naked capitalism

It’s pretty remarkable that Mr. Market shrugged off the devastating implications of the amended lawsuit filed by the Nevada attorney general, Catherine Masto against various Bank of America entities. As we’ve stated before, litigation by attorney general is significant not merely due to the damages and remedies sought, but because it paves the way for private lawsuits.

And make no mistake about it, this filing is a doozy. It shows the Federal/state attorney general mortgage settlement effort to be a complete travesty. The claim describes, in considerable detail, how various Bank of America units engaged in misconduct in virtually every aspect of its residential mortgage business.

The case argues on two tracks: it seeks to overturn the legal shield provided by a 2008 consent decree with Countrywide, since, in simple terms, Countrywide and BofA have flagrantly disregarded it. The case argues a separate series of claims, based on the same fact set, in case the consent decree is deemed to be operative.

The complaint describes abuses from the very outset of the securitization process: how borrowers were mis-sold mortgages (it describes how entire products were effectively predatory), how investors were misled as to their quality, how they were not conveyed properly to securitization trusts, how borrowers were subject to abusive servicing (as in charged improper and impermissible fees), how promises made under the old consent decree regarding mortgage modifications were violated (for instance, even though interest rate reductions were promised, instead modifications often resulted in HIGHER interest rates), and the filing of fraudulent paperwork to execute foreclosures.

Nevada vs Bank of America 2nd Amended Complaint

The reason Mr. Market may not be too excited is that Nevada is not a very large state, and the civil penalties may not seem that terrible ($5000 per violation or $12,000 for elderly or disabled borrowers). But an individual loan can, and likely does, have multiple violations. The suit also seeks restitution, costs for wrongful foreclosures, plus the cost of damage to municipalities and homeowners from unnecessary vacancies (I think the last, although the damages could be huge, would be hard to quantify and therefore would not be likely to be included in a major way). Note that an AG victory on the issue of wrongful foreclosure would pave the way for private lawsuits, and here the damages would be massive, particularly if state law or precedent allows for penalties (as we’ve noted, Alabama has statutory tripe damages for wrongful foreclosure, and recent rulings have had applied penalties in excess of nine times).

And aside from the potentially significant damages to result directly and indirectly from this action is that it makes several important arguments. First, the filing has a long discussion of why the damages redound to Bank of America and not Countrywide. Nevada isn’t the first to argue that Bank of America is on the hook for Countrywide liability; bond insurers have made this case in rep and warranty cases. (Keep in mind that some of the liability, for instance, for Bank of America servicing, is properly Bank of America’s).

Note that some (including Bank of America itself, via its now almost certainly dead $8.5 billion mortgage settlement) have taken the position that really, the problem is limited to the old Countrywide operation. By implication, Bank of America could put the old Countrywide into Chapter 11 and its damages would presumably be limited to the net worth of the entity at the time BofA bought it. BofA paid a bit over $4 billion, which was a smidge under 1/3 of reported book value, so if that line of reasoning were applicable, then the Charlotte bank could be asked to stump up at most a bit over $12 billion (note that BofA may have engaged in fraudulent conveyance, but that would not change the math if this theory held water). The case argues long form that some of the misconduct was carried out by Bank of America, and in other cases, that activities perpetrated by the old Countrywide have effectively been assumed and perpetuated by Bank of America. This may explain the mystery of why Bank of America hasn’t put Countrywide into Chapter 11. If this argument is largely correct, the liability cannot be isolated to Countrywide.

Second is that the case argues (as we and other have) that Countrywide on a large scale, perhaps pervasive basis, failed to convey its mortgage loans properly to the securitization trusts. Per Adam Levitin:

[T}he Nevada AG came out and alleged a securitization fail. The NY AG moved in this direction in his BNYM settlement action intervention, but was a little more oblique on that point. The Nevada AG minced no words:

Bank of America misrepresented, both in communications with Nevada consumers and in documents they recorded and filed, that they had authority to foreclose upon consumers' homes as servicer for the trusts that held these mortgages. Defendants knew (and were on notice) that they had never properly transferred [text redacted] these mortgage to those trusts, failing to deliver properly endorsed or assigned mortgage notes as required by the relevant legal contracts and state law. Because the trusts never became holders of these mortgages, Defendants lacked authority to collect or foreclose on their behalf and never should have represented they could.

Notice that this section focuses on the implication for homeowners – that the foreclosures were fraudulent, but Paragraph 53 points out the implications for investors:

Countrywide did not disclose to investors that it failed to properly transfer the mortgages to the securitization trust from which they were sold…..This means that investors would not have an enforceable or secured interest in the mortgages.

Ouch.

The third important issue the case highlights is how servicers charge abusive and impermissible fees. The embarrassing part here, from the standpoint of Federal regulators and the “see no evil” state AGs is that this evidence is in the public domain, via US Trustee actions in four states. We’ve said repeatedly that servicer-driven foreclosures are much more widespread that is commonly acknowledged; foreclosure defense attorneys say the consist of 50% to 70% of the cases they represent. But as we have also indicated, it is too costly to fight foreclosures on those grounds (chain of title is much easier to prove), so this problem goes largely unrecognized. This is a perfect area for state AGs and the FTC to pursue, so we hope Masto’s effort wakes up some of her colleagues.

Dave Dayen discusses the implications for the state attorney general settlement negotiations. He points out that the failed Nevada consent decree with Countrywide is the very sane template that Tom MIller and the Federal regulators were using in their negotiations:

The question looming over the entire enterprise was whether the states could ensure vigorous enforcement…. And apparently no AG but Catherine Cortez Masto has actually investigated whether or not BofA kept their promises. Turns out they haven’t…

Knowing this, seeing it fully documented in Nevada, how could there still be any negotiations on a settlement with the same people? The negotiation should be about whether there will be a public or private perp walk for BofA executives….

Do you think Tom Miller, who wants a foreclosure fraud settlement in the worst way, is going to bother to check to see if BofA managed to actually give Iowans the loan modifications they promised? Of course not. And he’s likely to bully all the other states in the Countrywide agreement to shut up about how that settlement was basically unenforced, because people would get the message that this new settlement would go the same way.

He must have got to all of them, but not Masto. And she has ruined his best wishes, not to mention the best wishes of Bank of America. They are denying any wrongdoing and still claiming that “the best way to get the housing market going again in every state is a global settlement that addresses these issues fairly, comprehensively and with finality.” Bullshit. The best way to restore the housing market, the rule of law, and faith in the American system is by rounding up criminal enterprises masquerading as banks.

Now as bad as this sounds, the underlying issue is likely worse. Believe it or not, Countrywide was considered to have the best servicing operations in the industry, bar none. That was the reason Bank of America was salivating to buy that garbage barge.

Now some of the wreckage in Countrywide servicing is likely to be due to poor merger integration and cost cutting (Bank of America is a very cost driven bank). The lawsuit depicts both how mortgage servicing staff is undertrained and even when they are trying to help customers, are prevented by management from doing so (they are held to time per call restrictions that make it impossible for them to do much that is useful).

In other words, it would be bad enough if the servicing mess were, like the abusive Countrywide origination, the result of a deliberate effort to take customers at virtually every turn. Instead, this looks like an operation that might have functioned adequately in servicing current loans that is inherently incapable of servicing a portfolio with a high level of delinquencies. In a way, this should be no surprise, since they are completely different activities. You can service performing loans on a factory basis: high volume, highly routinized. Delinquent loans, by contrast, are high touch: they require more employee latitude, and therefore completely different staff and training.

And remember: Bank of America is the biggest servicer in the US. This case illustrates that its servicing is badly, hopelessly broken. The other major servicers are likely to be no or not much better.

How are we going to fix the housing market through a hopelessly broken servicing apparatus? This is a fundamental policy challenge that the Administration and its cronies among the bank toadying state AGs are trying to sweep under the rug. But the utter incompetence of Bank of America and its peers means that even the coverup and the remedies will fail, and in all likelihood too quickly and visibly for the political enablers to escape the blowback. The Administration seems not to have learned this fundamental lesson from the embarrassment of HAMP or the more recent revelation that banks are still engaging in robosigning despite their pious promises otherwise.

But it is likely to learn its lesson the hard way. Tom Ferguson’s research showed that housing values were strong predictors of votes for Scott Brown. The Obama Administration’s unwillingness to discomfit the banks and come up with real solutions to the housing mess will simply feed “vote the bums out” sentiment at the ballot box.

