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Life Off-the-Grid

One of the Scariest Videos I’ve Ever Watched

by Cam Mather

Sometime when you have 8 minutes watch this really great video. On the surface it would seem quite innocuous, just a bank regulator talking about bank fraud. I know what you’re thinking… boring.

In the video William Black talks about the savings and loan crisis that occurred in the U.S. during the 1980s when Savings & Loan companies responded to Ronald Regan’s deregulated market by cheating and created a huge mess that the U.S. taxpayers coughed up a staggering amount of money to clean up.

Then in 2004 the FBI, which had prosecuted senior insiders in the savings and loan mess, said there was an “epidemic of mortgage fraud” and predicted that it would produce an economic crisis. They were right and it did. In fact it went global. This is what happens when you deregulate markets – people lie and cheat.

So after the largest economic crisis since the depression – which was completely avoidable with proper regulation and sane interest rates by the Fed –  the big financial institutions got the rules changed so they didn’t have to actually record the value of their loans. Since the housing market collapsed and there really is no hope they will be able to recover these losses they should have been “marked to market.” This just means that even if you loaned someone $500,000 for their house, if the house is now worth $250,000 and you really have no hope of recovering the full $500,000, then you need to be truthful and reduce what you can realistically hope to recover from that loan on your books.

But the banks convinced their regulator to change the rules so that they didn’t have to recognize the loss unless they sold the loan. So essentially what William Black is saying is that the large financial institutions in the U.S. are insolvent, or bankrupt. They’re just not admitting it.

If the real estate market had any chance of recovering at some point in the foreseeable future, this might help, but the market is moribund and with the continuing unemployment and lack of economic activity other than government stimulus there is little hope for this.

In fact, Nic Retsinas of the Harvard Joint Center for Housing Studies predicts that as housing prices continue to drop and ARMs (adjustable rate mortages) reset, half of all U.S. homeowners are predicted to be underwater on their mortgages by 2011.

You should read that again. Half of U.S. homeowners will have negative equity in their homes, or their mortgages will be worth more than their homes. How depressing is that!

And as if that’s not bad enough, those large financial institutions have got the accounting rules changed so that they don’t really have to acknowledge the mess. Even “The Economist,” which isn’t a publication known for panicking, notes that the number of bank failures in 2009 was 900% higher than in 2007 with 700 banks worth close to half a trillion dollars problematic today.

If you “mark to market” the number is significantly higher.

The message here is “batten down the hatches” – the worst is not yet over. There’s still more to come. It’s time to pay down debt, build up some savings, make your home more energy efficient and buy some precious metals. The potential fallout from a financial catastrophe this big means that you’ll be on your own. Make yourself more independent!


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