The Housing Bubble Was No Mystery

I've not posted about the economic crash recently, although I've made references to it in other posts along the way.  Today I read a short comment on from Dean Baker at the Center for Economic and Policy Research.  He was responding to the announcement from Federal Reserve Chair Janet Yellen that there will be a new committee in the FED to study and seek to avoid another destabilizing economic crisis like the recent ones, including the Great Recession. 

Reporting on this announcement, the New York Times continues to imply the oft-reported impression that the coming of that crisis was a mystery that no one could see.  Baker's contention is that many people did see it coming, including seeing all the obvious signs of the housing bubble.  Rather than not seeing these foreboding signs, what accounts for the FED's unreadiness and lack of preventive intervention was "an extraordinary level of incompetence."  Former FED Chair Alan Greenspan himself admitted to responding wrongly to danger signs, having been blinded by a false ideology of market economic systems.

Here are Baker's remarks.

September 13, 2014
It Really Wasn't Hard to See the Dangers Posed by the Housing Bubble 

At its peak in 2006, the housing bubble had caused nationwide house prices to rise more than 70 percent above their trend level. This run-up occurred in spite of the fact that rents had not outpaced inflation and there was a record nationwide vacancy rate.

The dangers of the bubble also should have been clear. Residential construction peaked at almost 6.5 percent of GDP compared to long period average of close to 4.0 percent. The housing wealth effect had led to a consumption boom that pushed the saving rate to near zero.

Also, the flood of dubious loans was hardly a secret. The National Association of Realtors reported that nearly half of first-time homebuyers had put down zero or less on their homes in 2005. The spread of NINJA (no income, no job, and no assets) loans was a common joke in the industry.

These points are worth noting in reference to an article discussing the Fed's efforts to increase its ability to detect dangerous asset bubbles. An asset that actually poses a major threat to the economy is not hard to find. It kind of stands out, sort of like an invasion by a foreign army. The failure of the Fed to recognize the housing bubble and the dangers it posed was due to an extraordinary level of incompetence, not the inherent difficulty of the mission.

Attorneys General Must Get Tough on Foreclosure Fraud

NAAG is the National Association of Attorneys General.  AGs from the fifty states and the various other jurisdictions such as territories, districts, etc., gather periodically to cooperate in how to manage common issues and work together on multi-state problems.  Some of the cooperative work they have done includes the Tobacco Settlement and the current Foreclosure Fraud Investigation.

Through North Carolina United Power, I have been participating with a working group of national organizations who are in conversation with the AGs about the Foreclosure Fraud Investigation.  Recently, we took a group to Chicago to meet with some of them about their work to protect homeowners and keep families in their homes.  I was interviewed by the local CBS radio affiliate in the hours before our meeting.

Among the key items of our agenda are:

• broad availability of principal reductions to reset the housing market and remove the risk of more foreclosures;
• remedies for all who have been harmed by fraud other criminal acts, whether they have already suffered foreclosure, are in process, or are facing impending foreclosure;
• the end of dual tracking, with simultaneous loan modification discussions and foreclosure procedures;
• all possible efforts for loan modifications and other non-foreclosure procedures should precede the initiation of foreclosure procedures;
• criminal prosecutions for criminal acts; and
• regulatory regimes to keep this kind of mortgage fraud from being repeated.

We were able to meet with four of the state Attorneys General:  Lisa Madigan of Illinois, Tom Miller of Iowa (the leader of the task force working on the foreclosure fraud investigation), Roy Cooper of North Carolina (President of NAAG who pushed the foreclosure fraud investigation forward), and George Jepsen of Connecticut (newly elected).  Our conversation was formal, perhaps overly so.  We discussed our agenda, they discussed their records, and then we exchanged questions and vague answers.  The time was short:  only 30 minutes.  There was very little new that came out of the meeting, but do not assume that I am saying it was not worthwhile.  Let me clarify why this was such an important meeting.

In organizing, we plan an action to get a reaction.  When we get our reaction, then we evaluate what we have learned and begin to plan future research and actions in light of it.  Our action in Chicago revealed a number of important things about our work on to change the conditions faced by so many families being hit by foreclosures.

This action showed something to our organizing groups, to the four AGs present in our meeting, to the many other AGs at the hotel but not at our meeting, and to the press and their readers.  To us, it showed that we have the power to bring the key law enforcement figures in the foreclosure negotiations to the table, even if we and they know they cannot negotiate publicly with us about potential criminal proceedings against banks.  Not only do they meet with bankers.  They also meet with us.