In case you doubted that America needs more progressive taxation, the case in its favor has just been made in a study, “Executive Excess 2011: The Massive CEO Rewards for Tax Dodging,” by the Institute of Policy Studies (hat tip readers aet and Vlad via the International Business Times). The report found that the CEOs of 25 major companies paid themselves more than their companies paid in Federal income taxes. Exhibit 1 on page 31 names and shames them (well, assuming they are capable of shame), and they include John J. Donahoe of eBay, Robert Coury of Mylan Labs, Jeff Immelt of GE, and Robert Kelly of Bank of New York. The New York Times article on the report elicited some not-convincing rebuttals.

Note that this was 1/4 of the 100 companies with the highest reported CEO pay. Perhaps it’s time to restrict the total pay over a threshold level to all C-level execs to a percentage of Federal income tax payments?

The summary also notes the increasing disparity between average worker and top executive pay, with the multiple of 263 in 2009 rising to 325 in 2010.

The report debunks the idea that the pay reflected superior performance in any arena other than tax avoidance (note that other studies have found that CEO pay is negatively correlated with performance):

What are America’s CEOs doing to deserve their latest bountiful rewards? We have no evidence that CEOs are fashioning, with their executive leadership, more effective and efficient enterprises. On the other hand, ample evidence suggests that CEOs and their corporations are expending considerably more energy on avoiding taxes than perhaps ever before — at a time when the federal government desperately needs more revenue to maintain basic services for the American people. This disinvestment also undermines the infrastructure and services that small and large businesses also depend upon.

Investigative journalists and tax research organizations have been documenting how U.S.-based global companies are aggressively shearing — and even totally eliminating — their federal income tax obligations. This past March, for instance, The New York Times traced the steps General Electric has taken to avoid U.S. corporate taxes for the last five years. Citizens for Tax Justice, as part of a forthcoming study on tax avoidance among the Fortune 500, has identified 12 corporations that have paid an effective rate of negative 1.5 percent on $171 billion in profits.

The study includes a table showing how much the 25 companies targeted spend on political contributions and lobbying. It also cites an idea presented here at Naked Capitalism by Doug Smith, that of a maximum wage:

From Doug’s post:

So, be it proposed:

“That any enterprise receiving taxpayer funds shall not compensate that enterprise’s highest paid person in an amount greater than twenty-five times what the lowest compensated person receives.”

First, note that this proposal would not apply to enterprises that do not receive any taxpayer funds.

For those, however, receiving bailouts, deposit insurance, government guarantees, tax breaks, tax credits, other forms of public financing, government contracts of any sort – and so on – the top paid person cannot receive more than twenty-five times the bottom paid person. This ratio, by the way, is what business visionary Peter Drucker recommended as most effective for organization performance as well as society. It also echoes Jim Collins who, in his book Good To Great, found that the most effective top leaders are paid more modestly than unsuccessful ones. And, critically, it is a ratio that is in line with various European and other nations that have dramatically lower income inequality than the United States.

Note, second, that this identifies the top paid person – not the CEO. Even though outrageous CEO pay and its ill effects on severe income inequality is much in the news, CEOs are not always the highest paid person.

Third, the proposal uses a ratio – 25-to-1 – instead of an absolute dollar figure. If a taxpayer funded enterprise wishes to pay the top person, say, $50 million, they can do so: just as long as the lowest paid person receives $2 million. In other words, instead of today’s limitless top wage being supported by taxpayer money – that is, socialism for the rich and only the rich — this proposal is equitable toward all.

Fourth, the choice of compensation is made by the enterprise – not by government officials.

Fifth, this approach to the maximum wage dramatically benefits the economy through some blend of more job-creating investment by the enterprise (through deploying higher retained earnings), and/or more consumer spending, savings and investment because of increased take home pay (and/or shareholder dividends) for the many instead of the few. It would, for example, immediately provide stimulus to restart our heavily consumer-driven economy.

Sixth, this proposal is competitively neutral: all enterprises using taxpayer funds must abide by the same 25-to-1 ratio of top-to-bottom compensation. In most industries, competitors respond to opportunities similarly; that is, if there are government opportunities, all try to take them and, if there are no such arrangements, none do. Nothing changes except the uses to which taxpayer funds get deployed as compensation. The new maximum wage rule levels the playing field for all competitors.

Nor, seventh, would this proposal have any adverse effect on the market for talent. Again, all enterprises are subject to the same rules. Moreover, there’s never been any – zero, zilch, nada – evidence that top pay correlates with sustained enterprise performance. Indeed, quite the reverse. Which, again, is why Drucker, Collins and others all note that talent and performance are not correlated to income inequality-levels of executive pay. The more likely result is the opposite: the maximum wage ratio will put enterprises using taxpayer funds on a better, sounder path to performance than those who don’t use taxpayer funds!! Meaning, of course, that such enterprises will attract the talent they need – not the talent they do not need.

Eighth, this proposal can and should be enacted by all federal, state and local jurisdictions that provide taxpayer funds to enterprise. And, of course, with the appropriate inclusive definitions of ‘compensation’ (salary, wages, bonuses etc) and “person’ to avoid cheating and evasion.

Ninth, enforcement will be inexpensive. Enterprises would be required to submit just two numbers to the appropriate tax authority: the highest and lowest compensation figures. If the ratio is in excess of 25-to-1, the offending enterprise will be given a simple choice: claw back the top earner’s compensation to the appropriate level; or, within, say, 30 to 45 days, pay all of the lowest earners the required amount; or, a combination of the same steps needed to bring the enterprise in line with the maximum wage rule. (If deemed necessary, generous rewards to anonymous whistleblowers could support monitoring and compliance efforts).

Tenth, and finally, remember that we’re talking about OUR MONEY. It’s not the ‘government’s money”. It’s OUR MONEY. And we insist that enterprises wishing to be funded and/or compensated and/or insured and/or tax advantaged with OUR MONEY abide by the maximum wage in order to reduce destructive, economy killing and unhealthy income inequality. When publicly funded companies operate within the 25-to1 maximum wage band, we all benefit.

It is the free choice of free enterprise whether or not to use OUR MONEY. If you are part of an enterprise and wish to pay anyone, including yourself, more than today’s all-too typical extreme, greater than 300 times the lowest wage earner, go ahead.

But do not use OUR MONEY.

Hopefully this study will provide more impetus to efforts to reform the corporate tax code and executive compensation. As we’ve discussed at length in earlier posts, the modern public company is an excellent vehicle for looting. Public shareholders are too weak and too transitory to have the means and motivation to curb the rent extraction by the executive group and the board.

Still having to do most of my posting at Starbucks, although the Internet was up at the house this evening. Keep your fingers crossed…

Freedom For Yvonne, Germany’s Runaway Cow: Search Is Called Off NPR (hat tip Buzz Potamkin). The sheep that escaped a slaughterhouse and ran down the FDR some year ago was immediately sent to a petting zoo (in Manhattan, it’s rather hard for a sheep to go missing for very long). Wonder why it took the Germans so long to give her a break.

Friendly Bacteria Cheer Up Anxious Mice Scientific American (hat tip reader Robert M)

Why the U.S. Isn’t Ready for Single Payer Yet Health Care Organizational Ethics (hat tip reader Francois T)

Adult children’s ‘bad mothering’ lawsuit dismissed McClatchy (hat tip Buzz Potamkin)

A Privately Owned Nuclear Weapons Plant in…Kansas City? Mother Jones (hat tip reader May S)

Japan’s life expectancy ‘down to equality and public health measures’ Guardian (hat tip reader May S)

Search engine data a useful predictor of stock returns: study PhysOrg (hat tip reader Robert M)

News International appoints lawyers to review papers’ practices Financial Times (hat tip Buzz Potamkin). Looking into The Sun, NOTW etc; but it’s not going to be the most massively independent enquiry ever conducted, is it?

‘Sleeping gas’ thieves target super-rich at Italian billionaires’ resort The Guardian. Or it’s just hangovers; we’ll know for sure if they inadvertently suffocate some plutocrat.

Keith Ewing: The Sound of Silence – Human Rights, the Rule of Law, and the ‘Riots’ UK Constitutional Law Group (hat tip Richard Smith)

Shocking new details of US STD experiments in Guatemala Guardian (hat tip Buzz Potamkin)

Homelessness could spread to middle class, Crisis study warns Guardian (hat tip reader May S)

Dick Cheney Shoots Former Colleagues in the Face Technorati Politics

Hurricane funds reignite US budget debate Financial Times

Tax us more, say wealthy Europeans Guardian (hat tip reader May S)

Bernie Madoff living in ‘alternate reality’ with no blame for losing $50bn of other people’s money Daily Mail (hat tip reader May S)

Chart of the Day: Consumer Confidence Ed Harrison

Struggling with a great contraction Martin Wolf, Financial Times

Vince Cable: disingenuous bankers are trying to derail reforms Guardian.

