Via Zero Hedge, I’ve acquired this very interesting little chart, that shows the number of margin calls on its credit-extensions to counterparties. Huh. Now, see, I just wrote that, and I have no idea what it means. It’s just lots of economic gobbledy-gook when you write it out in a single sentence like that. But, here, let’s take a gander at the chart, then I’ll explain, in human terms, what it tells us.
So, the European Central Bank (ECB) had this great idea, which was to implement a European version of Quantitative Easing. They called it the Long-Term Refinancing Operation, or LTRO.
It was actually pretty simple. The banks would go to the ECB and get an LTRO loan by providing collateral of some sort—generally A-rated securities. By which, I mean a security that at least one rating agency has rated as "A". Like, you know, Italian bonds. They don’t actually have to give the collateral to the ECB or anything, just let them know that, "Hey, we’ll just keep it safe, and can hand it over if we really have to." On the strength of those assurances, and the sterling quality of the collateral in question, like Spanish bonds, the ECB then gives the banks a huge hunk of cash. The banks then get to keep the money for up to three years, but are only charged the average overnight rate of interest.
Now, as long as the securities you put up for collateral are good, like Irish bonds, it’s a pretty sweet deal. Alas, if the securities turn out not to be so reliable, the ECB will make a "margin call", that is to say, they will demand the banks come up with additional cash or other assets to cover the collateral.
As you can see from the charts, that is exactly what the ECB is is starting to do. That’s troublesome. You see, the ECB has a €3 trillion balance sheet. But it only has a bit under €11 billion in actual assets. So the ECB has a leverage ratio of a little under 300:1. So, it really does have to go after better assets from the banks if the initial collateral turns, you know, sucky.
The problem then is, as Tyler at Zero Hedge puts it:
The rapid deterioration in collateral asset quality is extremely worrisome(GGBs? European financial sub debt? Papandreou’s Kebab Shop unsecured 2nd lien notes?) as it forces the banks who took the collateralized loans to come up with more ‘precious’ cash or assets (unwind existing profitable trades such as sovereign carry, delever further by selling assets, or subordinate more of the capital structure via pledging more assets – to cover these collateral shortfalls) or pay-down the loan in part. This could very quickly become a self-fulfilling vicious circle – especially given the leverage in both the ECB and the already-insolvent banks that took LTRO loans that now back the main Italian, Spanish, and Portuguese sovereign bond markets.
Essentially, the LTRO program is beginning to suck higher quality assets out of the banks to meet the margin calls that are issued when the initial collateral’s value starts to go belly up. Sucking those higher-quality assets into the ECB’s LTRO collateral program, mean that they can no longer be used to finance business and consumer credit, and, thus, spending. The banks essentially become bond storage warehouses, that don’t actually do any business.
That slows the economy, of course. Which means that those original A-Rated securities stand e much better chance of defaulting, in which case, they’re worth nothing. As Seeking Alpha explains:
The real menace comes in the event of a further weakening of the Eurozone economy. If the economy were to contract, the collateral that the banks have pledged to the ECB may cease to be "performing" (seemingly the only hard criterion for collateral for the second round of LTRO). The ECB would be at risk–and ultimately so would the banks that pledged the defaulting securities.
Any defaults, be they of collateral or the banks themselves, would be a serious issue for the ECB. The ECB is supporting its EUR 3 trillion balance sheet with EUR 10.76 billion in capital–leverage of nearly 300 to one. With the fiscal situation of European sovereigns already strained to the breaking point, it’s hard to see where the money to cover the defaults could come from. This issue of a ballooning balance sheet, coupled with shaky collateral and the 3-year tenor of the ECB loans, is precisely why Trichet and Weber would not go the Draghi route. They bristled at the risk.
The odds of a calamity of the sort that would endanger the ECB are not great, but nor are they impossibly long.
Well, that huge jump in margin calls may be an indicator that those not "impossibly long" odds are getting shorter and shorter. And I wonder how much exposure US banks have to an LTRO default through credit/FX swaps. Probably…really a lot.
So, we got that goin’ for us.
This is so loaded with irony I can’t even count the ways:
Days after General Motors announced it was temporarily suspending production of the Chevy Volt, the electric car was named European Car of the Year.
