If you're following the economy (it'll still be here the day-after-the-day-after
the eleven-two hangover subsides on eleven-four; and, yes, the nine-one-one quasi-metaphor
is there, since the MSM's post-election analysis will be chock-full of
reverse information on what's
really going down) there are a couple of must-reads in Sunday's papers (and their blogs) which shed significant light upon where things may be headed in congress' lame-duck session in mid-November and beyond, IMHO. The first article is an Ezra Klein WaPo interview on that paper's website with Columbia professor and Nobel Prize-winning economist Joseph Stiglitz, "
Economist Stiglitz: We need stimulus, not quantitative easing." The second piece is a New York Times Op-Ed column by Naked Capitalism Publisher Yves Smith, entitled: "
How the Banks Put the Economy Underwater."
"But first, a couple of comments from and about our 'sponsors'..." namely, (much-more-than) rumors regarding highly-probable White House and Federal Reserve strategies concerning our economy in the very-near-term.
A huge hat-tip to University of Oregon economics professor Mark Thoma, who points out much of what I'm talking about throughout this post over at his
Economist's View blog; specifically, regarding the latest buzz on the White House's economic strategy during the lame-duck congressional session, in: "
White House Considering 'Decoupling' Top-Tier Tax Cut," where Professor Thoma directs us to this WaPo piece...
White House considering 'decoupling' top-tier tax cut, by Lori Montgomery, Washington Post: With Republicans poised to gain ground in Tuesday's elections, the White House is losing hope that Congress will approve its plan to raise taxes on the nation's wealthiest families and is increasingly focusing on a new strategy that would preserve tax breaks for both the wealthy and the middle class.
According to people familiar with talks at the White House and among senior Democrats on Capitol Hill, breaking apart the Bush administration tax cuts is now being discussed as a more realistic goal. That strategy calls for permanent extension of cuts that benefit families earning less than $250,000 a year, and temporary extension of cuts on income above that amount.
The move would "decouple" the two sets of provisions, Democrats said, and focus the debate when tax cuts for the rich expired next year or the year after. Republicans would be forced to defend carve-outs for a tiny minority populated by millionaires, an unpopular position that would be difficult to advance without the cover of a broad-based tax cut for everyone, aides in both parties said...
Montgomery tells us that, "...Republican leaders have said they would accept a two-year extension of all the cuts."
...Administration officials said they have begun plotting strategy for the lame-duck legislative session but declined to comment on decoupling or another idea floated in recent weeks: embracing tax breaks for the rich in exchange for Republican support for additional economic stimulus...
Okay, I can deal with some political horse-trading to achieve more stimulus for Main Street. But, unlike the first stimulus package, let's actually make it about creating jobs, not just "saving" them. (What a concept, huh?)
However, Thoma points out that this could just be more of the same-old, same-old...
...Republicans have every intention of making the tax cuts permanent in any case, they're just trying to delay the main battle until they have a better chance of winning. Democrats have misplayed this.
Also, notice how the talk of additional stimulus from the administration is now entirely about tax cuts? Additional spending, which would have a larger and more certain effect on aggregate demand and employment, is not even mentioned. Talk about giving up without a fight.
And what kind of deal is "We'll trade tax cuts for the wealthy for tax cuts for business and the middle class" anyway? That sounds like the path to making the tax cuts for the wealthy permanent. There's no need to trade. Put tax cuts for the middle class and businesses to a vote and dare the party that has never seen a tax cut it doesn't like to vote it down.
But, enough from Thoma and yours truly about this, here's what economist (and, yeah, the guy's my hero) Joe Stiglitz had to say about real stimulus (much like what Krugman's been saying, all along, too) to Ezra, over at the WaPo (while Stiglitz also points out that more quantitative easing is, essentially, a waste of time and massive resources), Saturday night:
Economist Stiglitz: We need stimulus, not quantitative easing
By Ezra Klein
Washington Post Staff Writer
Saturday, October 30, 2010; 9:07 PM
...[KLEIN:] Why are you so confident that more fiscal policy will work?
