Tuesday, April 17, 2012

The Economic Crisis and the "Formula For Fraud"

Understanding how deregulation of banks helped caused the present economic calamity.
[Edited 4/18/12]

During the current economic crisis, millions of homeowners have lost their homes through foreclosure, over 1.9 million in 2009 and 2010 alone. Almost everyone knows someone who has lost their home or who is currently at risk. The banks who made and encouraged the bad loans, and who sold them off as triple A rated, but nearly worthless, bundled, complex securities, and who are arguably most responsible for the economic collapse, have been bailed out. Little has been done to help those foreclosed upon, or homeowners in distress.

Back in 2010-2011, Dean Baker at the Center for Economic and Policy Research, (Right-to-Rent Would Ease Foreclosure Mess ) suggested the following:
"There is a simple alternative that involves no government money and no new bureaucracy. We could temporarily change the rules on foreclosure to allow homeowners the right to stay in their home as renters for a substantial period of time (e.g., 5 years) following a foreclosure.

During this period, they would pay the market rent as determined by an independent appraiser. They would have the same rights and responsibilities as other tenants, with the exception that they could not be evicted without cause. The lender would own the property and would be free to sell it, although the former homeowner would still have the right to remain as a tenant even if the home is sold.

This policy accomplishes several important goals. First and foremost it provides housing security for homeowners who got caught up in the middle of the bubble. These people can be blamed for having made a mistake by buying homes at bubble-inflated prices. But this mistake is small compared with the mistakes made by the banks that made hundreds of billions of dollars of bad and often deceptive loans.

We were willing to give these banks trillions of dollars of loans at below market rates. Allowing foreclosed homeowners to stay in their homes as renters seems a rather small concession in comparison. This right-to-rent provision can also be narrowly structured so that it only applies to owner-occupied homes of less than the median value that were bought during the bubble years. This will ensure that it is not exploited by wealthy homeowners or investors."

The banks and Congress didn't listen to Dean Baker, CEPR, and other economists who felt similarly.

So now, unfortunately, NPR reported on April 16, 2012, that instead, banks are selling thousands of seized homes to "big-time investors" so that they can rent them out at what ever price the market will bear, to, in many cases, the people who have been turned out of their homes.

Another article by NPR, City Rents Rise As Buyers Wait Out Housing Bust

notes that:
"There's very little supply, there's lots of demand," he says. "People have been staying in the rental market longer 'cause they're not comfortable jumping into the sales market or they don't have the necessary down payments, so all of those things have been factored into a very tight and successful rental market."

That pattern is being repeated in many other parts of the country. Chris Herbert, research director of Harvard's Joint Center for Housing Studies, says rents rose more than 5 percent last year in Seattle, Chicago, Minneapolis, Boston, Pittsburgh and other cities. Herbert says the increases reflect growing demand for rental properties."

"In 2011, there was growth of a million renter households across the country, while homeowner households fell by 350,000," Herbert says. "So in one year to have growth of a million renters, that's a number we haven't seen in a long time."

A million renter mystery?

But wait, where did a million renters come from? Dean Baker in the article mentioned above, notes that:
"We are virtually certain to see at least a million foreclosures in 2011 and comparable numbers in 2012 and 2013. Many more homeowners will lose their homes through distressed sales."

If homeowner households only fell by 350,000 in 2011, what about the million or so who were put out of their homes in 2011 alone by foreclosures? (Not to mention the few million in previous years of the current recession.) Did NPR count them? Are they homeless, living with parents or friends, or are they, like the millions before them, seeking rentals? NPR doesn't bother to make a connection between rising rents and a few million foreclosures. That's par for NPR's uninformative, mind-easing course, which is; every thing's fine: "People have been staying in the rental market longer 'cause they're not comfortable jumping into the sales market or they don't have the necessary down payments, so all of those things have been factored into a very tight and successful rental market."