The Geneva Auto Show announced Monday that the Volt, which is sold in Europe as the Opel Ampera, was named its 2012 Car of the Year ahead of its annual car show that opens this week.
Europe, tottering on the brink of financial collapse because of unsustainable welfare state spending names a heavily subsidized car from a company owned in the majority by government that no one will buy as its pick of the litter (why, because it fits an agenda that no one buys as well).
Of course it’s Europe’s “Car of the Year”.
You just can’t make this stuff up.
Brett Arends is skeptical about Europe’s current direction:
Their proposal is preposterous. Anything can happen in this life, but it would be remarkable indeed if this idea got off the ground. Anyone pinning their hopes that this will solve the crisis needs to think it through.
Why would the Portuguese accept the right of Germany to impose budget cuts on their country? Why would the Greeks?
Would we accept that role for the Chinese and the Japanese, the biggest holders of Treasury debt? How would you feel if you opened the paper to be told that the new Sino-Japanese “Fiscal Stability Commission” in Washington had just slashed your grandma’s Social Security checks by one-third, scaled back federal highway repairs, and that it would impose a 10% national sales tax?
That is, after all, effectively what is being offered to the people of Greece, Italy, Spain, Portugal and Ireland.
It’s absurd. There is no reason why these countries should have to surrender sovereignty. They can simply, where necessary, default. A default by, say, Louisiana would not destroy the dollar. Neither did the bankruptcy of Enron or Lehman.
What happens when after signing the new treaty (if it ever actually comes to be) the Greeks or Italians decide to thumb their noses at the EU and default anyway? Kick them out? Isn’t that right where we are now? Isn’t the fear that countries are kicked out or leave leading to financial chaos and defaults? Will these countries truly continue to pay their bills and accept austerity in the face of a severe recession/depression?
If that is the concern, just as I have been pointing out for some time, anything short of true fiscal and political union will fail. The right of existing states to refuse to honor the treaty (remember the last one was treated as inconsequential by violators, including Germany and France) cannot exist which means the right of states to secede or be expelled from the union cannot exist. If that option is not off the table then Eurozone bonds cannot be treated as risk free. If they are not seen as risk free then they will be rated accordingly and the Eurozone will be unstable as Louis-Vincent Gave points out:
Basically, we have to remember that the average sovereign debt buyer is not a hazardous investor. The guy who buys a government bond is looking for a very specific outcome: he gives the government 100 only so he can get back 102.5 a year later. That’s all the typical sovereign debt investor is looking for. Nothing more, nothing less.
But now, the problem for all EMU debt is that the range of possible outcomes is growing daily: possible restructurings, possible changes in currencies, possible assumption of other people’s debt, possible mass monetization by the central bank etc. Given this wider range of possible outcomes, and the consequent surge of uncertainty, the natural buyer of EMU debt disappears. Again, the typical sovereign investor is not in the game of handicapping possible outcomes; he is in the game of getting capital back!
This is very problematic because once uncertainty creeps in, bonds will tend to gradually drift towards what I have come to call the bonds “no-man’s-land”. Basically, once sovereign bonds reach 90c to par, they tend to have a much higher volatility and much greater uncertainty. As a result, they are no longer attractive to the typical bond manager or asset allocator looking to buy bonds to diversify equity risk (think how Italian bond yields are now correlated to European equities. If you want to be bullish Italian bonds, you may now just as well spend a fifth of the money and buy European banks for the same portfolio impact…). And once a bond enters into no-man’s-land, it has to fall a lot before attracting the attention of distressed debt and vulture investors (usually yields of 15%+). So the first obvious problem is that more and more European debt markets are entering this “no man’s land” bereft of “normal” investors.
Do these countries need the Euro over the long term to be prosperous? More Brett:
The British look smarter and smarter for staying out of the euro area in the first place. Prime Minister John Major, and then, later, Chancellor of the Exchequer Gordon Brown, each took the decision to keep the British pound free. At the time fashionable opinion predicted disaster for the Brits. So much for that.
(Predictably, fashionable opinion now says the Brits look “isolated” for staying out. Really, you couldn’t make it up).
My guess is Brett is correct that we are no where close to a real resolution, which is a path to political unification or breakup.
It has long been clear the Franco-German duo wanted to use their shared currency to bludgeon the continent into something closer to a federal system.
