U.S. Could Face $2 Trillion Lending Shock - Goldman
Friday, Nov. 16, 2007
LONDON -- 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.

In a report dated Nov. 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.

"The macroeconomic consequences could be quite dramatic," Hatzius said in the note to clients. "If leveraged investors see $200 billion of the $400 billion aggregate credit loss, they might need to scale back their lending by $2 trillion."

Story Continues Below

"This is a large shock," he said, adding the number equates to 7 percent of total debt owed by U.S. non-financial sectors.

Hatzius said such a shock could produce a "substantial recession" if it occurred over one year, or a long period of sluggish growth if it occurred over two-to-four years.

One of a number of caveats outlined in the report was that baseline economic forecasts may already include significant reductions in the pace of mortgage lending.

But the conclusion remained a gloomy one regardless.

"The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized," he wrote. "While the uncertainty is large, the associated downward pressure on lending raises the risk of significant weakness in economic activity."

http://moneynews.newsmax.com/money/arch ... .cfm?s=mnh

All... I am posting this because we face some very difficult times ahead as a nation. There are a lot of very good people in here and I worry about friends.

Another reason is this Nation likes to give away the Tax payers wealth to Illegal Aliens... Be smart, know what the economic impact that giving citizenship away will cost, you, me and our children

Whether we like it or not, we have to choose wisely on the next president if this country makes it to the next election