Relocalizing Economics Part II

[The conclusion of the interview of Catherine Austin Fitts by Chuck Marohn on “Relocalizing Economics” from OregonPEN for 14 October 2017.]

Chuck Marohn, Strong Towns: I want to ask you a couple of questions about housing. I want to start with a story again and have you react to it and tell me what I’m missing.

After 2008 we had a bunch of houses here that went into foreclosure and we also had a lot of unemployed people. And we also had a lot of people who needed housing. And so I looked at this and, much like other people around the country, was a little bit bewildered about, “Well, why doesn’t one of these people who is an unemployed former carpenter or whatever, who was working for a big company, got laid off because they’re not building tract houses anymore, why doesn’t that person wind up with one of these houses. And then, convert it into a duplex, and sell it or rent it out?”

Why is that kind of thing not happening? And then, conversely, why are these kind of nameless, faceless entities from outside the community buying all these up with cash? Essentially we have you know unoccupied houses sitting here with people who need housing and people who need jobs. What’s broken here?

Fitts: Because the housing policy was designed. Remember I was the lead finance or my company was the lead financial adviser when the engineering of the housing bubble began and the housing bubble was engineered top down. So it took many years and many complex regulatory and administrative changes in the government to engineer it. The large banks knew exactly what they were doing. This was a highly engineered.

And let me just give you an example. I think it was 1994, FHA [Federal Housing Administration] was working on its plan its long term strategic plan. And FHA had traditionally been the provider of mortgage insurance credit in the low-income neighborhoods. And at the same time, they were promulgating affordable housing regulations for Fannie Mae [FNMA, Federal National Mortgage Association].

And when the Fannie Mae rules were promulgated, I looked at the volumes and I was shocked. Because what they were saying was, literally, you are going to have to issue more mortgages in low-income neighborhoods than there were houses. People were going to have to be refinancing mortgages from prison, you know two or three times a year, to make the numbers. And it was impossible.

And I went to a very senior official at FHA, and I said “Look, this is not possible.” Because we were working on Community Wizard and doing the play space data. And I said you can’t issue more mortgages in a neighborhood than there are people or houses.

And she looked at me and said “Shut up, this is none of your business.”

Strong Towns: “Oh, you just watch us do it.”

Fitts: Right. So this was — the creation of a large foreclosed housing pool was planned, and it was also planned that you would have large investment entities pick this up and aggregate.

So between 2008 and today, if you look at the top 100 landowners in America, their holdings have doubled on average, but the plan was to centralize control of land in real estate in in places. And it was a plan.

So a lot of those properties were picked up by investment entities, which were planning on doing basically what investors want which is income, income-producing investments that would give investors a steady income, and of course they would make a lot of money and own the equity.

Strong Towns: This feels like, again, one of these things where it might be really good if you’re sitting at the Federal Reserve Bank reading GDP statistics or if you’re running for Congress or President and you want to be able to tout some top line numbers, but this seems really at odds with what is in the best interests of the Popsicle Index, of our local communities and their strength and resiliency.

Fitts: Here’s the question.

Let’s see if we take the top 1 percent. Are we going to run the economy to maximize their ownership and control, or are we going to run the economy according to the Constitution. And the problem is if you look at what they’re doing to centralize most of it is, one, it’s outside of the law, or some of their tactics are outside of the law

Two, it’s destroying productivity. Productivity right now in the United States is falling. This is probably, from the point of view of the top people are the pension funds, this is the most serious problem. We’ve played this game of centralization in a way that is now wrecking long-term productivity and trust in the economy.

So it’s outside the law. It’s wrecking productivity. And its dirty little secret is that it depends on a negative return on investment on the government money, and we’ve plugged that [hole] with just printing currency and running up the debt. How much further can you play that game?

Strong Towns: I’ve listened to people who said indefinitely. I don’t think that’s true. But why would someone suggest that?

Fitts: Well, you can do it indefinitely if your weaponry is sufficient and your teamwork is sufficient. So if you’re willing to depopulate, globally, sufficiently to do that, in theory you can.