Any investor pinning their hopes on this bird flying needs to be aware it looks a lot more like a turkey than an eagle.
This week’s meeting of European leaders already marks the fifth “summit” to solve the region’s debt crisis since early 2009.
My favorite comment this time: “After a series of ‘final’ summits, it would be nice this time to have a real ‘final’ summit.” That was from Standard & Poor’s chief European economist, appropriately-enough named Jean-Michel Six. What’s the betting Mr. Six will be attending Summit No. Six in the new year?
Which is not to say that the ECB or some other entity couldn’t stem the immediate crisis and kick the can further down the road. Maybe, but if so the question is how far? A week, a year, five years? That I cannot answer now.
Or maybe a better analogy is Nero and Rome. Politicians and hard decisions just don’t seem to mix very well do they? It is much better to be Santa Clause than the Grinch. Especially if you want politics to be your career.
Maybe that’s the problem. If you remember correctly, at least in the US, politics was supposed to be a part-time job. But here as in Europe, it has developed into a full-time job that requires excessive pandering to special interest groups using taxpayer money and borrowing as the means.
And here we are.
In Europe, it has, as predicted for decades, finally reached a tipping point. And the political elite? They really have no idea how to handle the problem (and the same sort of problem is becoming evident here). So they resort to the usual reaction of politicians caught in an uncomfortable situation. Defer a decision:
Under pressure to deliver shock treatment to the ailing euro, European finance ministers failed to come up with a plan for European countries to spend within their means. Such a plan is needed before Europe’s central bank and the International Monetary Fund consider stepping in to stem an escalating threat to the global economy.
The ministers delayed action on major financial issues – such as the concept of a closer fiscal union that would guarantee more budgetary discipline – until their bosses meet next week in Brussels.
If their finance ministers can’t put together a plan of action, what in the world are the ministers going to do next week? Megan McArdle notices the can kicking as well and also recognizes that they’re doing that in a cul de sac:
Keeping the euro together requires much more than fiscal integration–all fiscal integration does is turn the peripheral countries into something like those Algerian ghettos ringing Paris. Actually correcting these imbalances is going to require a lot of people in the periphery to get up and move. That’s a really tall order. Despite the fabled European multi-lingualism, in my experience, the majority of workers speak English about like I spoke high-school French and college Spanish; well enough to go on vacation, but not well enough to enjoy living in another country. I’m told that this is about standard. And that’s just one of the many barriers to movement between countries.
It’s not just the Germans who have to ask themselves whether the PIIGS won’t eventually say "Enough!" and renege. The bond buyers have to ask the same thing. At this point, it’s not entirely clear to me that any solution is credible enough to kick the can more than a very short distance down the road.
McArdle’s question in the title of the piece is “How can Europe possibly save itself?” You could read the question two ways. The first is wondering out loud what Europe could do to fix the problem and solve the dilemma they’re in. The second is rhetorical and reflecting a belief that it can’t.
Given this latest deferral, I’m beginning to see the question as rhetorical and the result as catastrophic. If you want to see a real “Domino Effect”, let Europe collapse.
Oh, and by the way, they just downgraded the third quarter GDP estimate from 3.1% to 2.3%.
And that sound you hear? The can clinking along as politicians the world over do what they do best.
MICHAEL ADDS: You could actually read the question a third way: Who will step in to save Europe from itself? Why, none other than good ole Uncle Sam (aka we the taxpayers):
The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.
U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.
This is essentially a back-door bailout of the Euro. The Fed fixes the interest rate for these loans (the currency swaps) at today’s rate, sends a bunch of US dollars to European central banks (and elsewhere), which then loan out those dollars to European banks facing a “liquidity crisis” — i.e. running out of money and holding diminishing assets (one of which may have almost crashed last night). Nominally, the European central banks are on the hook for any losses suffered, but we all know how that works.
You can read more about how these swaps work here.
Yes, Paul Krugman has a novel idea that no one has previously thought of … we can get out of this mess we’ve spent ourselves into by taxing the rich.
And by the way, income inequality now makes that both feasible and acceptable:
About those high incomes: In my last column I suggested that the very rich, who have had huge income gains over the last 30 years, should pay more in taxes. I got many responses from readers, with a common theme being that this was silly, that even confiscatory taxes on the wealthy couldn’t possibly raise enough money to matter.
