Finance is based on investments producing streams of revenue sufficient to pay back the investment with interest. If a given investment doesn't work out, it has to be written down to a level that can work, either by negotiation or as the result of a bankruptcy proceeding. Making sure this process will work properly is called underwriting. That is what banks are supposed to do. It is what Jerome does do.

What happened is Greenspan asserted that banks were self regulating and proceeded to let them perform the regulation. This policy was reinforced by appointing anti-regulators to other regulatory bodies. With the repeal of Glass-Steagall higher risk/higher return opportunities were available and the Fed was there when things went wrong, with the Greenspan Put.

Investment banks, such as Goldman's, wanted more and more mortgages to package and sell on and didn't care about the quality. There was a rush to oblige this interest and the price of real estate in large markets soared beyond the conceivable ability of the economy to sustain over time. So we got, say, $10 trillion in mortgages packaged into MBSs that, at current real estate prices, are only worth, say, $5 trillion, and that is only if the banks do not try to sell the non-performing loans. If they did the property underlying the mortgages would be found to be worth substantially less. So, everyone is just holding the bad mortgages on their books and are being allowed to pretend they are still worth face value - extend and pretend.

Worse, the depression that has resulted is making even prime mortgages worth only half or less of face value, as mortgagees lose jobs and become unable to pay. The same dynamic has played out in other areas and other countries. Recently Cyprus has emerged as a new Euro-zone problem with a massive title fraud problem.

ALL of these problems have to be resolved and the unsustainable debt has to be written down in order for a new cycle to begin, regardless of what may change in that new cycle. But those who issued and those who hold the bad MBSs, etc. are politically powerful and refuse to allow THEIR assets to be appropriately written down. The lawbreakers are in control. As any healthy economy relies on rule of law, we have another reason why the current system must change before recovery is possible.

Properly and lawfully resolving these problems, including prosecuting lawbreakers, would both eliminate unpayable debt and restore the rule of law. Otherwise it will be worse than Groundhog day, as the whole situation will just keep repeating, but each iteration will get worse.  

"It is not necessary to have hope in order to persevere."