It's not the Forclosures- it's the deivatives;
It is actually related
Mark Wyatt, September 29, 2008 (Black Monday)
last updated September 30th (Bounce Tuesday)
We are in the midst of the collapse of a roughly $1 QUADRILLION (1000 trillion or 1,000,000 billion) notional derivatives bubble (see here starting page 24, with interpretive help here and here). The Paulson plan is designed to save this derivatives bubble, or at least the underlying bets. Many in congress and mainstreet want to add a component to the plan to help slow foreclosures, possibly by modifying the terms of mortgages. This could include interest rate reductions, principal forgiveness, term increases, freezes/holds, etc.
The problem is that the mortgages were securitized into mortgage backed securities, which were then pooled into collateralized debt obligations, which then tie into structured investment vehicles (the few which are left), hedge funds, and additional derivatives vehicles. Many of the MBS themselves are backed by credit default swaps, another type of credit derivative. Many of the above are highly leveraged. Some depend on a combination of leverage and a small interest difference (say 0.5% or less) to keep the derivative instrument alive. If the terms of the frozen mortgages start getting modified without new counter funds and fees to add new money (i.e., creating new mortgages at prevailing rates and new balancing derivatives contracts), then the whole paper ponzi-scheme could start collapsing under the weight of leverage, negative arbitrage, rating decay, etc. As a chain of counterparties start defaulting the whole bubble bursts. The derivatives bubble, since it is leveraged, will likely burst faster if the mortgages are modified then the slow death of the nation by foreclosure.
What this means is that we appear to be in a situation that pits Main Street against Wall Street (at best to buy additional time to solve the unsolvable problem). We can either save the derivatives bubble (actually opush out its collapse further), but slowly destroy Main Street, or we can save Main Street, but put the derivatives bubble into bankruptcy. It does not seem likely we can do both. I.e., we can have a Great Depression II, or we can have Congress utilize their Constitutional authority to create a new monetary arrangement.
Killing Main Street is not an option. The US has changed national banking multiple times in its history. We can do it again. Right now, though the financial system is failing, the houses still stand and generally are occupied, cars are on the streets, most people are working, food is being grown and distributed, weddings and births continue,etc. In other words, though on the edge, the underlying economy and society are still functioning. With the financial systems of Europe an Asia following in our decline, it seems likely that international cooperation to replace the currently failing fiat based central banking system is obtainable.
Tell your Congressmen to choose Main Street, not Wall Street. Tell them to Take Back The Fed.