Bottom line: While the sub-prime mortgage virus has temporarily infected banks, hedge funds, insurance companies and other institutions, most of Middle America is doing just fine, thank you very much.
Sheila Bair, the very smart chair of the Federal Deposit Insurance Corporation, told me in an interview that 85 percent of the outstanding sub-prime mortgages at her member banks are being serviced on time. She also reports that the banking system is highly profitable and that capital adequacy is oversubscribed. Others report that less than 1 percent of the entire mortgage total in this country is in default, a minuscule amount.
The biggest problem in the stock market is that the sub-prime virus has caused a temporary credit and trading freeze. Markets have already devalued mortgage bond prices, but the banks are loath to acknowledge price drops that would translate into sizable third-quarter profit losses. This is silly and shortsighted. Countrywide, for example, the nation's largest mortgage lender, has seen its stock drop by 40 percent; Bear Stearns has fallen 35 percent.
The sooner financial companies liquidate their losses, the faster markets will return to normalcy. The system is deleveraging, which in the long-term is a very healthy correction. Leveraged corporate loans are actually starting to trade-up once again, undoubtedly reflecting the money-good profits behind them.
Federal Reserve officials believe we have a temporary liquidity issue, not a solvency crisis. So, at the prevailing interest-rate target, the Fed and other central banks are prudently injecting $131 billion of new cash to "facilitate the orderly functioning" of markets. Fed chairman Ben Bernanke has the story right.
And so does President Bush, who is arguing against government bailouts, which would wind up rewarding banks, hedge funds, and unscrupulous lenders for their poor judgment. (Do U.S. taxpayers really want to finance France's BNP Paribas?) Market forces will see us through this correction. Mr. Bush is also on the money with his opposition to any and all tax increases, which would damage the work and business incentives that have been such a success in Middle America.
Nobody likes stiff stock market corrections. But if folks step back a bit they'll see the many positives -- the jobs, the incomes, and the profits -- that will carry us through this difficult period.
They'll see Main Street -- working and prospering.