And you thought Bush's budget deficits were bad...

[J]

How does $1.75 TRILLION sound?

Bloomberg link

Obama’s Proposes Up to $750 Billion More for Bank Aid (Update1)
By Roger Runningen and Brian Faler

Feb. 26 (Bloomberg) -- President Barack Obama’s first budget request would provide as much as $750 billion in new aid to the financial industry, as well as overhaul the U.S. health-care system and launch a program to cut carbon-dioxide emissions.

The spending blueprint, being sent to Congress today, anticipates the government will run a deficit totaling $1.75 trillion in the year ending Sept. 30, equivalent to about 12 percent of the nation’s gross domestic product. Obama has promised to cut the shortfall -- the biggest since World War II - - in half by the end of his first term.

A senior administration official, in a briefing yesterday with reporters, declined to say how large the White House forecasts the fiscal year 2010 deficit will be or provide the total budget figure.

Obama is scheduled to make remarks about his fiscal plan at 9:30 a.m. Washington time, and the full document is set for release at 11 a.m.

The administration proposes to finance the budget in part by limiting tax deductions for couples earning more than $250,000 a year, raising taxes on hedge-fund managers, cutting defense spending and paring subsidies to insurance companies participating in the government’s Medicare health-care system.

More details will come in the 134-page overview the administration plans to release later outlining budget priorities for the 2010 fiscal year, which begins Oct. 1. The administration official, noting Obama has only been in office for little more than a month, said the White House doesn’t plan to release a full, detailed budget until April.

Aid Figure in Flux

The official, speaking on condition of anonymity, said the White House hasn’t decided whether the $750 billion in additional aid to the financial industry will be needed. He said it will be put in the budget as a “placeholder.”

The official said the aid would appear in the budget as about $250 billion because the rules require policy makers to record the plan’s net cost to taxpayers. The government anticipates it would eventually recoup some, though not all, of the money expended to help financial companies.

The funds would come on top of the $700 billion rescue package approved last October by Congress.

The official said the White House is asking for a “down payment” of about $635 billion to begin overhauling the nation’s health-care system, which Obama has said is critical to expanding health-insurance coverage and getting the government’s fiscal house in order.

The fund would be financed in part by the limits on tax deductions for those earning more than $250,000 a year and by requiring insurance companies participating in the Medicare Advantage program to enter into competitive bidding.

‘Carried Interest’ Loophole

The budget proposes raising taxes on hedge-fund managers by eliminating the so-called carried interest tax loophole that allows investment managers to pay 15 percent tax rates on their compensation rather than the usual income tax rates. The spending plan would also raise taxes on corporate income earned overseas and crack down on business transactions that are solely designed to reduce companies’ tax bills.

The budget would eliminate the Advance Earned Income Tax Credit, a tax break for low-income earners that government officials have said is poorly administrated.

The spending plan assumes the government would begin taking in at least $75 billion in 2012 from a cap-and-trade system that requires companies to buy credits if they exceed greenhouse-gas limits. That money would be used to invest in clean-energy technology and also help offset higher energy costs for lower-and middle-income Americans, according to officials who spoke on condition of anonymity.

War Costs

On defense, the administration will request an additional $75 billion this year for Iraq and Afghanistan war costs, bringing the total annual spending on the conflicts to more than $140 billion. The budget assumes those costs will decline to about $130 billion in 2010 and $50 billion in subsequent years.

The administration official said Obama plans to pursue deficit reduction by cutting spending on defense, an area with “significant” opportunities for savings. Agriculture subsidies also are targeted for reductions, with the administration pushing to phase out payments to farmers earning more than $500,000 annually.

While the federal government has taken over Fannie Mae and Freddie Mac, the Obama administration opted to exclude most of the costs of running the mortgage financiers in its budget plan. The blueprint includes the money the Treasury Department has injected into the companies so far, the official said.

Many have already estimated Obama's upcoming budget deficit to top a trillion dollars, with most estimates coming in around 1.1 - 1.4 trillion. The official estimate is much worse and it still doesn't cover the full shortfall. Note the last paragraph which I've bolded, most of the costs of running Freddie & Fannie are being excluded, and those costs are substantial. From the bailout bill last October, we learned that F&F are being made to buy ~$40 billion a month in non-performing mortgage securities, these toxic pieces of toilet paper are worth pennies on the dollar at best and can be considered a total loss unless housing prices can be pumped to 2005-2007 levels. So in round numbers that's another $400-450 billion down the drain right there, bringing the total deficit to over $2 TRILLION.

