| Bad Credit Equals Poor Economy |
| By Credit Federal |
Published
09/2/2007
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Financial News
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Bad Credit Becomes Worst Short Term Threat to Economy
What is the cause of the bad credit situation? The lowering ability of borrowers to pay their bills and the subsequent fallout in the credit markets.
In a survey by The National Association for Business Economics, 32% of its respondents said loan defaults and excessive debt were short term concerns whereas only 20% said defense and terrorism were their biggest immediate worries. Credit risk also topped gas prices, inflation and government spending.
The president of NABE said the financial market turmoil has shifted the focus away from terrorism and toward subprime and other bad credit problems as the most important threats to the U.S. economy. The market turmoil began earlier this year, when mortgage lenders like New Century Financial Corp. and H&R Block Inc.'s Option One Mortgage Corp. unit reported their clients were more frequently missing payments on their home loans.
This led the Wall Street banks that finance the mortgage market to ultimately pull much of their money out. With cash draining rapidly from the industry, more than 50 lenders have gone bankrupt and a number of investment funds have gone under.
Victims include two of the 10 biggest mortgage lenders in the country and two hedge funds managed by Bear Stearns Cos.
Loan brokers say it has become more difficult for some people to line up mortgages. Subprime loans (loans to people with bad credit histories) have all but disappeared as lenders scale back or shut down completely.
The shakeout in the subprime mortgage market forced investors around the world to reassess how much risk they were willing to stomach. This led to an exodus of cash from investments like securities backed by home loans, short-term corporate bonds and stocks whose values were inflated because they were perceived as takeover targets.
In the past five weeks, the stock market has lost 5 percent. The dollar fell to an all time low versus the euro. A number of companies have had to cancel bond sales because of an absence of buyers.
And, the Federal Reserve has lent billions of dollars to banks from its "discount window," normally associated with bailouts for struggling financial institutions. The Fed this month issued a statement that the risks to the economy have risen considerably and traders ramped up their expectations the Fed would cut targets for interest rates this year.
The tumult in the financial markets has led businesses to revisit their interpretation of the housing boom earlier this decade and the easy credit that fueled it, NABE said. The proportion of surveyed members who call it a "serious national bubble" more than doubled from two years ago to 29%, the group said.
NABE said the market turmoil is considered a short term risk because the five-year outlook for housing is still strong. More surveyed members expect home values to appreciate in the next five years than fall. Very few expect a serious drop in home prices in the next five years.
The greatest long term risk facing the economy is still health care costs and the medical needs of an aging population, the NABE said.
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