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Sisyphean syphilis

by marco Thu Mar 26th, 2015 at 07:50:39 AM EST

If economic crisis were a venereal disease, would we continue to engage in risky economic behavior?

Does short-term gratification always trump long-term health?

Are we just children in the marshmallow experiment?

Are our economic systems doomed by the insufficiently stoic character of the majority of human beings?

Eight years and eighteen days ago, das monde wrote a diary titled Is Civilisation A Pyramid Scheme? in which he remarked:

As I write, financial markets are having a bad day across the world, after a rocky week. Can we make more sense of this than a combination of factors?

The hypothesis is that the modern economy is dominated by ever increasing and ever expanding speculation in stock and real estate markets. These markets will grow just as long as the volume increases. The markets are vastly overvalued due to a pyramid-style growth of the number of players. The markets will fail when there won't be any bottom to add to participants' pyramid.

promoted by afew


Sixteen days later, he posted another diary in which he wrote:

I am content to find out that my suspicion is not a wack unseen to human mind. Please enter Prof. Hyman Minsky (1919-1996), and his Financial Instability Hypothesis.

and concluded asking:

... Is a colossal collapse of all bubbles eminent [sic]? Perhaps there is still enough room for critical bubbles to grow for a few years, or yet another election cycle. But it would be downright immoral and dangerous to rely on that. Something more intelligent can be done, I believe.

It is pretty amazing that knowing so much about financial cycles, the Bush and other world administrations encourage precisely a path to a sharp crisis. Yes, the path does produce excitement of easily growing wealth - just as a pyramid scheme.

Can we enjoy a financial meltdown now?

How delighted I was to find in this old EuroTrib diary a prediction of the 2008 financial meltdown laid out with clear logic, a good full year in advance of the meltdown.  I had stumbled upon das monde's Hyman Minsky diary after reading Paul Mason's "To move beyond boom and bust, we need a new theory of capitalism" in The Guardian (published eight years to the day after das monde's Is Civilisation A Pyramid Scheme?  diary), in which Mason writes:

There's a global conference at the Organisation for Economic Co-operation and Development in Paris, where the giants of radical economics - including Greek finance minister Yanis Varoufakis - will get their biggest ever mainstream platform. And there's a film where a star of Monty Python talks to a puppet of Hyman Minsky. ...

Minsky's genius was to show that financially complex capitalism is inherently unstable. ... Bust becomes inevitable.

This logical and coherent prediction was laughed at until it came true. ...

In the aftermath of the crisis - which threatens some countries with a phase of stagnation lasting decades - Minsky's insight has been acknowledged.

Good catch, das monde!

And yet, lo and behold, this morning I am listening to the latest episode of the Planet Money podcast, and I can't believe what I'm hearing:

Planet Money host Robert Smith: ... when it comes time to undo QE, to start taking that money out of the economy, the Fed is still going to be making it up [i.e. winging it].

David Blanchflower:  They don't have a nice chapter in a textbook to tell them what they should do.  They've never done it before.  They're struggling.

Planet Money host Jacob Kestenbaum: So the Fed doesn't know what's going to happen when they finally wind down QE?

Blanchflower:  Absolutely not.  Sorry!  They absolutely don't know.

Jacob Kestenbaum:  That sounds terrifying.

Blanchflower:  It is terrifying.

<...>

Planet Money reporter Stacey Vanek Smith:  ... U.S. taxpayers are on the hook for 72% of new U.S. mortgages.  So in other words, if the people borrowing money to buy houses don't pay those loans back, the federal government will step up to make sure that lenders get paid back.  

Planet Money host Robert Smith:  72% of new mortgages?

Stacey Vanek Smith:  Yes.

Planet Money host Robert Smith:  Yeah, didn't we learn this lesson?  I'm getting a weird déjà vu about this.