In my opinion this is playing chicken with the Treasury bond market. The US better pray that the rest of the world continues buying T-bills & notes in record amounts, so far the rest of the world has done so, the problem is this can't continue since the largest customers of US Treasury bonds are now facing severe economic problems of their own and may not be able to continue their purchases of US bonds even if they wanted to. This is a very, very dangerous game.

[aerius]

It's not so bad, the deficit is only about half the total budget! Clearly, the market likes this, or should I say the financials like it, cause they're getting another $700 billion in free money so everything's heavily in the green this morning. They better hope the bonds market doesn't go "fuck you, I'm going home" in the coming months, cause that's how depressions are made.

[Coyote]

The problem is, and I hate to say it, but when Obama (or indeed other Democrats) set up something like this, I'm not as worried because I have more confidence that they'll be able to deal with it.

McCain could be making the exact same decisions right now (had he won), but I'd have no confidence in the outcome.

I know it doesn't make sense, but that's the way it is.

[Darth Wong]

I guess the hope is that the economy will turn around in the next year, and they'll be able to start raising taxes to pay for some of this. But I wouldn't hold my breath; the whole "taxes are eeeeevil" thing has become pretty deeply entrenched in the American psyche.

[Mayabird]

Bush's budget deficits were worse than they claimed because of accounting tricks that Obama won't use. (Was that posted here too or just at Librium Arcana?) It does not excuse the ridiculous amount of bank aid, but there you go.

[aerius]

Bush's budget deficits were worse than they claimed because of accounting tricks that Obama won't use.

Got any links or details on that? I've seen lots of conflicting numbers on the deficit run up by Bush's government, but I generally go by the CBO numbers.

It does not excuse the ridiculous amount of bank aid, but there you go.

Pretty soon I'll have to break out my TI-85 graphing calculator to add up the numbers, my normal one is running out of digits to handle these big numbers.

[Count Chocula]

accounting tricks that Obama won't use

It doesn't include the extra $410 billion from yesterday, which I guess doesn't count since it's meant to get the government through Sept. 30. As mentioned it doesn't cover Fannie and Freddie admin costs; nor does it even attempt to estimate further required cash infusions to them. We'll know more in April when the full proposal is unleashed, and then we'll see what's in and what's not on the budget. If Citigroup, Bank of America, or Wells Fargo go under, the FDIC would be instantly underwater and need dozens of billions of dollars.

So far, here's what Congress and Obama have given us to pay for in 5 weeks. Check me if I'm wrong.

• $787 billion spending bill
• $410 billion 2009 additional funding
• A proposed budget that brings the total bank bailout to $1.45 trillion, and adds $1 trillion to the deficit (not counting the $750B to banks) in a single year!

Here's an interesting perspective on repayment from this blog, which is really a kick in the nuts if you work in manufacturing or farming:

We’ve got an additional $1.75 trillion divided by 39,380,00 real primary-goods and farm producers.

CONGRATULATIONS! If you’re a primary producer you’re gong to get to fund an additional $45,595 worth of deficits this year and that’s on top of the financial train wreck left over by the republicorps/Bushiecrats. Wowzer…. Repeat after me: BOHICA.

Oh yeah, there doesn't seem to be any accounting for reduced income tax revenue on account of the millions of unemployed Americans! Jesus Christ.

[Mayabird]

SirNitram posted it originally over at LA.

New York Times

Obama Bans Gimmicks, and Deficit Will Rise
By JACKIE CALMES
Published: February 19, 2009

WASHINGTON — For his first annual budget next week, President Obama has banned four accounting gimmicks that President George W. Bush used to make deficit projections look smaller. The price of more honest bookkeeping: A budget that is $2.7 trillion deeper in the red over the next decade than it would otherwise appear, according to administration officials.

The new accounting involves spending on the wars in Iraq and Afghanistan, Medicare reimbursements to physicians and the cost of disaster responses.

But the biggest adjustment will deal with revenues from the alternative minimum tax, a parallel tax system enacted in 1969 to prevent the wealthy from using tax shelters to avoid paying any income tax.

Even with bigger deficit projections, the Obama administration will put the country on “a sustainable fiscal course” by the end of Mr. Obama’s term, Peter R. Orszag, the director of the Office of Management and Budget, said Thursday in an interview. Mr. Orszag did not provide details of how the administration would reduce a deficit expected to reach at least $1.5 trillion this year.

Mr. Obama’s banishment of the gimmicks, which have been widely criticized, is in keeping with his promise to run a more transparent government.

