Obamanomics: Restoring Faith and Currency

A helpful article:

WASHINGTON (MarketWatch) — For many people, filing for bankruptcy is seen as a scary, worst-case scenario, but consumer advocates say this last resort could be a real help for beleaguered homeowners.

There is no shortage of proposals in Congress to address the housing crisis: the Depression-era Federal Housing Administration is up for a makeover, and there are other plans to ease the stress of pricey mortgages. Under veto threat is a proposal that consumer advocates see as key to helping more people stay in their homes: allowing bankruptcy courts to modify troubled mortgages on primary residences.

Under current Chapter 13 bankruptcy law, courts cannot modify the mortgage on a principal residence, though they may for vacation or second homes. Consumer advocates and others see bankruptcy, which is meant to adjust debt and make it easier for people to repay creditors over time, as an efficient and established method for troubled homeowners to make good.

“The marketplace is designed so that it will protect owners of vacation homes and second homes, but yet a consumer who is struggling to make their mortgage payments cannot include their home,” said David Berenbaum, executive vice president with the National Community Reinvestment Coalition.

A major strength of court-supervised modifications, consumer advocates say, would be their ability to help people who have “piggyback” loans, which are second mortgages taken on homes at the same time as a first mortgage. Struggling homeowners are often urged to seek a loan modification from their lenders, but many second-lien holders won’t allow loans to be modified without being paid out, said Mark Zandi, chief economist of Moody’s Economy.com.

“Second-lien holders are mucking up the process, they don’t want to be subordinated,” Zandi said. “The other limitation is that some mortgage investors are not allowing these modifications to go through because they don’t think it’s in their best interests.”

Generally, a first mortgage gets paid in full, followed by the second, so the holder of the second mortgage has no incentive to support a modification that could cause it to face a 100% loss, said Eric Stein, senior vice president with the Center for Responsible Lending.

“The holder of the second is better off waiting to see if a borrower can make a few payments before foreclosure,” Stein said. And, he said, dealing with two servicers is a “negotiating challenge that most borrowers cannot surmount.”

About 40% of home-purchase mortgages in the first nine months of 2006 involved piggyback loans, according to a report last year from Credit Suisse. That figure jumps to more than 60% in some markets such as Los Angeles, Las Vegas, and Sacramento, according to the report.

Battle over bankruptcy law

 

• Changing bankruptcy law to enable loan modification faces strong opposition from President Bush and may have a tough time in Congress. ”Amending the bankruptcy code in this manner would undermine existing contracts, leading to contraction in mortgage credit availability and affordability,” according to an administration policy statement. “These and other bankruptcy-related provisions in the bill would rewrite long-standing tenets of bankruptcy law in ways that would fundamentally alter the expectations of parties to hundreds of thousands of home purchases after the fact.”

• The Mortgage Bankers Association said a bankruptcy proposal currently in the House of Representatives would give “judges free rein to rewrite these contracts without statutory or economic restraint.” The MBA also said the prospect of the bill’s enactment could prompt more foreclosures. “In the short term, lenders will likely move quickly to foreclosure to ensure that they are not covered by the onerous provisions of this bill,” according to MBA.

• However, CRL’s Stein said bankruptcy changes could act as an incentive for servicers and investors to refinance more loans because they may feel they can get a better deal.

• “It will induce some investors to go and accept a refinance program, and it will also get others to agree to modifications outside of bankruptcy,” Stein said.

• Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies, said bankruptcy reform should be considered, noting that the infrastructure already exists.

• “Particularly, if you look at alternatives like a large federal program,” Retsinas said. “For any new initiative, the government rulemaking will take months or longer.”

• The Congressional Budget Office estimated that the House proposal could encourage some to file for Chapter 13 bankruptcy, resulting in a 4% to 5% increase in annual filings. But there would not be a run to file for bankruptcy, said NCRC’s Berenbaum.

• “Most American homeowners understand the long-term impact of filing for bankruptcy. You have to wait before you can apply for a mortgage again. It impacts your credit,” Berenbaum said.

• Speaking Thursday, Sen. Barack Obama, D-Ill., offered his support for the modification of loans to avoid foreclosure or bankruptcy.
  • “It’s also time to amend our bankruptcy laws,” Obama said, “so families aren’t forced to stick to the terms of a home loan that was predatory or unfair.”

