We are already starting to see some historical analysis on the credit crisis and the paper,“Leveraged Losses: Lessons from the Mortgage Market Meltdown”, by David Greenlaw, Jan Hatzius, Anil K Kashyap, Hyun Song Shin; for the US Monetary Policy Forum Conference is one of the best. http://www.brandeis.edu/global/rosenberg_institute/usmpf_2008.pdf
“Leveraged Lessons” provide a good overview as well as a forecast of what may be the loss from this mess. The researchers are forecasting about $400 billion in mortgage loses. We have seen write-downs of about $230 billion. By this measure we are getting to about the half-way point of the problem. I view this as optimistic but as long as firms are taking a write-downs we are moving forward.
The authors look at the housing problem relative to some of the other regional crisis of the last 25 years and find that the foreclosure rates are consistent with the decline in housing. The behavior of housing in this crisis is not out of the ordinary. However, none of these other housing crises had the range of mortgage products that currently exist. This is what makes the crisis unique and provides new level of uncertainty so that any forecasts are suspect.
What is clear is the linkage between credit issues and the overall GDP. The housing problem will have at least a 1.3% or higher drag on GDP which is enough to put us on the cusp of a recession. It is just a matter of trying to predict the extent of the slowdown not whether we are in one.
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