The Homeowner Bill of Rights launched in California not only changed hundreds of years of real estate law, it may have turned the West Coast state into a judicial foreclosure state with financial firms on high alert, legal experts claim.
“In California, they just gave trial lawyers a nuclear weapon to use against the industry,” said Bob Jackson, president and attorney at Irvine, Calif.-based Jackson & Associates. Jackson spoke at HousingWire’s REperform Summit, a mortgage servicing conference under way in Dallas. “
The Homeowner Bill of Rights is the most massive change in the last 100 years of real estate law,” he said. “It used to be servicers were in the business of enforcing simple contract law. What the loan servicer did is they enforced the contract, but that is no longer how the game is played.”
The bill of rights, which was legislation designed by California Attorney General Kamala Harris, gave borrowers standing to legally address violations of the new foreclosure legislation.
The law bans dual-track foreclosures, requires single point of contacts for distressed borrowers and imposes civil penalties for the filing of multiple unverified documents, otherwise known as robo-signing. The robo-signing provision essentially means a law firm cannot file a notice of default or another foreclosure-related action unless a servicer has reviewed the filings to verify them, Jackson said.
Jackson said the bill created several new areas of concern for servicing shops. The first is the potential to be sued for wrongful denial of a loan modification. Firms also can be sued if a loan modification was denied because of a mistake made in the process.
With any document misstep leading to the possibility of litigation, Jackson said the hedging strategy would be to file judicial foreclosures, bypassing the common practice of nonjudicial foreclosures in California.
“You need to start looking at your foreclosure timelines,” Jackson said. “Judicial foreclosures get rid of 80% to 90% of this stuff.” He asserted, “[T]he bill will turn California from a nonjudicial foreclosure state to a foreclosure state.”
Jackson noted that Arizona and Oregon are currently considering similar legislation.
source: Kerri Ann Panchuk housingwire.com
Federal Housing Finance Agency Acting Director Edward DeMarco will not allow principal reduction on Fannie Mae and Freddie Mac loans.
“Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid foreclosures, and minimize the expense of such assistance to taxpayers, FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today,” DeMarco said in a statement Tuesday.
New FHFA analysis shows Fannie and Freddie would save $3.6 billion by writing down principal under the Home Affordable Modification Program.
After payouts from the program are factored in, taxpayers would save $1 billion if the government-supported agencies were allowed to participate, according to the analysis. Nearly 500,000 mortgages could be eligible for the program.
In a letter to Congress, DeMarco said the program could cost up to $90 million to implement and a year or more for mortgage servicers to get up to speed.
If half of the eligible borrowers go through the program, savings drop to roughly $500 million, according to the analysis.
“Experience indicates that the likelihood of successfully modifying and reinstating these loans is small so that the anticipated net benefit is likely to be much less than $500 million,” DeMarco said.
Treasury Secretary Tim Geithner urged FHFA Acting Director Edward DeMarco in a letter Tuesday to allow Fannie and Freddie to participate in the program after FHFA provided the analysis to some members of Congress. He even offered to pay for implementation costs of the program.
“I am concerned by your continued opposition to allowing Fannie Mae and Freddie Mac to use targeted principal reduction in their loan modification programs,” Geithner wrote. “In view of the clear benefits that the use of principal reduction by the GSEs would have for homeowners, the housing market and taxpayers, I urge you to reconsider this decision.”
An FHFA spokeswoman did not immediately reply to requests for comment.
The Treasury tripled payments to investors this year for allowing principal to be reduced through HAMP.
Preliminary analysis released by the FHFA in April showed Fannie and Freddie could save up to $1.7 billion from defaults avoided. But Treasury was thought to send $3.8 billion in the higher incentives for the write-downs. The program would therefore cost taxpayers a net $2.1 billion.
According to a separate letter from Michael Stegman, counselor for housing finance policy at the Treasury, the FHFA applied the program to the entire GSE portfolio of underwater home loans in the original analysis.
