Debtzilla Laughs At $700 Billion…

| September 30, 2008

I know there are plenty of folks (somewhere) who think that throwing $700 Billion down a deep debt hole was going to fix things. Let me help you out.

Consider the graph below from Credit Suisse


What this shows is that the first rate resets for the Subprime loans has mostly passed. So people who were going to default on rate payment shock have largely had their day of doom. If you look at 2009 – 2011, you see that there are 2 more flavors left to sour: Alt-A and Option ARM. These magic bundles of toxic waste are even nastier than subprime.

Alt-A were commonly jumbo loans for your $1 million and up McMansions, frequently purchased with little or no money down using low teaser rate loans. Option ARMs were loans where the borrower could pay less than minimum payment, yes that’s right! Their loans were growing larger month over month.

So if any of you think the credit troubles are behind us, I suggest you re-consider. Worse yet is the fact that what we are seeing now is not really about bad subprime loans, whatever the press may tell you. What this boils down is that the largest financial institutions were caught lying to each other, and now none of them trust each other enough to loan a dime. As a result the free flow of money that powers the economy has slowed or stopped.

You can throw in $700 billion to buy up bad debt, but it won’t erase the fact that many of these brand names are now technically insolvent, and the other banks know it. In the financial world once it gets rough it’s every enterprise for themselves, they would just as soon buy you up at the fire sale as help save you.

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Category: Credit Backlash, Economics, Main, Recession Watch

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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