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Lawrence Summers channels my doom porn

by Jerome a Paris Mon Nov 26th, 2007 at 10:52:58 AM EST

For close to 3 years now, I've been writing about the huge asset bubble generated by Greenspan's lax monetary policies, and about how unsustainable it was. I wrote how the real estate bubble had allowed average Americans to continue to consume despite the stagnation of their income, and how the end of these exagerated valuations would create a vicious circle of falling prices, less credit, less spending and lead to a massive recession.

Many people scoffed at me, and mocked my doomsterism. Well, I'm now officially in good company, as "serious person" Lawrence Summers, formerly the Secretary of Treasury in the later years of Clinton's presidency, joins me in a gloomy assessment of the situation today.



Wake up to the dangers of a deepening crisis

(...)

Several streams of data indicate how much more serious the situation is than was clear a few months ago. First, forward-looking indicators suggest that the housing sector may be in free-fall from what felt like the basement levels of a few months ago. Single family home construction may be down over the next year by as much as half from previous peak levels.  There are forecasts implied by at least one property derivatives market indicating that nationwide house prices could fall from their previous peaks by as much as 25 per cent over the next several years.

As the WSJ writes:


The Mortgage Bankers Association estimates that 1.35 million homes will enter the foreclosure process this year and another 1.44 million in 2008, up from 705,000 in 2005.

The projected supply of foreclosed homes is equal to about 45% of existing home sales and could add four months to the supply of existing homes.

No refinancings for existing borrowers, in particular those facing interest rate rests. No out via a sale as prices go down. No house equity withdrawals... Foreclosures, lower spending, and a sector (real estate, construction and associated financial nd other services) which accounted for a disproportionate share of growth in recent years which is dead.

But that's not the worst of it. Cueing Summers again:


Second, it is now clear that only a small part of the financial distress that must be worked through has yet been faced. On even the most optimistic estimates, the rate of foreclosure will more than double over the next year as rates reset on subprime mortgages and home values fall. Estimates vary, but there is nearly universal agreement that - if all assets were marked to market valuations - total losses in the American financial sector would be several times the $50bn or so in write-downs that have already been announced by big financial institutions. These figures take no account of the likelihood that losses will spread to the credit card, auto and commercial property sectors. Nor do they recognise the large volume of financial instruments that depend for their high ratings on guarantees provided by credit insurers whose own health is now very much in doubt.

The borrowers are in for a world of pain, but so are the lenders.

This is the reason why the financial crisis has not been that visible so far: it's a debt-side crisis, not an equity side crisis. The Dow Jones is still doing fine (well, outside of banking and retail stocks), but credit markets are in full panic mode (again, not my words). Banks have taken a look at their balance sheets, really did not like what they saw and all thought at the same time "if we look this bad, when we've been relatively prudent, what does the balance sheet of our colleagues, who did all sorts of crazy things, look like?" - and stopped lending to one another, because they all did the same crazy things, encouraged by cheap credits, easily obtained credit-ratings, and goaded by one another - and supported, of course, by the fact that it looked fine for a long while, as prices increased on the back of that credit bubble.

Well, even before the shit has hit the fan, banks are realizing they are overextended, and the simple fact of tightening conditions creates a crisis - one linked to slowing credit activity, not yet to the souring of past things. If you want, we're in the situation of a car passenger when the driver brakes brutally because of a crash in front of the car: with no belt, you're hitting the windshield as the car slows brutally even before it actually hits the wreck in front...

The actual is still to come. So says Summers, again:


Third, the capacity of the financial system to provide credit in support of new investment on the scale necessary to maintain economic expansion is in increasing doubt. The extent of the flight to quality and its expected persistence was powerfully demonstrated last week when the yield on the two-year Treasury bond dropped below 3 per cent for the first time in years. Banks and other financial intermediaries will inevitably curtail new lending as they are hit by a perfect storm of declining capital due to mark-to-market losses, involuntary balance sheet expansion as various backstop facilities are called, and greatly reduced confidence in the creditworthiness of traditional borrowers as the economy turns downwards and asset prices fall.

Everything that allowed the bubble to go up is now conspiring to bring things down. Trust is gone. Liquidity is gone. Optimism is gone. Exuberance is gone. Now's the time for prudence, depreciation of assets, cash hoarding, and enforcing contracts to the letter.

The banks are stepping on the brakes as hard as they can. Even if that means weakening one another.


Then there are the potentially adverse effects on confidence of a sharply falling dollar, rising energy costs, geopolitical uncertainties especially in the Middle East, or lower global growth as economic slowdown and a falling dollar cause the US no longer to fulfil its traditional role of importer of last resort.

Oh yes, it's raining and the road is slippery.

