After the housing bubble burst, American homeowners lost $7 trillion in home equity, while paying down mortgage debt by only $270 million. The result of which has left them buried under $4 trillion of excess mortgage debt. Just as water seeks its own level, so too will this imbalance. There simply is no easy way out.
Take a look at this scary chart.
Click to enlarge.
Source: A Blistering Ride Through Hell. Key Property Charts to Make Sense of This Week’s Housing Numbers and This Year’s Financial Crisis.
Resolving that much debt is going to be painful too.
Housing Bubble Leaves $4 Trillion Hangover: Chart of the Day
The CHART OF THE DAY compares the total amount of home loans outstanding with the value of residential real estate, as compiled by the Federal Reserve ... adjusted to reflect the average 40 percent debt-to- value ratio that prevailed from 1990 to 2005.
To eliminate the excess and bring down the ratio to its historical norm, either house prices would have to surge or home-loan repayments and defaults would have to accelerate, Joshi said today in an interview.“In either scenario, it would be a disaster,” the strategist said, adding that prices are unlikely to recover any time soon. The U.S. has 4 million more homes than it needs ...
The Last Bubble: The Problem of Unresolved Debt in the US Financial System
Nine out of ten Americans will notice that there is a significant gap that must be closed here. What makes it even more chilling is that the gap is continuing to widen as home prices continue to correct to the mean.
This debt must be resolved. There are two major ways to do it: repayment and default.
Repayment is probably a fantasy, if not beating a dead horse. The homeowners do not have the money with which to pay the loans given the current state of employment and wage stagnation, and the mortgages are for the most part on houses whose value is significantly under water compared to the debt, as in ' just mail in the keys.'
Straight up default, writing off the debt even through foreclosure, is also probably out of the question, because it would essentially vaporize the balance sheet of the US banking system which is also insolvent, to a greater degree than most understand, and if they understand it, would admit.
The Japanese solution was to ignore their bad debt and insolvent kereitsu, because admitting it would cause significant loss of face, not to mention financial loss, to an elite that does not permit such things to happen. So instead they arranged for their single party LDP system to drag the debt like a ball and chain through what came to be known as 'the lost decade' ...
Do you think the US can follow this path? As if.
Someone has to end up 'holding the bag.' And the consumer cannot rise to the occasion, the banks are all insolvent and a sinkhole until they change their business models. So what will be 'the last bubble?' Bernanke has managed to monetize about 1.5 trillion dollars so far ...
Consider this well, and you will understand what is happening in the economy, and why certain things occur over the next 24 months, despite the fog of wars, currency and otherwise. And bear in mind that the only real limit and effective constraint on the Fed's ability to monetize debt is the value and acceptability of the bond, and the dollar in payment of interest, by foreign debt holders, as domestic debt holders are under legal compulsion by the law of legal tender.
And it was all unnecessary, attributable to the dishonesty and greed of a remarkably small number of men in New York and Washington ... with the acquiescence and support of a public grown complacent and ... soft headed and corrupt.
Obama has been disappointing, but what comes next may well be worse, much worse.
And it's not just the $4 trillion in excess mortgage debt that will resolve itself one way or another either, but as much as $23 trillion in federal government bailout debt, and state and local government debt, and mountains of consumer debt, and yes, even another banking crisis is lurking around the corner too.
We are truly facing a nightmare scenario. God help us all.
OK, that is scary. You are definitely our economics guru.
Yes. Scary and very real. That's why I've been spending more time on the economy lately, because pundits left or right, refuse to speak (or don't understand) the truth.