Performed on a loan-by-loan basis, principal reduction would be applied on less than 500,000 Fannie and Freddie mortgages, compared to 700,000 in the preliminary analysis, Stegman wrote.
When the FHFA analyzed the program for the smaller pool size, it found Treasury payouts to the GSE to be $2.7 billion, not the $3.8 billion originally thought. Thus, the net benefit to taxpayers would be $1 billion after the $3.6 billion in savings to Fannie and Freddie is factored in. (Click on the graph below to expand.)
Less than 10% of the $29.9 billion Congress allocated to HAMP has been spent. Roughly 4 million Fannie and Freddie borrowers owe more on their mortgage than their home is worth. Most of them, however, are still current on their loans.
FHFA fears borrowers would strategically default in order to take advantage of the program, costing the GSEs even though they could otherwise afford their monthly payment.
Fewer than 19,000 strategic defaulters would offset the benefits of the program, DeMarco said in his letter.
Stegman wrote the program requires proof of a financial hardship and tests that show the write-down would be less costly to an investor than a standard modification.
“In essence, a borrower who defaults cannot be certain that he or she will obtain a HAMP modification, much less a HAMP modification with principal reduction,” Stegman wrote. “Therefore, a borrower would take a substantial risk by deliberately defaulting: they would have to choose to damage their credit for years to come and perjure themselves on the chance that they would be found eligible for the program.”
source: housingwire dot com, written by Jon Prior
Ocwen Financial Corp. reduced principal for 18,924 mortgage borrowers as of May as part of its shared appreciation program launched one year ago.
The average monthly payment on principal and interest shrank to $624 from $1,270 before the modification was granted. Ocwen reduced an average $75,500 per loan.
Fewer than 10% of the modified loans went 60 days or more delinquent six months after the workout, according to data provided to HousingWire.
Comparatively, 14.1% of third-quarter modifications by all servicers regulated by the Office of the Comptroller of the Currency went just as delinquent after the same amount of time, according to government data.
Ocwen will write down qualified mortgages to 95% of the underlying property’s market value. The amount written down is forgiven in one-third increments over three years as long as the homeowner remains current.
When the house is later sold or refinanced, the borrower will be required to share 25% of the appreciated value with the investor.
Paul Koches, general counsel and vice president at Ocwen, said the firm averages between 2,000 and 3,000 shared-appreciation modifications per month and likely passed the 20,000 total in July.
“It’s continued to perform very well,” Koches said in an interview. “We think we’re on to something here.”
Since July of last year when the program was announced, Ocwen performed nearly 60,000 modifications through March 31, according to its most recent financial filings.
During the same time Ocwen grew its servicing portfolio to $106.1 billion to roughly $128 billion in the second quarter to become the largest servicer of subprime mortgages.
None of the shared-appreciation modifications go to Fannie Mae and Freddie Mac loans as the Federal Housing Finance Agency continues work to determine whether to allow principal reduction. Each modification also passes the net-present value test used by investors to determine if the workout is more profitable than a foreclosure.
More than 11.4 million borrowers owe more on their mortgage than their home is worth, but that number is on a slow decline, according to CoreLogic . More servicers used principal reduction to keep these borrowers current, too.
More than 10% of modifications in the first quarter included a principal write down, up from 3% just one year ago, according to Office of the Comptroller of the Currency data.
Ocwen executives believe the program provides the best incentive to keep people paying on their home loan, and other parties are interested in how it’s doing.
“We’ve been responding to a lot of requests from various parties both public and private,” Koches said.
source: Jon Prior at houssing wire dot com
California Gov. Jerry Brown signed into law Wednesday the Homeowner Bill of Rights, a hotly debated piece of legislation that will reform foreclosure practices in the state. Among other things, the bill ends dual tracking, in which banks were permitted to foreclose on homeowners while they were negotiating for a loan modification with their lender. The legislation also institutes a single point of contact for homeowners who will no longer have to speak to a different person at the bank every time they call.
