Mortgage Mess Was Preventable and is Correctable

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Editor’s Note: Dean Baker hits the nail on the head with this article. His point is that the whole thing was easily preventable, it was predicted by a fairly large group of people with varying expertise and that the mainstream media, political forums, legislative bodies and executive branches did nothing to even investigate the problem, much less try to stem the tide of impending and obvious chaos being cased by the banks.

His beef comes in attacking the book review in the New York Times where the  basic theme is “who could have known?” The answer is that plenty of people did know and nobody close to the levers of power did anything about it. Part of that comes from our education system and part comes from lack of training of people who do the actual regulating. If they truly understood finance and economics, the answer was obvious.

Alan Greenspan understood the problem but thought that the solution was the “free market” system that would automatically correct the malfeasance of the banks. He was wrong and he admits he was wrong. But he also says that neither he nor a hundred PhDs at his disposal understood the circuitous PONZI scheme that was covered over by a claim of securitization of loans that was false. If they didn’t have enough information to understand it, why didn’t they get it. It was certainly available. And how is it that Federal Reserve experts are now claiming they didn’t understand the plot when so many other people DID understand it?

That said, the question is correction. How to make restitution to our economy, our investors, our homeowners and our consumers and workers? Again the answer seems to be to let the free market work itself out. It failed spectacularly the first time. How could anyone arrive at that policy conclusion? But they did and the press is buying it.

This is really not so difficult. The economy needs stimulus and the stimulus must go to the consuming class of people who are dubbed “middle class” and “poor” who basically spend all of their money, which is what fuels our economy. The FACTS are that they don’t have the money or the credit to sustain any economic recovery. No amount of “free market” thinking is going to correct that.

The only thing that can save us from another recession is to put money in the hands of those who will spend it. That is where ideology comes in to interfere with practicality. The ideologues say that giving a gift to the middle class simply converts us to a communist or socialist state. And I suppose that has a grain of truth in it. But what if the the money is restitution for losses attributed to outright fraud, and not a gift?

We already know enough to make the required correction and to justify it without changing our economy or society into anything other than a democratic society based upon a mostly free market economy (when it isn’t cornered by bullies, which is where antitrust comes in). The banks cornered the market on money and real property using lies, deceit and forgery, fabrication, surrogate signing and pure intimidation. The facts are in on that and so we know that the origination of the loans, the assignments, the allonges, endorsements were all a sham.

And so we also know that the robust foreclosure scheme has corrupted title all over the nation. Isn’t the correction obvious? If someone is defrauded by Madoff or Dreier or Stanford or whoever, they get a receiver to collect up the assets that remain and return it to the people who have been defrauded. It is common practice. The only place where it is not being used is in the biggest case of economic crime in human history.

The banks diverted the money, stole it, gambled with it and where they won they kept it and where they lost they got it from the Federal government or pitched the loss over the fence to the investors who advanced the all the money. They diverted the documentation, just like any common crook, from the investors and the REMICs to their own controlled affiliates so they could claim “ownership” where they traded on assets that did not belong to them.

The answer is simple. As Iceland and now Ireland are discovering, holding the banks accountable and decreasing household debt, is both right and the only practical solution. The money that the banks made should be clawed back. The assets of the mega banks should be used to make the investors whole as though they never bought those bogus mortgage bonds. Yes, that would lead to the inevitable conclusion that the homeowner-borrowers would have their debts wiped out and no foreclosure wave would be coming. But if played right, the tax on the benefit to homeowners could replenish the US Treasury far more than any plan they currently have on the table.

So homeowners don’t get a free house and the banks stop getting free houses. The US Treasury and the US taxpayers get the relief they deserve and the country can go on. Then there is the question of criminal prosecution. If we don’t hold the bankers responsible for their malfeasance, why wouldn’t they do it again at the first opportunity. BY this point in the savings and loan scandal of the 1980’s more than 800 people were serving prison terms. Why not now?

from Dean Baker

The story of the housing bubble is an incredible tragedy. The collapse of the bubble has wreaked havoc on the lives of tens of millions of people by leaving them or family members unemployed, destroying savings and costing millions their homes.

