Flirting With Depression

It is hard to believe that the financial system has come to this pass. Can you pay the balance of your mortgage tomorrow? That is what Congress is asking us indirectly to do.

The money has been lost and the banks do not have the assets to cover the losses because high risk loans were allowed to climb from a normal 8% of asset class to 22%. The money has been spent and is out there in the economy were the banks cannot get it. Therefore they have to contract their loan portfolio at the very least or as is happening, go out of business and abandon the bad loans to the government and on directly to us. Certainly the loan portfolios are already shrinking.

The bailout voted down on Monday was no more than getting ahead of the disaster and releasing the banks from the need to call billions of dollars in good loans. The banks will now need to call these loans and this will forcibly shrink the American economy. This is famously called deflation.

If it runs its course, millions will be thrown out of work and that will include government employees.

I am already seeing the first whiffs of heat coming from Main Street. And the fear now been induced will accelerate the effect. The banks are all hunkering down trying to see if they are still in business.

Right now no one seems to know how to sell a solution and I suspect no one there knows quite what a solution looks like.

I know that my suggestion to mark to market the housing market and securitizing the losses by sharing in the equity would clean up the housing sector for almost all participants. What bothers me is what I do not know and what everyone else does not know about the degree of leveraging off balance sheet.

That is the game that wiped out the Japanese system at the beginning of the nineties. It also caused the great depression.

I also think that it is high time that we removed the legal profession completely from the task of creating financial products and their regulation. The accounting profession is much better suited for this task by temperament, whereas lawyers are trained to think in terms of gaming the system without heeding the consequences. We are now harvesting the consequences.

Of course this will never happen.

Been the eternal optimist I hope that they can get over all this. A mark to market on housing would actually give the economy a nice bounce that would coincide with dropping commodity prices and energy replacement swiftly reinvigorating the economy.

We actually stand on the threshold of one of great economic transformations in human history that will completely change our way of life forever. The real challenge should be to make it better than to cause it to be delayed a single day.

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