If a bank does not follow the new procedural rules, California homeowners can take the bank to court. The bill was introduced by Attorney General Kamala Harris and championed by consumer advocates and homeowners. Residing within it is the Foreclosure Reduction Act, which restricts the dual-tracked foreclosures and the Due Process Rights Act, which guarantees a single point of contact for struggling homeowners. Both were passed last week. The latter also imposes civil penalties for fraudulently signing foreclosure documents without verifying their accuracy, a practice that became known as the robo-signing scandal. The bill, which takes effect on Jan. 1, 2013, will impose stricter rules on mortgage servicers seeking to nonjudicially foreclose on homes with mortgages in default and is expected to expose mortgage servicers to substantial new legal liability. Many industry groups argued the new legislation could add to the financial burden of distressed homeowners. “The legislation extends the impact of the national mortgage settlement so that all homeowners in California, regardless of which bank services their loan, have the same protections and rights,” said Kevin Stein of the California Reinvestment Coalition. “This legislation should serve as a national model for other states looking to enforce the settlement and protect homeowners.”
source jhilley housingwire.com
The biggest scandal in the world right now has nothing to do with sex or celebrities. It’s about an interest rate called LIBOR, or the London Interbank Offered Rate.
Most Americans probably never heard of LIBOR. When I first moved to New York, I hadn’t. Back then, I could barely afford my apartment and got an adjustable rate mortgage. And so I wondered: When my rate adjusts, how will I know how much I’ll be paying?
I searched through all the documents and it was right there — LIBOR. I would be paying a few percentage points above whatever LIBOR was.
LIBOR, as it turns out, is the rate at which banks lend to each other. And more importantly, it has become the global benchmark for lending.
Banks look at it every day to figure out what they should charge you for not just home loans, but car loans, commercial loans, credit cards. LIBOR ends up almost everywhere.
Gillian Tett, an editor with the Financial Times, says that $350 trillion worth of contracts have been made that refer to LIBOR.
So literally hundreds of trillions of dollars around the world, all these deals, are based on this number. Now we find out this number might be a lie. At least one bank was tampering with that number for their own profit.
We know this because federal regulators have released emails from Barclays bank that talk very casually about this manipulation. And the emails are incredible.
There is a supposed to be a separation between the bankers who help set LIBOR and the traders who bet money in the market. But the emails show they routinely talked to each other.
In one, a trader says: Who’s going to put my low fixings in hehehe. He wrote the evil laugh right in the email.
In another, traders offer to buy people Bollinger, expensive champagne, or to bring them coffee in exchange for fixing the number.
One trader thanks another banker for the manipulation in an email and says, “I’ll put your name in a book in golden letters.” The other banker responds, “I would prefer not to be in any book!”
Barclays says it was just a few traders behaving badly. But the scandal is about to break much wider than that. Because no bank can manipulate LIBOR alone. It’s an average of data from a bunch of banks.
Gary Gensler, the chair of the U.S. Commodity Futures Trading Commission, says the emails include contact with other banks. He hasn’t revealed which ones, but they have nicknames. “It’s safe to say its a least four other banks to benefit their profits,” he says.
This scandal is still unfolding. No one is sure how much money was made or lost on this scam yet. But think of it, with trillions of dollars in investments based on a number that now seems dodgy, if you lost money on a deal, you’d be calling your lawyers right now.
The city of Baltimore and a pension fund in Connecticut are the first to sue, claiming the LIBOR manipulation cost them millions. More lawsuits are on the way.
The following was written by the Editor of livinglies.wordpress.com:
I had the pleasure of listening last night to Michael Trailor, the Director of the Arizona Department of Housing. It was like a breath of fresh air. He was a home builder for decades and when the market crashed he went into this obscure post of this obscure state agency that turns out to have its counterparts in many if not all states. Each of these agencies has received money and authority to help homeowners and they are willing to pay down principal reductions, buy the loans and then modify and pay for moving expenses in short sales and other events.