Fiscal sleight of hand has long been a staple of federal budgets, giving rise to phrases like “rosy scenario” and “magic asterisks.”

The $2.7 trillion in additional deficit spending, Mr. Orszag said, is “a huge amount of money that would just be kind of a magic asterisk in previous budgets.”

“The president prefers to tell the truth,” he said, “rather than make the numbers look better by pretending.”

Recent presidents and Congresses were complicit in the ploy involving the alternative minimum tax. While that tax was intended to hit the wealthiest taxpayers, it was not indexed for inflation. That fact and the tax breaks of the Bush years have meant that it could affect millions of middle-class taxpayers.

If they paid it, the government would get billions of dollars more in tax revenues, which is what past budgets have projected. But it would also probably mean a taxpayer revolt. So each year the White House and Congress agree to “patch” the alternative tax for inflation, and the extra revenues never materialize.

Nearly $70 billion of the just-enacted $787 billion economic recovery plan reflected the bookkeeping cost of adjusting the alternative tax for a year.

The White House budget office calculates that over the next decade, the tax would add $1.2 trillion in revenues. But Mr. Obama is not counting those revenues, and he is adding $218 billion to the 10-year deficit projections to reflect the added interest the government would pay for its extra debt.

As for war costs, Mr. Bush included little or none in his annual military budgets, instead routinely asking Congress for supplemental appropriations during the year. Mr. Obama will include cost projections for every year through the 2019 fiscal year to cover “overseas military contingencies” — nearly $500 billion over 10 years.

For Medicare, Mr. Bush routinely budgeted less than actual costs for payments to physicians, although he and Congress regularly waived a law mandating the lower reimbursements for fear that doctors would quit serving beneficiaries in protest.

Mr. Obama will budget $401 billion over 10 years for higher costs and interest on the debt.

He will also budget $273 billion in that period for natural disasters. Every year the government pays billions for disaster relief, but presidents and lawmakers have long ignored budget reformers’ calls for a contingency account to reflect that certainty.

[MarshalPurnell]

I had figured we would add $4 trillion to the national debt over a period of Obama's entire first term before we got the financial collapse under control. I see I seriously lowballed. Not that there is anything wrong, necessarily, with racing the national debt up to 100% of GDP, or even higher, so long as the bond market will support it and the spending goes to productive projects that will improve the long-term competitiveness and prosperity of the nation. Then one can raise taxes and count on increasing revenue as the post-recession boom kicks in, and cut into the debt.

Except, as is increasingly clear, Obama has no intention whatsoever of taking the sorts of actions necessary to spend these trillions of dollars productively and the Republicans have no intention of even trying to be a useful opposition. We need money devoted to massive infrastructure projects, we need the books of the major banks cleared even if it requires nationalization, we need to buy up bad mortgages to restructure them to keep the housing market from continuing to collapse, we need a major overhaul of the financial and lending sector, we need to get used to the lower availability of credit and encourage Americans to save rather than leverage themselves to death with personal debt, and above all we need the faith of the population and of the rest of the world that we are acting wisely to recover and can afford the burden necessary for all of the above. Instead we're just going to piss away as much money as we can raise on these idiot bank handouts, on poorly conceived environmental projects, on badly managed health care entitlements, on "shovel ready" projects that were too dubious to get an earmark in more prosperous times, and maybe some tax cuts that people will take and save rather than spend. Even Obama can't get past the paradigm of reinflating the bubble that just crashed, which is the worst possible response to the circumstances, the Republicans are less than useless, and the entire world is going to pay for it.

[Forum Troll]

The 2010 federal budget of $3.55 trillion is spending $12000 for every man, woman, and child in the country, not counting county and state budgets. Somehow I bet a lot of it will go to people blowing a fraction of a million bucks on an overpriced house and to keeping up the same degree of a fractional-reserve banking system, with rather limited benefit seen by most people or by those using their money more prudently. A few years of deficits like this $1.75 trillion, and the national debt is going to be doubled from the $11 trillion it is now.

[Illuminatus Primus]

It's not so bad, the deficit is only about half the total budget! Clearly, the market likes this, or should I say the financials like it, cause they're getting another $700 billion in free money so everything's heavily in the green this morning. They better hope the bonds market doesn't go "fuck you, I'm going home" in the coming months, cause that's how depressions are made.

Its time to nationalize and cram-down. Fuck Geitner and his "nationalization is not the answer"; how the hell should he know? Screw his shareholder buddies. Time for them to eat a shit sandwich. This "pray and trust the financier wonks" religion that has taken hold in Washington needs to stop.