 

Ruth Mantell is a MarketWatch reporter based in Washington.

 

That’s Trillion with a “T”

• Most people agree that we can’t correct the problems that are still unfolding unless we admit the severity of the problem. The current estimates of a maximum of $450 billion damage are absolute lies designed to give reassurance to people who could and probably should cut and run. As long as we deny what is really happening, the real solutions will not emerge. The current group of proposals can be be all logged in under one word : patchwork. 
• The real solution is comprehensive political action together with regulatory reform that goes in an entirely different direction than allowing money to be controlled more by political force of individuals in power with their own private agendas.
• Here is a one page summary of the measurements of the actual damages caused by the sub-prime mortgage crisis, coupled with the effect of the sub-prime mortgage crisis on all mortgages and housing, coupled with the effect on inflation and private losses rippling out from the collapse of liquidity, credit, jobs, and social services. Some fo this information was taken from the BBC News Website.
• Mortgage Meltdown: The real measurements and statistics 

You can argue all you want on paper with equations and philosophical arguments, but a simple human fact remains true — if people do not feel any moral sense of accountability they will not act in accordance with a reasonable standard of good character. Without character the entire society, and of course the economy, goes down the crapper. The U.S. Treasury plan is not merely “more of the same” it seeks to institutionalize all that is bad and wrong with our society and our economy. 

Some immediate thoughts about the reports on the new plan to be unveiled on Monday by Secretary Paulson:  

• There is being nothing being reported that indicates the plan seeks to help out anyone now: soften the meltdown, slow the foreclosures, stop the evictions, restore confidence in the financial markets, restore consumer confidence, restore balance sheets, increase liquidity without enlarging the money supply, reverse the slide of the dollar, or reverse the rising tide of inflation. It is all about future bubbles and busts which may or may not look like the one we have, the one before (.com bubble), or the one that is in process (foreign exchange and commodities).
• There is nothing being reported that indicates the plan seeks to increase transparency for the public so that they are well-informed and educated about “new” financial products whose design is to create confusion through complexity and profit through back-doors that undermine the American Citizen, U.S. Economy, and U.S. foreign policy.
• There is nothing being reported that indicates the plan seeks to enhance the fundamentals of our economic system, which is currently based upon profligate consumer spending, pressures to increase consumer debt, and steering citizens away from savings. It is interesting that the very same people who “ideologically” plead for less government and more personal responsibility are lining up behind a plan that institutionalizes to an even greater extent all the economic forces that prohibit or inhibit the ability to provide fro their own security and prosperity.
• There is nothing being reported that the plan is willing to even address the current disparity of wealth, the current trend toward a deepening divide between a few people who have wealth and the rest who don’t. It is interesting that the very same people who plead for a free market economy line up behind a plan that would allow precedent to stand on socializing losses and expenses for big business, thus undermining entrepreneurship and innovation (the hall mark of all prior economic progress in the United States). 
• While these people tell us that windfall profits are part of the game that will even out in the end, they give us plans that prevent leveling the playing field by covering losses with access to tax dollars, covering expenses by shifting the risk onto public programs, and covering deception by legalizing slight of hand reporting in which both the methods of business and the financial results are completely misstated (that would be “lying”) or even reversed converting actual losses to the company and damage to the society into reported profits, higher per share earnings, higher price earnings ratios, higher stock prices, and “benefits” of bringing new products and services to the downtrodden members of our society (like tricking them into signing papers to “buy” a house) enabling the lender to sell the paper at a profit without regard to the quality of the paper, thus tricking investors, undermining pensions, social services etc.)
• What is being reported is more centralization of highly complex political and economic subjects into the hands even fewer people of dubious talent, leadership, training, education or creativity —thus decreasing the pool of available talent and decreasing the discourse on economic policies all contrary to the basic constitutional premise of checks and balances, division of power, prevention of tyranny and promoting policies for the health, wealth, safety, security, and benefit of United States citizens.
• Centralization of banking and deregulation of banking has produced a boondoggle of problems that will take decades to reverse. There is no doubt that the Federal Reserve should have greater control over any process that creates “money” in the marketplace so that monetary policy will mean something. But it is the Federal reserve itself that needs re-structuring to provide for greater transparency, more checks and balances, and greater de-centralization of decision-making. The open-market committee is simply not set up to deal with today’s marketplace, today’s money, the prospect of a declining dollar and the possibility of a rising Euro in the United States. 
• Centralization of banking has led to the flow of money away from where it is deposited into places that have no relationship to the depositors. Loans are made in foreign countries from deposits made in Springfield, Illinois. The depositors are deprived of the economic benefit of having that money loaned or invested in their locale, thus improving liquidity and growth prospects for those depositors and all the citizens of their town or city. With no safety net, the slightest ripple can and does cause blight to replace what were once vibrant or at least promising communities.
• Centralization of banking has led to indexing of loans as the exclusive basis on which to grant them — replacing the old fashioned relationship of person to person. This has resulted in hyperventilating the prospects for fraudulent lending by lenders, the entire CMO/CDO market, and fraudulent borrowing by borrowers. JP Morgan was asked at a senate hearing 100 years ago what was the primary criteria, the essential quality for granting credit; his answer was that it was “character,”(not balance sheets, income statements or track record) which is exactly what is not part of the equation now with the total reliance on FICO scores, other computer algorythms etc. 
• By removing “Character” from the equation we removed accountability. You can argue all you want on paper with equations and philosophical arguments, but a simple human fact remains true — if people do not feel any moral sense of accountability they will not act in accordance with a reasonable standard of good character. Without character the entire society, and of course the economy, goes down the crapper. The U.S.Treasury plan is not merely “more of the same” it seeks to institutionalize all that is bad and wrong with our society and our economy.