Trailor is a plain-speaking non-politician who tells it like it is. His agency has programs based upon the premise that principal reduction is the only thing that works and he has working relationships with some small banks where his agency literally pays the principal down while the Bank shares in that loss. The small banks see the sense in it. He can’t get cooperation from the big banks and servicers.
In the meeting at Darrell Blomberg’s Tuesday Strategist presentation (every week at Macayo’s restaurant in downtown Phoenix), we heard straight talk and we heard about a number of programs that I had advocated before Trailor became director. My suggestions fell on deaf ears. Trailor’s programs are of the same variety and creativity with the objective of saving the Arizona economy from destruction.
He reported that three states got together under the same program to make the offer of sharing the reduction of principal because the banks said that Arizona was not big enough on its own to motivate the banks to participate in the program. So he got three states — Arizona, California and Nevada. The banks did the old familiar two-step with him and his counterparts in the other states and essentially refused to pparticipate. Every borrower knows that two-step by heart.
I made some suggestions for programs that could be introduced in bankruptcy court, where the power of the Banks is much less. Right now if they don’t want to modify the loan, they can’t be forced. If they don’t want to SELL the loan and then modify it as the beneficiary or mortgagee, the mega bank can and does say no (while the small bank can and does say yes).
That’s right. His agency said they would buy the loan from the bank for 100 cents on the dollar, and then modify the loan the principal and payments to something the borrower could afford and that would not lead to future foreclosures (the fate of practically all modifications). The mega banks killed the idea. Don’t you wonder why banks would contrary to the interest of a ‘lender” who can minimize their losses with government money that has already been allocated but is not yet spent?
This is exactly what I predicted back in 2008. The small banks agree because it is the smart thing to do and THEY are actually owed the money. The mega banks refuse to go along with the deal because hanging on the now invisible and non-existent trunk of an existing debt-tree are hundreds of branches of swaps, insurance and credit enhancements upon which Wall Street has made and is continuing to make billions of dollars in “trading profits” at the expense of the investors and to the detriment of the homeowners.
In other words, they sold the loan multiple times — up to 40 times as I read the data. So hanging on your $200,000 loan could be as much as $8 MILLION in derivatives, swaps etc. That could mean $8 million in claims on the proceeds of sale of the obligation or note or satisfaction of the note or obligation.
Here is my suggestion for those homeowners’ attorneys that have started a bankruptcy proceeding. Where the so-called creditor has sent out a notice of sale and has filed a motion to lift the automatic stay, apply for assistance from the Arizona Department of Housing or whatever the equivalent is in your state. If the agency agrees to assist in refinancing or buying the loan so the homeowner can stay and pay, then the bank would need to explain the basis on which they are responding negatively. After all they are being offered 100 cents on the dollar — why isn’t that enough?
Make sure you notify the Trustee and Court of the pending application made to the agency and don’t use it in a silly fashion promising things that the agency will not corroborate.
I believe that Trailor’s agency and his counterparts would respond with some program that would essentially be an offer to the supposed creditor — provided that the true creditor steps forward and can prove that they are the actual party to whom the money from the homeowner’s obligation is owed. Darrell and I are starting talks with Trailor’s agency to get specific programs that will work in bankruptcy court and maybe other situations.
Once the Notice of Sale is sent, the “creditor” has committed itself to selling. How can they turn around and say no when they are being offered the full amount? In that court, once the “lender” has committed to selling the property they can hardly say they don’t want to sell the loan — especially if they are receiving 100 cents on the dollar. The offer would be accepted by the Trustee, I am fairly certain, and the Judge since there really is no choice.
Now here is where the fun begins. The Judge would agree as would the U.S. Trustee that only the party to whom the money is owed can get the money. Some of you might recall my frequent diatribes about who can submit a credit bid — only the actual creditor to whom the original loan is now owed or an authorized representative who submits the bid on behalf of THAT creditor.
