The media was positively giddy over yesterday’s huge rise by the Dow and other major markets. Unfortunately, it is entirely irrelevant to the real issue. The real issue is not the performance of the stock markets or the bond markets. The real issue is not liquidity in the credit system. The real issue is not whether your bank accounts are insured to $250K or $100K. The real issue is that billions or trillions of debt secured by collateral that are worth billions or trillions less than that.

The real estate bubble – can we officially call it that now? – popped because it was no longer possible to ignore this difference. As long as we were able to disregard it then the Ponzi scheme that was the US mortgage industry for the last decade or so could continue. You cannot, however, return to denial. These loans were written against myth. Their value based on the fiction that people would be able to repay them. This is no more true today than it was last week.

The discrepancy between the actual amount these properties will sell for and the amount banks gave for them still needs to be reconciled. Until this happens the entire banking system remains a faith-based initiative. It is impossible to judge any institution that has these securities on their books. We are trying to solve for X where the co-efficient is a black hole. The markets seem to think that adding debt to more debt is a solution. The markets also thought the only problem with this Ponzi scheme was that it ended.

I have no idea how all this will turn out. We are through the looking glass and into the part of the map that says, “There be monsters here.” The bright side is that it is such uncharted territory that there may not be monsters here. I don’t know. What I do know is that there will somehow, someway be a reckoning of the books. All the dollars/Euros/etc. loaned still have to be accounted for.