Financial Times Editorial Comment: From Wall Street to Main Street

Financial Times Editorial Comment: From Wall Street to Main Street
Copyright The Financial Times Limited 2007
Published: September 7 2007 18:50 | Last updated: September 7 2007 18:50


The question is no longer whether the turmoil in the money markets will affect the everyday world of jobs and high street spending. It is how serious the effects will be. So far, there is little sign that the credit crunch will have a severe impact on the world economy. The bad news is that the turbulence continues, and the longer it goes on, the more certain it will be to leave some bruises.

There were warning signs this week. The Organisation for Economic Co-operation and Development revised down its forecasts for US growth this year from 2.1 per cent to 1.9 per cent, and for the seven largest economies by 0.1 percentage points. That is less modest than it sounds. The OECD warns that it has not been able to assess the impact of market turbulence; in any case, we are just weeks from the last quarter of 2007, so a slowdown would do little to this year’s growth figures.

A more tangible indicator of trouble was Friday’s US payroll data. Economists had guessed that 110,000 more jobs would be created than lost; in fact, 4,000 net jobs were lost. Admittedly, those figures are based on a survey with a margin of error of 430,000 either way, but nobody would pretend that the news was encouraging.

Yet for all this gloom, the fact that the money markets keep freezing over has few direct implications for the rest of the economy. We should fear fear itself: consumers may tighten their belts after watching too many flashing red numbers on the evening news, and recent measures of US consumer sentiment have not looked encouraging.

Beyond that, the credit crunch will hurt productive investment and consumer spending only when it chokes the supply of loans to ordinary consumers and sensibly run businesses.

That is possible: the three-month Libor – the rate at which UK banks lend to each other – has risen sharply in recent weeks. Some loans are directly indexed to the Libor, and others will be indirectly governed by it.

If these rates stay high then it will become expensive for both companies and individuals to borrow.

But if calm returns to the money markets within a few weeks, little harm is likely to be done. Risk premiums may not return to the ludicrously low levels of the past few years, but those levels were always a questionable blessing.

The more substantial threat to the real economy is not from the money markets at all. It is from the continued weakness of the US housing market. There is little evidence yet that it is dragging down the rest of the US economy.

But if the US consumer stays at home because he feels that a fall in house prices has made him poorer, that will weigh heavily on the US economy – and perhaps the world. And it is to the US consumer that central banks will be looking.