Until now the global credit crisis has been a story of peripheral interest to most Australians. But that may change if recent events in the United States are any long-term guide.
Last week, a large California-based mortgage lender with loans of about $33 billion, IndyMac Bank, was placed under the regulatory control of the Federal Deposit Insurance Corporation after $1.35 billion in deposits was withdrawn in one month, a run that sent it to the wall.
The lender resumed business yesterday under a new name, IndyMac Federal Bank, but the cost to American taxpayers of keeping the bank in business and avoiding any wider fallout will be substantial. About 10 per cent of the corporation's $55.2 billion Deposit Insurance Fund is expected to be spent propping up IndyMac.
Meanwhile, alarm bells are ringing about the solvency and liquidity of Fannie Mae and Freddie Mac, which together own or guarantee about 40 per cent of America's home loans. Like IndyMac Bank, these two lenders will not be allowed to fail or rather cannot be allowed to fail but the cost of federal intervention, should it be required, will be a severe test of the US economy.
Some estimates are that an injection of public capital in the two banks could add up to $5 trillion to the US national debt of about $9 trillion.
If the American economy probably already in technical recession, but certainly labouring under the effects of the credit squeeze, and with consumer confidence hovering at a 28-year-low had to digest a partial or full-scale bail-out of these two mortgage lenders, the shock to the housing and financial markets, and to the already weakened American dollar, would be considerable.
Fannie Mae's and Freddie Mac's share prices have collapsed on fears about future losses and the dilution of shareholder value arising from new equity raisings, but some commentators argue the banks are in no immediate danger.
Both retain more capital than they are obliged to hold under federal regulations, and so could withstand a partial run on deposits, but whether they have enough capital to withstand further write-downs in assets and losses on housing loans in future is open to question.
Though house prices in America have retreated by about 15 per cent over the past year, there is no evidence they have bottomed out. Indeed, some economists believe that US housing prices were overvalued by between 30 per cent and 40 per cent before the correction began, meaning that the market may have a lot further to fall.
If that's the case, then Fannie and Freddie will need more capital and liquidity to roll over their debts just when debt financing has become increasingly expensive and scarce in the US. Because both banks rely heavily on short-term funding, both are susceptible to sudden losses of consumer confidence of the kind that sparks runs. Which is why the US Treasury has already signalled nervous depositors that it is prepared to inject public capital into the banks should that become necessary.
These assurances are also crucial to buying the confidence of private and foreign government investors so they continue to buy debt in Fannie and Freddie though foreign investors have become increasingly leery of investing in US debt securities as the value of the greenback has fallen.
Fannie and Freddie originated the use of mortgage-backed securities in the US, which in turn encouraged the issue of non-securitised loans to borrowers with little or no income, no jobs and no assets (so-called Ninja mortgages). They were principal causes of the housing bubble, so the fact their executives and boards look like being spared the consequences of their folly is ironic though, of course, the US Government and its regulatory authorities, which turned a blind eye to the reckless lending practices in the belief they would extend home ownership, also stand condemned for imperilling the American economy.
Many American commentators view a federal rescue of Fannie Mae and Freddy Mac as a case of when, not if. A bail-out of this magnitude will almost certainly dash hopes that the US economy might be spared a hard landing.
That in turn is likely to produce flow-on effects , particularly in major sharemarkets. Australians contemplating their superannuation results this month can blame the US credit crunch for negative returns and Fannie's and Freddie's woes are likely to cost Australian banking stocks further ground.
It would be tempting to hope that the fallout from the US credit crunch in Australia will be restricted to share price volatility, but some economists believe a correction in real estate prices is overdue, and that ours could be as severe as the US experience.
That process has already been presaged in some suburban areas of Sydney and Melbourne. Australians many soon be forced to recognise the unpalatable fact that real estate prices do not always rise.