Something very interesting is happening.
There’s been so much corruption on Wall Street in recent years, and the federal government has appeared to be so deeply complicit in many of the problems, that many people have experienced something very like despair over the question of what to do about it all.
But there’s something brewing that looks like it might be a blueprint to effectively take on the financial services industry: a plan to allow local governments to take on the problem of neighborhoods blighted by toxic home loans and foreclosures through the use of eminent domain. I can’t speak for how well the program will work, but it’s certaily been effective in scaring the hell out of Wall Street.
Under the proposal, towns would essentially be seizing and condemning the man-made mess resulting from the housing bubble.
I approach the issue and constitutionality of eminent domain — government seizing of property in exchange for whatever the government defines as just compensation — very suspiciously. While I am altogether hostile to the idea of government being able to declare that what is yours is not yours, it has recently become a device for government to transfer private property from one private owner to another.
In Kelo v. City of New London (2005), the use of eminent domain to transfer land from one private owner to another private owner to further economic development was deemed to be constitutional. In a 5–4 decision, the Court held that the general benefits a community enjoyed from economic growth qualified private redevelopment plans as a permissible public use under the Takings Clause of the Fifth Amendment.
While seizing land with compensation to build a highway for public use is one thing, seizing property for the private profit of others is quite another. Yet many like Taibbi are heralding the potential of seizing underwater mortgages. I will consider any initiative to reduce total debt and deleveraging costs, as I believe that excessive total debt is the largest cause of today’s depression. But given the history, I have every right to be cautious and even suspicious.
Taibbi:
The plan is being put forward by a company called Mortgage Resolution Partners, run by a venture capitalist named Steven Gluckstern.
Here’s how it works: Mortgage Resolution Partners helps raise the capital a town or a county would need to essentially “buy” seized home loans from the banks and the bondholders (remember, to use eminent domain to seize property, governments must give the owners “reasonable compensation,” often interpreted as fair current market value).
Once the town or county seizes the loan, it would then be owned by a legal entity set up by the local government – San Bernardino, for instance, has set up a JPA, or Joint Powers Authority, to manage the loans.
At that point, the JPA [i.e. the taxpayer!] is simply the new owner of the loan. It would then approach the homeowner with a choice. If, for some crazy reason, the homeowner likes the current situation, he can simply keep making his same inflated payments to the JPA. Not that this is likely, but the idea here is that nobody would force homeowners to do anything.
On the other hand, the town can also offer to help the homeowner find new financing. In conjunction with companies like MRP (and the copycat firms like it that would inevitably spring up), the counties and towns would arrange for private lenders to enter the picture, and help homeowners essentially buy back his own house, only at a current market price. Just like that, the homeowner is no longer underwater and threatened with foreclosure.
First — why municipalities? Why not states? The answer is that while all states other than Vermont have some form of balanced budget amendment, and cannot so easily take on debt, municipalities can freely take on debt. How much? Well, it’s almost certain to be open to legal challenges by current mortgage-holders, and courts may end up forcing municipalities to pay far more than municipalities initially stipulate. But at whatever values the mortgages are seized at, there is no doubt that the taxpayer will end up holding a lot of new debt.
The biggest problem though, is surely the danger of corruption. How many municipalities will end up using these opaque procedures to enrich well-connected insiders? How many will buy junk at inflated prices, or seize and sell to a well-connected insider at far below value? Who polices such transactions? Where is the transparency? How do we make sure that this is not just an excuse for bad lenders to offload junk to the taxpayer at inflated prices and cream a profit when they were set to reap a loss?
Matt Taibbi admits:
MRP absolutely has a profit motive in the plan, and much is likely to be made of that in the press as this story develops. But I doubt this ends up being entirely about money.
“What happened is, a bunch of us got together and asked ourselves what a fix of the housing/foreclosure problem would look like,” Gluckstern. “Then we asked, is there a way to fix it and make money, too. I mean, we’re businessmen. Obviously, if there wasn’t a financial motive for anybody, it wouldn’t happen.”
