A brief, if terrifying, introduction
(Full article here.)
Jerry Nelson, McLean, VA
October 2010
Hi, All,
Time to let Jon Stewart, host of Comedy Central's Today Show, take you on a roller coaster tour of recent foreclosure crisis news.

Stewart's premium cable TV show has restricted access, but see if one of these works:

It caught my attention last Saturday (16Oct) when Ben Bernanke, the Federal Reserve (central bank) Chairman, floated the idea of printing a trillion or so dollars.  Bernanke wants to print some money for the executive branch (buy Treasury Bonds, force down interest rates on all bonds and mortgages), but mostly he wants to print money for the banks.  Didn't we do this before? 

My memory's starting to go, I must look it up. 

Yes, 1.45 trillion dollars was printed and given to the banks by the end of last year -- twice the $700B in TARP money (the "Troubled Asset Relief Program" bailout).   And $1.2 trillion in loans went to banks overseas -- the loans that angered Congress when Bernanke refused to say who got them. (It may be the halls of Congress, but it seems like comedy to me: Representative Alan Grayson (D, FL) grills Bernanke.)

Consumers drive the economy.  Humiliating consumers by throwing them out of their houses hurts consumers' confidence for a generation.  Yet we cannot stop.  Even when the foreclosures are illegal (Jon Stewart, Comedy Central above), something is preventing us from stopping (not to mention criminally punishing) those who broke the laws and kept cycling owners out of their homes. 

From a strictly financial point of view, a mortgage is worthless until someone will step forward to resume paying it, and that will not happen until the number written on the paper is reduced to the actual house value or lower.  What can be making a fraudulent face value on home mortgages seem better to retain than doing a "cram-down" to numbers that someone will pay?   

It finally clicked.  I think I see how the program of steady foreclosures and resales, and the steady flow of trillions of dollars into the banks, are related to one another.  I think I figured out why we are rotating out the families inside the houses, and cannot change the mortgage to keep the original owner, except by doing it quietly later after we get rid of him.    

In my humble opinion, many banks are bankrupt, but the public is being shielded from this as it was in the Savings and Loan Crisis of the '80s.   Others have also concluded that our banks are bankrupt, but, like Weapons of Mass Destruction in the 2002/2003 run-up to war, the voices are few -- few will say the king is wearing no clothes. 

The Fed's trillions in printed money are not for economic recovery, they are to keep insolvent banks going . . . until the housing market recovers enough to unload depressed and even toxic assets.  

The mortgage values cannot be adjusted back to reality because many of the six hundred trillion dollars in currently outstanding derivatives are based on them.  In particular, there are thirty-two trillion dollars in credit default swaps outstanding, and these are mostly based on underlying commercial and residential real estate mortgages.  And, in today's global world, such mortgage-derived financial instruments have been sold to banks and organizations around the world.  There, people expect the United States to be wealthy, strong, and stable.  The TARP and the Federal Reserve did one or two trillion for our domestic banks, and we loaned out 1.2 trillion to foreign banks, but 600 trillion in derivatives, or even 32 trillion, is a bridge too far.  With no regulated, transparent, open market for these derivative financial instruments -- because the financial industry fought it off -- with no market, it cannot be established what the market value is -- and owners can't easily find the exits and cleanse their books. 

So we're stuck.  The pyramid of financial products built on mortgages now locks in a mortgage's face value.  None of those homeowners will pay -- they know the face value on the mortgage is fraudulent, they know from being unable to sell the house that no one else will pay it either.  The occupant of the home and his mortgage are trash. 

These families must be rotated out and replaced with other owners, but not fast enough to depress the market with too many houses at once.   The local bank has no authority to do anything, and, after you are out on the street, the local bank's "bank auction" always fails (because it's based on the original mortgage value).  The house is then "REO" (real-estate, owned) and passes up the chain from the bank to the "owner-of-bundled-mortgages" or higher.  There, all the deadbeat homes in a "bundle" are resold to new people at new prices, and the bundle or other financial instrument is saved. 

Prosperity would hide fraud.  But a recovery based on trashing homeowners and their mortgages will sputter and die.  Occupants can't be flipped fast enough to save the banks.  So the banks keep needing Bernanke. 

Printing money, are you kidding? 

This is transferring wealth, not creating it.  We are waiting for a recovery which is not happening.  The longer we wait, the more trillions the Federal Reserve will print and give to the banks in return for questionable assets.  If these assets are toxic enough, the Fed will not be able to sell them years down the line (... will not be able to pull the dollars back out of the money supply).   Printing money could destabilize the country and people's confidence in it.  High inflation (hyperinflation?)  from this money supply foolishness will damage all of us at home and abroad. 

We need a different exit strategy than the unstated play book the banks and the politicians are following.  I guess the politicians are more deeply financed by the banks than I thought.    We need another strategy.   I have no idea what it will be or who will provide it.  Please, please let's not waste time on "left" vs. "right" when what we all dearly want is "up".    

Sorry this "short version" became so long.  Robin let me waste a week researching and writing this:
J. I.  Nelson, Ph.D.
October 2010
Click on it, or send your browser to
And there's a second essay.

When the crisis broke in Sept 2008, I tried to figure out how only a few years of home mortgages could spin out to trillions of dollars, endangering the globe.  All mortgages outstanding are worth about 11 trillion.  The back of my napkin says 30 trillion would buy a new mortgage for every home in the country, yet the mortgage-based derivatives were 60, 100 trillion.   My run-down on  the games Wall Street played to get there is this:  (if it doesn't "click", type in )

J. I. Nelson, Ph.D.
McLean, VA
20 October 2008, Rev 1May10
"The Fed was really adamantly opposed to any form of regulation whatsover."
    --Arthur Levitt Jr., Chairman, Securities and Exchange Commission (SEC), 1993-2001
quoted in Washington Post, 15Oct08, pg A9
"... the burst of the biggest credit bubble in history ... "
The Washington Post, 24Jan09, pg A1

I worked for an investment firm with two billion under management, and sent  this "What Went Wrong" essay to my former boss, the co-founder.  His only criticism was that I was too easy on the destructive roles played by Fannie Mae and Freddie Mac.

I'm ready for a good joke or any happy news.  A smile and thank you to Ellen for sending a Gilbert and Sullivan President: 
    (Obama! A Modern U.S. President (musical spoof) )

My bottom line is that privileged people have lost their moral compass because they are never punished.  Perhaps criminal justice was no better in our parents' time, but the Great Depression and Hitler's near-conquest of the world served as a"punishment" that taught values to an entire generation.  For us, it may be climate -- the only thing still lacking is imagination to comprehend the future.    

Always glad to hear from you,
--jerry      jerry-va at removethistext speakeasy dot net        
Berndes Vanessa teapot 1990s