So assuming the Trustee and Judge agree that the “creditor” who filed the Motion to Lift Stay MUST sell the loan or release it upon receiving full payment, then they are stuck with coming up with the real creditor, which is going to be impossible in many cases, difficult in virtually all other cases. Trailor is sitting on hundreds of millions of dollars to help homeowners and he can’t use it because nobody will play ball under circumstances that he “naively” thought would be a no-brainer.
For those versed in bankruptcy you know the rest. The “lender” must admit that it is not the lender, that is has no authority to represent the creditor, that it doesn’t know who the creditor is or even if one still exists. The mortgage can be attacked as not being a perfected lien on the property and the obligation is wiped out or reduced by the final order entered in the bankruptcy court.
Now the banks and servicers are going to fight this one tooth and nail because while the loan might be $200,000, there is an average of around $4 million in derivatives and exotic credit enhancements hanging on this loan. If it is paid off, then all accounts must settle. There are going to be gains and losses, but the net effect might well be that the bank “Sold” the loan 20 times. And the best part of it is that you don’t need t prove the theft. If will simply emerge from the failure of the “lender” to conform with the order of the court approving the deal.
This is a classic case of the scam used in the “The Producers” which has been done on Broadway and movies. You sell 10,000% of a show you know MUST fail. They select “Springtime for Hitler” right after World War II and expect it to crash. After all it is musical comedy. But the show is a spectacular success. So whereas the news of the show’s closing would have sent investors to their accountants to write it off for tax purposes, now they were all clamoring for an accounting for their share of the profits. Since the producers had sold the show 100 times over it was impossible to pay the investors and they went to jail.
THAT is the problem here. It is only if the show closes with a foreclosure that the investors will not ask for the accounting. If the show succeeds (the loan is paid off) then all the investors will want their share of the payments that are due — unless they had the misfortune of taking the wrong side of a “bet” that the loan would fail. Not many investors did that. But the investment banks that sold the show (the loan) many times over used those bets as a way of selling the show over and over again.
If I’m lying I’m dying. That is what is happening and when people realize that as homeowners they are sitting on leverage worth 20 times their loan and they use it against the banks and servicers, they will get some very nice results. Agencies like Arizona’s Department of Housing can save the day like the cavalry just by making the offer and getting a judge to enforce it and watch in merriment how the “lenders” insist that they don’t want the payment and they can’t be forced to take it. That is what happens when you turn the conventional and reasonable lending model on its head.
So now the banks and servicers must come up with a whole new set of fabricated, forged and fraudulent documents in which the investors assigned their interest in the obligation or note or mortgage to some other entity that is now the “creditor” — but the question that will be asked by every Trustee and Judge in bankruptcy court “who paid for this, how much did they pay, and how do we know a transaction actually happened.” That is the problem with a VIRTUAL TRANSACTION. At some point, like every PONZI scheme, the house of cards falls down.:
A surge in maturities for troubled loans has pushed the delinquency rate for commercial mortgage-backed securities to an all-time high of 10.04% for May, according to a loan-research service.
That’s the first time the rate passed the 10% mark, fed largely by five-year loans that were made in 2007 — when standards were at their weakest — and are now coming due, according to Trepp LLC. Landlords have had difficulty paying these off given that standards and values are far more stringent now, with more properties falling into default. (Loans are delinquent when at least 30 days past due.)
Tens of billions of commercial-property loans that were securitized have run into trouble in recent years, as a drop in rents and values during the downturn pushed many landlords into trouble, unable to pay off their debts.
Even as the commercial-property market across the U.S. slowly recovers, more loans are falling into trouble because leases made during times when rents were higher are coming due, and because mortgages are reaching their maturity dates, with property owners unable to find new loans to replace them.
The rate of delinquent loans, up from 9.8% in April and 9.68% in March, has remained relatively steady above 9% for well over a year, increasing recently due to the 2007-vintage maturities. Currently $59 billion in CMBS loans is past-due, according to Trepp.
