"An economy is not like a household. A family can decide to spend less and try to earn more. But in the economy as a whole, spending and earning go together: my spending is your income; your spending is my income. If everyone tries to slash spending at the same time, incomes will fall — and unemployment will soar." -- Paul Krugman.
When economies aren't growing and unemployment is high, the solution is not austerity but more stimulus (spending), he says. The 2009 stimulus is what prevented another Great Depression and a decade or more of no growth or economic contraction.
The time for fiscal austerity is when economies are expanding on their own steam. The US Congress on January 1, 2013 took small steps towards austerity, eliminating the two-year payroll tax holiday (for worker contributions to social security), and raising taxes from 35% to 39% on households earning more than $400,000 a year. Congress also took stimulative action: it extended unemployment benefits to 99 weeks in partnership with states (depending on a state's unemployment rate). The CBO estimates this action will expand jobs by 300,000. Indeed, the US economy is still projected to grow by about two percent in 2013, barring unforeseen economic catastrophe and foreseeable (and avoidable) political catastrophe like Congress refusing to raise the debt ceiling and pay the nation's bills on spending they've already authorized.
Presidential candidate Mitt Romney would nip the housing recovery in the bud by pushing several million more foreclosed homes on the market this year by cancelling Obama's home modification program. He would force more properties onto the market than could be easily absorbed, drive prices of homes on the market down even further, and ultimately reward the money-bag investors who caused the housing market collapse in the first place because they can snap up houses at bargain-basement prices.
Ron Moore, who opposes all loan modifications, asks me why I think, if eight million foreclosed homes are quickly pushed onto the market by the banks, that many will stay vacant and run down for a long time? Er, the law of supply and demand and common sense make me think that's what would happen. It would take years for the housing market to absorb such a glut. We are already seeing, in certain minority neighborhoods, that the banks have failed to maintain and market many of the properties foreclosured upon. Click.
I didn't "deplore" the bursting of the housing bubble in places like northern and southern California where prices had gone through the roof. A market adjustment was necessary. What I deplore is the economic collapse of 2008-9 and the loss of 8 million jobs in short order, through no fault of the people losing those jobs.
I don't think they should be ruthlessly foreclosed on and put out on the street, causing the worst calamity since the Great Depression. I think it is far better for banks to offer loan modifications and other programs to work with people and keep at least some of them in their homes if they have steady sources of income and can make reliable payments. Principal reductions, interest rate reductions or other loan modifications seem like a good way to provide dispensation for families caught up in an economic whirlwind unprecedented since the 1930s.
Matt Taibbi has a devastating piece on Bank of America, "Too Crooked to Fail."
This "dual tracking" scandal, in which the banks lure homeowners into defaulting in order to qualify for loan modifications, and then the banks foreclose on homeowners while in loan modification workout plans, is scurrilous and maybe even worse than last year's scandal in which the banks were caught robo-signing false documents to submit before courts in foreclosure cases.
The foreclosure fraud settlement engineered by the Obama Administration against the banks supposedly gives harsh penalities for "dual tracking," but some consumer advocates are skeptical that it will end the practice unless there is stringent enforcement.
Related: Four Whistleblowers Who Sounded the Alarm on Banks' Mortgage Shenanigans (ProPublica). Of particular interest is how Bank of America purposely disqualified homeowners for government loan programs by processing payments incorrectly so they'd be late and steered homeowners toward more expensive proprietary loan programs that were more profitable to BOA.
The banks also failed to properly administer tens of thousands of loan modifications that were working. Though homeowners made payments on time, banks lost payments, lost paperwork, or broke their agreements with homeowners and took them out of loan modifications.
How many of these lawsuits will be allowed to continue given the government's settlement with the banks remains to be seen.
BOA and other mortgage servicers also charged struggling homeowners with insurance policies that cost 10 times the fair market value of homeowners' policies. This is predatory.
There really needs to be a grassroots movement to break up the big banks. Otherwise, in a decade or so, we'll face another crisis in which they're again "too big to fail."
