Samteac

The chart suggests that there will be heightened credit and liquidity risk for banks. Their interbank borrowing costs have been rising and will continue to rise b/c they can't price the value of their collateral since they chopped them up into exotic securities and sold them off anyway. Thus their balance sheets are all screwed up due to overleveraging in securities and giving out loans to people working at McDonald's. This means that rates will most likely rise in the long-term as banks, mutual funds and corporations that lend in the bank borrowing market keep more cash to themselves. The Fed printing money and injecting liquidity is the only thing keeping some banks from completely going under although it's only staving off inevitable bankruptcy. As Thomas Paine wrote in The Decline and Fall of the English System of Finance:

"Insolvency always takes place before bankruptcy: for bankruptcy is nothing more than the publication of that insolvency."

The massive and surprise losses resulting from the U.S. housing market collapse have created a lot of variation among financial institutions when they try and borrow money. Again, Banks that are light on funding or carry poor credit as I noted above are likely to pay a higher rate in the forward currency market. Confidence in and between banks has been dented big time after the Bear Stearns fiasco. Basically, investors and banks are reluctant to lend cash to banks, because they wonder who the next casuality will be. Hence Fannie Mae and Freddie Mac getting expanded powers by the FHA although they too are imperiled and will require a taxpayer bailout. The Fed is just kicking the can down the road b/c it's an election year and you don't want economic chaos during a transfer of power. It is too dangerous to the establishment...

In short, homes still remain immensely overvalued with respect to incomes as the chart I provided shows. The housing market thus has some time to go to correct itself. Hopefully, it doesn't overcorrect.The only thing that enabled people to afford the bubble prices in the last 3-5 years was the availability of cheap credit thanks to the Fed. That spigot for some banks has either been completely turned off or is just a trickle. If the pipes freeze and burst then we will have major problems....