[Darth Wong]

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford.

[Pablo Sanchez]

Its time to nationalize and cram-down. Fuck Geitner and his "nationalization is not the answer"; how the hell should he know? Screw his shareholder buddies. Time for them to eat a shit sandwich. This "pray and trust the financier wonks" religion that has taken hold in Washington needs to stop.

If and when the current plan of working within the existing economic context fails, will it still be possible to pursue the more aggressive "explode out of the fucking box and build a new one", or will things be too messed up even for that?

[Count Chocula]

If and when the current plan of working within the existing economic context fails, will it still be possible to pursue the more aggressive "explode out of the fucking box and build a new one", or will things be too messed up even for that?

If and when our current economic model fails, the inner cities will be ruled by people who look like your avatar. At that point, the stage will be set for a totalitarian Pied Piper to pick up the pieces and rope in those who will pay any price to stop the fighting, looting and scarcity. I'm hoping it never gets that far, but...it might. I'm still hoping that the adults will get to run the show, instead of the mouth-breathing thieving liars we've been saddled with for decades.

[Darth Wong]

If and when the current plan of working within the existing economic context fails, will it still be possible to pursue the more aggressive "explode out of the fucking box and build a new one", or will things be too messed up even for that?

If and when our current economic model fails, the inner cities will be ruled by people who look like your avatar. At that point, the stage will be set for a totalitarian Pied Piper to pick up the pieces and rope in those who will pay any price to stop the fighting, looting and scarcity. I'm hoping it never gets that far, but...it might. I'm still hoping that the adults will get to run the show, instead of the mouth-breathing thieving liars we've been saddled with for decades.

Frankly, the problem is not your leaders. It's your average citizen. Who do you think emboldened Bush to act the way he did? Remember those 90% approval ratings, or the fact that he got re-elected in 2004? People liked his policies until they started suffering blowback for them, then they got pissed off and voted for somebody else. But they never understood that their own attitudes were at fault. It's always somebody else's fault.

They still have the same stupid attitudes about demanding services from the government without wanting to pay for them.

[Illuminatus Primus]

If and when the current plan of working within the existing economic context fails, will it still be possible to pursue the more aggressive "explode out of the fucking box and build a new one", or will things be too messed up even for that?

If and when our current economic model fails, the inner cities will be ruled by people who look like your avatar. At that point, the stage will be set for a totalitarian Pied Piper to pick up the pieces and rope in those who will pay any price to stop the fighting, looting and scarcity. I'm hoping it never gets that far, but...it might. I'm still hoping that the adults will get to run the show, instead of the mouth-breathing thieving liars we've been saddled with for decades.

Typical self-important right-wing middle class drivel. The basis of most truly totalitarian regimes was the middle class; the middle class and the lower middle class were the basis of Hitler's support in his rise to power. It isn't the poor and blacks that put the jackboots in power, its the prissy middle class, offended their prerogatives aren't being kept.

[Kanastrous]

Dave Sim - a fine upstanding Canadian fellow - once observed that If you can't fool all of the people all of the time, you had better start breeding them for stupidity.

[Kanastrous]

The basis of most truly totalitarian regimes was the middle class; the middle class and the lower middle class were the basis of Hitler's support in his rise to power.

While the big-money financiers and industrialists paid his way. I think it was a combined effort.

It isn't the poor and blacks that put the jackboots in power, its the prissy middle class, offended their prerogatives aren't being kept.

Sticking with Hitler, the same was true of the military and the clergy.

[Illuminatus Primus]

The basis of most truly totalitarian regimes was the middle class; the middle class and the lower middle class were the basis of Hitler's support in his rise to power.

While the big-money financiers and industrialists paid his way. I think it was a combined effort.

It isn't the poor and blacks that put the jackboots in power, its the prissy middle class, offended their prerogatives aren't being kept.

Sticking with Hitler, the same was true of the military and the clergy.

In both cases they simply threw their support to him conditionally on smashing the communists and socialists and with the hope of co-opting him into a more mundanely authoritarian conservative regime. Hitler got into a position for opportunistic support by the ruling class and armed forces on the back of electoral support from the lower middle, rural, and middle classes.

[Samuel]

Remember, Hitler got the support of the military later, after the Night of the Long Knives when he crushed the SA. He didn't have complete control of the military until after he purged it in '44.