Boom and Bust Cycles: Predictions on American Life — PART I MONEY

The best predictor of future behavior is past behavior. It’s all we have really. Of course the problem with using past behavior is that we relying on defective memories or reports from people who had their own agenda in relating “facts” that tend to enhance their own future. Thus it is with something of a grain of salt that we take what is reported and convert it in our minds as something we know. 

Accordingly, our predictions are sometimes right and sometimes wrong depending upon the quality of the information we used, our ability to process that information and of course the ever-present probability of intervention of unforeseen acts, events, or plain bad intent. 

This is why when news was news, reporters would seek corroboration from multiple reliable sources before reporting it as fact. Now they report things that are unsubstantiated, partial and misleading, or mere statements of opinion in a hash that is known within their industry as fact based entertainment. It follows that anyone forming opinions on “mainstream” reporting is more likely to arrive at miscalculations and wrong conclusions than before.

Nevertheless, there are some things we know from American HIstory and World History that appear to be true, except for those instances where “revisionists” undertake to change public opinion by denying the painfully obvious with such fervor and passion and persistence that at least some portion of the population comes to doubt their own senses. It is clear that central policies of the United States are increasing resulting in failure to affect outcomes in economics, politics, war, or world society. we can argue over why, but the facts are inescapable as are the conclusions regarding our presents status.

Boom and Bust seems to be a fact if not an inherent part of human nature. We bunch up a group of ideas and theories, right or wrong, and act as if they were not only true but absolute. After a while, with the passage of time, the idea or theory becomes obviously true because “that’s the way it works.” The concept of a theory “proving” true because of people validating it with their behavior (despite obvious flaws in the idea or theory) usually does not occur to anyone — except for old texts, rarely read, by people who started with more basic questions and arrived at reality is which is far more ambiguous and ambivalent than prevailing political and economic theory, slogans or sound bites. 

In the context of this ambivalence and ambiguity we attach our perceptions of American Boom and Bust here for your entertainment or edification. Here are some thoughts on past, present and future which we believe have a high degree of integrity and reliability, based upon our reading, measurements, and interviews with those “in the know” (i.e., people who espouse a theory or slogan that gains currency and  thus, for a while, becomes a self-fulfilling prophecy which is “true” — at least long enough for book royalties and trading of securities to fill their own pocketbook).

MONEY: BOTTOM LINE: After years of enjoying the benefits of being the currency of choice, the U.S. dollar is declining in value and status and will continue to diminish tot he point where our wealth and fortunes depend upon the decisions of foreign sovereign nations and private companies rather than the U.S. treasury or the Federal Reserve. 

 

The United States will be called on to pay is debts and a series of deep recessions and possibly depression will ensue as a result of our obligation and attempts to pay off the debts created by our borrowing and the free ride that ends when those holding U.S. currency convert to other currencies or other forms of “money.”. This will cause tension in our foreign relations and could lead to war rather than payment.  

