Reasons for the Crisis: Message 2/10

ii) Things will get worse or much worse before they get better.  

The consequences of the crisis have not yet fully unfolded.  On the one hand, the global rebalancing of saving and consumption patterns has barely started. US consumers are said to have lost $13 trillion in wealth, something that should cut their consumption by about half-a-trillion dollars a year.  Their "deleveraging" (debt reduction) process has barely begun.   On the other hand, the flow of credit will not really restart until the balance sheet of the largest banks is cleared of the bulk of toxic assets.  The problem is that we do not have yet a price for those assets which, to make matters worse, continue to lose value as the real economy contracts.  Housing prices are still too high compared to their true rental value, so further downward corrections will take place.  By now, the toxicity is spreading to asset classes beyond mortgage-backed securities (credit cards and auto loans in particular).   And all this assumes that three low-probability-huge-impact risks will not materialize:  a "sudden stop" of capital flows to the US (by China among others); a global run away from the dollar; and a spiral of trade protection.