"Getting banks to clear up mortgage debts would help, not hurt, the economy":
Another Inside Job, by Paul Krugman, Commentary, NY Times: Count me among those who were glad to see the documentary “Inside Job” win an Oscar. The film reminded us that the financial crisis of 2008 ... didn’t just happen — it was made possible by bad behavior on the part of bankers, regulators and, yes, economists.
What the film didn’t point out, however, is that the crisis has spawned a whole new set of abuses, many of them illegal as well as immoral. And leading political figures are, at long last, showing some outrage. Unfortunately, this outrage is directed, not at banking abuses, but at those trying to hold banks accountable for these abuses.
The immediate flashpoint is a proposed settlement between state attorneys general and the mortgage servicing industry. That settlement is a “shakedown,” says Senator Richard Shelby of Alabama. The money banks would be required to allot to mortgage modification would be “extorted,” declares The Wall Street Journal. And the bankers themselves warn that any action against them would place economic recovery at risk.
All of which goes to confirm that the rich are different from you and me: when they break the law, it’s the prosecutors who find themselves on trial.
To get an idea of what we’re talking about here, look at the complaint filed by Nevada’s attorney general against Bank of America. The complaint charges the bank with luring families into its loan-modification program ... under false pretenses; with giving false information about the program’s requirements...; with stringing families along with promises of action, then “sending foreclosure notices, scheduling auction dates, and even selling consumers’ homes while they waited for decisions”; and, in general, with exploiting the program to enrich itself at those families’ expense. ...
Notice, by the way, that we’re not talking about the business practices of fly-by-night operators; we’re talking about two of our three largest financial companies... Yet politicians would have you believe that any attempt to get these abusive banking giants to make modest restitution is a “shakedown.” ...
What about the argument that placing any demand on the banks would endanger the recovery? ... First, the proposed settlement only calls for loan modifications that would produce a greater “net present value” than foreclosure — that is, for offering deals that are in the interest of both homeowners and investors. The outrageous truth is that in many cases banks are blocking such mutually beneficial deals, so that they can continue to extract fees. How could ending this highway robbery be bad for the economy?
Second, the biggest obstacle to recovery isn’t the financial condition of major banks, which were bailed out ... and are now profiting... It is, instead, the overhang of household debt combined with paralysis in the housing market. Getting banks to clear up mortgage debts — instead of stringing families along to extract a few more dollars — would help, not hurt, the economy.
In the days and weeks ahead, we’ll see pro-banker politicians denounce the proposed settlement, asserting that it’s all about defending the rule of law. But what they’re actually defending is the exact opposite — a system in which only the little people have to obey the law, while the rich, and bankers especially, can cheat and defraud without consequences.