    Not one word about loan forgiveness or a general bailout of the population? What part of “government backed counterfeiting cartel in the government enforced monopoly money supply” is so hard to understand?

    Debt forgiveness was commanded in the Old Testament even before fractional reserve lending in a government enforced monopoly money supply was invented. The need is even greater now.

    Fractional reserve lending has wrecked the entire economy including the banks but all could be fixed too by:

    1) Abolishing fractional reserve lending in the dollar.
    2) Sending every American adult a nice big fat check of new debt and interest free legal tender fiat sufficient on average to pay down every American mortgage to current market prices TIMES from 2-7 since that is Bible’s penalty for theft.

    After that we need genuine, fundamental reform in money creation including abolishing legal tender laws for private debt and the allowance of private currencies.

  9. Mike

    I remember when Enron happened and the national soul-searching that happened in its wake. The government always seemed a step behind the Worldcoms and the Tycos, but we gave them the benefit of the doubt. After all, what chance did the government have against such corporate amorality? They promised us they’d be more vigilant, and we moved on.

    But now it’s clear that government is either too small or too corrupted to rein these robber-barons in. And I really have no idea what they’re going to do. What kind of half-assed Commerce Clause justification are they going to put forth to try and paper over the violations of 50 different bodies of law? The sheer nerve of these banks is just staggering to me.

  10. Darby Shaw

    In practical terms, the American Homeowner has a simple problem: leverage.

    The fact of the matter is not only have the banksters triggered an economic Armageddon, their actions have reeked havoc for tens of millions of Americans (nay, hundreds of millions), destroying lives, wreaking homes and killing dreams, they have effectively backed nearly every homeowner in a inescapable corner. They simply refuse to even consider modest modification attempts let alone principal reductions (which is where the solution lay) or any other effective redress.

    As I see it, the ONLY leverage that a homeowner is to simply not pay their mortgage. It is the ONLY tool left in the toolbox.

    If an effort was brought forth to establish what would amount to a de facto union of american homeowners that could then apply collective strategies such as a “mortgage payment strike”. Coupled with what will certainly be a huge increase of defaults anyway, it could theoretically bring the entire banking system to its knees, thus enabling the citizens of this country to do what our imbecilic leadership and government cannot: Create a stick big enough to fix this goddamn mess.

    1. DownSouth

      Let me repeat that, since it certainly merits repeating:

      As I see it, the ONLY leverage that a homeowner is to simply not pay their mortgage. It is the ONLY tool left in the toolbox.

      If an effort was brought forth to establish what would amount to a de facto union of american homeowners that could then apply collective strategies such as a “mortgage payment strike”. Coupled with what will certainly be a huge increase of defaults anyway, it could theoretically bring the entire banking system to its knees, thus enabling the citizens of this country to do what our imbecilic leadership and government cannot: Create a stick big enough to fix this goddamn mess.

      The means are non-violent. And as the theologian Reinhold Niebuhr stated, “Non-violence is essentially non-cooperation.” Originally developed by Gandhi, non-violence played a key role in India gaining its sovereignty, in bringing down the centuries old race-based regime of the United States and in prostrating the Soviet Union and its satellite regimes in Eastern Europe.

      Jonathan Shell, who in The Unconquerable World thoroughly reviews the history and theoretical underpinnings of nonviolence, puts it this way:

      The similarities between the Eastern European movements and Gandhi’s movement in India are obvious. If there were evidence that Havel had pored over Gandhi’s works, we might suppose that his phrase “living in truth” was an inspired translation of “satyagraha”—-a term so different to render into other languages. In both movements, we find a conviction that the prime human obligation is to act fearlessly and publicly in accord with one’s beliefs; that one should withdraw cooperation from destructive institutions.”

