Citing "mounting evidence of a state of rampant lawlessness in Central Florida," Rep. Alan Grayson (D-Fla.) last week sent a letter to FBI director Robert Mueller and U.S. Attorney Robert O'Neill imploring them to investigate possible criminal conduct in what's become known as foreclosure gate.

"There are increasing signs that big banks routinely evade laws meant to protect homeowners," Rep. Grayson wrote. "It is not enough for big banks only to apologize for fraud, perjury, and even breaking and entering - when they are caught. It is time for handcuffs. Fraud does not become legal just because a big bank does it."

Barry Ritholtz, CEO of Fusion IQ and author of The Big Picture blog, couldn't agree more.

"The whole chain of the foreclosure process is rife with lies, with false affidavits, false testimony -- with fraud," Ritholtz says. "This is criminal and these people need to go to jail."

(Meanwhile, former Countrywide CEO Angelo Mozilo agreed to settle civil fraud charges with the SEC last week. Mozilo didn't admit any wrongdoing and Bank of America will pay the bulk of his $67.5 million penalty.)

Unlike some observers, who believe banks only appear guilty of what The WSJ editorial page called "sloppy work," Ritholtz says problems in the foreclosure process go far beyond mere technicalities.

"This is more about forgetting to dot an ‘i' and cross a ‘t'," he says. "This is a systemic approach to foreclosure where the rule of law completely trampled on and property rights have been totally ignored."

While some expert fret the impact a foreclosure moratorium will have on the housing market and/or bank balance sheets, Ritholtz says something far more fundamental is at stake.

"This is about property rights," he says. "This is about very sacred rights...and the respect for the rule of law" - or the lack thereof.

As expected, Ben Bernanke provided a rational for more quantitative easing Friday, declaring: "Inflation is running at rates that are too low relative to the levels the [FOMC] judges to be most consistent with the Federal Reserve's dual mandate" of price stability and full employment.

Predictably, Euro Pacific Capital president Peter Schiff wholeheartedly disagrees with that - and just about everything else Bernanke says.

"It's scary how clueless Bernanke is," Schiff says, noting the dollar is at or near record lows vs. several major currencies and commodities from agriculture to zinc are soaring.

"That is inflation," he says, dismissing this morning's tame CPI data as hedonically adjusted government fiction. "As money loses value prices are going to rise because you need more diminished dollars to buy goods and services."

Moreover, Bernanke's suggestion that more inflation will spur employment growth is the really "crazy thing" in today's speech, Schiff says. "You don't create jobs by creating inflation," he says. "You create jobs by reducing regulation and lowering taxes."

A pure libertarian and devote of the Austrian school of economics, Schiff expressed two main concern about Bernanke's policies:

One, the government is trying to prop up an economy based on debt-fueled consumption, rather than letting it "restructure," albeit from much lower levels.

Two, more quantitative easing will lead to more big government.

"What Ben Bernanke is saying to Congress is ‘run up the deficits because I'm going to monetize it for you,'" Schiff says. "He is enabling the government to get bigger, which is going to make employment worse, not better. He's throwing gasoline on a fire."

But not being short is different than being aggressively long. After moving to 100% cash in May right before the ‘flash crash', Ritholtz is currently "half-in, half-out" of the market: Fusion IQ is currently sitting on about 45% cash and "slowly adding to long positions."

"We have a foot in cash and a foot in the long side," he says. "The market is fairly valued but there are all these problems," i.e. the litany of structural issues facing the economy - and that's before the emergence of foreclosure gate', which could roil the financial system.

On his widely read blog, The Big Picture, Ritholtz has been writing about the tug-of-war between the bearish macro backdrop and the market's rapid ascent since late August.

"This market has had repeated opportunities to roll over, to fall on bad news, to follow other bourses lower, or to take a modest sell off...and turn it into something more dangerous," he writes. "In just about every case, Mr. Market has refused to cooperate with the bears."

To all the "Fed watchers, politicos, policy experts and amateur economic wonks," Ritholtz asks a simple (yet profound) question: Do you want to be right, or do you want to make money?

If your answer is the latter, Ritholtz recommends "what's working", including the ADRs of emerging market stalwarts like Brazil, Chile and Korea; high-dividend paying stocks, notably in telecom; and farm equipment plays like Caterpillar and Deere.

"There's more going on [in the agriculture sector] than just a weak dollar, QE and some softness in the corn harvest," he says.

Editor's note: For a chance to win a free autographed copy of Barry's book, email us at talkyourbook@yahoo.com.

___

Follow Yahoo! Finance on Twitter; become a fan on Facebook.

