Bad things happen to good people who do stupid things.

That’s what the good people at New Century Financial - and the good people who lent them money - found out yesterday. After losing 78% of its value last week, the New York Stock Exchange halted trading in New Century stock, as America’s second largest subprime mortgage company “teetered on the edge of bankruptcy,” according to the Financial Times.

Whenever we see something teetering on the edge of disaster, we have an almost irresistible urge to give it a little push. But it is not within our power to destroy New Century or to save it. All we can do is get out some popcorn and watch.

“Subprime lending problems escalate,” is the headline on the Financial Times piece. It explains that when the subprime industry tumbles into the abyss, it could drag the whole U.S. mortgage industry - which it puts at $8 trillion - along with it.

Will that happen? No one knows. But the investment banking stocks are headed down, too - generally off more than 10% from their highs. They are the companies that own the stock in New Century and much of the debt that it and its subprime borrowers can’t pay.

Together, Morgan Stanley, Goldman Sachs and Citigroup all hold a big part of the subprime bag.

Poor Goldman! No company made more out of the liquidity bubble...and no company is better placed to protect itself. Goldman’s man, Paulson, is now the head of the U.S. Treasury. In theory, no one stands to lose more when the liquidity whooshes out. But when the bubble finally deflates, we’ll see how good the wizards of Wall Street really are. Have they laid off all the risky debts and dubious assets onto widows and orphans? Or are they still stuck with a lot of it themselves? We note, for example, that someone sold the New York State Teachers Retirement System a 3.6% stake in New Century Financial. That salesman should get a special bonus.

Bloomberg News tells us, “the deepest U.S. housing decline in 16 years is about to get worse.”

“A year of pain ahead as American housing dream sours,” trumpets the headline.

“Lenders may foreclose on as many as 15 million more American homes, another 100,000 people in housing-related industries could be laid off, and another 100 mortgage companies that lend money to people with bad or limited credit may go under, according to real estate experts, economists, analysts and a Federal Reserve governor.”

The article tells us “the spring season, when more than half of all U.S. homes sales are made, has been disappointing...”

But wait a minute. Spring hasn’t even begun yet. Bloomberg is getting ahead of itself.

“The correction will last another year,” says Mark Zandi.

“If this slump follows the same pattern as the last one in 1991, it will persist for at least another year and may fuel a recession. Sales of new homes declined 45 percent from July 1989 to January 1991 and about 1 percent of all U.S. jobs, or 1.1 million, were lost in that recession...”

Recession? Alan Greenpan puts the odds of recession at one in three. Bloomberg notes the inverted yield curve; it says the odds are higher - one in two.

Delinquencies are rising. Foreclosures too. CreditSights, a N.Y. bond research firm, predicts that defaults will dump more than a half a million more houses on the market. Ken Rosen, an economist at U.C. Berkeley adds that 1.5 million houses, out of a total of 80 million, will be foreclosed.

Many of these houses were sold to people who were not asked to prove their income nor their work history. “Liars loans,” they were called in the industry. The epithet was unflattering to the mortgagees. But now it’s the mortgagors’ turn for ridicule and abuse. For if the borrower was a liar, the lender was surely an idiot.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.