      1. DownSouth

        Darby, another quote from Schell you might find interesting:

        What Michnik called a new evolutionism or building civil society Havel called “living in truth”—-the title of an essay he published in 1978. Living in truth stood in opposition to “living in the lie,” which meant living in obedience to the repressive regime. Havel wrote:

        “We introduced a new model of behavior: don’t get involved in diffuse general ideolgical polemics with the center, to whom numerous concrete causes are always being sacrificed; fight ‘only’ for those concrete causes, and fight for them unswervingly to the end.”

        Why was this living in truth? Havel’s explanation constitutes one of the few attempts of this period—-or any other—-to address the peculiarly ineffable question of what the inspiration of positive, constructive nonviolent action is. By living within the lie—-that is, conforming to the system’s demands—-Havel says, “individuals confirm the system, fulfill the system, make the system, are the sytem.”

        1. SidFinster

          L.N. Tolstoi corresponded with Gandhi when Gandhi was forming his ideas.

          Tolstoi expressed his thought in the form of a moral imperative: “Do not live by lies.”

  11. Darby Shaw

    To add to my previous thought, this would force the banks to capitulate to an agreeable outcome of sort of reaffirmation of debt (If the homeowner has clean title he could certainly agree to terms he found acceptable, a certain amount of principal reduction, 30 year fixed rate at a lowered rate etc.)The reestablishment of title would seem possible assuming the homeowner was willing, in exchange for a hold harmless for future claims. Of course this doesn’t address other issues related to the securities side, but would be a starting point nevertheless.

  12. Patrick

    Over time folks will come to realize what a very few of us said more than two years ago–the best plan is no plan. Had Bush and company not bought into Paulson’s hysterics about the system “collapsing” the banks, in an effort to survive when faced with no bailouts etc, would have ate their own and settled these issues amongst themselves. Instead we are left with the Krug’s and Frank’s of the world making policy.

    We will be printing money until the ink runs out.

  13. F. Beard

    We will be printing money until the ink runs out. Patrick

    Not necessarily. Just abolish fractional reserve lending, bailout the victims of it, the general population, and reform the money system.

    Or not and risk a catastrophe.

    What is it said about the “wheels of justice”?

  14. Sufferin' Succotash

    As for the Old Testament requiring debt forgiveness, check this out from one of the founders of Athenian democracy:

    As a statesman, Solon put principles before expediency. Elected chief magistrate in 594 B.C., he was given special powers to deal with the emergency brought on by civil war. The war had arisen mainly because of the oppression of the poor by the rich, who were entitled under the existing laws to tie some bankrupt debtors to the land and exact a sixth part of the produce (hence the victims were called hectemoroi, “sixth-parters”) and to sell others into slavery. Solon canceled all debts. He freed the land and those tied to it, and he purchased the freedom of those who had been enslaved. He enacted new laws of debt which were the same for both groups. “The laws I passed were alike for low-born and for high-born; my aim was straightforward justice for each.”

    Question: do we have to have a civil war before we can have a Solon?

  15. Jose L Campos

    A good deal of the present day confusion flows from the fact that we live under an incipient communist state where the ruins of the previous system have not crumbled completely. Therein the notion the debt will have to be paid, that our grand children will inherit our debt. That is far from reality, public debt will not be paid, government will continue making efforts to “create jobs” that is offering an income for everyone. Some as is natural among mortal men will receive a greater income than others, some will be loaded with honors.
    Most everyone is a rent seeker nowadays. Consider the car companies. They have the usufruct of a monopolistic system. the populace must have cars and it must purchase them . The car companies may contend among themselves but the contention is about the usufruct of the monopolistic system. Housing likewise, the State provides the final monopolistic financial basis.
    We are living a transition and we don’t know it yet. The State is in charge of everything from job creation or ” facilitating” the job creation, providing pensions, providing medical care, subsidizing universities, promoting bee keeping and corn growing, mandating the quality of gasoline and so on. The State is everywhere. We have entered into this system and there is no escape.
    There is a dialectic about this process.

    1. DownSouth

      You misdiagnose the core problem.

