Here’s how this plays out in an actual free market society which follows the law (ie., not this one.)
You go through and figure out if you can prove title to the property. If you can’t, those who were insured go to the title insurance companies. A huge legal battle ensures, with the title insurance companies claiming that they were the victims of fraud from their clients, the banks. Eventually, the title insurance companies pay out whatever they have to pay out that they can pay out, and most of them probably go bankrupt.
The banks then go bankrupt, which, well, they already are anyway, so maybe we should stop pretending.
The title insurance companies did not do their due diligence. They deserve to be destroyed for not doing their jobs. The banks engaged in and colluded with systemic fraud, they deserve to go out of business and their executives should go to jail.
And no, the real economy does not take it too hard on the chin. You wipe out a ton of debts, those people are no longer underwater and can buy. The banks are taken over by the FDIC, the shareholders are wiped out and the bondholders take a bath. The Fed refloats the banks (after breaking them up) and they go back to lending the way they should have. It costs LESS in the long run to do this than it does to keep extending and pretending, and non-zombie banks can actually lend.
Yes, the investor class takes it on the chin and this includes some widows and orphans, and that’s bad (throw in some undoing of “welfare reform” if you feel bad for them. Not that “slash food stamps” Obama is likely to.) But it’s better than eternal zombie banks and illegal foreclosures up the wazoo. And the investor class is essentially worthless anyway, they have spent the last 30 years investing in asset bubbles and offshoring industries and jobs, not in the useful productive domestic economy. Letting them take their losses (and these are their losses) is a good thing, and is the free market thing to do.
It also wipes out a class of people who are driving the buying of politics, and who tend to prefer Republicans, if you want to do some crass political calculation. Which, frankly, would be nice, since apparently Dems crass political calculations are done with an abacus they don’t know how to work.
Addendum: a friend sends me this suggested course of action by Karl Dennniger, which I think is a good one. Odds of being pursued? Minimal. But we can hope. As Denninger points out, if private interests steal the homes of millions of citizens with the collusion of government, well, that doesn’t lead anywhere pretty.
Glen
Nice post.
I’d say the odds of something SANE like this happening are low. I think we’re going to see just how creative Geithner can get with extend and pretend.
Steve J.
Good post, Ian!
BDBlue
In what is absolutely no surprise, the Obama Administration is signaling that it’s taking the banks’ side – see here and here, which nicely mirrors the industry’s shilling here. Be sure to vote Democratic in November!
Tom Hickey
Those already foreclosed on are apparently out of luck.
http://www.creditslips.org/creditslips/2010/10/the-finality-of-foreclosure-sales.html
John
I learned a new term on this Columbus Day: Equity Stripping. Even behind all the fraudulent securitization, this is the driving logic of the US financial system. And as I listen about the rape and pillage of the native peoples who were driven to mass suicide by Columbus and his men, I realize it has been about Equity and Asset Stripping since 1492.
It also describes what happened to the little people who had perhaps $40-50K equity in their homes in 2000, were sucked into the refi’s or upgraded to bigger and unaffordable, and are back to zero because of foreclosure. More money sucked up from the bottom of the economy by the oligarchic vacuum machines.
I think Marx was correct that capitalism would eventually destroy itself.
As the little bitch boy said, “Bring it on”
John B.
“Bring it on” is right…
Frank
Not that it changes the point of you post but in a truly free market, there would be no FDIC. There would surely be free-market versions of the FDIC but they would never have insured deposits for banks that took the risks Chase, BOA, Wells Fargo, etc. took. That also means the banks would not have taken those risks. So, in a truly free market, this whole mess wouldn’t have happened.
cripes
Still, the turd peddlers are selling the idea that it’s the homeowners fault, and that the public will pay financially if we don’t let the foreclosure mill grind on.
Last I checked, homeowners didn’t create 53 trillion in CDO’s based on shit securities, didn’t process millions of fraudulent foreclosures, didn’t toss millions out of work and didn’t get several trillion in taxpayer welfare, zero percent interest loans and on and on.
