The Pain Continues

Housing starts continue to fall and Countrywide mortgage, the largest home lender in the nation, is struggling (which may be an understatement). The Housing market is in a full blown recession, and with jobless claims rising you've got to wonder if the problems are permeating into the economy.

And the stock market continues in freefall ........

I will give Paulson and Bernanke credit for living their values. Thus far they have resisted the temptation to rescue the situation including this quote from Paulson:

"There is nothing, in my judgment, that we should be doing in terms of guaranteeing market participants against losses or in terms of restraining risk taking," Mr. Paulson said. "One of the natural consequences of the excesses is that some entities will cease to exist."

I wonder just how long he'll be able to stand on that platform?

Added: It appears that through it's daily money market activities, the Fed has done a defacto rate cut that is temporary. This is what financial pundits have been screaming for as an antedote. The markets responded with more fear.

Added: From Atrios, who in a former life was a econ prof., a quote from a wallstreeter describing the mess:

Second example: today any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund of funds that will in turn leverage these $4 millions three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself levered nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards. This unraveling of a Minskian Ponzi credit scheme is exactly what is happening right now in financial markets.