George Osborne and Vince Cable at war over bank reform Independent. The ICB report, on reforming UK banking, is due to be published on 12th September, so this ferrets-in-a-sack wrestling, inside and outside government, is getting more conspicuous.

Grandma Bunks With Jobless Kids as Multigenerational Homes Surge Bloomberg (hat tip Buzz Potamkin)

Analysts scale back US earnings expectations Financial Times

Exclusive: Bank of America kept AIG legal threat under wraps Reuters

Here’s The Bomb That Might Blow A Hole In Bank Of America… Business Insider. Henry piling on again.

ANDREW BREITBART ATTACKS EXILED EDITOR MARK AMES!…HIRES FAILED TEABAG REPUBLICAN TO INVESTIGATE THE GREAT “WHO IS JOHNNY CHEN?” CONSPIRACY Exiled

The Election March of the Trolls Chris Hedges (hat tip reader furzy mouse)

How the RBA Undervalued Housing Macrobusiness on dubious statistics.

Antidote du jour:

By Matt Stoller, a fellow at the Roosevelt Institute. He is the former Senior Policy Advisor to Rep. Alan Grayson. You can reach him at stoller (at) gmail.com or follow him on Twitter at @matthewstoller

The elite consensus in American politics is held together by a small group of well-paid and well-connected insiders who are marbled throughout the world of corporations, banks, government service, and elite nonprofits. Who are they? And what do they believe?

One way to start is to look at who is being recruited to attack Eric Schneiderman, the liberal New York Attorney General going after the big banks. Normally these people stay behind the scenes, but in this case, we’re getting a nice peak behind the curtain. The best example so far is Kathryn Wylde, the chief of the nonprofit Partnership for New York City, a big bank/corporate-funded lobbying group that advises political officials on how to build a more business-friendly New York.

Wylde, importantly, sits on the Board of the New York Federal Reserve as a Class C Director, the group that is supposed to represent “the public”. Yet, after Schneiderman got into a contentious legal fight with Bank of New York Mellon over foreclosure fraud, the bank literally referred reporters to Wylde for her comment. She even went so far as to confront Schneiderman at a funeral. Because she’s a director of the New York Fed, her actions reflect on the Fed. Let’s start there. Wylde is appointed, and can be fired, by the Federal Reserve Board in Washington, DC, according to Section 11(f) of the Federal Reserve Act (these Board members are Ben Bernanke, Janet Yellen, Elizabeth Duke, Dan Tarullo, and Sarah Bloom Raskin).

Should she be fired? Let’s look at the facts. Wylde is subject to this restriction in the Federal Reserve Act.

“Class C Directors as Employees or Stockholders of Banks No director of class C shall be an officer, director, employee, or stockholder of any bank.”

The odds are high that she owns mutual funds or bank shares. She made $466,000 last year. Unless she has profligate spending habits, or is unusually risk averse, she probably has a decent sized investment portfolio, and if she invested along orthodox lines, a chunk of it would be diversified holdings of domestic stock, which would have to include bank shares. The NY Fed is pretty sloppy about its ethics issues. For instance, former NY Fed class C director and ex-Goldman co-chariman, Steve Friedman, bought Goldman shares while privy to and probably influencing Fed “save the bank” efforts in early 2008. Eliot Spitzer pointed to clear conflicts of interest regarding Jeff Immelt. You’d expect the Federal Reserve Board in DC to put a stop to this, but so far, it has allowed Wylde to continue in her role.

Wylde’s open opposition to New York attorney general Eric Schneiderma’s objecting to a proposed $8.5 billion Bank of America mortgage settlement appears to run afoul of these NY Fed bylaws.

“As a Reserve Bank directorship is a form of public service, directors also must limit their participation in partisan politics. Specifically, directors should not engage in any political activity or serve in any public office where such activity or service might:

associate the Reserve Bank with any political party or partisan political activity;
raise questions as to the director’s independence and ability to perform the duties of his or her position with the System; or
bring embarrassment to the Reserve Bank or the Federal Reserve System.

She’s violated these quite clearly. Meddling in the work of a law enforcement officer is obviously embarrassing and risks the independence of the system. That Bank of New York Mellon is openly referring reporters to her shows that she is not operating independently, or even on behalf of the public. Whether that’s a firing offense is up to Bernanke and company.

Just checking into Kathryn Wylde’s background shows that she’s a standard issue Rubinite who wants to sell out America to bankers and Chinese elites. As head of the Partnership for New York City, she went after unions by attacking education expert Diane Ravitch (aligning her with Obama Education Secretary Arne Duncan to complement her alliance with HUD Secretary Shaun Donovan). Wylde opposes a living wage for New Yorkers, as well as paid sick leave. Not letting employees go home when they are sick is unsanitary, dangerous and authoritarian. These positions are literally pro-poverty.

But nothing screams “I represent America” like this post of hers.

Within a generation, the U.S. will no longer be the world’s largest economy. Partnerships with foreign-controlled businesses and investors will be more important than ever. China will be larger and is already the most important market for U.S.-based international businesses. Chinese leadership is fed up with U.S. policies and politics that discourage foreign investment in business and real estate, at the same time their country is holding much of our national debt.

Locally, New York is trying to counter this negative sentiment by supporting investment by one of China’s largest real estate companies in five floors of the Freedom Tower that is being constructed on the World Trade Center site. The Beijing-based Vantone Group will develop a 200,000 square foot business and conference center designed to encourage business ties between the two nations and to house the Western headquarters of Chinese companies that are going global.

And let’s be clear – Wylde is excited that this deal is approved by the Communist Chinese government, which is explicitly trying to reduce America’s wealth and power. And this woman is on the board of the New York Fed representing the public. So there you have it. If you feel like American multinationals are too warm and fuzzy for your tastes, you have Kathryn Wylde out there representing you at the New York Fed, making sure that Chinese multinationals are waiting in the wings to take over for them. That, of course, assumes there is anything left worth having in the US once the big financial players are done with their looting.

By Philip Pilkington, a journalist and writer living in Dublin, Ireland

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.
– John Maynard Keynes

In our previous piece on profits we showed how profits ultimately come from investment. There we saw that whether this investment was from the government sector or from the private sector mattered little (once again we leave out the external sector for the sake of simplicity). Either way it was the key factor determining profits.

We also saw that this entire system was rather fragile and prone to breakdown. If either sector chose to curtail its investment at any given moment the results would be a chronic deflationary spiral, mass-unemployment and bankruptcies. In this piece we will take another, slightly more theoretical look at this inherent instability.

(It should be noted that very little of what follows will make sense to anyone who has not read the previous piece. Not only will we be referring directly to this piece as an example but knowledge of the dynamics inherent in that argument must be fully understood for what follows. If you are unfamiliar with the previous piece or feel that you may not be wholly comfortable with the argument, I implore you to read over it [again]).

It was quite surprising that at least one commenter on the last piece claimed that my criticisms of Paul Samuelson – allegedly a member of the Keynesian old guard – were off the mark. After considering it a little I came to the conclusion that the commenter must have meant that Samuelson, since he was in favour of deficit spending during times of economic downturn, must then have somehow been aware of the dynamics I put forward in that article (this even though neither he nor his co-author thought it necessary to explain these to students in their textbook). What’s more, if this was true the same could then be said for my relationship to certain other pseudo-Keynesians running popular blogs at the moment advocating fiscal stimulus – notably Brad DeLong and Paul Krugman.

These are very dubious arguments. If they were true and if Samuelson and other neoclassicals (yes, I consider Samuelson a ‘neoclassical’, see: previous piece) recognised the dynamics I am here trying to highlight I would have simply stopped typing by now and redirected the interested reader to their nearest economics department. I obviously do not believe this – in fact I believe that many of these departments engage in something akin to brainwashing or cult-induction – and so I hope that what follows will, among other things, highlight the difference of this approach with that of the mainstream.

With that caveat we will now take a look at these problems through the lens of the historical ideas that gave rise to the contemporary neoclassical doctrine – and those that ran against them.

The Strange Case of M. Jean-Baptiste Say

Most people who are familiar with economic theory have heard at some point of a doctrine called Say’s Law. The simplest elaboration of this rather unusual piece of dogma is that supply creates its own demand. So, if the capitalist on the imaginary wizard island that we studied earlier were to hire workers to produce bread, the demand for this bread would always already be there – presumably out of the wages that the workers receive.