While it's pleasant to be finally proven right by "serious people " like Summers, I'd like to note that his discourse still lacks the analysis that this whole cycle was created on purpose to enrich a happy few on the back of the US middle classes, and that it has worked brilliantly, as the income of the average American stagnated and that of the very wealthy (in the top 0.1% mostly) shot up.

While I won't venture into the hidden goals of the Bush administration in Iraq, it is clear that the macro-economic strategy of massive outsourcing to China paid on (cheap) credit was structurally bound to weaken the dollar and, at some point, increase commodity prices. Geopolitical tensions caused by the same administration only reinforced that, consciously or not.

But Summers' advice (lower Fed rates, a Keynesian boost via increased government spending of tax cuts, and public support to lending and housing markets) completely ignores that diagnosis. Cheap money is not the issue - it's the problem (there's been too much of it for too long) and it's the symptom of the underlying bias in value sharing between workers and investors. Cheap credit has hidden for years the fact the the economy was not sound, as workers saw lower wages and the rich captured an increasing share of incomes. It's that split that needs correction. It's the fact that wages cannot keep up with costs. It's the fact that too much of GDP was generated by virtual activities (selling houses to one another using Chinese money, as Krugman described it more than 2 years ago) that created a lot of paper value but had no substance - and whatever value existed was captured - and spent - by the Wall Street bankers right away.

This is a crisis of the conservative economic policies pushed to their extreme. After denying for years that this was unsustainable, I expect that they will claim that their policies did not go far enough, and that they must be pursued further to "save the economy" - more refom, more labor "flexibility", more effort in the face of globalization. This is all bunk.

Wealth capture is not weath creation. Wage increases is not inflation. Asset price increases is not growth.It's time to change economic discourse now that 30 years of increasingly unrestrained economic laissez-faire are bringing us the greatest crisis since 1929.

The diagnosis is no longer only made by doom porn lovers that supposedly want America to fail. Hopefully, the diagnosis we make will be heard a bit quicker, and will lead to real changes in economic policies.

Display:
Crossposted on DailyKos:
http://www.dailykos.com/story/2007/11/25/164238/37


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Nov 25th, 2007 at 05:43:33 PM EST
This is the reason why the financial crisis has not been that visible so far: it's a debt-side crisis, not an equity side crisis.

Debt is the problem. It is the direct cause of inflation, and a monetary system based upon it is unsustainable, as we see.

The solution is to "Equitise": a Debt/Equity swap on a massive scale. To transform most of the insane "National Debt" into a "National Equity" for the most part based upon the land/property rental values which underpin most modern economies.

This is achievable - new "asset-based" forms of quasi Equity such as "REIT's", "Income Trusts", ETF's and the like show that the conventional toxic form of "shareholder value" "Equity" in Corporations is actually a pretty poor way of structuring things, unless you happen to be in the top two or three percent.

When you say

real changes in economic policies
are necessary,that is the undertatement of the year.

We need a change to economic reality, away from our current surreal fiction.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Nov 25th, 2007 at 06:12:27 PM EST
What's needed, i'm sorry to tell you again, is bankers doing their job again, ie actually anlysing risk instead of outsourcing that to rating agencies which can be paid to give the best rating possible.

But that's hard to do when everybody is complicit, from the public authorities that formally entrust the privately-owned rating agencies with the savings of many, to the investors too happy to get good, safe ratings and good returns, and to the bankers who get fatter bonuses.

The solution is simple: make bankers live with the consequences of making silly loans, one way or another.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Nov 25th, 2007 at 06:35:11 PM EST
[ Parent ]
Bankers as credit intermediaries are redundant, Jerome, and that's the Inconvenient Truth.

They are about to be "Napsterised".

Credit has a cost - consisting of shared system costs and defaults.

Capital has a market price, and we are currently seeing what that is, as Investors pile in to Treasuries, now at 3% - and not even Index linked....

But neither of these has anything whatever to do with Central Bank interest rates.

Money - as it truly is - has no cost, as we are seeing right now in the case of Northern Rock, where the Bank of England has quietly created £23 billion out of thin air, and is making 5.75% on it (plus an additional 1.25% gifted to the Treasury as a subordinated loan) for what should be ecstatic tax-payers.

If Northern Rock were to go belly up the tax-payer wouldn't lose a penny, any more than it does when the BoE takes back a few skip-loads of bank-notes and burns them. That money has never been anywhere near a tax-payer. It's pure unadulterated, free as air, credit.

But I digress.

We're hitting the windows (great analogy) of the Debt Money car crash, and that's not a threat to Bankers  it's an opportunity for them to become service providers adding value, instead of middlemen extracting it.

