To fix the economy, let bad banks fail

Since the housing market peaked in 2006, the nation has suffered through nearly half a decade of financial and economic hell.

It's past time for the politicians to do what they should have done in the first place. That is, protect the nation's priceless assets: the rule of law and free markets. Instead, the pols are protecting the worthless assets of zombie banks that do not know how to be banks.

Two years ago, many of the nation's largest banks should have failed - because their business model failed. That business model was willful incompetence. Back then, banks - including Countrywide Financial, now part of Bank of America - showcased this incompetence in helping homeowners borrow money they never could repay.

Today, thanks to Washington's bailouts, the bad banks are still alive. So is their disastrous business model. The banks now showcase their incompetency in their inability to foreclose on defaulted homeowners in an orderly, timely and nonfraudulent fashion.

Recently, Bank of America, JPMorgan Chase and some competitors temporarily halted most foreclosures. The banks stopped foreclosing as employees came forward to say they had defrauded courts - that is, falsely attested they knew the facts of thousands of foreclosure cases when they did not. Often, the banks cannot locate the documents that confirm a lender's right to foreclose.

Even as banks resume foreclosures, as Bank of America has, they have a motive to proceed slowly because they do not want to book the losses that come with property sales.

But the banks' dawdling imperils economic recovery, in ways prosaic and profound.

The prosaic: Borrowers stay stuck in homes they can't afford, meaning they can't get on with their lives. Prospective home buyers still can't afford property, and those who can remain wary, because until lenders clear their backlog of foreclosures, house prices won't fall to realistic levels. At the same time, small businesses cannot create jobs because banks and investors stuck with old, bad loans don't want to make new ones.

The profound: Botched foreclosures erode the property rights on which the nation's prosperity rests. When a person buys a home, he must know that he enjoys the legal right to keep and sell that property. Property rights break down if, three years from now, a former owner can say that she did not get her day in court and therefore a sale should be invalidated.

Thankfully, regulators, including the Federal Reserve, have the power to act. Banks, after all, must operate safely and soundly. By definition, a financial institution cannot be safe and sound if its executives have no idea who owns what and who owes what. Nor can a bank operate safely and soundly if it cannot properly value its or its customers' assets,

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