That’s not expected to continue for much longer. Most of those loans were made in the first half of 2007, so maturities — and defaults — should slow in the last six months of the year, Trepp said.
Nationstar Mortgage Holding bought $10.4 billion in mortgage servicing rights from Bank of America .
The portfolio is made up of Fannie Mae and Freddie Mac mortgages. Nationstar funded a portion of the purchase from a 65% co-investment from Newcastle Investment Corp. The loans are expected to transfer to the Texas servicer in July.
BofA serviced $1.3 billion in loans for investors as of March 31, down from $1.6 billion one year ago, according to its first-quarter financial filing. It handled 20% of the Fannie Mae single-family portfolio, making it the largest GSE servicer in the U.S., but that share dropped steadily from 26% in December 2010, according to Fannie Mae filings.
Nationstar will become the largest nonbank mortgage servicer in the country this year when its largest deals close. It made many acquisitions from firms looking to shrink their portfolios or exit the business altogether.
Nationstar agreed to purchase $201 billion in MSRs from the bankrupt Residential Capital last month. The deal is pending court approval. It also acquired $63 billion in servicing assets from Aurora Bank in March.
It bought a reverse mortgage-servicing portfolio from MetLife in April.
Nationstar went public in March, raising $233 million through an initial public offering. Its parent company Fortress Investment Group still controls more than 80% of the firm.
Should the ResCap deal go through, Nationstar will service mortgages held by more than 3.4 million borrowers.
Nationstar CEO Jay Bray said at a Keefe, Bruyette, and Woods conference Tuesday, the firm is not done acquiring new servicing.
“I think you’ll see more of that to come,” Bray said.
source: housing wire
The number of refinanced Fannie Mae and Freddie Mac mortgages nearly doubled in the first quarter as the largest banks launched the expanded Home Affordable Refinance Program.
Servicers refinanced roughly 180,000 GSE loans in the first three months of 2012, nearly double the 93,000 completed in the fourth quarter, according to Federal Housing Finance Agency data. In March alone, servicers refinanced 80,000 borrowers under the program.
HARP launched in April 2009 to allow more borrowers who owe more on their mortgage than their home is worth to refinance. But few severely underwater borrowers could take advantage of historically low rates. The FHFA expanded the program last fall to remove the loan-to-value ceiling of 125% — the so-called HARP 2.0 — and to reduce upfront fees and eliminate repurchase risk if the original servicer on the loan completes the workout.
With the surge in the first quarter, total HARP refinancing now totals more than 1.2 million loans.
And more severely underwater borrowers are finally being included (click on the graph below to expand).
More than 4,400 borrowers with LTVs above 125% refinanced through HARP in the first quarter. More than half of them were located in California, Florida and Arizona, states hardest hit by the foreclosure crisis.
Borrowers in the 105% to 125% range were often shut out as well, but that changed under the expanded program as well. In the first quarter, nearly 37,000 of these underwater borrowers refinanced, nearly triple the 13,000 in the previous quarter.
Lawmakers are considering another expansion of the program. Most of the HARP business is going to the largest banks because of the reduced repurchase risk, which is generating higher profits for these firms. Smaller lenders want in on the action and are busy lobbying Congress for more competition, specifically asking to remove repurchase risk for all lenders.
source: housing wire
The youtube video of 12 year old Victoria Grant speaking at the Public Banking in America conference last month has gone viral, topping a million views on various websites.
Monetary reform—the contention that governments, not banks, should create and lend a nation’s money—has rarely even made the news, so this is a first. Either the times they are a-changin’, or Victoria managed to frame the message in a way that was so simple and clear that even a child could understand it.
Basically, her message was that banks create money “out of thin air” and lend it to people and governments at interest. If governments borrowed from their own banks, they could keep the interest and save a lot of money for the taxpayers.
