The "Smart Money"?

It took a while, but highly-paid Wall Street "forecasters" -- I use that term loosely, as few seem to have made accurate predictions about virtually any aspect of what's been happening lately -- are beginning to acknowledge that leverage has its downside. In "Credit Market Losses May Cost Economy $2 Trillion, Goldman Says," Bloomberg reports on what one of them has to say.

Goldman Sachs Group Inc., the largest U.S. securities firm by market value, said the impact of the slump in credit markets on the economy could reach $2 trillion.

Losses related to record U.S. home foreclosures using a "back-of-the-envelope" calculation may be as high as $400 billion, Jan Hatzius, chief economist at Goldman in New York, wrote in a report.

The effects of the losses on the economy will be amplified because the banks and hedge funds involved have borrowed heavily to finance their investments, Hatzius wrote. If leveraged investors realize half of the potential losses, at $200 billion, they may have to scale back lending by $2 trillion, according to the report.

"A $1 mortgage credit loss could result in a reduction in lending by significantly more than $10," Hatzius wrote. "The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized."

Some might blame incompetence, self-delusion, or bad behavior in the "strategist"/economist/"analyst" community for that widespread lack of recognition.

Comments

[Polecolaw]

Wow, $2 trillion. That’s about 14% of annul GDP? Add to that all of the other businesses that will suffer as a result of consumers cutting back as they can no longer refi to pay off credit cards or buy cars, and we could be in for a big turn down. I also think inflation is a problem, and I read the FED statement to Congress as warning of stagflation. I wrote about that at my blog if you are interested:

http://polecolaw.blogspot.com/2007/11/stagflation-and-stupidity.html

In related news, the GSEs and Federal Home Loan Banks have had some pretty strong asset growth recently. The FHLBanks assets grew almost 30% from June 30 to September 30. I really wonder exactly what assets are being financed by taxpayer guaranteed lending. Worth some investigation, I think. I wrote a piece on that too, here:

http://polecolaw.blogspot.com/2007/11/taxpayer-bailout-act-1.html

Thanks for the post – interesting Bloomberg article.

Thanks for the post – interesting Bloomberg article.