To the AGs present, we were able to deliver a multiracial, multiethnic, knowledgable, prepared, faith-based and non-faith-based, nationwide constituency to speak intelligently and passionately about this critical work they are doing.  They found us to be what we said, representatives of hundreds of thousands of citizens, thousands of churches and synagogues and mosques, and from states all across the nation.

To the AGs not present, we made it publicly clear that their colleagues who are leading in this foreclosure investigation are willing to meet with us.  Miller, Cooper, Madigan, and Jepsen will meet with us not only in their private chambers back home but in a public forum where they can express, even with the press in the room, their strong agreement with our agenda.  They were very adamant that they would not settle for an agreement that did not fundamentally change the practices of mortgage lending and foreclosure.  They believe the result must benefit homeowners and borrowers, not primarily get lenders off the hook.

To the press and their readers (including bankers) we were able to show that the case for principle reduction remains strong, with a powerful constituency.  Among the key items reported was the commitment to take banks to court if the negotiations do not bring fundamental change.  These AG negotiators  have not given up on a strong settlement and will not accept a weak settlement.  Our action got broad coverage in newspapers and in banking industry news sources.

The investigation and negotiation of a settlement could come very soon.  Or it could drag on through the summer.  Sooner is better, and we are expecting to see a court decree with tools to provide real help to homeowners.

Big Banks See Fines and Penalties Coming

Bloomberg reported on Saturday that Bank of America and Wells Fargo/Wachovia, the biggest mortgage lenders, are anticipating significant fines, penalties, and legal costs to come from the many current investigations into questionable mortgage lending and foreclosure practices.  This news comes as the "Homeowner's Bottom Line" campaign has been meeting with states' attorneys general across the country to press for justice in the foreclosure crisis.

Of course, the devil is in the details.  What will and will not be addressed in the results of the foreclosure investigation has yet to be seen.  However, these big banks see enough significant impact coming that they felt the need to inform the public in a recent report filed with the Securities and Exchange Commission.

Foreclosure Fraud 6: Appeals, Resetting the Market, and Criminal Charges

The "Homeowner's Bottom Line" concludes by addressing a few additional concerns.  The issue of appeals echos earlier concerns with transparency.  This process cannot be left to autocratic decisions by banks and mortgage servicers.  The formulas they are using, the comparisons they are making, the documents they are relying on--all of these need to be available for examination by homeowners and their advocates.  Moreover, if a decision seems unfair to the homeowner, there must be an appeals process for reexamining the decision to foreclose.

Second, the insistence on loan modifications and principle reduction should not become a point of contention between homeowners facing foreclosure and other homeowners who have been able to continue paying their mortgages.  This crisis, and the lending feeding frenzy that led up to it, has harmed the entire economy.  Speculative, inflated prices of real estate harm entire neighborhoods, not only the homeowners facing foreclosure.  If houses in a neighborhood face sharp devaluation, underwater mortgages, and foreclosure, it hurts everyone there.  Neighborhood devaluations spread to entire municipalities as housing values drop.  People who bought homes during the housing bubble may have payed inflated prices and interest rates.  To get the housing and mortgage market back to a rational level of valuation, we recommend loan modifications be made available to all homeowners.  Mortgage principle and mortgage interest rates should be reset at the current market levels for all borrowers who want loan modifications, whether or not they are facing foreclosure.

Finally, the reckless, devious, and unscrupulous actions of some mortgage brokers, bankers, and other financial executives betrayed their primary fiduciary responsibilities to homeowners, workers, investors, and the common good.  Some have committed criminal acts.  As in the investigation of the savings and loan scandal, appropriate authorities at state and federal levels should bring criminal charges against any and all persons responsible for contributing to this crisis of credit, unemployment, foreclosure, and economic collapse.

Problem: Under the current system, borrowers who are denied for loan modifications do not have access to any kind of appeals or escalation process to have the decision reviewed for accuracy.

Solution:

Every borrower must have the right to appeal to an independent third party-a court, mediator or public agency-that can review the servicer's loss mitigation effort.  Foreclosure must be stayed during the appeal.

Problem: Mortgage fraud has caused a ripple effect of negative consequences for families, communities and government, including reduced property values, negative equity for millions of American homeowners, widespread job loss, and massive state revenue shortfalls.

Solution:

Allow homeowners to refinance at current interest rates and market values.

Problem: Throughout the entire mortgage process, from origination to servicing and modification, banks and bank executives have consistently broken the law.  Bank executives knowingly made and purchased deceptive and predatory mortgage loans; fraudulently packaged those risky loans as AAA high quality investments; ignored the securitization rules they themselves wrote; and systematically falsified loan documents in a rush to foreclose on families.  But so far, not a single bank or bank executive has had to face justice or pay for their crimes.

