Squeezing Greece won’t help German people

The Greek debt crisis is not a conflict between Germany and Greece.   It is the European Union acting as a debt collection agency for central bankers.

German working people get no benefit from the demand that the government of Greece impoverish the people of Greece so as to pay interest to the European Central Bank and the International Monetary Fund.

They in fact will suffer in the long run, because the more wages and living conditions are driven down in other countries, the harder it will be to maintain them in Germany.

Some five years ago, I wrote a post about how Germany was a good role model for the USA, because its leaders were committed to industrial productivity and a high-wage economy.   Unfortunately, the German leaders instead have taken the USA as a role model, and followed our downward path of financialization.

I believe that people who borrow money have a moral obligation to pay it back—if they can.  I believe that there are other moral obligations that take precedence, such as the welfare of those who depend on you.  That’s why the United States and other nations substituted bankruptcy laws for debtors’ prisons.

The Greek debt problem would have solved itself if Greece had its own currency instead of the Euro.  As Greece’s balance of trade worsened, its currency would be devalued and its products and services (including the tourist industry) would become cheaper in terms of dollars and euros.

The great fear of the “troika”–the ECB, IMP and the leaders of the European Union–is that Greece will stop using the euro, and that some of the other 17 countries that use the euro will follow suit.  That might be a problem for bond-holders.  I don’t see it as a problem for ordinary people in Germany, the USA or any other country.

LINKS 

It’s the class conflict, stupid! by David Ruccio on occasional links and commentary.

Europe: Shaking the Temple by Conn Hallinan for Dispatches from the Edge.  (Hat tip to Bill Harvey)

From Minsk to Brussels, it’s all about Germany by Pepe Escobar for RT Op-Edge.

 

Don’t back Russia into a desperate corner

It is a grave mistake to put President Vladimir Putin or the leader of any nation with nuclear weapons into a situation in which they think they have nothing to lose.

I wrote a post Wednesday on the danger of nuclear war with Russia.  Pepe Escobar pointed out that Russia has other means of Mutually Assured Destruction.

One would be to default on Russia’s debts, or even suspend payment on the debts, pending the end of the current emergency.  This would threaten major banks in Western Europe that have extended credit to Russia.

Another would be to cut off gas exports to Ukraine and the countries of the European Union.

Either of these things would hurt Russia as much as it hurts Russia’s enemies.  Russia needs credit, and Russia needs foreign markets.

But if the country has been brought to the brink of collapse anyway, then its leaders have nothing left to lose by striking back.

The passing scene: Links & comments 6/30/14

What If Banks, Not Abortion Clinics, Needed Buffer Zones? by Barbara O’Brien for Open Salon.

What if people doing business with the “too big to fail” banks had to run a gantlet of yelling protestors just to enter the bank.  Suppose the banks were vandalized, and their employees subject to harassing and threatening telephone calls.  Suppose bankers had actually been murdered.  Is there any doubt that the bank protestors would be classified as terrorists?  Yet all these things have happened with abortion clinics, and it is accepted as normal.

The Unkindest Cut by Elias Vlanton for The Washington Monthly.

Joshua Steckel, a high school guidance counselor, worked hard with students from poor families to convince them it was both possible and worthwhile to qualify for college by studying hard.   But at the end of the road, his students found that college was unaffordable.   Financial aid packages only covered part of the cost of college, and what was left was more than poor families can pay.

Antibiotic scientist must push discovery to market by Kelly Crowe for CBC News.

The emergence of antibiotic-resistant bacteria is a big threat to public health.  Yet few if any drug companies are interested in developing new antibiotics.  Profits on new antibiotics are small and risky because developing new antibiotics is difficult and expensive, regulatory approvals take time and money and antibiotics soon become obsolete as bacteria develop new resistance.

Peru now has a ‘license to kill’ environmental protestors by David Hill for The Guardian.

Under a new law, Peruvian police can escape criminal responsibility for killing civilians while on duty without having to show they are acting according to police regulations.

Big business loves desperate, overqualified, underpaid workers by David Atkins for The Washington Monthly.

Today’s South is boldly moving backwards by labor historian Nelson Lichtenstein for Reuters.

Historically Southern business leaders have sought to compete with the North by means of cheap labor.  This is still true.

Obama Admin’s TPP Trade Officials Received Hefty Bonuses From Big Banks by Lee Fang for Republic Report.