Stacey Vanek Smith:  Right.   Well, this all goes back to 2008:  the government bail-out of Fannie Mae and Freddie Mac.  You might remember, Fannie and Freddie were these two big mortgage companies, and they would buy mortgages from banks and sell them to investors.  But this is the key part:  they guaranteed those loans, so if people paying those mortgages loans defaulted, Fannie and Freddie said to investors, "We're on the hook for those mortgages, we will back them up."

Planet Money host Robert Smith:  And then of course, when the housing bubble crashed, Fannie and Freddie were in trouble.  

Stacey Vanek Smith:  Yes.  They went bust, the government swooped in, bailed them out for $187 billion: essentially took them over, essentially took over the mortgage market.

Planet Money host Robert Smith:  And everyone at the time said, "This is temporary, this is just crisis thinking here, we're going to bail them out temporarily, and then we're going to get the government out of the mortgage business.  And yet, you're telling me that 72% of mortgages are still guaranteed.

Stacey Vanek Smith:  Yes, exactly.  And these are new mortgages.  Three out of four new mortgages the government is guaranteeing.  So I wanted to find out find out what's going on:  why the government still basically owns this business. ... So basically, ... right now without government support, it would be really, really hard for most people to get mortgages.  And those mortgages would probably be more expensive, higher interest rates, things like that, if the government weren't guaranteeing that they would buy them up from banks.  That, in turn, would push housing prices down.  And I talked to Adam Levitin about this; he's a professor of financial regulation at Georgetown University.

Adam Levitin, Georgetown professor of financial regulation:  The problem is that we've built a market, and you know, home prices are based on an assumption of tremendous government support for the housing market.  And that basically becomes an entitlement for the middle class.  Socially, politically, and economically, withdrawing that entitlement would be disastrous.  The housing market has become really a market that's too big too fail.

Stacey Vanek Smith:  What would happen if the government got out of the mortgage business?

Adam Levitin:  We would have Great Depression.  Not Great Recession, Great Depression.

(I thought das monde's poll question at the end of his Hyman Minsky diary -- When is the Second Great Depression coming? -- was a little over the top, but maybe not.)

Quoting das monde from 2007 again:  It is pretty amazing that knowing so much about financial cycles, the Bush and other world administrations encourage precisely a path to a sharp crisis.

So, if as Minnesota Vikings athletic trainer Fred Zamberletti once said, "The definition of insanity is doing the same thing year after year and expecting different results", how do we put an end to this hamster wheel of madness?  Does salvation, as Paul Mason believes, lie in theory?

So the pursuit of theory is obligatory in economics. The holy grail is not a new orthodoxy, cobbled together from Minsky and the remnants of mainstream thought so that bankers can construct trading models to iron out problems created by the way our brains work. The aim should be something bigger to model capitalism's current crisis within an understanding of its destiny.

For me, the most fundamental question in economics still concerns the 2008 crisis. Was this event the last in a series of shocks needed to allow a third technological revolution to take off? Or was it evidence that capitalism's tendency to adapt and reshape in response to technology has stalled, or is even finished? That is the shadow we have to jump over in economics. Amid a mania for "new economic thinking", it is what we need to think hardest about.

As das monde put it back in 2007 March:  Can we make more sense of this than a combination of factors?

But what if we do come up with a more powerful, more accurate theory of capitalism / economics, "something bigger to model capitalism's current crisis within an understanding of its destiny"?  What happens then?  Will that somehow translate into wiser, more constructive social policy and public "common sense"?  How so?  Also, even if we could translate better theory into better policy, are there any candidates out there right now for such a theory?  

Alas, behavioral economics -- or maybe just plain psychology -- is not encouraging on that score:

Planet Money host Robert Smith:  ... And you know, we have talked about this before on Planet Money.  And it's something that no one really wants to talk about, which is:  the federal government actually makes a profit off of Fannie and Freddie, because people are paying off their mortgages, and then the mortgage business makes money.  It's a successful business right now.

Planet Money reporter Stacey Vanek Smith Smith:  Right.  Right now it is a successful business: they've paid back the $187 billion bail-out, and the government's made a profit off of them of about $40 billion.  So right now, we're kind of sitting pretty.  But, if things take a turn for the worse, if the housing market bottoms out again like it did, taxpayers will be on the hook for 72% of mortgages once again.

