Sun Jun 15th, 2008 at 12:01:15 AM EST
Over at The Agonist, Numerian, who is one of the keener observers of the financial markets, and, I suspect, has a bit too much vested interest in the financial markets his- or her-self, has an excellent summary of the rapidly approaching next phase of the credit market crunch and its impact on the economy:
Don't Be Fooled by Wall Street's Happy Talk
Wall Street continues to underestimate the spreading default carnage that is going to bring down a few more financial powerhouses before this crisis is over. The big story emerging in the housing markets is the galloping number of foreclosures affecting "decent ordinary folks" with prime mortgages (as opposed to the sub-prime customer species that kicked off the housing market crisis). Defaults and foreclosures on alt-A and prime mortgages are jumping to record levels.
Congress can pass all the legislation it wants to provide relief from foreclosure for these homeowners, but it will be mostly fruitless. The securitization of mortgages in the past eight years has legally and practically destroyed the ability for the financial industry to come through with any accommodations, so the homeowner is ejected and the banks wind up owning the property.
The banks now own so many homes through foreclosure that cities across the U.S. are suing them to force them to keep the properties in decent shape. It most places it costs thousands of dollars to get the lawn mowed and trash picked up, and there are many circumstances where the home has been vandalized, costing the banks much more. The banks are learning a terrible lesson last experienced in the Depression - foreclosure is something to be avoided at all costs. It doesn't just destroy the profit a bank may have had in the mortgage - it can destroy the bank.
Stage two is underway with deterioration in corporate debt, starting with the bonds issued by real estate developers, but spreading now to the high yield securities and bank loans of poorly capitalized and over-leveraged corporations. Well over 50% of all the corporate debt issued in the past eight years has been rated as junk debt, meaning it is not even investment grade (Baa rated or higher) and it has a very high probability of default.
The high price of oil is now clearly affecting all facets of the global economy, with one exception: wages. Workers are not being given pay increases, but instead are being pressed to put in longer hours, which is always management's way of coping at first with an economic downturn. But usually around six months into a recession, companies cave in to reality and start letting people go. We've just passed the six month mark for this downturn, so expect the unemployment data to noticeably deteriorate; last month the unemployment rate jumped up ½% of a percentage point alone.
the third thing you should watch for: large-scale layoffs in the public and private sector, with significant second order economic effects on consumer spending. This is all part of the vicious cycle common with recessions - stressed out employers let staff go, leading to declines in consumer spending, leading to yet more pressure on corporations and government to fire even more workers. The difference now is that the viciousness of this cycle will far outweigh whatever pain was experienced in the last oil recession of 1974. This recession will be lucky to avoid being labeled as a depression when it is over.
I am deliberately leaving out some very good parts, so that you go and read it all:Don't Be Fooled by Wall Street's Happy Talk