U.S. could face $2 trillion lending shock: Goldman

[katty]

more: http://news.yahoo.com/s/nm/20071116/bs_nm/economy_us_credit_dc;_ylt=AmdbPeq1qnWP5YidnjwDn.WyBhIF??
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U.S. could face $2 trillion lending shock: Goldman Fri Nov 16, 7:54 AM ET

LONDON (Reuters) - The impact of the U.S. mortgage market crisis on the underlying economy could be "dramatic" as leveraged investors may need to scale back lending by up to $2 trillion, according to investment bank Goldman Sachs (GS.N).

In a report dated November 15, Goldman's chief U.S. economist Jan Hatzius said a "back-of-the-envelope" estimate of credit losses on outstanding mortgages, based on past default experience, was around $400 billion.

But unlike stock market losses, which are typically absorbed by "long-only" investors, this mortgage-related hit is mostly borne by leveraged investors such as banks, broker-dealers, hedge funds and government-sponsored enterprises.

And leveraged investors react to losses by actively cutting back lending to keep capital ratios from falling -- A bank targeting a constant capital ratio of 10 percent, for example, would need to shrink its balance by $10 for every $1 in losses.

[Vincardog]

1. In other words it is the Parasitic Corporate Predators who are loosing money.

[cliss]

2. (mentally preparing myself)

Here it comes: The Avalanche has just started.

A LOT of people & businesses are going to get buried.

[papau]

3. The Fed can change the rules in second and release capital for loans - not a problem n/t

[bhikkhu]

4. the capital on account balancing loans is next to nothing

a rule change might free up some capital holdings, but these holdings are already dangerously and irresponsibly small - as the rest of the world with a better set of rules is well aware.

ergo - change the rules to allow banks to hold less cash against their accounts and our financial system becomes even more of a farce than it is, and even more unstable.

[papau]

5. Thanks for the info - I was not aware that it was so low - but there are still

"gifts" of capital that can be made - are there not?

[bhikkhu]

6. It can be created out of thin air - as always with fiat currency

This is, in fact, what is being done around the world at an increasing rate. The M3 is the report that reflects the money supply (no longer officially available, but calculable by secondary means). Roughly, the money supplies of the world's leading economies have been increasing at %10 per year. The US supply has been accelerating from 14% to 20%.

Ideally this capital creation matches GDP growth. If it exceeds GPD growth, it simply dilutes the value of existing money - causing inflation. If you combine an accelerating money supply with a contraction of GDP growth, you rick hyperinflation, or the collapse of the value of currency and the stability of markets.

Part of the problem here is that both GDP and inflation figures are widely considered to have been "cooked" for political purposes for many years now. So there is a great disparity between official positions and official actions, and all the confusion you might expect from having two or three sets of books, with varying levels of access and hyperbole surrounding them.

[papau]

7. I agree - I was not aware that M3 was growing so fast (I do not have a source for it) - but

in any case I moved to fixed loans and euro investmemts a while back because I noted the fact the CPI/deflator/etc was the only thing making "GDP" growth - and nothing else was happening that was good as jobs were moved to India so that our 450,000 annual new degrees (BS to PHD) in physics/math/science/enginneering were looking at only 150,000 new jobs each year (I threw a shoe at the TV when Bill Gates testified to Congress on the need for more graduates in the sciences and engineering in the US - as he said that the increase from about 280,000 H1b's a year to the 400,000 that is in the new Bill was not enough).

Thanks for the info. :-)

[bhikkhu]

8. for a good source, try shadowstats.com

at http://www.shadowstats.com . They give the US m3 rate of increase as 14.7%, though there should be a big "blip" with the recent and ongoing "liquidity injections"