"mortgage wipeout could result in a $2 trillion cutback in lending and
have dramatic implications for the U.S. economy, according to Wall
Street"
 

http://money.cnn.com/2007/11/16/news/economy/mortgage_losses/index.htm?cnn=yes

By Grace Wong, CNNMoney.com staff writer
November 16 2007: 10:21 AM EST

LONDON (CNNMoney.com) -- The mortgage wipeout could result in a $2
trillion cutback in lending and have dramatic implications for the
U.S. economy, according to Wall Street investment bank Goldman Sachs.

The housing slump is expected to end up costing banks, hedge funds and
other lenders an estimated $400 billion as defaults on home loans
rise, according to Goldman economist Jan Hatzius.

A $400 billion loss is equal to just about 2.5 percent of U.S. stock
market capitalization - or a bad day on Wall Street, he wrote in a
commentary on Thursday.

But most stock investors don't react aggressively to capital losses
the way banks and other lenders do. 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, the note said.

That means that if lenders end up suffering just half of the $400
billion in potential credit losses, they could be forced to reduce the
amount they loan by $2 trillion. Such a drastic credit crunch could
have dire consequences for the 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. ...