Stocks Fiddle as Subprime Burns

"The spillover from the subprime segment of the mortgage market has a marginal impact on consumption and credit, and it poses no systemic risk at this time," says Torsten Slok, senior economist at Deutsche Bank.

In a research piece in November, Slok cited a quote from former Federal Reserve chairman Alan Greenspan from October 2006: "A lot of people are going to lose their homes. ... It's a family tragedy. It's not an economic -- or macroeconomic -- tragedy."

How different is his tone from that of our new Fed leader, Ben Bernanke? In a speech last week Bernanke said: "If we did not place some limits on the downside risks to individuals ... the public at large might become less willing to accept the dynamism that is so essential to economic progress."

So while it is clear that the subprime mortgage market is only a small part of the economic haystack, the current Fed chairman is probably unlikely to ratchet up the pressure with rate hikes, unless absolutely forced to. Indeed, such calamity on Main Street is part of why the Fed seems so committed to remaining in the pause position, despite higher-than-desirable inflation and evidence of loose liquidity in the system.

Slok notes that adjustable-rate mortgages, or ARMS, make up only 20% of the total outstanding single-family mortgages, and ARM resets add up to about $18 billion in 2007. He adds that this is a small amount compared with annual consumer spending of around $9 trillion. The impact of the resets will account for less than 0.2% of total consumer spending, says Slok.