Interesting article but the part I am most concerned about is the blue box on page 4.
- Leverage Letdown
http://www.businessweek.com/magazine/content/08_1…
"A research paper released on Feb. 29 by four leading economists finds that highly leveraged financial institutions such as banks and hedge funds reduce their lending by $10 or more for every $1 of capital they lose. So losses on mortgages could cause them to cut back their lending by about $900 billion, shaving 1.3 percentage points off the economy's growth rate over the course of a year, say authors David Greenlaw of Morgan Stanley, Jan Hatzius of Goldman Sachs, Anil Kashyap of the University of Chicago Graduate School of Business, and Hyun Song Shin of Princeton University."
With losses curerently at about $300 billion at the major financial institutions, and assuredly more to come does this mean we can expect lending to decrease by $3 trillion or more?
And if that's the case, does that mean a loss of 5% or more of GDP growth? That would put us pretty firmly into negative territory.
Correct me if I'm reading this wrong but that scares the hell outta me...
it says 1.3% not 5% ...
No, because most of those $300bn in losses are not from "highly leveraged" financial institutions.
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