Solution:

As the top law enforcement officials in our states, Attorneys General must seek criminal penalties as they discover bankers and servicers who broke the law.  Banks and bank executives are not above the law and should not escape the consequences for their illegal actions.

 

A Prayer for the Foreclosure Crisis

I gave the invocation for a gathering of homeowners and organizers from fifteen states who met with Attorney General Tom Miller of Iowa.  Miller is leading a task force of the fifty state attorneys general who are investigating fraud and abuse in the foreclosure process.  Here is the prayer I offered.

God of all,

We come today with hearts that are heavy, yet hopeful.
Our hearts are heavy because
Your people cry out for the lack of justice.
Still, we come with hope because
We know the God who is a Waymaker.

Give us the clarity of your servant Isaiah
Who named the causes of economic collapse
Twenty-eight centuries ago--
The failed economy of Jerusalem caused by
The treachery of the powerful
Who had lavishly furnished their multiple homes
With the spoils of the poor.

May there be some like that prophet
Who will arise now,
Even from among this gathering,
To call on misleaders to repent
And do justice.

As you called Isaiah long ago,
We now listen to your calling:
"Come, let us argue it out," says the Lord.
Inspire our conversation,
And guide our feet.

Amen.

References:  Isaiah 3:14-15; Isaiah 5:8-9; Isaiah 1:16-18

Overheard in Des Moines

Here are a few things I heard while working on the foreclosure issue in Des Moines this week.

Gina Gates of San Jose, CA, said that her banker said she could get her home out of the foreclosure process if she would give them another $40,000.  When she asked for the agreement in writing, they said, "We don't put anything in writing."  Then they withdrew the agreement on the spot.

Peggy Mears of Los Angeles said, "When Bernie Madoff stole from rich people, he got 150 years on prison.  When bankers steal the homes of working people, they get millions of dollars in bonuses."

Ken Kelley of Antioch, CA, said, "If homeowners make a mistake on their mortgages, we lose everything.  But if banks make a mistake on our mortgages, we still lose everything."

Attorney General Tom Miller of Iowa responded to a question about criminal prosecution of fraud and other crimes in mortgage foreclosures, "We will put people in jail."

Push the Reset Button on Housing

That's what Gerald Taylor of North Carolina United Power keeps saying:  "We need to push the reset button on the housing market."  The economy got thoroughly messed up by the speculative, reckless practices of the mortgage industry.  The government responded by bailing them out.  They got their derivative market reset.  They get to borrow money for virtually zero per cent interest.  AIG got to push the reset button.  GM got to push the reset button.

But the banks don't want to give the rest of us a chance.  In a mess they willingly helped to make, they got off the hook.  The winners got to buy up their competitors for cents on the dollar.  They were allowed to voluntarily find ways to help homeowners, unemployed workers, pensioners whose incomes evaporated, and other victims of the economic crisis.  But they don't want to do it.

They string families along with delays and lost paperwork, offering loan modifications while simultaneously working full steam, even fraudulently, to move the foreclosure process forward.  Attorney General Tom Miller of Iowa says that this dual-track process of promising modifications while fast-tracking foreclosure is "insane."  What sense does it make for a family to get a loan modification proposal from the bank on the same day that the bank sold their house?

Give homeowners the same chance.  Reduce mortgage principal across the board to current market values.  That's right--we need across-the-board principal reductions for homeowners underwater, whether they are behind in their payments or not.  Push the reset button.  Make a market correction.  Why?

1.  Unemployed and laid-off workers, retirees depending on pensions, and many homeowners who bought market-rate homes with the assurance that the market was operating in a rational manner (when almost no one--not even the revered Alan Greenspan--recognized the housing bubble) did not come into financial misfortune because of carelessness, greed, or risky behavior.  They were overwhelmed by the economic tsunami from the collapse of the derivative house of cards.  Getting them on their feet and keeping them in their homes will help stabilize the economy.

2.  Foreclosing on one family, then selling the same house for half-price to another family is pure stupidity.  Without all the human trauma and with less paperwork and financial loss, banks could renegotiate reasonable mortgages for the people who are at risk of foreclosure. 

3.  Neighborhoods and communities where many foreclosures have happened become depressed, forcing down the value of other homes.  This puts more homeowners underwater and creates new risks for foreclosures.  Stabilizing neighborhoods by keeping families in their homes and paying modified mortgages is good for all of us.