 

Within the last 250 years of American history, 

 

• the Colony of Massachusetts declared wampum, the currency of native Americans to be the official currency of the colony. 
• Virginia used tobacco as currency, 
• there was no Federal Reserve or central bank at all, on and off, in our history, and 
• at times the Fed was only as strong or directed as its leader (like Strong who died 18 months before the 1929 crash), 
• our coin currency came from Spain (the origination of the “dollar”), 
• paper currency came alternatively from 
  • individual banks where a central exchange was used to publish their relative values, or 
  • paper currency came from the King of England, or 
  • paper currency came from the Federal government or 
  • paper currency came from states or groups of states, and 
  • even now the money supply comes from multiple sources and issuers 
  • only one of which is the Federal government through the Federal Reserve and the United States Bureau of Engraving and Printing. 
• The rest of our money supply basically comes from private systems of payments varying in media from paper, conversation, or digital representations on some accounting or reporting host located out in cyberspace. 

 

In ALL cases, the issuance of money led to boom and eventually bust of that currency, which means according to the paradigm we have adopted here, that our current money supply is in for some major changes. Wampum for example, went to zero in value because colonists figured out a way to mass produce it ( a scenario not unlike the current mortgage meltdown which derives from a Ponzi scheme using derivative securities to vastly increase the money supply and circumvent monetary policy). “Not worth a continental” was an expression of disgust with the issuance of currency from our new government during the war of independence. Greenbacks alternately received the same reception, only to come back in other forms. State Bank notes went out of favor only to come back as bank sponsored prepaid branded or co-branded plastic cards. The list is endless. The conclusion is inescapable: currencies come and go. Money changes because it is based upon confidence and trust in the issuer. 

 

Our prediction is that 

 

• private proprietary “money” which has already supplanted government efforts to control the money supply will continue to expand exponentially through issuance of private paper including derivative securities like collateralized debt obligations (which despite the current situation are not likely to go away anytime soon), 
• together with adoption and acceptance of some foreign currency in lieu of the U.S. dollar by private individuals and companies will lead to an “obvious” conversion (i.e.,  recognition long after the fact) to our money supply, and a deep erosion of the ability of both the Federal Reserve or the U.S. Treasury to have any significant impact on monetary supply. 
• Thus monetary policy of the United States will increasingly become irrelevant and be regarded as such. It is already happened. This is past and is not a prediction. 
  • Merchants in Manhattan and other places are asking for Euros instead of dollars. 
  • Electronic payment systems go through the Federal Reserve not in its position of authority but rather as a logistical clearing operation between member banks. 
  • “Prepaid” debit and ATM cards, some with “overdraft” (i.e., loan privileges) including payroll, loyalty, wire transfer emulation and other electronic accounts that the Federal Reserve never sees, except indirectly through total balances at member banks, are rapidly taking the place of paper currency or even traditional electronic payments. 

 

In succeeding installments we will cover the rise and fall of mass transportation, healthcare, war, oil, pharmaceutical companies, education, technology and innovation. In brief we believe the relevant historical cycles point to a severe continued downdraft for current dominant players in oil, healthcare, prisons, pharmaceutical companies (because of innovation in stem cell applications and innovation in protocols that currently result in each aging consumer to ingest hundreds if not thousands of expensive pills per year), insurance, and financial services, while an updraft of great significance is in the works for new companies, transportation, energy, education, medical protocols and procedures and personnel. The big new industry might be the protection of your identity and personal information from everyone including the agencies, companies and people who now pretend to do it for you. 

Whether Krugman is right in today’s New York Times, predicting a massive bailout between $450 billion and $3 trillion at taxpayer expenses, or the “free marketers” have their way and let everyone collapse, or some people finally get it and move toward a consensus of policy that forgives everyone their transgressions but keeps them in the game as we have suggested repeatedly in these posts, it is clear that perception of risk, trust, confidence and integrity has been changed. This change will be reflected in world and domestic financial markets rights down to a car loan, credit card, home equity loan or business loan.  

