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The Foreclosure Clusterf*ck

Everyone in the US is too close to the bomb to realize just how big Foreclosure-Gate could potentially become.

Everyone, including pro-bank blogs such as Calculated Risk, is focusing on the technical details of robo-signings.  Ellen Hodgson Brown – who has been consistently ahead of the curve on this explosive topic – sees some of the potential implications, but even she doesn’t see the ‘transition costs’ that will occur if she is right and the TBTF banks really are broken up under the Kanjorski amendment.

There is a much, much bigger issue at stake here than the legalities of foreclosures and questions over title.  It goes to the heart of the monetary system in the US and signals the next leg down in the metastisizing monetary cancer that is late-stage debt-based monetary dysfunction.

Let me tease out some – some – of the implications.

The first fundamental point to realize is that modern money – liquid wealth – is debt.  The biggest debt is in mortgages, so the biggest wealth generator is mortgage debt.  Ironic but true.  The more the bankers indebted the general populace the more money they made for themselves.  And this debt then went around the monetary universe as money – being traded as bonds.

Of course, money is only useful if it has a stable value.  People vomit out worthless money and pass the sticking hot potato onto others if they sense that money is worth less and less.  That’s called Gresham’s Law.

Once you grasp this fundamental point about modern money – that all the banks the world over have an interest in the integrity of the mortgage market because it ‘liquidates’ their own trading accounts – you realize how huge this problem is.

If any aspect of the chain of title is in question, the ‘asset’ backing the tradeable money in our international financial system – American mortgages – breaks down.  CDOs become worthless because no one can tell whether their CDO package has the ‘bomb’ of defective titles in their portfolio.  So the whole monetary system freezes, CDOs become worthless, the Fed has to step in yet again to buy this toxic crap and the major banks are ‘caught’ in an insolvency bind.

No one realizes that questions over even a small proportion of the foreclosures can freeze not only the property market in the US, but the whole international monetary system.

November 2008 would be child’s play compared to a full-blown CDO crisis, because it would expose all the biggest banks as holders of worthless paper – at the same time.  No one could escape.

That’s why I’m calling Foreclosure-Gate, the Foreclosure Clusterf*ck.

This really is Financial Armageddon.  And once questions are raised about the integrity of the foreclosure process, there is no way to stop this stinking turd of a snowball gather more momentum until it becomes an avalanche.

The real cause of this was the theoretical, empirical and universal assumption that house prices would never fall nationally on average.  Everyone was geared up on the assumption that no widespread slump in house prices could occur.  The rats didn’t plan to have to reverse out of their own maze.

They are trapped. 

And there is no way out.

I leave the best quote to last.  From Karl Denninger:

You can’t audit what you don’t have.

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