4.  The so-called moral hazard of adjusting loans in a way that is beneficial to the borrower is a smoke screen.  If banks were being swindled into letting people off the hook who never intended to pay their mortgages, that would be a moral hazard.  But the true moral hazard came when the mortgage industry turned into the anything-goes-mortgage-derivatives orgy.  Even admitting that some homeowners took stupid risks or failed to do due diligence before borrowing, the risks and benefits of mortgage finance have to be shared.  Letting the banks off the hook for their bad debts while holding small borrowers accountable for their debts is an unjust financial system.

So set the reset button for homeowners.

Pillars of the Home Mortgage Business: Fraud, Lies, Theft, and Greed

I know everyone in the home mortgage business is not a thief and liar.  Let me make that plain.

Yet it is clearly the case that the ongoing foreclosure explosion has become a money-and-power-grab by banking executives and major shareholders who will stop at nothing to make sure they don't lose a dime on their crappy mortgages, no matter how many families they have to put out on the street.  First it seemed they were simply unprepared for such a large number of mortgages going underwater.  Then it seemed they were disorganized and careless about people's paperwork.  Of course there was the disingenuous worry about "moral hazard," as if the real moral hazard had not been perpetrated by the financial system that speculated and cast away all standards in order to create more and more billions of mortgage backed securities.  Eventually it became clear that even the mortgage foreclosure cases that were progressing were not undergoing due diligence.  Then cases of "mistaken" foreclosures began to pop up more and more.  Finally, banks began to admit the ways they have been breaking the law in order to prevent loan modifications and recourse against foreclosure proceedings.  What is emerging is a coordinated and willful theft of homes from average homeowners.

So this week organizers from all over the country have converged in Des Moines, Iowa, for a summit on ending the ongoing bank misconduct and lawlessness in home foreclosures.  Gerald Taylor and I represent North Carolina United Power at this meeting, along with people from coast to coast who are fed up with the impunity of banks in the current financial crisis.  Like me, you may wonder, "Why Iowa?"

There are two reasons to meet in Des Moines.  First, Iowa Citizens for Community Improvement have a long history of making a difference for working people who are being abused by the powerful.  They are hosting our gathering.  Second, Iowa Attorney General Tom Miller is the lead lawyer for the national investigation into illegal banking activity in the foreclosure crisis.  He will meet with our group to discuss the ongoing investigation and the possibilities for working together toward a just resolution of this crisis for all parties.

We want three major elements for a just solution. 

1. Hold banks accountable for real, transparent loan modifications with borrowers before any foreclosure proceedings, including lowering rates, to keep families in their homes.
2. Mandate principal reduction for owner-occupied homes as a first-line modification tool.
3. Include remedies for homeowners who have lost their homes to be reinstated as homeowners or financially compensated for the effects of this unlawful, corrupt system.

 We will not solve it with one meeting, but we hope to see another vital step this week.

Isaiah and Economic Justice 5: Forcing People from Their Homes

Isaiah 5:8-10

Ah, you who join house to house,
...who add field to field,
until there is room for no one but you,
...and you are left to live alone
...in the midst of the land!
The Lord of hosts has sworn in my hearing:
Surely many houses shall be desolate,
...large and beautiful houses, without inhabitant.
For ten acres of vineyard shall yield but one bath,
...and a homer of seed shall yield a mere ephah.

The foreclosure crisis in which we are wallowing in our time is not the first one ever to happen. Isaiah brings it up as one of the main issues of economic injustice in his day. We know how the system works. Some people who have control of large amounts of money finance home construction and offer homebuyers mortgage loans by which they can move into a house before they can pay for it. If all does not go according to plan, the homebuyer may lose everything, including the home. All the while, the creditor was making money hand over fist from the interest on a long-term loan.

Mortgage loans and interest are not inherently evil. In a prosperous economy they can give workers access to home ownership with enough time to earn the money and pay for a home. Yet when the economy is not so strong, the system can lead to disaster for the homeowner. Moreover, when an economy moves step-by-step down a path of greed and injustice, homeowners may be put at a great disadvantage, shifting more and more risk onto them.

For instance, in an economy in which health costs have risen rapidly and growing numbers of workers become uninsured or underinsured, one illness or injury can lead to loss of income, loss of job, enormous debt, mortgage foreclosure, and bankruptcy. The bank adds another house. In another case, when businesses export jobs overseas and leave entire towns and neighborhoods without opportunity for earning a wage, people lose their homes. The lender adds house to house. When industrial farms use their political influence and polluting ways to undercut hard-working farmers, old family homes, farms, and lands are lost. The wealthy add house to house and add field to field. Entire towns, neighborhoods, and subdivisions may be emptied of occupants, until the foreclosed homes occupy all the land and there is no room for anyone else. The wealthy financiers are left alone to live in the midst of the land.