The simple reality is bad enough, but what makes matters worse is that the whole episode was entirely preventable. As early as 2002 it was possible to recognize that house prices had sharply diverged from their long-term trend without any basis in the fundamentals of the housing market.

Since we had just seen the rise and collapse of a $10 trillion bubble in the stock market it should have been apparent to economists that our economy can generate large bubbles. The collapse of that bubble had thrown the U.S. economy into a recession, from which we were having considerable difficulty recovering, so it should have occurred to economists that the collapse of the housing bubble would also be bad news for the economy.

At least a few of us did recognize the housing bubble, and the dangers it posed at the time, and did everything we could to try to warn the country. For this reason it was somewhat shocking to see a book review in the New York Times by Noam Scheiber, an editor at the New Republic, that longed for the day when we will have people who can use data to identify housing bubbles before they grow so large as to pose a serious danger to the economy.

The personal slight is beside the point; the issue is that our elites are being allowed to construct an alternative reality that absolves them of responsibility for the ruined lives all around us. The reality is that people in positions of authority chose to ignore the evidence of a rapidly growing bubble and those trying to call attention to the dangers it posed. Instead we have Scheiber giving us the “who could have known story?” His case is that the dynamics of the bubble were just too complicated for people to grasp given the tools available at the time. The people who clearly warned of the bubble, using data, simply did not exist in Scheiber’s universe.

If it were just Scheiber saying this on a rant somewhere, he could be easily dismissed as a crank. While he is a prominent writer on policy and politics, prominent writers say ridiculous things all the times.

But this was not just a random rant. It was a book review in the New York Times, by far the nation’s most prestigious newspaper. It is a paper that employs fact checkers and prides itself on accuracy. Would the NYT allow a book reviewer to bemoan the fact that no one had questioned the existence of weapons of mass destruction in Iraq prior to the war?

And the bubble warners were not entirely below the NYT’s radar screen. In fact, several NYT reporters had picked up on warnings of the housing bubble (here and here). In fact, Paul Krugman, perhaps the most famous economist in the world, used his NYT column in 2002 to warn of the dangers posed by the housing bubble.

Given this history, how can an ill-informed book reviewer get away with making what is obviously an untrue assertion in an NYT book review? The simple answer is that Scheiber’s “who could have known” story is quite comforting to people with power in this country. The people in positions of authority who ignored the warnings of the dangers of the housing bubble would like the public to believe that there were no such warnings. It is much easier for them to act as though the state of economic knowledge was too primitive to allow them to see a bubble than to acknowledge that they simply did not feel like paying attention to the warnings.

It is important to their legitimacy to maintain this fiction, since with virtually no exceptions the people guiding economic policy today are the same people who ignored the growth of the bubble in the last decade. If everyone recognized the enormity of their failure they would be less likely to heed their calls for austerity: for example the cuts in Social Security and Medicare that virtually everyone in the higher circles of the policy establishment agrees are necessary.

That is why it is necessary to keep reminding the public that the policy elite blew it. The tools of economics were entirely adequate to see the housing bubble and the dangers that it posed to the economy. The problem is that the people who controlled economic policy at the time found it convenient to ignore the evidence. They still do.

See article on original website

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8 Responses

  1. 11-21-12

    Dear Mr. Garfield & Mr. Baker: U.S. Real-Estate did not “BUBBLE”

    2004 is when I publicly documented the shaping of the U.S. housing inflation as the vehicle to balloon and burst the U.S. economy and to commit U.S. history’s greatest ever plunder:

    I am an actual witness to the fact that the “housing bubble” scam was not only 100% engineered but I am also an actual witness to the mechanics of its creation with “COUNTERFEIT OF MONEY” and that the U.S. real-estate had been selected as the best vehicle of choice to commit historic global plunders, two hundred times ($1.4 quadrillion) the entire value of the U.S. real estate mortgage, worth only $7 trillion, and in order to vacuum all wealth from the world population’s next generations.

