[cbasu]

There are now real fears that the recent foreclosure crisis in the US, as reported by the Wall Street Journal here and by the New York Times here and elsewhere, could lead to a second 2008-style financial meltdown.

While some politics-related cynicism is justified, as the Wall Street Journal points out here, the seriousness of the problem cannot be ignored.

Thousands upon thousands of foreclosures across the US, where a staggering 24% of all housing sales are foreclosure-related, could be under review due to shoddy or missing documentation.

Given how much of the balance sheets of major financial institutions are tied up in mortgages, and how intricately the financial system is interwoven into home equity, a cascading chain reaction similar to the 2008 meltdown cannot be ruled out.

To continue with this rather dismal outlook, were it to materialize, one also has to consider that the capacity of central banks to step into the markets with quantitative easing, like they did back in early 2009 and continuing today, is now severely limited.

While the problem is not nearly as severe in Canada, it would be foolish to ignore the consequences here given how dependent we are on the US economy.