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Dec 22 2010

Money, Money, Money

mr money bagsIn the 3rd and final part of his series on The Title Fraud Smoking Gun (my treatments of Part 1 and Part 2), L. Randall Wray offers a partial explanation of the deterioration of the US Economy that does not, I think, go quite far enough.

The problem is money.

Specifically that the Tax Policy of this country is not sufficiently redistributive to put it in the hands of people (and Governments) who will use it to buy goods and services instead of people who buy fraudulent fictional financial instruments.

Many people think only the Federal Reserve can coin money, but that’s not true.  By using Leverage a pile of money can get magically multipled by limits set only by the credulousness of the market.  Literally ‘What it will bear’.  Recently as much as 30 to 1 has been customary, but there is no theoretical limit actually.

High (some would call them ‘progressive’) Marginal Tax Rates on Businesses and Individuals reduces the perverse incentive to draw out as much cash as you can, wave your magic multiplier wand, and find some kind of Ponzi Pyramid Scheme to get out in front of.

As always, it is DEMAND that is driving Supply and not the other way round.

Anatomy of Mortgage Fraud, Part III: MERS’S Role in Facilitating the Mother of All Frauds

L. Randall Wray, Huffington Post

Posted: December 16, 2010 09:29 AM

In this piece, let us step back and examine the big picture to answer the question: Why did Wall Street create this crisis? For the answer, we have got to go back several decades. I do not want to give a long-winded history lesson, but it is necessary to understand the transformation that has taken place since the 1960s. Back then, the financial system was small, simple, regulated and relatively unimportant. Banks made commercial loans; thrifts made home loans; and Wall Street handled investment finance. Households had jobs and rising wages so they didn’t need to go into debt to finance rising consumption. With robust economic growth, each generation could expect to have roughly twice the living standard of the previous generation.

Things began to change in the 1970s, and especially in the 1980s as growth slowed, as median real wages stopped rising, and as financial institutions were unleashed to expand activities into new areas. At first households coped with stagnant incomes by putting more family members to work (especially women), but gradually they began to rely on debt. Banks created new kinds of credit and gradually expanded their views as to who is creditworthy. I can still remember one conference I attended at which someone from the financial sector proudly announced that the banks had discovered an untapped market for credit cards — the “mentally retarded”. The argument was that this group would be just as safe as college students, since parents would bail them out in order to avoid having their kids’ credit ratings suffer. This was not a joke — it was a business model.



Banks became giant one-stop casinos that facilitated every kind of crazy bet. They would make a loan to you, but then simultaneously securitize it to sell-on to an investor plus place a bet that you would default on your loan so that the security would go bad. For a fee, they’d let a hedge fund manager choose the riskiest loans to bundle into a sure-to-fail financial product that they would then sell to their own customers. And then they’d join the hedge fund in betting against their customers. The more loans they made, the more fees they collected; the more bad loans they made, the more bets they would win. The more debt they piled on households, the greater their profits; riskier debt meant even higher fees and more defaults and thus greater wins from gambling. Prospective death was a booming good business for our undertakers.

America became “Bubbleonia” — with a “bubblicious” economy that moved from one bubble and crash to another: A commercial real estate bubble and crash in the 1980s that killed the thrifts; a series of developing country debt bubbles and crashes in the 1980s and 1990s fueled in part by American banks; a US stock market bubble and crash in 1987; the dot-com bubble and crash at the end of the 1990s; and then the US real estate and global commodities markets bubbles and crashes this decade.

Increasingly, the bubbles were managed cooperatively by Wall Street and Washington. Chairman Greenspan and President Clinton made a pact with Robert Rubin’s Wall Street to pump up “new economy” internet stocks through “irrational exuberance”. When that failed, Greenspan extolled the benefits of adjustable rate mortgages, while President Bush hawked the “ownership society”. Wall Street turned America’s residential real estate sector into the world’s biggest casino — $20 trillion worth of property that could serve as the basis for many tens of trillions of dollars of bets. Bernanke promoted the bubble by assuring markets that America was enjoying the “great moderation” — a new era in which stability dominates — and that in any case, the Fed would protect markets in the case of any hiccups.

Title Fraud is just a symptom of the underlying problem with the Economy which is concentration of wealth.

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