Folks, you’re living in the past. Once upon a time America was a middle-class nation, in which the super-elite’s income was no big deal. But that was another country.
The I.R.S. reports that in 2007, that is, before the economic crisis, the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and it wouldn’t be hard to devise taxes that would raise a significant amount of revenue from those super-high-income individuals.
Because you know, “super-high-income individuals” don’t deserve to keep the money they earned, because, well, we’ve gotten ourselves in this awful mess and we need someone to bail us out.
And they have a lot of money, by gosh. A lot of money. So “it wouldn’t be hard to devise taxes” that would take most of it on the marginal side. Because again, we should have first claim when we get ourselves in trouble. Besides, they have more than enough money and they should pay their “fair share”.
A couple of reminders. Despite what Krugman says, taxing the top 0.1% isn’t going to make a significant difference. And even if it did, it would only make that sort of difference once. The next year, that money would be much less available. Which would probably mean what?
Well “rich” would have to be redefined, wouldn’t it? Maybe then it would be the top 1%, because we all know they have more money than they need and they should pay their fair share, right?
As a reminder, the Adjusted Gross Income necessary to be considered a one-percenter is a ‘rich’ $343,927. And this particular percentage of tax payers are indeed shirking their fair share. After all, they only pay 36.73% of all income tax collected now. Surely we can kick that up to, oh I don’t know, at least 50%. And, of course “we” can, certainly. For a short time, that will indeed bring in more revenue. But, again, once the marginal rate goes up those being stuck with the tax bill will go to work finding ways to minimize that hit. And, they will.
Which means those top 5% suddenly become vulnerable, etc.
A short version of the Krugman solution can be found working so well in Europe right now. And E21 does a good job of reminding us of Krugman’s unadulterated enthusiasm for the social welfare states to be found there. E21 also does a great job of eviscerating Krugman’s arguments concerning Europe’s problems:
Paul Krugman insists that the European debt crisis has nothing to do with excessive government spending. The problem, to him, is a failed monetary experiment that deprives nations like Greece and Italy of the ability to print money to inflate away excessive debts. The need to create an alternative understanding for the origins of the debt crisis is only natural given the extent to which the current crisis has tarnished the statist ideology that Krugman generally follows. But his basic claims are nonsensical, as is Krugman’s citation of Sweden and Germany as economic role models. While these economies have performed relatively well through the crisis, it was because they abandoned Krugman’s preferred economics and moved in a more market-oriented direction long-ago.
He was wrong about Europe and he’s wrong about taxes. He’s become an economic joke but just doesn’t know it yet. He’s a one-trick pony who, much like the global warming alarmists, ignores the fact that what he continues to claim is viable and necessary is constantly and consistently being trashed by reality.
The only good news is he remains a source of entertainment. It’s sort of like a game. You wonder how long he can go before reality actually grabs him by the scruff of the neck and makes him recognize the error of his ways (my bet? Never happens). And, as a bit of side fun, you wonder how long the NY Times will continue to let Krugman push his reality challenged agenda forward before they finally (and, of course “reluctantly”) can him (see first bet – they haven’t a clue).
In this podcast, Bruce Michael, and Dale discuss Obama’s “Americans are lazy” comment, the failing EU. and the presidential race.
The direct link to the podcast can be found here.
As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.
Megan McArdle hits some points that pretty much doom Europe and, if it is not already too late, the US. They are contradictions and conditions that make recovery from all this fiscal irresponsibility almost impossible. It involves social welfare, democracies and why that combination simply can’t find the necessary ability heal itself.
When I was a young and naive economics writer, I used to write about developing countries a fair amount. Time and again they would make these bizarre and pointless moves, like suddenly and for no apparent reason defaulting on a bunch of debt. They would engage in obviously, stupidly unsustainable fiscal practices that caused recurring crises. They would divert critical investment funds into social spending which was going to become unsustainable when underinvestment reduced government revenue. And the other journalists and I would cluck our tongues and say "Why can’t they do the right thing when it’s so . . . bleeding . . . obvious?"