During the 2008 presidential campaign, Barack Obama promised to create a $10 billion foreclosure prevention fund. In 2009, he made good on his pledge, and more, creating a $75 billion foreclosure prevention (loan modification) program as part of TARP. Officials said it would help 9 million homeowners avoid foreclosure. PolitiFact.com, the Pulitzer-prize winning website, at the time gave him a "Promised Kept." In early 2011, however, based on data that just 500,000 homeowners had received loan modifications from banks through the Obama program, Politifact.com revoked the "promised kept" and changed it to "promise broken." Investigations revealed the program had been "weakened, perhaps fatally, by lax oversight and a posture of cooperation—rather than enforcement—with the nation's biggest banks." The special inspector general for the Troubled Asset Relief Program, Neil M. Barofsky, penned a damning op-ed in the New York Times, calling the housing program "a colossal failure," blaming a lack of enforcement on the part of the U.S. Treasury Department.
The $700 billion TARP (Troubled Asset Relief Program), bailed out the nation's leading banks in October, 2008. Barofsky noted that TARP successfully prevented a meltdown of the financial system, and turned financial institituions that were on the verge of collapse into profitable businesses. "These banks now enjoy record profits and the seemingly permanent competitive advantage that accompanies being deemed “too big to fail," he wrote. But TARP had other important goals, including protecting home values and the preservation of home ownership.
The banks seemed to purposely thwart Obama's loan modification program, preferring to foreclose on homeowners and callously disregard program guidelines, Barofsky said. Many attempted modifications have failed, due to poor administration by the banks.
Instead of 8.5 million homeowners saved from foreclosure, 8 to 13 million were likely to lose their homes, Barofsky wrote in March 2011. And the too-big-to-fail-banks could expect another bailout despite their reckless behavior:
The biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever. They reasonably assume that the government will rescue them again, if necessary. Indeed, credit rating agencies incorporate future government bailouts into their assessments of the largest banks, exaggerating market distortions that provide them with an unfair advantage over smaller institutions, which continue to struggle.
PolitiFact.com has not yet rated the Obama Administration's February 2012 $25 billion National Mortgage settlement with the banks over the housing crisis, which depending on how the banks respond, may or may not prevent more foreclosures and auctions of homes, lowering property values for entire communities.
Some free market fundamentalists like Ron Paul maintain there should be no loan modifications for people who've gotten behind in their mortgages or for homeowners whose mortgages have fallen underwater due to market conditions and no fault of responsible homeowners. Conservative economists, however, have come around to the notion that large-scale, taxpayer-funded mortgage modifications are necessary. Click.
Presidential candidate Mitt Romney says letting financially-strapped households refinance their mortgages at today's low rates in order to stay in them would be a good idea.
The crushing volume of personal debt is an unaffordable drag on growth. "Simply put, you can't operate an economy where huge numbers of people are desperately in debt and have no real way out," argues Kenneth Rogoff, an advisor to John McCain's 2008 campaign.
The US economy cannot fully recover until the housing crisis is behind us. Millions of homes have lost from 25% to 50% of their value since 2006. "Americans have lost more than $7 trillion of equity in their homes," estimated NY Attorney General Eric Schneiderman. Bank-owned homes and short sales made up a quarter of all U.S. home sales in 2011, down from 37% of all homes sold in 2009, according to RealtyTrac. (In shocking contrast, foreclosures in 2005 represented less than one percent of all homes sold.) "Foreclosures and falling home prices spread like a virus, dragging even prudent homeowners underwater," observed Cristian deritis, a director at Moody Analytics. Housing prices at the end of 2011 were at the lowest level since mid-2006, 33% below what they were in the second quarter of 2006.
More than six million homeowners remain behind on their mortgage or in foreclosure, and severe financial pain is likely to come to many of them in 2012. Many banks had a moratorium on foreclosures in 2011 as they tried to recover from the robo-signing and document fraud scandals. A $25 billion settlement between mortgage lenders and the government will free lenders to foreclose on more properties and push them onto the market, AP reports:
A $25 billion settlement reached earlier this year between the nation’s biggest mortgage lenders and 49 state attorneys general has begun paving the way for more foreclosures this year...“That wave of new foreclosures that we’re seeing is going to translate into more short sale listings and more bank-owned listings in the next three to six months,” said Daren Blomquist, a vice president at RealtyTrac.