Perhaps we should quote M. Say in the original just to ensure that we are not misrepresenting him:

It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (A Treatise on Political Economy, Book I Ch. XV)

Well there it is in black and white.

So why do we say that this is such a strange doctrine? Readers of the last piece should have the answer tickling the top of their tongue: there’s no place for profits in this formulation!

Say was no market socialist. He was a follower in the footsteps of Adam Smith and a firm believer in capitalism. And yet if we take his formulation seriously there is certainly no room for the capitalist in search of profit. Say’s market actor – at once producer and consumer (an artisan?) – wants to offload his product as soon as he possibly can at a fair market rate. But then he also seeks to offload the money he receives for this product as quickly as possible in exchange for a new product that he can then consume.

We said in the last piece that mainstream economic theory is an ‘ideology of truck and barter’. Well, here it is in a nutshell. Any theory that implicitly assumes a Say’s Law-dynamic must scrub out the capitalist in search of profit from the theory and carry on as if we are a society of bartering artisans mediated by money. At multiple points this fallacy rears its ugly head in neoclassical theory – such as when mainstream economists must admit that profit is a transitory phenomenon; but we will not go into this here. The key point is that Say’s Law gives a picture of an economy of barter wherein the barter is undertaken through the medium of money. I give you the commodity I made; you pay me; I then carry the money to market and spend it all on another product; and so on.

When looked at in this fashion we can see why economists require the myth of money simply replacing barter as demolished by economic anthropologist David Graeber in a recent Naked Capitalism interview. This is, in a sense, the ‘founding myth’ of all classical and neoclassical economics. First men barter; then they invent money to lubricate their barter and make it easier – and it is from there that market socialism capitalism comes from.

Modern mainstream economists, when they are aware of the foundations of their theories at all – a rarity among this breed of ahistorical dogmatists – now refer to this fragment of their belief-system as ‘Walras’ Law’.

Walras’ Law is simply a rearticulation of the same article of faith by another zealous Frenchman. It states the same thing as Say’s Law but gives it mathematical form. Walras’ Law essentially says that all excess manifestations of supply or demand, be they positive or negative, must net to zero.
Does that sound sophisticated? It isn’t. It’s just a restatement of Say’s Law in jargonistic language that can then be formalised into a mathematical theorem (ΣXD = ΣXS = 0). This in turn can be used to impress mainstream economists who, as we all know, secretly dream of being mathematicians, physicists and other higher-order life forms.

So we’re back once again to our market socialist capitalist society in which everyone is simply trading amongst themselves without ever giving a thought to turning a profit. Money, in this wonderland, is simply a means of facilitating barter between comrades citizens.

Of course, this is not even remotely close to grasping how a capitalist economy actually operates. For that we need to begin with Marx. Ironically enough, while the neoclassicals continue to expound their vision of a market socialist utopia, it was Karl Marx – the father of Communism – that gave the world its first glimpse of the true functioning of a capitalist economy.

Money… More Money! MORE MONEY!

To say that Karl Marx was not fooled by Say’s Law would be a vast understatement. Marx was a dynamic theorist and understood that history was not to be thought of as a perfectly balanced phenomenon. Say’s Law, on the other hand, was the embodiment of a static society completely at odds with the capitalism Marx studied. For Marx – as for the capitalist – the driving force of a capitalist economy was profits.

But Marx detected Say’s Law running deep in the veins of classical political economy – an intellectual movement that included the figure of David Ricardo whom Marx admired so much. Reading Say’s Law into the writings of Ricardo, Marx writes:

This childish babble of a Say is not worthy of Ricardo. In the first place, no capitalist produces in order to consume his product. (Theories of Surplus-Value, Ch. XVII)

A rather obvious criticism when you think about it. By definition a capitalist is not one who produces in order to consume his product; he is one who produces in order to accrue profit.

From this simple observation Marx paints a rather different picture of a capitalist economy. He puts forward the equation:

M—C—M’

When translated into English that reads:

Money—Commodity—More Money

The capitalist invests money in order to create a commodity that is then sold on for more money. This is how the capitalist accrues profit.

Consider the capitalist on the magical wizard island we looked at in the last piece. He plunges borrowed money into the creation of a bread factory. After this he hires workers to bake bread in the factory and sell it on. But he only does this in order to get profits. As we say in that example, when profits were diminished – due to a lack of investment – the capitalist began to haemorrhage money fast – due to his not being able to finance his interest payments.

Of course, this is precisely what occurs in a capitalist economy. But it cannot be accounted for in the balancing act that is Say’s Law. Instead the capitalist is portrayed as a disequilibrating element that throws society off balance and into motion. And indeed, isn’t this exactly how the entrepreneur is portrayed today? As an innovating agent rather than a static clone? Needless to say, if he were actually caught in the system sketched out by the neoclassicals he would find himself suffocated with more violence than in even the most stagnant bureaucracy. But this is to return us to the point made in another piece that neoclassical theory, far from an ideology of individualism, is, in actual fact, a highly deterministic and conservative doctrine designed to freeze evolutionary movement and preserve the status quo. But for God’s sake don’t tell Maggie Thatcher!

The Metaphysician in Marx: An Unfortunate Historical Non-Event

Marx was close to establishing the truth of the capitalist system. Very close. But he stumbled. This was probably due, at least in part, to his ideological convictions.

Marx asked himself wherefrom the capitalist derived his profit and came to the conclusion that it must be from the worker. Marx, like Ricardo before him, believed that all value came from labour; that is, the blood, sweat and tears of workers. We might find this a convincing argument from a moral perspective – after all, doesn’t the worker do all the work? Or we may not find it a convincing moral argument at all – is that to say that the capitalist literally does nothing? But whether this is morally convincing or not it is, in essence, irrelevant to understanding the processes of a capitalist economy.

Michal Kalecki – whose theory of profit we studied in the last piece – called the idea that profit somehow came from the labourer ‘metaphysical’, and he was right. Marx should have forgotten for a moment abstract questions about where so-called ‘value’ came from and instead looked a little harder at his equation:

M—C—M’

If he had he might have noticed that at a macro-level the profit (M’) in fact must have come in some sense from the original outlay – that is, the investment (M).

In the last piece we saw that this is precisely the conclusion that Kalecki came to. He showed how all profit comes from investment. We also showed that a constant stream of investment is necessary in a capitalist economy in order for profit to continue to be accrued. (Remember that when the capitalist stopped paying his builders to work – i.e. investing in their labour – they became unemployed and the economy was threatened with massive deflation. It was only because the government stepped in with new investment capital that the economy continued to operate efficiently and bankruptcy was avoided).

Some Consequences of a System in Disequilibrium

What we have quite clearly laid out above is a picture of a system in a perpetual state of disequilibrium. This is where we rub up against the sore spot of those neoclassicals – such as Samuelson – that call themselves Keynesians. Our model – which is without doubt to be found in Keynes, indeed he credited Marx’s M—C—M’ equation as fundamental in a 1933 draft of the ‘General Theory’ – is one that is almost always off-balance; always waiting for that next hit of investment; like a junkie on the verge of withdrawal waiting for a fix.

This is not a model in equilibrium where everything flows nicely and demand automatically cancels out supply. If the investment process is interrupted at all the result could be a deflationary depression. There are numerous reasons why the investment flow might be interrupted; reasons such as uncertainty about future expectations or a Minskian collapse of the financial architecture (both of which we will explore in later pieces – and which do not tally with neoclassical/New Keynesian babble at all).

New Keynesians, following on from Samuelson, try to veneer over this fundamental uncertainty, together with the importance of debt-relations, by employing the IS-LM model – a garbage-in garbage-out abstraction that its own inventor, John Hicks, referred to as nothing more than a ‘classroom gadget’ which he thought should only be used for didactic purposes (a practice I would advise against). The IS-LM and its successor seek to turn Keynes’ theories into a policy toy by integrating a Say’s Law dynamic. In this New Keynesians like Samuelson, DeLong and Krugman are able to maintain their market socialist worldview while recognising the very real need for government spending. (Krugman almost broke his own spell once but quickly retreated back into neoclassical fantasy land).

We will explore the triggers might that set off an implosion in a capitalist economy in later pieces. For now it should simply be noted that these economies are fundamentally unstable. Indeed, it is this very instability that gives them their dynamism and their character. And it is this instability that is constantly pushed to one side by the static theories of the neoclassicals. We do not make understatement when we say that these scholars do not even know the nature of the beast they study, let alone its internal processes.