 

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Nov 25th, 2007 at 07:01:23 PM EST
[ Parent ]
Money - as it truly is - has no cost, as we are seeing right now in the case of Northern Rock, where the Bank of England has quietly created £23 billion out of thin air, and is making 5.75% on it (plus an additional 1.25% gifted to the Treasury as a subordinated loan) for what should be ecstatic tax-payers.

So if the money just appears out of thin air, how does the Bank make any profit on it? why dosn't the 5.75% just vanish back into the aether from whence it came?

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Sun Nov 25th, 2007 at 07:31:17 PM EST
[ Parent ]
The BoE usually only creates credit in the form of bank-notes: but it may (and does currently for Northern Rock) create credit in the form of a "loan". It doesn't cost a Central Bank anything to create such credit, but customarily the Bank will insist upon borrowing in the interbank market.

Tim Congdon - a bit more credible than li'l ol' me - said this (my highlight)in the FT recently

The explanation is that the Bank of England can create money "by a stroke of the pen". Parliament has made it the UK's only issuer of legal-tender notes, and it can expand the note issue or credit a balance convertible into notes at virtually nil cost.

Because of these special powers, the Bank does not need to borrow in the Interbank market at a positive interest rate.

The result is that 5.75% on the outstanding balance pa is being paid to the Bank of England by Northern Rock.

All of this 5.75% is pure profit to the Bank Of England, and in due course, to the tax-payer. If Northern Rock pulls through, then the additional 1.25% pa penalty will go directly to the Treasury on behalf of the tax-payers. Pure bunce.

If the "loan" is paid off then it extinguishes the money in the same way as burning bank-notes.

The point is that Central Banks can do this any time they please, but choose not to. The process has to be namaged of course, which is where Banks should come in as service providers, instead of as intermediaries using the current "s.moke and mirrors" methodology understood by few.

The amazing thing about what Congdon said is not what he said but the fact that the FT printed it.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Nov 25th, 2007 at 07:57:40 PM EST
[ Parent ]
And then you have the Scottish note situation, how does that fit in?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Sun Nov 25th, 2007 at 08:10:57 PM EST
[ Parent ]
Brown hands Banks a bill

is quite informative.

I'm not sure what happened subsequently after the consultation....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Nov 25th, 2007 at 08:40:36 PM EST
[ Parent ]
I would have thought that the banks had quite a strong bargaining position,  in that being the man that imposed British banknotes on the scots would be electoral poison.  Some bright banking PR person must have seen that they have a labour government over a barrel in that case?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Sun Nov 25th, 2007 at 09:18:31 PM EST
[ Parent ]
I think you misunderstand: which is not difficult!

Brown is quite happy for them to issue notes - it's just that HE wants the Seignorage that arises from the privilege of issuing notes.

He plans to do this by insisting that they hold £1.00 in Bank of England money for every Scottish/ Northern Irish £1.00 note they issue.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Nov 26th, 2007 at 05:12:13 AM EST
[ Parent ]
No I think I do understand, I just think it would be relatively easy to blackmail the government with the threat of Scottish nationalism into backing down on this 80 million cost.

Imagine the Banks coming out and saying
 "The government has made it uneconomic for us to issue notes by charging us an extra couple of percent of the notes value to issue them. This will force us to change to issuing UK notes and is an attempt to bind Scotland more tightly into the UK"
don't you think this might maybe swing a couple of seats in a future general election from Labour to Scottish nationalist?


Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Mon Nov 26th, 2007 at 05:29:14 AM EST
[ Parent ]
It's an interesting point, and I do not know the result of the "consultation".

It is possible that the possibility of an appeal to Nationalism might allow the banks to hang on to the "nice little earner" they have had ever since they started issuing notes.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Nov 26th, 2007 at 06:08:16 AM EST
[ Parent ]

Bankers as credit intermediaries are redundant, Jerome, and that's the Inconvenient Truth.

A banker's job is not to create money, it is to analyse risk and allocate it. The current crisis happened because banks forgot about their job and just focused on moving money around as fast as they could. That they did not do their job does not mean that there isn't a job that needs to be done.

The question is how you get bankers to focus on their real job, it's not whether that job exists or not.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Nov 26th, 2007 at 03:56:35 AM EST
[ Parent ]
A banker's job is not to create money

Well, I'm sorry, but whenever Banks operate as credit intermediaries, that is exactly what bankers do, whether they think it is their job or not.

The result is mathematically unsustainable, and breaking down around us in the slow motion "car crash" you describe.

A banker's job is not to create money, it is to analyse risk and allocate it.

Exactly: and a perfectly honourable and necessary profession it is, too.

It is now possible for Banks to operate purely as service providers doing the job you and I both agree is necessary.

They may do this by using the sort of partnership-based enterprise model I observe emerging. This should be extremely attractive to Banks since they would no longer need to commit aany of their own Capital to back their implicit guarantee.

