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
Page 4 of 4
In 1998, for example, the Federal Reserve rode to the rescue when the collapse of Long Term Capital Management shook global financial markets. Then in 2001, after the dotcom stock bubble burst, the Fed kept monetary policy in a loose mode for several years.
"People are still saying there's too much liquidity out there," says Brian Horrigan, an economist at Loomis Sayles in Boston, an investment firm that runs several bond mutual funds. But if some blame the Fed for throwing gasoline on a hot housing market, Mr. Horrigan notes that back in 2002, the Fed had legitimate worries that the economy would fall into recession due in part to a dearth of business investment.
Since 2004, the US and other nations have seen central banks tighten up a bit, but by some measures monetary policy still doesn't look tight.
Still, the credit cycle is turning, perhaps in a good way, many analysts say.
Failed investments, like those tied to Bear Stearns, can send a tough but healthy message to others: Buyer beware.
Recently, investors have been thinking harder about whether they want to lend money to private equity firms that have been on a buyout spree involving companies such as Chrysler.
And the often murky realm of derivatives has gotten a wake-up call. Derivative securities repackage debts in creative ways, and are then are parceled out among a wide range of Wall Street investors. Some investors, it appears, assumed that had virtually eliminated all risk.
"Hopefully we are shifting towards more normal, more realistic pricing of risk," says Gault.
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