Pop goes the Globaloney Economy - Eric Janszen

[Chris Coles]

Re: Pop goes the Globaloney Economy

I happen teach Constitutional Law and this statement jumped out at me.

There is nothing in the US Constitution that either states expressly or implies that the federal government can create a "banking sytem," "banks," or a "central bank" -- the term "bank" isn't even in the Constitution.

Now, Article I, section 8 specifies that the US Congress shall have the power to print currency (as opposed to the states doing so, a phenomena that existed from 1776-1788) but nothing is stated regarding the regulation of the flow of the currency, i.e. a central bank that would set national interest rates, etc.

The formation of a central bank did not occur until the administration of James Madison in 1819. This was challenged by the states who, while agreeing that the federal government could print the currency, argued that the states had the right to regulate it. Worried that a currency regulated by a central bank would result in spirals of inflation and deflation (!) the states challenged Madison's desire to form a central bank in the first place.

The Supreme Court ultimately decided in McCulloch v. Maryland that the Necessary and Proper Clause of Article I permitted the federal government to form a central bank and, indeed, to undertake any other power that voters deemed convenient so long as it did not contradict the Constitution. So, while the federal government cannot create a Department of Book Burning because the existence of such would contradict the 1st amendment, where the Constitution is silent, anything goes.

The states tried to argue that the 10th amendment meant that where the Constitution was silent, a governmental power could only be exercised by the states -- and since there is nothing about a central bank in the Constitution, only states could form regional or local "central banks."

This argument was rejected by the Court saying that the National Supremacy Clause in Article VI denied the states any power that would conflict with an otherwise Constitutional exercise of federal power.

So, the moral of the story: flash forward nearly 200 years and we have the feds bailing out banks, auto manufacturers, insurers, and my ugly cousin Gertrude for all I know.

For better or worse, the feds have the Constitutional authority to do all of this -- it is up to us as ctizens to vote out the politicians who want to actually exercise that authority.

Several years ago, I presented to The Supreme Court a petition to ask the question: "Is the government Ultra Vires if it does not act to the highest ethical standards". At the time, and since, I have been unfunded and as a British citizen, unable to fund taking the matter forward from that first attempt. But I am now getting close to being able to return to this and I ask, would such a petition in a large part solve the question of a Central Bank by making it impossible to act in any way unethically?

I must add that copies of my petition were presented to the Department of Commerce and the Department of Justice and I am intrigued by the continuous references to ethics by the Change team surrounding President Elect, Mr. Barack Obama. My petition should make for some very interesting debates when it again hits the desk of the Supreme Court.

[Andreuccio]

Re: Pop goes the Globaloney Economy

I think Jubillee would be a nice way out of this mess. A re-boot. Too bad for dumbasses like me didn't borrow more and spend it on fun stuff instead of paying off the mortgage and saving.

Or borrow and put it into something of value, like gold. ;)

[whitetower]

Re: Pop goes the Globaloney Economy

In the process it might be time for Congress to consider retaking the Federal Reserve into the Federal Government as the Constitution originally specified...

I happen teach Constitutional Law and this statement jumped out at me.

There is nothing in the US Constitution that either states expressly or implies that the federal government can create a "banking sytem," "banks," or a "central bank" -- the term "bank" isn't even in the Constitution.

Now, Article I, section 8 specifies that the US Congress shall have the power to print currency (as opposed to the states doing so, a phenomena that existed from 1776-1788) but nothing is stated regarding the regulation of the flow of the currency, i.e. a central bank that would set national interest rates, etc.

The formation of a central bank did not occur until the administration of James Madison in 1819. This was challenged by the states who, while agreeing that the federal government could print the currency, argued that the states had the right to regulate it. Worried that a currency regulated by a central bank would result in spirals of inflation and deflation (!) the states challenged Madison's desire to form a central bank in the first place.

The Supreme Court ultimately decided in McCulloch v. Maryland that the Necessary and Proper Clause of Article I permitted the federal government to form a central bank and, indeed, to undertake any other power that voters deemed convenient so long as it did not contradict the Constitution. So, while the federal government cannot create a Department of Book Burning because the existence of such would contradict the 1st amendment, where the Constitution is silent, anything goes.

The states tried to argue that the 10th amendment meant that where the Constitution was silent, a governmental power could only be exercised by the states -- and since there is nothing about a central bank in the Constitution, only states could form regional or local "central banks."

This argument was rejected by the Court saying that the National Supremacy Clause in Article VI denied the states any power that would conflict with an otherwise Constitutional exercise of federal power.

So, the moral of the story: flash forward nearly 200 years and we have the feds bailing out banks, auto manufacturers, insurers, and my ugly cousin Gertrude for all I know.

For better or worse, the feds have the Constitutional authority to do all of this -- it is up to us as ctizens to vote out the politicians who want to actually exercise that authority.

[BobH]

Re: Pop goes the Globaloney Economy

Ed, debt-forgiveness still doesn't work, as in your example, if the bank or the government forgives the mortgage balance rise from a time period before.