Instead, the Capital backing the guarantee will be that of the community of interest which together provides the guarantee. Such communities could be geographical, functional (eg IT workers, LNG market particpants) or a combination, and will therefore have - like credit unions - a "Common Bond".

The question is how you get bankers to focus on their real job, it's not whether that job exists or not.

I disagree: IMHO this is an existential problem. Banking as credit intermediation is unsustainable and fortunately, obsolete.

Banks as intermediaries are like submarines - a wonderful piece of engineering with a malign purpose.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Nov 26th, 2007 at 05:07:06 AM EST
[ Parent ]
What you describe as a new paradigm looks awfully like what happened with Mortgage-backed Securities and which is at the heart of the current mess.

Banks operated purely as service providers, bringing together asset-backed future streams (mortgages) and investors willing to take various shades of risk, from the lowest to the most aggressive, all via flexible structures (one might call them "wrappers") built for the purpose.

And, along the way, people forgot to actually analyse the risk.

The problem is not that bank committed their guarantees and Capital, it is precisely that they did not, and were de-responsibilized. They literally did not care of their wrappers went bad, given that they had no stake in the outcome, having taken their money upfront as a (fat) service fee.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Nov 26th, 2007 at 11:19:07 AM EST
[ Parent ]
I distinguish - and I thought I had made this pretty clear, ad nauseam - between unsecured credit and secured (asset-backed) credit.

The new paradigm isn't about disintermediating secured lending = quasi investment. As you say, that's happening anyway, albeit in complex and opaque ways.

It's about replacing such secured Debt (eg mortgages) with forms of ("asset-based") Equity which are not based upon ownership by Corporations, but rather upon other legal vehicles such as Trusts and quasi partnerships (eg simple new REIT clones).

If it isn't credit then there isn't any credit risk, and there isn't any capital repayment either (which cuts the cost dramatically).

In relation to "unsecured" credit the new paradigm is about outsourcing and "mutualising" a Bank's guarantee.

It's extremely easy to conflate secured and unsecured credit: they are like chalk and cheese.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Nov 26th, 2007 at 12:05:14 PM EST
[ Parent ]
with SECURED debt.

You still have the small issue of how much you value your security. That's risk analysis. That's what failed on a monumental scale in the markets, ie it was not done because banks did not need to do it (they did not hold any of the assets, and thus none of the risks).

Your trust and partnerships say nothing about what the underlying security is worth, and how much investment can be allowed on the back of such security - this is an investment decision, to be made by the relevant parties.

I am saying that the disintermediated model, where banks do not lend their own money, has failed miserably in its job to provide sound risk analysis, leaving investors with securities that are not worth enough to provide the cover they were supposed to.

That's your model that was used - and failed.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Nov 26th, 2007 at 12:19:12 PM EST
[ Parent ]
I'm obviously not making myself clear, which wouldn't be the first time... ;-)

I'm not talking about securitisation at all, ie a debt secured against revenues.

I am referring to "unitisation" or quasi "Equitisation" through actual ownership of revenues and/or the underlying assets.

Far from having been tried and failed, the model I advocate is in fact in constant use by Investment Banks.

Banks bring together investors in Corporations with conventional Equity in Corporations all the time. The way I see it, a secured loan is not an investment: it's a debt.

Debt = loans get repaid: Equity = investment usually doesn't.

Investment banks carry out all sorts of due diligence in respect of IPO's of Corporations. ie the creation of Equity.

It is that process of appraising either existing "productive" assets or - in the case of venture capital - potentially productive assets, where Banks have a role to play, probably not in respect of Equity in "Corporations" - which IMHO became obsolete on 6 April 2001 - but in other legal vehicles.

I guess this investment banking process must happen all the time in Canada when listed Companies decide to transfer a proportion of their revenues into Trusts and then flog off to pension investors units in their gross revenues as "Income Trusts". The kind of "value-added" banking you refer to is exactly what goes on when such units are to be listed alongside the relevant shares.

Similarly we had the Blackstone "IPO". They didn't sell off to the Chinese any of their "Corporation" shares - they sold off partnership interests in a Limited Partnership in which they were the General Partner, and so Investors in that IPO have virtually no control over Blackstone.

Just to be clear, the new paradigm I am describing is to replace secured debt - and all of the crap that went with it - with a new generation of asset classes using simple partnership-based legal vehicles.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Nov 26th, 2007 at 12:49:07 PM EST
[ Parent ]

I am referring to "unitisation" or quasi "Equitisation" through actual ownership of revenues and/or the underlying assets.

It's no different! If your revenues or underlying assets have been wrongly estimated, and/or mispriced, you will end up owning less than you expected, and suffering a loss.