 

How insiders rob banks and cause crises

William K. Blank is professor of economics and law at the University of Missouri at Kansas City, a former bank regulator and author of The Best Way to Rob a Bank Is to Own One (which I haven’t read).

In this TED talk, he explains how crooked bankers enrich themselves through what he calls “control fraud”.  The method is as follows:

• Make a lot of loans to people you know can’t pay you bank.
• Conceal the bogus nature of the loans through fraudulent appraisals.
• Collect high interest rates (for a while)
• Report record profits (for a while)
• Collect an enormous salary and enormous bonuses (for a while)
• Escape scot-free with your riches when the crash comes.

There are two other elements that he doesn’t mention in this particular talk.

• Convert the loans into financial securities and sell them to suckers
• Go to Congress and the Federal Reserve Board to be bailed out when the crash comes.

Black said all this has been facilitated for the past 20 years by the Clinton, Bush II and Obama administrations, and by the Federal Reserve Board during that period.  Everything is in place for another crash as big as what came before.

It seems obvious to me that we Americans need to (1) break up the “too big to fail” banks (those whose assets exceed a certain set percentage of Gross Domestic Product, (2) refuse to insure deposits that are used for risky investment and (3) prosecute financial fraud, as was done in the Bush I administration following the savings and loan crash.

LINKS

America Has Become a “Cheater-Take-All” Nation by Willliam K. Black for AlterNet.

The Big Lie That Haunts the Post-Crash Economy by Dean Stockman for The New Republic.   The “big lie” is that “everyone” is to blame for the crash of the housing bubble, when in fact the bubble was mainly due to crooked financiers.

New Lawsuit Alleges That Wells Fargo Has a Manual for Mass Fabrication of Foreclosure Documents by Yves Smith.

Why Prosecutors Whiffed on Subprime Crime by Barry Ritholtz for Bloomberg View.

Hat tip for the video to Yves Smith.

Good advice from Iceland (with caveats)

I like and agree with this statement.

I like it even though Iceland’s politicians weren’t necessarily as brave and far-seeing as the statement implies.

Banks were allowed to go hog-wild in the United States and Europe in the years leading up to the 2008 financial crisis, but Iceland’s banks were wild and crazy even by Wall Street and City of London standards.   They collected money from depositors all over the world, and lent out money at high interest rates without thinking about the high risk.   Investors in the United Kingdom, the Netherlands and other countries bought into this risky behavior without considering that there would be a day of reckoning.

When the crash came, it wouldn’t have been possible for Iceland to bail out its banks even if it had wanted to do so.  The banks’ liabilities were equal to eight times Iceland’s GDP (its annual economic output).

Iceland did suffer severely from the recession, and it isn’t out of the woods yet.   Individual Icelanders are struggling economically, Iceland has a big trade deficit and the country is going to take another economic hit when the government lifts exchange rate controls on the Icelandic kroner.   In the last election, Icelanders voted in the political parties whose policies led to the financial crash, which is hard for me to understand.

Still Iceland’s recent history shows that it is possible to give relief to the honest citizen and prosecute the crooked financier, and still survive to tell the tale.

A substitute for the gold standard?

Hat tip to Joshua Chacon

What I’d do about Wall Street

The original title of this post was “What I’d do about the banks”.

What to do about the “too big to fail” banks is obvious.  There are many good ideas in circulation (none of them original with me).  The only problem is accomplishing anything through the current dysfunctional U.S. political system.

The most obvious and important thing to do is to break up the “too big to fail” banks.  As even Alan Greenspan has said, if a bank is “too big to fail,” it is too big to exist.  Since the banking crisis, the biggest banks have become bigger than ever, and have resumed the practices that caused them to fail in the first place.  As some point, they will become too big to save.

Click to enlarge

Simon Johnson, former chief economist for the International Monetary Fund, and co-author James Kwak proposed in their 2010 book, 13 Bankers: the Wall Street Takeover and the Next Financial Meltdown,  that any bank be broken up if its assets are more than 4 percent of the current U.S. Gross Domestic Product or if the bank itself is more than 2 percent of GDP.   The exact percentage is unimportant.  What is important is that it be enacted into law, and not left to the discretion of regulators.  We learned from the 2008 crisis that regulators can’t be trusted to act in the public interest.

Their size limits would have applied to just six banks – Bank of America (16% of GDP), JP Morgan Chase (14%), Citigroup (13%), Wells Fargo (9%), Goldman Sachs (6%) and Morgan Stanley (5%).  Breaking up the banks would not affect their profitability.  When Standard Oil was broken up, its component parts – Exxon, Mobil, Sohio, Standard of California – did just fine.

