Economic Disaster

Are You Next?

Michael Collins

The human costs of the U. S. financial crisis are coming into clear focus.  Family members lose their jobs, then their homes, and the cascade of ruin begins in earnest.  Health problems are ignored, anxiety and depression increase, and domestic violence is more common.  Many are on the edge, anticipating their worst fears:  losing their home or apartment then struggling to find the next meal.  The biggest issues right now are about basic needs -- food and shelter.

There's a rational, reasonably immediate solution to a good part of the economic disaster.  The banks won't like it but you will.   But first the sad facts.

There were 2.3 million default notices to homeowners in 2008, up 80% over 2007.  It will be worse in 2009 with Option ARMs coming due (those favorites of Alan Greenspan).

Typically the nation's economic leader, California, saw foreclosures increase by 160% in 2008.  As a result three percent of California homes, 240,000 in all, became bank properties.  These are the same banks that slithered up to the bar and demanded a double shot of the new elixir for failed financial institutions, federal bailouts.  Put it on the tab.

To understand the full extent of the economic collapse, consider this.  The current official unemployment rate is 7.2%.  This includes those out of a job who have actively sought employment in the past four weeks.  But this figure understates the level of economic distress.  There are 1.9 million unemployed "marginally attached" workers not counted and 8.0 million underemployed workers seeking full time employment.

The total unemployed and under employed figure is 21 million U.S. workers.

Michigan, Florida, Ohio, and South Carolina are facing hard times similar to those in California.  Your state is next.  It's a phenomenon.

Despite hundreds of billions in give aways to the banks, there are no reports of a single U.S. citizen or family receiving a bailout from Washington to help them stay in their home.

What happens when you're thrown out of your home or apartment and you have no job?

To begin with, you're poor.

You can live on the street, move in with relatives, or seek to rent a home or an apartment.   After a foreclosure, your credit rating will probably disqualify you from most opportunities at the outset.   If you're in a warmer climate, you can live in a tent city which began springing up across the country last September.

You can and will enter an entirely new world where you're exposed to a variety of risks that will make it very difficult to put your life back together again.  Crime, infectious diseases, underpayment for work, and increasing social isolation are routine.

You can become a crime victim.  In your new world, that of the poor, you will find that you're among the group with the majority of violent crime victims.

You can seek and receive occasional "subprime" medical care in hospital emergency rooms.  But the days of serious attention to an ongoing condition, arthritis for example, are over for you.

You can watch your life melt away and your family suffer, all without the prospect of any real assistance.  Homeless shelters are full in most places.  Public health programs have been overflowing for years.  The "welfare state" simply doesn't exist.  You're screwed.

Wall Street welfare was supposed to save us from all of this according to the Bush-Cheney scam artists.  Those two and their henchmen doubled the national debt in just a few short years of concentrated looting.  Somehow, the most recent Wall Street donations were supposed to secure failed financial institutions and generate a stimulus for the economy.  No deal.

To add insult to that injury, a $140 billion tax cut for banks was written "into law" by a Treasury Department bureaucrat, a move that everyone consulted said was clearly illegal.  Nothing was done about it.  In fact, a key congressional staffer explained it this way:  "We're all nervous about saying that this was illegal because of our fears about the marketplace," Nov. 10, 2008

Crime pays.  Deception pays.

But the money to pay working people isn't there thanks to the financial manipulations that made the very wealthy even wealthier and left the rest with little to nothing in return.   There is no room at this inn for people who need a helping hand.

When do the People Collect?

California passed a law that cut into foreclosures by requiring that the banks actually give a reasonable notice of default prior to tossing families onto the street.  This program had an impact for a few months but foreclosures bounced back and kept growing.  .

Representative Marcy Kaptur, (D-OH), responded to the economic collapse of Toledo, Ohio (11% unemployment) with a sensible idea.  Foreclosures and evictions are a commonplace event.  Kaptur tells citizens to stay put, don't leave your home if a foreclosure notice is issued.  "Produce the Paper" is the theme.  Due to the complexity of many bad loans, it can be very difficult to figure out which bank actually holds the mortgage or to even find a true loan document.  Without that information, there are legal challenges that can force banks to delay or forgo eviction.

Time for a Nationwide "Cramdown"

The easiest solution, the most immediate, is a cramdown.  What's that?

In bankruptcy court, a judge can take the total amount of a mortgage and divide it into two parts.  The appraised home value becomes the "secured claim" and "the amount over the current appraised home value" becomes the "unsecured claim."  The unsecured amount is discarded.  The secured amount, i.e., current appraised value, becomes the homeowner's only debt.  This debt can be amortized over the life of the loan.  Thus monthly payments go down, people have a much better chance of staying in their homes, and they have some disposable income for essentials. Link

Congressional Democrats and President Obama are arguing over legislation that would give bankruptcy judges greater options for "cramdowns."  Both sides of the argument are out of touch with the accelerating harsh realities of the U.S. economy as experienced directly by the citizens.

There's no court that needs to hear this case.  The nationwide cramdown should be negotiated directly by the Obama administration, in behalf of all citizens and the remaining banks.  Obama's two financial system insiders, Treasury Secretary Timothy Geithner and chief economic advisor Larry Summers, would all of sudden become the good cop - bad cop negotiators shoving the banks in a corner and forcing them so submit to the plan.

Both President Obama and Congress resisted a comprehensive program to benefit the millions facing foreclosure.  On Feb. 14, 2009, the Washington Post wrote of the Obama program to loosen options for bankruptcy courts to perform limited "cramdowns" for individual home owners through bankruptcy courts.  

There are not enough bankruptcy courts to handle the millions impacted by this economic crisis.  Many in need can't afford lawyers for court and judges would have latitude rather than a mandate to help homeowners.

The people will bring them back to reality very soon, just as they did on the specific issue of having someone in the cabinet so rich and aloof that he forgets to pay $146,000 in income taxes.  In the mean time, the opportunity to help those in need is passing.

Meeting the urgent need for people to have a home means less social and economic disruption.  There would be an immediate stimulus with more money available to spend in the real economy.  This stimulus program would put money back in the economy in months not years.

Now is the time.

END

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Thanks to those who provided feedback on cramdowns and to Susannah Pitt for her very helpful comments.