• The recent rise of ankle biting between home equity lenders (many of whom have frozen home equity loan accounts making the credit limit unavailable to borrowers), borrowers and fist mortgage lien holders on short and long sales and refinancing, shows what has happened: Nobody trusts anybody anymore and credit is going to decline not only because of availability of money, not only because of viability of short-term credit instruments and the auction markets that drive them, but because rising borrower distrust of all lenders for all reasons is going to lower demand for credit.
• Just as there isn’t enough money in the world to bailout everyone in this mess, there isn’t enough equity, income or assets to cover the credit that exists, much less putting on more. But more is what we are getting in the form of inflation fueled by the Fed churning out money supply like it was candy from a machine.
• Borrowers seem to have learned that what lenders tell them can’t be trusted. It is a valuable lesson. They are realizing that lenders have a vested interest in keeping borrowers in debt and to maximize the debt of every man, woman and child in the United States. 
• The number of homes going upside down either because of overvaluation of the home for purposes of the purchase money mortgage or over valuation for purposes of home equity loans is increasing daily. Sorry to hit a sore point but the chickens are coming home to roost. The motivation of change lifestyle from home owner to renter has never been greater. It seems likely that people will do just that.
• This might be a paradigm change that could forever change the landscape of the American economy. retail buying sprees of things that nobody needs, and that nobody wants after they make their purchase, are on the decline. They might be on their way out as a way of life. That accounts for 70% of the U.S. economy.
• This new perception of risk and the new distrust, have taken on the same dynamics as the politics of division which was bound to be reflected in the marketplace eventually. Basic assumptions and formulas currently used in economics are now cast under a cloud of doubt, as are the policies based on current assumptions and current measurements of things that might not matter as much in the future as they did in the past.
• Doubt and uncertainty create bad environments for doing business, investing and living. We might be in for some hard times, but it is probably high time for the AMerican economy to “get real.”

 

• Senator Obama is correct when he states that the politics of division has caused us to look suspiciously at each other when we should be looking at predatory corporations stealing our wealth while government either looks the other way or lends a helping hand.  
• Here is the article: 
• Report Takes Aim at Mortgage Lender’s Auditor

By VIKAS BAJAJ

Published: March 26, 2008

In a sweeping indictment of one of the nation’s largest accounting firms, an investigator released a report on Wednesday that said “improper and imprudent practices” by a once high-flying mortgage company were condoned and enabled by its auditors.

Related

Text of the Report (pdf)

KPMG, one of the Big Four accounting firms, endorsed a move by New Century Financial, a failed mortgage company, to change its accounting practices in a way that allowed the company to report profits, rather than losses, at the height of the housing boom, an independent report commissioned by a division of the Justice Department concluded.

The report is the most comprehensive and damning document that has been released about the failings of a mortgage business. Some of its accusations echo charges that surfaced during the collapse of Enron, the energy giant, which collapsed in accounting fraud more than six years ago.

The scathing 580-page report documents how New Century lowered its reserves for loans that investors were forcing it to buy back even as such repurchases were surging. Had it not changed its accounting, the company would have reported a loss rather a profit in the second half of 2006.

The profit was important because it allowed executives at the company to earn bonuses and allay concerns that the company was healthy when in fact its business was coming apart, the report contends.

The report is the result of a five-month investigation by Michael J. Missal, a lawyer and former official at the Securities and Exchange Commission hired by the United States Trustee overseeing the New Century bankruptcy. It may allow New Century, which is in bankrutpcy, to sue KPMG.

McCain’s Folly

The solution to the liquidity crisis continues to be a political agreement between government, business, borrowers and investors in which the obvious factors are directly addressed — overvaluation of home values, overvaluation of creditworthiness, and overvaluation of CMOs. Any plan which does not address those factors will merely be an attempt to sweep this one under a rug that isn’t big enough to hide the dust. All current plans are partial swings at a moving target, based upon the political points the author or speaker wishes to score rather than being based on the health, safety and welfare of the citizens of the United States of America.

 

The plain fact is that is the practically nobody in government anywhere knows, understands, or has developed any proficiency in developing an understanding of the economic world of their constituents. Upon cross-examination they would fold like a house of cards. 

Yet in an odd irony (redundant, I know) it is true that all economics is actually political and that all political decisions result in economic consequences. Hence we have put ourselves in the hands of a bunch of people, most of whom lack either the intelligence or the motivation to know what they are doing, and who are responding to the “information” given to them by their staff which gets most of its information from lobbyists, and the resulting legislation is passed without ANYONE ever reading it. 

