The economy: The big unknown in 2008

If I sit back and worry about what could happen in 2008, I don’t worry about Iraq. I worry about the economy. Here is why, courtesy of the NYT:

In the coming year, interest rates on some $850 billion in mortgages are scheduled for their first increase. Over half of that is in subprime loans. That is the dangerous financial world we live in.

While I am not sure that I agree with their solution, they certainly get the problem right:

Until now, the deepest pain of the housing slump has been felt by hard-pressed borrowers, generally low-income homeowners stuck with unsuitable and even predatory subprime loans — adjustable-rate mortgages made to people with weak credit. As monthly payments have increased, the loans have become unaffordable, while falling housing prices and tougher credit terms have made them harder to refinance. Defaults and foreclosures have multiplied, but Congress has provided scant relief.

But now the pain is being felt by Wall Street. The two big Bear Stearns hedge funds that neared collapse last week were full of tricky investments tied to subprime mortgages. To try to ensure that hundreds of billions of dollars worth of similar investments don’t also plummet, endangering the financial system, Congress may finally have to do more to help lower-end borrowers. That, in turn, would prop up the investments based on their mortgages.

Let’s just be clear how bad this is. From MSNBC:

The number of residential mortgages going into foreclosure hit a record in the first quarter of the year, with the biggest increases coming in the so-called "subprime" market of borrowers with weaker credit histories. Foreclosure rates were highest in a handful of states where home prices and sales surged during the boom, including California, Florida, Nevada and Arizona.

Two early primary states. How bad?

A separate report this week by RealtyTrac reported that foreclosures for May were up 19 percent from April and up nearly 90 percent from May 2006. In Nevada, there was one foreclosure filing for every 166 households last month, nearly four times the national average and the highest rate in the country for the fifth month in a row, according to RealtyTrac.

Just to complete the loop. In Nevada, in one month, about .7% of the households lost their homes. If that rate were to stay flat across the year, (not really a realistic assumption) around 9% of the electorate would lose their homes. And the May number was a 19% increase over the previous month. And, from the NYT piece,  interest rates on nearly $500b in adjustable rate mortgage will increase sharply over the next year. And, the impact of this is magnified through the structure of the hedge fund industry, including, possibly, into other segments of the mortgage market.

In other words, it is likely that the foreclosure rate will accelerate. It will hit two very politically sensitive states. Add in Arizona and, possibly, New Mexico and Colorado, in which real estate is booming. You have 5 swing states, totaling 56 electoral votes that could be in real economic turmoil.

What is the economic and political plan to address this?