Bernanke Sees No Subprime Mortgage Contagion

Reuters reports that Fed Chairman Ben Bernanke has come around to the conventional wisdom that the subprime mortgage woes that so captivated the media will not metastasize into a broader recession.

Of course, the housing sector is still the weak link in the economy these days, taking more than 1% off GDP after the top of the boom. The economy's dependence on the housing sector has been both underestimated and surprisingly narrow. Economic growth in retail has collapsed as the faltering housing market cut off easy access to home equity. Yet, the industrial sector has been almost completely unfazed. Exports have been soaring, and productivity outside of the construction industry has been chugging along nicely.

One of the unanticipated consequences of the housing sector's weakness has been the fate of Latin America. Many recent immigrants of Latin American extraction have found a livelihood in the construction industry - and they routinely send remittances back to their home countries to share the wealth with relatives. Since the top of the housing market, job prospects for these immigrants have gotten much worse and remittances have collapsed. The amount of money being funneled back to Mexico has fallen by more than 30% in the past year, and this big drop will have real consequences.

Many areas of Mexico, and not just in Chiapas, are almost completely dependent on these remittances. In five Mexican states, remittances from the United States are greater than the rest of the economic activity by everyone who remains in the country.

Subprime mortgages don't seem to be holding the US economy back, but the unintended consequences for Mexico and the rest of Latin America will certainly be severe.