Politics

The BBC’s Paul Mason, fresh back from Greece, gives a report on Democracy Now of how living conditions have deteriorated as a result of the imposition of austerity measures. One of the stunners, mentioned in Atlantic Wire (hat tip Lambert), is that not only will some Greeks have to work without pay, some will have to pay for their jobs (yes, that is not a typo). The euphemism is a “negative salary.”

Mason also discusses how this program is radicalizing the public. Communists, Trotskyists and other extreme-left groups are polling at 43%. That’s a strikingly high number. This plus the level of dissent on the street suggests Greece is on its way out of the eurozone. But will the technocrats prevail? As Michael Hudson has stressed here and in other commentary, the banks are succeeding in stripping Greece of assets, an operation that used to be possible only via military force.

From Democracy Now (hat tip Philip Pilkington):

It seems that investors have been increasingly losing confidence in banks’ ability to live up to their payment obligations under “normal” market conditions and to generate sufficient profits going forward. Eurozone bank stocks have lost 71 percent of their value since the start of 2007.

Any attempt at restoring monetary freedom must be part of a comprehensive plan to roll back government.

Yves here. The release by San Francisco county assessor-recorder Phil Ting of a study of document irregularities in foreclosures has put a spotlight on the failure of Federal banking regulators and state officials to do anything beyond cursory examinations of servicers’ bad practices. If a country official with limited resources can show that there are widespread abuses, what is the excuse of state and Federal officials for their failure to understand the depth and severity of these problems?

As Dave Dayen has pointed out, it was two county registers of deeds, Jeff Thigpen in Guiford County, North Carolina, and John O’Brien of South Essex County, Massachusettes, who were the first to look at their own records to see how extensive the frauds were. O’Brien has called his office a “crime scene” and refused to register any more fraudulent deeds. He also performed a study of his own, and the results were released in June 2011. As Dayen reported, the study found widespread failures and apparent fraud, just like the later San Francisco exam:

Register John O’Brien revealed the results of an independent audit of his registry. The audit, which is released as a legal affidavit was performed by McDonnell Property Analytics, examined assignments of mortgage recorded in the Essex Southern District Registry of Deeds issued to and from JPMorgan Chase Bank, Wells Fargo Bank, and Bank of America during 2010. In total, 565 assignments related to 473 unique mortgages were analyzed.

McDonnell’s Report includes the following key findings:
• Only 16% of assignments of mortgage are valid
• 75% of assignments of mortgage are invalid.
• 9% of assignments of mortgage are questionable
• 27% of the invalid assignments are fraudulent, 35% are “robo-signed” and 10% violate the Massachusetts Mortgage Fraud Statute.
• The identity of financial institutions that are current owners of the mortgages could only be determined for 287 out of 473 (60%)
• There are 683 missing assignments for the 287 traced mortgages, representing approximately $180,000 in lost recording fees per 1,000 mortgages whose current ownership can be traced.

Below, John O’Brien gives us his views on the mortgage settlement.

By John L. O’Brien of the Southern Essex District Registry of Deeds – Salem, MA

When you enter my registry you see a sign that reads “The deeds tell the story.” Before the big banks took it upon themselves to corrupt the land recordation system, the deeds used to tell a happy story, one in which people purchased a home and lived “the American Dream.” Today, however they tell a different story one of greed, fraud, and forgery. By now everyone in Massachusetts knows what I have been doing over the past two years to expose and stop the schemes by the Mortgage Electronic Recording Systems, Inc. and their shareholder banks. The accuracy and integrity of the land records in my registry are of the upmost importance to me.

Just this past week the Attorney Generals of this country said they will enter into a deal with the 5 largest banks who have agreed to stop robo-signing, provide principal reductions of between 20 to 25 thousand dollars to a million underwater homeowners. This amount will in no way solve the housing crisis that we are faced with nor even begin to turn our economy around. In addition, the settlement suggests that approximately 750,000 people who have had their homes taken by foreclosure using fraudulent documents will receive a check for $2,000. As Yves Smith has said, “that amount is the new penalty for forgery.” This is merely a slap on the wrists to these lenders. It is my opinion that this deal has been crafted for the banks and by the banks. It is not in the best interest of the consumer, the homeowner, or the taxpayer. Simply put, I do not trust these lenders who have flooded my registry with over 32,000 fraudulent documents to do the right thing. Those homeowners who now have a corrupted title are looking for answers. This deal gives them none. The illegal activity by the banks is nothing shy of a criminal enterprise, where they crossed state lines using the United States Postal Service to deliver the instruments that were fraudulent and contained forgeries.

I will continue to pursue my request for Federal and State grand juries to be impaneled to hold the CEO’s of these banks liable for the crimes that have been committed under their watch. The only thing missing in this illegal scheme that MERS and the big banks came up with was a gun and a mask. I will continue to expose this fraud and work everyday to make sure that the taxpayers are fully reimbursed for the over $44 million dollars in lost recording fees in my district alone by institutions who still believe fees are “for thee but not for me.” A message needs to be sent to these banks that they may think that you are too big to fail but they are not too big to go to jail.

We need a common sense approach in order to get this economy running again. I strongly believe that the hardworking homeowners who have struggled to stay current on their mortgages should be able to refinance there homes, quickly at a fixed rate of 3%. A true national program with these terms would lower payments and infuse millions into our economy immediately.

Let’s not forget that foreclosures benefit no one. When a bank auctions off a home for less than is owed, that becomes the “comp” for the neighborhood. Simply put, your home and those of your neighbors are worth less. It makes far better sense to work with struggling homeowners and to take whatever action is needed to keep people in their homes.

Unless we face the facts and approach this with common sense we will be talking about the same issues a year from now and I am not sure we can wait that long.

Are Pets Psychic? A Cambridge Scientist Believes So Wake Up World. I’m not impressed by the science, but the stories are still nice.

Kim Dotcom wins bail in fight against U.S. extradition Reuters (hat tip Lambert)

Facebook’s nudity and violence guidelines are laid bare Guardian (hat tip reader John L)

Secretive Navy SEALs take starring role in new film Yahoo. Lambert: Wow! How secretive is that! Me: They must be having trouble with recruiting.

Steve McQueen blames US fear of sex for Michael Fassbender’s Oscars snub Guardian (hat tip reader John L)

Midwest Farmland Prices Update for the Year 2011 Big Picture Agriculture

China’s Flash PMI remains weak MacroBusiness

Greece races to meet bail-out demands Financial Times

Greece Bailout 2.0 BNN. Our Marshall Auerback gives a useful overview.

