It's always fun to read economic analysis wrapped in an amusing story. ET explains a huge problem to former Fed Chairman Alan Greenspan:
"Debt levels are central to the safety and soundness of a financial system. Left unchecked, they grow to a point when the debt service burden starts squeezing disposable income, which in turn curtails spending and what you call economic growth. If the ‘squeeze’ becomes a ‘shock’, as in rate resets of your Adjustable Rate Mortgages, the consumer defaults. If enough defaults occur, lenders get scared, pull in their horns and curtail credit. This sets off a chain reaction … lower spending, leading to lower business profit, leading to lay-offs. Now you have consumers experiencing painful shocks to both incomes and obligations … leading to more debt defaults … which repeats the cycle in a downward spiral."
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"Debt levels are central to the safety and soundness of a financial system. Left unchecked, they grow to a point when the debt service burden starts squeezing disposable income, which in turn curtails spending and what you call economic growth. If the ‘squeeze’ becomes a ‘shock’, as in rate resets of your Adjustable Rate Mortgages, the consumer defaults. If enough defaults occur, lenders get scared, pull in their horns and curtail credit. This sets off a chain reaction … lower spending, leading to lower business profit, leading to lay-offs. Now you have consumers experiencing painful shocks to both incomes and obligations … leading to more debt defaults … which repeats the cycle in a downward spiral."
Read more...
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