Several readers suggested a spread of the subprime markets over to the prime as a topic. "OK, so subprime is toast. But I don’t think investment losses on stupid loans, and foreclosures of deals that should have never been done to begin with, will sink the economy, do you? No one else seems to think so either, judging by the financial markets."

"The question is whether there is any evidence that the pain is shifting out of subprime, and is that likely to happen in the future. Mortgage rates on traditional mortgages are still low. So are default rates."

"I just saw a chart that shows that risk spreads over Treasuries are less than 1.0% across the board — mortgage backed, corporate, municipal, whatever. And Treasury bonds themselves have a NEGATIVE inflation risk premium relative to cash."

"Is subprime the canary in the coal mine or the whole problem? And is there some proof, even if anectdotal?"

A reply, "I think it just might be the canary. The problem is the whole system of pension & hedge funds that invests in these securities, especially the higher yielding ones. These vehicles are themselves geared, and then investors in them can also be geared, so you have gearing on gearing on gearing."

"It can’t be healthy, and means you get a domino effect if only one link in the chain fails. But then again, I am a bit 'glass half empty' on this subject."

One saw this argument. "As I understand it the 'bear' theory is that 'subprime is toast' => 'real estate is toast' => 'consumer is toast' => 'economy is toast.'"

"Many 'bulls' refute this chain of implications as follows: 1.) Real estate doesn’t depend on subprime (o.k. maybe in S. Florida) 2.) The consumer is robust and will keep buying Hummers and Plasmas even as they lose their home equity. 3.) Even if the 'little' consumer stops buying the super rich will keep right on going. After all the top wage earners account for 'most' of the consumption anyway."

"I don’t buy argument (1) one iota although I have to admit arguments (2) and (3) may yet prove to have some truth behind them. So yes the economy may well come through this but the real estate market is an all together different story."

"Ironically the economy stabilizing may yet be the final nail in the coffin for real estate as it may keep the BB helicopters grounded. My theory is that this is exactly the outcome the fed’s want … and likely what most bulls on wall street are counting on."

Another discounts the stock situation. "That’s because the recession of 2000 was halted by the credit bubble. The 'soft landing' was enabled by the credit/housing bubble."

"Now, IMHO, we will likely experience the fallout due in 2000 plus the carnage created by the destruction of the credit/housing bubble — unless they’ve got another bubble on the way (have to wonder about that stock market)."

One looks at the media. "Even the commentators on CNBC, you know, the same ones who hadn’t said a word about problems with subprime until last week when it was no longer possible to ignore - even those guys are saying it’s going to eat into prime."

"Why would it be confined to subprime? Seriously, how many Amerians can trully afford a 400K and up home? Yet in many areas of the country, that’s all that’s been available for several years."

"Also, in the Seattle area, and I’m sure many others, realtors and brokers have been encouraging people to borrow outside of their comfort zone- it was an agenda of theirs really for several years now. It was a racket really, to stretch people in all income categories past a rational limit."

One sees a larger picture. "You are looking at the wrong market. Subprimers (poor credit and/or highly leveraged borrowers) are unable to quickly sell property for the amount they owe. As a result, they are defaulting. These defaults are being reflected in the subprime paper market. In other words, the value of the real asset is falling and that affects both prime and subprime borrowers alike."

From Reuters. "Subprime mortgage companies' shares dropped on Friday, extending more than two weeks of declines and triggering slumps in many finance companies' shares."

"'There's so much fear and loathing and panic in the subprime mortgage sector,' said Howard Shapiro, a portfolio manager at KBW Asset Management, which has positions in several mortgage lenders."

"Other decliners included Lehman Brothers Holdings Inc. and Bear Stearns Cos., investment banks perceived as having large exposure to the mortgage market. Share weakness even extended to Fannie Mae, and Freddie Mac, though neither has extensive subprime exposure."

"But stock investors may be overreacting, analysts said. Even lenders with minimal subprime exposure, such as American Home Mortgage Investment Corp., are selling off."

"'They're getting tarred with the same brush,' said Lee Norton, an analyst at JS Asset Management, which owns American Home shares. KBW's Shapiro estimates that total subprime mortgage industry losses for 2006 loans would be in the ballpark of $6 billion."

"'There's no evidence of this yet, but the risk is that subprime is not just an isolated example of overstretched lending, but the first crack in a broader problem in credit in market,' said Bob Albertson, chief strategist at Sandler O'Neill."