Bank of Americas’s stock beat a bit of a retreat today as its so called $8.5 billion settlement came under increased fire. Frankly, the number of objections filed prior to late afternoon yesterday and today meant it was dead in its current form. At best, it would take a two or three years and a bigger price tag for any deal to be concluded (although we are in the skeptics’ camp, particularly as far as the currently overly broad waiver of liability is concerned).

Nevertheless, the latest developments pound more nails into the coffin. Yesterday, as we noted, the FDIC filed a minimalist objection, saying the disclosures were inadequate for it to know whether it would oppose the deal or not. Today, a suit by several homeowners, supported by the National Consumer Law Center, flagged an issue that we highlighted in our initial comments on the deal: that the settlement included provisions to manage foreclosures to strict timetables, designed to speed them up. That was one of the “gimmies” to investors, and homeowner advocates are none too happy. Per the New York Times:

On Tuesday, several homeowners filed suit in the Federal District Court in Manhattan seeking to block a proposed $8.5 billion settlement between Bank of America and major mortgage investor..The suit claims that the deal fails to address widespread servicing problems and would actually speed up foreclosures..

“There is a growing realization that this settlement needs more scrutiny,” said Keith Fleischman, the lawyer for the four homeowners in the suit. “It needs to address the housing crisis itself.”

Lawyers for the National Consumer Law Center said in a report prepared as part of the suit that the proposed settlement “will speed up foreclosures, perpetuate existing servicing abuses in the system, and undermine federal programs designed to stabilize the housing market.”

“The touted servicing ‘improvements’ aim to increase the speed of foreclosures but fail to set standards to protect homeowners from wrongful or unnecessary foreclosure or abusive servicing,” they added.

The Times story, as almost an aside, mentioned another legal development which appears significant:

On Tuesday, U.S. Bancorp, the trustee of a $1.75 billion mortgage pool originated by Countrywide in 2005, filed a lawsuit to force Bank of America to buy back the underlying mortgages, arguing the loans were made without proper documents and didn’t conform to underwriting standards.

This matters because the $8.5 billion settlement involves pretty much all, if not all, of the Countrywide mortgage securitizations which had Bank of New York as trustee. As we pointed out, citing research by Adam Levitin, BoNY was the house trustee for Bank of America’s RMBS, and could therefore be expected to be particularly accommodating to any requests made by Bank of America. The fact that a different trustee isn’t playing ball and instead is putting back loans would seem to strengthen the case of attorneys general Eric Schneiderman and Beau Biden, both of whom questioned the role Bank of New York was playing in the deal (it was getting an expanded indemnification from Bank of America, which is tantamount to a bribe).

As Tom Adams noted via e-mail,

This proposed $8.5 billion settlement has turned out to be a disaster for BofA – it has prompted discovery and crystalization of a whole host of other claims. Since it seems likely, especially given the Fed’s and Fannie’s presence in the settlement group, that the administration favored this settlement, it is also a bit of a disaster for the administration’s attempt to sweep the MBS problems under the rug.

We’ve long felt that there is still enough of an independent judiciary in the US to make it impossible to bury the widespread abuse of legal procedures that took place in the mortgage boom and its aftermath. So these setbacks to Bank of America offer hope that enough of the rule of law is operating to impede at least some aspects of the banking industry’s combined pillage/coverup operation.

Cross-posted from Credit Writedowns

Economic Cycle Research Institute co-founder Lakshman Achuthan was on Tech Ticker yesterday discussing the outlook for the economy. Business Insider does a good write-up of his commentary, highlighting the fact that the ECRI has yet to signal a double dip. However, I wanted to add a few comments as well. ECRI’s underlying message is this: we are in a decade-long post-credit crisis struggle which will mean high unemployment even if policy makers focused on jobs (which they have not, I would add).

I agree with this forecast. When I began Credit Writedowns in March 2008, I wrote:

I am cautious about the long-term outlook for the global economy and the U.S. economy in particular. The likely outcome for the next decade is one of sub-par global growth with short business cycles punctuated by fits of recession.

Achuthan explains that this too is the root cause of why he thinks the jobs picture is going to difficult for the US. In essence, Achuthan is saying he expects a series of what I have been calling Shiller Double Dip Recessions. This dovetails with my view of an austerity-induced initial dip followed by the recession-punctuated lost decade thereafter.

Achuthan also explains well that in the short-term the jobs picture has already been set by previous policy decisions. He expects the monthly jobs numbers to continue to be weaker than earlier in the year. If we get a double dip recession, “by definition, the unemployment will be spiking” he says.

Separately, Dean Baker argued yesterday that the President needed to have focused on jobs in a laser-like fashion much, much earlier in his presidency. I would agree with that.

Obama’s failure to understand where we are in the economic cycle and the relationship to historical precedent has been catastrophic to the conduct of economic policy and critical in his missteps. There is more to Obama’s misfortune than a bad economy.

I would add that anything the US President and Congress do now will only be relevant in the medium-term as the election of 2012 nears. I have repeatedly indicated Republicans will be unlikely to support these current job initiatives. Instead they will focus on trimming government expenditure.

The key here is that it does no good for the Republicans politically to compromise with President Obama. His policies are rightfully seen as failed. The right thing to do politically (but not morally) is to try and strike as much contrast to the President as you can, especially if it makes him look more failed. So that means favouring gridlock and pushing deficit reduction, looking for spending cuts and so on – even if it leads to a government shutdown stare-down as it did under Clinton. Is this the right thing to do? I don’t think so, if only because it reduces the number of potential positive economic outcomes. But I am speaking now more from a forecasting perspective than one of advocacy.

-A few comments about Tuesday’s election’s impact on the economy, Nov 2010

If you listen to the Republican voices in Congress and the Republican contenders for US President, this is what you will hear – and will continue to hear. I believe this will mean recession – and recessions cause tax receipts to plunge and outlays to increase, making the deficit larger. Does focusing on deficit reduction reduce deficits? No, an expansionary fiscal contraction will prove illusive. Focusing on deficit reduction will increase the deficit.

This is looking more like Hoover every day. So, the President will have to hang his re-election hat on being able to claim that he prevented an even worse economic environment, hoping the economy doesn’t double dip.

Yours truly still has no Internet, save at Starbucks. Richard Smith helped with today’s Links.

Damage at Nuclear Plant in Virginia David Swanson

Why the Fukushima disaster is worse than Chernobyl The Independent, h/t May. We ran posts from George Washington asking whether Fukushima would be worse than Chernobyl (the headlines were sensationalistic, but the posts proper had caveats), to the fury of some readers. Well, just give it time…

Monsanto Corn Plant Losing Bug Resistance Wall Street Journal. From the weekend but still important.

CIA’s Bay of Pigs foreign policy laid bare Miami Herald (h/t Buzz Potamkin). 50 years ago now, but still of great interest. The CIA’s own internal account pulls no punches.

IASB criticises Greek debt writedowns Financial Times

The Eurozone is Headed for a Crash CounterPunch (hat tip reader Carol B)

A sceptic’s solution – a breakaway currency Hans-Olaf Henkel, Financial Times. The beginning of an endgame?

Protests urged in Spain over deficit amendment AP/Google. Let’s see how a ‘low deficit’ constitutional amendment works out in Spain. H/t Lambert Strether.

The Sword of Spitzer Legal Affairs (via HuffPo, hat tip reader Deontos)

Give Karl Marx a Chance to Save the World Economy: George Magnus Bloomberg (hat tip reader Arthur)

Pimco’s Gross rues US debt ‘mistake’ Financial Times

Ride the Real Estate Roller Coaster Hullabaloo (h/t Carol B).

Oregon Foreclosures Appear Likely to Shift to the Courts Loan Safe

Bank Of America Buys Time Via Buffett Effect Francine McKenna, Forbes

BofA’s woes making life difficult for Merrill advisers Investment News

Bank of America Sells Stake in China Construction Bank Dealbook. Raising more capital it doesn’t need, how odd.

Market turmoil lands hedge funds with big losses Financial Times

How an SWF works Macrobusiness. Aussies mull the advantages of an SWF.

Why Michael Lewis Annoys the Bejeepers out of Me Scott Locklin (h/t Larry).

