A recession would be the good news

Bernanke says we might be in a recession. Wow, thanks for the update, Ben. Recession is a word with a lot of media weight. Its an armchair economist adjective to describe 2 consecutive quarters of negative growth. I'm not worried about a recession -- in fact, I think a recession would be a good outcome.

What the economy faces is in fact far more ominous -- we may be looking at multiple quarters of credit contraction throughout the financial system. Real estate and mortgages get the most play in the media but the creep in credit tightening continues.

NYC private schools saw their borrowing costs triple because the auction rate market pretty much fell apart. Three superdome projects saw the same. The Moynihan stadium plan fell out of planning because the funding costs have become too onerous to pursue. These gaps in the auction rate market not only derail the projects they're tied to, they also keep investor's capital tied up as there's no incremental buyer to take the held auction paper.

I believe there is no quick fix for the excesses of the last several years. What will fix these problems are tighter standards and time. As the housing market has been brewing in earnest since the early part of this millennium and kicked into high gear in 05/06 and prices in real estate have only begun to decline this year by low double digits, I expect this contraction in housing to continue for far longer than industry pundits and talking heads will ever dare to suggest. If this really was a bubble, a 10 or 15 percent correction in prices is small potatoes.

The real trouble still lies ahead in these write-offs. When a bank takes a mortgage and declares it worthless, it now has a cost of zero on that mortgage. The bank now has incentive to foreclose as its like they're buying the house for nothing. I think this is why ARMs are floating above fixed rates -- the banks don't want people to get out, they can't sell the mortgages but they can sell the house. If their cost is zero and financing for home buyers is much tighter, what will hold prices up?

A recession would be the good news.

[Added links 4/3/08 3:31pm - rh]