[STIGLITZ:] The point is the stimulus did work. They made a very big mistake in underestimating the severity of the downturn and asked for too small of a stimulus, and they didn't do enough in the design. About 40 percent was tax cuts, and we all knew that wasn't going to be very effective. But it worked; without it, unemployment would've peaked between 12 and 13 percent. With it, it peaked at 10 percent, and that was an achievement. A better, bigger stimulus would've gotten it still lower. The severity of the recession was too big to be dealt with by a stimulus of that size. I'd also note that one-third of government spending is at the state and local level, and you're seeing cutbacks there, which is why we're losing jobs. If you look at the net stimulus - federal and state and local - the full stimulus was extremely small, particularly when you see how much was tax cuts.
And part of the argument here is that the channels by which fiscal policy operates are more straightforward than the channels by which quantitative easing operates, right? If the Fed buys long-term Treasury bonds, other things need to happen before anyone gets a job. If the government decides to build a bridge, people who build bridges, and people associated with the building of bridges, get jobs.
Right. We know from the historical experience that unemployment benefits get spent almost dollar for dollar, and infrastructure spending actually gets spent, and you get new assets to boot.
So if I understand your argument as a whole, it's that we should be doing fiscal policy, and the Federal Reserve should basically announce that they won't let interest rates rise, but shouldn't step in before they're specifically needed...
You see, folks, the truth is that Fed Chair Bernanke's "Quantitative Easing" Version 2.0 ("QE2") is all about a second, stealthy Wall Street bailout, with a substantial focus upon the bond industry. So, if you were wondering why the banks and our government are saying, "no problem," when it comes to the current mortgage fraud crisis, it's because they know that's precisely due to the fact that the Fed's going to be announcing this on Wednesday or Thursday. And, it'll include earmarking many, many hundreds of billions of dollars for soaking up...drumroll please...all those fraudulent mortgage-backed securities held by Wall Street right now.
But, again, don't take my word for it. Here's highly-regarded Wall Street analyst Chris Whalen, explaining what's going down: "Chris Whalen Welcomes Our New Tyrannical Overlords, Prepares For The Taxpayer Funded Mortgage Insurer Bailout."
And, that brings me to my second "must-read," IMHO, on our economy this Halloween Sunday--plenty of tricks along with a few reality-based treats, too--from another one of my heroes, Naked Capitalism Publisher Yves Smith, in her op-ed in Sunday's NYT: "How the Banks Put the Economy Underwater."
Yves focuses upon two inconvenient realities in the banking industry: 1.) the fact that the banks have been constantly striving to squeeze more profits out of their services, including "...taking shortcuts with their mortgage securitization documents," and, 2.) around 2004, the banks couldn't keep pace with the explosion in the mortgage industry, in general; especially with regard to the securitization process which served as the foundation for the rapidly-expanding mortgage/refi bubble.
How the Banks Put the Economy Underwater
By YVES SMITH
New York Times (Op-Ed)
October 31, 2010
IN Congressional hearings last week, Obama administration officials acknowledged that uncertainty over foreclosures could delay the recovery of the housing market. The implications for the economy are serious. For instance, the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages, rather than widely cited causes like mismatches between job requirements and worker skills.
This chapter of the financial crisis is a self-inflicted wound. The major banks and their agents have for years taken shortcuts with their mortgage securitization documents -- and not due to a momentary lack of attention, but as part of a systematic approach to save money and increase profits...
Bold type is diarist's emphasis.
Yves tell us the roots of the banking industry's problems lie much deeper than just this latest travesty.
...A second, potentially more significant, failure lay in how the rush to speed up the securitization process trampled traditional property rights protections for mortgages...
--SNIP--
...As a result, investors are becoming concerned that the value of their securities will suffer if it becomes difficult and costly to foreclose; this uncertainty in turn puts a cloud over the value of mortgage-backed securities, which are the biggest asset class in the world...
