As the Occupy Wall Street protests continue, government of the banks, for the banks and by the banks has not perished from the Earth. In fact, it's gotten worse lately.
In a story called More Booze For The Drunk, Tim Iacono took Larry Summers to task for calling for more of what got us to this sorry point. Summers wrote an editorial for the Washington Post called How To Stabilize The Housing Market. You will recall that The Prince of Darkness (pictured below) was an important player on Obama's original economic team—he is back at Harvard—and anything he says now still represents Official Policy. I'll quote some of the same passages Iacono did.
The central irony of a financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it can be resolved only with more confidence, borrowing and lending, and spending. This is true, above all, of housing policies. Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) whose purpose is to mitigate cyclicality in housing and that today dominate the mortgage market, have become a textbook case of disastrous and pro-cyclical policy.
More confidence, more borrowing and lending, more spending. You can see why Iacono called it "more booze for the drunk." We also see that the GSEs (Fannie and Freddie) are now officially to blame for the Unholy Mess called the Housing Market. How do we fix it?
First, and perhaps most fundamentally, credit standards for those seeking to buy homes are too high and too rigorous. The characteristics of the average successful applicant in 2004 would make that applicant among the most risky today. The pattern should be the opposite, given that the odds of a further 35 percent decline in house prices are much lower than they were at past bubble valuations...
The GSEs, however, have made refinancings very difficult by insisting on significant fees and by requiring that any new refinancier take on all the liability for errors in underwriting the original mortgage at a cost to American households of tens of billions a year...
Fifth, there were clearly substantial abuses by financial institutions and most everyone in the mortgage industry during the bubble. Just compensation to the victims is a legitimate objective. But allowing negotiation over past actions to be the dominant thrust of policy creates overhangs of uncertainty that impose huge costs on the financial system and inhibit lending.
A rapid resolution of disputes is equally in the interests of bank shareholders and the housing market. The Federal Housing Finance Agency should be striving to rapidly conclude this period of uncertainty.
In other words, Summer wants us to return to the FIRE economy (finance, insurance, real estage) of the Bubble Era (1995-2007). Prosecuting banks for mortgage fraud simply creates "uncertainty" which inhibits stability and growth. Credit standards are too high and rigorous. Such standards should be lax again so "consumers" can resume borrowing and spending like there's no tomorrow and take advantage of (not so) low mortgage interest rates.
Note that Summers says the GSEs are wrong in insisting that refinanciers (the banks) be free of liability for "errors" (fraud) in underwriting the original mortgage. I quote from the Huffington Post's New Obama Foreclosure Plan Helps Banks At Taxpayers' Expense—
On a conference call with reporters, White House National Economic Council Director Gene Sperling referred to the HARP expansion as "a win-win policy" that will result in "less defaults" and "fewer foreclosures." But one of the program's new terms will benefit private-sector Wall Street banks, potentially at the expense of taxpayers.
The newly expanded program would expunge legal liabilities associated with mortgages refinanced through the program for the original lenders of the mortgages [i.e. the banks].
Each time a bank sent a loan to Fannie and Freddie, it certified that the loan met Fannie and Freddie's safe lending criteria. But many loans sent to the mortgage giants did not, in fact, meet those criteria. Currently, when borrowers default on those ineligible loans, the mortgage giants can "put back" the resulting losses onto the banks that pushed the loans.
OK, make sure you understand what you just read. Let's continue.
Under the modified plan, "put back" liability at banks will be erased for any underwater mortgage that is refinanced through HARP, eliminating Fannie and Freddie's ability to sack lenders with losses in the event that the mortgage does not pan out.
If borrowers go through HARP, but decide after several months that the modest monthly savings do not outweigh owing tens of thousands of dollars more than their home is worth, taxpayer-owned Fannie and Freddie will have to take the full loss.
Even if the original loan was sent to Fannie and Freddie with false or fraudulent guarantees from the bank — promises that may directly be tied to the borrower's current financial problems — banks will be immune from liability.
Fannie and Freddie plan to charge banks "a modest fee" to extinguish this liability, but the administration has yet to determine what that fee will be.
A modest fee? How about $10? Well, that may be too harsh. How about $5?
Thus Obama's program for aiding homeowners is mostly a thinly disguised plan to get the banks who made the original bad loans off the hook. Who takes on the liability? Taxpayers.
The yawning gap separating the People, as represented by Occupy Wall Street and many others, and the imperial Powers That Be, who represent the banks and other special interests, is very wide. Can the corruption get any worse? Honestly, I think not, at least within the bounds of the current system.
What will change things? Nothing. It's all downhill from here. The good news? Everybody enjoys a really big train wreck ... for a while.
Dave - great article. I had mulled over doing a post about this on my blog, but hadn't quite figured out how to pull it all together. You hit the nail on the head.
Posted by: Bill Hicks | 10/27/2011 at 10:56 AM