Sunday, 17 June 2007

The Debt Disaster: £1,300,000,000,000 in debt, and trouble round the corner

"Those who lend money without charging interest, and who cannot be bribed to lie about the innocent. Such people will stand firm forever." Psalm 15:5


[...] "A lot of the strength in the housing markets and consumer spending recently has been driven by people having easier access to credit. It's about the ability of people who would have been considered risky borrowers to get a mortgage."

What worries City economists now is how reliant the economy has become on easy credit. "There has been a cycle where the availability of credit has kept consumer spending high," says Mr Donovan at UBS. "That has supported the economy, which has supported employment, which has kept the consumer confident, which has encouraged him to borrow more money. And so we go round again."

Jumping off this money merry-go-round is a worry for us all. Georgina Taylor, a European strategist at Goldman Sachs, the investment bank, concludes: "The typical household financial position has weakened dramatically in the past year or so. That has quite a feed through to consumer spending, which means the UK economy is vulnerable - the great conditions we've had in recent years are about to change." Read more

For a (highly) techncial analysis, go here:

[...] This is how Larry Summers described it in an article (FT, 26 March 2007): ‘It is clear that the global economy has been relying on the US as an importer of last resort; that the US economy has been relying on the consumer for its primary impetus; and that until now consumers have been encouraged to spend their incomes fully or more than fully by being able to access the wealth in their homes.’

The mechanism by which the US consumer accesses this wealth is out of control, subprime being a single example (and which may or may not be the catalyst for its ultimate breakdown). This mechanism can be thought of as a motorway, one end of which is US consumption, which travels, via the householder, through the structured finance (Mortgage- and Asset-backed securities) markets to the Collateralised debt obligation market to the hedge funds, and on to the general public via the fund of hedge funds.

This motorway carried over $2 trillion worth of structured finance paper last year, and it has to be asked – why did the world oblige by taking on such an extraordinary amount of debt? [...]

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