There are 75 million owned homes in the U.S. One in 6, or 12 million homeowners, owe more than the house is worth. With further expected losses, 20 million homeowners will eventually be underwater. In California, where home-price declines will be 40% to 50%, half the homeowners in the state will owe more than the house is worth.

If you’re one of these homeowners and can afford the mortgage payment, time will eventually bail you out. If you can’t afford the mortgage payment, you should lose the house to someone who can make the payment. This is the failure side of the creative destruction that is true capitalism. If the government steps in to subsidize and eliminate failure, the system will ultimately collapse.

Part two of the great Boomer credit contraction will be the collapse of the credit card companies, who have mailed out 27 billion credit card offers in the last 5 years. They’re now reaping what they were at such pains to sow. As Boomers could no longer borrow on their homes, they switched to credit cards to make mortgage payments and car payments.

But that well is running dry. Losses in the first half of 2008 soared to $21 billion. Losses are expected to total $55 billion in the next year and a half.

This brings me to the latest outrage perpetrated on US citizens by Hank Paulson and his Treasury cronies. The credit-card industry, which collects 23% interest and $12 billion in late fees from consumers, is lining up to get their piece of the $700 billion bank handout. Capital One (COF) has just received a $3.6 billion injection from the American taxpayer, one week after projecting that their write-offs will be $7.2 billion in the next 12 months. This will allow them to send another million offers to more people who shouldn’t have a credit card. Why aren’t the pundits on CNBC outraged at this misuse of taxpayer money? Would the bankruptcy of Capital One hurt our country in any way?

The Great American Empire has begun its long slow decline. It may take a few generations to reach its nadir, but our Boomer-dominated leadership have put our country on a path to a declining standard of living.