Standby for the third Greek bailout Bill Mitchell

Greek debt accord hostage to political passions Ambrose Evans-Pritchard

Photo Gallery: Germans Go Nuts at Carnival Der Spiegel (hat tip furzy mouse)

Experts Say Iran Attack Is Irrational, Yet Hawks Are Winning the Debate Daily Beast (hat tip reader May S)

Iraq: This Year’s Official Executions Already Surpass 2011′s AntiWar (hat tip reader May S)

The American Century Is Over—Good Riddance The Chronicle (hat tip reader May S)

THE EXILED’S FREE CAMPAIGN ADVICE FOR MITT ROMNEY: “BAPTIZE AYN RAND”

The Tea Party’s war on mass transit Salon (hat tip reader May S). From last week, still relevant.

Obama Offers to Cut Corporate Tax Rate to 28% New York Times

EXCLUSIVE: The Memo that Larry Summers Didn’t Want Obama to See Noam Scheiber, The New Republic

Justice Kagan sides with the Right on Miranda Glenn Greenwald

We need to know who funds these thinktank lobbyists Guardian (hat tip reader May S)

“No unemployed need apply” McClatchy (hat tip Lambert)

Has America Lost its Drive? Part 2 Angry Bear

National Mortgage…Fiasco? The Investigative Fund

Legal Fees Mount at Fannie and Freddie Gretchen Morgenson, New York Times

Case collapse hits efforts to curb bribery Financial Times. No wonder Lanny Breuer keeps saying it is tough to prosecute executives. He sucks at it.

Under Volcker, Old Dividing Line in Banks May Return New York Times (hat tip reader Michael C)

Creepy model watch mathbabe

Antidote du jour:

If you were following the mortgage settlement negotiations, it was very clear than the decision of New York state attorney general Eric Schneiderman to abandon his role as the de facto leader of the opponents of the agreement, join a Federal task force to investigate mortgage abuses, and go silent on where he stood on the negotiations put the dissenters in disarray and enabled the Administration to push the deal over the line.

While this blog has repeatedly pointed out that Tom Miller, the Iowa attorney general and leader of attorneys general in the settlement negotiations, is not the most credible source, the flip side is that the description of the release in the Administration’s own propaganda website strongly suggests that the release of bank liability is broad, rather than narrow, as deal cheerleaders claimed.

If you take this section of an article at Politico, “HUD boss jumps into mortgage melee,” (hat tip reader Deontos) at face value, you can only draw damning conclusions about New York attorney general Eric Schneiderman’s role:

Schneiderman, whose Lower Manhattan office overlooks Zuccotti Park where the Occupy movement began, felt like he was being strong-armed by Donovan and wasn’t shy about sharing his dissatisfaction. In late August, The New York Times reported that Schneiderman had come “under increasing pressure from the Obama administration to drop his opposition to a wide-ranging state settlement with banks over dubious foreclosure practices.”

That did it for [HUD Secretary Shuan] Donovan, according to people close to him. Worried that the settlement was in danger of falling apart, he woke up at 5 a.m. the next morning and sketched the outline of what would emerge as the final compromise plan.

A bit later he called Schneiderman, who immediately began re-arguing his case for holding banks accountable.

Donovan stopped him: “Look, hear me out, I want to get past this,” he said, and proposed creating a special panel to probe wrongdoing by banks, to be co-chaired by Schneiderman. He also promised to limit the scope of any releases granted to the banks and rewrote his draft.

Miller, who clashed with Schneiderman over the releases, said Donovan didn’t make many changes but was artful enough to sell it as a compromise to the New York attorney general, who wanted to seal the deal.

“Essentially what Shaun did was let Eric take credit for shaping the release,” Miller said, “credit that wasn’t factually correct.”

Even though the mortgage settlement deal was without a doubt massively lawyered from the bank end, and should have received similar levels of scrutiny from the Federal and state officials, a major fly in the ointment may have been overlooked. The tax rule allowing a reduction in mortgage debt not to be counted as income expires at the end of this year. As the Seattle Times explains (hat tip Lisa Epstein):

Before 2007, all cancellations of debt by creditors — whether on auto loans, personal loans or mortgages — were treated as taxable events under the federal tax code. If you owed $200,000, but paid off only $150,000 through an agreement with the lender, the $50,000 difference would be ordinary income, taxable at regular rates.

Under the debt-relief law for qualified homeowners, you can avoid taxation on forgiven mortgage amounts up to $2 million if married filing jointly, or $1 million for single filers. To be eligible, the debt must be canceled by a lender in connection with a mortgage restructuring, short sale, deed-in-lieu of foreclosure or foreclosure. The transaction must be completed no later than Dec. 31…

Picture this scenario: You negotiate for months with your lender, realty agents and potential buyers. Finally you pull together a short-sale package calling for the bank to forgive $100,000. But the deal runs into hitches and doesn’t go to closing until after the Dec. 31 expiration date. Now your house is gone, your credit is shot, you’re looking for a place to rent, and the IRS demands taxes on your phantom “gain” of $100,000 on the sale.

The Seattle Times article estimates the odds of renewal of this program at less than 50%, since Republicans claim a two-year extension would cost $2.7 billion and would help deadbeats.

Consider how this interacts with the mortgage settlement deal. $10 billion of the total headline amount of $25 billion is to come from mortgage mods, which the Administration expects to come to a much bigger number in actual value, since banks are expected to get a credit of only 50% for mods of securitized mortgages. Since the Administration estimates that 85% of the mods would be on mortgages not on bank balance sheets, that would give a total value of $18-$19 billion. Another “up to $7 billion” is for “forbearance of principal for unemployed borrowers, anti-blight measures, short sales, and transition assistance.”

Look at the timetable. The mortgage deal is supposed to be finalized by the end of the month and submitted to court for approval by a Federal judge. We have been told the great unwashed public won’t see the actual terms prior to its submission. Given that various press leaks have indicated that some items are less nailed down than the officialdom would have your believe, there is good reason to think the court filing will come after the planned date of the end of this month.

Let’s assume the filing is made by the Ides of March. Since there is not a precedent for this sort of deal, I would hope the judge would allow for an adequate amount of time for interested parties to submit amicus briefs on the filing. The Administration, of course, will press for fast track approval. Let’s assume 60 days from a mid March filing, so mid May approval. The banks are given three years to accomplish the required principal mods, with 75% to take place in the first two years. Let’s assume the other $7 billion is on the same timetable.

If the banks are to be on track for their 75% in two years, you could expect them to do 37.5% in the first year. That’s actually likely to be generous, since they’d be ramping up in the first year, plus it will take time to get any mod or short sale done (the article said that short sales take four to twelve months).

Take (7.5 months/12 months)N x 37.5% and you get less than 25%. So the bank are likely to be at the very best a bit over 20% of the way though their required mods and other forms of relief, and given start-up and lead time factors, may be well below even that level.

What happens as of December 31? What borrowers will remain interested in short sales and principal mods if they will be hit with large tax bills? The benefit of the mod will take place over time, but the adverse tax consequences will be immediate.