And you can restructure all you like, but many underwater homeowners with a serious income shortfall will still not be able to pay their mortgages. Who carries the can? If the mortgage has been sold on then the loss will be on the new owner. In reality this is far more likely to be the taxpayer. Simply, the taxpayer may well end up carrying the can for a whole lot of bust mortgages.
What Taibbi — who usually has a very good sense of moral hazard — and MRP effectively seem to be considering is not only the continuation and expansion of Kelo, but also potentially the transfer of liability from bust irresponsible lenders to the taxpayer. While this is sure to enrich the bureaucracy and well-connected insiders — and admittedly, while it may help some underwater homeowners — it seems incredibly risky for the taxpayer.
While debt-forgiveness is one way out of the debt trap, we should be careful and recognise that many so-called debt-forgiveness schemes may instead be dressed-up scams and frauds that end up enriching special interests while putting the taxpayer deeper into a hole.
H/T to @MoiraCathleen
azizonomics 
“… potentially the transfer of liability from bust irresponsible lenders to the taxpayer.”
Bingo!
Taibbi is a decent guy, no fool, and he wants to help home owners. I don’t think he’s seen the above angle yet, but I’m sure he will.
If the home owner can then buy back his house, only now at the current market price, isn’t this really a “debt jubilee” anyway? Steve Keen had called for both debtors and people who didn’t play to get an equal amount of money, but this way the responsible people end up paying for the debtors.
This is a back door way of offloading the mess onto the taxpayers. The banks and the debtors (the people who put us here) are the winners. Insanity multiplied by a trillion.
“Why can’t they give people a nice new apartment?”
A quip by a rich brat!
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I got it, I got it, lets throw money out of a helicopter!
To be honest, throwing money out of an actual helicopter would have done more for the economy than QE.
So true!
I award Attaboys to all of you above — AZIZ, Backwardsrevolution, Rojek, FO-SHO ! [I wish all of you would run for office here in the US; foreign-born can’t (honestly) be president, but can serve in congress and state and local legislative, executive and judicial positions].
Don’t all of the free choice opportunities proposed under this scheme exist ALREADY under mortgage default and repossession contract provisions/law? If so, the aforementioned danger of corruption* is the only “advantage” added.
A somewhat related issue is bankruptcy of cities and states. Cases of hopeless debt and unfunded liabilities are coming to light, e.g., Stockton, CA and the state of California itself. Like profligate nations of the European Union**, they cannot print money!
A complaint: it is terribly important (for VOTER education) that we quit pitying “the taxpayer” ALONE in the ravages of runaway government debt! Government bankruptcy would end payments of Social Security, disability, “welfare”, food stamps, Medicaid, Medicare, etc.
* Until the recent upsurge in federal scandals and excesses, corruption in US local governments was traditionally the worst.
** Solvent states like mine (Texas), are not only stuck with federal insolvency, but, UNlike Germany, we cannot withdraw!
You make a fair point. Local Government can not print. It can only tax.
Therefore the Local Government would need to seek a handout from the Federal Government in order to participate in printed money from the Fed supporting US Treasuries.
It appears that the US will “Federalise” sooner than later.
How long before the US implodes and Free Staters choose a State to reside and call home, then batten down the hatches?
Looking at Germany’s Federal model, it could easily absorb EU states into its Federal model. The price of entry is capitulation to German rules. That is the beauty of German Federalism, over Frances Republic.
Looking at the Declaration of the Rights of Man, it appears the death of Europe began at the French Revolution.
Note right 13.
“A common contribution is essential for the maintenance of the public forces and for the cost of administration. This should be equitably distributed among all the citizens in proportion to their means”.
The birth of progressive taxation and the destruction of individual will to grow their capital for the benefit of themselves and their heirs and ultimately the wealth of their nation.
http://en.wikipedia.org/wiki/Declaration_of_the_Rights_of_Man_and_of_the_Citizen
People in fringe areas of Melbourne are having trouble moving their property. Australia’s property bubble is finally popping!
