Over and over, for the past few months, the nation’s newspaper financial pages have speculated on whether the crisis in the mortgage lending sector was going to have an effect on the economy as a whole. Well, now they have the answer. The day after Terrible Tuesday, the day the stock market tumbled, the business page of the New York Times reported that while “calm” had returned to the trading floor, “one important concern – that Wall Street’s bet on home loans to people with weak, or subprime, credit is souring quickly as defaults rise and home prices weaken – has not gone away.”  

Nor has the insecurity of the people caught up in the subprime market, the working people, disproportionately Latino, African American and Asian, who were lured into the home ownership market by all sorts of exotic loan arrangements and now face foreclosures in increasing numbers. It threatens to get worse. While the new chair of the Federal Reserve was assuring the public that he could see no signs that the general economy is at risk of contagion from the subprime mortgage market, the ratings for major investment firms were being downgraded in part because there was clear evidence that the troubles had spread to the 13 percent of mortgages written last year that are right above the subprime level.  

“Sooner or later, however, reality was bound to intrude,” wrote Times columnist Paul Krugman. “By early 2007, the collapse of the U.S. housing boom had brought with it widespread defaults on subprime mortgages — loans to home buyers who fail to meet the strictest lending standards. Lenders insisted that this was an isolated problem, which wouldn’t spread to the rest of the market or to the real economy. But it did.”  

Meanwhile the subprime lenders are dropping like flies. Twenty-eight relatively small mortgage lending companies have gone out of business since December and there is much consternation inside some of the big ones.  

“Wall Street analysts and economists have emptied boxes of toner cartridge in recent weeks opining on what might lie beneath the balance sheets of banks and brokerage houses,” says Business Week Online “There's growing fear that the subprime rot will spread.”  

Last week, one of  the biggest, Countrywide Financial reported that the foreclosure or default rate on subprime mortgages it handles for other lenders had risen from 17.2 percent in 2005, to 22.6 percent as of the beginning of this year. Another firm, Fremont General Corporation, which had scheduled a telephone conference call Feb. 28 to discuss its earnings for the last quarter of 2006 and for the whole year, last week postponed issuing an earning report for the last quart of 2006. On Terrible Tuesday it suddenly cancelled the meeting, later announcing it was selling its subprime mortgage operation. At the end of the tumultuous week, it was announced that Federal prosecutors and securities regulators had launched a probe of stock sales and accounting errors at the New Century Financial Corporations, the biggest mortgage company that specializes in subprimes – $33.9 billion worth last year. It wasn’t clear what the offenses might be but two of the firm’s directors are reported to have unloaded a total of over $20 million in stock as the year was coming to an end.

You think doctors talk funny? On Monday, officials at HSBC Holdings, the world’s third largest bank, which has lost $10.6 billion in the U.S. subprime market had this to say:

Fannie Mae—the government-chartered housing lender—banks, and other companies involved in making loans are now busy tightening the criteria for new home loans but for the people who bought subprime mortgages over the past two years that’s locking the barn door a bit too late. As the situation in Detroit and a number of other areas around the country indicates, the fact that the manufacturing sector of the nation’s economy is already in recession and layoffs are continuing, the announcement of new plant closings and job cuts offer a chilling prospect for many. Times financial columnist Floyd Norris had a bit of advice for Fed chief Ben Bernanke who might be contemplating raising interest rates to head off inflation: “He might be better off to pay more attention to markets, and contemplate what he would do if companies start laying off people, providing yet another reason for mortgage defaults to rise,” he wrote.  

That’s already happening in a lot places. Michigan has lost 300,000 jobs over the past six years and the state's jobless rate stands at 7.1 percent. Manufacturing companies have slated new cutbacks this year. Meanwhile, home foreclosures and personal bankruptcies are climbing fast.

“The truth is that efforts to pin the stock decline on any particular piece of news are a waste of time,” wrote Krugman. Events in Shanghai or former Fed chief Alan Greenspans’s loose lips talk about a possible recession may have kicked things off, but neither one was the root cause of the ravaging of the stock market Feb. 27. Asian investors are said to be nervous about whether U.S. consumers will, for long, be able to absorb the goods produced over there and the Chinese government apparently spooked some investors with threats of new regulations, but the current volatility on Wall Street is home grown. I hesitated to suggest scapegoating until I caught some of the editorial cartoons in major newspapers where the motto seems to be: when in doubt, blame the Asians.

Dean Baker, the economist that provides valuable internet resources at “Beat the Press”, says he doesn’t think the credit card companies were anticipating the current economic difficulties when they shepherded the Bankruptcy Reform Act through Congress in March 2005. He was on the West Coast recently talking to labor activists and others about his new book: “The Corporate Nanny State.” Baker said he doubted the creditors had that much prescience but he added that the new law, and changes in bankruptcy regulations in a number of states, was going to inflict a lot of pain on people trying to get out of debt, allowing creditors to pursue their pound of flesh after they had been declared insolvent.

What one writer termed “a truly contemptible piece of legislation,” the new bankruptcy law makes it much more difficult for working people to get out from under some of their debt and for consumers to wipe away some of their debts and get a new start. Under its terms, if a person earns more than the median income in their state, no matter how high their bills are, they cannot wipe their debt slate clean. As a result, debtors will be at much greater risk of losing their cars or their homes. If, as anticipated, the current economic developments – including ever rising healthcare costs - result in still more economic precariousness for working people, the new law will certainly increase the pain.

How serious is the present stock market crisis? As could be expected, the speculation runs the gamut, from pro-capitalist commentators assuring us that what we are witnessing is the long anticipated “correction” (after all, “what goes up must come down.”), to the anticapitalists’ dire omens of a looming depression. (We had an earthquake in the San Francisco Bay Area the other day and every time the house shakes and the cat runs under the bed we all wonder: is this the big one?)

“Be Very Scared’” wrote Neil Weinberg, in Forbes online Mar. 2. “Investors are breathing a sigh of relief as Wednesday's stock market rebound wiped away some of the pain inflicted by Tuesday's tumble. They would do well to stay very scared. Whether Tuesday's route turns out to be a turning point or a blip, it is an indication of just how edgy investors around the globe have become. With good reason.”

“With little margin for error, there is plenty of cause to fret,” wrote Weinberg. “The housing market, for one, is looking increasingly shaky. Defaults of subprime mortgages are already rising, and Wednesday's announcement of a 16.6% fall in new home sales in January represents the largest monthly drop in 13 years. These trends are worrisome for two reasons. Housing has been a key driver of economic activity in the economy the past few years. In addition, banks, brokerages and big investors are holding hundreds of billions of dollars worth of real estate-linked debt and derivatives. The knock-off effects of a meltdown are unknown but sure to be massive.”

How will this play out? Not being an economist I haven’t the foggiest notion, but those in the know are hedging their bets with Krugman raising the possibility of “a financial meltdown” and the Lex column in the Financial Times observing: “It is starting to feel like the endgame.”

BC Editorial Board member Carl Bloice is a writer in San Francisco, a member of the National Coordinating Committee of the Committees of Correspondence for Democracy and Socialism and formerly worked for a healthcare union. Click here to contact Mr. Bloice.

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