FCIC hearings must shatter the ’sociopathic nature’ of Wall Street
Wednesday, 01/13/2010 - 2:13 pm by Robert Johnson | 3 Comments
Reporting live from the hearings, Rob Johnson argues that the FCIC hearings must challenge Wall Street to reexamine its role in society.
The Hearings of the Financial Crisis Inquiry Commission began belatedly this morning. Carrying a structure of decision making that appears to be designed to make it hard to get things done, Chairman Phil Angelides has a gargantuan task before him. The first session, which is a beginning, did have moments of import. Angelides acquitted himself well when he reminded Goldman Sachs CEO Lloyd Blankfein of the fact that there were people on the other side of the losses, particularly police pension funds, when Goldman appears to have sold the “sophisticated investors” representing them some toxic mortgage paper.
What I find important about that moment is that Angelides’ questions serve to restore some humanity to this process that hides behind complexity, mathematics and screens while denying of human consequences. The sociopathic nature of Wall Street–a culture in which people see their actions as disassociated from the rest of the economy and society — has to be shattered. These financial professionals have failed as experts and custodians of the well being and future of the nation.
Another noteworthy element of the theatre was the relative absence of Jamie Dimon. He was hardly questioned or pressed. Lloyd Blankfein has been cast as the feisty defender of Wall Street practice.
The example of Goldman Sachs’s conflict of interest between the proprietary account of the firm and well being of customers is certainly not unique to the firm. It would serve us all if the FCIC were to dig deeper into how that conflict operates.
The other highlight was Blankfien’s declaration that he was never asked to take less than 100 cents on the dollar on AIG settlements.
Most assuredly, future hearings will delve into the interface between private firms and the government authorities at the Federal Reserve and the Treasury Department. One only hopes that the FCIC can get to the bottom of this relationship before we pass financial reform legislation in the Congress in the coming year.
Senior fellow Robert Johnson is Director of Financial Reform at the Roosevelt Institute and a former managing director at Soros Fund Management. He has recently been pegged to lead George Soros’ $50 million effort to create an Institute for New Economic Thinking which will promote free market skeptics and encourage a new economic paradigm.
Please review the enclosed article. I would very much like discuss these policies with you.
Solving The Unemployment and Foreclosure Crisis
The US economy has a major unemployment and foreclosure crisis. Millions of people are in the process of losing their homes or are going to be losing a home in the future.
The foreclosure prevention programs the government has created are very expensive and have failed miserable. With 75 billion dollars allotted only 26 thousand homes mortgages have been permanently modified. Unemployment is at 10% and may be rising. Something different must be tried. What the government is doing is not working!
I want to discuss with you, a different approach to economic recovery.
Normal capital markets cannot solve this economic crisis because collateral values have decreased so much and so many homes have underwater mortgages. It cannot be provided by the capitalist entity because it is still healing and will experience a relapse if interest rates continue to rise.
To solve the unemployment and foreclosure crisis and stabilize mortgage interest rates, we must start by doing two things.
First, we need to create a mortgage with terms that fit the current economic conditions; It must reduce foreclosures and improve employment by increasing total economic demand in the economy. The new mortgage I am proposing would improve the economy and the financial condition of Fannie Mae, Freddie Mac and the banks. I call it the 30 yr. 2010 STABILITY MORTGAGE. It would have a starting interest rate of 3% and increase 1/4% a year. (3% is currently more than 300% above the inflation/deflation rate. Mortgage rates have been historically 100% above the inflation rate. The current mortgage interest rate is over 500% above the inflation rate). The interest rate would cap out at 5%. The borrower would have to qualify at the 5% interest rate. Mortgages that are underwater would have their unpaid balance reduced by an amount equal to 20 to 30% of their monthly payment amount each month for 10yrs or until the mortgage equals the current possible sale price of the home. (Reducing the mortgage monthly by a small amount would be less of a loss than by reducing the mortgage by foreclosure or a short sale. It would also be better for the banks, investors and the homeowner.) If FNM, FRE and the Fed said they would buy a mortgage with a 3% starting rate, the banks would offer it to the public.
Temporarily, if necessary the US Treasury would buy the GSEs bonds. (Treasury would receive the money back when the Fed bought the MBSs from the GSEs) The banks would earn the fees for arranging and servicing the home mortgage. FNM&FRE would have less loses from foreclosures. They would be collecting interest on a larger mortgage than if they foreclosed or short sold the home.
The securities the Fed currently holds would go up in value and should be sold to investors to reduce the Fed’s balance sheet. The Fed would buy the new mortgage backed securities and sell them to investors, after home prices stabilized and the mortgage interest rate, on the new mortgage, had risen above the 10yr T-Bill rate.
The new Mortgage would stabilize home prices and eliminate the foreclosure inventory. After the foreclosure inventory is eliminated homes should appreciate slowly when the Zero Inflation Taxation Policy in enacted.
Enacting the ZERO INFLATION TAXATION POLICY is the second thing we should do. This policy will help prevent another economic crisis similar to the one that we are currently experiencing. It would also create a stabil market for thrity year fixed rate mortgages.
In the last decade we have had the dot com bubble. The real estate bubble, the commodities bubble (corn and oil) and almost the leveraged buy out bubble. The Fed was not able to do anything about these bubbles with the tools they have, without disrupting the US and world economies, as they did in the early 1980s by raising interest rates to 17%.
The excessive use of credit in business, investment and consumption got us into this economic crisis. Our income tax system encourages credit use and investing with credit. This is fine as long as the economy needs more credit use but when the economy is showing signs of excessive credit use, such as economic bubbles and inflation, credit encouragement should be curtailed and money investments (savings and bond investments) should be encouraged to maintain balance in our economy.
If we first use the income tax to guide investors and consumers before the Fed raises interest rates this will maintain the lowest possible interest rates and maintain the value of existing bonds and securities. Enact the Zero Inflation Taxation Policy
Conclusion: Foreclosures should decrease if the mortgage reduction plan is put into effect and the mortgage starting interest rate is reduced to 3%. The homeowner purchasing power will increase by 50% of their monthly interest payment if their current mortgage interest rate is 6% or more the first year and then slowly decrease the following seven years. With increased consumer purchasing power, total demand would increase, there by employment would increase. The banks would become stronger because their customers would become financially stronger and the collateral for small business loans would be stabilized.
For more information go to: http://www.economysflaw.wordpress.com/
Sincerely
Leonard C. Tekaat
economysflaw@yahoo.com
http://www.economysflaw.wordpress.com/ Read Alternative Economic Stimulus Plan and other economic papers.
Jan 13, 2010
Leonard C. Tekaat is a retired economic analyst, economic scholar, businessman, financier, investor, author and former candidate for California Congress. I have over forty years in the financial world.
Posted by Leonard C. Tekaat | January 13th, 2010 at 4:07 pm
This is off topic but would this site please do an expose on the Banks and what they are doing for Haiti as compared to bonuses top execs get. Bank of America only gave 1M. Wells Fargo gave $100, 000. (despicable). This may be a good subject to give light to their (in)humanity. What is Goldman doing?
Posted by Calvin | January 14th, 2010 at 7:02 pm
“These financial professionals have failed as experts and custodians of the well being and future of the nation.”
In the 1990s and the past decade these “experts” told us that unfettered free markets and innovation were the cure for all our financial and economic ills. Now they tell us that a consumer protection agency, a tax on leverage, and other proposed reforms/regulations will kill the goose that lays the golden eggs. Why, in heaven’s name is anyone listening to them? Haven’t we learned our lesson?
Posted by Victoria Posner | January 15th, 2010 at 11:40 am