But they’ll be the fall-guys.
anon2525
Not that it changes the point of you post but in a truly free market, there would be no FDIC. There would surely be free-market versions of the FDIC but they would never have insured deposits for banks that took the risks Chase, BOA, Wells Fargo, etc. took. That also means the banks would not have taken those risks. So, in a truly free market, this whole mess wouldn’t have happened.
False. It is not true that the banks took their risks because there is an FDIC. The FDIC did not save them from bankruptcy in Sept/Oct. 2008. The TARP and numerous programs by the Fed. Res. and the Treasury Dept. have delayed the day of reckoning for the banks (and the U.S. economy/gov’t.?).
You are correct that there is not a free market. But if there had been a free market, then there would be a mess, just not the one that we are seeing now. There would be less foreclosure fraud, but there would still be mortgage fraud. See Bear Stearns and Lehman Bros.
Frank
False. It is not true that the banks took their risks because there is an FDIC. The FDIC did not save them from bankruptcy in Sept/Oct. 2008. The TARP and numerous programs by the Fed. Res. and the Treasury Dept. have delayed the day of reckoning for the banks.
Whether or not the banks’ risk was socialized via the FDIC or some other mechanism (TARP, the Fed’s discount window, etc.), none of these things would/could exist in a free market. I have no reason to believe the banks would have taken the same risk knowing the losses would be their own. On top of that, without a central bank (which also could/would not exist in a free market), there would’ve been no housing bubble since interest rates would have sky-rocketed early on and, with no housing bubble, the environment that enabled the fraud would not exist.
Ian Welsh
Actually, what happened looks an awful lot like one the numerous financial panics of the 19th century. It would have taken a different form without the Fed, but this sort of thing would be happening. The breakdown of New Deal regulation/enforcement and the New Deal social contract is the problem.
anon2525
The breakdown of New Deal regulation/enforcement and the New Deal social contract is the problem.
Agreed. There were zero financial panics from 1935 to 1980, but less than a decade after the first pieces of de-regulation was put into place (1979/1980), the fraud began and caused the S&L “crisis” (propaganda term: “Let’s call it a ‘crisis’, not a ‘crime'”).
anon2525
Whether or not the banks’ risk was socialized via the FDIC or some other mechanism (TARP, the Fed’s discount window, etc.), none of these things would/could exist in a free market. I have no reason to believe the banks would have taken the same risk knowing the losses would be their own.
To use the lawyers’ term that I learned from T.V.: you are assuming facts not in evidence.
1. The banks did not take risks knowing the losses would not be their own (See: Bear Stearns and Lehman Bros.. See also, Hank Paulson on his knees begging Pelosi not to let “them” stop the TARP. Pelosi’s reply: “It’s not the Democrats who are threatening to stop this — it is the Republicans” Actually, it was both.)
2. The banks were not “taking risks” — they were committing fraud. “IBG YBG” (“Who cares whether these loans blow up? I’ll Be Gone / You’ll Be Gone before then!”) They are not called “banksters” for no reason. Long ago, they were legitimate business enterprises. But they had become criminal enterprises. Paulson&Company made this worse by socializing their losses while allowing the banksters to privatize their “profits” (What’s the correct term for getting money from fraud?)
Because the criminals were not removed from the banks, they have continued to commit fraud (forgery and perjury) in carrying out foreclosures. If you don’t stop criminals, they will continue to commit crimes.
anon2525
On top of that, without a central bank (which also could/would not exist in a free market)…
I hope that some people are learning that without regulation there will not be a “free market.” Without regulation, people/companies will lie, cheat, and steal. Without regulation, companies will eliminate competitors (either by mergers/buying or lying/cheating/stealing) to form monopolies so that they can use their monopoly pricing power to extract rent from their customers. “Self-regulating markets” has been shown to be an oxymoron. Even that useful idiot Greenspan could finally see that.