Liquidity Nightmare: Will Debt Engulf the World?

In 2005, Stephen King, managing director of economics at HSBC and also a columnist for the Independent.uk news site stated that there was a crisis of faith among central bankers. Two years later, we can see why this confession should have read as: central bankers must stick to their pseudo-religious tones to proliferate public delusions of invincibility.

On the American front, the worst is yet to come for the housing market declared a quite famous Keynesian and Clinton' s economic advisor Nouriel Roubini. The subprime mess is so far bottomless and many expect more debt liquidation to work through the system. There were about 800 billion of loans that were given to people with bad or limited credit histories.

Millions of people have yet to discover in the mail that their mortgage has gone up 40-50%. Some have gotten loans with so-called teaser rates of 1%. Those have seen their monthly payments too quadruple recently. Houses prices will have to go down. Because it is the housing market that sustained the whole economy and it will ripple through.

We're not talking of a small recession here. It is perfectly reasonable to forecast a 50-70% drop at this stage! History repeats itself. A Bloomberg headline speaks of an upcoming "bloodbath". The primary cause of the early 1990's recession was a real estate boom that turned bad due to speculative buying and lower credit standards.

The problem is that this time it will be a lot more devastating. It is the worst housing market since the depression says Mr. Butler who oversees the trading desk and operations for over 12,000 individual and corporate clients, both in the United States and abroad at EverBank World Markets. As if it weren't enough, a big wig at the Credit Suisse stated that the "housing chain" is endangered.

As to wonder whether he was referring to a "chain letter". To be fair, some are less alarmists but still foresee a widely disperse pain for the next few quarters. In its two page article "Bubble Mania In China" put on the net as of May 29. 2007, Wachovia's analysts stated that: