Credit Crunch Forces U.S. & U.K. to Limit Spending

The Dow rallied late today to finish up flat, after swinging as much as 150 points in intraday trading. Investors don’t know which way is up. U.S. Treasury Secretary Hank Paulson gave a speech and said about 45,000 distressed borrowers out of 1.9 million have sought foreclosure aid. Whether they get is one question. But it’s clear there are still a lot of people in a lot of subprime trouble.

There are now two aspects to this ongoing story. The household aspect-where people either lose their homes or existing homeowners see falling house prices-will have a big impact on consumption. No more using the house as a piggy bank.

The on-going financial aspect is investment banks and other financial institutions that are forced to take poorly performing assets back on to the balance sheet. This will force them to raise capital levels and restrict lending.

So if you’re keeping score at home, the crunch is forcing Americans (and the Brits) to rein spending and lending. That should tap the brakes on growth pretty well, although we’re not as sure it will do anything about inflation. That depends on how accommodating central banks choose to be. If history is any indicator, expect more rate cuts in the first quarter.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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