<...>

Planet Money host Robert Smith:  Now <sigh> I can understand, as someone who owns a house, I don't want anyone passing some sort of legislation that'll make my house worth less.  10, 20, 30% less, I would be quite upset.  But at the same time, I mean, come on people, the whole point of going through a crisis is to learn that prices have to reflect reality.  So is anybody just saying, like, "Look, we gotta bite the bullet, we can't build another housing bubble"?

Planet Money reporter Stacey Vanek Smith Smith:  Well, that's the other side of this.  There's the economic side, and now there's the political side.  There are a number of proposals in Congress to take steps to privatize Fannie Mae and Freddie Mac.  But they're basically not going to go anywhere, according to Guy Cecala [publisher of Inside Mortgage Finance].  There's just no political will for this.

Guy Cecala, publisher of Inside Mortgage Finance:  Cause I've had, you know, discussions with staffers of a number of key Congressmen, and they've all said that they've looked at this issue, and once they do, they say, "Oh my God, we'd be nuts to take a position on this.  Let's avoid it at all costs."  There's not a lot of upside to tackling this as a legislative issue.

And there you go.  What brilliant new economic theory will save us from our inveterate, lazy, risky behavior?  If not, we can always try spiking the water systems with psilocybin.

Display:
Psychologically, sociopathy is obviously a more powerful driver than sanity, iow people who are nuts get up earlier and work harder, hoping that being in pole position will compensate for their lack of affect (or deeper purpose for living than simple material terms).

Financially bubbles contain a 'feel-good factor' that a calmer economy does not engender, because quick profits are more attractive than slow ones.

So pols looking for near-future votes cannot resist blowing air into bubbles even though they know how it will end. Rubes go along and all try to sell before the music stops.

I would venture to say that none of this will stop unless one of two things happens: 1. a general strike of the 99% to remind the 1% where their riches come from, or 2. a massive education program to deeply plant the knowledge within people that slow profits are healthier for society at large than quick ones.

We have a 'slow food' movement, maybe now we need a 'slow economy' movement. It shouldn't be rocket science really, because capitalism-as-we-presently-conceive-it is not only permissive of bubblicious behaviour, it doesn't just condone it, it practically demands it!

Perhaps in the future embryonic scans for sociopathic traits can help us screen these folks and either reprogram them or at least sequester them where their games can do least damage.

Until then we can just wait for a 'Minsky moment' to epiphanise a large enough sector of the thinking public, which can become a pressure group big enough to battle this Leviathan.

I think there's little doubt about the unsustainability of predatory capitalism, it's a when, not an if as to its implosion due to inherent contradictions known since Marx. What concerns me most is the size of the crater this implosion will create. When contemplated, the brain struggles to fully take on board the possible permutations of what could follow from such a change.

I really enjoyed this diary, thanks, also to das monde for its inspiration.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Mar 24th, 2015 at 11:22:52 AM EST
Man, I feel flattened by this 3g lift... Haven't had that experience since nineteen something. Will I spoil this esteem? Probably yes, quickly... An overly sexual NSFW metaphor will do the job. Censor these shades of sticky grey if you have to.

Rather more positively than the title of your diary, the subprime bubble was an epic erection, a solid joy for planet's customers. It stayed on confusingly long, not naturally of course, but on synthetic CDO, CDS viagra. Nevertheless, the ejaculation came in 2008. The societies are still submissive to the expected wonders of liberalized economies, the perceived need to behave with restraint, implicit promises "You can screw too". But the economy won't get up, and no one will be satisfied for decades to come - and the masters know it. They will claim to be so tired saving the world with High Frequency Trading, with no mention of soft throbbing at Asian, Latin parlors. A lot more BS talk will come before all respect is gone. That's what "Nobel" worthy economic theories are for. Over 90% of the global population has to be duped with visions of recovery cycles, inevitable growth, credit sins, vulture funding virtues, austerity heaven, hyperinflation hell, islamofascism and what not.

by das monde on Wed Mar 25th, 2015 at 01:33:24 AM EST
Your comment may have been the first time I have literally laughed out loud reading EuroTrib.

