The Foreclosure Mess

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I haven’t been blogging about the foreclosure debacle in detail, so here’s a quickie catch-up on what it could all mean:

Beyond sloppy documents, the foreclosure debacle has exposed one of Wall Street’s little-known practices: For more than a decade, big lenders sold millions of mortgages around the globe at lightning speed without properly transferring the physical documents that prove who legally owned the loans.

Now, some of the pension systems, hedge funds and other investors that took big losses on the loans are seeking to use this flaw to force banks to compensate them or even invalidate the mortgage trades themselves. Their collective actions, if successful, could blow a hole through the balance sheets of big banks and raise fundamental questions about the financial system, financial analysts and a lawmaker said.

….Local laws in most states dictate that each time a mortgage changes hands, the transaction needs to be recorded in courts or county offices. But the speed with which the loans were being generated during the housing boom and then pooled together and passed around Wall Street meant that big financial firms took shortcuts, consumer lawyers said.

Italics mine. I was at dinner last night with a longtime reader, and we naturally ended up talking a bit about the economy. My biggest worry, I said, continues to be an “event.” Maybe China crashes. Or Iran decides to embargo oil for some reason. Or Ireland collapses, sending the Euro into a tailspin. Or maybe something like this foreclosure mess, which blows a hole in bank balance sheets yet again and turns into a replay of September 2008. I don’t know how likely this is, but the fact that Geithner & Co. are so obviously eager to keep the foreclosure machinery humming suggests to me that they have similar worries.

Now, maybe I’m just a worrywart. If I start hawking gold on the blog, that’ll be a sign that weird economic conspiracies have finally seized hold of my mind and I can be safely ignored. But a “lost decade” of slow growth and stagnant income, bad as it is, isn’t the worst thing that could happen to us. My sense is that although banks are much stronger now than they were two years ago, they’re still not strong enough. Another meltdown is still possible given the right event to set it off.

UPDATE: Details of the worst case scenario here.

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SIX TRUTHS

Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

Truth #2: Team Reality is bigger than it seems.

Truth #3: Facebook owns this.

Truth #4: When we go to work, we're in the fight.

Truth #5: It's about minority rule.

Truth #6: The only thing that can save us is…us.

Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

And if you think journalism like Mother Jones'—that calls it like it is, that will never acquiesce to power, that looks where others don't—can help guide us through this historic, high-stakes moment, and you're able to right now, please help us reach our $350,000 goal by October 31 with a donation today. It's all hands on deck for democracy.

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