Is an economic Katrina poised to overtake the financial system's levees?

[EV_Ares]

Credit debate rages on extent of emerging 'crunch'
By Rex Nutting & Nick Godt, MarketWatch

WASHINGTON (MarketWatch) -- Could the turmoil in the markets in the past few weeks be the precursor of a full-blown credit crunch that could force the U.S. and global economies into a recession?
Some observers think that the markets are exhibiting classic signs of a so-called "Minsky moment," when overleveraged borrowers must finally pay the piper for their euphoria. The result, they say, will be a credit shortage that could bring down even innocent bystanders in their wake.
Academics, economists and money managers are all sounding the alarm. Financial markets are counting on the Federal Reserve to drop interest rates to cushion the fall, and yet senior officials at the central bank have insisted that the markets must discipline themselves.
'I think the market wants to believe that we're pretty much done with the shakeout.'
— Paul Nolte, Hinsdale Associates
Market professionals seem resigned that the fallout is inevitable, and has already begun with losses in several rocky sessions on Wall Street. "The feeling I have today is that of watching a very slow motion train wreck," wrote Jeremy Grantham, chairman of GMO LLC, which manages about $150 billion in assets.
The S&P 500 index is now pricing in a recession starting in late 2007 and lasting for most of 2008, led by the financial sector, said David Bianco, chief equity strategist at UBS. "We believe the market expects this recession to slash S&P 500 by about 10%," Bianco said.
Most economists don't share that view. Of the more than 50 economists surveyed by the Blue Chip Economic Indicators, (many of whom have been warning about the housing bubble for years), none predict even one quarter of negative U.S. growth over the next two years.
A growth recession, with rising unemployment along with slow growth in output and sales, "is a certainty," said Dimitri Papadimitriou, president of the Levy Economics Institute, a think tank at Bard College. That's where economist Hyman Minsky fleshed out his theories of a credit-business cycle, which emphasized a close connection between the creation and destruction of asset bubbles in financial markets and the timing of economic expansions and recessions.
Hard landing?
The last two recessions, Papadimitriou said, follow the Minsky analysis to a "T." In the current cycle, he said, "economic activity will decline. The only debate is whether it'll be a soft landing or a hard landing."
While the stock market's gyrations are proof that credit-crunch fears are on the mind of many investors, thus far only a minority of market participants say they believe it will happen. Most seem to think it's far-fetched, largely because the global economy is strong, with ample reserves of liquidity.
"I think the market wants to believe that we're pretty much done with the shakeout, that the economy has been OK, and that the impact is more of a financial-related impact than an economic impact," said Paul Nolte, director of investments at Hinsdale Associates. "As long as those economic numbers stay solid, then we're fine."
Despite some signs that the carnage in the subprime sector has already slowed consumer spending growth, the problem is still mostly a financial one, said Tony Crescenzi, chief bond market strategist for Miller Tabak & Co., who asserts that corporations still have a ready source of funding for projects that will help the economy grow.
The loss of funding for the leveraged buyouts is a "yawn." Crescenzi said. "Good riddance to LBOs," which add no value to the economy except in the very long run.
In a research note to clients this past week, Crescenzi pointed to several factors that "weigh against the possibility of a broader credit crunch and make it likely that market turmoil will subside and credit formation will return to levels sufficient to power continued economic expansion."
Among Crescenzi's positive factors: Corporations are flush with cash and other highly liquid assets, some $1.7 trillion by one account. Banks are well capitalized. Money-supply growth rates are strong worldwide.
Still, even a skeptic such as Jay Bryson, global economist for Wachovia, acknowledges that "there is a significant risk that credit availability could become seriously impaired."
In a genuine credit crunch, Bryson explained, lenders broadly curtail credit - including for well-qualified borrowers. In such a scenario -- even if interest rates were to come down - the supply of credit wouldn't match the level of demand.
"Credit is the mother's milk of economic expansion," said Mark Zandi, chief economist for Moody's Economy.com.

http://www.marketwatch.com/news/story/story.aspx?guid=%7B2C57B7C4%2DAAEC%2D490A%2DAE79%2DB65E9F5FBCBC%7D

[Turbineguy]

1. I wonder if there are

more talking head experts than actual foreclosures.

[dkofos]

2. Not to worry. The taxpayers will fix their problem.

[cliss]

3. Will it?

Answer = watch the markets for the next few weeks. Stay tuned to the DU, especially the 'LBN' column on the right-hand side.

We'll know.

Ominous Signs
I couldn't believe it,last week there was a huge German company which is putting out distress signals. It could go under, based on conditions in the US. So it's kinda uncertain still; we don't know where it's going to appear. It could be another currency meltdown, or the Swedish real estate market could go belly-up.

It's too soon to tell.

But one thing's for sure - it's a house of cards, and the least puff of wind and it's over baby.

[EV_Ares]

4. I know, it is not a matter of will it occur but when it is going to happen.

I am about to just go to cash, I hate to but you can't time anything and then you wait until it is too late.

Who knows.

I am about done, Wall Street is all cheats anyway or most of them.

[EV_Ares]

5. LBN column? Where, thanks, eom.

[cliss]

6. Hi, yes actually the DU

is usually the fastest place to keep track of the news. I've found things here, that took a little while to appear on other news sites.

So if you want to keep track of the housing market, the LBN is a great place for it. Another fabulous news site is www.dailykos.com/

This is also a news site, but they go into much more depth they have such good writers there sharing the news. Look for 'Bonddad' he goes into detail about the coming crisis. :smoke:

[EV_Ares]

10. Hey, thanks, I go to the Kos site but haven't ever looked for financial

data there but will check it out. appreciate it.

[Systematic Chaos]

8. Every trading day, about 8 in the morning EST, there's a thread in Late Breaking News.

It's called the "STOCK MARKET WATCH" and it is full of excellent information. There's not really any investment advice there, but there are tons of columns and articles, plus summaries of whatever economic reports are released that day.

[EV_Ares]

11. Thanks, I have seen that, will especially watch it now with what we

are talking about here.

[SpiralHawk]

7. "Don't worry, WE'LL make out like bandits." - Republicon Homelander Cronies

"Smirk smirk smirk. We got it all figured out. Oh yeah, almost forgot our propaganda talking point for Rush and Bill O and Sean and the other millionarie media sluts: Too bad about you little people. Smirk, smirk, smirk."

- fat cat Republicon Homelander Cronies

[Cruzan]

9. The bear market has begun

Before Friday the talk was of a tug-of-war between the bullish good news of earnings and the bearish bad news of the subprime mess and its chain reactions. I think Friday's plunging close confirms that the bears have won and we've now turned the corner into a sustained bear market.

How long will it last? Certainly longer than the mini bear market precipitated by the Shanghai crash last February, in other words a few weeks at a minimum. However, the bad news and its effects have yet to fully play out. So things could in fact become much more serious. On the other hand, if the Fed somehow decides to give in on the current situation, or things worsen greatly and it feels it has no choice but to act, and lowers interest rates, that could radically alter things bullishly.

Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn't it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. It took me a long time to learn to trade on those lines.

-- Jesse Livermore