The Other Shoe

Whoever came up with the saying about the other shoe dropping must have lived in a simpler time. They didn’t live in a world where the currency policy of China interacts with the supply of oil in Iraq to impact the availability of financing in Iowa. It is likely the complexity of the modern-day financial system that allows people to continue to be surprised as the now yawn-provoking melodrama of the credit crisis continues to play out like a broken record for those of us who have been paying attention over the past year. People are accustomed to waiting for the other shoe to drop, dodging its trail and then moving along…but this time, those who stop looking up keep getting smacked in the back of the head.

Today a friend forwarded this Forbes article, which as the title suggests, predicts that a large U.S. bank will fail before the end of this crisis:

Large US bank collapse ahead, says ex-IMF economist

I guess the difference between last summer when I started this blog and today is that last year people thought I was just “paranoid” or that those of us who warned of disaster were just being extremists.

But now, a little over a year later, Noriel Roubini, who many see as one of the fathers of the “doomsday” crowd, got a nice spread in the NYTimes magazine. Here is the appropriately titled article.

Dr. Doom

I guess this means that those who had held out hope that the aftermath of the subprime lending boom would be limited in scope have started to wake up to the realization that what we are witnessing is instead a global retrenchment of credit in reaction to years of poor underwriting across a wide variety of asset classes of which home mortgages are only one example.

Unfortunately, I think we have more pain to bear before the economy starts to turn. Moody’s said recently they expect a 10 percent corporate default rate next year, which means that in reality the default rate will be even higher. Consumers still need to restructure and mortgage finance terms are continuing to worsen even as the government implicitly (and explicitly) stands behind Fannie and Freddie.

I hesitate to even acknowledge that the crappy underwriting needs to be corrected, because, like many Americans, I have personally benefited from cheap financing and a forever rising stock market.

For an America that has become accustomed to buying stuff that we like without really worrying about our bank accounts, we are in the process of a rude awakening that is going to take years to digest.

Thankfully, the “other shoe” instead of dropping all all at once, will instead materialize in the form of a steady hail storm with some too-big-pieces on windshields and hoods. We are in the midst of a twenty-mile pile up and the fog is so thick we can’t see those stacked in front of us even though the story is blaring on the radio…and the brakes are out. But thankfully, we have time to prepare for impact, and if we keep our eyes on the road we can hopefully find a way to come out of the other side better for the experience.

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