You mentioned high-frequency trading.  The media storm that Flash Boys provoked scared the hell out of me.  But I guess the verdict is still out on HFT's risk/benefit ratio?  My own hunch is that it's way more devil than angel, but I am just a layperson reading the popular press:

"The subject of the stock market right now is so complicated that it would not surprise to me to learn that within the SEC they're arguing with each other about how it actually works. I don't think there's a clear picture," he [Michael Lewis] added.


Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire
by marco on Wed Mar 25th, 2015 at 07:46:13 AM EST
[ Parent ]
High-frequency trading has no correlation to raising money for investment (that should be the reason for issuing stocks) not even as a means to create liquidity for investors that wants out (which in an ideal world is the stock markets function). It is all just creating froth and skimming it.
by fjallstrom on Wed Mar 25th, 2015 at 07:57:01 AM EST
[ Parent ]
Foremost, HFT is about "punishing" those smaller traders who want to buy or unload more than a few packs of some stock. Just when you hit the "trade" button, the price moves against you... More advanced versions simulate this naive behavior with phantom orders (that they would take away in microseconds if you try to call the bluff on a slow platform) and then cash in on the first level algorithmic reactions, etc. With HFT, stocks can be moved with far less own volume. Technology is developing fast.
by das monde on Wed Mar 25th, 2015 at 08:38:22 AM EST
[ Parent ]
I don't know if any new economic theory will save us, but checking my own thoughts from 8 years ago I think there is some progress.

These elements I think are important (in no particular order):

  • Money as power (Graeber)
  • Accounting as description of the power relationships (MMT)
  • The need of certain flows of money to uphold a capitalist/consumerist society (Keynes) and the imbalances that sets in motion the movement away from those flows (Minsky)
  • Sustainability with respect to the world

If we combine these I think we have some groundwork for how society needs to be reformed.

For example, combining the need for sustainability with the need for growth we can see the need for inflation. Combining the need for stability with the view of money as power we can see the need to curbe the maximum wealth (and thus power) of any individual.

by fjallstrom on Wed Mar 25th, 2015 at 05:32:44 AM EST
nice ones.  i finished that diary in a state of intoxicated despair.  but your outline miraculously threw out a thin line of hope.

supplementing / reinforcing some of your points:

  • When the rate of return on capital (r) is greater than the rate of economic growth (g) over the long term, the result is concentration of wealth, and this unequal distribution of wealth causes social and economic instability. (Piketty)

also, can we throw in anything robust with respect to

btw, MMT = Modern Monetary Theory, right?

Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire

by marco on Wed Mar 25th, 2015 at 08:48:00 AM EST
[ Parent ]
I wouldn't include Piketty. After doing sterling archive work he produced a supremely nonthreatening damp squib. And his solution is slight tinkering with the tax code.
by generic on Wed Mar 25th, 2015 at 09:18:34 AM EST
[ Parent ]
I am not qualified to weigh in with my own opinion, but here is Krugman on Piketty:

"Capital in the Twenty-First Century," the new book by the French economist Thomas Piketty, is a bona fide phenomenon. Other books on economics have been best sellers, but Mr. Piketty's contribution is serious, discourse-changing scholarship in a way most best sellers aren't. And conservatives are terrified. Thus James Pethokoukis of the American Enterprise Institute warns in National Review that Mr. Piketty's work must be refuted, because otherwise it "will spread among the clerisy and reshape the political economic landscape on which all future policy battles will be waged."

<...>

Now, the fact that apologists for America's oligarchs are evidently at a loss for coherent arguments doesn't mean that they are on the run politically. Money still talks -- indeed, thanks in part to the Roberts court, it talks louder than ever. Still, ideas matter too, shaping both how we talk about society and, eventually, what we do. And the Piketty panic shows that the right has run out of ideas.