The value added is in identifying future revenue flows. How you package them is irrelevant (calling it ownership or security or wrapper or whatever else) if they are not there.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Nov 26th, 2007 at 02:32:27 PM EST
[ Parent ]
I'm not arguing with your point in relation to the absence of "due diligence".

But you don't seem to acknowledge the qualitative difference between Equity and Debt.

It's quite possible - in fact it's probable in many cases - that there may be a sufficient revenue flow from productive assets like property to provide a decent return on Capital without there being enough to provide a return of Capital.

That is why there is all the difference in the world between Debt and Equity and that is why the replacement of Debt with new classes of Equity:

(a) would allow a Debt/Equity swap to provide a solution to the sub Prime crisis; and

(b) allow an entire new generation of quasi-Equity investment in infrastructure assets which remain in public ownership.

In both cases bankers like your goodself would do very nicely, thank you, in doing what you are good at.

But how you package assets, is, with respect, entirely relevant.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Nov 26th, 2007 at 02:55:23 PM EST
[ Parent ]
Is it possible that bankers' systemic function differs from their job description?

Through the fractional reserve system, banks do create money by lending it, even if when they lend the money they don't think about how much money they want to create today, but about how to balance the risks of their clients and counterparties.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Mon Nov 26th, 2007 at 05:37:25 AM EST
[ Parent ]
Correct.

And I am sure that the greater part of the banking profession have absolutely no idea of the truth of it.

They probably believe that the "gearing" that they bestow upon the "creditworthy" through fractional reserve lending is actually beneficial, rather than:

(a) a direct cause of increasing inequality in the distribution of wealth in the form of property over the "Commons";

(b) the driving force behind unsustainable "economic growth" pillaging the planet's resources.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Nov 26th, 2007 at 06:04:02 AM EST
[ Parent ]

Through the fractional reserve system, banks do create money by lending it, even if when they lend the money they don't think about how much money they want to create today

Given that each transaction is required by regulation to have a proportion of the bank's capital allocated against it, the regulatory authorities know exactly how much money is created at any given time, and can regulate it, if they want.

The problem is exactly the opposite - it is that banks have moved out of the lending business, to be in the wrapping/packaging service business, and, not holding assets anymore, they don't need to hold capital agaisnt the loans they package.

Instead, the money is created (or not, depending on its source) by unregulated entities outside the grasp of the regulator.

Banks are a lot easier to control than the other financial animals - that's precisely why these other anmals were created in the first place. Maybe they should not be able to trade unless they submit to the same regulation, but that's of course anathema today. but it's NOT the problem raised by Chris.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Nov 26th, 2007 at 11:24:11 AM EST
[ Parent ]
Hang on, precisely which entities can act as "Credit Institutions" without being subject to Basel requirements?

I know that people like LME Ring dealers/brokers were accustomed to giving credit to clients in relation to margins on LME contracts and have gradually been dragged kicking and screaming into the Basel net.

But who are you talking about? And why are they outside Basel requirements (putting other regulatory requirements to one side).

If it lends like a duck, surely it is a duck?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Nov 26th, 2007 at 11:51:09 AM EST
[ Parent ]
Economist Mark Thoma takes up the same essay.
So far there haven't been any comments (except mine) and Mark's introductory remarks.

http://economistsview.typepad.com/economistsview/2007/11/yesterday-may-h.html

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Sun Nov 25th, 2007 at 06:33:15 PM EST
There was an interesting article in my local paper in Cincinnati Ohio which touches on some of the more peculiar problems that can occur when you have mortgages being bundled and sold on the stock market to international banks combined with mounting foreclosures...


Hundreds of foreclosed properties in Greater Cincinnati and Northern Kentucky are falling into disrepair - neglected and all but abandoned by out-of-town banks that own them.

The city of Cincinnati has boarded up or demolished at least 156 bank-owned properties since 2004 - and issued building code citations on hundreds more.

As of last week, banks owed the city $201,237 in unpaid barricade and inspection fees

The worst offenders: Fannie Mae, the government-chartered mortgage bank; Deutsche Bank National Trust of Frankfurt, Germany; and ABN AMRO Mortgage Group Inc. of Amsterdam, Netherlands.

The banks rarely respond when called to court on charges of building code violations, court officials say. That forces cash-strapped municipalities to pay for mowing, winterizing and securing the vacant properties against drug dealers, vandals and squatters.
[...]
Police say they caught Christopher Hunley, 40, red-handed as he broke into the vacant house in August. They suspect he was there for the copper pipes, which he could then sell for scrap. He was indicted for breaking and entering.

The problem: Prosecutors couldn't find an owner willing to testify that Hunley did not have permission to enter the house.

