98 Mortgage-Owners Unmasked: "A faceless and seemingly innocent proxy"

(1) Mortgage-Owners Unmasked: "A faceless and seemingly innocent proxy"
(2) Mike Whitney: Stock market is flashing "recovery" while Bonds signal "contraction"
(3) Steve Keen: The tumour of debt has to be removed
(4) Steve Keen:  it’s better to give the money to the debtors than the lenders
(5) Why aren't we hearing about the worst job and wage situation? - Robert Reich

(1) Mortgage-Owners Unmasked: "A faceless and seemingly innocent proxy"
From: Ellen Brown <ellenhbrown@gmail.com>  Date: 22.09.2009 08:05 AM

Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

http://www.huffingtonpost.com/ellen-brown/landmark-decision-promise_b_292333.html

Ellen Brown

Posted: September 21, 2009 03:03 PM

A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose -- on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.

Eliminating the "Straw Man" Shielding Lenders and Investors from Liability

The development of "electronic" mortgages managed by MERS went hand in hand with the "securitization" of mortgage loans -- chopping them into pieces and selling them off to investors. In the heyday of mortgage securitizations, before investors got wise to their risks, lenders would slice up loans, bundle them into "financial products" called "collateralized debt obligations" (CDOs), ostensibly insure them against default by wrapping them in derivatives called "credit default swaps," and sell them to pension funds, municipal funds, foreign investment funds, and so forth. There were many secured parties, and the pieces kept changing hands; but MERS supposedly kept track of all these changes electronically. MERS would register and record mortgage loans in its name, and it would bring foreclosure actions in its name. MERS not only facilitated the rapid turnover of mortgages and mortgage-backed securities, but it has served as a sort of "corporate shield" that protects investors from claims by borrowers concerning predatory lending practices. California attorney Timothy McCandless describes the problem like this:

    [MERS] has reduced transparency in the mortgage market in two ways. First, consumers and their counsel can no longer turn to the public recording systems to learn the identity of the holder of their note. Today, county recording systems are increasingly full of one meaningless name, MERS, repeated over and over again. But more importantly, all across the country, MERS now brings foreclosure proceedings in its own name -- even though it is not the financial party in interest. This is problematic because MERS is not prepared for or equipped to provide responses to consumers' discovery requests with respect to predatory lending claims and defenses. In effect, the securitization conduit attempts to use a faceless and seemingly innocent proxy with no knowledge of predatory origination or servicing behavior to do the dirty work of seizing the consumer's home ... So imposing is this opaque corporate wall, that in a "vast" number of foreclosures, MERS actually succeeds in foreclosing without producing the original note -- the legal sine qua non of foreclosure -- much less documentation that could support predatory lending defenses.

The real parties in interest concealed behind MERS have been made so faceless, however, that there is now no party with standing to foreclose. The Kansas Supreme Court stated that MERS' relationship "is more akin to that of a straw man than to a party possessing all the rights given a buyer." The court opined:

    By statute, assignment of the mortgage carries with it the assignment of the debt ... Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust. [Citations omitted; emphasis added.]

MERS as straw man lacks standing to foreclose, but so does the original lender, although it was a signatory to the deal. The lender lacks standing because title had to pass to the secured parties for the arrangement to legally qualify as a "security." The lender has been paid in full and has no further legal interest in the claim. Only the securities holders have skin in the game; but they have no standing to foreclose, because they were not signatories to the original agreement. They cannot satisfy the basic requirement of contract law that a plaintiff suing on a written contract must produce a signed contract proving he is entitled to relief.

The Potential Impact of 60 Million Fatally Flawed Mortgages

The banks arranging these mortgage-backed securities have typically served as trustees for the investors. When the trustees could not present timely written proof of ownership entitling them to foreclose, they would in the past file "lost-note affidavits" with the court; and judges usually let these foreclosures proceed without objection. But in October 2007, an intrepid federal judge in Cleveland put a halt to the practice. U.S. District Court Judge Christopher Boyko ruled that Deutsche Bank had not filed the proper paperwork to establish its right to foreclose on fourteen homes it was suing to repossess as trustee. Judges in many other states then came out with similar rulings.