With the old tax rules in place, foreclosure is likely to wind up being the least bad of poor choices for most underwater borrowers who are under financial stress. Even if they would like to reduce the damage to their credit record via a short sale, the tax consequences may make that unaffordable.

And what does this mean for the banks? A substantial portion of the value of the settlement was to come in the form of mortgage mods and short sales. Even though the banks are supposed to be liable for the dollar amount in the settlement, what happens if they can legitimately argue that demand for principal mods and short sales has evaporated thanks to the expiration of tax relief? Is there any penalty or Plan B in the deal if the banks fail to produce the required level of mortgage modifications? I have a sneaking suspicion that this scenario is not reflected in the pact, and it gives the banks a perfect excuse for underperforming on an agreement that was already badly skewed in their favor.

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

Germans are practically euphoric these days—compared to the dour mood that prevailed for nearly two decades following reunification, when real wages declined in a stagnating economy beset with what appeared to be permanently high unemployment. While discontent smolders in other Eurozone countries, 88% of Germans are satisfied with their standard of living (Gallup). And 85%—a record since the beginning of the surveys—believe that they can get ahead if they work hard, up from 71% in 2007. This optimism is joyriding the powerful German export machine, an optimism that appears to be impervious to the nightmarish scenarios playing out at the periphery of the Eurozone. And it still hasn’t reacted to what may be the onset of a recession in Germany as the economic superstar has smacked into a wall. Read…. Germany’s Export Debacle.

And now, Germans have something else to be euphoric about (for a while, at least): a housing bubble.

The German housing market stagnated after reunification. And if adjusted for inflation, it declined significantly, while other countries, such as Ireland, the UK, and Spain, experienced huge bubbles. Only Japan’s housing market was more morose over the same period (graph, real housing prices 1997-2008). But by mid-2009, prices began to rise. In 2010, they were up 2.5% nationwide. And in 2011, they climbed 5.5% (Bundesbank, Monatsbericht)—with the hottest locations exhibiting bubble characteristics:

In Hamburg, prices of existing apartments skyrocketed 14% year over year in January. In Munich, prices of new apartments jumped 12%. In Berlin, prices of existing apartments rose 10%. In Cologne, prices of existing apartments rose 9%. These numbers confirm what I’ve been hearing anecdotally for two years: that Germans were plowing their money into brick and mortar.

It was the first time since reunification that an economic upturn produced significant price increases in housing, the Bundesbank said in its report. Among the top reasons:

- Household optimism—and the fact that the debt crisis hasn’t impacted that optimism.

- Record low financing costs. Average interest for a loan for 60% of the purchase price (Germans are a bit conservative) hovered around 3%, half of what it was ten years ago.

- Inflation fears and a seething frustration with the ECB’s loose monetary policy.

- Low yields for savers and holders of German government bonds. With these yields remaining below the rate of inflation, the average 5% yield on rental property suddenly is appealing.

- Capital preservation in times of increased risks and volatility in the financial markets.

- Capital flight from Eurozone periphery states where Germany is considered a safe heaven, particularly since it didn’t have a housing bubble.

- And now that prices have been rising, optimism is propelling prices even further.

Unlike in the US, most of the homes in Germany are rental properties. Only 43% of German households own their home, according to the Association of German Pfandbrief Banks. Homeownership is not subsidized by the taxpayer, as interest on a home mortgage is not deductible. And the government has stayed out of the mortgage securitization business. Instead, banks issue covered bonds against 60% of mortgage lending value. These bonds fund about 25% of all mortgages. Loans from savings banks and credit cooperatives fund most of the remainder.

As always during a bubble, individual investors are piling in. “And among them are more and more who are trying for the first time to invest directly in rental properties,” said Felix von Saucken, from the brokerage firm Engel & Völkers Commercial.

And so are institutional investors. Last week, in the largest real-estate transaction since the financial crisis, a consortium of German and foreign institutions bought 21,500 apartments from the Landesbank Baden-Württemberg for €1.4 billion.

The irony inherent in a monetary union: even if bubbles become clearly visible in certain countries, such as Germany or Denmark, their central banks are condemned to sit on the sidelines because they cannot set interest rates. Meanwhile, the ECB is flooding the market with cheap money to keep parts of the Eurozone and some large banks from imploding. In doing so, it is inflating bubbles in other parts of the Eurozone. Which comes with a steep cost: when housing bubbles blow up, the damage they leave behind is immense.

It may hit just when Germany can least afford it. Chancellor Angela Merkel warned that the country might be overwhelmed by its efforts to bail out the Eurozone and must not make promises it can’t keep. That reluctance has made Germany a punching bag. But the numbers are already staggering. Read…. Germany’s Ballooning Bailout Risks.

Mr Baboon is sitting on a rock scratching for fleas.
Along comes Mr Gazelle.
Morning Mr Baboon.
Top of the Morning Mr Gazelle.
What are you doing Mr Baboon?
Oh, I'm sitting in the sun on top of this rock scratching for fleas and, do you see that lioness under that tree Mr Gazelle?
Yes, I see the lioness under that tree Mr Baboon.
Well Mr Gazelle, when I'm finished with these here fleas, I'm going over to Ms Lioness and I'm going to fuck her.
I do so admire you Mr Baboon.
And Mr Gazelle leaves.

Along comes Mr Warthog.
Morning Mr Baboon.
Top of the Morning Mr Warthog.
What are you doing Mr Baboon?
Oh, I'm sitting in the sun on top of this rock scratching for fleas and, do you see that lioness under that tree Mr Warthog?
Yes, I see the lioness under that tree Mr Baboon.
Well Mr Warthog, when I'm finished with these here fleas, I'm going over to Ms Lioness and I'm going to fuck her.
You are so brave Mr Baboon!
And Mr Warthog leaves.

Along comes Mr Giraffe.
Morning Mr Baboon.
Top of the Morning Mr Giraffe.
What are you doing Mr Baboon?
Oh, I'm sitting in the sun on top of this rock scratching for fleas and, do you see that lioness under that tree Mr Giraffe?
Yes, I see the lioness under that tree Mr Baboon.
Well Mr Giraffe, when I'm finished with these here fleas, I'm going over to Ms Lioness and I'm going to fuck her.
My, my, Mr Baboon!
And Mr Giraffe leaves.

Along comes Mr Lion.
Morning Mr Baboon.
Top of the Morning Mr Lion.
What are you doing Mr Baboon?
Oh, I'm sitting in the sun on top of this rock scratching for fleas and talking shit Mr Lion.

By Philip Pilkington, a writer and journalist based in Dublin, Ireland

Recently the mainstream press have done some rather interesting coverage of Modern Monetary Theory (MMT). Particularly good was the Washington Post’s attempt to spell out the key differences between Modern Monetary Theory and standard post-war Keynesianism.

