THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Thursday, October 14, 2010

Halloween Horror Special VII: The Fall of the House of Usury

In "The Fall of the Houses: U.S.H.F.U.E.R.," a short story by Ingmar Alban Po (who just won the Noble Prize for Literature and Economics), the greedy, dirty, lousy, good-for-nothing capitalist pigs have tricked the local peasantry into buying overpriced and super-sized mansions constructed by the local building contractor, Vincent "Mac" MacDonald. These shoddily built roach motels are, naturally, referred to as "Mac's Mansions."

Having been convinced that the dwellings can only increase in value, the peasants purchase the homes with no down payments and by assuming sub-prime mortgages. This pleases the robber baron who governs the area, Lord Frederick "Freddie Mac" MacDonald, no end, for the contractor is his illegitimate half-brother, as well as their mother, the Dowager Baroness Lady Fanny May (she kept her maiden name). Besides, as required by the State under socialism, Lord Freddie and Lady Fanny create the money to purchase the homes out of nothing, and charge high rates of interest, thereby making enormous profits off of something that does not generate a profit — the classic definition of usury and other dishonest profit.

When an economic downturn hits the Barony, the peasants start losing their jobs and can't keep up the payments. At the same time, since there's no one left who wants one of Mac's Mansions at Vincent's prices, the prices fall, and the homes fall into disrepair. Outraged, the peasants approach the Castle with torches and guns, and quickly elect Lord Frederick to another term when he explains that it was all somebody else's fault. Unfortunately, all the houses collapse during the annual Oktoberfest, although no one is hurt due to the fact that everyone is in the beer tent.

Po's story is, of course, an allegory for the ongoing foreclosure/housing/sub-prime/etc. crisis in the United States, hence the otherwise obscure latter part of the title, which stands for "United States Home Foreclosures Undermine Economic Recovery." If Po had been a better writer, perhaps the powers-that-be would have paid attention to the serious problems represented by the crisis. Instead, all focus has been on the stock market and the miracle expected from the (second) defeat of the Republicans in November. The first defeat, as everyone knows, reestablished prosperity throughout the land, to such an extent that the recession is over, and everybody has a job again.

We still need to deal with the foreclosure crisis, though. A couple of years ago CESJ came up with the "HEC," the "Homeowners Equity Corporation" as a way of applying to housing the binary financing techniques developed by Louis Kelso, who built on the work of Harold Moulton in The Formation of Capital. These techniques have already been successfully applied in the ESOP, and have been embodied in Capital Homesteading as a way to finance the acquisition of capital by people who currently own little or nothing, and are not in a position to cut consumption and save in order to invest.

A HEC would be a for-profit stock corporation that purchases foreclosed residential properties in a local community, and through a "lease-to-equity" arrangement would enable homeowners facing foreclosure to: 1) remain in their residence, 2) pay off the market cost of the residence, and 3) build up equity as shareholders of the HEC.

The HEC would allow citizens to escape from the worst form of credit (loans for consumer goods that don't pay for themselves and are made to people who can't repay the loans) to the best form of credit (loans to purchase capital assets that pay for themselves and that turn non-owners into owners of income-producing assets). The HEC concept is based on a new monetary and tax approach that promotes the financing of private sector capital formation in ways that create new owners of that growth and thereby spread purchasing power throughout the economy.

One of the key characteristics of the Homeowners' Equity Corporation is that it would minimize the risk of the resident-shareholder foreclosing on the home mortgage by acting as a form of capital credit "insurance," through pooling of risk. There will always be a certain percentage of homes that are unoccupied for a time, but the shareholder's equity would be based on a HEC's value per share, based in turn on the aggregate value of all homes owned by a HEC, not the value of the home occupied. Also, a HEC's value per share would depend in part on the occupancy rate of all homes, as would the payments on the loans used by the HEC to acquire the homes. It is obviously much easier to make payments on 100 houses, of which 90 are occupied and generating rent payments, than on a single house with no rent payments coming in.

The HEC would also provide a means for those who cannot afford monthly lease payments on their homes, to participate in the lease-to-equity program. Vouchers linked to need (for a specified amount of time) could be provided. (For example, 25% of a HEC resident-shareholder's income would go to cover housing leases. The amount of the voucher to supplement this would be the difference between the homeowner's total income and the monthly lease payments. To protect against people playing the system, there would need to be a limit on how much of a voucher someone could receive and for how long they could receive a voucher to remain in a particular residence owned by the HEC.)

It's at least better than ineffectual hand-wringing over the plight of the dispossessed or those threatened with losing their homes . . . as you laugh all the way to the bank after making a killing on collateralized debt obligations backed by bundled toxic sub-prime mortgages and bailed out by the federal government with new money created in anticipation of future tax revenues collected from the jobless and homeless poor.