Wednesday, December 26, 2007

Subprimes: From Bad to Worse

As I have said a number of times over the past months, I believe that the U.S. economy seems headed for real trouble despite the rosie statements made by some and announcements that the economy is expanding. This Newseeek article looks at the reasons for the underlying instability ( I hate to say that I do not see any turn around in the near term - in part because the depressed housing market is killing my firm's cash flow - and see much more financial pain in the offing for many families. Here are some story highlights:
I hate to be the bearer of bad news, but the subprime flood—which has been declared contained over and over again—isn't contained yet. My NEWSWEEK colleague Daniel McGinn ably explains why the rate freeze is far from a panacea for all subprime borrowers. And a flood of new data indicates that the subprime woes may be a symptom—rather than a cause—of a broader economic malady. That awful smell in Midtown Manhattan isn't from the horse-drawn carriages carrying tourists around. It's the distinctive odor of debt going bad.

We've just ended a bubble in housing, in housing-related credit, and in all other types of credit. Low interest rates, competition for market share, the continual pooh-poohing of inflation, and the widespread use of securitization spurred banks and mortgage companies to lend with abandon. Today, however, the assumptions holding up the latticework of credit are coming apart, one by one. Even as the economy continues to expand, more and more borrowers are having difficulty remaining current on their debt. Which isn't surprising, given that median household income hasn't budged since 1999 (see Figure 1 on Page 4 of this Census report). What's more, in a natural reaction to reckless lending, mortgage companies and banks are now in money-hoarding mode and thus unable or unwilling to help Americans refinance existing debt.
As the volume and price of new home sales continues to fall, home builders are suffering as well. The Wall Street Journal reported yesterday that delinquencies on loans extended to condominium developers have risen sharply in the past year. . . . Other types of consumer debt, which have nothing to do with housing and nothing to do with subprime, are starting to go bad too. And so it goes. The next arena likely to see a spike in delinquencies and then defaults? Corporate bonds. In September ratings agency Standard & Poor's warned of a potential wave of defaults.
Investors may have thought that Bush and Treasury Secretary Henry Paulson stuck their fingers in a hole in the dike, thus forestalling disaster. But given the rising tide of bad debt across the economy, today's actions are more like throwing a sandbag into a rising Mississippi River.

No comments: