Glum & Glummer

At the urging of Karl Denninger, who has become the de facto doyen of the fraudclosure issue, I watched a panel discussion hosted by the American Enterprise Institute, featuring such prominent gloomsters as Nuriel Roubini and Chris Whalen. Five economists in all, and they competed to see who could be the most pessimistic about the economy. That's one thing I've noticed in recent months: it has become mainstream to be dire, whereas only a short time ago the happy talk seemed to compete on an equal footing, led by the Cheerleader in Chief himself, President Obama.

I think it's healthy, myself, to the extent one can extract any hope from such circumstances. The Federal Reserve is doing what it does, which is contemplating printing another trillion or two and flooding the bank basements with more "liquidity," which the banks won't lend, of course, because there are no qualified or interested borrowers. It's such an odd misunderstanding of what's wrong with the American economy: if you could actually fix it by making entries on a Federal Reserve computer, declaring the existence of more "money" by the typing of long strings of 1's and 0's, then the problem would not be real in the first place. Yet the problem is real, and the principal dilemma is that the economy has been built on a foundation of illusion and fraud for the last thirty years or so. It was only the forward momentum of American advantages which kept things going at a seeming level of prosperity for as long as they did. Various charts used by the Glum & Glummer panel verified this sad fact: it has been the steady build-up of private and government debt which has created the "wealth effect" which allowed our consumerist jubilee to keep going, as the great mass of the populace relied on the steadily rising value of their houses to amass a fortune, extracting this equity as they went to buy stuff from each other (and most of that imported).

Roubini forecasts another 10% drop in housing prices over the next 12 months. The effect, he said, will be to place about 50% of all mortgaged houses underwater, that is, the loans against such houses will exceed the value of the house. Chris Whalen added that we are only about 25% of the way through the foreclosure process for houses that are currently in trouble, let alone the "strategic defaults" to come implied by Roubini's forecast (and Dr. Doom & Gloom is rarely wrong about these things). Ergo, ipse dixit: Roubini is saying the whole damn thing is going to come crashing down around our ears. An economy depending on the wealth effect is going to get hammered if half the mortgaged housing stock represents bad loans and uncollectible debt. The general estimate is that about 60% of all houses have a mortgage to one extent or another; if half of these are negative equity situations, then 30% of the entire American housing stock will be underwater.

Securitizing mortgages made it all possible, because that process "spread the risk." It sure as hell did - it spread the risk to every nook and cranny of the nation. It's becoming apparent what really happened in the fraudclosure scandal. The banks and loan packagers were equally caught up the bubble mania of the boom housing years and simply never thought that any foreclosure problem could become epidemic. It's amazing in retrospect to contemplate something this huge and pervasive and imagine that it was not part of the advanced contingency planning. Housing prices would always go up; thus, the fact that mortgage-backed securities were loaded up with loans that did not meet the specifications of the prospectus (and Eliot Spitzer has recently discussed proof adduced by the Financial Crisis Inquiry Commission that at least 28-29% of the loans in "Triple A" rated CDO's did not meet the underwriter's warranties) would never come to light. A rising tide would continue to lift all boats, and no worries about a few borrowers here and there defaulting; the foreclosure auction would return 100% of the value of the loan back to the pool.

That's also why the big banks and securitizers didn't care that they were riding roughshod over county recording statutes and the Statute of Frauds, why they in effect created their own "real property common law" through the formation of MERS (Mortgage Electronic Registration Systems). Mortages were trading hands so fast, in such huge numbers, that they didn't want to be bothered with paperwork and all the burdensome county recording fees. And again, so what? Foreclosures in signficant numbers were never going to happen, and none of this shoddy, illegal paperwork would come to light. Just the fees at the front end, and the cash flow on sale of the CDOs, baby; that's all they cared about.

It is interesting what an enormous Black Swan the foreclosure crisis now presents to our collective consciousnesses, is it not? No one really saw it happening in just this way. It is a cautionary tale about the dire consequences of excessive complexity coupled with mass integration. When it goes, man, it takes everything with it. We were so much safer when there were thousands of small lenders holding their own mortgages, and the economy itself was diverse, with agriculture, manufacturing, building and all the other varied components of a real economy. Now we've got this mess. A financialized nightmare built entirely on fraud and swindle, and next up, the class action lawyers tearing into the bones of the banking system as they go after all those fraudulent CDOs issued by BofA, Goldman, Bear Stearns, Merrill Lynch, JPMorgan, et alia ad nauseum.

America, as we've known it, is toast. The moral of the story being that one had better seek his or her own diversity where she can find it.