The debt load of this type of forgiveness is put on the taxpayer. If the banks forgive this debt they go bust without a bailout from the government. The government has to give them “TARP IV” monies to cover it! Bottom line, it’s a Japan time line work-out!

Secondarily, if you reset the mortgage balance the asset balance will adjust with it. Just because a bank reset the mortgage balance from $400k to $200k doesn’t mean the house is still worth $400k. Additionally, the banks can’t and won’t do a line-of-credit, unemployment is rising, wages are stagnant, credit is shrinking, etc. Nothing else in today’s picture changes!

BTW, how do you figure adjusting all the bonds?

With another 15% decrease in national home prices we will have ½ of all mortgages under water or ~26M mortgages. Mechanically, just how long do you think it would take to reset the mortgages?

So it’s mechanically near impossible, doesn’t reset all debt and credit and now just moves the debt from some homeowners to all taxpayers. Debt-forgiveness just removes the debt from one place and puts it somewhere else. It is clearly nothing more than a socialistic move with zero benefit.

Sorry!

[audrey_girl]

Re: Pop goes the Globaloney Economy

That, Jeff, is pure genius. You made my Christmas with that one. The 2009 motto:

"I see broke people".

I used to work with a rather brilliant engineer who was infamous for his short temper and sarcasm. After this movie came out he had a plaque placed right behind his desk over his head,,,, it said "I see dumb people"

[Chris Coles]

Re: Pop goes the Globaloney Economy

Don't forget: New Road to Serfdom

Now we enter the negative equity phase:

The problem for recent homebuyers is not just that prices are falling; it’s that prices are falling even as the buyers’ total mortgage remains the same or even increases. Eventually the price of the house will fall below what homeowners owe, a state that economists call negative equity. Homeowners with negative equity are trapped. They can’t sell—the declining market price won’t cover what they owe the bank—but they still have to make those (often growing) monthly payments. Their only “choice” is to cut back spending in other areas or lose the house—and everything they paid for it—in foreclosure.

As a debtor who bought during the government engineered for FIRE Economy interests housing bubble we propose that mortgage holders owe only that portion of home price that was not produced by the government sponsored asset price inflation.

For example, if comparable houses in your area sold for $100K before the bubble and $300K at the peak and $150K now, and you bought at $250K with $0 down, you still owe $100K but the bank has to eat the $150K asset price inflation difference.

What's wrong with that?

Fred, you left out one small item. The short term money the banks borrowed to give to the original mortgage holder so they could pay the $250K for the house. Ergo, the bank still owes the $250K.

If the banks had been working within old fashioned capital strictures, then they would have borrowed the $250K long term, say over 30 years at say 2% and lent it at, say, 4% and so, while they would indeed be in difficulties, they could also wait for the 30 years to repay the money and take a hit on the overall profits. But no, instead, they have only borrowed the money for, say, three years and so, next year they have to pay that $250K back to their original source.... That is the underlying problem, they borrowed short to lend long.

The next problem is related to that short/long difference and stems from their need to raise the game to attract more funds, so they lent the original $250K at say 3% for 3 years with the need for a refi after that at a higher rate, say 5% to make up for the losses during the first 3 years... And it is that aspect that has the capacity to destroy so many previously solid deals as when the refi comes along, there is a need for a new deal between the bank and the householder. And that new deal in turn means the whole mortgage has to be completely renegotiated and that in turn requires new valuations. Insufficient value creates an automatic refusal to refi as the underlying value is now negative...

Simply leaving the original purchaser to pay back the $100K will not work as the mortgage has already defaulted and is as they say Moot. The bank meanwhile has their own creditor that has in mind exacting their own revenge and again, their acceptance of the new deal you propose is also, as they say, .... Moot.

No matter which way you look at the banks dilemma, they cannot win. I do believe that is why Japan had no other route away from their lost decade and that the same will apply to the USA except... if the banks go belly up and then the whole debt becomes a different matter altogether through good old fashioned bankruptcy.

[FlyingBoat]

Re: Pop goes the Globaloney Economy

Oh, that's great. So those of us who didn't buy a bigger house because we knew they were overpriced should pay for your ignorance? So you have a larger, nicer house than mine but I stick in my house and pay for yours. Frking rediculous. Rot in hell.

No, let the banks and those who invested in them eat these mortgages and go bankrupt. You can get out of your house and buy it back for a fraction. I don't pay for your mortgage. It is the bank's stockholders who are left holding the bag. That is the way it should be.

[we_are_toast]

Re: Pop goes the Globaloney Economy

EJ: Fed cuts dollar, Fire sales

In 1954 US GDP was just over $3 trillion versus $13 trillion in 2008 -- or is it $12 trillion, or $11 trillion? At the rate the US economy is collapsing, guessing at this year’s GDP is like trying to toss watermelon into getaway car chased by cops on truTV. Until the FIRE Economy finishes burning out, we won’t know how much of the US GDP was credit industry bezzle extracted from the Production/Consumption Economy, that is, how much economic growth measured as GDP came from actual production versus the portion “earned,” if that is the word, by financial firms by swapping inflated assets back and forth.

