The Fed and Mortgage Debt as Money

--- In economicclubsf@yahoogroups.com, "Lisa S" wrote:
>
> Thanks for your responce Ingo.
> 
> Where I am a bit confused, as are many, is where the solution rests. It
> seems rediculous that the government would "reward" the mortgagee for
> getting into a high risk situation. It also seems rediculous that the
> goverment would bail out lenders who were out of their minds!
> 
> So where does a solution rest? If we allow the markets to act freely what
> are the ramifications of this?
> 
> I would think that the solution rests between the lender and the borrower.
> If we allow the i-rates to reset and defaults rise lenders will eventually
> have to renegotiate terms with their mortgagees, perhaps the most qualified
> of the lot, in a way *they see fit* in order to avoid having to deal with a
> huge inventory of vacant homes.
> 
> L

Lisa,

A little background as to how we got here...

The way the Government is involved is that the Congress hired a 
banking cartel which called itself the "Federal Reserve" to print 
bank notes for the Government...Federal Reserve Notes (FRNs). They 
did that by passing the "Federal Reserve Act" of 1913 which President 
Woodrow Wilson signed into law. At first, the FRNs were "redeemable" 
into silver metal while the US Dollar was still set by the Congress 
to be about 1/22nd of an ounce of gold 92.9% fine. The original act 
strictly prohibited the FED to print money and back it with debt 
(i.e. Treasury Bonds in their portfolio). Nevertheless, beginning in 
1924, the then Chairman of the FED, Benjamin Strong through a newly 
established committee within the FED (Federal Open Market Committee)
started to do exactly what the original act prohibited, namely use 
Treasury paper as backing for the printing of FRNs. The FED member 
banks loved it, and particularly the foreign banks did. They couldn't 
get enough of that additional money. Chairman strong was able to 
persuade the politicians in Congress to amend the original act to 
retroactively authorize what he and the FOMC had been doing for 
months. The rest is history. The additional money created the stock 
market bubble. When trust was lost in 1929, the whole thing came 
crashing down, and we ended up in a depression. It took WW II to get 
us out of that depression.

In 1944 the WW II allied countries met in Bretton Woods, NH, and they 
decided that the world currency system after the war would be 
anchored on the US Dollar to be "redeemable" for 1/35th of an ounce 
of gold, but only for FRNs presented by foreign central banks. US 
citizen had been prohibited from keeping gold between 1933 and 1974.

The FED and their member banks, just like before the depression, kept 
clamoring for more "liquidity" and kept urging the politicians after 
WW II to vote all manner of "debt". This debt, payable by the US 
taxpayers, constituted the basis on which the FED could print more 
FRNs. These got into circulation and "earned" interest. The voting of 
debt and the printing of FRNs during the Vietnam War was so 
agrecious, that France lost faith in the FRNs and demanded they be 
redeemed for gold. In 1971, the demand by foreign central banks for 
gold was so high, that Richard Nixon closed the "gold window" and 
said "no mas".

Ever since, all world currencies have been floating against each 
other. The US Dollar however was the world reserve currency (that 
currency that most central banks would keep on hand to accomplish 
their countries trade and currency transactions). This fact allowed 
the FED to print additional FRNs without increasing domestic 
inflation by much. However, once started they couldn't stop 
themselves from increasing "liquidity", and there was 
no "redeemabilty" factor which would stop them. The more debt the 
Government (politicians) could vote, the better for the FED banks. 
There is however a limit after which the politicians will be hesitant 
to settle the taxpayer with more taxes. Some of the additional money 
found itself in the mortgage (resident/commercial) market and built 
the foundation for additional debt. The resultant real estate bubble 
is what is worrying us now. There is more to explain about how the 
system is held together with all manner of derivatives, etc., etc., 
but I'll stop here with my history lesson.

To comment on your view that it seems ridiculous that 
the "Government" would reward the mortgagee for getting into a high 
risk situation and that it would seem equally ridiculous that 
the "Government" would bail out lenders who were out of their mind, 
I'll give you the following:

The "Government" (politicians) encourage mortgage debt in that 
they "sponsor" government entities (GSEs) such as FANNIE MAE and 
FREDDIE MAC. These are in the business of buying up mortgages 
initiated by the banks and mortgage companies and bundle them to sell 
them as mortgage bonds, often overseas. The banks are happy, because 
they have assets ("mortgage debt") upon which to create further 
credit. The risk in these mortgages was laid off to the GSEs. The 
home buyer is happy because he finds a willing mortgage lender, and 
the politicians in your "Government" are happy because they got a 
happy "home buyer voter". Now that the overseas holder of some of 
that US mortgage paper are becoming unhappy, you must walk the cat 
back and see where all the interests lie. The banks laid off the risk 
for most of these mortgages, but they are now plaqued by mistrust, 
and are unable to peddle more debt. So their interest is to keep 
things quiet and calm, reestablish trust and peddle more debt. The 
executive branch, no dummies they, grabbed themselves Henry Paulson, 
head of Solomon Brothers (premier purchaser of US treasuries)and made 
him the U.S. Treasury Secretary. When the sub-prime scare dries 
up "liquidity", he has the job of getting the Congress to vote 
massive debt, and to see to it that money gets into the 
public/homeowners hands quickly. He is responsible for how the 
Executive Branch looks in all of this. As for the politicians in 
Congress, unhappy home mortgage holders are not good for the next 
election, so promise them an i-increase freeze. Do you see how the 
interests line up now.........???

With the above explanation, you can see that there is no free market 
as such. Instead the whole money system/debt system is orchastrated 
by the FED and their member banks and it influences every corporation 
and business that grows up around it.

In the end, the banks don't care, if the houses are repossed. It was 
money lent based on debt to begin with. Before there was a home 
buyer, there was nothing. After the the home buyer signed a mortgage, 
there was a house as security, an income stream to pay the interest 
on the debt in their portfolio, which by the way they had used as 
justification to create the mortgage to begin with. When the collapse 
comes, and everything is written down, then whatever firm or entity 
ends up with the repossed houses will try to sell them for whatever 
they can get for it at the time.

What about the home owner. His experience is traumatic. He finally 
realizes that he had been "renting" his home, often for much more 
than the actual market rent, and now he has to seek alternative 
shelter.

When the housing market crashes, all the mortgage holders will send 
their keyes into the banks. The banks will put the repos on the 
market for 20 or 30 cents on the dollar, and the whole things starts 
all over again.....unless of course the entire system is overhauled.

What is the solution??? A new monetary system and a new taxation 
system anchored on the land value tax. The details on how to 
accomplish this change in the system would take another ten 
pages...... so I stop right here for now.

Ingo