“Financial market conditions...have produced a volatile situation that has made forecasting the course of the economy even more difficult than usual. (We have seen) continued increases in the prices of energy (as well as) a sharp and protracted correction in the U.S. housing market. According to the most recent available data, housing starts and new home sales have both fallen by about 50 percent from their respective peaks.”
Bernanke made no effort to conceal the gloomy facts:
“Currently, about 21% of subprime ARMs are ninety days or more delinquent, and foreclosure rates are rising sharply ...Fraud and abusive practices contributed to the high rates of delinquency that we are now seeing in the subprime ARM market, the more fundamental reason for the sharp deterioration in credit quality was the flawed premise on which much subprime ARM lending was based: that house prices would continue to rise rapidly. (This) will have adverse effects for communities and the broader economy as well as for the borrowers themselves.”
Bernanke was equally blunt about the credit crunch that resulted from the excesses in subprime lending:
“One of the many unfortunate consequences of these events, which may be with us for some time, is on the availability of credit for nonprime borrowers...The far-reaching financial impact of the subprime shock is that it has contributed to a considerable increase in investor uncertainty about the appropriate valuations of a broader range of financial assets, not just subprime mortgages. (As a result) the problems in the subprime mortgage market may lead overall economic growth to slow.”
Bernanke went on to give a very detailed account of how the banks “underwrote many of the loans and created many of the structured credit products (MBS, CDOs, ABCP) that were sold into the market. Banks also supported the various investment vehicles in many ways, for example, by serving as advisers and by providing standby liquidity facilities and various credit enhancements.”
As the problems in subprime have grown, the banks have been forced to take on more and more of their struggling “off balance” sheet operations which dramatically increases their debt-load and further impairs their capital base. This explains why the banks have been reporting huge losses from their deteriorating collateral while their market value has dropped sharply. Now banks have become more restrictive in their lending and credit has become more expensive and less available.
When the banks are unable to issue loans; the economy suffers.
Bernanke added ominously: “The market strains have been serious, and they continue to pose risks to the broader economy.”
Amen, to that.
Economic soothsayer Doug Noland summed it up like this:
“The Mortgage Finance Bubble is a bust, Wall Street finance is imploding, and foreign financial institutions are keen to cut and run from the business of providing U.S. Credit... Worse yet, the economy is quickly succumbing to recessionary forces. With a high degree of confidence we can proclaim that the Mortgage Crisis has now evolved into a Corporate Debt Crisis – and this crisis will not be resolved anytime soon – by rates, by helicopters, or by bailouts.” (Doug Noland “Mortgage Crisis to Corporate Debt Crisis”, Prudent Bear)
Thanks for your honesty, Ben, but all the exits appear to be bolted-shut. We'll have to ride this storm out from inside the bunker.
http://www.informationclearinghouse.info/article19058.htm
