The Economy's $2 Trillion Worry

The subprime spread continues: A Goldman Sachs report says the overall impact of mortgage losses on economic activity could be huge

Just a few months ago, analysts believed the collapse of subprime mortgage securities and related investments would lead to losses of $50 billion to $100 billion, a large but manageable number. Now, a new report from Goldman Sachs (GS) says losses from subprime exposure could be much larger than recently assumed, hitting as much as $400 billion. But that's not the extent of the financial carnage: Goldman said the full impact on the economy could be even more substantial, because the losses could compel banks and other lenders to curtail lending by as much as $2 trillion.

If banks trim their lending by that amount, consumers and businesses won't be able to borrow the money they need to maintain strong economic expansion. "This is a large shock. It corresponds to 7% of the total debt owed by U.S. nonfinancial sectors," wrote Goldman Senior Economist Jan Hatzius, the author of the report. "The drag on economic activity could be substantial."

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