--SNIP--
....The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable...
Yves closes out her column by stating: "...unless the mortgage finance industry agrees to a sensible way out of it, the entire economy will be the victim."
And, as I noted above, this Halloween Sunday, another stealthy Wall Street bailout will do just that trick. Yes, another trick for Wall Street. (Double-entendre intended.)
As always, Smith provides us with significantly greater detail about all of this on her blog over the past couple of days on these subjects (as she has been doing, quite intensively, for more than six weeks); most notably, here: "Will State AGs in Shining Armor Slay the Bank Dragons?:"
# # #
(Diarist's Note: Diarist has received written authorization from Naked Capitalism Publisher Yves Smith to reprint her blog's diaries in their entirety for the benefit of the Daily Kos community.)
Will State AGs in Shining Armor Slay the Bank Dragons?
Yves Smith
Naked Capitalism
October 30, 2010
Joe Nocera has a very hopeful piece at the New York Times on the potential scope and impact of the investigation by all 50 state attorneys general into the robo signing scandal. Nocera stresses that the leader of this effort, Tom Miller of Iowa, and a core group of assistant AGs with long standing working relationships, are using the probe into what banks would have you believe are mere paperwork problems to delve into more serious abuses, with an eye to forcing the servicers to make serious loan modifications:
And best of all, they have a very clear idea of what they are trying to accomplish. They don't want to merely reform the foreclosure system (though that would be nice, wouldn't it?). Nor do they particularly want a big financial settlement, which would be meaningless for a giant like Bank of America.
Rather, they hope to use their investigation as a cudgel to force the big banks and servicers to do something they've long resisted: institute widespread, systematic loan modifications. "Instead of paying a huge fine," Mr. Miller posited to me the other day, on his way to an election rally, "maybe have the servicers adequately fund a serious modification process." Getting the banks and servicers to take loan modification seriously is another in a series of areas where the Obama Treasury Department has failed miserably.
Nocera recounts how some of the AGs were early onto abuses by subprime bank lenders, and mounted successful efforts against First Alliance (in 2002!), Household Financial, and Ameriquest.
But the story also describes how the state prosecutors were blocked from going after bigger banks:
During the bubble, it was the state attorneys general who first saw the problems in subprime lending. But whenever they tried to do something to halt the predatory lending and outright fraud, they were stopped cold by the federal bank regulators, who consistently sided with the banks in court. It is not too much to say that if the states had succeeded, the subprime crisis might never have occurred.....
On the contrary, the O.C.C. and the Office of Thrift Supervision, the two primary federal regulators of the banking industry, viewed their role, incredibly, as protecting banks from consumers rather than the other way around.
They consistently went to court to block efforts by states to put a stop to predatory lending. Their primary weapon was the doctrine of pre-emption, which said, in effect, that because the national banks were governed by federal rules, they were immune from state consumer protection laws. The success of both agencies in asserting pre-emption -- which they also used as a marketing tool to make their charters more attractive to potential bank "clients" -- actually forced some states to roll back their antipredatory lending laws.
Nocera also believes the passage of Dodd-Frank and the difference in national sentiment mean the AGs will have a clear field in which to operate:
One advantage they have this time is that foreclosure is a state matter, not a federal one. The O.C.C. couldn't intervene even if it wanted to.
Of course they have another advantage this time around: times have changed. No federal regulator would have the nerve, post-financial crisis, to try to block the states from investigating the mortgage foreclosure scandal.
The law has changed too. As a result of the Dodd-Frank law, it will be much harder for a federal regulator to use pre-emption to shut down a state investigation into a financial institution. Under the new law, states can enforce their own state consumer laws against nationally chartered banks -- even when those laws are stronger than any parallel federal law. And state attorneys general have been given the explicit right under the new law to enforce the rules and regulations that will soon emerge from the new Consumer Financial Protection Bureau.