The registered property owner - Fannie Mae - denied owning the property and said the deed it filed with the Hamilton County Recorder's Office was in error.

By the time prosecutors tracked down the true owner - Washington Mutual Bank - the bank didn't have anyone to come to Cincinnati to testify. With Hunley in jail and time running out to bring him to trial, prosecutors made a deal last week that let Hunley plead guilty to a misdemeanor and get out of jail by month's end.

[...]
The number of foreclosures in the Cincinnati metropolitan area has increased 125 percent over the past year, according to the foreclosure data firm Realtytrac. One of every 145 households is going through foreclosure in the 15-county region in Southwest Ohio, Northern Kentucky and Southeast Indiana.
[...]

Deutsche Bank National Trust purchased the most properties - 265 - this year through Oct. 31.

The German banking giant didn't own a single parcel in Hamilton County in 2004, but now is the second-largest owner of single-family homes in the county, after the federal government. The bank owned 188 properties last week, and is taking on an average of nine or 10 newly foreclosed properties each week, according to the Hamilton County Auditor's records.

And yet Deutsche Bank denies owning any houses here.

John T. Gallagher, a bank spokesman in New York City, would not comment on the bank's ownership or maintenance of properties. Instead, he issued a written statement that said the bank acts only as trustee for securitization trusts - investment pools that buy up risky subprime mortgages in bulk on Wall Street.
[...]


Nobody owns the houses, but yet they have been foreclosed upon.  It is easy to conlude that a system with such huge flaws and ungovernability might soon collapse of its own weight (this is my layman's view).  
by gobacktotexas (dickcheneyfanclub@gmail.com) on Sun Nov 25th, 2007 at 09:39:20 PM EST
Why doesn't the local goverment appropriate the houses when the banks that own them don't keep them up or pay for the upkeep? I'd suspect it's due to having a right wing circuit court, but I'm curious...
by nanne (zwaerdenmaecker@gmail.com) on Mon Nov 26th, 2007 at 11:33:51 AM EST
[ Parent ]
Interesting.  The article I linked to originally mentioned something about this, now it is gone from the article, along with much of the info about Deutschebank.   I have written the paper to ask why.  

Basically the original article stated that what was being looked at was to not let the banks foreclose that don't assume ownership of properties after foreclosure.  

My first thought personally was that the city should simply attach property of the banks in Cincinnati that don't upkeep the property; that should change their behavior patterns fairly quickly.    

Sure, twisted right-wing ideology could play a role, but since when do right-wingers feel a soft spot for German banks?

by gobacktotexas (dickcheneyfanclub@gmail.com) on Mon Nov 26th, 2007 at 12:17:07 PM EST
[ Parent ]
It is quite difficult to make special expropriation rules for foreign banks. You might get trouble with the WTO and anyway, they can work around it through subsidiaries. What I meant was that rules that allow a local government to expropriate might be much tighter under a conservative (or libertarian) court. At least vis-a-vis corporations...
by nanne (zwaerdenmaecker@gmail.com) on Mon Nov 26th, 2007 at 03:20:07 PM EST
[ Parent ]
I wrote the author of the article, and got a link to the old version.  Here's the relevant excerpt:


John T. Gallagher, a bank spokesman in New York City, would not comment on the bank's ownership or maintenance of properties. Instead, he issued a written statement that said the bank acts only as trustee for securitization trusts - investment pools that buy up risky subprime mortgages in bulk on Wall Street.

That position - while helping Deutsche Bank evade responsibility for maintaining properties - could put a halt to its foreclosures across Ohio.

Last month, a federal judge in Cleveland ruled that Deutsche Bank can't have it both ways: Either it owns a property, in which case it must maintain it; or it doesn't, in which case it shouldn't be foreclosing on it.

U.S. District Judge Christopher A. Boyko sharply criticized financial institutions for their handling of foreclosures. He said the banks "rush to foreclose" and then "sit on the deed, avoiding responsibility for maintaining the property while reaping the financial benefits of interest running on a judgment."

Fifth Third Bank is the Cincinnati region's dominant lender but ranks 10th in properties acquired through foreclosure sales in Hamilton County this year. Fifth Third executives say the best way to manage their portfolio of foreclosed properties is to avoid foreclosure in the first place.

by gobacktotexas (dickcheneyfanclub@gmail.com) on Mon Nov 26th, 2007 at 11:11:51 PM EST
[ Parent ]
That article fills in a lot of practical details of the puzzle.

