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To: Knighty Tin who wrote (214045)	1/13/2003 8:18:28 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 436258

KT, >The problem is generic and overwhelming, IMHO. It is a nation awash in debt. If you are a lender, you are likely to be a loser. If you are a lender whose stocks are "hiding places" for investors, thus, bid up, you are dead meat. << Do you mind if we talk about this a little more (related to banks)? I'm in the camp that believes there are a lot of credit excesses. So mark me down as a bear. However, I'm also in the camp that thinks the fears might be a little bit overblown. These are some of the things I'm worried about. 1. Any situation where capital is being withdrawn from inflated assets in the form of credit. Typically I am talking about home equity loans here because I believe home values in a lot of areas are inflated. There is also a lot of evidence that suggests that these equity loans and refinancings are supporting consumption. 2. Our indebtedness to foreigners and the related inflows of foreign capital. I consider both of the above to unsustainable and therefore contributing to a situation where the "real balance level" within our economy is sort of hidden. So not only will some of the obvious excesses have to be unwound as these unsustainable things end, but there are also some excesses that won't get exposed UNTIL the obvious things are unwound. I am less worried about corporate debt. I think we are already well on our way to taking care of a lot of that. In telecom, where a lot of the excess debt was located, there's already been a large number of bankruptcies, debt for equity swaps, creditor takeovers etc... The same is true in a few other industries (parts of the energy business etc....) and at other isolated companies. Consumer debt is high, but I'm really only worried about the real estate portion of that in terms of it supporting consumption. People rarely walk away from houses. Banks rarely have massive losses on single family homes. We would have to get into a depressionary situation for losses on residential real estate to cripple large banks. (perhaps some very small banks without geographic diversification could get killed though). I also know there is a lot of fear about FNMA and Freddie Mac. IMO, those institutions are probably too leveraged, but as part of the fear over these institutions people are mismeasuring the actual aggregate debt of the economy. They are double counting by adding in financial debt to consumer/corporate/government. (IMO) If Fannie or Freddie borrows money to buy mortgages from a bank and either keeps them or securitizes them there is really only one debt - not two. (well sort of) :-) Freddie/Fannie may owe someone money and the original mortgage borrowers may owe someone money, but as long as the original borrowers make good on the loan, F/F and/or the investors holding it will be whole. Yet lots of bears are counting this is as a clear cut two debts. It's not. It's more like two debts that are linked to one borrower. This may be a slightly riskier situation than one debt, but it's not as big a macro risk as summing all the debt and comparing that to GDP would indicate (at least IMO). If the borrower goes bad, ultimately there will only be a loss equal to that original amount. If I borrow $10 from by brother and then lend it to my father, either I can go bad or my father can go bad but in the end the most that can be lost is $10. That's true even though there's $20 of debt in the chain. Not trying to downplay the risks too much, but I think some people have gotten carried away.