Credit crisis has Main Street watching Wall Street
The financial credit crisis could affect US consumers.
from the August 13, 2007 edition
Page 3 of 3
Meanwhile, lenders have grown pickier about whom they lend to, because it's no longer easy to resell the loans as mortgage-based derivatives. Countrywide Financial Corp., a large mortgage provider, summed up its own situation in a statement last Thursday: "[The] situation is rapidly evolving and the potential impact on the company is unknown." Those words might be echoed by many hedge funds and Wall Street brokerage houses.
Wall Street could remain a volatile place in coming weeks as investors try to sort out the scope of the problem.
The irony is that derivatives have been viewed by many as a tool for reducing risk, in part by spreading it around. But they did not eliminate risk. And, in a way, the risk was just repackaged.
"Things designed to reduce risk, at certain special times, have a way of not always going perfectly," says Peter Kretzmer, an economist at Bank of America in New York.
Despite the credit-market challenges, most economists expect that the fallout on Main Street won't be bad enough to send the economy into recession.
"I doubt it's going to ripple very much," says Mr. Hymans.
Mr. Kretzmer adds that, "Only really large changes in the valuation of securities and wealth matter" in terms of consumer spending. Most consumption, he says, hinges on two factors, "Do I have a job, and what is my income growth like?"
Unemployment remains low in the US. Most economies worldwide have been growing solidly. Perhaps most significant is that central banks have shown in recent days that they stand ready to calm credit markets if they appear to be freezing up. The Federal Reserve funneled $38 billion into the system Friday. In addition, some economists believe the Fed will cut short-term interest rates soon.
"They're clearly vigilant," but not panicked, says James Sarni, a managing principal at Payden & Rygel, a fixed-income mutual-fund company in Los Angeles. "I think they're doing the right thing."
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