Ever since the $25 billion settlement over foreclosure abuses between five of the nation’s biggest banks and the state attorneys-general was announced, there’s been a steady drumbeat of naysayers who’ve asserted the deal does more for the banks than it does for homeowners. And barring some happy accident in which the settlement somehow inspires banks to behave, they’re probably right: In comparison with the estimated $700 billion difference between what people owe on their mortgages and what those homes are actually worth, $25 billion is peanuts.
But the problem isn’t that the settlement is part of some grand plan by the government to help out the banks. Rather, the problem is that the government doesn’t seem to have a grand plan for the banks.
For all the current and well-deserved bank bashing, few question that a well-functioning economy is predicated on a well-functioning banking system. And few question that confidence is a critical ingredient. So then the issue becomes: What kind of banking system do you want to have, and how do you inspire confidence in it?
At two major junctures, our government (Congress went along with the Bernanke-Paulson-Geithner triumvirate) made the call that it wanted the banking system we had, not a radically reshaped one. First, the government bailed the big banks out in the fall of 2008. Perhaps more critically, the Obama administration made the call not to break them up or nationalize them in early 2009. In a sense, this new settlement is a continuation of that call. As Yves Smith at Naked Capitalism has pointed out, it’s a bailout for the banks: It will reduce the amount that people owe on their mortgages, thereby helping them afford their home equity lines of credit, roughly $400 billion of which are parked on the balance sheets of the big banks. And Scott Simon, the head of the mortgage business at bond giant Pimco, has argued that investors, not banks, will bear the brunt of the cost of any mortgage modifications.
But most important, the settlement lets the banks off the hook for repeatedly breaking the law in the foreclosure process. One analyst who has studied this tells me that their legal transgressions alone could have been used to rip apart the banking system, had the government desired to do so. Even if it’s true that the banks merely violated technical aspects of the law, and didn’t kick anyone out of a house who deserved to stay, that still flies in the face of everything we’re supposed to believe about the importance of the rule of law. Next time you get a ticket for running a red light, try arguing that you shouldn’t have to pay because you didn’t hit anyone.
But at the very same time, the government is doing a host of other things that look like they’re designed to undermine confidence in the banking system, if not the system itself. The news of the settlement broke at about the same time President Obama announced a new task force that would delve into the crimes of the bubble era. It’s not clear how this task force will differ from the one he announced in 2009, but the point — look out below, banks and bank investors! — is consistent with his anti-bank rhetoric. And the settlement is only a small piece of the litigation facing the banks. As Obama said: “This settlement also protects our ability to further investigate the practices that caused this mess … we’re going to keep at it until we hold those who broke the law fully accountable.” Indeed, multiple other investigations and lawsuits are ongoing; the Wall Street Journal also reported that the SEC might soon bring cases involving the packaging of mortgages.
The litigation isn’t all. Investors express a whole host of other worries, including Dodd-Frank’s so-called resolution authority — which dictates the way big banks in crisis are supposed to be unwound and, some say, basically means that politicians will pick the winners and losers in the next crisis. These concerns also include new capital requirements, President Obama’s proposed $61 billion bank tax, and the Volcker Rule. It’s death by a thousand cuts. All those things, plus a much tougher operating environment, help explain the continuing dismal performance of bank stocks. Yes, they’re up from the lows of last fall, thanks to the general market rally, but bank stocks are still depressed, thanks in part to the political risk they face. And the mere fact that political risk exists is a big problem in and of itself. (One smart investor uses the phrase “political finance” to describe the dangerous intertwining of two spheres that should be separate.)
You might say: So what? Surely the banks deserve to die for the agony they’ve inflicted on our economy! Which is probably true. But that’s a reaction, not a policy. Now, the prudent policy might well be to kill the big banks. Plenty of very smart people, like Simon Johnson, the former chief economist of the IMF, Mervyn King, governor of the Bank of England, Paul Volcker, and Thomas Hoenig, the next vice-chairman of the FDIC, have inveighed against the dangers posed by banks that are too big to fail. So then, let’s kill them outright! While we’ve missed our best chance, there would still seem to be some fairly simple ways to do that, like reinstating the Depression-era Glass-Steagall law separating commercial and investment banking or mandating sky-high capital requirements for any firm over a certain size. That would bring its own set of challenges — most notably a drift of activities to the shadow banking system — but I’m not sure anything could be more challenging than regulating today’s big banks, given not just their complexity but also their well-oiled political and regulatory influence machine.
There’s an argument that articulating a clear policy, let alone executing it, is simply beyond Washington’s capabilities. Which is scary, because right now, we have the worst of both worlds: A banking system that the population at large abhors, and one that investors can’t trust.
