The fundamental problem is that everything got levered up to the gills during the bubble years.  Now all these “upside down” assets are a huge millstone around everyone’s neck – a problem from which we cannot realistically escape by any means other than realizing the losses.

Why not?  Because for nearly 20 years one of the fundamental requirements for sound lending – that is, the sharing of risk by the borrower and provision of a buffer against asset value declines (this is commonly known as a “down payment”) was systematically removed from our financial system across allasset classes.

See, assets do not always rise in price.  It doesn’t matter whether the asset is a stock, a bond, a piece of real estate or anything else. This is especially true when one “pumps” asset prices through the provision of nearly-unlimited credit without regard for ability to pay.

The government has, for nearly two years now, been concerned about “stabilizing housing prices.”  This is not only wrong-headed it is dangerous; there has been several trillion dollars in residential real estate “value” wiped out and there is more to come; in order to “stop it” you’d have to replace the money somehow. Then you’d get to do it again with commercial real estate, and again with credit cards, and……

This goal is not possible to achieve, but admitting the truth means admitting that a lot of our financial institutions that “ate their own cooking” are in fact bankrupt, and that just won’t do.  Never mind that some darned inconvenient questions might get asked about Washington DC’s role as “enabler in chief” for all the fraud of the last couple of decades – and perhaps more than a bit of personal complicity. 

I understand that at least a couple of sitting Senators might be able to provide tips on vacations in Antigua (Stanford Financial), as just one example of the outrageous “sleeping with thy sister” campaign that lay at the root of the faux prosperity of the last decade.  Senator Bill Nelson is reported to have received nearly $46,000 in campaign bribes, er, “donations”, along with Senator Pete Sessions of Texas ($41,375).  Even more outrageous is the fact that Stanford apparently gave $800,000 (!) to the Democratic Senatorial Campaign Committee during the year that Senator Nelson was vice-chairman – 2002, specifically.

What’s important about 2002?  It was a year in which Stanford was lobbying furiously against anti-fraud legislation for the securities industry. 

How’d that turn out?

The bill was killed in Senate committee.

The best government money can buy, compliments of Senators Nelson and others. 

via Foreclosure Prevention? BS! More Fraud Coverup! – The Market Ticker.

Not sure this is the only problem.  I’d tend to see the root cause as the easy money policies of the Fed enforcing below market interest rates.  That new money then gets into the system and there were other problems created to adjust to that “pressure.”

Still, “perfect storm” seems to have developed from additional factors, including Banana-Republic collusion between “public” and “private” sector.  I use quotation marks around the virtually meaningless words.  We should just refer to the Ruling Sector, or the Parasite Sector.  It’s the Wall-Street-WashingtonDC nexus.