Federal Reserve Chairman Ben Bernanke isn't feeling too optimistic about the economy these days, according to NPR. He warned Congress today of an coming economic slowdown tied to the subprime meltdown, the surge in energy prices, and oh yeah, did we mention the subprime meltdown?

"Delinquencies on these mortgages are likely to rise further in coming quarters as a sizable number of recent-vintage subprime loans experience their first interest rate resets," Bernanke testified.

"Weakness in the housing market will keep construction in a down trend," he said.

He also had some advice for those of you in mortgage meltdown land: "Get in touch with your lender because experience shows the earlier you do so you'll be able to resolve the matter."

Retailers should worry, too: "Indicators of overall consumer sentiment suggested that household spending would grow more slowly, a reading consistent with the expected effects of higher energy prices, tighter credit and continuing weakness in housing," Bernanke said.

He's a cheerful guy, isn't he? We like that about him. Maybe he didn't hear that Hey there, camper! Why the long face? Bloomberg is reporting that consumer confidence is at a two year low. Does someone need a hug?

Maybe another Fed rate cut will help your self-esteem? From Bloomberg (emphasis ours):
The Conference Board's index of consumer confidence declined to 95.6 this month from 99.5 a month earlier. It compared with the median forecast of 99 in a Bloomberg News poll. The U.S. currency reached $1.0511 per Canadian dollar, the lowest since 1960.

Home prices in 20 U.S. metropolitan areas fell 4.4 percent in the 12 months through August, the most since records began in 2001, according to the S&P/Case-Shiller home-price index released today.

The Fed cut its target rate for overnight bank loans by a half-percentage point on Sept. 18 to 4.75 percent, the first reduction since 2003, after losses from subprime mortgage investments roiled credit markets. The dollar has dropped against all 16 of the most-actively traded currencies since then, losing 3 percent against the euro.

Interest-rate futures traded on the Chicago Board of Trade show a 94 percent chance the Fed will lower its benchmark rate by a quarter-percentage point to 4.50 percent tomorrow.

With home equity harder to find these days, one might suspect that there would be a drop in consumer borrowing. Nope.

The Associated Press says that consumer borrowing has increased as home owners see the pools of easy credit dry up. The Federal Reserve reported that consumer credit rose at an annual rate of 5.9 percent in August, the biggest increase since a 7.9 percent jump in May.

The increase was led by an 8.1 percent leap in revolving credit, the category that includes credit card loans. Consumers have been using their credit cards more to finance purchases now that home equity lines of credit are becoming harder to obtain.

Non-revolving credit, which includes auto loans, also rose at a faster pace in August, increasing at an annual rate of 4.7 percent, compared with gains of 3.1 percent in July and 4 percent in June.

In total, consumer credit rose by $12.2 billion to a record $2.469 trillion. The increase was bigger than the $9.5 billion gain analysts had been expecting.

Ryan Sweet, an economist at Moody's Economy.com, said that the healthy increase provided "further evidence that consumers did not pack it in" after the financial market turbulence hit in August. When home prices were soaring many consumers tapped the "value" in their homes for easy cash. Now they're running back to credit cards, but (so far) not borrowing less.

It must not be fun around WaMu headquarters today. Profits are down a whopping 75%.

From the AP, emphasis ours:
Washington Mutual said its loan loss provision for the quarter will total $975 million. The provision exceeds net charge-offs -- loans written off as having no chance of being recovered -- by $550 million. Loss provisions, on top of paying current charge-offs, are used to cover future losses.

The company will also write down the value of various loans and portfolios by about $410 million.
...
Rising delinquencies and defaults among mortgages, especially subprime loans given to customers with poor credit history, have led to the near disappearance of investors willing to buy the loans in the secondary markets and forced lenders to reserve more cash for losses. Um... damn. We hate it when we estimate incorrectly to the tune of $550 million dollars.

Citibank is warning investors to expect a 60% drop in earnings due to "dislocations in the mortgage-backed securities and credit markets, and deterioration in the consumer credit environment."

Ouch. "Our expected third quarter results are a clear disappointment. The decline in income was driven primarily by weak performance in fixed income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs," said Charles Prince, Chairman and CEO of Citi. Thankfully, Citi has a plan to fix the problem. Free burritos for college students! Yes! This is foolproof.

Citi Expects Substantial Decline in Third Quarter