Following the Boyko decision, in December 2007 attorney Sean Olender suggested in an article in The San Francisco Chronicle that the real reason for the bailout schemes being proposed by then-Treasury Secretary Henry Paulson was not to keep strapped borrowers in their homes so much as to stave off a spate of lawsuits against the banks. Olender wrote:

    The sole goal of the [bailout schemes] is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value -- right now almost 10 times their market worth. The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

    ... The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC . . . .

    What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back.

Needless to say, however, the banks did not buy back their toxic waste, and no bank officials went to jail. As Olender predicted, in the fall of 2008, massive taxpayer-funded bailouts of Fannie and Freddie were pushed through by Henry Paulson, whose former firm Goldman Sachs was an active player in creating CDOs when he was at its helm as CEO. Paulson also hastily engineered the $85 billion bailout of insurer American International Group (AIG), a major counterparty to Goldmans' massive holdings of CDOs. The insolvency of AIG was a huge crisis for Goldman, and Goldman was the largest recipient of public funds from the AIG bailout.

In a December 2007 New York Times article titled "The Long and Short of It at Goldman Sachs," Ben Stein wrote:

    For decades now ... I have been receiving letters [warning] me about the dangers of a secret government running the world ... [T]he closest I have recently seen to such a world-running body would have to be a certain large investment bank, whose alums are routinely Treasury secretaries, high advisers to presidents, and occasionally a governor or United States senator.

The pirates seem to have captured the ship, and until now there has been no one to stop them. But 60 million mortgages with fatal defects in title could give aggrieved homeowners and securities holders the crowbar they need to exert some serious leverage on Congress -- serious enough perhaps even to pry the legislature loose from the powerful banking lobbies that now hold it in thrall.

(2) Mike Whitney: Stock market is flashing "recovery" while Bonds signal "contraction"

From: Paul de Burgh-Day <pdeburgh@harboursat.com.au> Date: 19.09.2009 09:17 PM

Post-Bubble Malaise  

By Mike Whitney

September 17, 2009

"Information Clearing House"

We keep hearing that "The worst is behind us", but the spin doesn't square with the facts. Sure the stock market has done well, but scratch the surface and you'll find that things are not as what they seem. Zero hedge--which is quickly becoming the "go-to" market-update spot on the Internet--recently posted an eye-popping chart which traces the Fed's monetization programs (Quantitative Easing) with the 6-month surge in the S&P 500. The $917 billion increase in securities held outright equals the Fed's $1 trillion increase to its balance sheet. In other words, the liquidity from the Fed is following the exact same trajectory as stocks, a sure sign that the market is being manipulated. Surprisingly, traders seem to know that the Fed is goosing the market and have just shrugged it off as "business as usual". Go figure? Perhaps it pays to take a philosophical approach to market rigging. Who needs the gray hair anyway? The result, however, has been that short-sellers (traders betting the market will go down) who have placed their bets according to (weak) fundamentals, have gotten clobbered. They appear to be the last holdouts who still place their faith in the unimpaired operation of the free market. (Right)

 Here's how former hedge fund manager Andy Kessler sums it up in a recent Wall Street Journal article, "The Bernanke Market". Here's a clip:
"By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market."

So, the Fed has given a boost to stocks while keeping the bond market priced for deflation. That's quite a trick. One market is flashing "recovery" while the other is signaling "contraction". Bernanke has worked this miracle, by simply changing the definition of "indirect bidders" (which used to mean "foreign buyers" of US Treasuries) to mean just about anyone-anywhere. Here's an explanation of this latest bit of chicanery from the Wall Street Journal in June:
"The sudden increase in demand by foreign buyers for Treasurys, hailed as proof that the world's central banks are still willing to help absorb the avalanche of supply, mightn't be all that it seems.

“When the government sells bonds, traders typically look at a group of buyers called indirect bidders, which includes foreign central banks, to divine overseas demand for U.S. debt. That demand has been rising recently, giving comfort to investors that foreign buyers will continue to finance the U.S.'s budget deficit.

“But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners." (Is foreign Demand as Solid as it Looks, Min zeng)

Pretty clever, eh? So, if the Treasury doesn't want dupes like us to know when foreign demand drops off a cliff, they just twist the definitions to meet their needs. My guess is that the Fed is building excess bank reserves (nearly $1 trillion in the last year alone) with the tacit understanding that the banks will return the favor by purchasing Uncle Sam's sovereign debt. It's all very confusing and circular, in keeping with Bernanke's stated commitment to "transparency". What a laugh. The good news is that the trillions in government paper probably won't increase inflation until the economy begins to improve and the slack in capacity is reduced. Then we can expect to get walloped with hyperinflation. But that could be years off. For the foreseeable future, it's all about deflation.

No matter how you look at it, the economy is on the ropes. Yes, there should be a rebound in the next few quarters, but once the stimulus wears off, its back to the doldrums. According to David Rosenberg of Gluskin Sheff, "All the growth we are seeing globally this year is due to fiscal stimulus.... For 2010, the government’s share of global growth, by our estimates, will be 80%. In other words, there are still very few signs that organic private sector activity is stirring."

The question is, how long can the Obama administration write checks on an account that's overdrawn by $11 trillion (The National debt) before the foreign appetite for US Treasuries wanes and we have a sovereign debt crisis? If the Fed is faking sales of Treasuries to conceal the damage--as I expect it is--we could see the dollar plunge to $2 per euro by the middle of 2010. Imagine pulling up to the gas pump and paying $6.50 per gallon. Ouch! That should be revive the economy.

For the next year or so, the demon we face is deflation; a severe contraction exacerbated by household deleveraging and massive financial sector defaults. The Fed's money-printing operations just can't keep pace with capital-hole that continues to expand from delinquencies, foreclosures, and failed loans. Workers have seen their credit lines cut and their hours reduced, households are $3 trillion above trend in their debt-to-equity ratio, and unemployment is soaring. Industry analysts expect a $1.5 trillion cut-back in credit card spending. That's why Bernanke is firehosing the whole financial system with low interest liquidity, to stimulate speculation and reverse the effects of a slumping economy.

Here's a clip from an article in the UK Telegraph:

"Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation..."

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said. (Ambrose Evans-Pritchard, "US credit shrinks at Great Depression rate prompting fears of double-dip recession", UK Telegraph)

The Fed has pumped up bank reserves, but the velocity of money has sputtered to a standstill. There won't be an uptick in economic activity until consumers reduce their debt-load, rebalance their personal accounts and find jobs. That's a long way off, which is why San Francisco Fed chief Janet Yellen sounded more like Nouriel Roubini in this week's presentation "The Outlook for Recovery in the U.S. Economy" in S.F.:

"With slack likely to persist for years, it seems likely that core inflation will move even lower, departing yet farther from our price stability objective. From a monetary policy point of view, the landscape will continue to present challenges. We face an economy with substantial slack, prospects for only moderate growth, and low and declining inflation. With our policy rate already as low as it can go, it’s no wonder that the FOMC’s last statement indicated that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” I can assure you that we will be ready, willing, and able to tighten policy when it’s necessary to maintain price stability. But, until that time comes, we need to defend our price stability goal on the low side and promote full employment."

That's from the horse's mouth. Recovery? What recovery?

The consumer is maxed out, private sector activity is in the tank, and government stimulus is the only thing keeping the economy off the meat-wagon. Bernanke might not admit it, but the economy is sinking into post-bubble malaise.

see zero hedge chart. . .

http://www.zerohedge.com/article/correlation-sp-500-performance-fed-monetization-activities-start-qe

(3) Steve Keen: The tumour of debt has to be removed

From: ERA <hermann@picknowl.com.au> Date: 19.09.2009 07:39 PM

There will be no recovery until debt tumour is excised

STEVE KEEN

September 15, 2009

http://www.smh.com.au/business/there-will-be-no-recovery-until-debt-tumour-is-excised-20090914-fnug.html

... According to Minsky’s theory:

  Capitalist economies can and do periodically experience financial crises (something that believers in the dominant “Neoclassical” approach to economics vehemently denied until realityin the form of the Global Financial Crisisslapped them in the face last year);

  These financial crises are caused by debt-financed speculation on asset prices, which leads to bubbles in asset prices;

  These bubbles must eventually burst, because they add nothing to the economy’s productive capacity while simultaneously increasing the debt-servicing burden the economy faces;

  When they burst, asset prices collapse but the debt remains;

  The attempts by both borrowers and lenders to reduce leverage reduces aggregate demand, causing a recession;

  If the economy survives such a crisis, it can go through the same process again, with another boom driving debt up even higher, followed by yet another crash; but

  Ultimately this process has to lead to a level of debt that is so great that another revival becomes impossible since no-one is willing to take on any more debt. Then a Depression ensues.

