Housing bust means at least 12 more months of pain

By Jennifer Ablan - Analysis

NEW YORK (Reuters) - It was only nine months ago that pundits, investors and government officials, argued that the U.S. subprime mortgage crisis had been "contained." So they were wrong.

The implosion of the subprime mortgage market has been rampantly spreading throughout the economy, slamming consumers, banks, investors, even state and local governments to a degree unforeseen by most pundits and analysts and yes, U.S. Federal Reserve officials.

And it ain't over: it could last another 12 months, sucking the life out of lending, driving layoffs, and spurring company bankruptcies and bank failures. Some argue a recession has already begun and it could last for some time.

The depth of the crisis hasn't been hit yet if a new study by several prominent economists is correct concluding that unless financial markets can quickly recapitalize, banks are likely to cut back their lending to consumers and businesses by nearly $1 trillion. That will slash economic growth by more than a percentage point over the next 12 months, said the study by David Greenlaw of Morgan Stanley, Jan Hatzius of Goldman Sachs, Anil Kashyap of the University of Chicago, and Hyun Song Shin of Princeton University, released Friday.

UBS analysts said Friday that losses from the global credit market crisis will likely top $600 billion, of which listed banks and brokers should account for 'only $350 billion.'

Already, mounting home foreclosures, and more than $140 billion of write-downs at banks worldwide with hundreds of billions of dollars more likely, have become the "new normal."

The housing turmoil has spread violently enough that even the municipal bond market, generally viewed as mom and pop's sleepy investment and downright boring, is showing signs of seizing up.

But while the deterioration in housing, triggered by hundreds of thousands of subprime home loans going bad, has been cushioned somewhat by aggressive rate cuts by the Federal Reserve, that won't translate soon into a return to normalcy.

"The housing crisis is the single biggest influence out there on the U.S. economy -- and it is far from over," said Dan Fuss, vice chairman of Loomis Sayles & Co, and widely regarded as one of the best bond fund managers. "You don't see signs of economic strength until later this year," said Fuss of Loomis, which manages $100 billion of fixed-income assets.

This week, Fed chairman Ben Bernanke said as much.

He acknowledged that brewing price pressures at a time when U.S. home prices were falling could make the central bank's job in keeping the economy growing more difficult, especially compared with the last recession in 2001 when the tech-stock bubble burst led to firm's pulling back on investments.

"In this case the consumer is taking the brunt of the effects," of the current downturn because housing wealth has been tied strongly to spending and their homes are their biggest asset, Bernanke said.

He placed a forecast that housing should weigh on the economy "in coming quarters."

AIN'T OVER TILL IT'S OVER

More bombshells could trip up Bernanke's conservative timeline.