Our current economic models are built around the assumption that there will always be more and more humans clamoring for less and less available and more and more valuable real estate. The moment that any part of that assumption becomes untrue, the entire structure begins destroying itself by cutting the flow of the short-term loans banks take from each other to fund the long-term loans they make to consumers.
There will be more and more humans each year, 75 million more, to be exact, but what almost all of them will be are clamoring for is not overpriced real estate. It's food, water and medicine.
The idea of the ever-growing-pie (perpetually expanding economies and infrastructures that will accommodate a perpetually expanding population) has been a boondoggle from the start. Perhaps a global meltdown of the very institutions that have benefitted from it most is what needs to happen to get the G7 talking about leveling off their populations, and achieving what John Stuart Mill postulated in 1848 would be a "Stationary State".
But, let's stay with the current situation for now. We'll have plenty of time to talk about reorganizing the economy after the apocalypse.
Increasing the leverage at which citizens could purchase property came to fruition under Ronald Reagan's deregulation of the financial industry in America, which was continued to a lesser extent by Bill Clinton, and then taken to the extreme under George W. Bush. This created a generation and a half of folks who, unwittingly, were as vulnerable as big banks to price reversals in the housing market.
Home "ownership" peaked in America at 69% of families in 2004 - the top of the housing bubble. At that point, the banks were literally pulling people off the street and giving them mortgages. One hairdresser in Las Vegas bought 19 homes. The main reason banks didn't see any downside to the sub prime mortgages they were hawking was that they thought that they had it written off.
Mortgage-backed Securities (Derivatives) are a "risk-management" tool that amalgamate risky loans, dampening the exposure to a few defaults by bundling them together by the thousands and writing securities against them. Ironically these "securities" actually magnified big banking's exposure to massive mortgage defaults. Still, they became globally accepted by banks and their regulatory agencies world-wide as justification for leveraging into more and more risky loans.
The special quality of leveraged instruments is that they require less capitalization to create a scenario in which, when you win using them, you win big, BUT THERE IS NO SUCH THING AS A TIE. By going "all in" on the leveraged sub-prime mortgage market, all the big U.S. investment banks created a situation whereby they were vulnerable not only to a downturn in housing prices, but where a simple leveling off was enough to break them.
Take a look at this chart. The blue line is the National Home Price Index. It's easy to see why they thought this would be a good idea.
The housing market indeed leveled off, and the brutal kiss of the derivatives killed Lehman Brothers (apparently not dead enough that they wouldn't receive $183 billion from The Fed during QE1, though) and put the rest of the banks in such a wringer that credit evaporated almost overnight. This caused the credit-fueled housing market to nose over and dive. The National Home Price index lost 30% of it's value by November 2008. If somebody didn't stop it, all the big banks would go down in flames in very short order.
Now check out the consolidation in the blue line at the extreme right. That is arguably the effect of QE1, then there was a big dip, then QE2 came on line in November 2008 and it's bottomed out for a minute. The conventional thinking says that the $16 Trillion the Fed splattered around actually caused banks worldwide to start loaning money again, and that liquidity is all that is currently standing between the international banking world and the abyss.
The current world-wide exposure of banks and governments to credit-swap derivatives is estimated at $1.5 QUADRILLION! That, boys and girls, is $1500 Trillion. Should another 30% blow off the top of the housing market that exposure is going to become a black hole for big banking and the highly-leveraged generation of homeowners who bought into the price explosion in housing over the last 30 years. At that point, Occupy Wall Street will morph suddenly into Occupy Your House.
On the bright side, If big banking is kaput, who will foreclose on the mortgages? If the recent $16 trillion dole from the Fed is an indicator, the first American corporations that'll lie bloating in the street like drowned Saints fans will be Citigroup, Morgan Stanley, Merrill Lynch, Bank of America, Bear Sterns, Goldman Sachs, JP Morgan Chase, and that zombie bank, still staggering through the streets of New York and Tokyo oozing toxic "assets" three years after it's death, Lehman Brothers.
The basis of the problem is simple. Countries around the world and their people, with very few exceptions have been spending more money than they are making for a very long time, and they have no way to pay back what they've borrowed in a slowing world economy.
The keystone event is also very simple. Some banks or some countries that very few imagined could, will go under, and the default of their credit swap derivatives will be triggered.
There are billions of these contracts on the books, but nobody seems to have a way to estimate how to value them for sale or trade, let alone what will happen if they're defaulted upon. The worst of it it is that all the banks worldwide have tangled themselves up together in these toxic assets, and can't figure out how to unwind them. This has accomplished the exact opposite of the risk diversification that was their "as advertised" reason for coming into being.
Here's a very illuminating video on the scope of the problem by Chris Martenson, who suggests transitioning into "tangible assets" like precious metals. It's possible to use his capitalization on these themes to color one's evaluation of what he says but you'll find him very sincere and immensely knowledgeable.
Next - SINGING BACKUP TO THE SUPREMES