Our knowledge has surpassed our wisdom. -Charu Saxena.
by metavision on Tue Nov 27th, 2007 at 03:00:52 PM EST
[ Parent ]
Deutsche Bank is a trustee, not an investor - ie they front the ownership for others.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Nov 26th, 2007 at 12:22:21 PM EST
[ Parent ]
But it would be infeasible legally to go after the hundreds of thousands of individual investors, the majority of whose only connection to Cincinnati, Ohio would be their ownership in the trusts.    So if you can't attach Deutschebank's assets, or find a way to get Deutschebank to assume responsibility, it appears you would have no recourse.  So the system appears to be teetering on the verge of anarchy.    
by gobacktotexas (dickcheneyfanclub@gmail.com) on Mon Nov 26th, 2007 at 11:19:29 PM EST
[ Parent ]
But as a trustee Deutsche Bank has an agency relationship with the trust(s) and, thus, has the legal right, if not the obligation, to manage the trust's assets.  Foreclosing on properties and then allowing the properties to depreciate in value - moulder away - seems a failure to preform.

At least if I remember my Business Law correctly.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Nov 26th, 2007 at 11:48:42 PM EST
[ Parent ]
You know that laisse faire economy is in sore straits when its defenders turn to lunacy:
The U.S. dollar is in a scary slide. Gold and oil are hitting record highs, while the dollar is hitting record lows. To get how strange this all seems to an engineer like me, imagine the following headline: "Foot Falls against Meter for Fifth Straight Day."

The accompanying article would breathlessly report that after the U.S. abandoned its "antiquated" fixed-exchange-rate system (one foot equals 0.3048 meters), our beloved foot began plunging in length. A "length trader" would predict that if the foot fell below the "psychologically important 0.2800 meter support level," it could fall as low as 0.2500 meters. But an economist would say that as long as the foot didn't fall more than 10 percent, everything would be okay.
   
by das monde on Mon Nov 26th, 2007 at 04:26:40 AM EST
And some idiot from the Telegraph would argue that shorter feet meant there would be more of them, which would be a net benefit.

At the same time the meter's reluctance to allow itself to shorten was a symptom of fantasy thinking and could only end in tears, as meters started to become too long to be useful.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 26th, 2007 at 11:57:06 AM EST
[ Parent ]
Summers's column reveals what camp he's clearly in.  Unfortunately, he's right.  Whatever influence policy will have, it will be influence resulting from past policies.  The simple truth is that the central banks didn't see this coming, which is shameful, but it is what it is.

He seems to be suggesting that we prop up house prices and bail out home-buyers, but I'm afraid this would now simply be a bailout for the upper class and upper-middle class.  The working class and middle class have already lost out.  It's too late to prop it up and try to work a stagnant housing market out of this.  We're already in the crash.  Better to let the crash follow through and get it over with.  Households need to learn not to use houses as ATMs.  The country, in general, needs to learn to live within its means.

Cut rates where necessary to avoid actual contraction and not allow a recession to turn into something closer to the d-word.  Keep the banks up.  Beyond that, wait it out and hope for the best.  That people still don't realize how bad this could get is stunning to me.  That they continue to spend like drunken sailors makes me sick.  The rest of the world really and truly needs to take account of its ties to this.  If decoupling has truly not occurred to any great degree, -- I'm not even going near the talk of recoupling -- then we've got bigger things to worry about than a few foolish borrowers in the American suburbs.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Nov 26th, 2007 at 05:10:22 AM EST
The housing price correction will actually be very good for the working and lower middle classes.  I don't subscribe to the "American Dream" = Owning your home mythology but I recognize how dejecting it is to so many people to realize that if they work their hardest within their abilities they may still never be able to buy a house where they live, forcing them to relocate away from friends and family or having an unstable living situation  that fosters less social investment in their communities.

We have built a "landlord class" that needs to be taken down before it takes us down.  A person's right to live in a dwelling is like their right to health care in the US in the way it is undervalued.  A city with tens of thousands of homeless should not have five thousand vacant units, being held off the market to lower supply and further drive up rents.  This is bad for the economy and the social fabric, leaving some out, enriching a few and making the majority work harder just to get by and keeping their resources locked up in housing rather than everything else that it used to go for.  

by paving on Mon Nov 26th, 2007 at 08:16:58 PM EST
[ Parent ]
Yes, I agree the correction will be good for the working and middle classes.  It used to be that we had a housing market very accessible to working-class folks.  Even the bottom 20% had been about 50/50 on ownership vs renting.  That came to an end back in the mid- to late-'90s, when the property boom began, but I've little doubt we'll get back to it.