She said her own country of Canada actually did this, from 1939 to 1974. During that time, the government’s debt was low and sustainable, and it funded all sorts of remarkable things. Only when the government switched to borrowing privately did it acquire a crippling national debt.
Borrowing privately means selling bonds at market rates of interest (which in Canada quickly shot up to 22%), and the money for these bonds is ultimately created by private banks. For the latter point, Victoria quoted Graham Towers, head of the Bank of Canada for the first twenty years of its history. He said:
Each and every time a bank makes a loan, new bank credit is created — new deposits — brand new money. Broadly speaking, all new money comes out of a Bank in the form of loans. As loans are debts, then under the present system all money is debt.
Towers was asked, “Will you tell me why a government with power to create money, should give that power away to a private monopoly, and then borrow that which parliament can create itself, back at interest, to the point of national bankruptcy?” He replied, “If Parliament wants to change the form of operating the banking system, then certainly that is within the power of Parliament.”
In other words, said Victoria, “If the Canadian government needs money, they can borrow it directly from the Bank of Canada. The people would then pay fair taxes to repay the Bank of Canada. This tax money would in turn get injected back into the economic infrastructure and the debt would be wiped out. Canadians would again prosper with real money as the foundation of our economic structure and not debt money. Regarding the debt money owed to the private banks such as the Royal Bank, we would simply have the Bank of Canada print the money owing, hand it over to the private banks, and then clear the debt to the Bank of Canada.”
Problem solved; case closed.
But critics said, “Not so fast.” Victoria might be charming, but she was naïve.
One critic was William Watson, writing in the Canadian newspaper The National Post in an article titled “No, Victoria, There Is No Money Monster.” Interestingly, he did not deny Victoria’s contention that “When you take out a mortgage, the bank creates the money by clicking on a key and generating ‘fake money out of thin air.’” Watson acknowledged:
Well, yes, that’s true of any “fractional-reserve” banking system. Even before they were regulated, even before there was a Bank of Canada, banks understood they didn’t have to keep reserves equal to the total amount of money they’d lent out: They could count on most depositors most of the time not showing up to take out their money all at once. Which means, as any introduction to monetary economics will tell you, banks can indeed “create” money.
What he disputed was that the Canadian government’s monster debt was the result of paying high interest rates to banks. Rather, he said:
We have a big public debt because, starting in the early 1970s and continuing for three full decades, our governments spent more on all sorts of things, including interest, than they collected in taxes. . . . The problem was the idea, still widely popular, from the Greek parliament to the streets of Montreal, that governments needn’t pay their bills.
That contention is countered, however, by the Canadian government’s own Auditor General (the nation’s top accountant, who reviews the government’s books). In 1993, the Auditor General noted in his annual report:
[The] cost of borrowing and its compounding effect have a significant impact on Canada’s annual deficits. From Confederation up to 1991-92, the federal government accumulated a net debt of $423 billion. Of this, $37 billion represents the accumulated shortfall in meeting the cost of government programs since Confederation. The remainder, $386 billion, represents the amount the government has borrowed to service the debt created by previous annual shortfalls.
In other words, 91% of the debt consists of compounded interest charges. Subtract those and the government would have a debt of only C$37 billion, very low and sustainable, just as it was before 1974.
Mr. Watson’s final argument was that borrowing from the government’s own bank would be inflationary. He wrote:
Victoria’s solution is that instead of paying market rates the government should borrow directly from the Bank of Canada and pay only token rates of interest. Because the government owns the bank, the tax revenues it raises in order to pay that interest would then somehow be injected directly back into the economy. In other words, money literally printed to cover the government’s deficit would be put into circulation. But how is that not inflationary?
Let’s see. The government can borrow money that ultimately comes from private banks, which admittedly create it out of thin air, and soak the taxpayers for a whopping interest bill; or it can borrow from its own bank, which also creates the money out of thin air, and avoid the interest.
Even a 12 year old can see how this argument is going to come out.