If the banks threaten to pull up stakes and relocate to some financial haven such as the Cayman Islands, the answer would be: Let the Cayman Islands bail you out when you get into trouble.

The federal government should also:

• Set up an orderly procedure for reorganizing bankrupt banks, as was done with savings and loan associations during the S&L crisis.  During the S&L reorganizations, the failed management was fired, the depositors were held harmless, the failed investments were liquidated and the good assets were sold to soundly-managed S&Ls.  The solvent S&Ls got bargains, but that’s okay.  They were being rewarded for good management.
• Prosecute financial fraud.
• Give regulatory agencies, including the new Consumer Financial Protection Board, the resources to do their jobs, and head them by people not beholden to the financial industry.
• Reenact the Glass-Steagall Act, which separates commercial and investment banking.
• Impose a stock transaction tax of some small amount, say 1/10th of 1 percent.  Individual traders and computerized trading programs destabilize the market by trading huge amounts of stocks and commodities several times a day.  A small transaction tax would not be noticed by regular investors, but would slow down speculative trading.

As an individual, you can shift your money to a non-profit credit union or savings and loan association if you have money in one of the “too big to fail” banks, or if you think your bank is abusing you.  I do not say all for-profit banks are bad.  Many of them perform their function, which is to provide a safe haven for savings, loans for businesses and credit for consumers.  But so long as the “too big to fail” banks are saved from the consequences of reckless and exploitative actions, the prudent and ethical bankers will be crowded out.

“I’ll be gone, you’ll be gone”

A Wall Street money manager named Barry Ritholtz wrote a good article in the Washington Post about the IBGYBG management philosophy of so many Wall Street banking and brokerage firms.

IBGYBG is shorthand for “Let’s grab everything we can get now because I’ll be gone and you’ll be gone when everything crashes.”

I do not care what shareholders and their boards pay the people who create enormous value. … … On the other hand, many others received huge bonuses for bankrupting their firms and driving the economy into recession. Their job performance should be the subject of your ire and of regulators. They brought the world to the abyss of economic collapse because they had incentives to do so.

If that sounds unbelievable, consider:

– Subprime mortgage brokers who were paid based on the quantity – not the quality – of their mortgage writing. The loans lenders sold to Wall Street to be securitized carried a 90-day warranty. Hence, the brokers’ jobs were to find people who would make the first three monthly payments of a 30-year loan. After that, it was no longer their concern.

– Derivative traders who knew that what they were buying was going to blow up. In 2007, I published an e-mail from one such trader who wrote, “We knew we were buying time bombs.” The motivation was deal fees and bonuses. Once the derivative machinery was in motion, they had to “keep buying collateral, in order to keep issuing these transactions.”

– Collateralized debt obligation managers whose job it was to assemble pools of mortgages, yet had little or no understanding of the underlying loans. The salespeople, traders and managers working in the mortgage sector had incentives that were upside down. The greater the risk they took, the more they were paid. But brunt of those risks was on third parties, never themselves. It was shareholders and taxpayers who shouldered them.

This is backward. The people who should bear the downside are the ones who have the upside. Instead, the system was perversely one of private profit but public risk.

He named names:

l Lehman Brothers Chairman and CEO Richard Fuld Jr. made nearly a half-billion – $490 million – from selling Lehman stock in the years before it filed for Chapter 11 bankruptcy.

l Countrywide Financial (now owned by Bank of America) founder and CEO Angelo Mozilo cashed in $122 million in stock options in 2007.  His total take is estimated at more than $400 million dollars.

l Stanley O’Neal, who steered Merrill Lynch into financial collapse before it was taken over in a shotgun wedding with Bank of America in 2008, was given a package of $160 million when he retired.

l Bear Stearns former chairman Jimmy Cayne, rescued by a $29 billion Fed shotgun wedding to JPMorgan Chase, received $60 million when he was replaced;

l Fannie Mae CEO Daniel Mudd received $11.6 million in 2007. His counterpart at Freddie Mac, Richard Syron, brought in $18 million. In 2008, the two were forced into government conservatorship.

via Washington Post.

As Ritholtz pointed out, things weren’t always this way.  Once most Wall Street firms were partnerships, and the partners went into personal bankruptcy when their firms failed. Their mansions, yachts, automobiles and even their watches were auctioned off.  During the 1970s and 1980s, the big partnerships became public corporations, and the principle of limited liability meant that the owners were only on the hook for what they put into the firms, not for what they took out of them.