Now I just look at my understanding of reality and everything I’ve seen, I don’t think it’ll work. But you know in theory if you could have superb teamwork and the weaponry was there you could do it.

Strong Towns: Let me ask you one more question on housing. It’s current to our time. We just got done with hurricane Harvey as you and I are recording this. We’re hours away from Hurricane Irma in Florida.

Let’s forget about federal flood insurance, which I think is just a crazy concept in of itself, the way it’s done. How can you buy a house in a floodplain and not have the holder of that mortgage demand that you be insured against floods? How does that even happen in our system?

Fitts: Because if, basically, if the institution or, if you have insurance, the insurer doesn’t require it, then it’s a no brainer.

Strong Towns: OK, let me let me give you two scenarios. Let’s say you’re the local bank and you’re holding onto this thing. And local banks don’t hold 30 year paper, but let’s say you’ve got a seven-year balloon. Aren’t they going to hedge their bets by requiring flood insurance? If you’re a local bank, could you take that much risk without it?

Fitts: Well if you’re a local bank, and there’s real risk of floods, you’re going to want flood insurance if it’s on your balance sheet. But, again, if it’s being pumped into through the federal credit system, through Freddie, Fannie and they don’t require it, you don’t care, and you’re not going to require it.

Strong Towns: So if you’re the local bank and you’re not planning to hold the mortgage more than 30 days while you sell it off to Fannie or Freddie or whoever, it doesn’t matter to you. It’s not something that’s going to ping — you just want to get the transaction for selling it.

OK, Let me ask you this then: if I am the pension fund who has bought a bunch of mortgage-backed securities, and I look now, today, and I realize a huge portion of my portfolio is under water in Houston, Texas. Do I care? I mean, does that bother me in any way? It seems to me there’s a strategy here, if I’m in Houston, and I have a huge mortgage and I’m literally underwater as well as being financially underwater now. Why don’t I walk away from that?

Fitts: Is Texas an anti-deficiency [state]? I don’t know. I should know but I don’t. I don’t remember offhand. But the reality is, as long as you’re not in danger of a deficiency judgment, you probably will walk away. Depends.

Here’s where the system has really fallen down. In 1997, I made a presentation. I had a subsidiary of Hamilton Securities. [We] had a relationship, a contract with the Department of Justice, and we were trying to work with pension fund leaders to see how we couldn’t turn the existing situation around, all of the things you and I are talking about now.

One of our goals was to ensure that the pension funds made their target investment rates so that the Boomer retirement was taken care of.

So their big question was “We have this big bulge of people moving through the system. How do we make sure we can achieve their targeted retirement goals?

So, a wonderful group of pension fund leaders. And I made a presentation about how we could take all the federal money going into Philadelphia, and turn it from a negative return investment to a positive and do it in a way where, with the place-based equity funds, the pension funds could make huge and hideous profits and thus be able to fund Boomer retirements.

And one of the people on the board was the president of CalPERS.

CalPERS is the largest pension fund in the country, the California public pension fund. So the president of CalPERS looked at me, he said “You don’t understand.” He got all excited, he said, “Oh my God, this could really work,” and then he froze and he said “you don’t understand. It’s too late. They’ve given up on the country. They’re moving all the money out starting in the fall.” And that was the fall of 1997, which is the beginning of fiscal 1998, when all the $18 trillion started going missing from the federal government.

Now, here’s what you need to understand after that meeting.

CalPERS proceeded . . . . You know, of course, we know they didn’t re-engineer the government money. Instead we had a huge housing bubble that generated a huge amount of capital that could then be moved and globalized and a whole bunch of other things. But here’s the thing.

CalPERS then proceeded to buy — and then subsequently lose a huge amount of money on, basically, mortgage fraud. But they knew. They knew. Now that is in complete violation of the law and fiduciary obligation.

And what I learned from that one example, that one event, was that, literally, you had a centralized governance that could tell a public pension fund, it could order a public pension fund to basically buy hundreds of billions of dollars of paper that the organization knew there was something wrong [with].

