For those of you who think we can "grow out of this", ponder this video...

Let's expand on the charts a bit (click for larger copies of either):

This is a major problem - note that delinquencies were nasty in the 1980s and 1990s, but few of them translated into charge-offs.  Now we're seeing a really ugly trend - they're translating directly into charged-off loans at a rate that threatens the entire banking system, and despite the claims of The Fed and Treasury that "things have been stabilized" there is no evidence of this in the loan performance data.

No fractional reserve system can survive with charge-off rates much beyond 1% over any material amount of time.  Rates beyond 2% threaten near-imminent collapse.  This is inherent in how fractional reserves work - with a 6% Tier Capital ratio 2% charge-off rates eat dramatically into your Tier Capital - and this assumes that your "assets" are marked accurately.  You can try to make this up with "earnings" (and the banks are) by charging outrageous interest rates, but as you can see from the above chart all this has done is feed back into higher delinquency and loss rates, becoming self-defeating.

What's worse, however, is the news contained in this chart:

I was asked about including assets in these numbers, and demurred originally since you don't pay for debt out of assets (usually), you pay it down out of income.

But the question got me curious enough to hunt down the data series in the historical Fed Z1 tables.  My first glance didn't reveal anything interesting - until I normed it to "per-capita" and graphed the rate of change.  At that moment the ugly smacked me in the head: right about 1999, before the market blew up in 00-03, personal assets per-capita started to decline.

That's why we decided to try to blow the bubble - the threat of incipient large-scale defaults and a collapse in asset prices.  But the decline was shallow, the bubble huge, and we got a grand total of three years worth of asset value growth out of it for Americans on a per-capita basis, while doubling the mortgage debt outstanding and (with 08 data included I'm sure) also doubling Federal debt.

Per-capita incomes, at the same time, increased by less than 25% over the same time.

What did this chart look like before every economist, Wall Street and Government wonk went stupid?  Like this:

Notice that while debt grew so did income and asset levels, and while mortgage debt grew faster, consumer debt grew slower.  (The government started its "stupid phase" roughly in 1981, a few years ahead of the consumer economy, as you can see.)

The destabilization after the early 1980s pair of recessions was not an accident.  It occurred due to the specific and intentional bankrupt policies and beliefs of many people who claim an advanced degree or Nobel in economics, each and every one of them 100% certifiably full of crap.  It is the continuation of these policies that led us to the crash in 2000, the even worse crash in 2007 - early 2009, and leaves us where we are today.

Another attempt to do the same thing won't work.  We got a horrific plunge out of the attempt to "reflate" in 2000-03 - far worse than the market crash and recession in 00-01, and if we try to do it again with this much excess debt in the system compared to incomes we may get no material amount of lift in the economy at all.

What we will get is a cataclysmic collapse of our economy and financial system. 

The math simply cannot be argued with.

We must not let it happen.

Just to get back to 2004 levels (where assets are as of the end of 2008) we must contract consumer and mortage debt by some 30%.  This will destroy huge numbers of financial institutions, but it must be done.  The asset base losses that underpin these "loans" have already happened - they're being intentionally hidden by the banks with the full complicity of our government, and so long as this is allowed to continue the amount of debt in the system as a whole will continue to ramp while incomes will not.

But without incomes increasing the ability to service this increasing amount of debt simply does not exist.  Increasing taxes saps income and will force even more defaults and job loss yet at some point taxes must go up to pay for the increasing federal debt.

How the Japanese and Chinese can justify buying even one more Treasury bond or bill while looking at these charts escapes me.  There is no logic to it whatsoever - certainly they will take horrifying losses if they sell now, but if they don't the odds of an outright refutation of the debt, that is, an outright selective (or not-so-selective) default, rise precipitously toward 100%.

What's better - to take a loss now or take a bigger one later, when the loss is certain to occur?

America needs a banking system.  We do not need the specific banks that have caused this, including The Federal Reserve, and who are to this day continuing to hide the truth about asset quality depreciation.

Do you believe that among all assets held by Americans their value has fallen from the peak by only 18%?  The stock market alone (even with the recent rally) is off 30% from its all-time highs in the S&P and somewhat more than that in the DOW.  Home prices are down some 15% nationally.  Is this claimed 18% credible or does it include the hiding of literally tens if not hundreds of thousands of defaulted mortgages on the books of banks where they're being held "for investment" at 100 cents on the dollar while the homeowner hasn't made a payment in more than a year?

We know for a fact that the latter is going on.  We know that many large banks are withdrawing as much as 90% of their foreclosure auction properties from bidding less than 72 hours before the auction, yet those loans were neither cured nor was the property sold privately.  The latter is easily-verified - there's either nobody living in the place at all or if there is, they haven't paid a nickel.

If you want to know why there's a "backlash against banks over mortgage modifications", this is why.  They write it down, they have to report the change in "value" of their so-called "asset."  This in turn, if done at the scale where it should be, would force major financial institutions to admit that they are in fact worth bupkis.

This is not just in Residential Real Estate either; the losses in commercial real estate being papered over are staggering.  We continue to see losses of 25, 30, even 40% or more when banks fail, with the most outrageous recent example being Colonial where BB&T took a 37% write-down .vs. their book value across their entire line of business, with some sub-categories being mis-marked by half or more!  This is an outrage.

The UN has called for a "new global reserve currency" to fix the global "confidence game."  The key is the root of the word "confidence" - that is, CON - which is what we're running on the world stage, writ large.

Greenspan is back in the news claiming that "capital requirements must be raised."  How about we repeal the bogus "sweep account" nonsense along with re-imposing formal leverage limits at no higher than 12:1?  Oh wait - you had a hand in both parts of that original scam, didn't you?  Did you see Jesus Alan, or was that a ghost?

My money is on the second.