It’s not practical to turn the Wall Street firms back into partnerships.  Instead Rithholtz suggests legislation to make corporate executive personally responsible for reckless management and to claw back their excessive compensation.  I think that’s an interesting idea.  A better idea, in my opinion, would be to make the corporate decision-makers criminally liable for criminal actions of a corporation.

Mortgage sharks

I cited some stories of wrongful foreclosures in an earlier post.  Here’s another.

NO ONE TOLD Deanna Walters she was about to lose her home. Not when her mortgage servicing company foreclosed on it, nor when it landed on the county auction block and sold to the highest bidder. She realized what was happening only when a man taped a note to the front door of her well-kept house in a leafy corner of Stockton, California, last January. “My son went out and took it down,” recalls the 43-year-old single mother of two, “and that’s when he told me it was a ‘three-day or quit’ notice.”

Walters’ discovery that her home had been sold out from under her marked the low point of a four-year fiasco that began when Ocwen Loan Servicing became her mortgage servicer in late 2004. Through no fault of her own, Ocwen incorrectly processed or lost dozens of Walters’ payments and charged her more than $2,000 in late fees and thousands more in additional charges—all without notifying her. The Florida-based company tried to foreclose on her three times. After she paid more than $10,000, Walters figured things were settled. But Ocwen had other ideas.

via Mother Jones.

The article goes on to describe how borrowers are at the mercy of mortgage service agencies, which are not subject to effective federal regulation.  In Walters’ case, Ocwen went ahead and sold her house anyhow.

Testifying before the Senate banking committee last July, Diane Thompson, an attorney with the National Consumer Law Center, explained that servicers have an incentive to “push” homeowners into late payments: “If the loan pays late, the servicer is more likely to profit than if the loan is brought and maintained current.” After Ocwen auctioned off Deanna Walters’ house, it collected more than $3,500 from 36 different buyers’ fees, in a single day. …

Deanna Walters has sued Ocwen, and a judge has allowed her to stay in her home, even as the winner of the foreclosure auction is trying to charge her rent. …  A self-described “spitfire,” she is left to do her own legwork—”every day, all day long”—to save her home. “If you could tell me who I need to speak to,” she says, “I would be in a van tonight headed to Washington to figure this out.”

via Mother Jones.

And here is one Wall Street response.

“The first thing that needs to happen, I think, is to get these people out of their homes,” a man wearing a bespoke blue-striped shirt, a Hermés tie patterned with elephants and Ferragamo loafers said recently. “Correct! I’ll explain,” the veteran member of a bank restructuring and advisory team said. …

via The New York Observer.

The article goes on to quote Wall Street bankers on the irresponsibility of homeowners who took out larger mortgages than they could afford to pay back.  Ken Bentsen, executive vice president of the Securities Industry and Financial Markets Association, a lobbying group, said he hadn’t heard of any wrongful foreclosures and didn’t think it is a problem.  A former member of the Goldman Sachs management committee said the real scandal is allowing people not current on their mortgage payments stay in their homes because of paperwork mistakes.

“The question to me is not do you foreclose or do you not foreclose. The question is when and with what philosophy you foreclose,” the man on the bank restructuring team said. “If you want to reduce the amount of leveraged homeowners you have, you need to ultimately kick them out of their homes.” A colleague walked up: His recommendation was to burn houses. It would lower the supply.

via The New York Observer.

Banks ‘foreclose’ on houses bought for cash

A man in Fort Lauderdale, Fla., bought a house for cash last December as an investment property.  In July, he was learned that the Bank of America had foreclosed on the house and sold it at auction.  He was astonished because he didn’t have any mortgage or any other relationship with the Bank of America.  But it was only after he contacted the South Florida Sun-Sentinel that he got anywhere in trying to get his house back.

His experience wasn’t unique.  A woman in central California bought a house for cash in 2001.  But the Bank of America in February sent her a notice of foreclosure, placed ads in the local newspaper and nailed a notice of foreclosure to her door.  She said she couldn’t get the bank to admit its mistake until KCRA of Sacramento took up her case.

There are other examples besides those two cases and other culprits besides the Bank of America, although it seems to be the worst offender.

And there are worse cases than this.  Banks foreclose on properties based on mistakes in the addresses.  Property-owners come home to find their furniture and personal property missing, their utilities cut off and their locks broken by “trash out” companies that have been sent to the wrong address.