Antidote du jour:

By Richard Smith

Continuing this blog’s august tradition of tangling with dodgy Scottish financiers, we turn our attention away from RBS’s ex-CEO, adulterous failed banker Sir Fred Goodwin, (pausing only to note that his wife has at last thrown him out, and high time too), and towards the equally inexplicably Teflon-coated architect of another Caledonian banking trainwreck: former HBOS director, and now youthful pensioner, Peter Cummings.

The meat will be in future posts; first, some background, and then a swipe at the Financial Services Authority, which was the UK’s banking regulator when HBOS was doing its dirty business, and is now muffing the clean-up.

Like RBS, the HBOS collapse is another variation on the endless 2008 theme in which precarious short-term funding models combine with crummy assets to produce a combined liquidity-and-solvency crisis. HBOS was initially “rescued” by way of a government-sponsored shotgun marriage with Lloyds Bank; it soon turned out that HBOS’s funding problems were sufficient to overwhelm its new parent, too. The UK taxpayer stepped in, taking a 43% stake; which isn’t going to be easy to sell on, just yet.

But it got a lot worse. Once the semi-nationalization deal was done, “problem loans” surfaced pretty quickly. Cummings ran HBOS’s Commercial lending division, with execrable results. And deeper down in his division, it went well beyond imprudence, to alleged large scale fraud, as documented in posts at “Naked Capitalism” by Ian Fraser, for instance:

The allegations concern money-laundering, corruption and fraud activities between 2002 and 2007 involving Reading-based bank executives and consultants from a corporate turnaround specialist called Quayside Corporate Services…

Many of the allegations are from companies that were forced to use the services of Quayside and were then loaned large sums of money, much of which was removed in Quayside fees. From 2007, after fraud allegations surfaced, scores of companies were put into administration. The suspects, which include numerous Quayside consultants, then allegedly expropriated physical assets worth scores of millions and, in administration deals from April 2007, were permitted by the bank to take ownership of many surviving assets.

And where there’s alleged fraud on this scale (the total involved seems to be around £1Bn), any cover up would have to be massive:

Whistleblower Paul Moore, who was ousted as group head of regulatory risk at HBOS in 2005 after he sought to alert its board to self-destructive behaviour in its retail sales arm — plus many of the owners of the 50-plus companies that got sucked into the fraud and were put into administration as part of an alleged cover-up — believes that board-level directors at HBOS including former chairman Lord Stevenson, former chief executive Andy Hornby and former head of corporate Peter Cummings ought to be investigated.

They claim that senior executives at the firm failed to notify the whole HBOS board and the Financial Services Authority (FSA) about the criminal nature of the activities. Senior sources from the impaired assets divisions of other leading banks claim that at their organisations, it would be inconceivable for large numbers of loans worth many millions of pounds to be extended to companies with debt problems without board-level executives being aware.

Moore said: “There are inferences from the evidence of the involvement of senior executives and board members either in the fraud itself or in a conspiracy to pervert the course of justice – in other words in a cover up.”

HBOS senior managers have always denied any knowledge of wrongdoing.

Well, actually. they would, wouldn’t they?

The contrast between the life styles of the perpetrators and the victims is striking, too:

The most sickening thing about the whole sordid debacle is that the alleged perpetrators wre able to buy an fund the running costs of two mega-yachts in the Mediterranean Sea, having siphoned funds out of a state-rescued bank. And secondly, that the decent company directors, whose businesses and indeed lives have been destroyed, or harmed, as a result of the bank’s behaviour, continue to be persecuted, with one couple having been through 22 separate court hearings as the bank seeks to repossess their home, in the apparent hope of silencing them.

To judge by the energy and promptness with which it has pursued its investigations, the FSA, the UK’s financial regulator, is fine with all of this.

In fact, according to the Sunday Times of 24th July, FSA is keen to do a nice little deal with Peter Cummings (who was, incidentally, the director of 149 of the companies to which HBOS lent, many of which were joint ventures between the bank and its favoured clique of property tycoons, though none of these appear to have been beneficiaries of the Reading branch’s largesse). The proposed FSA deal is this: Cummings agrees to a lifetime ban from the securities industry, and the FSA in return drops its investigation into his tenure as director of corporate banking at HBOS. That’s an investigation which could only embarrass the great and good on the HBOS board at the time, and, indeed, would leave the FSA itself struggling to explain the quality of its banking supervision during the period in question. So pretty much a win-win, then: unless you are one of the fraud victims; or believe, quixotically, naively, that such cataclysmically bad oversight (or is it plain malfeasance?) ought to be investigated, and if appropriate, prosecuted.

Unfortunately for the FSA’s cosy proposal, the uncooperative Mr Cummings suspects his assailant is brandishing nothing more threatening than a wet noodle, and has invited the FSA to either produce evidence of wrongdoing, or clear his name.

Irrespective of that, Nikki Turner (one of the fraud victims) was sufficiently incensed by the reported deal proposal to draft an open letter to the Chairman and CEO of the FSA, respectively Lord Turner (former vice-chairman of Merrill Lynch) and Hector Sants (former CEO of Credit Suisse in Europe).

Here are some highlights of the letter:

• The loans made by Reading-based bank executives vastly exceeded the control limits supposedly applied by HBOS’s Commercial Lending  wing.
• The “extraordinary transaction” of British Linen Properties may be the subject of a future post here at Naked Capitalism.
• The payment of £29Mn by HBOS, to  companies that were already in administration, surely cannot have been authorised by any of the HBOS executives now on fraud charges, but by someone more senior.

To avoid prejudicing the existing fraud investigation, which involves more junior HBOS types, this open letter appears with redactions. This must be a first. It is the sort of contorted gambit one adopts when working one’s way around regulatory inertia, British legal protections, libel suits, and police process. All of this has slowed down the delivery of the letter by several weeks, as you see.

Readers in jurisdictions with less cockeyed attitudes to civil liberties and fraud investigations are welcome to chuckle, or sigh. Of course, Thames Valley Police may contact me via yves@nakedcapitalism.com if they feel they need to set me straight on anything.

Before I finally hand over the microphone to Nikki T., please be assured that I’ve seen enough to be happy that the allegations below are well documented: the deeply suspicious dealings of Mr Cummings, the improbable obliviousness of other HBOS board members, and the inertia, prevarication (and connivance?) of the FSA.

The Administration appears to be gearing up to try to Do Something on the housing and general economy front. Readers have no doubt wised up to the fact that Doing Something, Obama Administration version, generally consists (at best) of largely cosmetic measures accompanied by lots of handwaving. The latest sightings include yet another effort to push the 50 state attorney general settlement over the line by the phony deadline of Labor Day and more chatter among by members of the Democratic hackocracy in favor of an expanded Fannie/Freddie refi program as a way to fix the housing market. That idea appears to be moving front burner, since Baghdad Bob Ezra Klein has decided to weigh in.

Adam Levitin did such an effective takedown that it obviated the need for yours truly to say anything. On August 25, Levitin, in “Financing Malarkey,” said:

It looks like the Obama Administration is about to endorse some version of the Hubbard-Mayer plan of letting everyone (or at least everyone with an agency mortgage) refinance at today’s low rates, regardless of whether they are delinquent or underwater… I fail to see how such a plan will accomplish much.

The ability to refinance depends heavily on whether a homeowner is current and has equity. Consider, then, the impact on the 4 categories of homeowners under this rubric:

(1) Borrowers who are current and have equity. Refinancing is always possibly for anyone who is current and has sufficient equity in their home. That’s a lot of existing borrowers for whom a new refi program does nothing.

(2) Borrowers who are current but lack equity. There is also a large pool of borrowers who are current, but have insufficient equity or negative equity for a refinancing. A new refi program probably doesn’t do much for them either. It doesn’t take very much equity to do a FHA refinancing, but putting that aside, the Home Affordable Refinancing Program (HARP) allows for negative equity refinancings. There haven’t been a lot of them, however, and I think that bodes poorly for any new program. The closing costs for refinancings can be a major obstacle for households without a lot of extra cash sitting around and with uncertainty as to whether they’ll stay in an underwater house long enough for the lower rates to make the refinancing worthwhile.

(3) Borrowers who are delinquent, but have equity. These borrowers can already get out of the house via a sale. In any case, most of these borrowers are seriously delinquent, not just 1 or 2 months delinquent. Lower monthly mortgage payments aren’t going to do a thing to change their delinquency or the pending foreclosure.

(4) Borrowers who are delinquent and lack equity. As with delinquent borrowers who have equity, most of these borrowers are seriously delinquent, not just 1 or 2 months delinquent. Lower monthly mortgage payments aren’t going to do a thing to change their delinquency or the pending foreclosure.

