Will it be harder to get credit?

The problems of subprime loans hint at broader risks in financial markets.

from the July 13, 2007 edition

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In ordinary times, there's nothing earthshaking about the collapse of a hedge fund or two. Such events are hard on the relatively small group of investors involved, but don't threaten the wider availability of money in the economy.

The problem today is: Nobody can say whether these are ordinary financial times.

In fact, as some investment funds reel from mortgage-loan losses, what analysts can agree on is that financial markets are operating today in untested waters. The rise of "derivative" securities – complex investments derived from other assets such as mortgage loans – means that even insiders can't quantify the risks or say where they lie.

All this doesn't mean that an all-out credit crunch, in which years of easy credit give way to a drought of borrowing and investment, is likely. But the threat is there.

"Clearly there's a risk" that a tighter financial climate could spread beyond the arena of low-quality mortgage loans, says Nigel Gault, a US economist at Global Insight, an economic forecasting firm in Lexington, Mass. "It's unknowable because of the way the financial markets operate now.... Risk is much more widely spread around the financial system than it used to be."

Mr. Gault predicts that what's happening now is a shift back to normal after a period of easy money, in which many lenders seemed too complacent.

"It's a necessary process. Risk became quite severely mispriced," he says.

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