EIR Correspondents Advance the Hopes of Homeowners: The Harrisburg Testimonies

2 de diciembre de 2007

[address] [/address][address]The following two testimonies were submitted as testimonies in support of Pennsylvania House Resolution 418 (LaRouche HBPA) to the Pennsylvania House Government Affairs Committee, November 29, in Harrisburg, PA. The [a:href="#Richard%20Freeman"]first testimony[/a] we present here was submitted by Richard Freeman, Economics writer, Executive Intelligence Review. The [a:href="#Paul%20Gallagher"]second testimony[/a] was submitted by Paul Gallagher, Economics Co-Editor, EIR News Service and Executive Intelligence Review.[/address]---------------------------------------------------------------------------------


Testimony submitted by [a:name="Richard Freeman";title="Richard Freeman"]Richard Freeman,

Economics writer, Executive Intelligence Review

The ongoing systemic breakdown of the world financial system, including the $20 trillion U.S. housing bubble of mortgages and Mortgage-Backed Securities (MBS), is contributing to the tsunami-wave of U.S. home foreclosures. People and all their worldly possessions are thrown out on the street. My colleague Paul Gallagher showed in a graph, that in 2007 by year's end, based on projections of the first eight months of this year, there will have been 2 million American households in one stage or another of foreclosure.

However, EIR projects that America is staring at a catastrophe-- that 7 to 10 million households, representing more than 20 million people, will likely permanently lose their homes over the coming few years. Some people are so terrified that they want to deny reality; but it is true.

People have proposed three responses to this crisis.

The first is to do nothing.

The second response is to support a plan that would have the secondary housing market giants, Fannie Mae and Freddie Mac, buy up the radioactive and failing mortgages. This bail-out plan, which in addition to producing a disaster, as my colleague Paul Gallagher has already shown, is also ridiculous: Fannie and Freddie are experiencing melt-down, and are in no position to bail out anyone else.

Foreclosures are not statistics; people live in these homes. We must stop the foreclosures while erecting a firewall that protects the banking system. The only response worth considering is the adoption of Representative Harold James' House Resolution 418. Pennsylvania would join other state and local legislative bodies to compel the U.S. Congress to adopt immediately the Homeowners and Bank Protection Act. This is the only proposal that would work.

In recent weeks, in direct proportion as HR 418 has gained support and endorsers, questions have been raised and criticism has been hurled at the resolution. Three basic questions stand out, that this presentation will respond to: first, the critics claim that a plan, such as the Homeowners and Bank Protection Act, has never been adopted before in history; second, they claim that it violates the law: and third, they claim that the proposed legislation is a way to bail out banks that are not entitled to be bailed out.

To answer the criticism we look at history, specifically at the revolutionary actions President Franklin Delano Roosevelt undertook during the 1930s depression, to crises that were similar in nature to those of today, although the financial crisis of today is far more severe.

What Roosevelt and like spirits did during the 1930s was to adopt solutions guided by the overarching principle of the General Welfare clause of the U.S. Constitution, which clause is contained in the preamble of the U.S. Constitution, and which clause subsumes the entirety of the U.S. Constitution. The General Welfare clause is based on the concept that our nation's primary mission, is to promote the General Welfare for the population as a whole, that is, promote the rapid improvement of the cultural and material standards of living of the citizens, for past and present generations, and for future generations yet to come. America's robust government transmitted discoveries of scientific principle into the general economy, producing explosive economic development, and progress. This has generated the survival of the republic and a continuous betterment of life over generations.

Not incidentally, the General Welfare clause and the Constitution itself were written in September 1787, by a five- person drafting committee, led by Alexander Hamilton, and under the overall general direction of that towering genius, Benjamin Franklin. Of note, Alexander Hamilton was the architect of the American System of Economics, and quite literally of its entire banking system, a pro-development, anti-speculation banking system.

Roosevelt refused to be constrained by so-called received "authoritative opinion," because most of the authorities had produced the 1929-33 depression and financial crash. Rather, Roosevelt was guided by the General Welfare principle and the associated American System of Economics, of government regulation, and the issuance of directed, cheap credit to expand and upgrade scientifically-based production, including great infrastructure projects.