So in the end, it’s really not clear who this would help.

Chris Matthews objected in comments to Levitin’s post, which led to a second response by Levitin, which was that he still thought the proposal was lame, in that it didn’t do a very good job either as economic stimulus or as a sop to the housing market (although one can imagine that this is what the Administration is left with in the stimulus category, having signed up so enthusiastically for deficit reduction at a time when that is guaranteed to increase deflationary pressures).

And there is a rather large fly in the ointment, as Klein himself has acknowledged, that any bank that does a refi would expose itself to any rep and warranty liability on the original mortgage. That would seem to make the program a non-starter.

So get this: you have a program that even if it works, won’t accomplish much, and is unlikely to even be taken up by the banks! So that would seem to make it not worthy of support, right? No, predictably, Baghdad Bob will find a reason to support any bad idea as long as it is this Administration’s bad idea:

But it’s worth a try. It’s been endorsed chief economist Mark Zandi of Moody’s Analytics, the National Consumer Law Center, the National Association of Mortgage Brokers, the California Association of Realtors, the California Association of Mortgage Professionals, and William Gross, managing director and co-chief investment officer of fund manager Pimco. And if it doesn’t work, it’s pretty much a no-harm, no-foul sort of deal, as it’s not going to cost the government money if banks don’t refinance mortgages.

Earth to base: implementing weak and ineffective polices DOES have a cost, which is that it takes political capital and keeps a bad status quo intact. Remedies of this sort then lead to “well we need to see how this works” arguments that then delay more effective measures from being implemented Even worse, they also serve to feed the false perception that nothing will work. Notice how the stimulus program at the beginning of the Obama administration, which pretty much every reputable economist said was too small to do much, is now being used to argue that stimulus doesn’t work? Yet another at best not-very-effective housing market remedy will serve to cement beliefs that government intervention won’t work, when that is the only possible route out of a massive private market failure.

So yes, there are plenty of reasons not to act for the mere sake of acting. But that logic doesn’t register with the defenders of this Administration, it seems.

Ooh, this is getting to be fun. Now the FDIC has weighed in too.

Can’t wait to get my hands on the filing (any readers who can get it are encouraged to provide a link or send a pdf so I can upload it).

Needless to say, the FDIC objection is further validation of the questions raised by attorneys general Eric Schneiderman and Beau Biden.

No details yet, merely a notice of the existence of the objection at Bloomberg.

Update. Here is the filing. The general logic is similar to the Biden objection (although he also took a major shot at the Bank of New York role), but this is as skeletal as it gets. This is literally a placeholder, to weigh in prior to the deadline for objections, which is August 30.

FDIC Objection to Bank of America Mortgage Settlement

Sorry for the thin links, am way behind.

The Ministry of Fear reports on the weather CorrenteWire on the hurricane media fest. The real disaster seems to be public transport, in fact.

…or floods, but not in NYC Business Insider.

Bank Of America Buys Time Via Buffett Effect Forbes. Francine McKenna on Bank of America and Buffett, h/t Scott F.

Complexity is a Cash Cow, but not for you Expected Loss. I don’t think ‘buyer beware’ quite deals with the problem.

The Jackson Hole Papers FT Alphaville with some Hole-related reading matter for you.

Sino-Forest CEO resigns. FT Alphaville: another one of John Hempton’s shorts is maturing nicely.

Even a joint bond might not save the euro FT, Munchau. Paywalled, but worth using up one of your free views on if you’ve got any left.

Effects of corruption on the market Crisp points from that sight for sore eyes, Barry Ritholtz.

The Democratic Deficit in Europe and the Periphery Macroresilience with another angle on the Eurozone’s problems (non-European readers are invited to read across to their local conditions if they think it’s appropriate).

An opportunity for an Antiantidote: let’s hear it for carnivorous plants! More back story here.

By Richard Smith

Displacement activity: behaviour that occurs typically when there is a conflict between motives and that has no relevance to either motive: e.g. head scratching

- The Free Dictionary

…when the Ponzi pyramid financial scheme collapses we have a Minsky moment.

- Paul Davison

Abreaction: an emotional release resulting from mentally reliving or bringing into consciousness, through the process of catharsis, a long-repressed, painful experience.

- The Free Dictionary

From Reuters’ round-up of comments made at this year’s Jackson Hole beanfeast, here’s Angel Gurria, head of the Organization for Economic Co-operation and Development:

The governance right now is not going through a very brilliant moment, I have to say, neither in Europe nor in the United States…The signals that are coming out of the short-term discussions is, ‘We can’t even agree on about the time of the day, even if there’s a big clock telling us what the time of the day is.’”

Latest to point to the big clock is the IMF’s new head, Christine Lagarde, during a brief tour of US and European options in which she urged immediate action to deal with the risk that the economic recovery is being “derailed”. On Europe, she had this to say:

we need urgent and decisive action to remove the cloud of uncertainty hanging over banks and sovereigns. Financial exposures across the continent are transmitting weakness and spreading fear from market to market, country to country, periphery to core…banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary. One option would be to mobilize EFSF or other European-wide funding to recapitalize banks directly, which would avoid placing even greater burdens on vulnerable sovereigns.

ECB head Trichet, who was on the platform with her, didn’t like the reference to a possible liquidity crisis much

The idea that we could have a liquidity problem in Europe [is] plain wrong

…but with the Bundesbank and the normally quiet German President both now openly suggesting that ECB purchases of Spanish and Italian debt may be illegal, that probably isn’t the end of the story. For contrast, unnamed Eurozone officials, in this FT story, concede there have already been liquidity problems, and think Ms Lagarde is wrong about capital levels, too:

But officials said Ms Lagarde’s comments missed the point of banks’ current difficulties. “The key issue is funding,” said one experienced central banker. “Banks in some countries have had trouble securing liquidity in recent weeks and that pressure is going to mount. To talk about capital is a confused message. Everybody – politicians, regulators, other officials – is quite concerned.”

Officials, nervous that Ms Lagarde’s statement would further spook bank investors, said they planned to urge the former French finance minister to clarify her statement.

Not much sign of a consensus there, then. And a bit of plain speaking from Lagarde about the real problem gets deflected off into debates about liquidity and solvency and messaging: displacement.

Elsewhere we read that a former European Commissioner’s contention that Eurozone bonds are the only solution to the European crisis, and that Angela Merkel has ruled out the issuing of Eurozone bonds. Or again, the Greek rescue is now at risk because other countries have joined Finland in dickering about the loan collateral:

After Finland, four other small countries – the Netherlands, Slovenia, Slovakia and Austria – are calling for Greece to provide collateral for their share of the 109-billion-euro bailout, Kathimerini reports. Together with Finland, the five countries’ combined contribution amounts to 10% of the €109bn bailout. The separate agreement with Finland was subject of the discussions among finance ministries this Thursday.

This is all displacement: no one wants to recognize the losses and write off the debt, yet; not in Europe, (and not in the US, either, as we know well). There’s still too much room to argue about whether it’s liquidity or solvency, and about who should end up holding the bag, et cetera. Round and round it goes.

From a psychological point of view, it’s as if everything before the Minsky moment was displacement activity; the Minsky moment itself coincides with the onset of abreaction. Here, via email, is an little instance of what it’s like when you really run out of mental dodges; this is abreaction:

I had a convo last week with a guy that worked at a structured products advisory shop and he said that in late 2008 (post-Lehman) he was hired to look at a Landesbank’s books and when the representative from the bank asked him what this stuff was worth the advisory guy said he looked at the German and said “its all worthless, maybe a few pieces will perform in the long term but almost all of it is gone” and the German guy started crying and screaming at him…

Not the prettiest moment of enlightenment, but at least the Landesbanker got there in the end. Unfortunately the wait for an honest official confrontation of the public and private debt problems in the US and Europe is far from over.

