So much for that morning reprieve! The level of credit-related anxiety spiked again this afternoon when American Home Mortgage announced its own demise and saw its shares trade lower by about 90% after being halted for a day and a half.
Part of the problem with all this arterial blockage in the debt markets is that the entire American economy has become so overwhelmingly financialized (if you'll pardon the term) in the last couple decades, and especially in the last few years. How do automakers generate profits? If they do at all, it's primarily through their financing units. How do retailers boost their bottom lines? In part through the company credit cards they push out to consumers. And of course financial firms per se--brokers, asset managers, banks, &c.--constitute roughly one-fifth of the capitalization of the U.S. stock market.
So when borrowing gets tougher and more expensive and lending gets (or seems, or threatens to become) significantly riskier...we're talking about the very heartbeat of the post-industrial American economy.
Sure, we still make stuff. And thanks in part to the devalued dollar, we even export stuff--and not just music, movies, and software. But finance in all its forms is truly the essence of our economy. So a perceived/potential/actual disruption in that domain is indeed cause for concern.
For several years, investors have been compensated handsomely for perching their portfolios well out on the risk curve. For now, anyway, the name of the game is prudent risk management.
Bradley Keoun, "American Home Can't Fund Loans, May Liquidate Assets," Bloomberg, July 31, 2007