Frazier-Lemke II

In the midst of the Depression, North Dakota Senator Lynn Frazier and North Dakota Rep William Lemke, with the blessing of FDR, introduced the "Frazier-Lemke Farm Bankruptcy Act" which was passed on 28 June 1934. This act effectively delayed the banks right to repossess a farmer's land for five years, though the farmers did have to pay the banks rent, with the amount determined by a judge. It was extended until 1949. Other measures adopted by individual states and the creation of the Home Owners Loan Corp eventually prevented about 90% of all foreclosures from 1934 onwards. For many banks, this was a crushing blow, though it must be said that this act did provide societal stability, which was under far more stress than most of us realize. The Nebraska state capitol was stormed by angry farmers. 25,000 famished war veterans camped in front of the US Capitol were charged with naked sabres by the US 5th Cavalry.. led by one George Patton. Repossessing a home took a lot of courage; many such repo agents were shot; in many cases, the local police refused to help the agent. Banks had shut down in most states; most states in the deep South could'nt pay teachers. In the Depression, a very large part of the nation's food was produced by small farmers, and a decent portion of the population was indeed rural. In many ways, Frazier-Lemke was in large part responsible for keeping the nation from falling apart, which Eleanor Roosevelt fully believed would happen.

Here in the Great Recession {Depression if you are not on Wall Street or Government employees} something has arisen in the last week or so that could lead to the passage of something akin to Frazier-Lemke. The first is the forclosure clusterf*ck, which I explained in my last post. Second is the impending QE2 (Print to Infinity), which promises to, in one way or another, destroy the value of the US currency. The banks, in their haste to foreclose and sign bad mortgages, left some pretty serious errors in the paperwork. Some of it is outright fraud.

Today, a couple in Simi Valley,CA.. Jim and Danielle Earl, upon advice of their lawyer, forcibly repossessed their foreclosed home, which had already been resold to another buyer. The police, stumped as to what was actually legal, went about their business of eating doughnuts and watched helplessly, especially after the lawyer called in the local media. This comes on the heels of Bank of America's announcement to halt all foreclosures, with JP Morgan, Ally and Wells Fargo doing so in about half the states. On Fox News Sunday, US Rep Debbie Wasserman-Schultz (D-FL) went on to advocate a complete ban on foreclosures on a family's primary residence. Increasing numbers of articles are coming out advocating this foreclosure ban as well. For millions of Americans, such a ban would seem to be a Godsend. The momentum is building; if it keeps building, it's going to get proposed in a bill in Congress. Something in the same vein as Frazier-Lemke, whereby people would simply be ordered to pay a percentage (say 35%) of their take home pay to avoid foreclosure on their homesteaded property. All second homes and vacation cabins would be, however, fair game for repossession. President Obama, already under severe pressure due to the economy and from his own party, would almost have to support it. The Republicans, usually on the side of big business, would likely oppose the deal.

The problem is, today's banking system and mortgage markets are vastly different than they were in the 1930s. In the 1930s, the bank loaned you the money (usually you would need 20% down) to get the home and you paid the bank back. Today, the "right to be paid back" on the mortgages are rolled up into what are known as Mortgage Backed Securities, which are packaged and sold by companies such as Goldman Sachs, JP Morgan and Wells Fargo, and then sold to investors.. including these very same institutions. The MBS market is in the trillions of dollars in size. Worse, these same banks wrote Credit Default Swaps on these MBS.. and these CDS's also amount to many trillions. If something similar to Frazier-Lemke were to pass, these MBS's would become nearly worthless as they no longer entail the "right to be repaid". The financial tsunami this would unleash could very well crash the entire financial system.

My bet: Frazier-Lemke II is not enacted due to the incoming Republican House majority; Obama thrashes the Repubs for being "pro-business" and it's quietly buried. But there is the possibility that it's actually passed before the Repubs take office, despite the howls from Wall Street. Many Republican Congressmen are from states like Nevada, California and Florida where foreclosures are highest. In such states, opposing Frazier II would be political suicide.. and they might simply sit this one out, allowing it's passage. The Senate would be a tougher nut, but it is in Democratic hands and there are a few liberal Repub Senators. If it gets past both houses of Congress and arrives at Obama's desk, he will have the most painful of choices.. help his constituents and possibly crash the system or commit political suicide and veto it. The pressure is building to "do something" about foreclosures. Interesting times indeed.