David Wessel had a nice summary of the banking/investing situation today.
American households, much like the American government, have been spending more than they earn for a long time. It shouldn't be a surprise that living beyond our means could not go on forever but there seem to be a lot of Peter Pan's out there, especially on Wall Street (and the White House).
I am still expecting to see the stock market drop as the housing market continues its slow meltdown throughout all of 2008. But how much money have our banks really lost investing in SIV's and mortgage-backed securities?
Central Banks Map a Middle Course
October 18, 2007
Wall Street Journal
The story so far: The merry-go-round of rising housing prices stopped early in 2006. Builders were thrown off first, then subprime borrowers. Because these homeowners could no longer tap rising home values to refinance mortgages they couldn't afford, defaults and foreclosures spread more rapidly than investors in mortgage-backed securities had anticipated.
Then in August, the problem in the U.S. housing sector became a global financial problem, and that's when things got complicated.
A lot of subprime mortgages had been turned into securities that were sold to outfits that relied on short-term borrowing. With the value of those securities in doubt, these outfits could no longer borrow and turned to the banks that had created the securities or which had promised to lend to them in a pinch.
Since no bank was sure who was or would be stuck with this toxic waste, banks grew wary about lending to one another, a classic case of distrust that called for central banks to provide credit, which they did.
The Fed, and its counterparts abroad, have made their objectives clear: (1) Do what's necessary to keep financial markets functioning and prevent a financial crisis from provoking an unwelcome recession; (2) Encourage the return of more prudent, realistic attitudes among investors, lenders and borrowers.
