Wednesday, 14 March 2007
Time called on the US Credit binge; UK to follow in 2007?
The FTSE fell again today, and is now down to 6000.7 and may well go below 6000 tomorrow which is a 10% drop in a couple of weeks.
What has caused this?
Well in the US, there is a fairly rapid bursting of a residential housing asset bubble. New builds are being cancelled and prices of property are down on average 10%. This has caused many of the lenders of sub-prime mortgages (i.e. high risk lending) to get into serious difficulty as people begin to default on their loans. They have done this as interest rates have gone up from 1% to 5% in the past few years. This is the real legacy of Alan Greenspan whose lustre may well fade now the chickens are coming home to roost.
This is a real problem because for the last few years US citizens have been financing credit card bills by withdrawing profits from the equity in their houses. So any large problems with the housing market will reduce consumer spending and bring on a mild recession at the very least.
As we all know, what happens in the US is often followed in the UK. Although we have not gone to the same excesses as in the US, we have some of the same symptoms. Rapidly rising house prices (although we have supply issues unlike the US, giving our prices better underlying reason to rise), huge credit card lending (over £1 trillion now) and rising interest rates. We have a high money supply though which means inflation is more of an issue here than in the US. Perhaps we will be saved the worst by the huge wave of immigration that is keeping wages low and house prices high?
We are likely here in the UK to have a housing dip and credit squeeze. This will slow down the economy more quickly than the treasury is predicting and cause finance issues for our high spending government. On the plus side, perhaps interest rates will not need to go beyond 6%.
We live in interesting economic times though; shame , I preferred the mill pond.
Posted by CityUnslicker