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As followers of this blog have discovered, we work within a framework that has been dubbed Modern Money Theory (MMT). The approach itself is fundamentally descriptive, although there are logical ways to apply the principles of the approach to any number of policy-oriented (i.e. prescriptive) economic problems. Above all, we are committed to describing the way government spending works in a modern money system. Once that is understood, it becomes apparent that a government with flexible exchange rates and a sovereign currency (US dollar, British pound, Mexican peso, etc.) can afford to purchase anything that is for sale in its own sovereign currency.

This means that debates about “affordability” become inapplicable. As this becomes more widely understood, we can begin to have a completely different — and vastly more important — debate about the size and role of government.  What do we, as Americans, want? Medicare for all? A job guarantee?  High-speed rail? Renewable energy?

As promoters of MMT, we are all very keen on Abba Lerner, who was one of the first to articulate the foundations of the approach. Lerner believed that the government should maintain the level of aggregate spending in the economy (either by reducing taxes, increasing its own spending or a combination of the two) at the rate consistent with full employment. We agree. This is the overarching goal. How we get there is, as I said, a matter of (political/social) choice.

But we cannot ‘get there’ until we dispense, once-and-for-all, with the erroneous belief that deficit spending is reckless and irresponsible, something akin to “fiscal child abuse”, as Kotlikoff and Burns so disgracefully characterized it.

Insteaad, just remember this fundamental accounting identity:

For me, this is the most important identity in economics. It holds true in every nation at every point in time, and it is useful when you run thought experiments like, for example, “What will happen to the private sector’s balance sheet position if the government’s budget is cut by X% of GDP and the current account deficit remains Y% of GDP?”

So, for example, in the US we have a current account deficit of, roughly, 5% of GDP. This SUBTRACTS from the Private Sector Surplus. So, the only way the private sector can have positive net savings (i.e. a surplus) is for the government to run a deficit that is LARGER than the current account deficit. This is exactly what the government has been doing, and it is the reason the private sector has managed to sharply increase its savings in the downturn. Cutting the public sector deficit will reduce the private sector surplus one-for-one in a closed economy (i.e. one with no foreign trade and therefore no current account). It is an easy way to demonstrate that the government’s deficit is the private sector’s surplus.

So the next time someone tells you that the US government cannot “afford” to keep its promises to retirees, fund the arts, build bullet trains, and so on, ask them whether they understand any of this!

** And, no, it does not follow that because the US government “can” do something that it “should” do it.  It has the ability to puchase anything for sale in terms of its own currency.  Let us accept that point and then debate whether, when, and to what extent it should exercise this power.

One of the defining motifs of theoclassical economics textbooks is the provision of examples of the unintended consequences of government action. Those consequences are invariably negative. The narrative is the government intended to achieve some goal, e.g., help the poor, and ended up harming the poor. Four counter narratives virtually never appear in these tracts. Theoclassical economists rarely mention: 1. Any governmental program that succeeds in its aims 2. Any governmental program that has unanticipated, positive consequences 3. Any private action that has negative unanticipated consequences 4. Any private action that has negative, intended consequences

A fifth counter narrative sometimes appears in theoclassical accounts – governmental actions that are intended to be harmful by the private parties that corruptly convince public sector actors to aid the private parties at the expense of the public interest. The fifth example reflects poorly on both the public and private sector actors and suggests that the private sector is a source of corruption of the public sector – which fits poorly with theoclassical dogma.

This column focuses on MERS as an example of the first and third types of counter narrative. It will be the first in a series of columns about MERS. A conservative, but not theoclassical economist, Hernando de Soto, is famous for his work on private property. I highly recommend his book: The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. De Soto’s primary point is that private ownership of real property allows even poorer people to mobilize their limited wealth by pledging the real estate as security for loans. The individuals can use those loans as a source of capital to become entrepreneurs. De Soto uses the United States as an exemplar of his thesis, explaining that the colonies that become the U.S. began a system of public recordation of land titles and a system of surveying land. The developing U.S. made these systems a major priority. De Soto argues that these public sector programs were spectacularly successful and helped produce America’s economic success by encouraging entrepreneurial activity.

These two successful government programs (public recordation of land titles and transfers and public land surveys) achieved their intended goals. They made it far easier to pledge real property, which made real property more valuable. Public recordation greatly reduced the risk of fraudulent pledges. Reducing the risk of fraudulent pledges makes lenders more willing to lend and reduces the interest rates on secured lending. Reduced interest rates mean a lower “hurdle” rate for investment, which means that more productive investments will occur and economic growth will increase.

