Two important milestones were reached yesterday.
The Dow climbed over 13,000 – a new world record, noticed by all.
Meanwhile, ignored by almost all, the dollar (USD) sank to its lowest level ever against the euro (EUR).
Of the two, the latter we consider more interesting. For the decline of the dollar – against euros, gold, and financial assets generally – undermines Americans’ wealth even as they see themselves living in the lap of prosperity. The decline of the dollar could also push forward the day on which the world’s big holders of the greenback look at their piles and begin to worry that they have a trillion or two too many. At that point (which we have been attending for so long we often forget what we are waiting for) you should see some real excitement in the world’s investment markets.
The most obvious consequences will be a further sell-off of the dollar, sparking an increase in U.S. dollar-yields. This, in turn, would disrupt millions of financial decisions, making lenders more wary and borrowers more prudent.
That there is still ample room for movement – towards wariness on the part of the former, and prudence on the part of the latter – is demonstrated in today’s International Herald Tribune. Yes, dear reader, the mainstream press is finally catching on to the imperial trend we spotted years ago – towards widespread, commonly accepted fraud. Today it is ‘fraud for housing.’
“Loans that require little or no documentation of income soared USD$276 billion, or 46 percent, of all subprime mortgages last year, from USD$30 billion in 2001,” says IHT. Now, these ‘liars’ loans’ are defaulting at eight times the rate of regular, fully documented prime mortgages.
According to the paper, many of the buyers didn’t even know they were lying about their income; the mortgage brokers lied on their behalf, inflating income figures in order to get the loans through the approval process.
“I saw account executives openly engage in conduct such as altering borrower’s W-2 forms or pay stubs, photocopying borrower signatures and copying them onto other, unsigned documents and similar conduct,” said a witness.
But the FBI is not on the case. The G-men aren’t interested in ‘fraud for housing.’ They’ve got bigger fish to fry – people who lie to get multiple mortgages with no intention of paying them back, known as ‘fraud for profit.’
And don’t expect the local DA or politicians to go after the small fish either. There’s nothing in it for them – no glory…no votes…no path to higher office.
Instead, they will move to ‘protect’ the hapless victims of mortgage fraud
– in many cases, the very same people who lied to get loans. Every era produces its own special variety of fraud; and every great, shining fraud is followed by paler imitators. Typically, borrowers get themselves into trouble; and then the politicians thunder about ‘debt relief’ or a ‘moratorium’ on foreclosures.
From Grant’s Interest Rate Observer, we learn that in the midst of the Great Depression, many debt relief measures were passed. One of them was a clear interference with the right to contract, and was challenged in the U.S.
Supreme Court. The Supremes affirmed the state’s power to meddle, saying it was justified by the economic emergency. But Justice George Sutherland, who was writing for the dissent (but who might have been writing for the Markets and Money), expressed the view shared by all economists who aren’t idiots – both of them.
“The present exigency is nothing new. From the beginning of our existence as a nation, periods of depression, of industrial failure, of financial distress, of unpaid and unpayable indebtedness, have alternated with years of plenty. The vital lesson that expenditure beyond income begets poverty, that public or private extravagance, financed by the promises to pay, either must end in complete or partial repudiation, or the promises be fulfilled by self- denial and painful effort, though constantly taught by bitter experience, seems never to be learned: and the attempt by legislative devices to shift the misfortune of the debtor to the shoulders of the creditor without coming into conflict with the contract impairment clause has been persistent and oft-repeated.”
But in the contest between the sanctity of contracts and debt relief, the forces are badly mismatched. For every creditor trying to get his money back, there must be thousands of debtors armed with voter registration cards, determined to stop him.
Markets and Money