In their piece on MMT, the Post rightly pointed out that after the war there were two distinct brands of Keynesianism. One came down from Keynes himself through his students at Cambridge; the other was essentially invented by the American economist John Hicks and came to dominate academia after the war.

In the coming days we will probably see many commentators expressing confusion over the differences between the two types of Keynesianism. And while there are many threads that one could follow to try to draw what is a very real distinction between the two approaches, we will concern ourselves here with Hick’s old ISLM model and the liquidity trap interpretation of Keynes’ argument.

Hopefully following this thread will tease out some of the differences between the two approaches (differences which Hicks conceded when he rejected his own interpretation of Keynes later in his life). Key among these will be: the post-Keynesian protest in trying to fit Keynes into some engineering diagram straitjacket; the post-Keynesian focus on actual business psychology; the rejection of the so-called ‘loanable funds’ theory; and the post-Keynesian scepticism as to monetary policy.

From the Mists of Time

First, the liquidity trap itself. Keynes deduced it – like he deduced so many other things – but it was only an endnote to a chapter entitled ‘The Psychological and Business Incentives to Liquidity’ in his General Theory of Employment, Money and Interest. The passage in the original – remarkably difficult to find given the muddle surrounding the liquidity trap today – is as follows:

“There is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest. But whilst this limiting case might become practically important in future, I know of no example of it hitherto. Indeed, owing to the unwillingness of most monetary authorities to deal boldly in debts of long term, there has not been much opportunity for a test. Moreover, if such a situation were to arise, it would mean that the public authority itself could borrow through the banking system on an unlimited scale at a nominal rate of interest.

This passage was seized upon by Hicks and other monetary policy enthusiasts as the nodal point of Keynes’ theory of an economy out of whack. While we won’t get too deep into the details, these economists thought that it was under these specific circumstances that active government fiscal policy was necessary. Yes, some of these ‘ISLMic Keynesians’ would probably have broadly supported the use of fiscal policy even when the economy was not mired in the dreaded liquidity trap, but their theoretical underpinnings for such a recommendation were weak, self-contradictory (having to do with so-called ‘rigidities’ which were otherwise ruled out in their models) and, dare I say, born of naked political motivation.

Keynes, on the other hand, clearly advocated fiscal policy measures even though, in his own words “whilst this limiting case [of the liquidity trap] might become practically important in future, I know of no example of it hitherto”. Here was a man who never saw a so-called liquidity trap in his life, yet whose theory led him to advocate fiscal policy in a manner that he understood to be wholly consistent with logic. In Chapter 12 of the General Theory entitled ‘The State of Long-Term Expectations’ he wrote:

For my own part I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest.

Clearly Keynes was sceptical of monetary policy despite the fact that he had never seen a so-called liquidity trap. His analysis – which was not Hicks’ ISLM model – led him to conclude that monetary policy was too weak a tool to manage a capitalist economy. He was right of course; as a means to stimulate growth monetary policy is probably, to a large extent, voodoo – a conjuring trick summoned out of dust to tweak the animal spirits of investors in the good times. And the reason it is still appealed to by the ISLMists? Because without it their criss-crossing totem falls apart and they are once again led to think in terms of business psychology and the real world.

Moving back to our little history, Keynes’ liquidity trap argument was not loved by all and sundry. The British economist Arthur Cecil Pigou, who had received something of a clawing in Keynes’ General Theory, was convinced that even if an economy entered a liquidity trap the self-equilibrating forces of The Market would ensure that everything would return to normal eventually. Pigou thought that if competition were allowed to work its magic wages and prices would fall. This fall in prices would mean that already existing money would become worth more in real terms, so consumption would increase and the economy would exit the liquidity trap as GDP grew – this became known as the ‘Pigou effect’.

Pigou’s argument was rather dim. It did not, for example, take into account the distributional impacts of the real money boost provided by the deflation together with the disproportionate propensity to consume among the different income classes. Nor did it consider the fact that when people see a general decline in prices they might hold back purchases in the hope of more declines, thus reinforcing the deflation spiral. And then there was another, rather enormous problem that was pointed out by the great Polish economist Michal Kalecki: put simply, that the real levels of debt would rise as prices and income fell:

The adjustment required would increase catastrophically the real value of debts, and would consequently lead to wholesale bankruptcy and a ‘confidence crisis’.

While the deflation might – we emphasise the word ‘might’ – encourage those who held money to consume, it would cast debtors deep underwater and massively increase bankruptcies. Kalecki’s point had, of course, already been stated in theoretical form a few years before by Irving Fischer in his ‘The Debt Deflation Theory of Great Depressions’ – especially in this now famous passage. But, of course, such theories are not equilibrium theories and so Pigou could never have accepted them.

Pigou was largely ignored by the new Keynesian orthodoxy. This new orthodoxy, who were otherwise ISLMists to the core, also tended to broadly ignore the liquidity trap argument. Partially this was because they had, like Keynes, never seen such a thing; but partially too because fiscal policy was, due to contemporary government policy, the economic fashion of the day – and if economists are good at nothing else they are quite brilliant at following intellectual fashions.

The New ISLMists

Moving on to recent history – one in which the fashion is undoubtedly monetary policy – the most popular advocate of the ‘liquidity trap’ argument today is Paul Krugman. Krugman had long been familiar with what he thinks to be a liquidity trap problem because of his study of Japan, which went through similar problems to those currently being experienced by the US and the UK after their housing and stock bubbles blew up in 1991.

Krugman is, of course, an avid ISLMist. But prior to this he thought that Pigou’s argument had some merit:

If you really want to know, I had initially believed that the ‘Pigou effect’ might play an important role in the discussion, and needed the intertemporal model to convince myself that it did not.

From his initial Pigovian ideas, Krugman has since moved onto the ISLM model. Although Krugman does recognise that government fiscal stimulus should be used aggressively in the current downturn he understands this only in terms of the ISLM. This leads him not only to fundamentally misunderstand the nature of the problem, but also to call for negative real interest rates. He recommends that in lieu of adequate fiscal policy the central bank should try to scare people into thinking that inflation is just around the corner. This is a rehash of the arguments he put forward in relation to Japan:

[M]onetary policy therefore cannot get the economy to full employment unless the central bank can convince the public that the future inflation rate will be sufficiently high to permit that negative real interest rate… [And] an economy which is in a liquidity trap is an economy that as currently constituted needs expected inflation… (My emphasis)

Negative real interest rates – which essentially mean trying to blackmail savers into investing by threatening to inflate away their savings – are a dubious tactic for number of reasons, none of which can be appreciated from within the ISLM model.