Public recordation in the U.S. became even more effective in spurring growth and efficiency with the development of Article 9 of the Uniform Commercial Code (UCC). Article 9 set out to make it far easier for lenders to access public records of liens by dramatically increasing the degree of uniformity in how and where such records would be kept. Article 9 was not only a governmental program that achieved its aim – it was the brainchild of an academic (Yale Law School’s Professor Grant Gilmore). Article 9 further reduced the risk of fraudulent pledges and greatly increased efficiency. Business, particularly lenders, strongly supported its adoption.

MERS (Mortgage Electronic Registration Systems) sought to privatize key aspects of the public title system. The primary purpose was to avoid recordation fees when interests in real property were assigned or transferred. MERS’ founders read like a who’s who of the entities who caused the recent financial crisis, so some scholars view its creation as an example of a private sector action intended to harm the public. This column assumes that MERS’ harms were, originally, unintended. It focuses on the insanity – from the standpoint of honest lenders and investors – of MERS’ devastation of a public system of recordation that had served business, particularly lenders and investors, brilliantly.

MERS’ problems are legion, but they are also inherent in its structure. This column addresses only one aspect of its “agency” problem. MERS is set up in a bizarre fashion designed to minimize costs. It has only a trivial number of real employees. It has no ability to check its members’ initial or continuing quality or integrity. MERS appoints its members’ personnel as MERS officers and exercises no meaningful oversight over their actions.

As I have explained in prior articles, MERS’ members have endemic, severe problems with mortgage documentation. They originated, purchased, or agreed to service loans and collateralized debt obligations (CDOs) without the underlying mortgage note. Fraud begets fraud. The exceptional incidence of underlying mortgage origination fraud led to widespread failure to prepare and maintain proper documentation – and that was before the mortgage originators failed. When the mortgage originators failed, as they did by the hundreds, mortgage documents were frequently thrown away. Mortgage documentation became particularly defective because originators could sell mortgages without the purchaser even checking whether the seller was delivering the original note.

The secondary market in nonprime mortgages operated under the financial version of “don’t ask; don’t tell.” The incidence of fraud and defective documentation in nonprime loans was so large that the purchaser faced an inescapable dilemma. If it did competent underwriting it would detect widespread fraud and missing notes and document that it knew that the nonprime loan portfolio it was purchasing (and then reselling them as the collateral for CDOs) was fraudulent. Documenting that one is selling CDOs one knows to be backed by fraudulent loans that often lacked the underlying note is an excellent strategy for going to prison and being sued by every CDO purchaser. The alternative was not to do any meaningful underwriting when purchasing nonprime loans. The no meaningful underwriting alternative, however, maximized the already perverse incentives to originate and sell fraudulent loans lacking essential documentation.

MERS’ members, therefore, had overwhelming incentives to engage in foreclosure fraud. The loans they were seeking to foreclose on often lacked essential documentation and were induced by defrauding the borrower. They had no legal right to foreclose, but that result was unacceptable to the senior officers controlling the loan servicers. They insisted on results, and did not monitor compliance with the law. The result was tens of thousands of felonies – monthly – by some of the largest financial institutions in the world. Filing false affidavits became business as usual. No one senior in the Justice Department or administration appears to be seriously upset about this. These felonies were committed by, or at the direction of, MERS “officers” – and MERS does not appear to be seriously upset about fraudulently foreclosing on the homes of tens of thousands of Americans. I study fraud by elites, and even I am stunned by the frequency and nature of the frauds and felonies and the lack of prosecutions and the overall blasé attitude by CEOs to the fraud and felonies.

I write to contrast four recent stories about Countrywide.  Here are their headlines and brief synopses provided in the initial paragraphs of the stories.

When it comes to improving public understanding of tax policy, nothing has been more troubling than the deeply flawed coverage of the Wisconsin state employees’ fight over collective bargaining.

Economic nonsense is being reported as fact in most of the news reports on the Wisconsin dispute, the product of a breakdown of skepticism among journalists multiplied by their lack of understanding of basic economic principles.

Gov. Scott Walker says he wants state workers covered by collective bargaining agreements to “contribute more” to their pension and health insurance plans.

Accepting Gov. Walker’ s assertions as fact, and failing to check, created the impression that somehow the workers are getting something extra, a gift from taxpayers. They are not.

Out of every dollar that funds Wisconsin’ s pension and health insurance plans for state workers, 100 cents comes from the state workers.