How far beyond housing will the housing bubble’s credit problem spread?

Steve Pearlstein has an excellent, if somewhat depressing, column about just how bad the housing bubble could be, and how far beyond housing debt its tentacles could extend.

First, for people recently touting the Blackstone Group IPO:

The altered fortunes of the big Wall Street firms could also be measured yesterday in the humiliating 25 percent increase in the cost of insuring their own bonds against default. And investors who rushed to buy shares in Blackstone Group, the world's largest private-equity firm, when they were issued last month have watched the value of their stakes fall by 17 percent.

Second, this ride is only beginning:

It would be comforting to believe that the availability of all this money precipitated a deterioration of lending standards in only a few credit markets, such as subprime mortgages. But in an efficient global financial market in which money flows toward the best return, it is more likely that loosey-goosey lending anywhere is a symptom of loosey-goosey lending everywhere. If so, it's likely that this credit correction has only just begun.

Third, how widespread will the damage be?

In truth, nobody knows how all this will play out. Many of the newfangled financial instruments at the heart of today's credit system have never been fully tested in a market panic. And for all their claims to rationality, financial markets are still driven by the emotions of greed and fear that cause markets to overshoot on the way up as well as on the way down.

Fourth, it ain’t just housing debt that's a problem:

Banks and credit-card companies have begun to report noticeable increases in delinquencies on consumer debt.

And now, investment banks are having serious trouble raising money to finance corporate takeovers and stock buybacks. A record flow of those deals fueled a year-long stock market rally that, only a week ago, pushed the Dow Jones industrial average past 14,000. Yesterday, the Dow closed at 13,473.57, down more than 300 points.

High-profile deals left hanging by this week's turmoil include the big buyout of Chrysler by Cerberus Capital Management, KKR's purchase of British retailer Alliance Boots and Citigroup's purchase of Allison Transmission. Barry Diller was forced to trim the stock buyback through which he hoped to take Expedia private. And there were reports that the sale of Cadbury Schweppes's drink business, which was being shopped around, will be delayed for months.

If you take all the different economic-type worries that voters have listed individually in recent polling, and make them one lump sum titled “economic worries,” they’re already rivaling the situation in Iraq as a matter of concern.

Once again, as I’ve blogged before, can you say, “recession”? And, if you’re a Democrat, whether a presidential or congressional candidate, are you ready to address this?