By Richard Smith

You won’t be hearing much from Yves today:

Traceroute has started…

traceroute to vroo.pair.com (209.68.1.136), 64 hops max, 52 byte packets

1  192.168.1.1 (192.168.1.1)  5.882 ms  0.760 ms  0.631 ms

2  yves.tearing.hair.out (yves.tearing.hair.out)  8.501 ms  15.333 ms  9.936 ms

3  te-9-4-ur01.brunswick.me.boston.comcast.net (68.87.36.53)  9.966 ms  10.767 ms  9.605 ms

4  te-0-7-0-2-sur01.brunswick.me.boston.comcast.net (68.85.162.61)  10.250 ms  9.868 ms *

5  te-1-1-0-0-ar01.needham.ma.boston.comcast.net (68.85.162.246)  26.179 ms  25.956 ms  25.944 ms

6  pos-2-2-0-0-cr01.newyork.ny.ibone.comcast.net (68.86.93.185)  32.955 ms *  117.248 ms

7  tengigabitethernet9-2.ar4.nyc1.gblx.net (64.213.77.217)  31.811 ms  32.612 ms *

8  64.210.21.150 (64.210.21.150)  66.971 ms  77.856 ms  72.333 ms

9  * * *

10  * vroo.pair.com (209.68.1.136)  65.129 ms  65.480 ms

No mobile signal either, and the nearest public Wi-Fi is 15 miles away. So much for the relaxing up-country break, methinks. Or maybe it is just a reminder that the expectations nourished by life in the big city are always out of whack with what’s available out in the boonies (or, from Comcast). I remember a wide-eyed ex-Londoner, newly resident in Herefordshire (rural England), commenting on the 30-mile round trip required to stock up on his taramasalata. Feel free to add your own stories of bemused encounters between city and country types in the comments; from either perspective. We have a goodly selection of both, but no civil wars please.

Don’t bother telling me how to fix the timeout problem – that’s for Comcast et al to sort out. I’ll be helping out with the blog as best I can today…

By Matt Stoller, a fellow at the Roosevelt Institute. He is the former Senior Policy Advisor to Rep. Alan Grayson. You can reach him at stoller (at) gmail.com or follow him on Twitter at @matthewstoller

A lot of people have asked why New York Attorney General Eric Schneiderman is going after the banks as aggressively as he is. It’s almost unbelievable that one lone elected official, who happens to have powerful legal tools at his disposal, is doing something that no one with any serious degree of power has done. So what is the secret? What kind of machinations is he undertaking that no one else has been able to do?

I’ve known Schneiderman for a few years, back when he was a state Senator working to reform the Rockefeller drug laws. And my answer to this question is pretty simple. He wants to. That’s it. Eric Schneiderman is investigating the banks because he thinks it’s the right thing to do. So he’s doing it. This guy has thought about his politics. He wrote an article about how he sees politics in 2008 in the Nation, and in his inaugural speech as NY AG he talked about the need to restore faith in both public and private institutions. Free will still counts for something, apparently.

In all the absurdly stupid punditry, the simple application of free will to our elected officials goes missing. Yeah, Obama got money from Wall Street. But Obama is choosing to pursue a policy of foreclosures and bank bailouts not because of any grand corporate scheme. He just wants to. He thinks it’s the right thing to do, and he’s doing it. If you don’t think it’s the right thing to do, then you shouldn’t be disappointed in him any more than you might have been disappointed in Bush. Obama is not trying to do the opposite of what he’s doing, he’s not repeatedly suckered by Republicans, and he isn’t naive or stupid. Obama is simply doing what he thinks is right. So is Eric Schneiderman. So is Tom Miller. So are any number of elected officials out there.

In positions of power, the best expression I heard is that “up there the air is thin”. That is, you have enormous latitude, if you want to use it. Power can be wielded creatively and effectively on behalf of whatever it is the wielder wants. Now of course there are constraints, plenty of them. Smart politicians spend their time working to maximize the constraints they want to impose and weakening the ones they want to overcome. But the basic Reaganite liberal argument defending supplication towards Obama these days is that Obama is “disappointing”. In this line of thought, powerful corporate interests and Republicans are preventing him from enacting what his real agenda would be were he unfettered by this mean machine. Eric Schneiderman, who is in a far less powerful position as New York Attorney General, shows that this is utter hogwash. Obama is who he is, and anyone who thinks otherwise is selling something.

The banking system is really at the heart of our politics, which is why it’s such a great test of one’s political theory of change. I’ve been following the foreclosure fraud story for a few years now, because it’s the tail end of a massive economy-wide fraud scheme that started as early as 2003. The securitization chain failure can’t be put back in the bottle, the housing system it collapsed is simply too big to bail. So elites keep trying to patch this up the way they have everything else. It isn’t working. And their scheme has been obvious and obviously dishonest. Along with Obama (who I criticized as empty as early as 2004, ratcheting this up to dishonest and authoritarian by 2006-2007), I pointed out that Iowa Attorney General Tom Miller was engaged in serious bad faith only a few months after the negotiations started.

I’m no genius, I just listened to what these people actually said and did. Obama mocks the idea that he is an honest politician, overtly, lying about NAFTA and FISA very early on in power. Miller lied to activists about being willing to put bankers in jail, and then said he was negotiating with banks in secret. It was overt. For Miller, as with Obama, few people really picked up on the lies until recently. Iowa activists who heckled Miller got it, as did Naked Capitalism readers. Now it’s becoming more and more obvious. That’s just how it is, I suppose, people in the establishment are paid to not notice corruption until the harsh glare is too bright.

The crazy thing is that robosigning is apparently still going on. Right now, the “settlement” talks are the equivalent of law enforcement negotiating with a serial killer over whether he’ll get a parking ticket, even as he continually sprays bullets into the neighborhood. Even having these “settlement” talks when the actual crimes haven’t been investigated or a complaint hasn’t been registered should be example enough that this process is rigged as badly as Dodd-Frank. It should not be a surprise that the administration is putting pressure on Eric Schneiderman, that Tom Miller is kicking him out of the club house. That’s who these people are. It’s what they believe in. Just as it should not be a surprise, though it is laudable, that Schneiderman isn’t knuckling under to the administration. I suspect he probably is laughing at the idiocy of Miller’s pressure tactic. I mean, this is a guy going up some of the most powerful entities in the United States: Bank of New York Mellon, Bank of America, the New York Fed, etc. And the Iowa Attorney General isn’t going let him on conference calls? Mmmkay.

When you look closely at most significant areas of government, it becomes clear that the President and his administration are enormously powerful actors who get a lot done. Handing over our national wealth to the banks and to China is not nothing. These people are reorganizing the economy and the political system so that there are no constraints on the oligarchical interests that fund and pay them. That is their goal, it has been their goal from day one (or even before that), and anyone who says otherwise is just wrong or deluding him or herself. Obama spoke at the founding of Robert Rubin’s Hamilton Institute, and his first, and most important by far policy initiative, was his whipping for TARP, a policy that was signed by Bush but could not have passed without Obama getting his party in line. That was his goal, and he’s still pursuing it. The numerous “what happened to Obama” wailing editorials overlook the consistency of his policy agenda, which stretches back years at this point.

If someone worked or works for the Obama administration, or the Department of Justice, or any other executive branch agency, they need to remember their service as a mark of shame for the rest of their lives. Remembering how they participated in this example of how to govern is literally the least they could do for the damage they have caused. I would leave out the small number of people who are there to overtly prevent as much damage as possible, and those who resign or are fired in protest.

For the rest of the Democratic Party, well, reality is just beginning to intrude into the fantasy-land of partisans, even though the 2010 loss should have delivered a searing wake-up call to the failure Obama’s policy agenda. From 2006-2008, the Bush administration’s failures crashed down upon conservatives, and they in many ways could not cope. But their intellectual collapse was bailed out by Obama. Faux liberals are seeing their grand experiment in tatters, though right now they can only admit to feeling disappointed because the recognition that they have been swindled is far too painful. And the recognition for many of the professionals is even more difficult, because they must recognize that they have helped swindle many others and acknowledge the debt they have incurred to their victims. The signs of coming betrayal were there, but in the end it all comes down to judging people based on what they do and who they choose as opponents. And this Democratic partisans did not do, choosing instead a comfortable delusional fantasy-land where foreclosures don’t matter and theft enabled by Obama (and Clinton before him) doesn’t matter.

Eric Schneiderman’s willingness to go after the banks and stand up to the corruption of the Bush and Obama administrations should be a reminder to all of us of this. We have free will. He is doing the right thing for no other reason than because he wants to, because he believes in it. He is going to face serious consequences for this, very nasty stuff. Eliot Spitzer was taken down and his name dragged through mud because of who he took on. Paying ugly costs for standing up is routine, unfortunately, in modern America. And the least powerful among us face far worse consequences than politicians who are embarrassed. But integrity exists, and Schneiderman is showing that free will can be exercised in its service. This fact is true of many people, not just Schneiderman; Bill McKibbin, Jane Hamsher, Dan Choi and others just got arrested in front of the White House to register dissent. So next time someone tells you that you have no choice but to support one of the two branches of the banking party, just remember, you also have free will. And the only person who can take that away from you, is you.