The Piketty Panic, APRIL 24, 2014

As far as I'm concerned, when Krugman and Jon Stewart take leave of the public discourse, we're effed.  Who else can I trust on matters economicsal?

Did Krugman fall for Piketty like I fell for Taylor Swift the first time I heard Shake It Off?  Besotted like a middle schooler?

Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire

by marco on Wed Mar 25th, 2015 at 09:34:10 AM EST
[ Parent ]
No, Krugman's economics are actually very similar to Piketty. Not to denigrate either one's contribution to public debate, but going by content Krugman tells us that except in these very special circumstances the classical theory works. The total inversion of Keynes actually. For Krugman the General Theory is the theory of liquidity traps.
by generic on Wed Mar 25th, 2015 at 09:52:02 AM EST
[ Parent ]
To clarify: We should differentiate between theory and public discourse. Both Krugman and Piketty don't bring all that much to the first, but have a quite positive  impact on the latter.
by generic on Wed Mar 25th, 2015 at 10:08:12 AM EST
[ Parent ]
... going by content Krugman tells us that except in these very special circumstances the classical theory works.

Ha.  That sounds a lot like how Mason characterized "the mainstream".  So you would you put Krugman among that lot?

Mainstream economics had convinced itself that capitalism tends towards equilibrium; and that any shocks must be external. It did so by reducing economic thought to the construction of abstract models, which perfectly describe the system 95% of the time, but break down during critical events.

In the aftermath of the crisis - which threatens some countries with a phase of stagnation lasting decades - Minsky's insight has been acknowledged. But his supporters face a problem. The mainstream has a model; the radicals do not. The mainstream theory is "good enough" to run a business, a finance ministry or a central bank - as long as you are prepared, in practice, to ignore that theory when faced with crises.

And here I was, believing Krugman's voice to be John the Baptist's, crying in the Wilderness.

Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire

by marco on Wed Mar 25th, 2015 at 10:14:56 AM EST
[ Parent ]
See: Who Are These Economists, Anyway? (By James K. Galbraith, January 2010)
This article is partly a response to Paul Krugman's piece in the Sunday New York Times of September 6, 2009, on the failures of the economists in the face of the crisis. Here, Senior Scholar James K. Galbraith takes up the challenge of identifying some of those economists--the "nobodies" of the profession--who did see it coming, and who have not gotten the credit they deserve. He also points out the urgent need to expand the academic space and the public visibility of ongoing work that is of actual value when faced with the many deep problems of economic life in our time--an imperative for university administrators, for funding agencies, for foundations, and for students.


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Mar 25th, 2015 at 10:17:13 AM EST
[ Parent ]
 
Krugman's economics are actually very similar to Piketty.Krugman's economics are actually very similar to Piketty.

There are many paths to the disruption of the reigning political-economic paradigm. I think Krugman has an excellent argument here, even while I disagree with him on money and banking. Piketty planted a minefield with Capital. That he stuck to statistics and did not veer into polemics makes it much harder to dismiss him. I have always loved polemics - to a fault. And ideological purity has long been the bane of the left.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 25th, 2015 at 02:08:04 PM EST
[ Parent ]
Who else can I trust on matters economicsal?

A lot of people. Krugman is the only one to stumble into a New York Times column. There his job was to propagate free trade. And then Bush was elected.

by IM on Wed Mar 25th, 2015 at 10:33:39 AM EST
[ Parent ]
Who would be some others?                    

Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire
by marco on Wed Mar 25th, 2015 at 09:57:46 PM EST
[ Parent ]
Scott Fulwiller is a good place to start.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 26th, 2015 at 02:35:54 AM EST
[ Parent ]
MMT is indeed Modern Monetary Theory.

I think Piketty does belong there, in that he charts a long-term destabilisation route. So he would belong with Keynes and Minsky.

In general, I think it is important to understand the economics of the urbanised, industrialised, consumer world we are living in and also how it differs from other economies.