Steve Keen was right, just did not figure Helicopter drops into the Financial Institutions! He was 3 years too early.
Deflation is a bitch! how do you promote property when your friends at the dinner table complain about owing more to the bank than they paid, and their poorly made house’s facade is looking tired and needs an expensive renovation!
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Gluckstern: “Then we asked, is there a way to fix it and make money, too. I mean, we’re businessmen. Obviously, if there wasn’t a financial motive for anybody, it wouldn’t happen.”
This is exactly how the contemporary “educated” human beings think. Everything in life is tied to the profit motive. Nothing is done because it is the right thing to do, or, as an investment for future generations. After all, that would be silly.
It is this belief system that rationalizes the universal institutional thievery that continues to define this era.
impermanence – “Everything in life is tied to the profit motive. Nothing is done because it is the right thing to do, or, as an investment for future generations.”
Herein lies the problem. As Dickens said, “All is going on as it was wont.” This is what man is at the moment, unfortunately. This mad time of greed and selfishness will correct itself, but only after people feel some pain. That is what will concentrate their minds and make them see who they are.
If you smell a rat, Aziz, then you can bet your arse there’s a rat hiding somewhere nearby. The opportunities for corruption is mind-boggling. Just because you haven’t thought of it yet, doesn’t mean no one will. The shysters will have a field day. Fight it tooth and nail!
Hi,
I have been actively developing the Australian Nationalist Party. It is not a formal party as we need a lot of members before the electoral council will register, but a key policy platform is Austrian economics, and large scale land release, with smaller lot and house sizes to allow the younger families a start, without crippling debt. No one in the 2-35 age category wants to have kids, so Australia is going to suffer a cultural and Labour force issue in 1-2 generations.
I have mentioned this to Steve Keen and I am awaiting a reply.
email me birojek at hotmail dot com if you and associates are interested.
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LIke let one corruption to overtake another corruption.That was what China’s Black Collar “princeline” corrupted government official criminal Bo Xi Lia and his so called “Beating Black Corruption” gang-mafia had done in the city of Chong Ching in China, They had put the before them corrupted profiteers, looters, and thieves in jails and then grabbed taking in all their wealth. But instead of putting all that wealth in for the public goods, they had stuffed large portion of that gains into their own pockets. It’s like the Wild West and the barbaric old good time of the long past – when you are strong enough to grab the worldly goods, they are all yours to take.
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A good example, Ricecake, of human history’s record of suffering a new corrupt/despotic devil vs. an old devil. Others come to mind, e.g., Bolsheviks – Czars; Italian (Capone) Chicago mob – Irish mob; Castro – Batista. Then there is split-the-loot/power collusion, such as Washington DC Republican-Democrat “bipartisanship” (definitely not NON-partisanship) and the Pennsylvania Avenue-Wall Street partnership.
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It might be worth noting in the named case, Kelo v. City of New London (2005), the private venture ultimately was underfunded and never completed the project (at least last I knew).
While the ruling was an example of court favor for use of eminent domain, it may ultimately really be better suited as another case of the stained legacy of the new millenium Supreme Court.
Which Supreme Court — state or US?
Aziz
I clicked to your blog off Noah. Why he links to you . . ..
Any way. You are an idiot.
First you write that Franklin was great because of his willingness to be aggressive and to experiment
Then you act like a right wing reactionary, pissing and moaning because some proposes aggressive experiment, leading to only one conclusion.
Your an asshole, out to show everyone that you are an asshole
I never said that, I was quoting Bernanke to illustrate Bernanke’s past views.
I’m into aggressive policy experiments, sometimes. I’m not into aggressive experiments with the potential to bail out crappy lenders who screwed up, and with the potential to transfer bad debt onto public balance sheets, and grossly indebt the public for the enrichment of private corporations. Taxpayers and public deserve to be shielded.
Um, if you’re going to insult me at least do it with correct spelling so that you don’t leave yourself open to ridicule.
I don’t consider myself either to be left-wing or right-wing. But I always try to be an advocate for the little guy.
Think he’s referring to the Roberts Court