Pro-Publica, which has done a thorough investigation of the foreclosure crisis, predicts that foreclosure sales will increase by about 20% in 2012 from 2011. Bank of America president Brian Moynihan told CNBC that it will probably be the end of 2013 or the spring of 2014 before the housing market returns to normal pre-2006 levels in terms of numbers of homeowner delinquencies, numbers of foreclosed properties, etc. Foreclosure sales will peak in 2012, he said.
The video above very succinctly and eloquently addresses some very big ideas. The ideas are those of conservative British historian Niall Ferguson. He reveres Western civilization, Adam Smith, the Protestant work ethic, innovation and materialism, and fears that the West is losing its edge.
China and the Mideast were wealthier and more enlightened than the West before the 15th century, he says. But then six "killer apps" were developed, and the West surged ahead. Those killer apps were competition, the scientific revolution, the rule of law, modern medicine, the consumer society, and the work ethic. Now those killer apps are spreading to the rest of the world, and Ferguson believes the West is losing its 500+-year economic dominance of the world. (Newsweek excerpt; His book is Civilization: The West and the Rest)
That Used to Be Us: How America Fell Behind in the World It Invented and How It Can Come Back, by Tom Friedman and Michael Mandelbaum has similar themes, as does The Post-American World by Fareed Zakaria.The West, or more specifically the US, will no longer dominate the world economy, orchestrate geopolitics, or overwhelm local cultures, Zakaria says. But it can still strive to be a pragmatic, honest broker by sharing power, creating coalitions, and helping to set a global agenda.
"Inside Job," Charles Ferguson's documentary about the Wall Street meltdown, narrated by Matt Damon, seems to be slowly lighting a fire of outrage in the American public. It could certainly help sustain the 'Occupy Wall Street' movement because it adds substance to the sentiments expressed.
"The film is about the systemic corruption of the United States by the financial services industry, and the consequences of that systemic corruption," Ferguson told Charlie Rose. "I knew there was a story there that I wanted to tell, but it turns out that the story was even more extreme and even remarkable than even I realized."
Ferguson, who has a PhD in political science from MIT, describes himself as a political moderate, and the film sharply criticizes both Democratic and Republican administrations. "You can't just say, 'Switch parties and everything will be better," he told Erica Abeel in The Huffington Post in October, 2010. "I certainly made the film for the general population, not for specialists. I tried very hard to make the film nonpartisan and non-ideological, because the problem comes from both sides of the aisle."
What shocked Ferguson in his investigation was first of all, "the ethical level that the financial services industry, particularly investment banking, had sunk." Secondly, he was shocked by the "astonishing incompetence of the government's response in the crisis period of 2008."
Ferguson acknowledged to Rose that if President Bush and then-Treasury Secretary Henry Paulson had done nothing, "we could be back to growing our own food." But they did two things that were deeply wrong. First, they failed to study what would happen if Lehman-Brothers went bankrupt. "What did happen came as a complete surprise to them." If they had done their homework, the international disasters that did occur could have been avoided, Ferguson says. Secondly, while they saved the banks, they didn't save the rest of the American population, and they didn't force banks to make any sacrifices at all.
Film's Influence
Why hasn't the behavior described in "Inside Job" led to more criminal prosecutions? Ferguson acknowledges that much of it was probably not illegal, although he suspects that "massive fraud" has taken place. Financial writer Andrew Ross has also explored that question. Aside from a few long sentences for insider trading, Ross suggests the behavior probably wasn't illegal or it would be hard to prove that it was illegal.
After "Inside Job" brought to light potential conflicts of interest of economics professors consulting to Wall Street firms, Columbia University is requiring professors to disclose their consulting clients.