Foreclosures on houses without mortgages are only the worst and most obvious of examples of a huge and increasing number of wrongful foreclosures.  It is the result of the bursting of the housing bubble, and banks trying to clear their books of bad debts.

I don’t suppose banks intentionally seize houses for which they have no legal claim.  It is just that mortgages are sold and resold so many times that the paperwork gets messed up, and the mortgage-holders can’t be bothered to hire enough people to check whether it’s right or not.

It’s in the nature of things that a large, bureaucratic organization such as a bank will make mistakes.  But in these cases, and many more, some of which are indicated in the links below, the banks show no interest in correcting mistakes – even in something so simple as foreclosing on the wrong property because of a clerical error in the address. Usually they only act when a reporter for a local newspaper or broadcaster investigates and threatens them with bad publicity, or when the property-owner successfully sues.

True, Bank of America recently announced that it will review foreclosure documents for correctness in cases pending in the 23 states where the courts must approve the documents.  GMAC Mortgage and JP Morgan Case have said they will amend paperwork where improperly done.  We’ll see whether this makes any difference in the affected states; homeowners in the other 27 states are out of luck.  Citi and Wells Fargo, the other two big mortgage processors, claim to have no problem with their process.

The new American oligarchy

About two months after President Obama was inaugurated, he met with the CEOs of the 13 largest financial institutions to ask for their cooperation in averting financial collapse. The U.S. government was engaged in a major financial rescue effort to save the U.S. banking industry from collapse. In return, he asked that the bank CEOs hold off on big pay raises and bonuses that enrage the public. “We’re all in this together,” he reportedly said. “Help me to help you.”

He was pleading with them as if they were a sovereign power in their own right. “This administration is the only thing standing between you and the pitchforks,” he reportedly said.  The bank CEOs balked at Obama’s requests and since then have mobilized against even modest financial reforms.

This story is told in 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, by Simon Johnson and James Kwak. Simon Johnson is a former chief economist for the International Monetary Fund. His brother-in-law, James Kwak, has had a successful career as a software entrepreneur and business consultant. In many ways, they argue, the United States fits the profile of faltering Third World oligarchies the IMF has had to bail out. And Obama, so far, has not challenged this.

Their definition of an oligarchy is a nation in which economic power generates political power, and vice versa. They show how, for the past 30 years, a financial oligarchy has emerged and, under Democrats and Republicans alike, has steadily freed itself of governmental control while continuing to demand and get government bailouts. The recent bailout is only the latest and biggest of a long series, and is unlikely to be the last unless big changes are made.

The savings of Americans, instead of being invested in American industry and contributing to the nation’s economic growth, have been diverted to a kind of high-stakes poker game that benefits nobody but the winners, and in which the big losers are bailed out.  This will not end, they say, until the big banks are broken up, as President Theodore Roosevelt broke up the Standard Oil trust.

The economy held hostage

Unless Congress passes legislation to re-regulate financial predators and break up the “too big to fail” financial institutions, we as a nation are in for repeats of what we’ve experienced in the past 10 or 20 years – long stretches of economic stagnation interrupted by economic crises.

Our future prosperity depends upon restoring the banking and financial system to its historic role of turning savings into investment in the real economy.

We know Wall Street financiers make big campaign contributions, and we know Wall Street executives have held and still hold high executive positions under Republican and Democratic administrations alike. But the source of the banking and finance industry’s greatest power is more than that. It is its power to drive up interest rates and crash stock and bond prices if the government’s actions displease it.

When President Andrew Jackson refused to renew the charter of the Bank of the United States, a privately-owned bank with roughly the same power as the Federal Reserve System today, the president of the bank, Nicholas Biddle, deliberately brought on a recession by restricting loans.  Jackson thought this was not too high a price to pay to destroy the bank’s financial and political power.

I don’t think today’s financiers and bankers would do anything that blatant, but they wouldn’t have to. The “automatic” working of the market would do the job.  This is a great danger when the federal government is running huge deficits, and needs low interest rates to keep them under control, and when the new economic recovery could be aborted by a fall in stock prices.

When Bill Clinton was President, he accepted as a fact that he could not do anything that would disrupt financial markets.  One of Clinton’s advisers, James Carville, famously remarked that if he died and was reincarnated, he wanted to come back as the bond market, because everybody would fear and obey him. But the financial markets are not a proxy for democracy. As long as we Americans are governed by the financial markets, we are not a self-governing people.