Wednesday, March 24, 2010

BofA to start reducing mortgage principal-sources - WHY IT WON'T HELP

Bank of America will on Wednesday announce plans to start forgiving mortgage loan principal for troubled homeowners who owe more than 120 percent of their home's value or are battling ever-expanding "negative amortization" loans.
Now why won't this help?

Seems pretty simple to me, it doesn't address the fundamental issue with what we are witnessing.
Now what is that.

The current financial system is based on exponential growth, no matter how many principle reductions you do someone has to take out an additional amounts of credit to service the present system which is $52.7T. What has to happen to get the system in a state to grow again is two things 1.) Destruction and 2.) Time. To get to that point after the credit peak of 2007 the system will need to liquidate the non-performing. Way too many non-performing assets being held up.

They don't call it a death spiral for nothing folks. Hilter and Germany got feed up with the slow process 70 years ago. This process will take many decades to work through until we hit the bottom, we have barely started the descent.

At the present time, consumers would have to instantly take on additional $5T of new credit annually over the rate they were in Q4 2009 to have the system have any effect on what is going on. The federal government is the last player at the table.


  1. 1) Isn't principal reduction destruction?
    2) How do arrive at the $5T new credit annually number?

  2. 1.) $10Billion or $100billion of destruction isn't going to put a dent in anything. Now eliminate a few billion of the non-performing assets and say destruction of a Europe, Asia and North America that is probably a start. Just remember 70 years ago it took the whole destruction of Europe, half of Asia and parts of Africa to get to the bottom. This cycle wave is magnitudes larger.

    2.) 2007 was the peak of credit creation, around $4.5T new credit for the year see Z1 report. Current pace of credit creation is around -$500+ billion annualized... of course this doesn't account for the already missing trillions from the system.

    Nice questions BTW.

  3. re 1): You're saying the debt is unpayable, therefore either the lender or the borrower or both will get screwed. I buy that. But I don't see how killing off lots of humans accomplishes a clearing of the bad debt. Whose interest will that serve? Presumably not the borrowers' -- they're the ones who get "liquidated." The lenders', then? What does this kind of liquidation accomplish from their perspective?

    I found your blog via ZH where I enjoy reading your comments.

  4. After the peak the system must find a bottom, the problem is the system has to reach it's maximum descent. It's a wave or cycle.

    You have more and more unfunded liabilities, who is going to fund them, how does it get funded. Are the unfunded liabilities going to be happy when someone doesn't fund them? I doubt it.

    Once you get into a death spiral, that's it. In Europe in the 30s they were dumping grain out at sea to try and get prices up while people were starving onshore.

    Now consider today where virtually 95% of all people walking around can't even fund their own water supply. The 30s were slow death, the world went into a depression in 1932-35 by 1937-1939 it was back in a depression.

    In the system that has been constructed, you hit your peak and collapse to the maximum bottom... a wave. There really are no slowdowns if you look at federal reserve Z1 report over the last 66+ years, not that I can find. You are either supplying and demanding what is needed for the equation to sustain itself or it begins to collapse.

    It's misinformation that banks are not willing to lend, there just isn't even close to the amount and the amount of people willing to take on more at the 2007 rate, let alone more to keep the equation functioning.