[tightasadrum]

Anyone who thinks this sub-prime mess is isolated to a few over-extended players in the mortgage business is not watching what is happening. Talks of a bailout are not about them. It’s about the confidence in the entire credit system. With little affordable credit, businesses, especially small business, dry up. The economy slows and everything depreciates in value. FIRE fans, that includes the growth of your assets! Don’t listen to me. What I know wouldn’t fill a thimble. But check out how one expert sees it.

(See Hegcap.com for an explanation of the problem. Here are a few excerpts.)

*********

"The western world has embarked on a speculative journey for which all the historical precedents are ominous."

Peter Warburton[i]

Make no mistake about it - if the Federal Reserve is holding back on interest rate cuts because of near-term inflation fears, it will be fiddling while Rome burns. The collapse of the structured finance edifice must be understood as a highly deflationary event. The sell-off in the equity and credit markets signify a severe loss of confidence in the benchmarks of value established by market gatekeepers such as rating agencies, underwriters and market makers. A failure of the Federal Reserve to demonstrate that it recognizes the systemic threat posed by the collapse of structured finance and the subprime mortgage market could send the markets into a full-blown tailspin.
By writing off $38.6 billion of deferred taxes, General Motors is not merely removing that amount of value from its balance sheet. The company is also admitting that it does not expect profits to return to any significant extent in the foreseeable future because it is effectively saying that it will not have any profits to shelter with these deferred taxes. That is a remarkable admission, … that the company's goose is cooked. With a stock price below $30 dollars per share …, the quarterly loss resulting from this writeoff was a whopping $68.85 per share.

And GM's problems do not stop at the automobile business. The company reported a $757 million loss on its 49 percent interest in GMAC…. The previously profitable GMAC is being throttled by losses at Residential Capital LLC ("ResCap"), a home-mortgage business that was/is (surprise!) a big subprime mortgage player (reportedly the eighth largest home mortgage lender in the country).

…Freddie and the larger Fannie Mae have been aggressively supporting the expansion of the mortgage market for the past several years and will now be pulling in their horns. Shrinkage of these entities' balance sheets - even a slowdown in their growth - will contribute to the withdrawal of capital from the economy that the subprime mortgage meltdown is causing. America's debt-driven economy is rapidly being deprived of its lifeblood.