[Kanastrous]

Hitler had support from the military prior to the Night of the Long Knives; part of the object of slaughtering Rohm et all was to placate the OKW (was it called OKW at that point? not sure...) as well as remove Rohm as a potential rival for power (and public embarrassment).

[Pablo Sanchez]

In both cases they simply threw their support to him conditionally on smashing the communists and socialists and with the hope of co-opting him into a more mundanely authoritarian conservative regime. Hitler got into a position for opportunistic support by the ruling class and armed forces on the back of electoral support from the lower middle, rural, and middle classes.

This is getting off-topic, but I just want to clarify this before I command you all to get back to the point. Poor Germans living in urban areas overwhelmingly had left politics. The working poor were more likely to be Socialists, if they were unemployed or otherwise radicalized, they supported the Communists. The Nazi voter base was most definitely the formerly comfortable middle classes, which had seen their savings wiped out by the Weimar hyperinflation and so become radicalized. The very wealthy aristocrats and industrialists had much of their wealth on terra firma (real estate, factories, rental properties) and had come through intact, but once the Nazis emerged as the strongest party they threw their support behind him, as the alternative was no government at all and a possible Communist takeover (because of the German Communist Party's strategy of refusing to form coalition with the Socialists, there was no possible governing coalition that was not Nazi-dominated).

If and when our current economic model fails, the inner cities will be ruled by people who look like your avatar. At that point, the stage will be set for a totalitarian Pied Piper to pick up the pieces and rope in those who will pay any price to stop the fighting, looting and scarcity. I'm hoping it never gets that far, but...it might. I'm still hoping that the adults will get to run the show, instead of the mouth-breathing thieving liars we've been saddled with for decades.

The paranoid spokesman sees the fate of conspiracy in apocalyptic terms — he traffics in the birth and death of whole worlds, whole political orders, whole systems of human values.

Honestly, your statement here smacks of historical ignorance. People, especially on the internet, talk a good game about Social Collapse but it's just bullshit. In most countries society is actually pretty rugged and can survive a beating, and this has been demonstrated time and again. It is extraordinarily unlikely, for example, that the current economic problems will get even close to the kind of ugly situation that Britain survived in the postwar era (rationing continued into 1954, for those of you who didn't know). Certainly, in an economic meltdown some countries on less secure footing are going to be in trouble--Mexico is already fraying around the edges, just for one--but America is a pretty tough bird.

A more likely result of our current economic model failing is the emergence of a long term economic malaise such as that which has afflicted Japan for the better part of two decades. My question, and I would still like somebody with some economic knowledge to give me an opinion, is whether this would be so severe as to prevent it being fixable.

[J]

Its time to nationalize and cram-down. Fuck Geitner and his "nationalization is not the answer"; how the hell should he know? Screw his shareholder buddies. Time for them to eat a shit sandwich. This "pray and trust the financier wonks" religion that has taken hold in Washington needs to stop.

If and when the current plan of working within the existing economic context fails, will it still be possible to pursue the more aggressive "explode out of the fucking box and build a new one", or will things be too messed up even for that?

This depends on how long the various players in the game can drag out the current course of action, plus how far things deteriorate before the bottom drops out or the lightbulb goes on and the plan is deemed to be worthless. The best I can do is lay out a few possible scenarios since there's things going on which I don't understand, and others which are not rational.

Best case: Sometime in the next few months the bond market sends a clear message to the power that be that it's had enough, and any further monkey business will be met with a mass sell-off which would make deficit spending impossible unless Treasury wants to adopt the Zimbabwe model. The message is received and the government comes up with a workable recovery plan. In this scenario it's still possible to liquidate the insolvent corporations and setup a working financial system without causing too much undue hardship, unemployment will still reach double digits and we can all expect a drop in our living standards. In around 5 years or so we can expect to be back where we were around 15-20 years ago, everything will be better regulated & more stable, and we'd have the laws in place to prevent the events of the past decade from happening again.

Median case: We repeat Japan's Lost Decade or the Great Depression. A "reset" is still possible in this scenario though it'll suck a lot more. The recovery will be slower and more painful, plus we'll be starting from a lower baseline. It'll probably take around 20 years to return to where we were 15-20 years ago.

Worst case: Things continue as they are for another few years, more bailouts, more massive deficits, more money sucked out of everyone to pay off bankers who continue to lose trillions betting "double or nothing" in the metaphorical casino. We have a slow grind downwards as in the Great Depression, with "relief rallies" every now and then which suck more people into the market to have their capital destroyed in the next step down. Then one day the bottom falls out, and entire bond market mass liquidates, driving yields on all bonds & loans through the roof and cutting off credit entirely. Borrowing becomes impossible, it's cash & gold or nothing. This shuts down our entire commerce system, farmers can't get loans to plant nor harvest their crops, gas stations can't get credit to fill their storage tanks, this shuts down the trucking industry overnight since with no fuel the trucks can't move, meaning stores & supermarkets are emptied out within days.

The US will also lose all of its overseas oil imports as tankers require credit to move the oil, no credit, no tankers, no oil. Imports from Canada & Mexico may also be reduced or shut off entirely. This would be absolutely disastrous. If this comes to pass we're looking at martial law, strict rationing, and a command economy system to get through the immediate crisis. Rebooting the economy will be the least of our concerns, we'll have our hands full keeping people from starving, freezing in the cold, and maintaining order among citizens who are feeling justifiably angry & distraught, and may be seriously considering another Tea Party or revolution. The rest of the world has also gone to hell, there's probably a score of large scale wars & revolutions taking place. At this point a "reset" is unlikely, we may spend decades slowly clawing our way out of the hole, the prosperity which we've all been fortunate enough to experience will never again be seen within our lifetimes.


Given the actions to date taken by our world leaders I do not believe the best case scenario is likely. I hope I'm wrong.

[Surlethe]

A more likely result of our current economic model failing is the emergence of a long term economic malaise such as that which has afflicted Japan for the better part of two decades. My question, and I would still like somebody with some economic knowledge to give me an opinion, is whether this would be so severe as to prevent it being fixable.

As far as I know, the only person on the board who is really qualified in economics is MoO. Anyway, it seems reasonable to think we're heading toward a lost decade or two; after all, the collapse of the Japanese banking system precipitated their lost decade. As to whether the economy could become so severe it's not fixable, I think that's the wrong first question to ask; more pertinent, perhaps, would be, "Is it possible for an economy to be stagnant and not experience long-run growth?" To my knowledge, the answer is yes, but only under a limited set of conditions: a permanently non-functional financial system, lack of an impartial court system, lack of property rights, lack of stable government, etc. Aside from the US improbably devolving into a third-world shithole, the most pertinent of these is a permanently non-functional system; but if all else fails, the government can nationalize the banking industry, absorb the debt, and forcibly set the banks back on the straight and narrow.

Things continue as they are for another few years, more bailouts, more massive deficits, more money sucked out of everyone to pay off bankers who continue to lose trillions betting "double or nothing" in the metaphorical casino. We have a slow grind downwards as in the Great Depression, with "relief rallies" every now and then which suck more people into the market to have their capital destroyed in the next step down.

Doesn't this sort of assume that nobody ever gets around to valuing the shit bonds and ironing out the rating system? Once that happens, we'll know for sure who is insolvent and who (if anybody) isn't. Then either everybody goes bankrupt and the banking system starts over from scratch, the government buys up the debt and sells it later once house prices go back up, or some combination of the two.

[J]

...but if all else fails, the government can nationalize the banking industry, absorb the debt, and forcibly set the banks back on the straight and narrow.

I'd say that's a qualified yes. It's possible only if the banks are first crammed down and their derivatives holdings are voided.


(click for larger chart)

JPM by itself holds more in various derivatives & structured finance products than the entire yearly global GDP, in a worst case scenario most of them would go kablooie leaving a $90 trillion crater. There's no possible way for the US government to nationalize that kind of debt without imploding, hence the CDSs, CDOs, and other alphabet soup derivatives products must be zeroed out and voided prior to nationalization.

Doesn't this sort of assume that nobody ever gets around to valuing the shit bonds and ironing out the rating system? Once that happens, we'll know for sure who is insolvent and who (if anybody) isn't. Then either everybody goes bankrupt and the banking system starts over from scratch, the government buys up the debt and sells it later once house prices go back up, or some combination of the two.

Well, I did say "things continue as they are", and so far that means ratings agencies & regulators remaining ignorant or complicit in the fraud and everyone continues lying on their balance sheets past the point of all reason. With regards to knowing who is or isn't insolvent, that requires full balance sheet transparency; that is forcing all Level 2 & 3 assets back onto Level 1 where they get "marked to market" along with pushing all derivatives products onto a central clearing exchange where they can be regulated & traded with proper margin supervision. This puts a market value on all assets so that solvency can be determined, then we cramdown, recapitalize, or nationalize as needed. Will this happen? I sure hope so, but I'm not holding my breath.