Yves here. As much as I would like to believe this optimistic scenario, do not underestimate the banking industry's ability to regain the upper hand, and from the public's perspective, snatch defeat from the jaws of victory. While a bold move by the Ohio attorney general to stymie bank efforts to continue with business as usual in the wake of the robo signing scandal is a good early salvo, this battle has only recently been joined. Because the banks don't yet appear to realize how much jeopardy they are in, they have not yet geared up for a serious fight.
One factor very much in the AGs favor is the degree of denial operative in the financial services industry and Washington. We've (and by this I mean me plus the mortgage and legal experts I confer with) have been gobsmacked by the lame defenses offered by securitization industry professionals, and more important, major law firms. They appear not to understand the nature of their clients' transgressions; there remarks, when you parse them, amount to "The procedures were proper, what are you folks, idiots?"
But the issue, as we have described in gruesome detail, is the procedures set forth in the securitization documents were not followed, and it appears the lapses were significant and widespread. Now we've been told by some experts in close contact with investors that these white shoe law firms are so removed from what is happening in local courts, and have not been consulted by clients who really haven't turned over the rocks in their own organization, that they are badly behind facts on the ground. While that may be true, there is a more cynical explanation: that investors relied on big firm opinions, which were crafted very narrowly (the form was "if everyone does what they committed to do, everything is swell). These attorneys are bound to come under the spotlight, and their emphasis on the soundness of the procedures, as opposed to what actually took place, is very consistent their likely "see no evil" defense.
The longer that bankers, their lawyers, and their lapdog regulators keep saying "nothing to see here", the harder it will be for them to reverse gear and demand that Congress or Federal regulators intervene on their behalf. But don't kid yourself that discussion of that possibility is not underway. I happened to chat with a staffer to a not-terribly-bank-friendly Senator about the foreclosure mess. He matter of factly said he though concerns were overblown (this was about a month ago, before additional shoes had dropped) but then volunteered that if anything serious were amiss, Congress would intercede, relying on pre-emption. Now does Congress have the nerve to trample on state law and run the risk of a Constitutional challenge? I suppose it depends on how high the stakes are perceived to be.
Similarly, we've had this worrying trail balloon:
The chairperson of the Federal Deposit Insurance Corporation recently suggested a solution to the on-going mortgage and foreclosures scandal. FDIC Chair Sheila Bair proposed that the banks involved would be granted "legal protection from lawsuits" in exchange for granting struggling homeowners a minimum of 25 percent reduction in monthly mortgage payments.
First, the idea of a broad based exemption from liability is heinous and undermines the operation of a capitalist society. What good are contracts if you can mess up on a grand enough scale so as to receive a Federal waiver? Second, mere payment reductions are inadequate, and serve to protect servicers, whose fees are based on unpaid principal balances. Most investors favor principal mods to viable borrowers because their losses are lower than what they experience through the costs of foreclosure and the process of selling the home (there would need to be disciplined processes for verifying income and putting together household budget information; NACA has a process that could be adapted to this purpose). And remember, many borrowers losing their homes now were not profligate borrowers, but normal credit losses, as in individuals suffering from job losses or cutbacks in hours worked, as well as those on the wrong end of servicing errors.
So I'd be delighted to be wrong and see Nocera's scenario pan out, but state attorneys general have been hemmed in before. If the foreclosure mess turns out to be as serious as we believe, the banks will push Congress and its friendly regulators hard to call off those nasty state AGs. This saga has a long way to run before anyone can start forecasting outcomes.
# # #
Bold type is diarist's emphasis.
Here's another weekend post from Yves regarding what's going on in Ohio, and elsewhere at the state level, where the foreclosure mess is now playing out: "Ohio Attorney General Guts Bank 'Just Submit New Affidavits' Plan."
Yes, another Halloween and more tricks (for the MSM and Main Street) and treats for the kids...and the status quo, too.
Happy Halloween, all!
Peace!