I come back to governance structure. We have a governance structure which is invisible. It’s secret. It’s massively misallocating capital from any standpoint of productivity or efficiency, as you and I would define it, and it seems to be able to get a wide number of players — throughout the capital allocation process and state and local governments — to behave in ways which were not only unlawful but economically irrational. And the question is what do we do.

Strong Towns: I don’t know if you read the book The Big Short.

The movie didn’t really do justice I think to this particular scene although it tried to. There’s that scene when they’re in Vegas, and they sit the guys down with the pension fund guy, the guy running the pension funds, says you know, I don’t care. I’ll buy every mortgage-backed security you guys issue, I’ll buy every insurance contract you issue. The guy stands up and says “Whatever that guy owns, I want the opposite on.”

I think the power of that scene was that, here was a person who was running hundreds of people’s future, people’s retirement, and the incentives that this person had had nothing to do with how good the quality of what they were purchasing.

It was very, very, short term. I can’t help but react to that by thinking that the centralization is like the core problem.

Fitts: Well I would say this: I would say the governance structure is the core problem. We are being governed by a system which is secret, and invisible, and it is centralizing, and it is using centralization. It is doing that centralization, among other things, by running the federal government outside the law.

So, in 2001, I went to speak with the chief of staff to the chairman of the Senate Appropriations Committee that appropriates, the subcommittee that appropriates for HUD. And it was a person I had never met before, so I being sort of trying to be discreet. And they said to me what do you think is going on at HUD.

And I said, I don’t know, what do you think is going on at HUD? And they looked me dead in the eye and they said HUD was being run as a criminal enterprise. And I said you know I don’t disagree because in fact HUD was being run his criminal enterprise at the time, and sorry it was in 2000, it wasn’t in 2001, HUD is being run as a criminal enterprise at the time.

But here’s what you need to know. HUD is run on a matrix structure. The New York Fed depository banks control the bank accounts along with the Department of Treasury. And then the Department of Justice is very controlling and instrumental and of course the intelligence agencies, unfortunately, are in there too.

And you can’t run what is a criminal enterprise unless . . . and the big defense contractors who run the information and payment systems . . . So you can’t run HUD as a criminal enterprise unless all those groups are doing so, which means, you know, the whole U.S. government is being run as a criminal enterprise. So, you know, it’s a big place, it’s a complex place, so I’m not trying to impugn anyone.

But here’s the big problem I have in trying to do anything locally in my neighborhood or your neighborhood. You know, it’s easier in wealthy neighborhoods than in poor neighborhoods.

But the management — every neighborhood is producing, is being drained financially, to produce wealth for this system. You know the system that is centralizing.

And the reality is, if I get 20 soccer moms together and we try and back hard narcotics trafficking out of the neighborhood, you know, that hiccups the cash flows of the central machinery, and the next thing we discover is the drugs are financing Tony Soprano who is financing James Bond and we’ve got black helicopters coming down on our heads.

And so in a model that is this centralized, you know nobody can be an exception. And you know we’re up against centralized forces, and so the question politically is how do you organize you know 3100 counties at a local level to say, “Wait a minute, you know, we’ve lost our local power, we need to get it back.”

So this is a power equation between local communities trying to run things productively and an invisible governance system, I think that’s why people call it the Deep State or . . . . There are various names for it, and a lot of us would just like to say “Look, I want to make my neighborhood wonderful, I don’t want to get into all of that.”

And the problem is, if there is an invisible tithe going from our neighborhood up to that governance structure, think of this as an invisible tax, and everyone of us are paying that tax, and the payment of that tax requires that we run things in a way which to us looks intuitively irrational.

How do we deal with that? Now what I just have to say is there are lots of ways of dealing with it, but I had a great pastor in Washington who was fabulous. He used to say “If we can face it God can fix it.”

The first thing we need to do is we need to face what’s happening, and we need to face our complicity, because the reality is we’ve been in the central banking warfare model, that’s what I call it, for five hundred years, and most people in America are beneficiaries of the model.

I’ve told you the red button story, right?

Strong Towns: No, I don’t think so.

Fitts: Do I have time for another story? This is my favorite story.

