THE ECONOMY OF THE US is going to crash and burn.  The prospective bailout of the financial markets by Congress won’t work.  Previous posts have stated why Chaos Theory applies to the financial and mortgage crisis today.  Chaos theory applies to all natural complex dynamical systems like markets, ecosystems, and weather.  For over 18 months the US financial system has been demonstrating a condition known as Negative Dynamical Volativity/Stability.  This is known in mathematics as the Butterfly Effect.

The dynamics of the financial and mortgage markets are sensitive to initial conditions (fragile).  This sensitivity manifests itself as an exponential growth of instability from the initial change of condition.  The cause of extreme instability is both architectural structure flaws, and flows (of money) over time.

The analogy is an airplane with a structural design failure.  As corrections are made to control the aircraft over time, there is increasing amplitude of failed control.  Without correcting both defective structure (regulations and organizational architecture) and the flow (of money) the market crashes.

The current crisis cannot be controlled without both organizational (institutions have disappeared that provided the structure with stability), regulation, and restoring the flow of money-liquidity.

Congress and Wall Street is ignoring the fact that an entirely new mortgage financing structure must be created instantly, institutions providing credit suddenly dead replaced, AND liquidity provided to be effective in creating market stability.  Congress is providing only bailout liquidity.

There is a high probability the economy of the US is gong to crash and burn within the next four months.  Fasten your safety belts.

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THE STABILITY IN FINANCIAL MARKETS we needed, as I have previously posted, is not happening.  One thing is certain, instability will continue.  This is true because the big mortgage losses are still ahead of us.  The Pay Option ARMs resets will be in the billions in California in 2012.  Foreclosures will hit their peak then.

One thing that will not occur is something similar to the Great Depression when deflation and the money supply collapses the economy.  The opposite is runaway inflation do in part to a meltdown in the dollar.

There is a technical term for this condition.  There is the Edge of Chaos, using Chaos Theory, where the economy normally works.  Going beyond this boundary area of normal gradients of change there is Chaos.  A better more understandable term is Negative Dynamical Stability.  This occurs where corrections and efforts to bring about stability produce greater instability, in wave of increasing amplitude.  Should Negative Dynamical Stability continue the structure eventually comes apart.  Chaos results.  Then new structures evolve.

It seems now certain that the economy has entered a prolonged period of Negative Dynamical Stability.  Stand by for more negative impacts.

SILCON VALLEY HAS ONE OF THE STRONGEST housing markets in the nation.  The decline in home prices and foreclosures have not had the impact experienced elsewhere.  The bailout of Fannie & Freddie has helped as has the new housing bill.  But what people may fail to recognize is that as a result the real estate recovery will take longer.  Dr. Housing Bubble has accurately pointed out the 10 reason why.

Home sellers and real estate professionals want the real estate boom to return.  It isn’t going to happen.  Silicon Valley is more than four years away from significant home price increases, other than those brought by inflation.

FANNIE & FREDDIE were taken over by the Treasury Department yesterday.  This is great news for the mortgage and real estate market.  Mortgage credit underwriting should ease, and rates should fall.

The public purse will go kaching, kaching as the federal bailout will cost the public not billions, but a trillion dollars or more.  The federal debt in the trillions of dollars was never actually paid off from the 1987 bailout of the savings and loan industry failure.  Maybe, someday, the Congress will come up with the regulatory architecture for a mortgage system that works.

By October mortgage money should be flowing again.  Yippie!

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