Washington lawmakers are still trying to figure out who exactly will pay for the US$900 billion-plus rescue package proposed by the Treasury Department and the Federal Reserve Bank. But the package itself does not address the most fundamental issue which led to the crisis in the first place: a total breakdown in the integrity of asset valuations.

The pricing logic on which the US government will purchase bad debt from faltering financial institutions has not yet been disclosed. In fact, currently available information suggests that no verifiable pricing mechanism will be publicly available at all. By all accounts, Treasury or Fed officials will determine debt prices on a case-by-case basis. And that is precisely why the entire rescue package is doomed to fail; as bond risk spreads this coming week will show, the chaos and uncertainty surrounding asset valuations will continue, and even intensify.

The underlying fact is that no group or institution in particular is responsible for the crisis. It is the capitalist system which is imploding, in its totality. The rapidly changing structure of the global economy is ensuring that the true worth of American labour will remain depressed well into the next decade. As a consequence, family incomes are not only capped; for a large majority, incomes are declining in real terms, given the sharp hikes in food and oil prices. Since the overall capacity to service housing, credit card and other types of consumer debt is severely restricted, it is virtually impossible to see what key value drivers will improve the quality of mortgage paper in the foreseeable future.

Nobody has recommended taking remedial action to rectify either the impaired status of asset valuation techniques or the flawed system of credit ratings. When told that an asset is worthless unless it can generate sustainable cash flows, an advisor to presidential hopeful Barack Obama indicated that the policy of constructive protectionism will eventually upgrade inflation-adjusted family incomes which, in turn, will underpin home values. A John McCain surrogate claimed that more oil drilling will, almost immediately, change the course of the US economy. In reality, neither protectionism nor drilling will resolve anything.

Not that Wall Street insiders are unaware of the need to revamp asset valuation methodologies; what they lack is the will, and what they fear is the explosive political impact of a programme which will directly challenge the qualifications of real estate brokers, appraisal specialists, bank managers, certified accountants, project engineers, corporate monitors and financial analysts. The lack of quality at all levels of the valuation matrix was far from apparent as long as asset prices were rising, year after year. Today, as the surpluses supporting housing debt servicing have disappeared, for a variety of well-grounded reasons, the serious weaknesses within that matrix stand exposed. The rescue package, in brief, simply reflects the fact that a new era of state capitalism has begun with a vengeance. In its true form, the free market has collapsed.

At that point, these home owners may default on their mortgages at the same time.

If this occurs, a “criticall mass” of home owners with high mortgages may default at the same time causing a panic in the housing industry….