      The core problem is not that “the state is everywhere,” but whether the state can be made to deliver some reasonable level of justice and fairness.

      Of course those who assume it is impossible for the state to deliver some reasonable level of justice and fairness conclude that “the state being everywhere” is the root problem and, instead of toiling to improve the state, seek to eliminate or at a minimum greatly curtail the state.

      This sort of theorizing emanates from both the extreme right and the extreme left. The communist thinker Engels is a perfect example. He imagined that if only the institution of property could be done away with, mankind could return to the state of original innocency—-one of idyllic harmony with “no soldiers, no gendarmes, no policemen, prefects or judges, no prisons, laws or lawsuits.”

  16. Schofield

    So OK aggregating the comments we have a despotic state and despotic capitalism so maybe we should just combine the two into crony capitalism. That way we can stop fighting each and start fighting the common enemy the United States of Crony Capitalism.

  17. heather

    Individual land rights is as old as the magna carta, this democracy and capitalism is based on this.

    Banks have obligations as well. Fiduciary responsibility and due diligence is part of the deal. Period. If a mafia butchers son is running the show then mafia rules are in play not the Queensberry rules.

    My experience is that at every step of the way my actions in good faith were met by abusive, sadistic bullies which is not a political position but psychological illness. Calling a mental illness a political party or in any way equating this to capitalism only confuses the issue. Its like calling Mugabe an entrepreneur.

    It is also my personal experience that there vast inequalities in the banking system as they exist right now that arose because of a subversion of legal rights. In a nutshell the bankers sought to change the system but forgot to go through congress.

    If reduced to an argument on capitalism all transaction between individuals are a social contract. The rules of the game are agreed on as long established societal rules that have developed over a long period of time to accommodate individuals not with competing needs but a common goal. Both are at the table because they want something from each other. Negotiation is to establish the rules of the contract.

    What happened to the banking industry is that Tony Soprano decided to go legit. A number of individuals with little or no education decided to subvert the rules. They found loopholes. Because they are sociopaths used confusion and obfuscation and a lack of transparency to disguise their illegal activities. There are no tyrants without victims. The majority of homeowner’s believed for far too long that abusive lies.. It’s no accident that the first victims were individuals who had long been used to abusive behavior, the underdogs in society, the immigrants, the blacks, the women. What is the biggest refrain of the bankers? They made us give them the loans. Men who abuse their wives say the same thing. They made me do it.

    What is at play here is not the rules of the business contract but simple abuse of power. This was never about a business transaction because those are easy. I give you x in return for y. Done. Forgotten about. Move on. What is at play is systemized sociopathic behavior. Sociopaths don’t understand rules, but act as if they do. Sociopaths are incapable of establishing long term goals. Its all about right now. Even the most die hard Palinesque individuals if they were capable of thought would realize that throwing millions out of their homes and arming them with assault weapons is a plan that would not end well. Not good social policy. But these people are not thinking about the larger good but instant gratification.

    What we need to realize is what we the homeowner are dealing with. These are bullies who cave at the first sign of resistance. We the homeowners are meekly getting on the trains because we think we are dealing with individuals who are playing by the rules. They are not.

    We the homeowners have a lot of power at our disposal. We have communication. We also have the rule of law if we use it. We have shown in the past that telephone calls, fax machines, emails, and the blogosphere are incredibly powerful and if we need to we can stand our grand because we were given in Florida incredible rights if we believe we are being threatened in our own homes. The biggest threats to those individuals are not the crazies in the streets but being met with reasoned thought and argument. Bullies are bullies because they only have one weapon in their arsenal. Humor is especially effective because that required a level of intelligence that they never will attain.

