Premeditated Fraud

It is my opinion that the housing bubble was a preplanned scam. While I agree with Minsky about the increased demand that easy money loans can generate, I disagree with one of his followers, Steve Keen. Steve says that the housing bubble was not preplanned. I totally disagree. If you read the following reasons closely you will see that they knew.
I have ten reasons for believing this:

1. Alan Greenspan suggested you could get a "better deal" with an adjustable, at the beginning of the private mbs explosion of easy money, in February of 2004. 

2. Geithner took over at the NY Fed just in time to allow Henry Paulson to spread crap CDO's the whole world over.

3. Greenspan let easy money loans continue in the S and L crisis. He refused to allow a peek into the derivatives while he was in charge during the big bubble. Those are similar behaviors.

In other words, Greenspan knew the outcome of toxic loans in the days of the S and L crisis and allowed them to continue anyway. He knew banks would fail, then, so there is no reason for him to believe the same would not happen in the Ponzi Housing Bubble! Greenspan had to know he was putting the financial system at risk!

4. Basel 2 allowed a Gaussian Copula that assumed all mortgages could not default at the same time. I believe that was done on purpose with the permission of the BIS.

5. That risk management was bogus from the start. It allowed the mbs to be sold with pretty low interest being required. That fueled the private mbs explosion. Similar risk management had failed at Parmelot and Worldcom and of course, at Enron years before. And the Japanese housing market had failed prior to that.

6. The Fed in DC and the NY Fed are in charge. It makes no difference if others in the Fed knew or didn't know about the coming housing crash because they were not privy to the scam. Or they were liars who were covering for the scam. 

7. So much easy money was offered that it created scarcity, sort of like when the investment banks corner the oil market when they take huge positions in futures markets. 

8. The housing bubble was imported from the UK where liar loans were called self certified loans.

9. The Commodities Futures Modernization Act and the Financial Services Modernization Act (the repeal of Glass-Steagall known as Gramm, Leach, Bliley) made it possible for this imported banking scam from the UK to work in the USA. They both were passed in time for the housing bubble to begin.

10. It was a clear securities violation to spread crap CDOs the world over, yet no one was ever prosecuted for it. The same Tim Geithner who allowed the spread of the CDOs while NY Fed president, had moved on to treasury, and was instrumental in stopping the prosecutions of the bankers so that they could live to ponzi lend another day.

So, I say it was premeditated and known by the insiders, and not an accident that the housing bubble happened. Securitization and off balance banking (to hide bad stuff) and bogus Gaussian Copulas all came together. 

Steve Keen says the FOMC meetings in 2007 showed the Fed had no clue. I say that is baloney. The Fed said this in August 2007:


At the conclusion of the discussion, the Committee voted to approve the text below to be released the following morning:
"Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."
Votes for: Messrs. Bernanke, Geithner, Fisher, Hoenig, Kohn, Kroszner, Mishkin, Moskow, Rosengren, and Warsh.
Votes against: None.

In September, 2007 the Fed that supposedly was clueless issued this ominous warning:

At its September meeting, the FOMC lowered its target for the federal funds rate 50 basis points, to 4-3/4 percent. The Board of Governors also approved a 50 basis point decrease in the discount rate, to 5-1/4 percent, leaving the gap between the federal funds rate target and the discount rate at 50 basis points. The Committee’s statement noted that, while economic growth had been moderate during the first half of the year, the tightening of credit conditions had the potential to intensify the housing correction and to restrain economic growth more generally. The Committee indicated that its action was intended to help forestall some of the adverse effects on the broader economy that could otherwise arise from the disruptions in financial markets and to promote moderate growth over time. Readings on core inflation had improved modestly during the year, but the Committee judged that some inflation risks remained, and the Committee planned to continue to monitor inflation developments carefully. The Committee further noted that developments in financial markets since the last regular FOMC meeting had increased the uncertainty surrounding the economic outlook. Accordingly, the Committee would continue to assess the effects of these and other developments on economic prospects and remained ready to act as needed to foster price stability and sustainable economic growth.

So, again, it appears that the Fed knew the housing market, including jumbo markets like in California, were continuing to deteriorate but it did nothing. [See my update here as the article and accompanying chart show that the Fed had the data, yet ignored the coming crisis.]

The Fed had to know, because it allowed the derivatives and the securitization and the fraud. 

Now, whether the fraud can actually be proven to be a crime is another story. I believe that the government had a window for charging the financial institutions and even the Fed who adopted the rules allowing for securitization of crap loans for RICO crime. But we know that the Fed will never be charged with a crime. It is too big of a crime, the financial crime of the century and maybe of all time.

There is technically no crime to offer a toxic loan*, however, there were so many offered that the borrowers lacked knowledge and disclosure that the loans were artificially pushing up house prices. Over time, loans had pushed up house prices by slightly greater than the inflation rate since the Great Depression. But the accelerated elevation of house prices by this ponzi lending scam needed to be disclosed to borrowers and was not. The risk to the borrower was never revealed.

That is fraud, be there a law against it or not.

*Update: We have found out there was a law against giving a loan to folks who had little chance to pay them back and it is explained at this blog post:

Business Insider Is Starting to Disgust Me Thoroughly 

It is explained here as well. 





 


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