Mortgage Settlement Is Like “Giving Banks a Parking Ticket for a Felony Offense”

February 11, 2012 SVadmin Comments 3 comments

Here Amy Goodman and Juan Gonzalez of Democracy Now interview Yves Smith of the popular Naked Capitalism blog about the Obama administration’s announced settlement with mortgage lenders.

Yves Smith has been one of the most prominent critics of this settlement (see her “The Top Twelve Reasons Why You Should Hate the Mortgage Settlement” and “Mortgage Settlement as Attorney General Sellout: Deal is Not Done, and Final Version Guaranteed to be Worse Than Advertised“).

Smith says that this settlement sets the price of fraud at from $1500 to $2000 (per mortgage … that’s less than most title insurance, isn’t it?)

3 thoughts on “Mortgage Settlement Is Like “Giving Banks a Parking Ticket for a Felony Offense””

See also “On the Mortgage Settlement: There Is No Political Solution to a Math Problem”
By Dylan Ratigan and Eliot Spitzer

Excerpt:

“An investigation, and a multi-billion dollar settlement. That sounds like a lot, until you put it into perspective. Here are the numbers. Roughly half of homeowners with mortgages are underwater, which means they owe more than they own, to the tune of $1 trillion or so. And housing values are still declining so far in this “recovery”, throwing more homes underwater. In terms of an investigation, the Savings and Loan crisis used roughly 1000 FBI investigators to uncover fraud — this task force taking on a crisis forty times more severe will employ 10 FBI agents.

There’s a reason this is so inadequate to the problem at hand. For the last three years, the policy has been to impose a political solution to a math problem. It hasn’t worked. America simply has too much mortgage debt to pay back. Serious economic thinkers across the spectrum, from Democrat Alan Blinder to Republican Martin Feldstein to New York Fed President William Dudley, believe that there is only one solution — writing down the enormous creaking mound of debt. This solution is currently off the table, because writing down these unsustainable debts could cost our fragile banks enormous sums of money and possibly lead to a restructuring of one or more of our major banks. Avoiding this clear policy choice has resulted in our economy falling into a Japan-style “zombie bank” torpor, with debts carried on the books at full value which everyone knows will not be paid back at par.”

Excerpt:

“SK: If you’ve ever been to the forum in Italy and taken a look at the friezes that are cut into the stone there, one of them is of the burning of the books of debt, which is a regular activity in pre-capitalist societies of actually writing off the debt completely and liberating people who had been put into debt slavery beforehand. If you hadn’t had that escape valve none of those societies would have lasted.

HT: Tell us how it could work as you are proposing it. Whose debts are you are writing off?

SK: Well, you have to see where the debt is a good or bad thing. And debt in some senses is definitely a good thing. Because rising debt is what actually fundamentally finances investment. Increases in productivity, new technologies, the iPads of the world and so on — fundamentally they’re financed by rising debt levels. That’s the good aspect of debt. The negative side is when we borrow the money to gamble on rising asset prices. And that’s what we’ve been doing globally, encouraged by the banks to gamble on rising share prices, rising house prices.

HT: So I want to borrow a million pounds because I’ve got this fabulous idea that is going to be a new technology, a new innovation and society will benefit from it — good. I want to borrow a million pounds because I want to gamble on financial instruments — bad!

SK: That’s right. If you look at the form of the good bit in America’s economy for example, that seems to be something which is sustainable at the debt level of something like about 50 or 70% of one year’s GDP. Whereas the current level of debt in America peaked at 300% of GDP. It’s about 4 to 5 times the level of government debt.

HT: But that’s not all bad debt. An awful lot of that for example in the US as we know is people wanting to own a house and in order to do so taking out a mortgage.

SK: Yes. What they’ve been caught up in, that has caused a bubble in house prices. There’s no denying now that there’s been a house price bubble. And the cause of it was actually borrowing money in the first place. Without the house price bubble they could be back with 75% level of debt.

HT: Where we are now, are you saying we write off the mortgages, the debts of people like you and me?

SK: Yes.

HT: Even people who can afford to pay?

SK: We have to look at the situation that we’re in and say, What do we face if we continue trying to honor debts that we now know should never have been extended in the first place? What do we face? The best example of that is Japan and Japan is a far more cohesive society than anywhere else on the planet really. They have been in a 20 year slump where the rate of [economic] growth has been lower than their population growth, and they’re having rising unemployment even with a falling population.

Now if we look at that in OECD nations, we face two decades of that. So what I’m talking about, yes, of course this is an extreme change but it is basically admitting something which should be obvious to everybody by now: the credit system has failed.”