Lingering hopes that the damage could be contained to a handful of financial institutions that made bad bets on mortgages have evaporated. New fault lines are emerging beyond the original problem -- troubled subprime mortgages -- in areas like credit-default swaps, the credit insurance contracts sold by American International Group Inc. and others. There's also a growing sense of wariness about the health of trading partners.
The buzz word that I hadn't heard or read before: "Deleveraging":
Fed and Treasury officials have identified the disease. It's called deleveraging, or the unwinding of debt. During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can't pay back the loans, a problem that is exacerbated by the collapse in housing prices. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.
That's the term being used to describe what is happening to America's major financial houses, as well as a host of other businesses across the globe. Of course, underneath it all, driving the cascading failures, is the mortgage debacle, but even that is a symptom of a greater problem: way, way too much debt at every level.
It's going to take a long time to crawl out of this mess, and we're all going to learn to live on less as sources for credit dry up. I honestly think that's a good thing, however; the U.S. has been living on borrowed time for far too long, including the government itself. If tightening belts points to weight loss, a leaner, meaner U.S. economy coming out of the other end of this disaster would be a good thing.