Then we had our own financial crisis and it became suddenly, vividly clear: democratic governments cannot do even obvious right things if the public will not tolerate it. Even dictators have interest groups whose support they must buy.
This has come home to me forcefully several times over the last few years, but never more than now. The leaders of the eurozone have a dual mandate to keep the euro intact, and to not do the things which could keep the euro intact. They cannot fiscally integrate to the extent necessary because, as I wrote for the Daily the other day, the Greeks do not want to act like Germans, and the Germans do not want to share their credit rating with anyone who won’t.
It is a bit like the Ohio vote on unions. In a heavily union state, those who benefit the most vote to continue the situation where they benefit. In democracies like Europe where people’s property are up for re-distribution, those who benefit from such redistribution are always going to vote to continue the status quo. And, of course, politicians who benefit from the vote of that constituency are going to try to find every way they can to accommodate that constituency.
So even when it is “so … bleeding … obvious”, to most economic observers as to what action must be taken, nothing happens or, in some cases, it gets worse.
At some point, though, the bill comes due. We’ve talked about the laws of economics and how unyielding they are. Oh you can screw around and play some games that allow you to defy them for a while, but like gravity, it all will finally come tumbling down.
We’re there. We’re at the falling down stage if things don’t change drastically.
But there is seemingly no stomach for drastic change.
And that leaves us to try to figure out what the world will look like after the collapse of the Western social welfare system is complete. Because it is seeming like its not a matter of “if”, but “when”.
Irony of ironies. The Chinese lecturing the supposed capitalist West on economics and the welfare state. Of course, as we’ve discussed many times, Crony Capitalism and/or Corporatism aren’t Capitalism. At best the West has a mixed economy with various levels of intrusion and market distortion caused by governments. In effect, what this gentleman is saying to Europe is the intrusion and distortion levels are such that they have caused a cultural malaise which is finally coming home to roost:
"If you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of the worn out welfare society. I think the labour laws are outdated. The labour laws induce sloth, indolence, rather than hardworking. The incentive system, is totally out of whack.
"Why should, for instance, within [the] eurozone some member’s people have to work to 65, even longer, whereas in some other countries they are happily retiring at 55, languishing on the beach? This is unfair. The welfare system is good for any society to reduce the gap, to help those who happen to have disadvantages, to enjoy a good life, but a welfare society should not induce people not to work hard."
Jin Liqun, the supervising chairman of China’s sovereign wealth fund
Of course that just touches the surface of the problems Europe faces, but essentially Jin is saying that the system in Europe, i.e. state welfare, is not only unsustainable, but discourages hard work – a vicious and self-defeating cycle.
Go figure. Most rational people understand that human beings respond to incentive. And that a good portion will always choose the easy way. Human nature 101. So when given the option of hard work or being a slacker and getting paid to be one, those who tend to slack will always choose the latter if an incentive to do so is provided.
His point about labor laws that require rules such as featherbedding for instance is true. And, by dictating wages, etc., government intrudes on market dynamics which properly price labor. Instead we see the distortion of labor’s worth, rules that cut into productivity and spiraling costs which kick up the price of goods and services beyond what a market would dictate.
And that’s just a very small part of the problem. Europe decided decades ago that it could use a mixed economy to somehow pay for a large welfare state. It thought it had it all figured out and then this crisis hit. But it was clear to many that it isn’t this crisis that precipitated Europe’s current financial problems, it just hastened them. Much like the revenue shortfalls we see here for the trillions in unfunded obligations for Social Security, Medicare and Medicaid, Europe has seen those for years. Its day of reckoning is at hand.
Greece was the weakest member of the Eurozone. But Italy, Spain, Portugal and Ireland aren’t far behind. What critics of the welfare state have said for decades can no longer be hidden. And, unsurprisingly, the culture that sort of a state breeds is fighting tooth and nail to preserve it, even if they really know that’s not possible.
But the irony is unquestionable. Lectures by communists on the dangers of the welfare state. Snowballs in hell are obviously possible.
Well it looks like the much touted Euro economic package for Greece may be coming apart more quickly than expected, thanks to the bombshell announcement by Greek PM George Papandreou. Papandreou has decided, apparently without consulting anyone else, that the package should be put up for a vote. As the Wall Street Journal points out, a no vote could be disastrous:
A "yes" vote in the referendum could deflate the massive street protests and strikes that threaten to paralyze Greece as it tries to enact a brutal austerity program to earn rescue loans from the euro zone and the International Monetary Fund.