    We need to regain our personal power and stand up to these bullies. We can stop paying our mortgages. We can stop giving them more weapons to use against us. We can realize that these bullies are never going to play by the rules of the game ever. Quit participating in the silly HAMP modifications because when you get to court the bully judge will not care. The bully judge will not even look at your file. We need to stand up for ourselves and trust me they will cave. Like the parasites they are they need us to survive. We need to recognize like the abused housewife must that no matter how their abusers cry and say they will change, and try to scare us some more they will never change. We won’t get fooled again. What the economy will collapse? It has already collapsed. I guess no one told them. I can live on food stamps. My job is already gone. Everyone else I know is living like me. So they are afraid of a little discomfort? Mama never thought they were good enough. Well guess what; they aren’t.

    1. Jackrabbit

      That’s a powerful call to action. I think there are many many people around the country that are thinking about their own personal experience with “the system.” The foreclosure fiasco has opened a possible means of redress to those who feel wronged and disenfranchised.

    2. readerOfTeaLeaves

      What happened to the banking industry is that Tony Soprano decided to go legit. A number of individuals with little or no education decided to subvert the rules. They found loopholes. Because they are sociopaths used confusion and obfuscation and a lack of transparency to disguise their illegal activities.

      Well, it appears that you and I have drawn similar conclusions.

      Which is why, in my case (after initially supporting Geithner, et al), I now find it disgusting and contemptible to see them hand-holding what appear to be mafiosa. Ditto the courts, who are basically doing the mafia’s work at this point.

      I’ve not dealt with foreclosure issues, but rather with identity theft.
      You are absolutely right in stating that these people do not play by ‘the rules’ that someone like myself assumed were in place.
      I also agree they are short-term thinkers, which inevitably makes them behave expediently.

      All the more reason to emphasize your ‘personal empowerment’ theme.
      It is neither reasonable, nor healthy to let bullies make the rules. Ever.

    3. Eclaire

      “We the homeowners are meekly getting on the trains because we think we are dealing with individuals who are playing by the rules. They are not.”

      Whoa, Heather! Those two sentences sent shivers down my spine.

  18. Bernard

    there is no way the System will allow itself to be “changed.” The Banksters/Obama/Congress et al are “winning” by playing the System. The sociopaths won.

    other than by non cooperation i can’t see any other way for the House of Cards to fall down. Feeding the Monster will only keep it alive and eating us. i gather we must be somewhere in the beginning of the crash. the momentum hasn’t started to take the System/Banksters/Congress down yet. i don’t know what the Fall of the USSR was like, but i imagine there are parallels there.

    to watch Obama use the pocket veto of this bill and then say the foreclosures must continue means this 11th dimensional Chess game is well under way. Obama is doing his part in what is necessary to play the game of consolidation on the American taxpayer, or what is left of them.

    what i do gather is the rule of law is over. that is frightening, totally. the basis for American capitalism has changed. that is what is occurring before our eyes.
    the rule of men over the rule of law. The Lord of the Flies society is what we are devolving into.

    144 billion in bonuses? reading that was enough proof that we are no longer a society but a collective mass run by a few. with all the idiots in America, i can see how similar this is to the Weimar Republic. Obama will go down in history, if there is someone there to write it.

    Isn’t America great! or what?

  19. mario

    “This will help to downsize the financial sector and reduce monopoly power. Moving forward, policy should favor small, independent, financial institutions.”

    What an absurd idea… for operating in global markets. Sounds like a fantasy doom scenario.

  20. Eric L. Prentis

    Hurray for Marshall Auerback and Eric Tymoigne. Yes! Yes! Yes! lets institute a “bank holiday.” The sooner insolvent banks go through resolution, focusing on writing off bad debt, the sooner the economy can begin a real recovery. Absent that, like Japan, a lousy economy is in store for the US over the next 20 years. Also, the longer this bank insolvency problem is put off, the larger the eventual economic crash becomes. Lets at least stop the bankers from paying themselves a record $144 billion dollars in compensation this year, all based on cooked books. In addition, stop Bernanke’s QE2 madness, now! Where the hell are the politicians.