So around Phoenix and Las Vegas, in Los Angeles and Seattle, in Florida, Ohio, and Michigan, surely many large and beautiful houses are without inhabitant. The gimmick in such a system is to "get mine, and get out." Many mortgage bankers believe they have done this. For insurance, they got the government to bail them out so that whatever they lost in the crash was reimbursed to them out of our pockets. But at some point, somebody has to bear the cost of getting mine and getting out. Isaiah says that the cost will ripple to the point that the productive economy will diminish to near nothing.

The point is to fix this before it gets so bad. Find a way to get people into homes and keep them there. An economic system can't stand on this kind of self-serving injustice.

Deficits and Politics

For those of you who are as irritated as I am by the smoke screens about deficits that are used to hinder economic reforms, Dean Baker named the problem again this week. Are "tax and spend" liberals in Congress causing deficits? Of course, Congress is causing deficits, but not in the ways that their critics claim.

Take the wars in Afghanistan and Iraq. The completely unnecessary war in Iraq has helped to build a trillion dollars into the deficit. Congress gave in and colluded with the Bush administration and the Project for the New American Century agenda to waste this money in the name of empire.

How about the housing bubble? Laissez-faire economic philosophies said that the banks, the mortgage industry, the credit default swap system, and all the "new economy" would be self-correcting and self-policing, leading to continued prosperity. I guess maybe they were deluded by their own self-serving greed. There goes another trillion dollars to the deficit thanks to the "talent" running the finance industry.

Baker gets it right, but thanks to bad reporting most people can only see the smoke screen.

Open Hearts Mean Open Hands, Part 1

During the early summer I was working with a group of scholars to prepare a theological reflection on the economic crisis. I posted the resulting document in several parts. This document was distributed to bank executives, along with a document prepared by a muslim scholar from North Carolina which explains the economic commitments of Islam and its opposition to usury.

Another purpose of the "Theological Reflection on the Economy" was to create conversation in churches and provide encouragement to pastors to preach on economic issues. As part of that purpose, I prepared a sermon on the economic crisis which I have had several opportunities to preach in the past month. The last occasion was a Service of Prayer and Public Witness hosted by my church, Mt. Level Missionary Baptist Church, at the instigation of Rev. Dr. William C. Turner, Jr. A number of other churches and ecumenical groups joined with us on Wednesday, Sept. 23 for the service. A Jewish Rabbi and a Muslim Imam were on the program to read from their scriptures and bring remarks concerning the economy and usury.

What follows here and in the next two posts is the text of the sermon preached that night.

Deuteronomy 15:1-11
Acts 4:31-35

If you take some time to read a newspaper, listen to the news on the radio, or watch the news on the television, you can’t help but hear people talking about hard times. Or maybe I should say, you can’t help but hear people arguing about what we ought to do in these hard times. The latest version of the argument is about health care and health insurance reform. Different interest groups and political camps have different views of how to organize the system of access to health care, and they are calling each other idiots and Nazis. On a recent Saturday outside the Capitol in Raleigh, hundreds gathered to demand health insurance reform now. Across the street, people tried to shout us down, saying, “No ObamaCare.”

Stretching the truth and even flat-out lies are daily fare in this shouting match because billions of dollars and millions of lives are at stake. At the rally I mentioned at the Capitol in Raleigh, Rev. Dr. William Barber, known to many of you both as a preacher and for his work with the North Carolina NAACP, delivered one of the best lines on this matter. He said it in response to the disinformation an fear campaign that is claiming government committees will be deciding which old people can live and which must die. Barber said, “There is not a death panel in the current proposal; there is a death panel in the current system.” Right now, corporate insurance managers make decisions to deny claims, drop coverage, and delay payments that can mean life or death, work or disability, survival or bankrupty in the lives of people like you and me. Some of you may have heard about another great big lie. After a rally in Washington, DC, a few days ago, the rally’s promoters intentionally put out a press release with a photograph of crowds on the Capitol Mall from another event, an event held in 1997, to give the impression that their crowds were 10 times as great as they really were. Everyone who has been on the gravy train in the out-of-control health system wants to keep that train rolling.

People whose livelihoods have been destroyed by the exploding costs and inequities of the current health system have had enough, but these people have trouble getting their voices heard. They are too busy working extra jobs to stay ahead of the bill collectors. Or they have become homeless and are just trying to figure out how to recover from losing their home to foreclosure by the bank. Or they are too sick with an untreated illness to speak up. Some are just too discouraged by the number of hard-hearted, tight-fisted people they have run into.