On Thursday, RealtyTrac released its third-quarter report on foreclosures, which rose 4% vs. the second-quarter amid a record number of bank repossessions in September, at over 102,000.

Third-quarter foreclosures were down 1% vs. a year ago but that's a "false positive," Sharga says. "Lenders and loan servicers are trying to manage the availability of distressed property [on the market]. They are doing this primarily so they don't flood the market with inventory that would crater home prices and make even more problems" for the industry. (See: Foreclosure Gate a "Small Sub-Issue" of Banks' $2.7T "Paper Problem," Dan Alpert Says)

Sharga says this "balancing act" can maintain a state of equilibrium in the housing market until 2013, by which time RealtyTrac estimates the roughly 3.5 million of distressed properties will work their way through the system. "It's going to be a very gradual, managed, measured slog in what is essentially a flat housing market for at least the next 2.5 years before we get through this inventory," he says.

But that somewhat grim outlook assumes the economy recovers, job growth resumes and "nothing else bad happens," Sharga admits.

Nothing like, say, another economic downturn or a huge scandal in the foreclosure process that prompts investigations, lawsuits and the kind of disruption that could put the financial system back into a state of disequilibrium.

For more on Foreclosure-Gate, see:

Homeowners Hit Again by Incompetent Banking Industry 

Refi Madness: Use Fannie and Freddie to Solve the Housing Crisis, Hubbard Says 

Upside Surprise! Whitney Tilson Sees Silver Lining in 'Foreclosure Gate'

___

Follow Yahoo! Finance on Twitter; become a fan on Facebook.

Financial markets continue to climb on hopes for more stimulus by central bankers here and abroad. But there's a huge gap between boosting the market with easy money and getting the global economy back on track.

"I don't expect the quantitative easing to work miracles," says Zanny Minton Beddoes, economics editor at The Economist, which recently issued a special report, How to Grow. "If you look ahead, you see years of very slow growth, possibly stagnation, in a lot of the rich world."

Moreover, "if Mr. Obama has his way and the Bush tax cuts for high earners are eliminated, [America] is heading for the worst possible outcome: raising taxes on income and capital but failing to trim the country's pension liabilities and rising health-care costs," the report warns.

By the "rich world," Minton Beddoes refers primarily to the economies of the U.S., Western Europe and Japan. Ten years ago, they accounted for about two-thirds of global GDP; now the figure is around 50%, according to The Economist, which predicts the "rich countries" share of global GDP could fall to around 40% in another decade.

'Very, Very Grim'

The rapid growth in emerging markets accounts for much of this trend. But so too do a number of factors Minton Beddoes says provide a "very, very grim outlook" for the developed world, including:

The scale of the recession and the ensuing deleveraging process: "This is not like the kinds of post-war recessions the U.S. has been used to," Minton Beddoes says.

The weakness of the recovery: "It's a matter of several more years. This is not a question of whether growth will bounce back in 2011 or not," she says.

The downward spiral: There is a "pernicious interaction between a weak recovery and the economy's supply side," Minton Beddoes says. If businesses don't invest, this can lead to "structural" problems in the labor market that undermine productivity growth and inflict huge societal costs.

Aging demographics: The potential for labor shortages, particularly in Japan and Western Europe, which can lead to lackluster productivity and prolong the road to recovery.

Minton Beddoes, a former IMF staff economist, says there is "some cause for optimism," notably the rising U.S. savings rate and strength of corporate balance sheets. There are some relatively straightforward steps developed nations can take, she says, including keeping taxes low, continuing government stimulus until private demand revives, deregulating the economy and addressing the "festering issue" of negative home equity.

But given the political atmosphere in Washington and the entrechned "austerity vs. more stimulus" camps, that's proving to be much easier said than done. 

Allegations of mass fraud and missing documents have spurred a national outcry about foreclosures that has put the Obama administration at odds with many Congressional Democrats. Iowa Attorney General Tom Miller is leading a multi-state probe into potentially illegal foreclosures by some of the nations biggest banks, including JP Morgan, Wells Fargo, GMAC and Bank of America. On Tuesday, California Attorney General Jerry Brown announced his state's participation in the probe and NY AG Andrew Cuomo said he was expanding an ongoing probe into alleged violations.

The banks' inability to prove they own the mortgages they're trying to foreclose on is not a new story, notes Dan Alpert, managing principal at Westwood Capital. In 2007, a federal judge ruled Deutsche Bank couldn't proceed with 14 foreclosures because the firm lacked proof of ownership of those mortgages. That landmark case helped spur a "show me the note" movement among American homeowners facing foreclosure. (Click here for CNBC's primer on the foreclosure crisis.)