The HBPA flows from the same General Welfare principle and same general method of Roosevelt. This method is emphatically in the tradition of Franklin, Hamilton, and President Abraham Lincoln. This does not mean that point for point, we would follow today, what Roosevelt did in his time. It does mean that by following the principles that guided Roosevelt's method, we would achieve today similar success, spearheaded by the HBPA. Let us look, under a microscope, accordingly at the objections leveled against the HBPA, from this perspective.

1930s Home Foreclosures

On April 13, 1933, President Roosevelt declared, "that the broad interests of the Nation require that special safeguards should be thrown around home ownership as a guarantee of social and economic stability, and that to protect homeowners from inequitable enforced liquidation in a time of general distress is a proper concern of government" (emphasis added). Roosevelt promulgated this in the time frame that he proposed and passed through Congress, the Homeowners Loan Corporation (HOLC).

As with today, Roosevelt faced a huge home foreclosure deluge, one which was larger then, but today's is moving to fast overtake it. For example, a study released by the Twentieth Century Fund in January 1934, found that in a survey of 22 of America's most important and largest cities, that in half the cities there was a mortgage default rate of at least 38% or higher. In Cleveland, the default rate was 62%.

Contrary to the claim that the HBPA's stress of a mortgage moratorium is unique in history, in fact, 25 of the then 48 states existing in the Union, introduced or adopted some form of law meant to institute a partial or full moratorium on mortgage payments, and that would keep people in their homes. (Footnote 1) Let us look at a few extraordinary, representative cases that signal to the present.

The most famous full or partial moratorium or moratory laws as they are called-- occurred in Minnesota. In 1933, the Minnesota legislature passed, and the Governor signed into law the Minnesota Mortgage Moratorium Act (Chapter 339, Section 4 of the Laws of Minnesota [1933]). The prime provision of the Act, is that people who had a mortgage, known as mortgagors, who were unable to make their mortgage payments, could seek at a state court, an alteration of their payment schedule to lower the level of their payments, usually to a rental equivalent. During this time, they stayed in their homes. The law provided for a significant two-year period in which they could work on their payment schedule. Everyone recognized, that for most mortgagors, this would be a two-year period of moratorium on their mortgage. The law was passed after intense unrest, and a march on the statehouse in St. Paul.

The law was originally intended for farmers. However, when a couple, Mr. and Mrs. John Blaisdell-- who were being thrown out of their property for non-payment on a mortgage debt of $3,700, and were having their home sold out from under them for a song --successfully applied and got protection under the Minnesota Moratorium Act, the company which held the Blaisdell's mortgage, the Home Building and Loan Association, sued them.

Of great importance, the State Supreme Court of Minnesota upheld that the Moratorium Act was constitutional, and that the Blaisdells would not be dislodged from their property during the allotted time. Of more astounding importance, the U.S. Supreme Court, which had a definite anti-Roosevelt slant, in 1934, by a five to four vote, likewise affirmed that the Moratorium Act was constitutional. Most remarkable, according to a synopsis of the case that appeared in the Feb. 1934 Columbia Law Review (vol. 34, No. 2), were the grounds, cited by the majority, for upholding the Moratorium Act's constitutionality. It cited the ongoing economic emergency situation, and then stated, "The reservation by the state of the authority to pass reasonable laws FOR THE WELFARE OF ITS CITIZENS is an implied condition of every contract. While an emergency may not be a source of power, it may furnish the occasion for the use of power already possessed [by the state]" (emphasis added). In opposition to the critics who say that mortgage moratoria violate the law, in the case of the Minnesota Mortgage Moratorium, one of the most celebrated cases of the 1930s, the U.S. Supreme Court upheld its constitutionality.

Moratoria legislation abounded across America. In six states-- Arizona, Iowa, Oklahoma, Illinois, Michigan, and Rhode Island-- legislation that instituted a two-year continuance-- effectively a postponement-- of all pending foreclosure cases, was either introduced or passed in 1933. In Massachusetts, legislation was introduced, which stated that all home foreclosures would be stayed until the chief executive of the state declared that "the emergency creating the necessity for this legislation no longer exists."

