About a year ago I wrote The Bush Boom Party is Over:
The U.S. housing bubble is popping. Interest rates are up and will not go down soon. Many people who recently signed Adjustable Rate Mortgages will learn that they can not afford their houses. But by then housing markets will be down and foreclosure will come. More offers will further turn down the market prices. Construction workers will lose their jobs. Homebuilders will shut down.
This will get really nasty next year when $1 trillion in ARMs are in for readjustment. Finally the Bush boom party is over.
And here we are. Financial markets are in a mess. Nouriel Roubini argues, that there is serious danger that this is a systemic crisis and not only a temporary hickup.
Interest rates rose and the credit quality of marginal, interest only, no money down, new homeowners turned out to be worse than the guys with rosy glasses expected. The lenders certified models of rating their leveraged portfolios of mortgage backed securities turned out to be as good as the lunatic business models of some pet-food selling Internet companies in 1999/2000. Some of these lenders are now going belly-up, but the effects will spread further.
Shills like Greenspan have lauded instruments like mortgage backed securities and collateral backed securities (car loans etc. packed into sellable securities) as helpful for spreading risk. As it turns out now these instruments have rather hidden risk and the agencies that rated these risks were, just as during the 2000 Internet bubble, simply self interested sales people.
As banks get cautious and survey their losses, they are suddenly unwilling to give more easy credit to homeowners. There is also no more credit available for leveraged buyout deals in the corporate market. Without that demand current equity prices seem overrated and will have to decline, thereby further deminishing capital otherwise available for lending.
There are some 7 million people in the U.S. who have taken out Adjustable Rate Mortgages that will reset in the coming month and require significant higher interest (and risk premium) payments.
This is far from over.
CNBC’s Wall Street shill Jim Cramer is flipping out on camera (recommended annotated version here) calling for Bernanke to start the helicopters, to drop money onto the banks that are in trouble and to lower interest rates.
Will Bernanke do so? Not yet, but he eventually will have to because of political pressure. But this will likely be too little to late and only lead to higher inflation and a lower dollar (and higher gas prices) without stopping the fall out from the crisis.
The U.S. is not the only country in trouble. There are popping housing bubbles in the UK and in Spain too. The credit crunch will be felt in equity markets world wide. It’s hard to tell when and where this might stop.
Personally I don’t expect this coming recession to be a mild one.