American homeowners are victims, not crooks. Even people who own their homes free and clear are hurt by Fed policy. Wall Street bailed out crooks at Countrywide and its cohorts. The credit-rating agency Fitch has found financial fraud in every mortgage package it has examined. And these are the packages that have made Wall Street rich and powerful enough to gain Washington bailouts making them the new ruling class, bailouts to use for buying up Washington politicians and lawmakers, and for buying out the popular press to tell people how necessary Wall Street financial practice is to "support" the economy and "create wealth."
Why are ten million American homeowners being treated like Lehman, if the Fed believes that they are as savable as Countrywide and A.I.G.? The explanation is that a double standard exists. The wealthy get bailed out, creditors including fraudsters, but not their debtor victims.
Recent federal bankruptcy proceedings have exposed Lehman's deceptive off-balance-sheet accounting gimmicks such as Repo 105 to conceal its true state. No fraud charges have yet been filed, but this is the elephant in the committee room. "Everyone was doing it," so that makes it legal – or what is the same thing these days, non-prosecutable in practice. To prosecute would be to disrupt the financial system – and it is Fed doctrine that the economy cannot survive without a financial system enabled to "earn its way out of debt" by raking off the needed wealth from the rest of the economy?
The fraud issue lies as far outside the scope of the financial committee meetings as the question of how the economy should cope with its unpayably high mortgage, state and local debts in the face of its inadequately funded pension obligations. Fed Chairman Bernanke testified on Thursday, September 2, that "the market" itself breeds what most people would call fraud.
The Fed argues that the economy cannot recover without a solvent financial system. But. would the economy fall apart without mortgage fraud, without deceptive packaging of junk mortgages, without computerized gambling on derivatives or credit-ratings agencies whose AAA writings were up for sale just like the honor and conscience of politicians on the Senate and House Banking Committees? Do we really need them?
And does the economy need more credit (actually debt)? Or does it need jobs? Does it need to un-tax the banks and give tax-favoritism to Wall Street?
What if it had been the debtors who were bailed out, instead of the lenders who had made bad loans and the large institutions that bought them? The bailout has saddled taxpayers not only with $13 trillion that now must be sacrificed by the economy at large (but not by Wall Street), with the cost of a decade-long depression resulting from keeping the bad debt on the books. This is what rightly should be deemed criminal.
Defenders of Wall Street insist that there was no alternative. And the committee hearings are carefully only listening to such people. They are writing mythology, as if they are crafting a new religion. In this new ethic, Wall Street financial institutions – "credit creators," that is, debt creators – are supposed to fund industry, not strip assets or make bad loans. Without rich people, who would "create jobs"? Such is the self-serving logic of Wall Street. For them, Wall Street is the economy. The wealth of a nation is worth whatever banks will lend, by collateralizing the economic surplus for debt service.
Where does "lowering loan standards" turn into outright fraud? Has that simply become part of "the market"? This is what the commission seems to fear addressing.
Excerpted from Michael Hudson Wall Street economist and distinguished Research Professor
