The difficulties today start””as they began last year””with housing and housing-related credit. Last Thursday, the Mortgage Bankers Association quarterly report showed that the percentage of mortgage borrowers behind on their payments””6.35 percent””was the highest since the MBA began tracking the number in 1979. It’s not just subprime. In the first quarter of 2008, 36 percent of all foreclosures initiated were on prime adjustable-rate mortgages in California. Mark Zandi, chief economist of Moody’s Economy.com, says the decline in home prices has slashed $2.5 trillion from household wealth, or about $25,000 per homeowner. The fall has also removed an important source of support for consumer spending, as Americans who grew accustomed to borrowing against rising home equity to finance car purchases or vacations now find themselves bereft. Banks are extricating themselves from the home-equity-line-of-credit business in the same way college students get themselves out of relationships gone bad: abruptly. Judi Froning, a second-grade teacher in San Diego, was surprised last week when she received a letter from Chase informing her that it was terminating her untapped HELOC. “In the light of declining home values, they said they are stopping, effective May 31, any draw on my line of credit,” she says.
Despite repeated claims that the damage has been contained, the banks that recklessly financed the housing boom””and then traded mortgage debt even more recklessly””are still cleaning up the mess. But it turns out (surprise!) the same sort of clouded judgment led banks to excesses in commercial lending, and in loans to private-equity firms. The battered financial system, which has raised tens of billions of dollars on onerous terms from new investors to shore up balance sheets, is still likely to suffer more pain from the popped credit bubble, said Bruce Wasserstein, the CEO of the investment bank Lazard, speaking at a New York breakfast. “The harm will radiate for another year.” The latest victim: Wachovia CEO G. Thompson Kennedy, cashiered after the North Carolina-based bank suffered a string of losses. Next up: write-offs for bad credit-card and commercial realestate debt. After a serene period between 2004 and ’07 in which the Federal Deposit Insurance Corp. went without a single bank failure, four have gone under so far this year. FDIC chairperson Sheila Bair warned of the “possibility that future failures could include institutions of greater size than we have seen in the recent past.” In preparation, the agency has brought staffers out of retirement.
This may or may not be accurate. Given that the information and analysis is coming from Newsweek, I’m inclined to think it rubbish.
And given that our US deficit continues to balloon each and every day due to the needless war of occupation in Iraq, and therefore the dollar continues its steep decline, I’m inclined to think it ‘spot on’.
Apparently, the speculators agree with me (and Newsweek).