But the banks' "paper problem," is a "small sub-issue," relative to the fact there are still $2.7 trillion of home mortgage paper, i.e. non-securitized home mortgage paper, on the banks' balance sheets, Alpert says. "Banks are not exactly rushing to foreclose on anyone given the fact they stand to suffer major losses. Until the quality of those loans become known, we can't be sure the banks are safe."(Editor's note: An earlier version incorrectly said there were $2.7 trillion of "residential mortgage-backed securities (RMBS)" on the banks' books. Tech Ticker regrets the error.)

Such concerns help explain why Bank of America was relatively quick to announce a national moratorium on foreclosures. They also help explain why the Fed is widely expected to embark on another round of quantitative easing, a notion reinforced by the minutes of the September FOMC meeting released Tuesday.

"The entire policy apparatus of the Fed and U.S. government and other central banks is based on notion of...'let's not force more losses into the systemic part of the banking system or we'll be right back where we were during the depths of the crisis,'" Alpert says. "If banks are forced to go through a high level of foreclosures in the current climate you could see 100s of billions of dollars in additional losses."

And while the political and moral debate over foreclosures heats up, a sluggish economy and stubbornly high unemployment mean more mortgages are entering the foreclosure pipeline every day.

___

Follow Yahoo! Finance on Twitter; become a fan on Facebook.

On Friday, The FT's chief economics commentator, Martin Wolf and U.S. managing editor Gillian Tett joined me to discuss the highlight of the conference, including a panel moderated by Wolf, featuring George Soros, Joseph Stiglitz and Jaime Caruana, GM of the Bank for International Settlements.

The panel turned into a referendum on the new Basel III accords, which impose higher capital requirements on banks as well as tighter regulatory oversight on systemic risk. With Wolf in agreement, Soros and Stiglitz cited several concerns about whether the financial system is any safer today.

Soros asked Caruana a seemingly simple question, which led to a heated discussion: "How do you deal with risk?"

The capital requirements in Basel 3 are "more proportionate to the risk" on the banks' balance sheets vs. in Basel 2, Caruana responded.

"But you're still relying on the financial models of the financial institutions which is problematic," Wolf chimed in, a point to which Caruana conceded.

"I would've thought letting banks make their own risk models would have been a non-starter" after the bursting of the credit bubble, Stiglitz added.

Repeating a familiar critique of the "perverse incentives" on Wall Street, the Columbia professor and Nobel-prize winner said the "widespread misunderstanding of risk...creates an opportunity for Wall Street to exploit [regulatory loopholes] and dump risk on the taxpayer."

Piling on further, Soros and Stiglitz warned of the risk of firms being not only too big to fail, but too interconnected. "Things have gotten out of control, have not been brought under control by what has been done" on the regulatory front, Soros said.

After several minutes of this, Wolf gave Caruana an opportunity to respond and, in essence, defend the new regulatory regime. "There were a lot of points," he said to laughter. "I would like to find an alternative that's better [than] risk-weighting, but I haven't. Basel 3 is much better, but" it's not perfect.

Judging from the panel, "better" doesn't necessarily equal "safer". 

___

Follow Yahoo! Finance on Twitter; become a fan on Facebook.

Earlier this week, Chinese Premier Wen Jiabao said a sharp rise in the yuan "will bring disaster to China and the world.

U.S. Treasury Secretary Tim Geithner retorted by saying China's policy of keeping its currency undervalued "sets off a dangerous dynamic."

Such heated political rhetoric - along with Friday's weak jobs report and a recent House vote condemning China's currency regime - underscores the urgency of this weekend's G7 and IMF meetings in Washington.

The meetings come amid a "period of profound anxiety, which is feeding into the political climate and poisoning a lot of the political debate," says Gillian Tett, U.S. managing editor of The Financial Times.

Martin Wolf, The FT's chief economics commentator, notes the tensions over China's currency are not exclusive to America.

There is "very considerable distress and anger" among emerging market countries, which are seeing immense inflows of capital because of the Fed's aggressive monetary policy, Wolf says. With China's renminbi pegged to the ever-weakening dollar, countries like Brazil "are concerned either they lose competitiveness [vs. China] or they lose monetary control and get a lot of inflation," he says.

The Paradox of Perception

Indeed, it was Brazilian finance minister Guido Mantega who warned of the potential for a "currency war" last month and the Bank of Japan which has been intervening most aggressively to weaken its currency.

The threat is real, but don't expect any substantial action at the DC confabs, even though the dollar hit a 15-year low vs. the yen, a record low vs. the Swiss franc and multi-year lows against the Australian dollar Friday.

"I believe we are in paralysis," Wolf says. "The Chinese are saying, ‘no we're not going to do what you want because it's going to be bad for us.' To everyone else, China is a colossus but they insist ‘we are a developing country'."

At an FT conference this week, Pimco's Mohamed El-Erian explained the roots of this paradox of perception: While China's economy is now the world's second largest, it ranks just 99th in the world in per capita income.

How policymakers address this conundrum will have profound ramifications for the global economy. "If relations between the most powerful country in the world and the second-most powerful country in the world become really bad we will feel it across a huge range of issues," Wolf says.

In The Weekend That Changed Wall Street: An Eyewitness Account, Maria Bartiromo adds to the canon of books written about the crisis of 2008 and its aftermath.

"If you were watching what was taking place the weekend [of Lehman's bankruptcy] and the entire period of the crisis, you know we were looking at a financial system that was on the doorstep of collapse," Bartiromo recalls.

A self-described free-market capitalist, Bartiromo says policymakers were therefore right to intervene and provide capital to the financial system. "You can argue with the approach, how to help, but I do believe we were in a moment in time" where the government had to step in.

Contrary to the popular notion that not much - or very little - has changed for Wall Street since the bankruptcy of Lehman Brothers, the CNBC anchor cited a number of areas where there has been "real change," including:

<B>The Cost of Debt:</B> "We're all looking at debt differently [now]," she says, noting the U.S. savings rate has climbed back above 5% while S&P 500 companies are holding nearly $2 trillion in cash.

<B>Falling Dominoes:</B> While Wall Street did enjoy huge government largess, Lehman Brothers, Bear Stearns, Merrill Lynch, WaMu and several other firms did not survive the crisis or lost their independence. Today, financial firms are engaging in asset sales and the splitting off (or shuttering) of proprietary trading desks in the wake of the Dodd-Frank financial reform. Bartiromo expects this process to continue "because fin-reg is wide open to interpretation" about what banks can/cannot do with their capital.

<B>A Say on Pay:</B> The aftermath of the crisis has bought a "new focus on boards [and] management," Bartiromo says. "We're actually seeing pay for performance."

There's certainly much more talk of accountability, which would be a huge change, and seemingly zero tolerance for any misconduct by executives (See: Hurd, Mark). But it's premature to declare there's been a wholesale change in corporate governance: Of the 23,600 directors up for election in 2010, only 92 didn't get the majority vote, according to Ann Yerger, Executive Director of the Council of Institutional Investors.

In terms of what hasn't changed, the status of Fannie Mae and Freddie Mac is the biggest issue for Bartiromo.

It's "just ridiculous" the financial reform bill didn't address Fannie and Freddie and "completely lopsided" that it did focus on proprietary trading, she says. "Prop trading has nothing to do with anything [and] was not one of the reasons for the financial collapse."

Thursday marks the unofficial start to earnings season, with results due from Dow component Alcoa as well as consumer giant PepsiCo. Overall, analysts expect 23.4% year-over-year profit growth for the S&P; 500, Bloomberg reports; that's down slightly from the start of the quarter but still a pretty solid target.

Then there's the financial sector, where earnings estimates have been slashed amid a steep decline in trading volume and the passage of the Dodd-Frank financial regulatory reform bill last summer. Expectations have been falling fast and furious for the group after Jefferies missed expectations in late September and its CEO cited "painfully slow trading."

In the past month, analysts have slashed their forecasts for Morgan Stanley's third-quarter results by more than 73% and Goldman Sachs' by more-than 25%, The FT reports.

Meanwhile, Morgan Stanley has announced a hiring freeze, while Bank of America and D.E. Shaw have announced layoffs amid rumors of many more cuts coming; noted analyst Meredith Whitney predicts as many as 80,000 Wall Street layoffs are coming in the next 18 months.

Charlie Gasparino, senior correspondent at Fox Business News, isn't looking that far ahead but he too has low expectations for the coming earnings season.

Gasparino, a veteran reporter who has written several books, most recently Bought and Paid For:The Unholy Alliance Between Barack Obama and Wall Street, cites several forces weighing on the sector:

The winding down of the Fed's $1.25 trillion asset-backed purchase program has removed a key (and no-brainer) profit center from the industry.

A lack of investor confidence in both the economy and the market, which is leading to punk trading volumes. (September NYSE volume was down 25% from August.) Gasparino is also unsure about whether to trust the recent low-volume rally, and wonders how much further major averages can fly while the financial sector lags.

Uncertainty about tax policy, most notably as it pertains to dividends and capital gains, as well as a general sense the Obama administration is anti-business.

Such "macro" issues that are weighing on Wall Street firms far more than financial reform, he says, suggesting the industry "dodged a bullet" despite the histrionics about onerous new regulations.