There is plenty of blame to go around for this health care access mess we are in, starting with insurance companies and pharmaceutical companies, then moving on to various institutions, health professionals, and government officials. And the economic problems of health care are just one part of our economic woes. Bad thinking, bad leadership, bad values, and bad morals have spread like the untreated cancers of the uninsured throughout our economic system. The current recession was directly caused by loose, shady, exploitive practices in credit and finance, and by lots of wishful thinking that it would all work out even if the risks people were taking were far beyond what prudence would allow.

Hard economic times place people and institutions in jeopardy, whether it be from health care costs, credit crises, pay cuts, or layoffs. Not only is there plenty of blame to go around, today there is also plenty of pain to go around. You and I have seen the results up close. People are losing their homes. Banks are closing. Businesses are failing. Workers are losing jobs. Families are uprooted. People are crying out for a solution. This week, some people say the recovery has arrived, but we sure don’t see it in our neighborhoods and workplaces.

What kind of a economic recovery leaves giant banks standing while the average worker’s life gets harder and harder? That is not a solution. It smells like collusion. Whose money bailed out the banks? Every taxpayer’s money. But who is an economy supposed to benefit? (I’ve got a lot of questions, folks. May I ask some questions here?) Who says billions can bail out executive jobs but nothing can bail out the jobs of common laborers and clerical workers? Who says tax dollars can pay off banks’ bad debts, but the average taxpaying citizens are on their own to dig their way out of debt? Debt relief for millionaires and homelessness for working people—that’s not the kind of economy we believe in. That is like saying Jesus came to announce the Jubilee, to proclaim the Year of Remission, to offer the forgiveness of debts, BUT . . . BUT . . . but then qualified the announcement by telling us only bankers and brokers and insurance executives are eligible. All I can say is that this topsy-turvy, smoke-and-mirrors, hocus-pocus economy is messed up.

I want to spend a few minutes recollecting the route we took on the way to this economic train wreck.Is it all right to break things down tonight?

One major part of the problem had to do with a collapse of home prices. Loans had been written with the assumption that housing values would rise steadily and without interruption. Some people borrowed more than they could afford, but there were others who actually could afford their mortgages, only to find that the crashing market in home values left them paying double the value for a house that had originally been overpriced in an inflated market. The accumulating effects of a weak economy led to workers losing jobs, and without jobs they also could no longer meet their mortgage payments. In other cases, because of adjustable rate mortgages or balloon mortgages, many people found their payments increasing at the very time when they were taking pay cuts, losing work hours, and even losing their jobs. Now the total number of mortgages in trouble was relatively small compared to all the ones that were doing fine, but the fear of bad loans and bad debts began to spread like a panic.

People became concerned about many other forms of debt, from the high finance of hedge funds to the average person’s credit card debt. A crash in the stock market followed up the crash in home prices, and many people who had thought they were in good financial shape now saw their pensions and retirement funds, their homes, and their investments lose a third or a half of their value, not to mention the ones who lost everything to swindlers running Ponzi schemes. Add to those the people who have lost health insurance coverage and built up mountains of debt for medical care.

When the economic situation became too severe to ignore, government officials recommended a massive bailout of major financial institutions, with the claim that saving them would save us all. Institutions who had operated in an ethereal world of trading worthless paper for empty promises were treated as the foundation and backbone of the economy. For millions of Americans, however, the recovery of these institutional Leviathans has not had the intended ripple effect. We have not been warmed by the glow of their cash-burning recoveries.

The idea was to stabilize the financial system by providing cash to banks and other financial institutions who were threatened by bad loans. However, the banks and financial institutions took our money and held on to it, or they used our money to prop up only their executive bonuses and stockholder profits. The cash infusion to financial giants did not slow down the pace of foreclosures on home mortgages that keep putting hardworking families out of their homes. Again, I have to quote from Rev. Dr. William Barber, who said, “You can’t break the bank, then rob the bank, then say there ain’t no money in the bank.” In other words, that bailout money was not intended for a small, smug, self-important group of financial genius posers who believe they are entitled to bonuses even when they fail miserably. It should be for the lenders and the borrowers who are in trouble. The bailout did not pump up the economy or reverse the plummeting employment statistics. It did not ease the pressure of indebtedness on the wage-earning public. To the contrary, credit card companies pressured their small borrowers with new and harsh credit terms and fees, and consumer interest rates soared to loan-shark heights.

So I’ve taken a little time to recall how the economic situation got so bad. We are all very capable of making a mess of our lives, and sometimes a few people can bungle things up for the rest of the people. Our collective failures can accumulate to the point that it sometimes seems there is no way out of our trouble. One solution may seem to introduce a whole new set of problems.

Continued in next post . . .

