We have posted on the scariest parts of the ongoing credit restructuring and just how big it could become.
The long term problem is that their customers have been severely hurt. A real percentage of the customers has been actually put to the wall. Everyone who financed a house using excessive leverage has likely lost all their capital if not their job. Assets like stocks and cars are always sold to support the house before one throws in the towel. Once lost, a citizen is starting over completely with incremental savings and a really bad attitude to banks and other financial institutions who encourage such imprudent behavior in the first place.
Since we are doing this the hard way, it is certain that a number of years must pass before these customers are back and strong.
My problem is that so far Obama produced reassurance and little else that convinces anyone that positive steps are underway, unless you think that the defacto nationalization of GM is actually going to work at all. He has been also less than insightful in terms of preserving the integrity of bilateral agreements, but that is because his supporters are not above pushing through a fast one or two. The point is that he and his staff can be had, which is not unusual for a rookie president.
So while he is riding along, he is also trying to ignore the big domestic government finance disaster rushing down the rail toward him. California is screaming for help and others can not be far behind. The cities must be facing huge contractions in their budgets. In the end it will become visible and congress will be forced to react again in a panic. All this is foreseeable and plans can be made.
And while the financial punditry inventories the credit balloon and takes fearful conclusions from it, I do want to make one observation. The mere fact that the larger banks chose to pay back their bailout funds is very encouraging. They felt no need to hang on to the government lifeline. This suggests that the subprime collapse was actually isolated in terms of making losses and that the remaining portfolios are intact and operating normally. If true, this is good news because it means that everything else will slowly get back to work from the present base.
We still have not resolved the housing problem, but without doing as I posted, the market will continue to grind out a solution while brutally slashing household wealth. Everyone with a good job gets to pay of their credit cards for a couple of years.
It would be wonderful if in fact the only problem Obama faced in the financial realm is the subprime portfolio.