I recently read a critique of Keynes analysis of the German WWI debt, based on the post-Napoleonic french states ability to pay 700 million livres over the course of a couple of years. I think a crucial difference (that was not covered) is the mainly rural characther of early 19th century France. If the state mainly extracts surplus from farmers with access to the productive resources it needs, the state does not really need to provide demand to keep the economy going, the farmer's belly does that just fine. But the economy we are in is in contrast extremly dependent on demand being there all the time in order for labour, capital and resources to form up to economic activity.

Bit of a tangent there.

by fjallstrom on Wed Mar 25th, 2015 at 10:18:11 AM EST
[ Parent ]
I wholly agree about the need for the relevant economic history to be considered in any economic comparison. The fact that it blows up so many grand theories is likely a large part of why it and History of Economic Thought has largely been banished from Mainstream Economics. And I agree that Piketty's conclusions are both consistent with and supportive of MMT. But they are not the same thing.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Mar 27th, 2015 at 12:11:00 AM EST
[ Parent ]
I see how my comment can be read like Piketty is part of MMT, but actually I meant he belongs on the list, at point three with Keynes and Minsky.
by fjallstrom on Mon Mar 30th, 2015 at 02:00:10 PM EST
[ Parent ]
by Robert Skidelsky - Project Syndicate

That should have ended the argument. But it did not. Some economists claim that governments faced a balance of risk in 2010: Cutting the deficit might have slowed growth; but not committing to cut it might have made things even worse.

The Keynesian remedy, the argument went, ignored the effect of fiscal policy on expectations. If public opinion believed that cutting the deficit was the right thing to do, then allowing the deficit to grow would annul any of its hoped-for stimulatory effect. Expecting that taxes would have to rise to "pay for" the extra spending, households and companies would increase their saving. Fearing sovereign defaults, bond markets would charge governments punitive interest rates on their borrowing.

<...>

This is part of the mess into which macroeconomics has gotten itself. Once beliefs and expectations are introduced into economics, as is surely reasonable, the results of fiscal policy become indeterminate. Too much depends on what people think the results of the policy will be. In the economists' lingo, policy results are "model-dependent."

<...>

If fiscal policy is in a muddle, so is monetary policy. Central banks have tried to avoid the confidence fairy by printing money - technically, by buying government bonds on the secondary market. The extra money is expected to percolate through the economy, quickening activity. The European Central Bank has just started a €1.1 trillion ($1.17 trillion) bond-purchase program to bypass the German veto on fiscal expansion.

But the effects of so-called quantitative easing also depend on expectations. If giving businesses extra cash makes them more confident, they will spend more. If they mistrust the policy, they will hoard the cash.

Nice little corner we've painted ourselves into. We cant even discuss fiscal policy, because TINA. And we can't discuss monetary policy because we're stuck at ZIRP and the second-guessers and the algos go all aquiver over how the central banks even try to phrase the suggestion that they might be considering how or when or whether to maybe someday raise interest rates.

Now where are we going and what's with the handbasket?

by budr on Wed Mar 25th, 2015 at 01:47:31 PM EST
In his classic work Imperialism J.A. Hobson noted the role of universities as guardians at the gate of the existing order. Since the second half of the 19th century TPTB have been concerned that their university graduates have "sound views". "Sound men, sound views." I have personally encountered this in my graduate work, though I was too naive to recognize what was happening at the time. In the fall of '64 I was exposed to A.J.P. Taylor's The Origins of the Second World War, E. H. Carr's The Twenty Year Crisis, to Norman O. Brown's Life Against Death and to Thomas Khun's Nature of Scientific Revolutions. I found them all confirmatory of what I suspected and embraced them enthusiastically. While my quickness of comprehension may have suited me to being a graduate reader, my embrace of the ideas, I now suspect, marked me as 'unsound' - both with the professor, an ex US Navy captain with a mid career PhD from Stanford with specialization in the British Labour Party, and with most of the rest of the faculty at the University of Arizona in Tuscon, which, though being the Democratic bastion in AZ had a very conservative History faculty. I thought they were liberal because of the atheists and gays on faculty. Some on social issues was about it.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 25th, 2015 at 02:39:14 PM EST
Australia: one of the worst housing bubbles ever
By all accounts, Australia is experiencing what is one of the greatest credit-fuelled real estate bubbles in modern times. On the back of a collapsing mining sector, we can thank the RBA, APRA, ASIC and the political elite in Canberra for creating a flawed household wealth-creation strategy that shares all the hallmarks of a predictable economic disaster.