The simple truth is that there's nothing wrong with renting.  A lot of gorgeous places can be let for far less than they'd cost to buy.  I'm, personally, not a believer in the idea that owning a home is necessary for the American Dream (whatever that is), although I can certainly see the appeal and would like to own someday if the price is right.  But these are, at base, places to live, not investments.  Historically the return on housing has been pretty lousy compared with other investments, so I certainly don't think people should freak out if they never own a place.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Nov 27th, 2007 at 05:02:56 AM EST
[ Parent ]
European Tribune - Lawrence Summers channels my doom porn
But Summers' advice (lower Fed rates, a Keynesian boost via increased government spending of tax cuts, and public support to lending and housing markets) completely ignores that diagnosis.
Do you mean increased government spending or tax cuts? Does Summers think we haven't had enough tax cuts? That there hasn't been enough Central Bank ancouragement of lending? More worrying: that increased government spending and tax cuts benefit the economy equally, or benefit the same segments of society? Tax cuts and support for lending and the housing market benefit the well-off as Drew points out. Government spending tends to benefit the working class by providing jobs. Especially if the government spending were directed at the much needed infractructure maintenance and development something good might come out of that. But instead Clinton's Secretary of the Treasury proposes more corporate welfare and more wealth capture for the rich. So much for the Democrats. As Drew says, we know what camp they're on.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Mon Nov 26th, 2007 at 05:34:30 AM EST
I know I already said this to you on GMail, but I'll say it for others, too:  In fairness, Summers was actually proposing tax cuts for low- and middle-income households in his column.  I've certainly heard worse ideas, but I'm inclined to agree that public works projects, especially on infrastructure, would be the superior means to stimulating the economy.

I'd also argue that the wealthy and the upper-middle are more aware of government benefits, and so they will be first to seek that money appropriated for bailouts.  It's unfair on two fronts:  It takes money from poorer taxpayers to bail out wealthier taxpayers.  And it takes money from those who sat out the feverish boom and maintained solid finances by giving money to those who behaved like teenagers on their parents' credit card.  At some point, we do need to draw the line and make people take responsibility for being stupid.

The government should be there to make sure they don't go without basic necessities, in my view, but the welfare state shouldn't be there to essentially reward the behavior we've seen.  Many of these people were swindled because of ridiculous terms they couldn't have understood.  I'm open to helping them, preferably via suing their lenders into poverty.  But many -- again, upper- and upper-middle-class households (say, $80,000+) -- were only swindled because of their own arrogance.  They were sure that they could ride the wave to wealth and status by flipping houses at low teaser rates.

It didn't work, and they deserve to lose their houses.  It's not like we're running out of apartments anytime soon.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Nov 26th, 2007 at 07:00:22 AM EST
[ Parent ]
You and Nouriel Roubini are on the same page too. Click for even more depressing commentary:

http://www.rgemonitor.com/blog/roubini/228668

Liquidity and Credit Crunch in Financial Markets is Back to Summer Peaks, Only Much Worse and More Dangerous

Nouriel Roubini | Nov 25, 2007

...

The reasons why the massive liquidity injections and policy rate cuts by central banks have miserably failed are clear and were discussed at length in August by this author in previous note: we are facing a credit/insolvency problem in addition to a liquidity crunch and central banks' monetary policy is impotent in dealing to credit problems: Fed easing will not prevent millions of US households from defaulting on their mortgages and will not prevent home prices falling 20% or more given the biggest housing recession in US history; it did not and will not prevent dozens of mortgage lenders and home builders from going bankrupt; it will not prevent a surge in corporate defaults once the economy experiences a hard landing. Monetary policy can lead with pure liquidity runs; but when such liquidity runs are related to the risk of insolvency monetary policy is mostly impotent.  And most of the current problems in the real economy and in the financial markets have to do with insolvency, not just illiquidity.

...


by yally04 on Tue Nov 27th, 2007 at 09:28:46 AM EST
Good diary, as usual, however...  I'd beg you to stop comparing yourself to the lower castes in the media.  Your validation comes from the sense your ideas make, not from some unadmirable person agreeing with you.

Our knowledge has surpassed our wisdom. -Charu Saxena.
by metavision on Tue Nov 27th, 2007 at 03:24:43 PM EST
but that's not how the world works.

So my common sense ideas become serious when validated by people that have previously obtained the "serious" label themselves.

If I can claim I got the now unfolding common wisdom early and right, then I'll become a guru and i can start spewing lots of crap that will get taken seriously until some new upstart becomes the new serious.

Cooptation and evolution.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 27th, 2007 at 04:49:44 PM EST
[ Parent ]
All truth goes through three stages. First it is ridiculed. Then it is violently opposed. Finally it is accepted as self-evident: Schopenhauer


"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Nov 27th, 2007 at 06:24:56 PM EST
[ Parent ]
ET template LTE:

"This view was expressed more clearly, accurately and completely by __ on ET on ___: Link.

It is old news to many people, when a newspaper prints it under the name of someone who may have read it there."

Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Tue Nov 27th, 2007 at 06:49:41 PM EST
[ Parent ]


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