[Marxism] A gloomy prognosis from Goldman-Sachs

[Louis Proyect]

http://news.yahoo.com/s/nm/20071116/bs_nm/economy_us_credit_dc

U.S. could face $2 trillion lending shock: Goldman

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).

In a report dated November 15, Goldman's chief U.S. economist Jan 
Hatzius said a "back-of-the-envelope" estimate of credit losses on 
outstanding mortgages, based on past default experience, was around $400 
billion.

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.

"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.

One of a number of caveats outlined in the report was that baseline 
economic forecasts may already include significant reductions in the 
pace of mortgage lending.

But the conclusion remained a gloomy one regardless.

"The likely mortgage credit losses pose a significantly bigger 
macroeconomic risk than generally recognized," he wrote. "While the 
uncertainty is large, the associated downward pressure on lending raises 
the risk of significant weakness in economic activity."

(Reporting by Mike Dolan, editing by Mike Peacock)