Bernanke’s Forgotten Housing Fix

Even taking the legislative “sausage making” metaphor into account, the pathetic flailing around and posturing currently going on in Congress over the economic stimulus bill is disgusting to watch.

Not only does the future of the U.S. hang on their quick and focused action (two qualities rarely attributed to Congress even on its best day), the fate of the world depends on it. If the U.S. goes down, much of the world goes with it. So what are we getting right now from our august representatives? Political posturing, theatrics, and BS. Same old, same old.

I don’t why Americans aren’t taking to the streets. Maybe they are and it’s just not being televised.

What no one is mentioning, and what no one likely will mention at this late date or ever again for that matter, is that back in late 2007 when the housing crash was first looming on the horizon as a possibly unpleasant financial event, Federal Reserve Chairman Ben Bernanke quietly admitted to the New York Times that he did know how to fix it and fix it fast, and that he aslo knew that if he didn’t fix it, it had the potential to get very bad.

I’m not kidding.

Here’s what  he said: You have to fix the problem at the bottom, not at the top of the financial pyramid. This means forcing the banks and mortgage companies to adjust the principal portion of the stinky mortgages to reflect reality.

He admitted that doing so would immediately require banks to take write downs and losses, and that doing so would also create a lot of noise about moral hazard and so on and so forth,  but he also underscored that doing so would instantly fix the problems all the way up the line, all the way up to the bad investment vehicles that Wall Street overvalued and then sold to the world.

Why would this work? Because value would be corrected and established at the base and it would be real value, not inflated value. At the root of this whole mess is the biggest pile of imaginary money in history. Cut out the imaginary part at the root, and boom. Problem solved.

Having put forward a painful but surefire fix, Bernanke then lamented that sadly, the banks would never go for it because some would fail and the others would lose money that year. He said this as if he weren’t the head of the Federal Reserve, the guy who gets to make all the rules, the head honcho, the big banana, the guy at whose desk the buck supposedly stops.

He said it passively, like a depressed housewife, as in, “Gee honey, this would fix it but who will listen to me? What do I know? I’m nobody. I’m powerless. Plus, I don’t want to upset the feelings of the big banks and the big bank stockholders. I hate it when the big banks get mad at me. Gosh I hope it doesn’t get too ugly.”

So instead of taking that easy, direct, surgical step–a step that could have prevented all of this– what has been done instead?

Well, Treasury Secretary Hank Paulson has personally thrown billions at the top of the pyramid and has claimed accountability to no one. So many billions that many analysts say the real number is closer to a trillion. We don’t know where most of that money went. Paulson won’t say. When Elizabeth Warner, head of the TARP Congressional overisght committee (COP for short) asked the banks where it went, they said, “We don’t have to tell you.” Piss off.

We do know lots and lots of CEOs at failed banks got golden parachutes despite running their companies right into the ground, and others went on with business as usual– spending on luxury retreats, corporate jets, bonuses, and designer bathroom remodeling at the taxpayers’ expense, even while laying off lower level employees by the thousands. When challenged they sniffed and pouted and kept on doing it.

Throwing billions at the top of the pyramid has had this single predictable effect: The top of the pyramid now wants more billions. Lots more. More please. And this in spite of the fact that throwing these billions at the top has not had ANY quantifiable positive effect. (Not counting the material comfort it has provided to a select few billionaires.)

Banks are failing anyway. Banks are taking huge losses anyway. The economy is in the toilet. And the original problem: the overvalued stinky mortgages; are more upside down and stinkier than ever  before. They haven’t been touched.

Why am I bringing this up now?

I don’t know. I’ve noticed that in the United States, if you watch the news and read a lot, you will always find a salient bit of info that gets lost after a big crisis breaks. This bit of info will lead you directly to an arsonist, or a group of arsonists. But even though I can find this trail and I’m hardy a CSI regular, our government can’t and these guys get off scott free. That’s because, unlike in the movies and on TV, the goal isn’t to catch the arsonist, the goal is to protect the arsonist. In other words, what arsonist?

The most recent L.A. riots were like this. In the days following the breakout of violence, Newsweek ran  an exhaustive and excellent article chronicaling the precise steps L.A. Police Chief Darryl Gates took to insure that violence would indeed ignite–up to and including pulling all police from the area and leaving town and turning off his cell phone so that he could not be reached no matter what happened until it was too late.

As the riots continued, and then later, long after they’d stopped, this excellent reporting was shuffled away and the instrumental role that Gates played in starting the riots fell off the radar completely. Today no one even talks about him in connection to the riots. (Except a few of the unfortunates who were there and remember–but no one listens the them. They’re poor. They’re black. They live in L.A.)

Something similar has happened with Benjamin Bernanke and the economic crisis in the U.S.

I have to ask myself this question:

If the head of the United States Federal Reserve (who is basically the boss of all the bankers in the U.S.) knows how to prevent a potentally catastrophic problem by wielding the normal authority granted to his position, but takes no action, can he not then be held liable for negligence?

I’m no attorney, I’m just thinking out loud.

And as I think, here’s a second question, in some ways more provocative that the first:

Why did he let it happen if he knew how to fix it?

Why did Bernanke behave as through he were a  lowly bank employee shooting the shit in the employee lounge,  instead of acknowledging that he personally was the head of all the banks in the U.S. and the one guy–maybe the only guy–who could actually do something?

What makes it worse is that Bernanke is a scholar of the Great Depression. It’s his specialty. So he absolutely cannot say he didn’t realize what was happening. If anyone in the country was smart enough to see it coming and see it clearly, it was Benjamin Bernanke. And yet he took no action.

Over a year later, we still haven’t addressed the problem of upside down mortgages and the downward housing spiral. That’s still going on. It’s in free fall now, like nothing since the first Great Depression and looking likely to worsen fast. It’s so scary that the sheriffs of the counties in the area of Michigan where I live have recently announced a temporary halt to all foreclosures and evictions. Cook county in Chicago stopped evicting in November of 2008. Sheriffs departments, law enforcement agencies–these people need a populace that lives indoors if they are to maintain order, no matter how long Washington wants to dither.

So we’re on our second trillion of federal money now, things are getting worse fast, and the original problem has not only not been touched, it’s barely being discussed. Am the only who finds this a bit smelly?

Is this anyone’s fault? I’m just asking, because at the bank job I used to have (I lost it in October and now the bank is defunct) I got reprimanded for peeing on the clock. At some point, a little accountability at the top would be appreciated.

Or a little prison time.

For general advice and tips on how to invest in American real estate, check out our article United States Housing Prospects for 2009.