In all these cases, the legislation effectively flowed from the principle of the General Welfare clause. This is the principle that gives life to the HBPA. Write Off Speculative Debt Obligations

Finally, there is the third criticism that the HPBA would facilitate the bail-out the banks. This is a completely incompetent charge.

The Act states that it would explicitly write off speculative debt obligations. The legislation incorporates the idea that there will be time provided for a "shakeout [that] may take several years," during which time the valuation of U.S. homes and of mortgages will come down. The understanding is that during this interim, no branch or agency of the U.S. government should be permitted to purchase any of this mortgage paper at currently inflated values.

Rather, worthless pyramided speculative paper should be written off the banks' books, and these banks should "resume their traditional functions, serving local communities, and facilitating credit for investment in productive industries, agriculture, infrastructure, etc." Thereby, the banks would have real loan assets on their books, which are of far more real value than a large volume of speculative assets which are disintegrating before one's very eyes.

In the limited space that remains, let us see the importance of Roosevelt, relying on the General Welfare clause, putting the banking system through a significant, but partial bankruptcy reorganization of the banking system, through the Emergency Banking Act.

Between 1930 and the end of 1932, throughout the USA, 5,100 banks, or one fifth of those that existed at the outset of 1930, failed. On March 4, 1933, President Roosevelt was inaugurated as President. On March 6, Roosevelt closed all of the banks through his executive order of a National Bank Holiday. The Emergency Banking Act legislation was introduced to Congress on March 9, at noon, and was signed by President Roosevelt at 8:37 pm. The whole affair, from start to finish, had taken less than 9 hours, showing that Congress can be spurred to act swiftly, when a good kick is administered. Banks reopened on March 13, and one month later, 76% of U.S. federally-chartered banks were up and operating.

Lyndon LaRouche has called for a bankruptcy reorganization of the thoroughly bankrupt and collapsed banking system.

Footnote 1. The 25 states were Arizona, Arkansas, California, Idaho, Illinois, Iowa, Kansas, Michigan, Minnesota, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas, Vermont, West Virginia, and Wisconsin.


Testimony submitted by [a:name="Paul Gallagher";title="Paul Gallagher"]Paul Gallagher

Economics Co-Editor, EIR News Service and Executive Intelligence Review

1. What the United States faces now is not a "housing crisis," but a dollar crash and a banking crisis, triggered by the meltdown of a hyperinflated mortgage bubble the size of which the world has never seen before, and will never again. The country also faces economic depression if the real economy, the depository banks, the households, are not protected from the collapse of this bubble by actions of government. HR 418 supports an emergency legislative action which could be called "the first firewall" to protect the people and the real economy, from an unstoppable collapse of vast mountains of mortgage-asset-based debts. As a call from Pennsylvania's legislature to its elected officials in Congress, HR 418 can be a historically timely action toward saving the United States from very hard economic times and the social chaos of mass home foreclosures.

[img:align=left;class=pictures;date=2007-12-03;layout=standalone;pid=4637;size=article;src="\/files\/pictures\/de90a0db0f8a647021b9498d63d6aa80\/article.jpg";title="Chart+1"] Look at this mortgage bubble (Chart 1, mortgage originations in the United States): It was called by housing economist Robert Shiller, in testimony to the Joint Economic Committee of Congress, a bubble unlike anything in the history of the United States and world economy; and its collapse, unprecedented both in terms of its domination of financial investments, and in how far home prices will fall before it's over. You see that in a sudden eruption after 2001, some $14 trillion in new mortgage debt was issued in a few years in the United States--leaving aside that the process was quickly repeated in the UK, Ireland, Spain, the Scandinavian countries. On top of this, some $7 trillion in mortgage-backed securities were issued in the same few years--a mortgage debt bubble, thus, of over $20 trillion blown up in such a short time, vacuuming in investment capital from all over the world--all this driving a stupendous escalation of the price of homes, which doubled after inflation since 2000. But millions of homeowners gave up equity, in favor of more debt, even as the price bubble inflated. Mortgage-backed debts have been used as "assets" to generate much more leveraged debts by hedge funds, private equity funds, money-center banks.