    “NO HOUSING BUBBLE”:
    Even a ten-fold inflation of housing prices is not a “BUBBLE” while counterfeiting financial instruments two hundred times of the value of their underlying assets (U.S. Realty) is the real bubble and I discovered this criminal financial PONZI scheme early 2003 and documented it in my 2004 lawsuit #04CC11080 in Orange County, California (aka: World Capital of Fraud). ( by printing & selling un-backed counterfeit U.S. financial derivatives)

    Printing and selling un-backed counterfeit U.S. financial derivatives:

    $1.4 quadrillion counterfeit junk bonds (i.e.: derivatives), which was the real balloon and bubble, was marketed and sold around the globe as real estate investment instruments (as Mortgage Backed Securities), and in order to plunder the whole world of private and public wealth by selling the world such totally worthless junk bonds.

    Any 12 year old knows that a $7 bill can’t sell for $10 let alone for $1400 (two hundred times). (p.s.: dollar amounts relate to trillion)

    Fake economists like Paul Krugman claim none of this mess was predictable or foreseeable. However, I think such people are parts and parcels of public media to help prevent the disclosure of America’s perpetual, and unlimited, counterfeiting schemes, as further explained below:
    Is it hard to understand that the only way to fraudulently cash $1400 worth of products, services, or wealth, from unwary victims by offering to sell a $7 bond is through the counterfeiting of 200 pieces of $7 bonds and to sell those bonds to 200 people (and countries) around the world all of whom were promised that the $7 original bond (entire U.S. mortgages) they were shown by a New York fraudster (banker) backs their own $7 bond, while not knowing that the original $7 bond (U.S. real estate) had in fact been pledged (promised) as the backing of 200 similar counterfeit junk bonds (MBS), which are backed with nothing. (i.e.: U.S. real estate had been pledged 200 times over to the buyers of those MBS junk-bonds).

    If it is still complicated for such “TOP ECONOMISTS” to understand what happened, then let me make it even simpler, so that not to leave them any further excuses:

    The only way for a career-criminal to cash $1400 from victims with just $7 of cash is to photocopy (counterfeit) the $7 into $1400 xeroxed dollars and spend it around the world by buying imports, and assets. When the time comes for receivers of the forged dollar to finally spend their money in the United States of America, where the $1400 were forged and exported, U.S. authorities (which designed and facilitated the counterfeiting) tell them that their dollar bills (purchased MBS) were all forged and were worthless. Meantime the foreign forged dollar holders had already given away all their wealth in return for those forged dollars and have all become bankrupt. Here I am talking about the countries which have gone bankrupt for having bought America’s counterfeit dollars.
    This is why the U.S. dollar should be devalued to less than one cent, banned, and taken out of circulation as an international currency, as I proved it all the way up to the U.S. Supreme Court.

    Here are a few related pages:

    http://kareemsalessi.files.wordpress.com/2010/04/12-3-09-salessi-revelations-of-2008-collapse-in-2004-lawsuit1.pdf

    What the U.S. authorities, and its accomplice media, have successfully conspired and managed to conceal, is the fact that the United States has been living and running on counterfeit money since 1945, as I recently documented at the last pages of a Petition to the U.S. Supreme Court in Case #11-1013. http://kareemsalessi.files.wordpress.com/2010/06/the-american-meltdown.pdf. Petition itself: at this page dated 2-12-12 at: >>>>>>>>>http://kareemsalessi.wordpress.com/litigation-discovery-documents/.
    More on the U.S. COUNTERFEIT MECHANICS can be seen at: >>>>>>>>>http://kareemsalessi.wordpress.com/c-o-u-n-t-e-r-f-e-i-t-mechanics/

  2. We left the US after fighting a losing battle against HSBC who very clearly had no Standing or even anything to do with our loan, yet the CO court, by simply not ruling on our case, caused us to lose our home. Having relations in South Africa, we went there.

