LONDON Falling real estate prices, massive bank write-downs and a quickening drumbeat of slashed credit ratings adds up to one thing: The credit crunch has only just begun.
While no surprise, given that we are coming out of a worldwide debt binge, the fact that loans are harder to get for even the best borrowers raises the risks of a recession.
It also puts the Federal Reserve in a tough spot, caught between the imperative of keeping the blood flowing in credit markets and genuine concerns about inflation from more expensive food and energy.
Evidence of the credit crunch can be found under every rock.
Washington Mutual, (WM.N) the sixth largest mortgage U.S. lender, said on Wednesday it expected depressed home loan demand and falling real estate prices through 2008.
WaMu is also the subject of an investigation by New York State over alleged inflated home appraisals, under which both Fannie Mae FNM.N and Freddie Mac FRE.N have been subpoenaed.
Hardly news likely to make loan officers more likely to extend a firm, friendly handshake.
Also on Wednesday, Morgan Stanley announced a $3.7 billion loss from its subprime mortgage exposure, while Merrill Lynch MER.N upped its tally of exposure to risky subprime and structured credits by $6.3 billion, to $27.2 billion.
Merrill included for the first time $5.7 billion of subprime exposure at Merrill Lynch Bank USA and Merrill Lynch Bank & Trust, while also upping by about $600 million its exposure to CDOs after an insurance policy Merrill had taken out against losses was terminated following a dispute with the unnamed seller.
Meanwhile, Moody's cut ratings on $33 billion of debt of structured investment vehicles (SIVs). SIVs, off-balance sheet bank affiliated structured financings, total more than $300 billion, and are a threat to find their way back on to bank balance sheets.
There is no sign of a viable SIV bailout fund, despite ongoing talks including the U.S. Treasury, Citibank (C.N) and others.
And as losses and provisions mount daily, bank balance sheets are pinched, leaving less still to lend.
"Today, the ultimate vision that must be dealt with is that the largest asset in most Americans' lives, their home, is dropping in price, while the cost of financing...is rising," Annaly Capital Management CEO Michael Farrell wrote in a note to shareholders last week.
"We are witnessing the piercing of a worldwide debt bubble."
LOAN OFFICERS JUST SAY NO
The root cause is a deflating U.S. housing bubble, which if history is any guide, will be with us for at least a year and a half.
The October Federal Reserve Senior Loan officer survey showed tightening conditions almost across the board, and notably for loans to "prime" home borrowers.
The survey has been around since 1966 and has proved to be highly predictive of future economic growth.
Released on Monday, the latest edition showed significant tightening in conditions in a number of areas.
More than 40 percent of domestic banks polled had tightened lending standards on prime mortgages -- mostly traditional fixed-rate loans made to borrowers with strong credit -- compared to 15 percent in the Fed's July survey.
Overall residential lending conditions are now tighter than at any time since 1991. Demand is weakening too, the banks said.
Take special note of the prime issue. These loans, made to borrower with good credit histories, have thus far been spared the worst of the crunch.
Interestingly, bonds issued by Fannie and Freddie have trailed those with issued by Ginnie Mae, which have an explicit U.S. government backing
Terms were tougher too for commercial and industrial borrowers, both large and small, according to the survey, and loans for commercial real estate are now harder to get than any time since the early 1990s.
One-third of foreign-owned banks were tightening lending standards and three-fourths increasing price-related terms, making them even more cautious than their domestic rivals.
Federal Reserve Governor Frederic Mishkin said on Wednesday that there was evidence that small businesses were still enjoying access to credit, though he noted that real estate, which is often used as collateral for small business loans, was an important concern.
You could look at all of this as ample justification for the 75 basis points the Fed has cut thus far.
I look at it as good evidence for why, outside of the stock market, the effect of those cuts has been blunted.
(James Saft is a Reuters columnist. The opinions expressed are his own. At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can reach him at email@example.com.)