Reader Jack asks "Where DID the money go?"
“What will be the consequence of losses of over $1 trillion and, possibly, as high as $2 trillion? That would wipe out most of the capital of most of the US banking system and lead most of US banks and mortgage lenders – that are massively exposed to real estate – to go belly up. You would then have a systemic banking crisis of proportions that would be several orders of magnitude larger than the S&L crisis, a crisis that ended up with a fiscal bailout cost of over $120 billion dollars. And the worrisome part of this scenario is that – with home prices likely to fall by 20% or more – this scenario of systemic banking crisis is becoming increasingly likely.” Nouriel Roubini at the committee hearings last week.
When I read that last paragraph in Roubini’s testimony to the Congress I am left a bit dazed and confused. That’s $1 trillion, or maybe $2 trillion, that may have just evaporated and the entire length of the testimony doesn’t even begin to raise the question, where did it all go? What are the consequences? Indeed. What would be the consequences of my stealing $100 out of the grocer’s till? So why does this testimony only focus on what now and leave entirely unspoken, how so?
Since this crises began in the fall of 2007 there have been an endless parade of analysis focused on what happened, how did it happen, what is likely to happen next, when will if happen and what can be done to deal with what is happening? What I haven’t been able to find in all these learned writings is, where did it all go? A balloon popped, but the balloon wasn’t filled with air. It was filled with hard money. The money that all the mortgage banks lent to all the buyers of what now may have been grossly over valued real estate. The paper generated by those loans (a mortgage is that process that turns cash into paper) was then turned back into cash again by the miracle of restructuring. The promises to repay became themselves objects to sell.
So where is all that cash? Who retains the funds represented by all those defaulting mortgages? Who retains the profits and fees generated by all that restructured paper, those collateralized debt obligations that weren’t so well collateralized? No one seems to care about where all the money went, but one thing I do know is that in the world of finance bubbles are filled with cash until they pop. Then there seems to be an evaporative effect and the money is now worthless debt. I’d like to know who it is that is still whole cloth, monetarily that is. Financial bubbles don’t occur as a result of subterranean hydro-thermal activity. It’s another form of hot air that is put in play.
(Lightly edited by rdan)
Jack is usually a regular reader of Econospeak and Maxspeak, and this is a first post for him. The question might be on the minds of many in one way or another, so I thought it a good idea to put it on the table.