That is where we were … in 1987. The great tragedy of today is that naïve Neoclassical economists like Alan Greenspan and Ben Bernanke allowed this process to continue for another three or more cycles than would have occurred without their rescues.

In 2008, they did it againonly with methods they would have disparaged a mere year earlier (“Rational Expectations Macroeconomics”, a modern neoclassical fad, preaches that government intervention can’t influence the level of economic activity at all yet another belief that reality has recently crucified). This time, while the rescue has worked, the recovery they expect afterwards can’t happen because there’s almost no-one left who will willingly take on any more debt.

This time, there’s no re-leveraging way out. The tumour of debt has to be removed.

(4) Steve Keen:  it’s better to give the money to the debtors than the lenders

http://www.debtdeflation.com/blogs/2009/09/19/it%e2%80%99s-hard-being-a-bear-part-five-rescued/

It’s Hard Being a Bear (Part Five): Rescued?
Published in September 19th, 2009

I’m happy to admit that I underestimated how strongly governments would respond to this financial crisis. Dramatic reductions in interest rates, huge fiscal stimuli and—in the USA and UK—expansion of government-created money, have all had a positive impact on the economy and asset markets (both shares and houses).

In his recent essay, Australian Prime Minister Kevin Rudd estimated that the rescues were the equivalent of roughly 18 percent of global GDP over a 3 year period, which is an unprecedented level of expenditure by governments.

Eichengreen and O’Rourke’s comparison of today to the Great Depression gives the most balanced assessment of how effective these policies have been at the global level.

They have clearly turned around stock markets. Six months ago, world stock markets were 50% below their peak, a far worse performance than during the Great Depression when, at the same time after the peak, they had only fallen 10%. By the beginning of September, markets had recovered to be only a couple of percent below the comparable 1930 position of a 30% fall.

Industrial output has also turned around. Six months ago this was 13% below the peak level, worse than the 1930s position of an 11% decline. Since then it has risen to be only 10% below, while at the equivalent time in the 1930s, industrial output had fallen 20% from its 1929 high.

So has the government cavalry ridden to the rescue? If the crisis were one simply of liquidity, the answer would be yes. A government stimulus can overwhelm the impact of a credit crunch, and the innate dynamic of a productive economy can re-assert itself after such a crisis, leading to renewed growth.

But this not merely a crisis of liquidity. It is one of excessive private debt, on a scale that is also unprecedented: the USA is carrying US$41.5 trillion in debt on the back of a US$14 trillion economy, proportionately 70 percent more debt than it had at the start of the Great Depression. In December 2007, the private sector swung from ramping up debt levels as it chased speculative gains on asset markets, to retreating from debt as the asset bubbles burst.

In the space of a year, private debt went from adding US$4 trillion to aggregate demand, to subtracting US$165 billion from it. Private debt had ceased being the economy’s turbocharger and had instead become its flooded engine.

While economic outsiders like myself, Michael Hudson, Niall Ferguson and Nassim Taleb argue that the only way to restart the economic engine is to clear it of debt, the government response, has been to attempt to replace the now defunct private debt economic turbocharger with a public one.

In the immediate term, the stupendous size of the stimulus has worked, so that debt in total is still boosting aggregate demand. But what will happen when the government stops turbocharging the economy, and waits anxiously for the private system to once again splutter into life?

I am afraid that all it will do is splutter.

This is especially so since, following the advice of neoclassical economists, Obama has got not a bang but a whimper out of the many bucks he has thrown at the financial system.

In explaining his recovery program in April, President Obama noted that:

“there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?,’ they ask”.

He justified giving the money to the lenders, rather than to the debtors, on the basis of “the multiplier effect” from bank lending:

the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (page 3 of the speech)

This argument comes straight out of the neoclassical economics textbook. Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.

This “multiplier effect” will only work if American families and businesses are willing to take on yet more debt: “a dollar of capital in a bank can actually result in eight or ten dollars of loans”.

So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.

What are the odds that this will happen, when they already owe more than they have ever owed in the history of America? The next chart inverts the usual portrayal of America’s debt to GDP ratio by inverting it: the top of the graph represents zero debt, the bottom, a debt to GDP ratio of 300 percent—which is just shy of the current ratio of 292 percent.

