Slip Sliding Away: The Mortgage Crisis Is Only the Beginning

Article excerpt

BAD FINANCIAL PAPER, like rust, never sleeps.

The tropical paradise of Hedge Fund Island might seem tranquil for now, but worms are turning in the dumpsters of securitized alphabet debt (MBSs, CDOs, CLOs), and the odor blowing around the world from all this garbage grows stronger by the day in places like New York, London, Tokyo, and Shanghai.

Transfusions of loss-cover loans from the Federal Reserve and other central banks have enabled the Big Fund Boyz to spend the late summer weekends rubbing elbows in the Hamptons with transcendent beings like Diddy and Kelly Ripa. The Boyz gather along the dunes at twilight, bongs in hand, to gaze at Hedge Fund Island, looming offshore in the gray Atlantic mist, and they notice something alarming: the island, which the BFBs built themselves over the past ten years, seems to be either floating out to sea or perhaps just sinking. In any case, it's getting smaller.

The scores of billions of dollars, euros, and other monies that central banks have recently poured into the sinkhole of losses will only paper over the essential problem for another few weeks, at most. The damage to global structured finance has been done, and there is a widespread, belated recognition that it's not possible to get something for nothing after all. When you hold a lot of paper that represents nothing and put it up for sale, nothing will be offered for it. What a surprise!

Now the task of people with power to act in the finance sector--which itself may be a conceit at this point--is to manage the rapid dissolution of hallucinated wealth in such a way that as few people as possible notice that x-trillions in dollar-denominated pixels have vanished from the hard drives. Sooner or later, though, millions of shlubs dependent on pension checks, annuities, or monthly payouts of one kind or another will notice that something has stopped landing in the mailbox. Repo men with bad haircuts and tattoos will be seen driving other peoples' cars to the auction barn. Young adults accustomed to thrilling paydays will discover that their services are no longer required in the mortgage origination business and will instead have to memorize dozens of excruciating formulas for different sorts of beverages more or less based on coffee. Millions of realtors will enter second childhoods as they move back in with Mommy and Daddy, who themselves must now change their plans, since it is no longer possible to flip the 1962 raised-ranch in Hempstead to buy that condo in Boca Raton.

Reality is biting hard. As with the little marmot caught in the gray wolf's jaws, the body simply surrenders and God's grace of physical shock softens the translation from joyful creature to dead meat. That is where we are at the threshold of autumn, 2007. Digestion follows. The Big Fund Boyz and their minions will end up as mere worm castings in the global compost heaps.

Terrible shocks are going to rip through the socioeconomic fabric of the U.S. as we turn the corner into the darkening quarters of the year. The fiasco of bad debt won't be contained. The choices for those who find themselves financially underwater will be 1.) liquidation, 2.) bankruptcy, or 3.) destroying whatever remains of confidence in the U.S. dollar in order to erase debt by hyperinflation. People holding power don't like the first two, which translate into Depression (let's make it a capital "D.") When a nation turns into a fire sale from sea to shining sea, and bankrupt citizens don't have enough cash on hand to buy things that have become desperately cheap, well, that's a Depression. Everybody from Fed officials to news editors has lately favored the softer term "recession" because it implies a mere pause in the inexorable march of progress toward economic nirvana. But that's not what we're heading into this time.

There will be so many assets up for sale across the U.S. in the months and years ahead that the very sun in the heavens will take on a K-Mart blue-light-special glow. …