You Want to Fix the U.S. Economy? Here’s a Start

Charles Smith

July 19, 2011

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Charles Hugh Smith publishes Foreclosure Crisis Weekly, dedicated to documenting the often-amazing foreclosure crisis.

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A simple 8-point plan would restore both the banking and the real estate sectors, and end the political dominance of the parasitic “too big to fail” banks.

Craven politicos and clueless Federal Reserve economists are always bleating about how they want to fix the U.S. economy and restore “aggregate demand.” OK, here’s how to start:

1. Force all banks to mark all their assets to market at the end of each trading day, including all derivatives of all types, including over-the-counter instruments.

2. Allow citizens to discharge all mortgage and student loan debt in bankruptcy court, just like any other debt.

3. Banks must mark all their real estate to market weekly as defined by “last sales of nearby properties” adjusted for square footage and other quantifiable measures (i.e. like Zillow.com).

4. Require mortgage servicers and all owners of mortgage-backed securities to mark every asset within each pool to market weekly.

5. Any mortgage, loan or note which was fraudulently originated, packaged and sold, including the misrepresentation of risk, the manipulation of risk ratings, fraudulent documentation by any party, etc., will be discharged as uncollectable and the full value wiped off the books and title records without recourse by any of the parties.

If a bank fraudulently originated a mortgage and the buyer misrepresented material facts on the mortgage documents, then both parties lose all claim to the note and the underlying asset, the house, which reverts to the FDIC for liquidation, with the proceeds going towards creditors’ claims against the bank.

6. Any bank which misrepresents marked-to-market asset values will be fined $10 million per incident.

7. Any bank which is insolvent at the end of a trading day will be closed and taken over by the FDIC the following day, and liquidated in an orderly manner via open-market auctions of all assets, including REO (real estate owned).

8. All derivative positions held by the insolvent bank will be unwound immediately, and counterparties who fail to make good on their claims will also be closed, given to the FDIC and liquidated.

You know what this is, of course: a return to trustworthy, transparent accounting. And you know what the consequences would be, too: all five “too big to fail” banks would instantly be declared insolvent, and most of the other top-25 big banks would also be closed and liquidated.

At least $3 trillion in impaired residential mortgage debt would be written off, maybe more, and $1 trillion in impaired commercial real estate would also be written down. Derivative losses are unknown, but let’s estimate it’s at least $1 trillion and maybe much more.

If $5.8 trillion of fantasy “value” is wiped off the nation’s books, that’s only a 10% reduction in net household and non-profit assets, which total $58 trillion. Even an $11 trillion hit would only knock off 20%. If that’s reality, if that’s what the assets are really worth in the real world, then let’s get it over with. Once we’ve restored truthful accounting and stopped living a grand series of debilitating lies, then the path will finally be clear for renewed growth.

The net result would be the destruction of the political power of the “too big to fail” banks, the clearing of the nation’s bloated, diseased real estate market, and the restoration of trust in institutions which have been completely discredited.

Bank credit would flow again, and we could insist on a healthy competitive system of 250 small banks instead of a corrupting system of 5 insolvent parasitic monsters and 20 other bloated but equally insolvent financial parasites.

Those who lied would finally get fried. At long last, those who misprepresented income, risk, etc. would actually pay some price for their malfeasance. Criminal proceedings would be a nice icing on the cake, but simply ending the pretence of solvency would go a long way to restoring banking and real estate and ending regulatory capture by TBTF banks.

What’s the downside to such a simple action plan? Oh boo-hoo, the craven politicos would lose their key campaign contributors. On the plus side, the politicos could finally wipe that brown stuff off their noses.

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