Goldman Sachs: Mortgage mess to curtail lending by $2 trillion
I've read enough reports and stories about the potential fallout from the mortgage mess to make my head spin. Most are very well-reasoned and informative. But some really stand out, like a Goldman Sachs report just published by the firm's Chief Economist Jan Hatzius
He concluded the global credit market slump could cut global lending activity by $2 trillion, roughly 7% of the total amount of U.S. household, corporate and government debt outstanding. That estimate assumes financial firms will reduce lending by an amount equal to 10 times the loss of capital they experience.
Interesting research to say the least. You can read a Reuters story on the report here, and a Bloomberg story on it here.
Meanwhile, on the economic front, Fed Governor Randall Kroszner tried to dampen expectations for more interest rate cuts. He said the Fed knows the economy will experience a "rough patch," adding:
"Home sales seem likely to weaken further given the difficulties faced by some potential buyers in obtaining a mortgage and, perhaps, some concerns on their part about buying into a falling market. Moreover, with the inventory of unsold homes already quite high relative to sales, a further weakening of demand is likely to prompt additional cutbacks in construction.
"In the mortgage market, two considerations suggest that conditions for subprime borrowers will get worse before they get better. First, the bulk of the first interest rate resets for adjustable-rate subprime mortgages are yet to come. On average, from now until the end of 2008, nearly 450,000 subprime mortgages per quarter are scheduled to undergo their first reset, eventually causing a typical monthly payment to rise about $350, or 25 percent. Second, the weakness in house prices and the resulting limit on the build-up of home equity will hinder the ability of subprime borrowers to refinance out of their mortgages into less expensive loans; as a result, more borrowers will be left with a mortgage balance that exceeds the value of the house."
But Kroszner also implied that officials believe the rate cuts to date should be enough to restore growth over time. Specifically, he said:
"Looking further ahead, the current stance of monetary policy should help the economy get through the rough patch during the next year, with growth then likely to return to its longer-run sustainable rate."
I doubt that's what Wall Street wants to hear, but it is what it is. I think it's undeniable that the economy is slowing right now. The latest datatpoint this morning showed that industrial production dropped 0.5% in October, vs. forecasts for a 0.1% gain. In fact, production declined in all three sub-categories (manufacturing, mining, and utilities). Capacity utilization (a measure of how much available productive capacity is being used) dipped to 81.7%. That too was below expectations.
He concluded the global credit market slump could cut global lending activity by $2 trillion, roughly 7% of the total amount of U.S. household, corporate and government debt outstanding. That estimate assumes financial firms will reduce lending by an amount equal to 10 times the loss of capital they experience.
Interesting research to say the least. You can read a Reuters story on the report here, and a Bloomberg story on it here.
Meanwhile, on the economic front, Fed Governor Randall Kroszner tried to dampen expectations for more interest rate cuts. He said the Fed knows the economy will experience a "rough patch," adding:
"Home sales seem likely to weaken further given the difficulties faced by some potential buyers in obtaining a mortgage and, perhaps, some concerns on their part about buying into a falling market. Moreover, with the inventory of unsold homes already quite high relative to sales, a further weakening of demand is likely to prompt additional cutbacks in construction.
"In the mortgage market, two considerations suggest that conditions for subprime borrowers will get worse before they get better. First, the bulk of the first interest rate resets for adjustable-rate subprime mortgages are yet to come. On average, from now until the end of 2008, nearly 450,000 subprime mortgages per quarter are scheduled to undergo their first reset, eventually causing a typical monthly payment to rise about $350, or 25 percent. Second, the weakness in house prices and the resulting limit on the build-up of home equity will hinder the ability of subprime borrowers to refinance out of their mortgages into less expensive loans; as a result, more borrowers will be left with a mortgage balance that exceeds the value of the house."
But Kroszner also implied that officials believe the rate cuts to date should be enough to restore growth over time. Specifically, he said:
"Looking further ahead, the current stance of monetary policy should help the economy get through the rough patch during the next year, with growth then likely to return to its longer-run sustainable rate."
I doubt that's what Wall Street wants to hear, but it is what it is. I think it's undeniable that the economy is slowing right now. The latest datatpoint this morning showed that industrial production dropped 0.5% in October, vs. forecasts for a 0.1% gain. In fact, production declined in all three sub-categories (manufacturing, mining, and utilities). Capacity utilization (a measure of how much available productive capacity is being used) dipped to 81.7%. That too was below expectations.
posted by Mike Larson at
9:28 AM
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