    ITS HAPPENING IN SOUTH AFRICA TOO!! Only thing is, is that they are doing something about it here!

    http://www.newera.org.za/sa-banks-must-pay-out-big-time/

    There are links, transcripts, court docs, etc posted on this website – maybe we can learn something here that will help in the US???

    http://www.newera.org.za

  3. 11-20-12

    Mr. Garfield & Mr. Baker:

    2004 is when I publicly documented the shaping of the U.S. housing inflation as the vehicle to burst the U.S. economy and commit the U.S. history’s greatest ever plunder:

    I am the actual witness that the “housing bubble” scam was not only 100% engineered but the mechanics of its creation with “COUNTERFEIT OF MONEY” and that it was done as the conduit for historic plunders, two hundred times the entire value of the U.S. real estate. Even a ten-fold inflation of housing prices probably can’t be called “BUBBLE” while counterfeiting financial instruments two hundred times ( counterfeit U.S. derivatives) the value of their underlying assets (U.S. Realty) is the true bubble and I discovered this criminal financial scheme early 2003 and documented it in my 2004 lawsuit #04CC11080 in Orange County, California (aka: World Capital of Fraud). Here are a few related pages:

    http://kareemsalessi.files.wordpress.com/2010/04/12-3-09-salessi-revelations-of-2008-collapse-in-2004-lawsuit1.pdf

    What the U.S. authorities, and its accomplice media, have successfully conspired and manged to conceal, is the fact that the United States has been living and running on counterfeit money since 1945, as I recently documented at the last pages of a Petition to the U.S. Supreme Court in Case #11-1013. http://kareemsalessi.files.wordpress.com/2010/06/the-american-meltdown.pdf. Petition itself: at this page dated 2-12-12 at: >>>>>>>>>http://kareemsalessi.wordpress.com/litigation-discovery-documents/.
    More on the U.S. COUNTERFEIT MECHANICS can be seen at: >>>>>>>>>http://kareemsalessi.wordpress.com/c-o-u-n-t-e-r-f-e-i-t-mechanics/

  4. SEC Charges J.P. Morgan and Credit Suisse With Misleading Investors in RMBS Offerings

    FOR IMMEDIATE RELEASE
    2012-233

    “Washington, D.C., Nov. 16, 2012 — In coordination with the federal-state Residential Mortgage-Backed Securities Working Group, the Securities and Exchange Commission today charged J.P. Morgan Securities LLC and Credit Suisse Securities (USA) with misleading investors in offerings of residential mortgage-backed securities (RMBS). The firms agreed to settlements in which they will pay more than $400 million combined, and the SEC plans to distribute the money to harmed investors.

    Additional Materials
    SEC Order v. Credit Suisse
    SEC Complaint v. J.P. Morgan
    The SEC alleges that J.P. Morgan misstated information about the delinquency status of mortgage loans that provided collateral for an RMBS offering in which it was the underwriter. J.P. Morgan received fees of more than $2.7 million, and investors sustained losses of at least $37 million on undisclosed delinquent loans. J.P. Morgan also is charged for Bear Stearns’ failure to disclose its practice of obtaining and keeping cash settlements from mortgage loan originators on problem loans that Bear Stearns had sold into RMBS trusts. The proceeds from this bulk settlement practice were at least $137.8 million.”

    http://www.sec.gov/news/press/2012/2012-233.htm

  5. And why is it, Obama will not start fixing it? Isn’t that why we hire new people in companies to fix what the incompetent ones have lent ineffective? This blame game is very annoying and frankly quite short-sighted.

  6. “…lack of training of the regulators?” Ridiculous. The regulators have been through the revolving door to Goldman Sachs and back so many times, it’s unlikely anyone will believe that statement. You’re confusing total complacence with ignorance or lack of training.

  7. The most culpable party in this whole debacle is George Bush. He should be indicted for gross neglect of his Presidential responsibilities and prosecuted criminally.

    wrong wrong wrong —-President Cheney , His aid George went along for the ride….

  8. I warned the the FBI in person in early 2004 that the mortgage industry was in a state of total anarchy. A month later, Robert Mueller went to George Bush and told him the same thing.

    The most culpable party in this whole debacle is George Bush. He should be indicted for gross neglect of his Presidential responsibilities and prosecuted criminally.

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