If the money multiplier was going to “ride to the rescue”, private debt would need to rise from its current level of US$41.5 trillion to about US$50 trillion, and this ratio would rise to about 375%—more than twice the level that ushered in the Great Depression.

This is a rescue? It’s a “hair of the dog” cure: having booze for breakfast to overcome the feelings of a hangover from last night’s binge. It is the road to debt alcoholism, not the road to teetotalism and recovery.

Fortunately, it’s a “cure” that is also highly unlikely to work, because the model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.

The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth.

Looking at the timing of economic variables, they found that credit money was created about 4 periods before government money. However, the “money multiplier” model argues that government money is created first to bolster bank reserves, and then credit money is created afterwards by the process of banks lending out their increased reserves.

Kydland and Prescott observed at the end of their paper that:

Introducing money and credit into growth theory in a way that accounts for the cyclical behavior of monetary as well as real aggregates is an important open problem in economics.

I couldn’t agree more, but unfortunately they—and neoclassical economists in general—did bugger all about it. On the other hand, the Post Keynesian group, of whom I am one, have continued to try to construct models of the economy in which credit plays an essential role.

I’ve recently developed a genuinely monetary, credit-driven model of the economy, and one of its first insights is that Obama has been sold a pup on the right way to stimulate the economy: he would have got far more bang for his buck by giving the stimulus to the debtors rather than the creditors.
The following figure shows three simulations of this model in which a change in the willingness of lenders to lend and borrowers to borrow causes a “credit crunch” in year 25. In year 26, the government injects $100 billion into the economy—which at that stage has output of about $1,000 billion, so it’s a pretty huge injection, in two different ways: it injects $100 billion into bank reserves, or it puts $100 billion into the bank accounts of firms, who are the debtors in this model.

The model shows that you get far more “bang for your buck” by giving the money to firms, rather than banks. Unemployment falls in both case below the level that would have applied in the absence of the stimulus, but the reduction in unemployment is far greater when the firms get the stimulus, not the banks: unemployment peaks at over 18 percent without the stimulus, just over 13 percent with the stimulus going to the banks, but under 11 percent with the stimulus being given to the firms.

The time path of the recession is also greatly altered. The recession is shorter with the stimulus, but there’s actually a mini-boom in the middle of it with the firm-directed stimulus, versus a simply lower peak to unemployment with the bank-directed stimulus.

Why does this model show that it’s better to give the money to the debtors than the lenders, in contrast to the case that Obama was sold, that it’s better to give it to the bankers?

Because the “money multiplier” model is effectively a mechanical, static, equilibrium model of the economy. Give the banks excess reserves, and they will lend them to the public, which will happily take on the debt. Once the reserves are fully lent out, the economy is back to equilibrium again.

In contrast, my model is a dynamic, non-equilibrium one, where the “circular flow” of money and goods is properly accounted for. In this system, you can think of the different bank accounts in the system as like dams with pipes connecting them of vastly different diameters.

When a credit crunch strikes, the pipes pumping the bank reserves to the firms shrink dramatically, while the pipe going in the opposite direction expands, and all other pipes remain the same size.

If you then fill up the bank reserves reservoir—by the government pumping the extra $100 billion into it—that money will only trickle into the economy slowly. If however you put that money into the firms’ bank accounts, it would flow at an unchanged rate to the rest of the economy—the workers—while flowing more quickly to the banks as well, reducing debt levels.

So giving the stimulus to the debtors is a more potent way of reducing the impact of a credit crunch—the opposite of the advice given to Obama by his neoclassical advisers.

This could also be one reason that the Australian experience has been better than the USA’s: the stimulus in Australia has emphasized funding the public rather than the banks (and the model shows the same impact from giving money to the workers as from giving it to the firms—and for the same reason, that workers have to spend, so that the money injected into the economy circulates more rapidly.

This model can explain some aspects of the current US data that are inexplicable from the conventional, neoclassical point of view—the key paradox being that while base money (“M0”) has been increased dramatically, there has been almost no movement in broader measures of money (“M1” and “M2”). If the money multiplier argument were correct, the increases in M1 and M2 would have been multiples of the increase in M0, as Obama was led to expect.

