http://news.yahoo.com/s/nm/20071116/bs_nm/economy_us_credit_dc;_ylt=AmdbPeq1qnWP5YidnjwDn.WyBhIF??U.S. could face $2 trillion lending shock: Goldman
"LONDON (Reuters) - The impact of the U.S. mortgage market crisis on the underlying economy could be "dramatic" as leveraged investors may need to scale back lending by up to $2 trillion, according to investment bank Goldman Sachs (GS.N)."
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"But unlike stock market losses, which are typically absorbed by "long-only" investors, this mortgage-related hit is mostly borne by leveraged investors such as banks, broker-dealers, hedge funds and government-sponsored enterprises. And leveraged investors react to losses by actively cutting back lending to keep capital ratios from falling -- A bank targeting a constant capital ratio of 10 percent, for example, would need to shrink its balance by $10 for every $1 in losses."
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"The macroeconomic consequences could be quite dramatic," Hatzius said in the note to clients. "If leveraged investors see $200 billion of the $400 billion aggregate credit loss, they might need to scale back their lending by $2 trillion. "This is a large shock," he said, adding the number equates to 7 percent of total debt owed by U.S. non-financial sectors.
Hatzius said such a shock could produce a "substantial recession" if it occurred over one year, or a long period of sluggish growth if it occurred over two-to-four years."
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And this is what the next Democratic President will inherit. Another fine mess Bush Republicans have got us into.