The $9.1 trillion bailout price tag – American households have lost $6.8 trillion in residential real estate values while mortgage debt has increased. The banking Stockholm Syndrome.

Wednesday, September 8, 2010
By Paul Martin

“It takes two to speak truth, one to speak and another to hear.” -Henry David Thoreau

For those following the housing boom and bust carefully, the solution to let prices correct is not a novel concept. That is why it is surprising to see headlines, four years after home values peaked and have been falling, arguing for home values to fall. The equation is simple because people that make less money can only afford a certain amount of home. The only reason to keep home prices inflated artificially was to appease those with tremendous amounts of housing debt. It took four years for some to see the light (many have not) yet trillions of dollars are now out the door under false pretenses for something that was going to happen anyway. In the end we have created the biggest moral hazard with housing as the centerpiece in this modern game of Monopoly. Yet after all the pain and economic suffering that Americans have suffered and with obvious culprits, nothing has occurred to fundamentally change our banking system. To that issue we focus our attention today

Banking Stockholm Syndrome

Some people still believe in the narrative that we had to save the banking system. There is a legitimate case for this. But did we have to save in the way that we did? Absolutely not. Under pressure and fire the biggest looting of American wealth has occurred and no revolution was necessary. Remember when good old Hank Paulson gave us a three page memo requesting $700 billion for “troubled assets” which was a nice euphuism for toxic mortgage crap? Some have forgotten the days of September 2008 when the word bailout seemed to be a daily utterance. By the way, the vast majority of those toxic mortgages still sit on the balance sheet of banks even after the money is now out the door.

Some suffer from a banking Stockholm Syndrome where they now believe in the propaganda pushed out by the bailout winners. Use logic when thinking about this. If that initial bailout was to remove toxic assets from bank balance sheets and banks still have those toxic assets, then the program was an expensive failure by definition. And this bailout was only one of many. The big issue is who has shouldered the cost of the banking and housing calamity. We need only look at the biggest net worth line item for American households, homes:

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