In fact, the expansion in M0 has been met by a fall in the credit-generated component of the money supply: since M2 includes all of M1 and M1 includes all of M0, this is clearer when we substract the double-counting out. M1 has actually contracted almost as much as M0 has expanded, while the expansion in M2 has been less than a third the size of the growth in M0.

The “money multiplier” has also collapsed—a mystery from a neoclassical point of view, but entirely predictable from the “endogenous money” perspective.

Obama has been sold a pup by neoclassical economics: not only did neoclassical theory help cause the crisis, by championing the growth of private debt and the asset bubbles it financed; it also is undermining efforts to reduce the severity of the crisis.

This is unfortunately the good news: the bad news is that this model only considers an economy undergoing a “credit crunch”, and not also one suffering from a serious debt overhang that only a direct reduction in debt can tackle. That is our actual problem, and while a stimulus will work for a while, the drag from debt-deleveraging is still present. The economy will therefore lapse back into recession soon after the stimulus is removed.

(5) Why aren't we hearing about the worst job and wage situation? - Robert Reich

http://robertreich.blogspot.com/2009/09/real-news-about-jobs-and-wages-ode-to.html

Friday, September 04, 2009

Why aren't we hearing more about the worst job and wage situation since the Great Depression?

The latest employment figures (released this morning) show job losses continuing to grow. According to the payroll survey, job losses are increasing more slowly than in previous months. According to the household survey, they're accelerating -- from 9.4 percent of the workforce in July to 9.7 percent in August. Bottom line: almost one out of six Americans who need a full-time job either can't find one or is working part-time. Meanwhile, wage growth among people who have jobs has just about stopped. The Economic Policy Institute reports that between 2006 and 2008, wages grew at an annualized rate of 4.0%; by contrast, over the past three months annual wage growth has plummeted to just 0.7%. At the same time, furloughs -- requiring workers to take unpaid vacations -- are on the rise: recent surveys show 17% of companies imposing them. More than 20% of companies have suspended their contributions to 401(k)s and similar pension plans.

So why isn't the media screaming? Partly because these job and wage losses are not, for the most part, falling on the segment of our population most visible to the media. They're falling overwhelmingly on the middle class and the poor. Unemployment among those who have been in the top 10 percent of earnings is closer to 5 percent, and their earnings continue to climb -- although, to be sure, much more slowly than before the meltdown. It's much the same with health-care and pension benefits. Among people under 65 who are in the bottom 20% of incomes, only 21.9% have employer-sponsored health insurance -- if they have a job at all. Half of all people nearing retirement age have a 401(k) balance of less than $40,000.

I keep hearing that the economic meltdown has taken a huge toll on the stock portfolios of the rich. That's true. But the rich haven't lost nearly as much of their assets, proportionately, as everyone else. According to a report from the Bank of America Merrill Lynch ("The Myth of the Overleveraged Consumer"), analyzing data from the Federal Reserve, the bottom 90 percent of Americans hold 50 percent of more of their assets in residential real estate, which has taken a far bigger beating than stocks and bonds. The top 10 percent of Americans have only a quarter of their assets in housing; most of their assets are in stocks and bonds. And although the stock market is still a bit tipsy, it has rallied considerably since it hit bottom earlier this year. Home values, on the other hand, are down by an average of a third across the country, and are still falling.

What does all this mean for the economy as a whole? It raises the fundamental question of where demand will come from to get us out of this hole. If so manyAmericans are losing their jobs and wages, you have to wonder who will be returning to the malls.

That same Bank of America Merrill Lynch report notes cheerfully that 42 percent of consumer spending before the meltdown came from the top-earning 10 percent of Americans (not too surprising given that the top 10 percent was raking in half of total earnings) and the top 10 percent continues to do relatively well. So, says Bank of America Merrill, we can rely on the spending of the top 10 percent to get the economy moving again. Indeed, they conclude, Congress and the White House should be careful not to raise taxes on the top 10 percent, lest the consuming ardor of these most privileged members of our society be dampened.

This logic is morally and economically indefensible. If we've learned anything from the Great Recession-Mini Depression of the last 18 months, it's that the skewing of income and wealth to the top has made our economy far less stable. When the majority of middle-class and poor Americans are either losing their jobs or feel threatened by job loss, and when those who still have jobs are experiencing flat or declining wages, there's simply no way to get the economy back on track. The track we were on -- featuring stagnant median wages, widening inequality, and job insecurity -- got us into this mess in the first place.