At least the Huffington Post notes that:

"The practice of turning foreclosed homes into rentals is becoming so popular that the Federal Reserve issued guidelines earlier this month for banks to use when they're flipping foreclosures into rentals. But the practice also faces criticism: Namely, some are concerned that the very banks and agencies responsible for the housing crisis in the first place will now benefit from their own questionable practices."

See also:
Rentals Continue to Outshine Purchase Market, Home Values Still Plagued By Foreclosures
Foreclosure re-sales challenge previous peak in February, According to February Zillow Real Estate Market Reports

"The rental market remains a bright spot in the housing market, where many markets, especially hard hit ones, are experiencing significant annual rent appreciation and drawing the attention of investors. Converting distressed and vacant properties into rental units will reduce the oversupply of homes and speed up the recovery process."

Not to mention making rich people wealthier. Recovery? Recovery for who? Certainly not for the millions tossed out of their homes. Sounds like recovery for the 1 or 2%.

When you consider the reasonable alternative promoted by Dean Baker, i.e., to allow people to stay in their homes as renters, and the current reality that people's homes are being auctioned off at fire-sale prices to wealthy investors who charge increasing rents, that really says all you need to know about who the government cares about and who they are responsive to.

So why are all these people being foreclosed upon and how did the economic crisis come about in the first place?

William Black, "Formula for Fraud":

I’m going to quote from George Akerlof and Paul Romer’s famous article, or, at least, an article that should be famous where the title says it all: 'Looting: The Economic Underworld of Bankruptcy for Profit.' So, the bank fails or, in the modern era, is 'bailed' out, but the CEO walks away wealthy. And this is what Akerlof and Romer wrote about 20 years ago:

"Neither the public, nor economists foresaw that savings and loan deregulation was bound to produce looting, nor, unaware of the concept, could they have known how serious it would be. Thus, the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now, we know better. If we learn from experience, history need not repeat itself.'

(c. 8:22) “George Akerlof was awarded the Nobel Prize in Economics in 2001. So, you might think economists would pay attention. You might think, since this article was written nearly 20 years ago, that the textbooks would mention fraud and looting. They don’t just ignore everyone here. They ignore Nobel Prize winners in Economics.

“So, what, again, was this lesson? It was the regulators in the field, the little people, not the fancy people, who understood from the beginning that deregulation would lead to massive looting. And it was the economists that ignored them. And after we had proven that it was fraud, after we had sent over a thousand elite bankers and their cronies to prison, after a Nobel Prize winner warned about it, after all those things, they ignored it and produced crisis after crisis, including the one we experience now.

(c. 9:59) “So, what did we know out of that savings and loan crisis, that was widely described at the time as the worst financial scandal in U.S. history? And we have a history rich in scandal. Here is what the national commission that investigated the causes of the crisis reported:

"'The typical large failure [grew] at an extremely rapid rate, achieving high concentrations of assets in risky ventures... [E]very accounting trick available was used... Evidence of fraud was invariably present, as was the ability of the operators to 'milk' the organisation.'

(c. 11:04) "That means to loot the organisation. But, speaking of milk, [Applause] the frauds I’m describing are in no way limited to the Unites States; they exist in every country. And they are common enough to explain; and they are old enough to explain what Balzac was saying because many of the wealthy become rich through precisely the scandals, the fraud, I will describe.

“In criminology, we call them financial super predators when we’re being lyrical. When we’re writing journals, we call them ‘control frauds,’ which is boring. Control fraud occurs when the person who controls a seemingly legitimate entity, like Parmalat, uses it as a weapon to defraud. And they can often use this weapon with impunity. In finance, accounting is the weapon of choice.  And these accounting frauds cause greater losses than all other property crimes combined, yet economics, again, never talks about it.  Worse, when many of these frauds occur in the same area, they hyperinflate financial bubbles, which is what causes financial crises and mass unemployment.  It makes the CEOs wealthy, produces Balzac scandals, and destroys democracy."

"William Black is Associate Professor of Law and Economics at the University of Missouri, Kansas City.  He is a lawyer, academic, and former bank regulator and the author of The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry."

