The real extent of the credit delusion in the US is now beginning to be recognised. The hidden losses among financial houses are being uncovered. While a few banks, like Goldman Sachs, might try to defer recognition of the losses till 2008 so that the news doesn’t hit their share price, analysts from Bernanke to Wall Street to the media are cottoning on to the reality of the house of cards that was created by easy credit over the past 5 years.
Today’s review by the BBC headlines $ 1 trillion of potential losses (that’s over 7% of US GDP) and then discusses estimates of $ 150 – 450 billion in losses. (Recommended reading now.)
The markets will suffer because disclosure is so uncertain. Even blue chip investment banks were heavily into the multiple layered leverage of packaged mortgage products (CDOs) and can not liquidate their holdings. And the leverage in this sector also supported extended corporate debt in other sectors – non-bank balance sheets may be of questionable integrity too.
This rapid evaporation of liquidity is going to hit consumer spending as we enter the holiday season. Consumption is nearly three quarters of GDP. Expect a slowdown in the US economy now.
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