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Will Devaluation and Default be the Themes for 2011?
December 14, 2010

Will Devaluation and Default be the Theme for 2011?
The mystery of how so many useless new houses came to be built in a remote part of Ireland might have the usual explanation: that rash speculation had been unwisely left to go its own way by the state. Such an impression of previous government passivity would certainly be helpful to the Fianna Fáil party, which has governed Ireland since 1997 and which on September 30 announced it would spend up to €18 billion on a further state bailout of Irish banks-otherwise, in the words of Brian Lenihan, the finance minister, their insolvency would "bring down" the Irish state itself, in ways he didn't go on to describe. Lenihan put the blame squarely on the banks for their "pattern of reckless lending," but as Fintan O'Toole demonstrates time and again in this book, the government was far from being a helpless spectator. Its policies and behavior were crucial to the property boom that, when it inevitably turned to bust, wrecked the Irish economy so spectacularly. O'Toole has written much about the theater, including brilliant studies of Shakespeare and Sheridan, and he sees tragedy, absurdity, and of course hubris among the human ruins left standing on the national stage. What he shows most memorably, however, is how Ireland's political leaders were complicit in the boom's every aspect: land acquisition, planning permission, funding.

Ian Jack
"Ireland: The Rise & the Crash"
The New York Review of Books
November 11, 2010

First we wish a safe holiday and happy, healthy and prosperous New Year to all. The IRA will be quiet until just before New Years, when we will review last year's predictions publish our prognostications about 2011.

Also, this week in The IRA Advisory Service, we discuss how the proposal by the FDIC to impose punitive insurance premiums on large banks that use all types of brokered deposits could have a decidedly adverse impact on the entire U.S. banking industry. To our friends at the FDIC we recall the old saying: Be careful what you wish for. You may get it.

We start this comment with an excerpt from Ian Jack's review of Fintan O'Toole's new book, Ship of Fools: How Stupidity and Corruption Sank the Celtic Tiger. Both are must reading for students of the crisis around the world. And conveniently enough, you have but to change the words of either of these works to include American politicians and states to show that the stories on both sides of the pond were remarkably similar.

Speculative booms are the result of free people doing greedy, short-sighted and stupid things to benefit themselves at the expense of everyone else. We invite you to examine the new book by our friend Alex Pollock at American Enterprise Institute, Boom and Bust: Financial Cycles and Human Prosperity, wherein he writes:

"Despite their historical frequency, the busts at the end of the bubbles take people by surprise. Then they ask the same questions. How did it happen? How did prices get out of control? How did so many risky loans get made? Who is guilty. What can we do so it never happens again?"

Well, sad to say that the whole point of being a free society is that booms and busts will happen again. The Irish and their American cousins share this terrible but also wonderful attribute. When the desire for individual freedom and opportunity runs into the reality of a zero sum world, there is fraud and larceny. Sad to say, when Americans arrive at the point of perfectly managed regulatory perfection we shall all being living in a Euro-style corporate dictatorship. The reason that the Danes have such an orderly mortgage market is because like much of Europe, their people have only the freedoms allowed by the state. And fraud and corruption in Europe are largely the province of politicians and their clients among the largest banks and corporations. Indeed, America is well along in the journey down that road to serfdom, in part because we still are unwilling to punish the outliers and thereby restore balance between individual aspirations for a better life, call it the American dream, and the public good.

Last week, we received an invitation from some good citizens to sign onto a letter calling for criminal prosecutions of fraud as a necessary condition for national recovery. At first this idea liked us well, but then we reconsidered. If you are calling for criminal prosecutions, does this not demand a certain degree of specificity? Thus we demurred in the letter writing effort, preferring instead to conduct our own investigation. We are already on the record regarding our view of the need for prosecution of delinquents such as former Citigroup director Robert Rubin. Read the past issues of The IRA ( 'Country Risk: The World According to Robert Rubin (Updated)', June 29, 2010 ). Former Treasury Secretary Hank Paulson and Bank of America CEO Ken Lewis also come to mind.

Our friend Yves Smith over at Naked Capitalism has been sorting out the foreclosure documentation mess for some months and her work suggests some additional culprits. In a December 2, 2010 post, Smith skewers American Securitization Forum executive director Tom Deutsch for giving "one of the most outrageously dishonest presentations I can recall ever seeing." Click here  to read "American Securitization Forum Tells Monstrous Whoppers in Senate Testimony on Mortgage Mess." 

Now, just to be clear, we are not suggesting that all of the members of the ASF should be transported free of charge to Guantanamo. But if you follow the excellent work done by Smith and others in the blogosphere, the only conclusion to be reached is that there are potentially thousands of individuals associated with originating, selling and/or servicing mortgage loans who could or should be prosecuted for deliberate acts of fraud. And the lawyers too. Yet Washington refuses to do the will of the American people.

The view on all of this expressed by the banking and loan servicing community is that the imperfections in the documentation of a lien or the transfer of a note are significant, but that at the end of the day the imperfections will be cured and the note holder will prevail. We agree.  More to the point, when the dead weight of all of the defaulted loans which are just now starting to move from foreclosure to involuntary sale falls upon lenders, the courts, and communities, the legal and technical problems that Smith and others very accurately accurately describe will become political and they will be fixed -- and not always to the benefit of the note holder. The whole point of our federalist system is that such issues must first be adjudicated by the lower courts, then the appeals courts and Congress will take a systemic view and move toward a consistent means of resolution. 

One of the things about a free society is that when a problem grows to a certain size, the political force behind the good of the many becomes irresistible and the good of the few or the one can often overlooked. As new political tendencies join governments in Ireland and the U.S. in January 2011, we look for macro economic and financial factors to start driving events in some ways that will be very unpleasant for creditors and consumers like. More on this in a couple of weeks.  Just remember that sovereign states like Ireland, California and New York don't file bankruptcy, they merely default a la Iceland and Argentina.  Or to quote the headline in The Daily Bail: "Secret GOP Plan: Avoid A Massive Bailout By Pushing States To Declare Bankruptcy, Smashing Unions"

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