I wrote about some of the potential problems of this approach on this site recently. Put simply, because the ISLMists rely on a toy model with intersecting lines to determine investment behaviour, they cannot even begin to try to think in terms of investor psychology – which is precisely the type of thing that Keynes, plugged into the real world as he was, was interested in. The ISLM model implicitly models robot that, lo and behold, act in their investments as if they were reading the results of an ISLM model. (Tautology, much?). This leads the ISLMists to completely ignore the perverse effects that certain policies may have upon the psychology of the investor. Their ISLM robots only move in one direction when pushed – in the real world investors can go in any number of directions.

Related to this is that by scaring the hell out of investors that inflation is around the corner they may seek to hedge against the perceived threat to their money savings and they may do so by hedging in commodities. This can cause any number of economic problems.

The most obvious of such anomalies in the current situation is gold, the market for which is in an obvious bubble. Now the gold bubble will have few effects on the real economy except for leaving a few convinced gold bugs with ashes in their hands when the whole thing burns – but there are other commodities markets that certainly do have effects on the real economy when they inflate. As former International Petroleum Exchange director Chris Cook argued on this site recently, oil and other commodities markets are probably being inflated right now due to investors hedging against feared inflation. Ironically enough, this produces the feared inflation by raising energy and other prices which in turn push up the CPI.

This is not the first time these issues have been raised. Hedge fund manager Mike Masters, MMT economist Randy Wray and Commodity Futures Trading Commission commissioner Bart Chilton have all noted that massive amounts of money looking for a ‘safe haven’ might be inflating bubbles across the commodities markets and raising prices for consumers.

Of course, the model-obsessed ISLMists will truck out their criss-crossing totems once more to ‘prove’ that supply and demand in the oil and other markets cannot be tampered with by hedgers and speculators (presumably they would say the same about the gold market, although it would take quite a twisted mind to explain why the ‘real’ demand for gold has more than doubled since the financial crisis). Harking back to undergraduate level economic models is a weak move and would, I think, be laughed at by real world investors who are nowhere so naïve about commodity markets.

ISLMists would, as usual, be better off reading Keynes himself who in his Treatise on Money spelled out the possibility of what he called ‘commodity inflation’. But alas, they probably will not. After all investors piling out of dollars and into commodities to hedge against inflation in the current environment doesn’t look like how their ISLM robots should be acting during a so-called liquidity trap. And when models are worshiped like totems it is reality that is to be ignored rather than an anomalous reading recognised for what it is.

Death of the Loanable Funds Doctrine

In truth the liquidity trap argument is basically meaningless in how it relates to a modern economy with a modern banking system. This is because, as followers of Keynes and his students have now known for over 30 years, the amount of money in a modern economy is determined by the demand for said money and not its supply. This is a key difference between the standard ISLM Keynesians and the post-Keynesians which should be stressed as much as possible.

The only control that central banks have over the supply of money is through the exogenously determined interest rate which, as everyone knows, is set through open market operations (OMOs). This means that if we whip up a model the supply function of money will be represented by a horizontal line, indicating the infinite elasticity of the supply of money. One of Keynes’ most eminent students, Nicholas Kaldor, put it as such:

The supply of money is infinitely elastic – or rather it cannot be distinguished from the demand for money.

We won’t get into the reasons that this is the case as they are quite complex, but the reader can consult the mounds of theoretical and empirical material that has accumulated over the past few decades in Post-Keynesian circles. Instead let us see what consequences such an argument has for those that adhere to the liquidity trap theory.

Any good ISLMist will tell you that if the supply for money is indeed infinitely elastic then the Holy Model is truly cooked and the liquidity trap theory burns up with it. Why? Because if we plot a horizontal line representing the supply of money (LM) across the ISLM model we will see that the investment-saving function (IS) is then always moving along a horizontal line which, in the standard ISLM model, only occurs when a liquidity trap is hit.

Monetary economist Marc Lavoie sums it up rather well in his book Foundations of Post-Keynesian Economic Analysis:

In a theory of endogenous credit money, the role attributed to liquidity preference by the earlier neoclassical Keynesians loses its significance. The preference of the public for holding money does not play any role, either in the determination of the rate of interest or in that of employment.

This means that the liquidity trap argument is reduced to being a rather bland statement about the fact that interest rates are not leading to increased confidence rather than a fancy modelled theory about how investment is determined. The reason that the ISLM turns up such boring results when confronted with the endogenous theory of money is because the ISLM model itself is reductionist and faulty.

Indeed, those researching and theorising in the tradition of Keynes have come very far from the old liquidity trap arguments and the ISLM doctrines. But the mainstream, with their collective head buried in a model, remain painfully unaware.

Refocusing the Issues

While it would take us rather too far off topic to go into any detail on where economic commentators should be looking for the causes of the current stagnation, a few comments should be made in passing because these subtle theoretical differences have enormous real world consequences.

First of all, the world around us is not as the old models would have it. Where the models might expect mild deflation we have persistent but mild inflation and this even with unemployment at high levels. This inflation, as alluded to above, is in part due to the very policy choices by economists who apply pseudo-Keynesian models to analyse the world around them. Before they are to understand a single thing beyond the ends of their noses, economic analysts have to stop abstracting so violently away from the real world and seriously ask themselves why their models come up lacking when confronted with the facts.

Secondly, and tied to this, models like the ISLM are reductionist in the extreme and should be thrown out immediately. Not only do they fail to integrate many aspects of Keynes’ own analysis (as was later recognised by the creator of the ISLM himself), but they essentially fall apart when confronted with certain important realities of our modern world – especially those realities that have to do with credit and the real processes of credit creation in modern economies.

I will no doubt be chastised for not supplying a replacement for the ISLM. This is a ridiculous criticism to be made of a short essay focused on the liquidity trap. But there are mounds of real Keynesian research and theory out there for the interested reader to explore. As for a replacement for the ISLM… frankly, the model should never have existed and should anything resembling it ever come into existence again it should be immediately thrown out.

Economists need to become more flexible – and flexibility is not built into these models. (Nor are they built into their supposedly more ‘sophisticated’ but equally reductionist DSGE cousins). These models are constructed in a manner that excludes contradiction, especially empirical contradiction, and so they lead to ignorance and prejudice rather than to new discoveries. The models also, as we never tire of pointing out, allow their adherents to avoid thinking about how economic agents might react in psychological terms. This was a key aspect of Keynes’ analysis and one that gave it such power.

The models are like calculators in that they add up the limited variables inputted neatly but allow us a handy excuse to stop thinking – and given sufficient ‘training’ in these models the user will inevitably become something of a calculator himself.

As for the liquidity trap? When it was invented it was nothing but a footnote that its author brushed aside. Today it is a fad theory that explains away the pressing need to take a good hard look at what is going on around us. Confine the bloody thing to the dustbin of history where it belongs!

