Thursday, August 21, 2008

The Trickle-Down Effect

As the housing crisis becomes more pervasive in the US and UK, unfortunately it trickles through a large part of the economy. The banks have taken a big hit in their sub-prime investments, which in some cases have meant significant layoffs and certainly lower compensation. As homeowner equity declines, equity refinancing and desire to spend both decline affecting consumption. For homeowners that have high leverage, in some cases bankruptcy is the only option, meaning that it will take a while for their spending to come back - for those that decide to hang on and try to continue to make the mortgage payments, spending on other things declines. Less house purchases and less moving is bad for home retailers (as is less spending). These are some of the reasons why this might take a while as the overall issue trickles down through other parts of the economy.

1 comment:

Anonymous said...

How long it will take for this crisis to end? Also , is this is a good time to invest in mutual funds? investors lost ,more than 40% out of their total investments in mutual funds since Sep-2006, when do we expect the markets to correct itself ? Thanks