$2 Trillion Dollar Cutback
November 19, 2007
Wall Street investment bank Goldman Sachs reported recently that the current mortgage mess could bring about a whooping $2 trillion reduction in lending. This cut back, according to Goldman Sachs, could have far reaching and dramatic consequences for the overall US economy.
Jan Hatzius, economist at Goldman Sachs, reported that the downturn in the housing market, along with a much expanded credit cut back, could cost lenders as much as $400 billion.
He wrote in a recent commentary that a bank that aims to maintain a capital ratio of 10 percent would need to shrink its balance sheet by $10 for every $1 in credit losses.
He went on to explain that if banks and other lenders suffer only half of the $400 billion in potential credit losses, they may be backed into a corner where they would be forced to decrease the amount they can loan out by a staggering $2 trillion dollars. This amount of credit reduction could result in drastic consequences for the US economy.
“Even if this occurs gradually, and even if there are some offsets from reduced credit demand and increased lending by other sectors, the drag on economic activity could be substantial,” Hatzius wrote