Thursday, December 6, 2007

double whammy caused by the deleverage

--What's with all the gloom about the U.S. economy? The problem is that we have two problems. One is that the economy is slouching toward recession or, at best, slow growth. It's the consequence of falling house prices, higher energy prices, flagging consumers and shrinking profits. The other is that the market for credit, the lifeblood of a modern economy, isn't functioning well. That problem is amplifying the pain caused by the first. Rising delinquencies for credit cards and home-equity and auto loans are bound to make banks, credit-card issuers and other lenders wary. --Leverage is defined as the factor by which a lever multiplies a force. In economics and finance, leverage allows the bold to borrow to make bets that can pay off handsomely when times are good. But leverage magnifies losses when things go bad. So borrowing binges are followed by periods of deleveraging in which lenders and investors borrow less and take fewer risks. Economists dub the recent decades in which recessions were scarce and inflation calm the Great Moderation. That seems to be giving way to the Grand Deleveraging.

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