The amount of subprime mortgages as a part of the whole mortgage industry is fairly small. The subprime mortgages that are destined for foreclosure will be larger than normal, but certainly not all of them. The biggest problem is not the number of non-performing loans, but the fact that the confusion and reduction in liquidity are a governor on credit as a whole for both individuals and business.
Profits may be the "mother's milk of capitalism". But credit greases the skids.
Jan Hatzius is the chief U.S. economists for Goldman Sachs, the investment bank most often cited as being the smartest of the smart money. Hatzius challenged statements by some that the mortgage losses being experienced were insignificant as a part of the whole industry because of the way the mortgages have been "leveraged up".
If highly leveraged investors in mortgage securities such as banks, S&L's, broker-dealers, Freddie and Fannie, and hedge funds account for $200 billion of mortgage-related credit losses, and they lever up 10 times, that hit results in a $2 trillion reduction in credit, calculates Hatzius.
This could cause a credit contraction equal to 7% of total debt, resulting in recession.
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