Paul Krugman answers the question I raised yesterday: he says that the housing crunch is creating solvency problems, not just liquidity problems, for some large financial institutions. If so, it’s not just homeowners who are in for a rough ride.
But I’m not sure Krugman’s argument supports his conclusion. Yes, there are clearly lots and lots of bad loans out there; how many, and how bad, we won’t know until housing prices stabilize. But since not every home with negative equity will go into foreclosure, and the loss to the mortgage-holder in a foreclosure varies, the fact that a 20% drop in housing prices would put 13.7 million mortgages under water doesn’t tell me whether the banks that hold those mortgages are broke or not.
I read somewhere that Warren Buffet is buying bank stocks. That seems reassuring.