Hedge fund manager Sy Jacobs saw the subprime meltdown handwriting on the wall about three years ago.

Yet, he says, people are still missing the point completely. It's the economy, again, stupid.

Jacobs, principal of the $222 million Jacobs Asset Management firm, says people first ignored subprime. Now they have focused too much on it, Jacobs told Barron’s.

Jacobs says the subprime debacle is just now beginning to drag down the rest of the economy. Without home equity loans to use as personal piggy banks, Americans are spending less, and the securitization market has slowed.

"So we see consumer and business spending slowing; the economy will falter," he says.

The pain will extend into the markets, too.

"We believe the recent rally in financial stocks — and for the whole market — is a bit of a head fake that will prove to be a bear-market rally," he says.

"They’re missing the broader storm that’s coming — that’s the head fake."

Construction loans, too, will suffer from the subprime spill-over.

Jacobs notes that a lot of developers and home builders are not only stuck with a large inventory of new homes, but they’re also sitting on lots that have loans against them.

"Subprime is such a small piece of the banking industry, but construction lending is a core product. If the housing market stays weak for much longer — and it seems to be getting weaker — construction loan losses are going to be a big problem."

That will hit banks hard.

Construction permits for new homes peaked at 2.3 million in September 2005. That's 1 million more than were reported in April 2008.

In April, single-family home construction dropped by 1.7 percent, to an annual rate of 692,000 units.

In fact, luxury builder Robert Toll told an audience at a financial industry event this week that he wouldn’t be surprised to see housing fall another 20 percent. Even housing numbers guru Robert Shiller hasn’t gone that far.

The banking industry shouldn’t be surprised to see a lot of banks go under, Jacobs warns.

"The number of banks that get taken over by the FDIC and disappear may not be as high as it was in the late-1980s and early 1990s because there is strength in the energy patch now.

"But real estate lending institutions are the bulk of the community-bank world, and I think you are going to see a lot of banks disappear."