Bad loans have come home to roost

Peter Hartcher writes that Bad loans have come home to roost for the Americans while conveniently ignoring the same thing happened in Australia, Ireland, England, Spain, etc.

Yet even this does not explain the real force of this financial fright. Its greatest multiplier effect stems from the fact that it comes at the end of a five-year speculative bubble in US house prices.

The Federal Reserve dug the economy out of the 2001 recession by cutting interest rates to record lows. The key official rate went from 6 per cent to a record low of 1 per cent, and stayed there for a year.

This unleashed a great gusher of liquidity, and it gushed straight into real estate prices. Prices boomed and speculation flourished. Individuals, builders, building supply firms, property developers, banks and financiers all behaved as if house prices could only go up. Debt soared.

The bust in the junk mortgage market acquires its great power from the fact that it is the pin that pricks the housing bubble. 'This is very much an American problem,' Hale says. 'It reflects the very reckless behaviour in the American economy built on the assumption of ever-rising house prices.' One result is that the US is suffering its first national fall in house prices since the Great Depression.

Emphasis Mine

This is another don't panic article about how well the economy is performing. Just ahead of the market drop on Monday, Tuesday, Wednesday, ...

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