Bailout 16: Thoughts on Describing the Problem

As mentioned earlier, I am working on the problem of analyzing the current economic situation in light of biblical and theological concepts related to Jubilee, the Sabbatical year, the denunciation of usury, etc. Below are a few short paragraphs in which I have tried to describe the problems of the economy in order to begin this sort of analysis. Obviously, this is a work in progress.

1. Hard economic times place people and institutions in jeopardy. In 2009, there is plenty of pain to go around. People are losing their homes. Banks are closing. Businesses are failing. Workers are losing jobs. Families are uprooted.

2. Some call the economic woes a credit crisis. Some focus on the housing price bubble. Others emphasize the irresponsibility of financial institutions eager to sell “creative” investment products. Still others highlight the complexity of financial instruments divided, bundled, and resold again and again so that no one is sure who owns what. Many recognize that consumption had outpaced income, and too much of the economy depended on overextended debt. Others criticized the deregulation of financial institutions which allowed them to take inordinate risks with other people’s money.

3. A major part of the problem had to do with a collapse of home prices. Loans had been written with the assumption that housing values would rise steadily and without interruption. Some people borrowed more than they could afford, but others who could afford their mortgages found that they were making payments on a mortgage for an amount that was up to twice the new value of their home. They could not afford to keep paying double for a house that had originally been priced in an inflated market. In a weak economy, workers losing jobs also could no longer meet their mortgage payments.

4. All these mortgage problems led to a crisis of confidence in the mortgage-based securities and the financial institutions investing in them. As the seriousness of the mortgage problems became apparent, the more people became concerned about many other forms of debt, including credit card debt which has grown exponentially. A crash in the stock market followed up the crash in home prices, and many people who had thought they were in good financial shape now saw their pensions, their homes, and their investments lose value dramatically. People losing health insurance coverage were building mountains of debt for medical care.

5. When the economic situation became too severe to avoid, former Treasury Secretary Paulson and Federal Reserve Chair Bernanke recommended a massive bailout of major financial institutions. With only a bare sketch of a plan, the engines of government shifted into high gear to authorize transferring hundreds of billions of dollars directly to banks and other financial institutions to prop up their endangered portfolios of assets.

6. Their idea was to stabilized the financial system by providing cash to banks and other financial institutions who owned securities based on delinquent loans. They said that this would set things in order so that banks would be willing to lend money to grease the wheels of commerce. However, the banks and financial institutions took the money and held it. It did not slow down the pace of foreclosures of mortgages. It did not pump up the economy. Homeowners kept losing their homes with no relief. Credit card companies pressured small borrowers with tightened terms and higher interest rates.

7. What kind of a solution leaves giant banks standing while the average worker’s life gets harder and harder? That is not a solution. It smells like collusion. Whose money bailed out the banks? Who is an economy supposed to benefit? Who says billions can bail out executive jobs but nothing can bail out labor jobs? Who says tax dollars can pay off banks’ bad debts, but the average taxpaying citizens are on their own? Debt relief for millionaires and homelessness for working people—that’s not the kind of economy we believe in.

Bailout 5: How the House of Cards Began to Tumble

According to some new information, Wells Fargo analysts and others have come to conclude that Wachovia's mortgage-based securities are probably worth 85¢ on the dollar, with a few of the worst ones worth 74¢ on the dollar. That is lower than earlier estimates that I had read, but not so low as the market was pricing them. No wonder Wells Fargo was willing to pay much more than Citigroup had offered to buy out Wachovia. I reiterate that the mortgage losses in real dollars are not nearly so bad as what the market would make it seem. Citigroup was very angry that someone called them on their extreme low-ball offer and sued Wells Fargo. Now they are fighting it out over who buys Wachovia. If the market stabilizes, who knows if someone else will even offer a better price.

On the other hand, the market in loans between banks and in commercial paper (short-term loans to large businesses to keep their cash flowing day to day) got into a serious crisis over the past months and weeks. I got a tip to listen to an outstanding description of just why this crisis came to be seen as so serious. I was surprised to find out that it was on the public radio program This American Life, usually known more for its quirkiness than for hard-hitting financial reporting. I don't mean they never tackle hard topics--their work on school reform is also some of the best I have ever heard. So if you have about an hour to listen and learn, you won't be disappointed by listening to Another Frightening Show About the Economy. If you want to dig a little deeper, another hour will allow you to hear about the housing bubble and unorthodox mortgage practices which laid the groundwork for this recent crisis in the show called The Giant Pool of Money.

Finally, the point that the people of the U. S. who are being asked to bail out these businesses need to get a share of the profit from their recovery. Another Frightening Show will explain the idea of making sure the government takes an ownership share through preferred stock in whatever companies it bails out. A growing swell of voices are asking for this. It is written as an option into the bill that Congress finally passed, but not because Paulson or Bush were advocating it. So if you want to know what to say to your representatives and senators, then ask them to support this way of dealing with the money our taxes will make available. Here is how one economist describes it.