Senator McCain is unfortunately one of the offenders for lack of actually reading the printed word. He reads nothing. He gets summaries orally on the run, and that is why he makes so many mistakes in his speeches. He spends no time in analysis or contemplation, not that he isn’t capable of it. He just doesn’t do it. And in our political world he has proven by getting the Republican nomination, that you don’t actually need actual policies in mind that serve as stepping stones to a better future — you just need votes, endorsements and money (not necessarily in that order).

In an effort to score political points, John McCain, presumably with the advice and counsel of prehistoric economic advisers, hawks the idiotic notion that government regulation is a bad thing in and of itself. Economists from all sides of the political spectrum admit that is wrong. Without a referee in the “free market place” we would all return to slavery or the dark ages of serfdom. We have recently gone too far in that direction, a fact which is obvious to about 80% of the American citizenry and even to young adults who ordinarily don’t even think of such things. The necessity of a referee (i.e., government) is completely unknown to McCain either in concept or reality. John McCain is decidedly not an idiot — but like most of his colleagues, he acts like one.

He said yesterday which much fanfare that it is not government’s job to bail out people, big or small. True enough — and it certainly plays well to those who blame the victims, as long as they are small victims rather than big companies whose stock is publicly held. 

According to the founding documents of this country, which are the Supreme Law of the land, it is government’s business to protect the health, safety and welfare of its citizens; and that means doing something to stop the current financial bleeding and slowing the American and worldwide tailspin that is destroying the paycheck of most American citizens increasingly each day, as the U.S. dollar reaches lower into the abyss and the price of gas now approaches 25% of the net paycheck of many workers. 

Bailout is one of the tools on the table and it is a good short-term and very small part of a total solution. The actual solution to the present crisis can only be reached through political consensus which thus far has not been the subject, much the less the focal point of discussions in the current emergency. To that end only Obama (and recently endorsed by Clinton) has proposed establishing an emergency commission not unlike the 911 Commission. 

A major bailout to everyone will only put the dollar, and thus the purchasing power of each citizen in further jeopardy. That is why Obama is right about limiting the resources applied to the bailout part of the equation. Stopping the foreclosures and evictions through political consensus is also a urgent requirement. Again Obama is right on the approach of consensus but probably wrong in his opposition to the 90 day freeze on foreclosures and evictions proposed by Clinton. 

We need some breathing space to show the world we are still in control here and that we understand the root problem — which is that prices became artificially inflated by high pressure sales tactics getting people to sign mortgage documents that could be sold to satisfy the last group of deals that were sold on terms that were impossible to sustain on their own. 

No bailout at all is government failing to do what it is there for — to referee between competing groups and interests and intervene when it gets out of hand.  

McCain is advocating (or more specifically parroting) the economics and the politics that got us into this mess. We had a Federal Reserve with no power to monitor or regulate the creation of money supply by the private sector. Paulson announced today he wants to change that and expand the Fed’s authority to acknowledge the obvious fact that investment banks have been creating more money supply than all the central banks put together. As a result, worldwide money supply from derivative security sales skyrocketed beyond the imaginable, with some estimates putting it at as much as $500 trillion.

 

That is why we keep saying here that the answer to the crisis lies in political consensus — as Obama preaches, and not in ideological fixed constructs like McCain and Clinton promote for political points. Paulson’s proposals will be helpful 30 years from now. Partisan solutions produce partisan fights resulting in gridlock. Americans need action now. Obama’s proposals should be looked at far more closely, and used as a point of discussion. We need help today, this minute.

Mortgage Meltdown: Socialized Losses and Expenses

The root of any solution to the current credit crisis and meltdown is politics, which is simply a consensus of opinion. When people consent to an idea like “free market” it seems to work because we make it work. The fact is that we don’t have a free market, we never had a free market, and if we did, the mortgage crisis  would be even worse. When we give up our ideology in favor of thoughtful response to the facts “on the ground” we will have a solution. Failing that, the economy is headed for far worse than ever imagined by the doom  sayers.