Source: BBC Weather

Neil Barofsky, former Special Inspector General of the TARP, weighs in on the mortgage settlement at Bloomberg. One intriguing little aspect of this deal is the degree to which the Administration, particularly HUD, is frustrated that its PR efforts are landing with a thud. I’ve been told of HUD efforts to push back against my post, “The Top Twelve Reasons Why You Should Hate the Mortgage Settlement,” as well as an important article by Shahien Nasiripour at the Financial Times on how the administration’s mortgage modification program HAMP would wind up providing taxpayer subsidies to the settlement.

The Bloomberg reporter Erik Schatzker mentions how HUD has disputed the Financial Times reporting and Barofsky explains why the FT got it right.

Prices are increasing for land in the corn belt:

Land values are uniformly rising throughout the Corn Belt and the Great Plains, thanks to farmers being the primary buyers and to the value of commodities. Higher prices for grain have spurred the most significant demand for land since the 1970’s.

These price increases will work their way into the cost of food for consumers, and let’s not forget that corn (among other crops grown in the corn belt) is a subsidized crop, so taxpayers get to pay for the corn twice.

As mentioned by one farmer in the film King Corn, “I don’t know a single farm out here that isn’t in a government program.”

The profitability of farm land may also be linked to the proliferation of genetically-modified crops in recent years. In addition to corn, the linked article also notes that much of the land may be used for soybeans. There is nothing free-market about soybeans either since soybeans are another case of a type of government subsidy being used to enhance private profits (soybeans are also directly subsidized). In this case, the subsidy takes the form of a government-granted monopoly known as a patent. This patent is on the soybean genes themselves, since these genes are from herbicide-resistant soybeans. (Most corn/maize also is also genetically-modified (GM) and patented.)

The patenting of crops in turn leads to less innovation in crop varieties and in consumer choice since the owners of genes can prosecute any farmer who plants varieties of non-GM crops that may have been unintentionally crossed with GM crops via wind. Farmers who have the bad luck of owning farms downwind are then likely to be sued by the the owners of the patents should the downwind farmer attempt to harvest seeds from his own crops.

This use of monopoly power to crush the planters of other varieties of corn and soybeans constitutes a third way that government intervention leads to consumers paying extra for food. This time, the extra payment is in the form of fewer choices in food.

This isn’t an attack on GM food, mind you, which may have many benefits. However, the growth of government monopoly power over all varieties of GM crops and over crops that even happen to be planted near GM crops (which is most crops) has led to a severe retardation in innovation and the use and development of other varieties of these crops everywhere.

In the developing world, however, Reuters reports that GM crops are booming, and it is hard to begrudge the residents of poorer countries their desire to grow food that is less likely to spoil or fall victim to disease. On the other hand, one cannot know the long term effects of government monopoly on the future of innovation in agriculture in the absence of a free market in planting and development of new crops.

On the other end of the spectrum is Europe, where most GM crops are simply banned. This is just another type of tax on consumers, although Europe is notorious for meddling in even the tiniest aspects of agriculture, so who can be the least bit surprised?

A recent Reuters story notes that the bans on GM crops will likely continue well into the future, although they have approved one variety of maize controlled by Monsanto via its monopoly on the patented gene. But otherwise, any consumer who actually wants these goods is simply out of luck.

So, while farmland is now profitable, the taxpayer and consumer is certainly paying his fair share. He pays in his tax dollars, and he pays for the government monopolies (known as patents) which in turn diminish his choices of crops via government intervention. And, he pays more for food through price inflation. The feds point to the CPI and claim that prices increases are mild, but even the CPI shows food price increases at 3.5 percent to 4 percent over the past year, and this is well above income growth for the same period. If food prices are growing faster than income, that’s not the kind of “stability” that leads to wealth creation. Of course, As the New York Fed has informed us: Who needs food when you can just buy an iPad?

A Rothbardian perspective shows that even many of today’s free-market economists concede too much to the government when discussing tax reform. Rather than pining for a tax code that appeared to be consistently designed with some purpose in mind, Rothbard would much prefer a tax code that violated no one’s rights.

The law of returns; convertibility and valuation; labor versus leisure.

Apologies for thin links. The combination of going out to lunch and doing a bunch of e-mails relating to a longer term initiative are more than my no-slack calendar can readily accommodate.

Frozen plants spring back to life BBC

FDA approves the treatment of brain tumors with electrical fields Gizmag (hat tip reader Aquifer)

Humans are naturally nice Aljazeera (hat tip Lambert)

Open hospital windows to stem spread of infections, says microbiologist Guardian (hat tip reader Lambert)

Climate scientist Peter Gleick admits he leaked Heartland Institute documents Guardian (hat tip reader John L). Yes, this is bad, but tell me how this is worse than what was done to Dan Rather (in which he was given fake documents that actually contained accurate information, so that the “fake documents” part would lead the information they contained also to be considered fake, when it was actually accurate. Rather took all the heat and no one was angry with the perps).

‘It’s Going to Be War’: First Nations Battle Canadian Tar Sands Common Dreams (hat tip readre Aquifer)

China realty weakens MacroBusiness

Youth Unemployment at Crisis Level Chosunilbo (hat tip reader Lambert)

Top Ten Ways Iran is Defying US, EU Oil Sanctions and How You are Paying for It All Juan Cole (hat tip psychohistorian)

Eurozone agrees second Greek bail-out Financial Times

The Greece deal MacroBusiness. Contains the full sustainability report.

Strauss-Kahn ‘a suspect’ in prostitution ring inquiry BBC. He tries the “in the night all cats are grey” defense.

Maine GOP Commits Massive Election Fraud in State Caucuses; Paul Supporters Justifiably Outraged Brad Blog (Feb 15) v. Why and how the Maine caucus mess matters Bangor Daily News (both hat tip Lambert)

Wisconsin Unions Use Politico Gaffe as Rallying Cry Dave Dayen (hat tip reader Carol B)

Will S&P fight to the death? Sydney Morning Herald (hat tip Crocodile Chuck)

Schneiderman Sues Again Wall Street Journal (hat tip reader Paul Tioxon). You have to read this. Seriously. This is concrete proof that reading the Wall Street Journal opinion pages will make you stupid.

Some Doubt a Settlement Will End Mortgage Ills New York Times (hat tip Lambert). We said from the get go that a single point of contact was impossible in a call center type environment. You actually do NOT need a single point of contact, you need decent record keeping, which (as we have also discussed at some length) seems to be beyond servicers’ capabilities (in part due to horrible systems). But this proves a bigger point: the servicers cannot live up to their servicing standards (at least without losing boatloads of money) and hence never will.