The latest data from ECRI indicate that the US economy on track to contract to near its pre-FIRE Economy level. Already automobile unit sales are back to 1983 volumes. A full retrace of the FIRE Economy puts US GDP around $6 trillion, less than half 2007 GDP. I don’t expect that to happen; a solid portion of the technology-driven New Economy is real, so a decline to 1995 levels, around $9 trillion, is more likely, near the scale of decline experienced during The Great Depression. That may sound dire, but then when I told readers three years ago that the housing bubble was going to collapse and send the financial system and economy into the worst crisis in 70 years, that sounded dire, too.

A U.S. GDP drop from 12T - 9T is roughly 25%,
The chart L.1 above is suggesting world GDP of -2% for 09.
Are you suggesting that other national GDP's will not fall like the U.S. or that after 09 things REALLY fall off a cliff?

FRED:
Those are steps 2, 3, and 4.

Step 1: Elect politicians who do not represent FIRE Economy interests.

Maybe in 2010.

A bit cynical, especially since the 2008 politicians haven't even arrived in DC yet, and when just a few days ago you commented on how many politicians read iTulip and how respectful we should be. ;)

Also the "what we mean by debt forgiveness " link seems to be in a loop of it's own and links back to this thread.

[goadam1]

Re: Pop goes the Globaloney Economy

I think Jubillee would be a nice way out of this mess. A re-boot. Too bad for dumbasses like me didn't borrow more and spend it on fun stuff instead of paying off the mortgage and saving.

[bart]

Re: Pop goes the Globaloney Economy

What we mean by debt forgiveness.

Lots cheaper than TARP, etc. and lays the costs at the feet of the FIRE freaks too.

[FRED]

Re: Pop goes the Globaloney Economy

Eric, with all do respect debt-forgiveness won't work either. The vast majority of homeowners are just like the banks. They are way over leveraged. So you can give them money (reduce their mortgage) but the net effect is still the same. They can't go to their housing ATM and spend and they have no other credit source from which to gain additional monies. Net effect - Japan style work-out.

Sorry not buying it!

What we mean by debt forgiveness.

[Wild Style]

Re: Pop goes the Globaloney Economy

Well it seems to be "working", at least here in the D/FW area. A friend has an employee who's wife managed to dodge all of the axes while remaining employed at Countrywide all this time. Lately she has been putting in double time and they have called a lot of people back. Refi's are booming.

until those people end up defaulting because of job loss or inflation so hindering that they wont be able to make all their bills?

[krakknisse]

Re: Pop goes the Globaloney Economy

I feel like that kid in the movies. "I see broke people. They don't even know they're broke."

That, Jeff, is pure genius. You made my Christmas with that one. The 2009 motto:

"I see broke people".

[FRED]

Re: Pop goes the Globaloney Economy

Well EJ, you've been right so far, but this broad statement makes me nervous enough to ask what do you mean or have in mind?
I realize the following will come off rather curmudgeonly but ...

If the banks loans were irresponsible, e.g., liar loans, no money down, questionable appraisal, then the banks should take the hit - not the public, e.g., if requiring them to forgive principle b/c of their own responsibility makes them insolvent or devastates their shareholders so be it (NOTE: this will never happen as we've already seen - can't have banks failing left and right).

If home buyers were irresponsible by getting caught up into bubble greed mania, then they, along with the bank should take the hit, not the public (Note: not going to happen) Joe6P says "i'm under water and won't pay", so bank says OK we'll right the principal to keep you in the house (b/c we don't really have any choice as default and foreclosure is worse for the bank (again homeowner gets a break and banks take a hit)

Or how about this, when that recent homebuyer bought an over inflated house, the seller undoubtedly received a windfall. Let's mark all those underwater homes to market, and get the difference back from those who profitted on the sale (seller, brokers, banks, appraisers etc). As absurd as this may sound, it is no less equitable, and I would submit more equitable than distributing these losses of fictitious wealth (which remember is cold hard cash in the pockets of those who participated on the way up) on the "public". And talk about future moral hazard.

I would very much appreciate understanding how you see a debt forgiveness working.

Don't forget: New Road to Serfdom

Now we enter the negative equity phase:

The problem for recent homebuyers is not just that prices are falling; it’s that prices are falling even as the buyers’ total mortgage remains the same or even increases. Eventually the price of the house will fall below what homeowners owe, a state that economists call negative equity. Homeowners with negative equity are trapped. They can’t sell—the declining market price won’t cover what they owe the bank—but they still have to make those (often growing) monthly payments. Their only “choice” is to cut back spending in other areas or lose the house—and everything they paid for it—in foreclosure.

As a debtor who bought during the government engineered for FIRE Economy interests housing bubble we propose that mortgage holders owe only that portion of home price that was not produced by the government sponsored asset price inflation.

For example, if comparable houses in your area sold for $100K before the bubble and $300K at the peak and $150K now, and you bought at $250K with $0 down, you still owe $100K but the bank has to eat the $150K asset price inflation difference.

What's wrong with that?

[BadJuju]

Re: Pop goes the Globaloney Economy

My parents purchased their house for $30,000 back in 1990. Suffice to say, they never had a mortgage.