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13 March, 2007

Turbulance ahead?

News that sub prime lending delinquencies reached a four year high is worrisome to say the least. The sustained abnormally low interest rate environment seems to be taking its toll on the economy with the rise in defaults. As mentioned earlier, a long period of low interest rates is conducive to lenders becoming more lax with regards to their lending requirements. This is a behavioural phenomenon in that the more the good times last, the less we remember the bad times. Its in fact what leads to those famous market bubbles that we just can't seem to rid ourselves of. What's unsettling in all this is that a collapse in the housing market (for we haven't seen the end of it yet) will have a psychological impact in the form of a drop in consumer spending, a key component of growth. Now that could punch a hole in the fundamentals that have so far remained unscathed by recent events.

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