A short comment of the current condition of our securities markets appears to be in order.
A run on a major bank with Freddie Mae and Fannie Mae coming to the table cap in hand is not business as usual. In fact it is a reprise of the worst days of the onset of the Great Depression. That is the bad news.
The good news is that volatility has increased in the oil market and a major commodity price crash is now brewing up. Expect oil to break below a $100 very soon. The economy cannot sustain the higher prices at all. The other commodities can be expected to follow suit right away.
The problem we have is that the real estate market has been marked down and is now taking all boats with it. Your fifty percent mortgage in the Hamptons can go under water. And underwater debt cannot be resolved easily until all that inventory is worked off a generation from now.
Any attempt to actually solve the problem by liquidation is impossible because the incoming supply is outstripping the supply of any likely buyers. It cannot be done.
So far the fed and congress has thrown cash at the institutions in an effort to keep it all afloat. The problem with this scheme is that it is not creating new buyers and not halting the downward pressure on prices.
This may not end until a full blown decadal depression is in full swing with a major deflation of value across the board. However, there is a simple fix that can be implemented if someone had the balls and vision.
Every property is marked to market on a set day. Each property is mortgaged to a maximum of 75% of value. The owner surrenders a fifty percent equity share in the property for the balance of the old mortgage not so covered to the mortgage company. The balance sheets of the mortgage companies are then refinanced by the takedown of equity by the fed or other government agency. (this going to otherwise happen the hard way)
The next day all the customers are whole and are in rebuilding mode. The banks have a major new shareholder(s) and a shrunken mortgage portfolio of high quality as well a huge portfolio of property equity that it can expect to dispose of profitably over the next several years as their new partners will want to buy them out.
The customers emerge largely whole and the banks emerge chastened but with excellent prospects to recoup all their capital in the medium term as prices now begin to rise as fresh demand is created. And we can get on with solving the energy problem.