The speech is highly recommended for those who still believe, after all the economic collapses we have repeatedly been experiencing, that deregulation is the answer.

Guns and Butter
"Formula For Fraud" with William K. Black from the first Italian economic Summit on Modern Money Theory in Rimini, Italy. How to become a billionaire - the four necessary ingredients in the recipe for fraud; the three sure consequences of banking control fraud; gutting of the underwriting process; Gresham's Law; The Business Roundtable; hyperinflation of a bubble.

Guns and Butter - April 4, 2012 at 1:00pm

Click to listen (or download)

Transcript Here

Today’s show has been ‘Formula for Fraud.’  William Black is Associate Professor of Law and Economics at the University of Missouri, Kansas City.  He is a lawyer, academic, and former bank regulator and the author of The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry.  

“Please visit the University of Missouri, Kansas City New Economic Perspectives blog at www.NewEconomicPerspectives.org.  Visit the website for the first Italian Summit on Modern Money Theory at www.DemocraziaMMT.info.
Transcript by Felipe Messina for Media Roots and Guns and Butter

[Here is an outline of the recipe for bank fraud, by William K. Black, so please click this link if you are looking for an outline of the transcript of the speech. It is digestible if you have a general knowledge of the players and "economics" (god forbid!) and read it while listening to the speech, but the speech transcript is an easier read.]

Wednesday, April 4, 2012

Two Tidbits, one quite funny, the other less so. . . .

Republicans Reveal that Entire Presidential Race was a Prank
April Fool’s Day Announcement Brings Practical Joke to an End

WASHINGTON (The Borowitz Report) – In an April Fool’s Day announcement that took the political world by storm, the Republican Party revealed today that its entire presidential race had been an elaborate prank.

“April Fool!” exclaimed former Massachusetts Governor Mitt Romney and former Pennsylvania Senator Rick Santorum at a press conference in Washington, where they were joined by fellow merrymakers Newt Gingrich, Michele Bachmann, Rick Perry and Herman Cain.

Moments after revealing that the GOP primary had been one long practical joke, Mr. Santorum explained the rationale behind staging such a complicated and expensive prank.

“A lot of Americans are suffering right now and need a good laugh,” he said. “I think my colleagues and I can be justifiably proud of the entertainment we provided – even if it meant me wearing these ridiculous sweater vests.” See http://www.borowitzreport.com/2012/03/31/republicans-reveal-that-entire-presidential-race-was-a-prank/ for rest of a very entertaining post.


George Galloway: Why I won't condemn attacks on UK soldiers in Afghanistan; If you don't mind my saying so, that's a very silly question. . .

George Galloway (born 16 August 1954) is a British Respect Party politician, author, journalist, and broadcaster, and the Member of Parliament (MP) for Bradford West. He was previously an MP for the Labour Party, for Glasgow Hillhead and then its successor constituency Glasgow Kelvin from 1987 until 2005. He was expelled from the party in October 2003, the same year that he came to national attention for his opposition to the Iraq War.
(From Wikipedia)

OK, Three Tidbits
Tongue-cutting at Al Jazeera
By Glenn Greenwald

April 05, 2012 "Salon" -- I’m currently conducting interviews as a follow-up to the rather acrimonious debate that erupted this week from my argument that “terrorism expertise” is not an actual discipline, but rather (like the term “terrorism” itself) just another instrument for legitimizing the violence of the U.S. and its allies, delegitimizing the violence of their Muslim adversaries, and dressing up state propaganda with the veneer of academic neutrality (for an example of how this works, see this New York Times article this morning on the different approaches taken by the U.S. and French governments to “fighting terrorism,” by which the article exclusively means: Muslims). One reason I think this discussion is so important is because the manipulation of the term “terrorism” this way permits and bolsters (even if unintentionally) an extremely ugly, destructive, and toxic worldview, one which the Editor-in-Chief of Commentary Magazine, John Podhoretz, vividly expressed last night on Twitter when discussing the firing of Keith Olbermann by Current TV: (See LINK for rest.)