Bailout 2: Bailout or Feeding Frenzy?

Bailout or feeding frenzy?

The failure to pass today's bill promising a solution to the credit crisis should not be a big surprise. Numerous members of Congress were reporting contacts from constituents opposing the Bush/Paulson plan at ratios between 100/1 and 1000/1. This weekend's Citigroup acquisition of Wachovia Bank should give us a clue into the anger and opposition of the populace. Citigroup swooped in and acquired an enormous range of financial resources at fire sale prices. This is exactly the kind of profiteering, even racketeering, that the average person suspects is going to happen.

Citigroup, it is said, has tried without success to build a consumer banking business for many years. Raking in money in other ways, they were among the financial institutions not overwhelmed by the mortgage crisis. (What happens when this morphs into a consumer credit card debt crisis, is yet to be seen.) Bad decisions by First Union, which renamed itself Wachovia when it acquired the previously well-managed bank, included buying the mortgage company which specialized in one of the now-despised mortage innovations, option adjustible-rate mortgages. These are the ones that let the borrower take the option of not making a payment now and then (and adding it on the end of the loan period). Now they own too many bad mortgages.

The strange thing about this crisis of "securitized" mortgages is that they are really worth much more than the market is saying. Around 2.5% of mortgages are in foreclosure. Many of those have been processed into interest-bearing securities, or bonds. So on average, it might be that the value of such a bond, in real terms of how much it would pay out, may have dropped to around 97.5 cents on a dollar. But let's estimate that the mortgage bonds are worse off than that because they are encumbered by additional mortgages which are not yet in foreclosure, but in danger. And let's say that these securitized mortgages have a larger share of the bad mortgages from the recent frenzy of bad financing than the 2.5% rate would indicate. So maybe these interest-bearing bonds may pay out 90 to 95% of their face value. Maybe a few would be even lower, or much lower. But that would not cause such a crash. What causes the crash is that since no one wants to buy these securities, their price drops way below their adjusted value. Then the holders may find themselves with a cash-flow problem. They need to sell some securities, but they can't get a buyer at a fair price. When this infects the whole market, the financial institutions start to treat these securities as if they are worth almost nothing. As a side effect, a powerful and wealthy institution like Wachovia finds its stock dropping to pennies. But buying them at a low price is a great idea if you don't have to worry about cash flow. The government has time to see them pay off, and maybe at a good profit.

In walks Citigroup, with the help of the FDIC, to pay a measly $1 per share to buy one of the largest banks in the world with assets galore. Buying at a fire sale lets them reap a huge reward. Just like Bank of America bought Countrywide and Merrill Lynch. Just like J. P. Morgan Chase bought Washington Mutual. After all this hoop and holler about a financial crisis, the US is left with three financial giants who have an even greater ability to dominate the financial business and exercise a joint monopoly over setting interest rates and fees.

This so-called bailout had nothing to say about the concentrated power of wealth in the hands of the few. And its fatal flaw was that it did nothing to help the other people caught in the mess of bad mortgages. The bailout plan had no provisions to help refinance mortgages for common people, homeowners who are facing foreclosure in a weak economy. It was suggested that by buying these mortgage-based securities, the government would be able to refinance mortgages for homeowners. But owning the security is not the same as owning the actual mortgage. These remain in the hands of banks, savings and loans, and other mortgage institutions all over the place. This plan does not offer any relief to them. It offers relief to large financial instutitions who have questionable securities.

So an additional provision to assist homeowners might have been enough to win a few more votes. The provision to deny "golden parachutes" are a gesture toward the common borrower, but not much more than that. Real help to homeowners is what was needed. The long and heated meetings about bailing out the economy could not muster the compassion and courage to do what was right. The proposal allows the same feeding frenzy to go on. As one commentator said today (I can't remember who), the homeowners who endure foreclosure faces the greatest crisis. They can't go back to their neighborhoods. They lose the bedrooms and kitchens where they lived. They no longer live where their ball teams or other social connections had been built up.

The Neighborhood Assistance Corporation of America released the following comments:

There is one reason for the financial crisis – Foreclosures.
There is only one solution – Restructure mortgages to make them affordable.
Who would benefit – Everyone.

This seems to me to sum up the shortcomings of the proposed bailout.

Thanks to reports on NPR's Morning Addition, AP news reporting by Sara Lepro, and the insights of my friend Steve Bumgardner for helping me think abou this issue. Any erroneous reporting and reasoning is mine.