Though "Inside Job" was first released at the Cannes Film Festival in the spring of 2010, the film had almost no impact on the 2010 elections. Theater screenings for a documentary were hard to come by. Popular anger in 2010, as manifested by the Tea Party Movement, was directed almost entirely at the federal government, not Wall Street. The movie was released on DVD in March, 2011. Ferguson has faith that as Americans see the film, they are beginning to understand who is to blame for the extended economic downturn, and who is really in charge of the economy.
He says three changes are necessary to make the system work better:
reduce the role of money in elections;
pay regulators well;
hire enough law enforcement to actually enforce the financial laws we do have.
Gradually, he thinks a people's movement not unlike the civil rights movement or the environmental movement can exert enough pressure on the government to try to "make the society fair again."
The DVD can be ordered from Netflix as part of your monthly rentals. A streamed version is not available yet. Or the movie can be downloaded from the Apple Store for $14.95.
Right-wing Tea Party and left-wing "Occupy Wall Street" crowds might find common ground in breaking up banks that have become "too big to fail" so they don't need to be bailed out again. "The country’s six largest financial institutions (Bank of America, CitiGroup, JP Morgan Chase, Wells Fargo, Morgan Stanley and Goldman Sachs) now have amassed assets equal to more than 60 percent of our gross domestic product. The four largest banks issue two-thirds of all credit cards, half of all mortgages, and hold nearly 40 percent of all bank deposits...."
"Wall Street bankers will continue to gamble with other people’s money. Sooner or later, when their bets go wrong, they will come back to Congress asking to be bailed out again. Why not nip that in the bud?"
Some commenters ridicule Wall Street demonstrators, claiming "they're long on bitching, short on feasible solutions." No, the demonstrators aren't policy wonks. They aren't likely to release detailed policy papers on how to solve the nation's economic problems.
But if the "Occupy Wall Street (or where-ever)" crowd put a spotlight on what Wall Street did to America, a fraction as effectively as the movie "Inside Job" did, I say more power to them. That movie documented the causes of the 2008 global financial meltdown -- a corrupt financial industry, its corrosive relationship with politicians, academics and regulators, and the trillions of damage done.
Why haven't there been more prosecutions? Not one Wall Street executive has faced criminal charges.
Why are American banks so under-regulated that banks sneakily rake up $38 billion a year in over-draft fees, primarily by preying on the poor? Why couldn't the government regulate the salaries and benefits of the companies they were bailing out, preventing golden parachutes and sweetheart deals at taxpayer expense? Or why do CEO salaries skew to above average, even for CEOs whose companies are failing?
Seems to me the demonstrators could raise some really good questions.
If the demonstrators help to dramatize the plight of the 20%-25% or so of Americans who are under-employed or unemployed -- 40% of young people, nearly 20% of African American men -- I say more power to them. If the demonstrations help to mobilize Americans whose mortgages are underwater, who've been foreclosed upon illegally or incompetently, who've been unable to obtain a much promised loan modification, who're deep in debt from college loans or credit card companies that distributed cards with impunity, verified no income, then charged 30% interest when consumers -- surprise -- missed payments, I say more power to them.
If the demonstrations put a spotlight on Americans who have inadequate health care or are without any health insurance whatsoever, who are too poor to ever retire because they lost their investments in the crash, or their adult children moved back in with them as well as their elderly parents, and their companies don't offer adequate pension plans, I say, more power to them.
I realize that to free-market fundamentalists, it seems absurd to watch presumably left-wing demonstrators complaining about bailed-out banks when it was politicians on the left and in the center who bailed the banks out in the first place. Free-market fundamentalists like Ron Paul stood on principle and opposed the bailout. People like him assert the government had no business bailing out banks because governments should leave the financial system alone, leave it to "the magic of the free market." But in the real world, opposing the bank bailouts at the moment of financial crisis in 2008 wasn't a real option. The likelihood of a run on banks world-wide, financial Armageddon, and deep world-wide depression, was all too real.
Perhaps what some Wall Street demonstrators are asking is why the US allowed banks to get too big to fail? And if the taxpayers had to bail out too-big-to-fail banks, why couldn't they do it in a way far friendlier to average consumers, like Sweden did?
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