Outright mortgage frauds have proliferated, and one of the most dramatic frauds hit nearly 1,000 households in one Pennsylvania County.

We have also seen, this month, a series of Federal court decisions in Ohio's Eastern District which are potentially a broad shock to mortgage-backed securities. Three judges have stopped foreclosures because the investment trusts foreclosing on the homes could not show they owned the mortgages. The suspicion has been raised in these cases, that the same home mortgage loans may have been used in multiple "pools" of mortgages being made into securities.

This immense bubble of mortgage debt apparently has produced, as of now, a very small but real drop in American homeownership. From the standpoint of the generation of "financial products" by London and Wall Street investment banks and mortgage lenders in this bubble--mortgage products, mortgage-backed securities products, leveraged debt and derivatives products--what was being sold, was not homes, but mortgages: As many, as large, and as high-interest as possible. Consumer debt, which was 25% of GDP in 1960 for comparison, has ballooned to well over 95% now.

[img:align=right;class=pictures;date=2007-12-03;layout=standalone;pid=4638;size=article;src="\/files\/pictures\/7235a82ac2cae1caf79c521888f378cc\/article.jpg";title="Chart+2"] Look at the dependence of the assets of the U.S. banking system (Chart 2) on mortgage debt--49% as of 2006, 48% as of now, according to figures from the FDIC; and 35% dependent on residential mortgage debt. Now, housing economists such as Dr. Shiller have told the Joint Economic Committee that home prices--we cannot say "home values," but home prices--are in the process of declining rapidly by perhaps 20%, perhaps more. This is uncharted territory. One study by First American Core Logic found that with just the first 10% drop in median home price, 25% of mortgages originated in 2005, and 39% of those originated in 2006, go "upside-down," wherein their mortgage debt is greater than the sale price of their home.

This process drives both mass foreclosures and massive bank losses.

[img:align=left;class=pictures;date=2007-12-03;layout=standalone;pid=4639;size=article;src="\/files\/pictures\/5e5f24db42cb9f8f081c7f714b1f0c17\/article.jpg";title="Chart+3"] 2. That foreclosures must be stopped by legislative action, is becoming very clear. Nearly half a million homeowners will have lost their homes to foreclosure actions during 2007 (Chart 3, foreclosure actions).

The prospect in 2008 is much worse: Nearly 2 million adjustable rate mortgages will reset to higher rates and payments (Chart 4, ARM resets);

homeowners' equity will fall with price declines; the loss of well-paying jobs could accelerate under the impact of the dollar collapse.

[img:align=right;class=pictures;date=2007-12-03;layout=standalone;pid=4640;size=article;src="\/files\/pictures\/8150cd428840a731c4070e5ba86b350d\/article.jpg";title="Chart+4"] You are meeting here, in part, because no Congressional action has been taken to stop foreclosures. The "great hope" of Fannie Mae and Freddie Mac expanding dramatically to buy up and refinance subprime mortgages, has been proven a delusion: Both are actually shrinking, due to growing mortgage losses, which in Freddie Mac's case, already threaten its core capital. EIR News Service called this $150 billion expansion of the Government Sponsored Enterprises (GSEs) unworkable, when it was first proposed. And it was the wrong way, the bailout way, to deal with hyperinflated mortgages and mortgage securities.

Other mortgage reform measures which have passed in the U.S. House of Representatives only look to the future, and not to stopping this mass foreclosure wave. Appeals to the mortgage industry or to bankruptcy courts to reform mortgages are not slowing down that wave either, and cannot deal with the national plunge in home prices which is only still gathering momentum. What remains urgent, is for Congress to stop foreclosures by law--by a national mortgage foreclosure holiday during the mortgage/price collapse; a state determination of fair-market rent equivalents to be paid to participating banks by homeowners with problem mortgages; and Federal protection of Federally chartered and state-chartered banks which are suffering rapidly growing losses in the mortgage bubble collapse.