Massachusetts Home Seizures Threatened in Loan Case: Mortgages Bloomberg (hat tip reader Deontos). This is super important and I wish I had time to write on this, but I suppose I’ll just wait for the decision. The highly respected Massachusetts Supreme Judicial Court is going to rule on whether the mortgage (the lien) can be separated from the note (the borrower IOU). Since the US Supreme Court over 100 years ago said the lien was a mere accessory to the mortgage, the odds are high they will say no. That means they might invalidate the foreclosure at issue, putting many other FCs under a cloud (but even if they rule for the borrower, I’d expect them to award damages rather than undo the FC; there is a lot of other law that treats sales out of bankruptcies and foreclosures as final). But a ruling in favor of the borrower would also deliver a fatal blow to MERS.

Is Obama Getting Serious About Bank Fraud? Real News Network (with Bill Black, hat tip reader Aquifer)

Antidote du jour:

Yves here. In case you managed to miss it, there is supposedly an agreement for Greece to get €130 billion. But then we learn that Greece will still need more dough if it meets its target of reducing government debt to GDP to 120% by 2020 (and why is debt to GDP of 120% seen as sustainable then when it is not seen as sustainable now? And leaked documents further note that Greece might not meet its targets (duh!) and its debt to GDP could instead by 160% of GDP, which would require bailouts of nearly twice the amount now contemplated. And “discussions” are continuing in Brussels into the early morning, which says this deal is about as done as the US mortgage settlement.

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

The Greek Prime Minister spoke of a choice between “austerity” and “disorder”. He got both, as the Greek Parliament based the European Union (“EU”) agreed to severe budget cuts and outside rioters protested the plan.

In great dramas, sub-plots support the main story. The story of “hairshirts” (the Greek economic plan) and “haircuts” (the writedown of Greek debt or PSI – Private Sector Involvement) are little more an intriguing side show in the broader European debt crisis.

With Greece increasingly doomed, the real significance of the negotiations is that they provide a template for future European sovereign restructurings. No one buys the oft-stated European leaders’ position that Greece’s position is unique or exceptional. Portugal is first in the line of fire, with the Irish, Spanish and Italians watching anxiously.

In July 2011, the Institute of International Finance (“IIF”), a lobby group representing major banks and investors, proposed a complex plan entailing investors suffering a loss of around 21% on the value of their Greek bond holdings. On 27 October 2011, banks and investors were “invited” to accept a 50% write down under threat of larger losses if they did not agree. The write-down was structured as a “voluntary” exchange of maturing Greek bonds for new bonds, to avoid triggering credit default swaps (“CDS”) contracts, a form of credit insurance.

Greece has around Euro 350 billion in debt including Euro 70 billion in bailout loans and around Euro 80 billion in bonds held by the European Central Bank (“ECB”). A 50% haircut of the remaining Euro 200 billion equated to reduction of Euro 100 billion. As around Euro 85 billion is held by Greek banks and pension funds, the reduction of Euro 100 billion was less than 30% of outstanding debt, as only private investors are covered and bonds held by official institutions such as the ECB are excluded.

Following protracted negotiations, the Greek government has agreed on a new austerity package. The bond exchange is likely to proceed with bond holders’ writing off 53.5%, equating to losses of over 70-75%.

The Troika – the European Union (“EU”), European Central Bank (“ECB”), the International Monetary Fund (“IMF”) – needs to reduce the level of Greek debt to a “sustainable” 120% of gross domestic product (“GDP”) by 2020. The bond deal and the latest budget cuts are designed to achieve this paving the way for a second financing package for Greece to enabling Greece to repay a Euro 14.5 billion bond on 20 March 2012. Deterioration in Greece’s finances required the bigger writedowns and greater budget cuts.

But even the greater austerity and larger losses to lenders will probably leave Greek debt above the target level, requiring delicate financial engineering to at least cosmetically reach the target. In the end, the fancy footwork yielded an irrelevant 120.5% of GDP.
The 120% level is largely meaningless, being a political construct designed to avoid drawing unwelcome attention to Italy whose debt levels are around this level.

There is no certainty that the agreement reached can be implemented. The IIF represents around 50% of banks and investors.

Investors with Greek bonds naturally want to minimise losses. Investors who have hedged by reinsuring the Greek bonds prefer default to a voluntary restructuring, allowing them to trigger their insurance and cover losses. Hedge funds who bought into Greek bonds, at prices around 30%, want a result which gives them a profit.

The deeper losses will increase resistance to the deal, especially from hedge funds who may prefer to take their chances in a default.

One option is to unilaterally insert collective action clauses (“CACs”) into existing bond contracts, allowing a supermajority of lenders to bind the minority.

A complicating factor is the ECB’s refusal to take losses. With direct holdings of Greek bonds of Euro 40 billion as well as additional loans to banks secured over Greek bonds, the ECB’s capital of Euro 5 billion (scheduled to increase to Euro 10 billion) is insufficient to absorb losses. As the CAC would force the ECB to share in losses, a special arrangement will exempt them from the effects of any CAC to the further detriment of already resistant private lenders.

The special treatment of the ECB means that commercial lenders are effectively subordinated to official lenders, a position which has been avoided to date. Given that after any restructuring, the bulk of its debt will be held by official lenders, such as the ECB and IMF, it is unlikely that Greece will be able to return to financial markets for a long time, which probably in reality was always the case. But this will discourage commercial investment in risky European debt, such as that of Portugal, Ireland, Spain and Italy, adding to the contagion pressures.

Any agreement is also likely to face legal challenges from lenders, which would complicate proceedings.

Another complication is the extremely tight timetable that must be followed to ensure the arrangements are implemented in time. There is little margin for error.

If the new agreement cannot be implemented, then the Troika could extend the necessary money to meet the March maturity and continue negotiations, although this would be difficult. Alternatively, they could arrange an orderly default. Another outcome is that Greece unilaterally declares a debt moratorium and leaves the Euro.

Voluntary or involuntary default, large voluntary losses, and/or CACs all increase the risk that credit insurance contracts may be triggered with increased threat of contagion.
This agreement is unlikely to be the definitive resolution everyone seeks.

Greece has consistently failed to meet economic forecasts. Despite measures by the Greek government, debt continues to increase. According to the EU statistics office, Greece’s debt reached 159.1% of GDP in the third quarter of 2011, up from 138.8% a year earlier and 154.7% in the previous quarter.

Greece may get through the March 2012 maturity but the arbitrary 120% debt to GDP ratio, the best case under the plan, is unsustainable, even in the unlikely case that it is met. The Greek economy, which has been in recession for years, shrank by 7% in later part of 2011. Budget revenues for January 2012 fell 7% from the same time last year, a fall of Euro 1 billion. This compares to a budget target for an 8.9% annual increase. Value-added tax receipts decreased by 18.7% in the same period compared to January 2011.

Greece’s financial position will deteriorate and it will miss key milestones – debt levels, budget deficits, growth, asset sales and structural reforms. The projected reductions in debt are based on optimistic assumption of growth which are unrealistic given the severity of the income cuts and shrinkage in government spending.