A "no" vote, however, could bring down the government and cut off international funding for Greece, leaving the country facing a financial meltdown.
Of course the country is already facing a financial meltdown, austerity measures have sparked violent protests for months and the purpose of the package agreed upon by European leaders was designed to help avert a meltdown and save both the Greek economy (as much of it as can be saved), while propping up the Euro.
As you might imagine, the surprise announcement was not favorably met by other European leaders. In fact, it wasn’t met favorably by a lot of Greek leaders who apparently had no idea that a referendum was in the offing.
Jean-Claude Juncker, who chairs meetings of euro zone finance ministers, refused to rule out a Greek debt default.
"The Greek prime minister has taken this decision without talking it through with his European colleagues," he said in Luxembourg.
Asked whether a Greeks "no" vote would mean bankruptcy for Greece, Juncker responded: "I cannot exclude that this would be the case, but it depends on how exactly the question is formulated and on what exactly the Greeks people will vote on."
I think most understand that no matter how the “question is formulated”, a vote against the plan would most likely send Greece spiraling down the drain and the fear is it would take the Euro with it
Markets, which had calmed down after the plan was announced, have had the expected reaction to the Papandreou referendum plan. They’ve headed down:
Greek Premier George Papandreou said he will put the nation’s bailout deal through a referendum, potentially undoing a long-awaited agreement struck last week and sending European stocks down 3.3 percent. The region’s bank shares fell 6.4 percent.
"European leaders feel as if they’ve been blindsided by Papandreou," said Chad Morganlander, portfolio manager at Stifel, Nicolaus & Co in Florham Park, New Jersey.
He said the move underscored the current risk in Europe and threw a wrench into the region’s stability plan.
The Dow dropped 2% on the news.
While our attention is on the Palinization of Herman Cain, we need to really keep an eye on this impending crisis. If Greece has a referendum and the vote is “no”, what Cain did or didn’t do in the 1990s isn’t really going to matter much. We’ll have another financial tsunami headed our way and we’d better begin to batten down the hatches.
James Pethokoukis reminds us that if we’re not watching the European debt crisis, we should. The one thing Tim Geithner apparently got right was how it could effect the US negatively. Geithner said:
Europe is so large and so closely integrated with the U.S. and world economies that a severe crisis in Europe could cause significant damage by undermining confidence and weakening demand.
And that’s the obvious truth. If you need to catch up, here’s an article in the Financial Times to bring you up to date (you may need to sign up or register to read it).
Pethokoukis then points to a report from Barclays Capital that details what Geithner was talking about:
Our baseline forecast assumes that policymakers will prevent the turmoil in Europe from leading to a full-blown financial crisis similar to 2008 and that US policymakers will not impose excessive fiscal tightening starting in 2012. If, by contrast, either of these risks is realized, the potential for another recession will increase substantially. We use the Fed’s stress scenario under the Comprehensive Capital Analysis and Review (CCAR) as an alternative scenario to our baseline, but ratchet up the intensity modestly and analyze its effect on the outlook for house prices.
1) Our modeling suggests that in a recession scenario, house prices, as measured by the CoreLogic headline index, could decline another 7% in 2012 . … The scenario posits declining real GDP for four consecutive quarters, with Q2 12 having the deepest decline at 6% (q/q saar).
2) Real disposable personal income also declines for four consecutive quarters, albeit with a one-quarter lag relative to the decline in GDP, and the unemployment rate moves persistently higher, peaking at 12.1% by the end of our forecast horizon. …
3) Furthermore, the rising unemployment rate suggests that delinquencies would push shadow inventory higher, putting downward pressure on distressed home prices. Together, the two effects send home prices significantly lower in 2012.
Or in simple terms, if Europe goes, so does the US. Housing down another 7% and unemployment up into the 12% area.
Obviously this is all based on modeling and plugging in various numbers. So just as obviously those numbers could be off a bit. However, the basic premise is correct. If Europe can’t solve its debt crisis, the US will also suffer and, as you can see, suffer mightily (check out the chart at the link).
I think the political implications are clear even for the most partisan among us.