My colleague Richard Freeman will demonstrate how this has been done historically under the American System and the General Welfare principle.

3. Banks are taking and will take great losses no matter whether Congress Acts or not. Outside of the huge losses of the money-center banks in London and New York, the example of National City Bank in Columbus, Ohio, a large regional, Federally chartered bank, shows what is happening--in the third quarter 2007, National City reported nearly $775 million in impaired mortgage assets in three categories; a $160 million loss; and a layoff which has reached 1,500 of its staff.

The Financial Times warned on Nov. 25: "The projected size of this year's credit shock is now rising rapidly. The U.S. government initially forecast $50 billion losses on subprime securities. However, investment banks now expect $500 billion subprime losses--and additional massive losses in other debt markets, such as credit card loans." It has been clear that the big money-center banks do not know, or are continuing to hide, their real losses. A well-informed banker in Denmark has estimated to EIR, that the money-center banks' unrealized losses are actually $2-2.5 trillion.

On Nov. 25 the European Central Bank, which has made a full $1 trillion in weekly liquidity injections into the British and European banks since early August, announced it would step up that pace of cash injections through the end of the year. On Feb. 26, the Federal Reserve announced that it would do the same, to try to bring down interbank lending rates and liquefy securities markets. This attempt is now four months old, and intensifying, not diminishing. Federal Reserve liquidity injections recently through the Fed Funds window have been over $40 billion each week.

Treasury has released, that in August and September there were large, net capital outflows from U.S. securities, totaling $165 billion as Asian banks and investors in particular dumped the dollar. This is shocking, after years of net capital inflows routinely $70-100 billion a month. The mortgage meltdown and bank crisis have triggered a U.S. dollar crash, destabilizing international monetary and trade relations. Goldman Sachs chief U.S. economist Peter Hatzius has just made a projection that these massive bank losses will cause a drop in banks' ability to lend, of $2 trillion. For comparison, in 2006 total U.S. bank lending to households and financial and non-financial corporations was about $3.24 trillion, according to the Federal Reserve. Mr. Hatzius called the result, with dramatic understatement, "a substantial recession."

Already dramatically contracted for months, is interbank lending, the reason for the Fed's and ECB's escalating cash injections to the banking system. The failure of a few big banks, could take hundreds of smaller regional and local banks down with them.

4. We should stop the massive bailing out of non-banks, non-depository institutions typified by Countrywide Financial Corp. or by the hedge funds and investment banks securitizing mortgages; stop the attempt to bail out the "value" of these securities.

The Countrywide case is the exemplar. It received a $22.5 billion credit line from 40 banks on Aug. 25, hours after an early morning Federal Reserve injection of $20 billion into the banking system. It later received an additional $11 billion credit line from a group of banks. It has been loaned the astonishing total of $51 billion since September by the Federal Home Loan Bank--another of the GSEs along with Fannie and Freddie--provoking Sen. Charles Schumer of New York to protest Nov. 26 that "Countrywide is treating the Federal Home Loan Bank system like its personal ATM. When Congress created these banks, it never intended for them to be used to prop up mortgage lenders.... At a time when Countrywide's mortgage portfolio is deteriorating drastically, FHLB's exposure to Countrywide poses an unreasonable risk."

What has Countrywide done with all that bailout credit? Shrunk its mortgage lending by 40%; shrunk its employees by 17,000; and bought back, en masse, from hedge funds and others, its mortgage securities--in effect, bailing out those securities and their holders.

The loans to mortgage lending companies through the FHLB alone, have totaled over $150 billion since September. I have already noted the trillions injected into the banking system by the Federal Reserve and ECB since August, for similar purposes.

If Congress simply put chartered depository banks, and those only, under protection, as called for in H.R. 418, far smaller amounts of Federal credit would be necessary, for much better purposes of protecting the economy, that in these attempts to bail out the hyperleveraged, speculative instruments based on mortgage-backed securities.