In plain English, since the mid-1990s, Australia's strategy is for home buyers and investors to borrow heavily from lenders and flip houses to the next buyer who has taken out even more debt to speculate.

Today, all this country has to show for it is a $1.9 trillion mountain of household debt that will make the US credit-fuelled housing bubble of the last decade look like a walk in the park when our housing bubble bursts.

Isn't the orgasmic household wealth-creation strategy all the same around the world? Finally the media talks about all the hallmarks of a predictable economic disaster a little bit earlier than obvious to all.

China should beat Australia in the "ever" category rather soon.

by das monde on Sun Mar 29th, 2015 at 10:25:27 PM EST
Barney Frank drops a bombshell: How a shocking anecdote explains the financial crisis - Salon.com

The TARP legislation included specific instructions to use a section of the funds to prevent foreclosures. Without that language, TARP would not have passed; Democratic lawmakers who helped defeat TARP on its first vote cited the foreclosure mitigation piece as key to their eventual reconsideration.

TARP was doled out in two tranches of $350 billion each. The Bush administration, still in charge during TARP's passage in October 2008, used none of the first tranche on mortgage relief, nor did Treasury Secretary Henry Paulson use any leverage over firms receiving the money to persuade them to lower mortgage balances and prevent foreclosures. [...]

Whether or not you believe that sky-is-falling narrative, Frank kept pushing for action on foreclosures, which by the end of 2008 threatened one in 10 homes in America. With the first tranche of TARP funds running out by the end of the year, Frank writes, "Paulson agreed to include homeowner relief in his upcoming request for a second tranche of TARP funding. But there was one condition: He would only do it if the President-elect asked him to."

And now...

Foreclosure to Home Free, as 5-Year Clock Expires - NYTimes.com

[In] a growing number of foreclosure cases filed when home prices collapsed during the financial crisis, lenders may never be able to seize the homes because the state statutes of limitations have been exceeded, according to interviews with housing lawyers and a review of state and federal court decisions.

In November 2009, her mortgage servicer at the time, Aurora Loan Services, a unit of the now-defunct Lehman Brothers, filed to foreclose on her house.

Instead of making her roughly $1,300 monthly mortgage payment, she pays her lawyer $500 a month to represent her in court.

In June 2010, Aurora agreed to modify her loan on a trial basis, she said, but waited months to send her the modification deal. When she received the contract in the mail, she refused to sign it, saying that documents had arrived too late.

For months, she heard nothing about her case. It turned out that the law firm that negotiated her modification deal on behalf of Aurora had been shut down after complaints about improper foreclosures, including backdated documents. Nationstar, meanwhile, took over the servicing duties of many of Aurora's mortgages.

In August 2012, Nationstar made contact with Ms. Rodolfi for the first time, saying it was now servicing her loan.

by das monde on Thu Apr 2nd, 2015 at 04:49:30 AM EST
And what proportion of US bank assets include home loans that can't be foreclosed on?

There's a similar law for debt in the UK. The time limit is six years. If the debt isn't acknowledged legally in that time, it slides off the credit record and is considered "statute barred" - i.e. it still exists, but no collection action can be taken.

This doesn't stop some collectors from trying to collect on it anyway, because - of course - most people don't know the law, and many are honest enough to believe that debts should be paid for moral reasons.

I don't know this if this applies to mortgages too - but it would be exceptionally unlikely for a UK lender to ignore mortgage arrears for more than six years.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Apr 2nd, 2015 at 08:52:50 AM EST
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