With elections due in April 2012, government support for the austerity plan cannot be assumed, in face of a serious recession and increasing social unrest.

A similar pattern is already evident in Portugal, Spain and Italy with debt, budget and growth targets, largely unrealistic, being missed. Popular resistance to reforms and austerity is also predictably rising. Prime Minister Maria Monti has made it clear that Italy cannot take more austerity, which has barely started to be implemented.

Even if the Greek “rescue” is agreed, the Euro-zone still need to finalise the Euro 500 billion rescue system by April 2012’s IMF meetings. The fund is designed to create the much vaunted firewall to prevent Euro-Zone instability from spreading.

There are suggestions that the size of the bailout fund could be increased. But Germany, Finland and the Netherlands, the only remaining AAA rated members of the Euro-Zone, are reluctant to increase their commitments. The credit ratings downgrade of many other member nations, including France and Austria, has increasingly highlighted the risks of increasing their exposure.

The IMF is trying to marshal additional funds from members to support a European bailout. At the World Economic Forum, IMF head Christine Lagarde said that she was attending “with my little bag, to actually collect a bit of money”.

Following direct approaches by Lagarde, China and Japan have mouthed platitudes about “help”. Any support has been made conditional upon the Euro-Zone members increasing their commitments, in the knowledge that it is presently unlikely. Tellingly, China Investment Corp (“CIC”), the country’s sovereign wealth fund, and influential Chinese central bankers have rejected suggestions of purchasing European government debt. One official stating that: “We may be poor, but we aren’t stupid”.

The US has ruled out contributions, though is shouting encouragement from the sidelines. The US Congress still hasn’t approved the previous round of additional IMF commitments.

Everyone knows the amount of money available is insufficient to deal with the problems.
History suggests that a write-down of debt for distressed borrowers is frequently followed by others.

The entire trajectory of discussions, plans and negotiations largely ignores Greece. There is no longer any pretence of “assisting” Greece. It is about ensuring that German and French banks minimise their losses. It is probable that no funds will be released to Greece but rather placed in a special account from where it will be used to meet the country’s debt obligations.

Germany and the Netherlands has suggested that the EU assume control of Greek finances and elections be suspended in favour of a technocratic government, having the confidence of Berlin, Paris and Brussels. In the end, the communique required Greece to pass a humiliating law giving priority to debt repayment over other government obligation. The Trioka will establish a permanent presence in Greece to oversee the process. The loss of Greece’s sovereignty has not been well received, at least in Athens.

Subplots connect main plots in thematic terms or provide minor diversions or comic relief. The light relief in this instance come from a group of hedge funds who have threatened to take action in the European Court of Human Rights alleging that Greece has violated bondholders “rights”.

In the end, Greece may live to default another day. Other embattled European nations will be scrutinising the Athenian sub-plot extremely closely as to clues as to their future as they await the battles that lie ahead.

We’ve been giving examples off and on about how servicers scam borrowers. Examples include impermissibly deducting fees before applying payments to interest and principal; force placed insurance, inflated prices on and excessive frequency of broker price opinions, and in altogether too many cases, treating payments that are on time as late. What many observers fail to appreciate is that these are tantamount to scamming investors. If a borrower goes into default, any bogus charges will be deducted from the sale of the house, and hence come out of investors’ hides.

Lisa Epstein of Foreclosure Hamlet is a mortgage document maven and has been looking extensively at investor reports and compared them to court documents and has found serious discrepancies. Her research shows that servicers are not only taking advantage of borrowers but are also scamming investors.

Lisa looked into a Countrywide trust (CWALT 2008-oc8) with Bank of America as the servicer, in part because it is the focus of an important case in Florida, Pino versus Bank of New York. She determined that despite the fact that the case had been satisfied in July 2011, it was still being included as of January 2012 in the monthly investor report. That means Bank of America is still charging servicing fees on it, and likely other fees (late fees, periodic broker price opinions, etc).

And she found that the Pino loan is not alone in having court records show that the property has been sold (ie, the trust is clearly no longer holding the mortgage), yet is still reported as an asset of the trust. From 4closureFraud (emphasis original):

Our research has uncovered other non-existent “assets” on the books of this trust. To put this in perspective, at the origination of this trust there were 6,734 loans of which 61 were originated in Palm Beach County. As of the Jan 2012 investor report, 29 of the original 61 Palm Beach County loans remain on the trusts’ books. Only ONE is performing as originally contracted at closing. Three others have been modified; one has a $39k forbearance, one has a $8k added to principal, one has $16k added to principal. The other 25 loans are non-performing. (As of Jan 2012 report, total left in the trust 2,921; of the 2,921 left 1,187 are non-performing (delinquent = 237, bankruptcy 188, foreclosure = 512, REO = 250) but we know this data isn’t correct, so….)

Some “non-existent” loan examples from the trust

Roman Pino loan #130133456 – $162,400 – (July 2011 satisfaction – still on the books in Jan 2012 trust report in “foreclosure” status) [3764 Mil Run Court, Greenacres, FL 33463] – BoA monthly servicing fee for non-existent mortgage $50.73

Samantha Woodruff loan #130521936 – $171,940 – (Sept 2011 deed from trust REO to new buyer – still on the books in Jan 2012 trust report in “REO” status) [1497 Lake Crystal Drive D, West Palm Beach, FL 33411] BoA monthly servicing fee for non-existent mortgage $33.70

Robert Rodriguez loan #130450231 – $176,542 – (Sept 2011 short sale deed & Nov 2011 satisfaction – still on the books in Jan 2012 trust report in “REO” status) [1139 Lake Terry Drive 60L, West Palm Beach, FL 33411] WOW – BoA monthly servicing fee for non-existent mortgage $181.69

Elsa Castillo Rivas loan #130445815 – $375,000 – (July 2011 short sale deed) – remained on books through Dec 2011 in “REO” status), finally reported as “liquidated” in Jan 2012 report [13918 Preacher Chapman Place, Centreville, VA]. WOW – BoA monthly servicing fee for non-existent mortgage $328.04

This is just a small example of what we are uncovering. If we learned anything from the robosigning scandal, if there are more than two “irregularities,” there are thousands.
More examples from other trusts to come.

We feel comfortable saying that this is widespread…

Investors have told me they’ve seen signs of even more gross abuses, such as servicers treating fees as credit losses. But this sort of remark in a way shows investors suffer from the same agency problems as servicers, who have no reason to do a good job but instead are motivated to game a complex system of fees. Institutional investors are running other people’s money and therefore have no incentive to crack down on miscreant servicers (they feel it is not their job, plus if any one investor were to take this issue on, the rest of the industry would free ride on his work).

So no wonder we only have isolated and very dedicated individuals chipping away at this looting. Everyone else appears to be part of the problem.