He sure did. I almost drove off the road when I heard that...
Southack, your viewpoints on matters economic are cogent and well-reasoned. Do you think the sub-prime problems have a reasonable chance to seriously affect the larger economy if the Fed does not"assist", as some want to happen?
Sub-prime isn't the problem; sub-prime is just a symptom.
The actual sub-prime market is not large enough to warrant Depression-era concern.
The core problem, however, is that large.
The core problem is that we are in a Fed-induced liquidity crisis. Commercial paper and sub-prime "Asset-backed" securities and Alt-A mortgages and even prime mortgage notes are all traded on a secondary market. Large players buy and sell them just like you and I buy stocks through on-line brokerages.
Except, the large players aren't buying notes anymore.
Well, lending institutions have to sell those notes in order to fund new lending...and right now that's gone.
If the Fed fails to lower interest rates to banks in the next 60 days, there will be no new mortgage loans.
None. Game over.
Home sales will be a thing of the past. Forget refinancing, that's already in trouble. I'm talking new home sales...gone.
A major deflationary spiral...a full-scale liquidity crisis.
Of course, our system is built such that we aren't supposed to have another 1930 to 1940 liquidity crisis again. The whole purpose of the Fed is to insure that such a major credit crunch never reappears...and the Fed has unlimited tools with which to inject cash liquidity back into the market at the wholesale level as well as to cut interest rates a great deal if required to further spur on lending.
For some reason (probably a vain as in vanity attempt to prop up our Dollar to prove our international manhood), however, the Fed has so far failed to ease this brewing credit crunch.
So it's not that sub-prime loans have gone away, not to be made any longer (or at least for the moment), and it's not that sub-prime loans might see 25% default rates...the core problem is that lending institutions have run out of cash with which to make any new loans because the Secondary Market isn't buying the old loans made by said lending institutions.
And the job of the Fed is to mitigate such a crisis. You can't just let our entire financial system shut down like it did in 1930.
Heck, why even have a Fed at all if it lets such a situation reoccur?!
So the problem is vastly larger than a few hundred thousand Joe-Blows who took on the riskiest sub-prime mortgages in order to maybe score big in real estate speculation (and who are now toast).
The real problem is much, much larger. The money for lending institutions to keep their doors open has dried up.
And the shame of it is that our economy is actually poised for more growth were the financial institutions to remain open. Unemployment is at near record lows. That's cool! Productivity is at near record highs. That's cool, too!
And corporate profits are very robust (P/E ratios on stocks show fair valuations, too).
So the economy could go either way, boom or bust, based on whether the Fed does its job immediately or delays more.