There is not enough MONEY in the world to stop this crisis. Mortgage Meltdown/Credit Crisis/Monetary Crisis/Housing Crisis can ONLY be solved politically through a consensus of ALL parties involved. REAL incentives must be present for borrowers, homeowners, bankers, mortgage brokers, appraisers, lenders, underwriters, investment bankers, retail securities brokerage houses, traders, money managers, CFO’s of government and companies and individual investors. “Bailing out” some of the variables just tips the economy more toward ultimate disaster. 

While we have free market forces at work within our economy, sometimes they work and sometimes they don’t. That is why you need a referee (government regulation). Free market ideology is wrong in its premise — that given the chance, everyone will rise to their highest potential, at least in terms of wealth. That has never been true because people are all different, they have all different perspectives and values, and all different life challenges that come from factors outside the closed circle of economic theory. 

In a truly free market, tyranny is the inevitable result. Those with the ambition, leadership qualities and political skills end up with controlling positions in the marketplace and in government such that wealth is unevenly distributed to themselves. Innovations, education, and cultural advances that endanger the dominance of such persons or companies are squelched. It’s legal because we make it legal. For the past 10-12 years American society has been reaching for the “ideal” of non-regulation or “free economy.” Now even the most ardent free market proponents are conceding that it has brought us to the brink of disaster.

In a truly “free market,” the market is actually a closely held dominated society with despotic leadership. Government mirrors the society in which the predatory and monopolistic entities get to pay for legislation and enforcement (and non enforcement) they want. 

In a truly free market, a few people dominate government and the marketplace so that losses and expenses are transferred to the citizens while profits and gains are transferred to the leaders in the marketplace and in government. This is what Bill Maher called “socialized losses.” I would add “socialized expenses.” 

Thus a truly free market is actually a socialized marketplace for the benefit of those at the top. In other words, “free market” is a combination of words stating an idea that does not exist but which politically is accepted because politicians and business leaders refer to it so much it has gained sufficient acceptance by listeners to be considered true. 

Thus it is the opinion of most people that “free markets” exist even though all empirical evidence is to the contrary. 

However as a political tool, the bullet phrase “free market” is appealing and is used to socialize the marketplace for the benefit of a select few right under the noses of the people whose opinion was swayed by disinformation emanating from the top.

In a truly free market, Bear Stearns would have gone out of business, the proper result of overreaching behavior that tipped the risk allocations without telling anyone. 

OR, in an environment where free market forces were the goal, the Fed would not only have opened up its window to private investment houses, but also to private individuals and small businesses that were equally in danger of being wiped out. Instead we have the Fed conspiring to bail out one of a dozen variables in the equation that would produce a solution and then, responding to political pressure (something that the Fed was designed NOT to do), it increased the bailout for Bear Stearns 500% so rich people and the people that worked for this firm would not get completely wiped out. 

Careful examination of the Fed bailout of Bear Stearns, however, reveals the perfect plan for bailing out all the players behind all the variables in the equation for solving our monetary crisis, credit crisis, housing crisis, confidence crisis, political and economic crisis: Leaving the opportunity for their fortunes to rise when the crisis is over allows maximum protection for the player to recover, establishes an equilibtrium or plateau that is fairly strong is withstanding further downward pressure, and restores CONFIDENCE in the U. S. financial markets around the world.

By starting out as $2 per share and then moving up to $10 per share, the Fed and JP Morgan established a new precedent that can be applied to borrowers, investment bankers, lenders, investors in CDOs, homeowners who are in foreclosure and homeowners who are at risk. 

If followed out to its maximum advantage, foreclosures could stop, evictions would cease, payments would resume, CDOS (CMOs) would recover their value on balance sheets, capital insolvency would recede, and the opportunity for every one to recover as much as possible would be restored. 

As we have repeatedly said, there is not enough MONEY in the world to stop this crisis. Mortgage Meltdown/Credit Crisis/Monetary Crisis/Housing Crisis can ONLY be solved politically through a consensus of all parties involved. REAL incentives must be present for borrowers, homeowners, bankers, mortgage brokers, appraisers, lenders, underwriters, investment bankers, retail securities brokerage houses, traders, money managers, CFO’s of government and companies and individual investors.

Central to the solution is a political feat of enormous proportions: accepting the fact that housing prices were artificially inflated in 2001-2007. A reduction of the mortgage balances, payments and interest rates combined with an incentive to all players to recover their losses downstream when the market recovers would stop the slide, eliminate the crisis and stimulate the recovery.