Plenty of economists have been downgrading the chances of the mortgage meltdown/credit crunch turning into a recession. So have the betting markets. Over at Intrade, traders have lowered the odds of recession this year from around 15 percent to around 3 percent and next year from 60 percent to 30 percent. But there's still an element of uncertainty and danger out there.
Federal Reserve Chairman Ben Bernanke seemed to say as much Monday night in an economic speech in Manhattan. At one point, Wall Street legend Henry Kaufman asked him what sort of information he would like to have when making monetary policy. In response, Bernanke joked, "I would like to know what those damn things are worth," referring to complex credit products at the heart of the current financial turmoil.
Then you have the news that three of the largest banks—at the urging of Treasury Secretary Hank Paulson—will team up to buy troubled credit instruments. Here's the insightful take of my friend Larry Kudlow (of CNBC) on all this:
At the urging of the Treasury, the big banks that couldn't sell asset-backed commercial paper have decided to pool their resources and create a new vehicle to do what? Sell more asset-backed commercial paper. The markets aren't buying it. They gave it a big Bronx cheer. There's something like $500 billion worth of asset-backed commercial paper to be rolled over in the next few months. And, while no one can be sure, there's something like $500 billion worth of subprime securitized mortgage bonds, plus leveraged loans from various buyouts and the private equity deals that are sitting on bank shelves. Eventually this paper will be sold at big discounts. Now the banks will take big haircuts, cutting into their loan loss provisions and their capital adequacy ratios. That, in turn, may reduce the availability of loans to good businesses and consumers. In other words, the subprime credit crunch has additional shoes to fall. While it's quite true that jobs and incomes look pretty good, it is also true that credit turmoil is not yet over. Goldilocks is looking at all this with great caution.