Credit Crunch – what does it mean for you?


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What might the market turmoil mean for jobs, prices, and incomes? There is no definitive answer, of course, because we’re in the middle of the storm. Simply put, investors and bankers are worried as to whether the loans they’ve made will be repaid. In this climate, lenders sit on their hands, unwilling to make new deals until they can accurately value them.

When lenders are less willing to part with money, its price rises. In the jargon of the market, risk premiums are moving up, as the higher price of credit reflects a riskier lending environment.

So why should you worry about a bunch of rich banks losing money on some bad loans? Because this disruption doesn’t necessary just bring down one sector of the market. It already has been rippling through the economy; diminished investment in homes is one main reason economic growth is falling. That’s already led to slower job growth this year than last, and unless the economy starts to grow, unemployment is likely to keep moving up.

As long as consumers keep spending freely shouldn’t we be fine? Maybe, but weak investment activity bleeds into consumption both through the direct lack of economic stimulus and equally importantly, through what Keynes called diminished “animal spirits.” Enough economic actors, i.e., people, lose confidence in where the economy is and where it’s headed, and their prophecy becomes self-fulfilling.

Anyway, consumption falters, employers see less activity, jobs are not offered…you get the picture.