Currency War

So as we debase our currency we are holding China to account for basically offsetting our devaluations. If China devalues just to keep level with the US dollar is their fault and the US is blameless?

Currency Devaluation Non-Solution

On the October 13th "Breakfast with Dave", David Rosenberg correctly points out that currency revaluation by the Chinese will not likely have the outcome desired.

Since 1985, dollar-yen has sunk nearly 70% and yet the US has the same bilateral deficit with Japan today as it had then. So why does everyone think that a Chinese revaluation will necessarily clear out any perceived imbalances? Maybe if U.S. policy encouraged thrift over asset-based consumption growth, these trade imbalances would dissipate more quickly.

Voting is Not the Will of the People

Imagine four people choosing three types of fruit from a menu. They decide to be democratic and vote. If 2 people like bananas and each of the other participants choose an apple and pear then, accordingly, the will of the people will be to eat bananas for this meal. For the two people who did not get their primary choice - the will of the people is not so great. Voting for a politician is very similar. One side wins and claims "the will of the people" therefore it is just.

Additionally, this type of voting does not reflect intensity of desire. If the two people causing the majority like bananas slightly more than the other two fruits, they would have been content with any choice. Further, what if the two people left out despise bananas and adore their respective choices? As we see in voting the will of the people is not always reflective of intensity of desire.

Democratic voting is preferable than a dictatorial situation but I present this for educational purposes. With the election coming up - regardless of who wins it will not be the will of the people.

The Tennessee Municipal Fiasco Applied

There was a recent problem in Tennessee where to have municipal fire service you must pay a $75 annual fee. A man did not pay his fee and the fire department did not put out the fire even though they arrived on scene and the victim offered to pay (at least the $75). Put aside for this conversation he had pets in the house. This was not a free market failure. I don't know too many businesses that would, in a non-monopoly position, would refuse to extinguish the fire. This was a municipal policy failure. As an aside, the quick fix would be that the fire department in this case would put out the fire but for a unsubsidised price of $5000 or cost which ever is lower. That was not a choice in this situation which I find odd.

Suffice it to say that Krugman, et. al. have said what a horrible society we would have if the above fire department policy was in practice more broadly. To some degree I agree and feel content to pay taxes to provide municipal fire and police but that is for each municipal entity to define.

For a thought experiment, let us say that not only could you not insure for the $75 payment after the fact. Presume also that a home owner could not hire and pay the cost of the fire department services in the event of a fire. Now imagine a situation where you could not hire a different department to extinguish the fire nor attempt to resolve the problem amongst neighbours by law with penalty of fine and/or incarceration - even if equipped with both knowledge and equipment. Finally, even if health or life could be in danger, alternative means of handling the fire would be illegal.

Would not that be an even more horrible society than what many critics of the Tennessee municipality claim?

Readers from Canada may recognize this as their single-payer health care system. The single payer system can actually act to bar a person from alternative or paid medical care by force of law. The analogy is not perfect but the flaw is not that you can pre-pay but that while you have coverage demand exceeds supply and thus causing queuing with mechanism to equalize. It is a system that actively prevents the resolution of the supply/demand imbalance.

Hat tip: David Henderson for the clarity http://econlog.econlib.org/archives/2010/10/krugman_tenness.html

The Paperwork Problem

The banks and services have filed 10's of thousands of affidavits regarding loan documentation, etc and apparently with some fraudulent documentation. What the CNBCs and CNNs have mis-characterized as paper work problems are completely wrong. There is also an incorrect belief by analysts and delinquent mortgage holders will lead to free houses. In a few cases maybe but in general these home owners are severely delinquent and the house will be foreclosed unless it cures - who has standing in the foreclosure is not clear currently. This is a problem where the holders of the mortgage backed security may be able to unwind the contracts and "put back" the securities and the IRS may be looking for some money from improperly conveyed REMICs that normally allow for tax pass through when legal and proper.

Regarding the "paperwork" problem, this is a comment from a reader named "Ella" on the Naked Capitalism blog regarding affidavits.

Affidavits, perjury and fraud on the court.
An affidavit is a legal document which can substitute for live witness testimony in court. All testimony in court is governed by the rules of evidence or by statute. All testimony requires that the witness swears to tell the truth, is competent and has personal knowledge of the facts they are testifying about. An affidavit is no different, in most if not all jurisdiction, the affiant swears to tell the truth by being placed under oath by the notary, the affiant states in the affidavit that they were sworn, are competent and that they have personal knowledge of the facts in the affidavit. The notary attests to the oath of the affiant and that the affiant is who they claim to be.

If a witness lies in court or in an affidavit then they could be charged with perjury. Perjury is lying to the court.

The affidavit issue is being portrayed in the MSM at a paper work problem. Lying to the court is not a paper work problem. Attorneys are prohibited from making a material misrepresentation to the court of fact or law. Further, attorneys in most jurisdictions have an affirmative duty to report known perjury by their clients to the court.

The problem with the affidavits is perjury on behalf of the affiants and possibly the notaries depending on the notaries’ knowledge that the affiants had not reviewed the files, the promissory notes, the mortgages, or the records of default.

Further, you can reasonably argue that the entities pursuing foreclosure (banks or servicers) have perpetrated a fraud on the court by submitting perjured affidavits. If the attorneys representing the entities have knowledge of the fraud or are preparing questionable documents then they may also be involved and subject to penalties.

At the heart of any trial or hearing is the determination of the truth of the matter. It is the very purpose of the rules of evidence and what law and fact is presented to the court. If the affiants lied, as it appears, then the truth of whether they owned the note and held the mortgage and the borrower was in default is at issue. Courts, Attorneys General, and bar associations need to serious consider actions that will assure compliance with the rule of law.

This country cannot stand as a democracy if there is one set of law for the banks, corps, elites and another set of law for the rest of us. Perjury and fraud on the court is very serious matter. It is not a mere paper work problem.

What are the impacts going to be?

• Banks are going to have a lot to write down


• Bank earnings and stock prices will take a big hit


• State budgets will be impacted due to the likely pause in foreclosures (no taxes paid by delinquents)


• Short term home inventories may look better as distressed properties don't come to market


• Longer term there is going to be a surge in inventories and an offsetting drop in prices when the foreclosures do clear - the housing downturn is not going to be over for a few more years.


• Current foreclosure sales are going to fall through reducing near term home sales


• Some lawyers are going to make out from all this very well on both sides of the problem