$4 Trillion

"The amount of working capital you'd expect the government to take into this would be around $3 trillion to $4 trillion," said Simon Johnson, a senior fellow at the Peterson Institute for International Economics and author of its Baseline Scenario financial crisis blog.

Johnson, who until last year was the chief economist at the International Monetary Fund, said that banks will need more rounds of capital from the government because their cushion against losses is too thin. He also said that there is a need to get rid of some of the toxic assets weighing on financial institutions before they can recover.

This is the first time I've seen a real number tossed about that makes any sense. I think it's a realistic snapshot of how much toxic mortgages are out there, and their effect on housing prices for everything.

More debt will become this "toxic" debt as housing prices deteriorate, which will make more people walk away from their mortgages, which decrease prices further, which make more people walk away, and so on. The recession will get deeper, and will get wider, and will take all of the nation's credit the government is willing to pour into it and then some to prop up these prices without increasing the demand for housing.

In the problem is the solution. Increase demand for homes, and you've got the problem licked. The "toxic" debt is decontaminated. Banks become solvent. In a perfect world, banks behave well and will use that capital infusion to write credit. But they won't, they'll sit around, not spending anything, waiting for other banks to fail so they can buy them cheap. That's what happened to the first $350 b, and will happen to the rest if we continue to do this. Keep throwing money at banks, without doing anything for demand, and nothing will happen. It ain't gonna come back out again in the form of loans.



Imagine if you will American banks, each holding pieces of market share pie--their favorite food in the world. Now imagine that they've gathered around the opening of a very deep hole, into which they've thrown the US economy, a large anvil. Only after laughing at the anvil's pleas for help, does each bank realize that he is tied to the anvil with a very strong rope in a hopelessly tangled knot. They scramble frantically to untie themselves from it, but soon realize that they will never have enough time to free themselves. They know that if they put aside their pieces of pie, they have enough combined strength to pull on their ropes and stop the anvil from falling, and to perhaps even bring it back up to the surface.

But then they begin to peer at the big piles of rope in front of each other, uncoiling into the hole at a fantastic pace. None of the banks know how much rope the other banks have left before they're pulled down with the anvil, dropping their pieces of market share on the ground above for the others to split. Peering jealously at the other pieces of market share, the banks reason that surely some of them have ropes short enough to be taken down into the hole, and each feels confident they themselves have enough to not be dragged down before the anvil hits the bottom.

The first bank is swallowed into the hole, dropping his market share, which is hungrily scooped up by the others before it even reaches the ground. And then another falls into the hole with the same result. And finally the third. The fourth bank looks around at all his market share he's got, and as he prepares to take his first bite, is violently ripped away from it into the dark below.

The point is, banks are fucking stupid, and what they're interested in might not necessarily be what you're interested in. So if you need their help, you better fucking show each of them the knot they're in, how deep the hole is, and how much rope they have left.