It is a very ugly day on Wall Street today. As of this writing the Dow is down 425 points, after being down over 500 points a little while ago. Gold is down $22 an ounce. This comes on the heels of a breakdown in the Shanghai Stock Exchange that saw a 9% drop, the largest fall in a decade. That has sent ripples around the world.

Why is this happening? Lots of reasons, although ultimately I believe one of the culprits is the US housing market. Recently a great deal of trouble has arisen in the “subprime” market–those people who were given the exotic interest-only and negative amortization loans, and especially folks who didn’t have to put any money down. As their rates start to rise in a bad housing market they are defaulting left and right. There are even lots of them who default right after buying the property! These people clearly should not have been given these loans for houses they could not afford, and the chickens are now coming home to roost.

Tons of subprime lenders have gone under or reported huge losses in the last two months. That is causing lenders to re-think their business (finally), and they are beginning to tighten credit and lending standards. That immediately axes a bunch of people right out of the housing market, which will exert further pressure on prices. More pressure on prices mean fewer people can sell their houses at a price sufficient to pay off the mortgage, including people who might have better credit and better loans but who might find themselves in financial trouble. So the risks are rising that the “disease” in the subprime market may spread to the rest of the market as well, and the worse the housing market is the worse the impact on the economy. Chances of a recession are increasing, as was stated aloud by Alan Greenspan in a speech yesterday.

There are a ton of other problems too. People are drowning in debt because of all the cheap credit, both mortgages and otherwise. The budget deficit continues to be a problem, as is the outrageous trade deficit. There’s Iraq, Iran, and Afghanistan. There is expensive energy (the price of oil is on the rise again). The economy is seriously out of whack, thanks in no small part to crooked economists like “the Maestro” Greenspan himself and the shill for the National Association of Realtors David Lereah, and their constant hyping of why it’s good for consumers to be in debt up to their eyeballs (all the while encouraging the debt through rock-bottom interest rates and taking out ads in papers extolling the virtues of buying overpriced houses in a bad market).

There had to be a day of reckoning. Was this it? Time will tell..but if so, it’s going to be one ugly ride.

Tags: economics, economy