Credit Correction or Crash?

After posting on the mortgage mess on Saturday, I arrived Monday morning to this Wall Street Journal editorial: "Bernanke's Bear Market" (Aug. 6, 2007).

That's Bear with a capital B, as in Bear Stearns, the Wall Street titan whose credit problems on Friday triggered another broad stock market selloff. Credit markets are continuing to re-price risk across the board, and investors are wondering when the next financial corpse will float to the surface. So naturally the wounded are clamoring for the Federal Reserve to ride to the rescue with easier money when it meets tomorrow, even though the Fed helped create this mess. ... The big question is whether this credit correction is destined to become a full-blown credit crunch, damaging the larger economy. ...American Home Mortgage stopped lending last week, and the Sowood Capital Management hedge fund got caught by wider credit spreads. The ISI Group's Andy Laperriere, who has been ahead of the housing curve, is predicting a further mortgage crunch "worse than most pessimistic assumptions." In these kinds of financial corrections, it pays to expect more surprises.

Nonetheless, the Journal shared this good news (these are quotes; and by the way, I didn't choose these silly flowers as bullets):

1. Credit panics are never pretty, but their virtue is that they restore some fear and humility to the marketplace.
2. Yet overall credit spreads...so far don't seem to signal the kind of liquidity crunch we saw with the Asian crisis of the late 1990s, or the dot-com crash of 2001.
3. The global economy is booming, with every country save for a couple of despotisms growing.
4. [L]ast Friday's U.S. employment report for July showed a slowing but still healthy job market.
5. [B]oth services and manufacturing continue to expand...

In the end, the editorial identifies the source of the problem as "Wall Street and other bankers" who were "lending into a housing asset bubble fed by easy monetary policy. Risky mortgages always look better when home prices look like they'll never decline."

The editorial concludes: "Current Fed Chairman Ben Bernanke was along for the Greenspan ride, so he's hardly blameless. No doubt he'd love to play the hero role now, signaling easier money this week. However, he'd have to do so at a time when the dollar is weak, oil is at $78 a barrel, and commodity prices in general are roaring. Mr. Bernanke and the Fed might have more room to maneuver this week had they been tighter earlier. But now they can't afford to ignore global dollar weakness. The run on Bear Stearns would look like a Sunday stroll compared to a global run on the dollar."

The bold New York Sun headline this morning read: "Bear Stearns Bodes Ill for Market: Wall Street Braces for Credit Questions."

I spoke with a friend who just moved to Orange County, California, where he is having to rent a house for his family because housing prices are half way to the moon. He is seeing the same trend in foreclosures there as we are seeing here in New York.

Another source in New York financial circles: watch for housing prices to go as low as 40% of present values. Yikes!

Pray for a chastening smack, but beyond that that the Lord would mercifully withhold such a catastrophe. No one should want to profit from suffering that severe.