PHOTO: A man walks past a Wells Fargo Bank branch on a rainy morning in Washington January 17, 2012. REUTERS/Gary Cameron
I would like to clarify a point in my earlier comments.
I am NOT an advocate of States Rights’ as a solution.
I believe we need a strong federal government, but one that is answerable to the American people, which our present government is not.
One of the main problems with our Constitution is that our Founding Fathers were afraid the country would devolve into a democracy, as much of Europe was doing at the time.
As a result, they built in safeguards (e.g. the Electoral College) to ensure that the American people never had the power to vote. What we have for national elections is a sham. The popular vote doesn’t count at all.
This country is not a Democracy, but a Plutarchy (i.e. Plutocracy plus an Oligarchy), or basically rule by a small wealthy class. It has always been a Plutarchy, right from the beginning in 1776. The US Constitution was designed to be that way, and it still is today.
It was also designed to have a small federal government and limited powers for the supreme court.
As I said above, the deterioration began in 1803 in the case of Marbury v. Madison, where the US Supreme Court unlawfully extended its limited powers under the Constitution by means of giving itself the powers of “judicial review” over the intent and meaning of the written Constitution
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Marbury v. Madison, 5 U.S. (1 Cranch) 137 (1803) is a landmark case in United States law and in the history of law worldwide.
It formed the basis for the exercise of judicial review in the United States under Article III of the Constitution.
It was also the first time in Western history a court invalidated a law by declaring it “unconstitutional”.[1][2]
The landmark decision helped define the boundary between the constitutionally separate executive and judicial branches of the American form of government.
Judicial review in the United States refers to the power of a court to review the constitutionality of a statute or treaty, or to review an administrative regulation for consistency with either a statute, a treaty, or the Constitution itself.
The United States Constitution does not explicitly establish the power of judicial review. Rather, the power of judicial review has been inferred from the structure, provisions, and history of the Constitution.[1]
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Notice the last two sentences in the above quote.
The power of judicial review of the US Constitution was “inferred” by the Supreme Court. The power of judicial review was discussed by our Founding Fathers, but never included in the Constitution itself, but the Supreme Court only 27 years later usurped the power on its own, thus establishing itself as an authority above the written US Constitution.
In effect, the Supreme Court instantly became more powerful than the US Constitution. What that also means is that every single law ruled on by the US Supreme Court since 1803 is invalid, since it has no actual power to interpret the US Constitution.
I doubt anyone at the time could see what would happen as a result of this action by the Supreme Court, but over time it permitted the unnatural growth in the size and scope of the Federal Government (especially as the nation expanded westward, and always at the expense of the individual states who continued to lose power in Supreme Court rulings).
As I said, the federal government, by declaring war on the southern states who wished to withdraw from the union in 1861, exceeded its legal authority under the US Constitution, since it has no such powers to do so, and has ruled unlawfully since.
A major reason why the federal government was able to grow as it did was due to the “constitutional” rulings of the Supreme Court, which gave it legal status it did not otherwise have under the Constitution, so the Supreme Court was the “great enabler” of the growth of the federal government, which helped to cause the Civil War over States Rights’ that were being constantly eroded.
(Yes, slavery was a major issue, but the real underlying reason for the Civil War was to enable expansion of power of the Federal Government.)
It is the combination of the federal government and supreme court working together that has been largely responsible for the massive growth in the size and power of the federal government throughout this country’s history.
The US Supreme Court — completely unanswerable to anyone in the government or the American people — far from being a check on the rising power of the federal government (i.e. the supposed “checks and balances” of our government) has acted mainly as the “power behind the throne”, being careful for the most part to maintain a low profile.
The truth is neither has the legal right — under the original intent of the US Constitution — to enact the laws they have enacted.
These are the facts of the situation as time and space permits.
Therefore, in order to address the problems we have in the federal government today, both the issue of the roles of the federal government and that of the supreme court MUST be addressed.
The present Constitution is not capable of addressing these issues.
This country is on the verge of disintegration once again, just as it was prior to the Civil War in 1861. Unless something is done we will have another terrible price to pay. I would prefer not to see that happen.
The American people NEED to understand the extent of the problem and how long it has persisted. This is very important to resolving the issues we face today. They must realize the only way to address it is to hold another constitutional convention — at which point we can create the government we want and need, one which will address the problems of the American people as they are now.
I don’t think that will happen, so by default we will again go through another period of crisis with little hope of surviving intact as a nation.
We have precious little time before it becomes too late again.