Never have an epiphany in the middle of a speech. So I was speaking, I have been invited by a wonderful health care practitioner to speak to a group that she is in called Spiritual Frontiers Foundation International, and they have a conference each year to talk about how we can evolve our society spiritually. A wonderful group of people, very serious, very responsible, pretty financially secure, hardworking people who take care of business.

Anyway, so there I am in Philadelphia giving a speech, and I’m in the middle of a speech, and I’ve been asked to speak on how the money works in organized crime and it’s really sort of a light, funny description of the intersection between illegal cash flows and Wall Street and Washington because they were trying to understand the corruption.

So I’m in the middle of a speech, and I’m talking about working for a reporter who was interviewing a spokesperson from the Department of Justice during the congressional testimony on the Dark Alliance allegations which was narcotics trafficking by the U.S. intelligence agencies into South Central L.A.

It was the crack cocaine epidemic. So the Department of Justice spokesperson tells the reporter that the U.S. economy launders $500 billion to a $1 trillion a year of all illegal cash flows. So that’s narcotics trafficking, that’s illegal gambling, that’s sex slavery that’s everything.

So I said to this wonderful group of 100 spiritually evolved people, what would happen if we stopped? What if we just said, you know, we’re not going to do that anymore. We’re going to be good Christians, and we’re not going to, you know good, spiritually evolved people, we’re not going to basically going to not do that. What would happen?

And they said, well you know, we would have a problem, because all that accumulated capital would leave the New York Stock Exchange and go to Zurich or Hong Kong. And you know, they might not want to refinance the government debt, so we might have a problem with the government budget. I said, OK, well let’s pretend there’s a big red button up here on the lectern and if you push that button you can stop all hard narcotics trafficking in your town, your county, your state, your country tomorrow, thus offending those people. Who here will push the button?

And out of 100 people dedicated to evolving our society spiritually, only one would push the button. And I said, why would you not push the button? And they said we don’t want our government checks to stop, we don’t want our taxes to go up, and we don’t want our 401(k)s and IRAs to go down.

So here’s the problem. Let’s say, against your better judgment, we make you president next year. Your political guy is going to walk into the office and say the American people just spent $1 to $2 billion to get you elected, they all want their government check, you know, they want their money. So you’re going to turn to your Secretary of Treasury. He’s going to say, well, you better be nice to the people who control what was, in 1998, $500 billion to $1 trillion of all illegal money, and now it’s much bigger.

And so, if the American people won’t push the red button, how are you supposed to push the red button? Because for you to make radical change you need 80 percent or more consensus in the general population, and you’ve only got 1 percent behind you.

So what the American people are basically saying to you is, we want our check and we want you to pretend. We want you to give us a story that allows us to feel good about ourselves, we’re good Christians, and we’re not doing all of this crazy stuff to get the money.

Strong Towns: It seems like there’s a there’s an end story there, that doesn’t bode well.

Fitts: The end story is that if you keep playing the red button you’re going to keep shrinking productivity, and shrinking the pie, and shrinking the economy. So think of it as if I’m taking drugs. I’m slowly destroying my body.

Well, it’s the same thing with financial addiction to narcotics money or criminal enterprise. We’re doing something that is financially not sustainable and we’re liquidating our intellectual capital, we’re liquidating our economy, we’re liquidating our human civilization.

So it doesn’t make us healthier. And what the problem was, not that nobody wanted to deal with it, because what people were saying is my fiduciary obligation is to my family, my business, my you know, and if I try and do this big overwhelming thing you know I won’t be effective. And so I’m not going to deal with it.

The problem was not that they would not push the red button, the problem was that they wouldn’t start talking about what is happening and saying, “OK how can we make money pushing the red button?

I call it turning the red button green. How can we make money pushing the red button? How can we generate fees for our friends pushing the red button? Because then we will push the red button. And in fact pushing it in an effective productive way will turn this around and make the economy start growing healthy again.

Strong Towns: Catherine Austin Fitts, president of Solari Inc. I’m going to give people the Web site here now

Fitts: So can I just say one thing, before I close? I really want to stress that, in 20 years of dealing with this issue, I’ve never seen anyone do a better job of going at the heart of the matter and turning it around than you and what you’re doing in Strong Towns.