Economic Outlook...Dim Government's Response....Worse

American's seem to have an amazingly tiny attention span. When the "subprime" mortgage problems began to bubble up people were worried. Now? Most people don't seem to care. That's unfortunate because the hammer hasn't fallen yet. It takes time but it will trickle down. Buckle up.
Merrill Lynch - $8 billion in write offs for bad debt. They went from a profit of $3 billion to a net loss of $2.3 billion.

Bank of America - 32% drop in 2007 Q3 profits. Net income fell 1.72 billion dollars.

Bear Stearns - 61% drop in 2007 Q3 profits. Total revenue fell 38%.

Countrywide Financial - 37% drop in Q1 2007 profits. Net income fell 249.5 million.

Citigroup - 57% drop in Q3 2007 profits. $6.5 billion in pretax losses and write downs.

I could go on, but these are the best examples. The bigger question is what does this mean? The drop in profits alone is irrelevant for the wider economy. What is relevant is how these loses have tightened equity markets. Less capital leads to less investment which leads to fewer jobs. It is a very simple equation. The fed has bailed out the banks with bundles of cheap cash (notice the dollar's value falling hourly?), but banks will still tighten their lending practices.

What is the government proposing to do? Exacerbate the problem of course. Congressman Barney Frank is proposing to...

"require all mortgage originators to present consumers with loan products appropriate to their current circumstances, ban prepayment penalties for sub-prime mortgages and forbid incentive payments to lenders who steer borrowers into higher-cost loans" (from The Hill)

Imagine if we instituted such rules for restaurants. What would happen? The menu would change for most people depending on who decides the definition of "appropriate", the restaurant wouldn't be able to punish you if you walked out on your check, and waiters would not be allowed to encourage you to buy the extras (desserts, appetizers, drinks). Does not sound like a desirable economic situation for either the buyer or the seller. Essentially the same will happen in the real estate market. There will be a capital crunch.

I'm no historian but this is eerily similar to what happened in the great depression.