photo: USGS

Of all of the problems facing our economy, the biggest drain is the housing crisis. It forces too many of our people to spend money on houses that are worth less than is owed. Too many others fear that they will lose their jobs and then their houses. Too many counted on their houses as part of their retirement savings, and loss of home value forces them to save more cash to prepare for retirement. Too many others have been forced into bankruptcy, and have no choice but to try to rebuild their retirement savings.

At the same time, the idiots in Congress and the hyper-rich and their minions in the press call for austerity at every level of government. Businesses won’t invest in new equipment. Our trade balance is negative. We can’t export our way out of this problem, and there is no source of growth. How did this happen?

From the beginning of the Great Crash it was clear that the banks and the hyper-rich would not pay for the losses they caused in the world’s economy. The first plan was put forward by Henry Paulson, then Treasury Secretary and the de facto representative of the banksters. The federal government would buy up underwater collateralized debt obligations. Paulson changed course as soon as he got the authority to proceed, because too many serious people and noisy bloggers of every political persuasion said that it would only work if the government paid more than the garbage was worth. That would be a direct transfer of money to the banks and it was politically deadly.

It became clear that housing prices were going to fall for a long time. The banksters started a campaign to blame the problem on borrowers. The media began chanting in unison about irresponsible people who borrowed more than they could ever hope to repay, with not-so-subtle racist overtones. They preached their version of a commercial morality that only applies to human persons, not to Corporate Persons. Of course, the really irresponsible people were the banksters who owed to their shareholders the duty to invest other people’s money sensibly. But banksters had the ability to influence public debate, and the money to whisper into the ears of Congress and the President, and their lies were amplified in the media echo chamber.

Reality disappeared into the din of right-wing noise-makers and the economically ignorant Tea Party blowhards. The problem wasn’t sub-prime lending, it was the economy, and as unemployment grew, middle-class homeowners found themselves unable to pay.

The bankruptcy bar recognized the coming problem in 2007, and began pushing the idea of amending Chapter 13 to permit homeowners to reduce the amount owed on home mortgages to the value of the home in judicial proceedings, a procedure called cramdown in the tradition of gallows humor. Candidate Barack Obama endorsed this idea, as did Senator Dick Durbin. It came to a vote April 30, 2009, and got 51 votes in the Senate. Unfortunately, we do not have majority rule in this country, so that was a defeat. President Obama didn’t lift a finger. At that moment it was clear that politicians intended that the entire loss in the housing market would be born by everyone except the banks and the hyper-rich.

Foreclosures grew, and then we learned about the fraudulent formation of the pile of underwater CDOs. We learned that banks didn’t have the right paperwork, and that they and their lawyers were lying to State courts in judicial foreclosures and to Bankruptcy courts in motions for relief and proofs of claim in all states. Only a very few courts enforced the laws, and the arrogance grew, until it hit resistance from homeowners and a small group of lawyers and bloggers, like 4closure Fraud and Foreclosure Hamlet.

Banks first tried a secret amendment to prevent courts from examining their lies, and when that failed, they decided to immunize their flawed documents by passing a bill that retroactively legitimizes their systems, the great MERS whitewash, which bmaz explains here. President Obama’s economic advisers think foreclosures are a great thing, and should proceed as soon as the banksters can get their new paperwork together.

Meanwhile, the investors who purchased the garbage CDOs are demanding that banks take back their pile of fraudulent lying mortgages, and the banks plan to spend whatever it takes to make sure that your pension plan, your Church’s endowment funds, and your bond funds eat the loss. Interest on the savings of retirees and small savers are near zero.

Our courts are strangled by procedural rules. The lawyers who appear on these cases will make any argument, no matter how specious, without fear that judges will hold them in contempt under Rule 11. Cases remain unresolved indefinitely.

Our political system is a failure. It refuses to face up to this massive conflict. It will take a seismic event to break this gridlock. Apparently the seismic event of 2008 didn’t do the trick. How will we survive an even bigger crisis? And if there is no seismic event, how will we survive the slow erosion of our economy?