"About twenty years ago, the question that clients asked was how the economy was going to affect the stock market," wrote David Rosenberg, chief North American economist for Merrill Lynch, in his weekly note to clients. "Not anymore. Now it's about how the stock market and the housing market move the economy."
But as Rosenberg points out: "On average, the 'consensus' has predicted 2.5% real growth just prior to the onset of recession and not once did it come close.
Bernanke got a small glimpse of what might happen this past week when the financial markets gasped, wheezed, choked and hacked up something that used go down smoothly -- Chinese stocks, or maybe subprime mortgages -- but which suddenly turned sour. The appetite for those risky assets was gone faster than you can say "no-documentation, reverse-amortization mortgage."
Easy credit wasn't just Fed policy; it was the policy of every lender, every realtor, every automaker. It kept the economy afloat in late 2001 when it really mattered, and it provided most of that extra cash consumers needed to spend when their wages were flat in 2003 through 2005. It was easy credit that put millions of SUVs on the road, it was easy credit that inflated the housing bubble and it was easy credit that boosted the earnings of financial companies.
So far, it's only a segment of consumer borrowers who can't find credit.
But the contraction in credit in the mortgage market is significant. Last year, as many as 40% of all mortgages were in the subprime or Alt-A market, which caters to borrowers who can't qualify for the best terms.
Many of those borrowers have now been effectively shut out of the market as lenders tighten their standards. On Friday, federal regulators finally released tougher "guidance" for lenders that suggests they should evaluate "the borrower's ability to repay the debt" before offering a loan. What a quaint notion!
Already, originations of the riskiest loans have fallen 50% in the past two months.
Kicking as many as half the potential buyers out of the market will hurt sales.
"The risks of a recession are not trivial," Dhawan said. That's what Greenspan was saying when he warned this week that a recession was possible. "The economy is more fragile."