Federal Debt and the Bank of Timmy

There has been much breathless discussion lately surrounding the national debt ceiling as total government debt approaches the legal limit. Treasury Secretary Timothy Geithner said there was "no alternative" and threatened Congress with unspecified "catastrophic" consequences if the limit was not increased. Of course, he is merely following in the tradition of terroristic threats by corrupt Treasury officials.

But just as the implied threats of martial law were used by Henry Paulson as cover for one of the biggest thefts in history, we must now ask what lurks behind the current spate of threats out of Treasury? Paulson lied about what the TARP was to be used for - which is why he demanded immunity in advance. Geithner is lying about the need for an immediate increase in the debt limit. What is being hidden is many activities that aid speculators and bureaucrats that will have to end if the limit stays in place.

In the real world there is a problem that a lot of money is being spent that has nothing to do with the operations of the federal government. This can be seen clearly in the recent announcement that the Treasury will be selling off some of its $142 billion of MBS (mortgage backed securities). There really is no legitimate function of government that relates to manipulating the price of bonds. It's good that they are looking to get rid of them but there is no reason to have them in the first place other than to overpay to help sellers and also to make continuing holders look more solvent by deliberately distorting the "market" price.

Then there are the loans which Treasury has extended to the states to cover their own spending. The state unemployment funds are in hock to Washington for $46.3 billion as of March 23. This is problematic in that it undermines the constitutional requirements that many states must balance their budget every year. It also undermines the ability of the states to function as sovereign entities when they are financially so beholden to the central government. Thus it is a direct attack on the our Federal system of government.

Secretary Tim Geithner is not running a Treasury Department. He is in fact running a bank under the aegis of the federal government and Congress needs to keep that in mind as he goes begging them for more money. Treasury should not be in the business of lending money to the states or of buying private market debt. Those are functions for commercial banks and bond markets. Worse still, those banking functions have been performed using the credit of the American People. If Geithner was not playing these games, the Treasury would have another $190 billion in borrowing authority remaining.

Any increase in the debt limit should be conditional on the Treasury ceasing all interference in state finances and public financial markets.

The Law

Here at Financial Jenga we have hoped, even prayed for the law to be enforced for the last couple of years. Yet the fraud has raged unchecked and if anything grown worse. Banks have mass filed false affidavits to fraudulently seize houses through the foreclosure process and then said "oopps, we made a technical paperwork error" when caught. At first they got away with it. They HAVE seized houses through this procedure when there was no mortgage and no lien at all.

The Fed has gone and done things far beyond the scope of authority given to it by Congress - like using our money to prop up the investment banks and the stock fraud they are running. They are given the power to buy exactly two thing - bonds carrying the full guarantee of the US government and short-term loans for planting of crops. Buying junk bonds containing mortgages violates both the letter and the spirit of their charter. Buying stocks is so far beyond their legal powers that someone should be in prison and probably a lot of someones.

No one has shown much sign of really stopping the Fed yet but the Massachusetts Supreme Judicial Court landed a major blow for the law today by confirming a lower court ruling that nullified two foreclosures because they plaintiffs couldn't show they owned the property. In both cases, "robosigned" affidavits were introduced as proof of ownership and later shown to be without merit.

The state Supreme Judicial Court today upheld a judge’s decision saying two foreclosures were invalid because the banks didn’t prove they owned the mortgages, which he said were improperly transferred into two mortgage-backed trusts. As reported by Bloomberg:

“We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure,” Justice Ralph D. Gants wrote.

While there have been many similar rulings across the country, this is the first such decision by a state supreme court. And since property law is still properly the jurisdiction of the states, this decision is final as far as Massachusetts is concerned. Hopefully they will follow up with prosecutions for the mass of fraud represented by those false affidavits.

And this entire financial crisis is bound up with a struggle to centralize political power in Washington. One of the key enablers of the late-bubble madness was the effective nullification of state lending regulations. This was done in 2004 when the Office of Comptroller of the Currency used federal preemption to overrule state laws against predatory lending. It was one of the worst moments of the Bush Administration:

The Office of the Comptroller of the Currency Feb. 21 published for comment a ruling that Georgia's predatory lending law, the Georgia Fair Lending Act (GFLA), is preempted for national banks.

At the same time, it issued two advisory letters to national banks to clarify its expectations for banks to avoid involvement with "predatory" lending practices.

So basically, the OCC's action wiped out state legal protections against predatory lending. And they substituted a finger wagging "don't do it" with a nudge and a wink to just go ahead. And of course the very worst mortgage paper was written over the next three years after the change. We have documented the results of those no-doc, alt-A and option ARM loans here from the very beginning. But those abusive mortgages would not have been possible without Washington stepping in to remove the legal shield that states provided their citizens.