Interesting article on the sub prime crisis.  It asks some interesting questions, that pose at a minimum, uncertainty about the economy, and in particular Banks.

Robert J. Samuelson – Another Credit Minefield – washingtonpost.com

Credit and financial markets subsist on trust and confidence. The subprime crisis has corroded both. Estimated losses range upward from $50 billion. Because trading in subprime mortgage securities is thin, how can they be accurately valued? Who holds them? Banks and investors have reacted to these uncertainties. For example, banks now find the “interbank market” — banks lending to each other — riskier than before, because they don’t know which banks are most exposed.

Some takeaways I got here:

• potential run on effects from sub prime, are the ‘credit default swap, market which dwarfs the sub prime market.  Otherwise known as junk bonds, the current default rate is at a low 1%, whereas 5 – 10% is the norm in a recession
• the same potential for a pyramiding effect exists with CDS’s
• the ultimate connection between the financial markets and the ‘real consumer’ economy is uet unclear. 
• there remains no evidence of a widespread credit crunch
• while credit standards have increased somewhat, bank lending is still increasing
• strong corporate cash flow cushions the economy as companies pay down debt

In the final paragraph, the need for scepticism must remain, as evidenced by the Fed (US Central Bank):

The obvious danger is another wave of large losses that would cripple
investors, particularly banks. The Federal Reserve acted last week to
forestall that possibility by creating a new lending procedure by which
banks can borrow from the Fed. This provides an escape valve if the
interbank market remains too unforgiving. The Fed seeks to maintain
confidence without bailing out lenders from bad decisions. It’s also
trying to avoid recession while cutting inflation. The difficulty of
reconciling all these worthy goals may well explain the great
perception gap.

Relevance to Bankwatch:
Why does the whole thing feel like Nero fiddling while Rome burns?  Of all the points in the article, the reference to the lack of connection between the financial economy, and the real one befuddles me.  There must be a connection, and at best a lag.  Losses are losses, and someone has to pay.  Losses breed layoffs.  Layoffs breed consumer spending reduction.  Or are corporate and bank profits so large, that losses can be absorbed, and capitalisation retained? 

Lots of questions, which may well be dependent on the original question …  ‘what if its not the only problem?’