  21. Pearl

    President Obama did veto H.R 3808 when it was realized that a pocket veto could have been skirted by some sort of legislative procedure. He added an addendum which clearly stated his intention to veto the bill. (That happened late on Friday, October 8.) I do not completely understand what the addendum did–perhaps it was in between a pocket veto and a full veto–but closer to a full veto. (Would sure like clarification, however, if anyone has it to offer!) I don’t think our President is pro-bank at this point. And I think a lot of Congressmen and Congresswomen who are still pro-bank–will not be pro-bank once they wake up and smell the coffee. I think the big banks are toast–and they’ll be the last to notice.

  22. Brian Longley

    I must point out that it is not fair to name Yves, Bill and Mike as the ones having “started” this. The people on the front lines in Florida began bringing fraudulent documents to the attention of attorneys and other parties 3 to 4 years ago. Neil Garfield has been posting information about this fraud for years. Attorneys like Jeff Barnes and Matt Weidner, Ice Legal, Stopa, April Charney and others have actually brought this to light for almost everyone.
    If I hadn’t started following this 3 years ago via the people in Florida, I would never have heard of it.

    And let us not forget, blame is hard to nail down. But proof is as elusive. Why not assume that due to the bailouts directly to the bank, and to the bank via insurance, that every loan was paid off regarding the obligation. Not that it wasn’t already via securitization where the note resides in multiple REMIC’s.

    My lying eyes couldn’t believe it at first either. Then it became overwhelming, then it became obvious.

  23. ep3

    I am sorry author, but you are obviously clueless and in dreamland. That corporatist Obama would never do something like this. And the powerful elite would not let it happen. They have all the systems set up so that any resistance by us common people will result in our being treated like “terrorists”. And there are just enough stupid common folks that would go along with such a plan that it would be used effectively for the elites. So after millions live in complete poverty and our cities collapse and we live in a fascist militaristic apocalyptic hell, eventually we have another small revolution and the cycle starts over.

    1. freepressmyass

      Terrorists is right. Anyone interfering with commerce is now a terrorist. One of the fascist goodies in the Patriot Act.

      A few months ago, a handful of people were arrested as terrorists for holding a peaceful protest against a coal mining company poisoning their water from mountaintop removal. Forget about our rights. All of them are now arbitrary to the whims of the ruling class.

      Our only hope is the rest of the world. They are sick of our shit, and freaking that Ben is set for another round of QE. It’s gonna be payback time, folks. They’re gonna cut the dollar loose. I’m looking forward to watching all the scum sucking sociopaths who caused our demise to come crashing to the ground crying about injustice.

  24. libarbarian

    Now, I better understand why the Roman peasants followed Caesar and, 400 years later, let the barbarians sack Rome. What the hell do we have to gain by defending a system that offers NOTHING to us?

  25. Bagger McGee

    Couldn’t our elected officials revisit cramdown? (And the Tea Partiers could revisit the streets saying they won’t pay mortgages for losers, even though they paid for the Bank “losers”)

  26. Vesta

    A guy from the M$M is predicting that they will paper this thing over and push a “law” through to legitimize what these criminals are doing with foreclosures. Another bailout, in other words.

    http://www.cnbc.com/id/39686897/

    Let’s get off our asses and do what they’re doing in France right now. I also like the idea of what others mentioned about dropping out of the game: strategic defaults.

  27. Scott

    My biggest single complaint about MMT is that diagram that shows the treasury and the central bank connected. I propose that the central bank’s number one priority as represented in the US is to protect the big banks and that connection in the model is a farce. MMT takes advantage of the relationship between the central bank and the treasury and glosses over the fact that the Fed is private. It’s funny to see Marshall get heated about QE because in his model, the central bank is just a repository, not the actor. In the real world model, the actor is the Fed and not the government.

    Marshall, do you advocate ending the private-public relation between the central bank and the treasury in place of a unitary system of central bank and treasury? If that were true, we would not be bitching about QE and could go fiscal and have our deep pockets to back it without having to worry about the big banks. Just wondering as if this is where MMT is going, I need to know.

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