‘Prime’ Borrowers Feel Sub-prime Pain

February 13, 2008 03:46 AM
by findingDulcinea Staff
America’s credit woes appear to be widening despite a Wall Street surge spurred by separate efforts from the U.S. government and Warren Buffett.

30-Second Summary

Although it started in the sub-prime market, the credit crisis is beginning to drag down people with good credit, as well. The number of prime loans in foreclosure is the highest in 10 years, according to findings reported by The New York Times.

This is bad news for the wider economy, as prime borrowers usually keep the economy afloat during downturns, the Times reports.

In the meantime, consumers at large are paying for sub-prime-related shortfalls. To offset their losses, banks have been charging higher interest rates on credit cards and tightening lending.

Compounding matters is investors’ continued mistrust of debt-backed securities, a trend that threatens “to deepen the financial system's wounds,” The Wall Street Journal writes. If the trend persists, banks will reduce lending, stifling economic activity.

World financial leaders’ projections complete the pessimistic picture: they expect sub-prime losses to reach $400 billion even though write-downs have already topped a record $100 billion.

A small ray of hope was offered by billionaire investor Warren Buffett, who offered to reinsure municipal bonds, and by a government plan to help troubled borrowers. Stocks rallied on the back of the news.

An upbeat voice is that of Smart Money columnist James B. Stewart who says that Americans should spend in such troubled times, not save. Not only because spending would be the patriotic thing to do, but also because both goods and stocks are cheaper.

Headline Links: The credit crisis spreads

Background: Sub-prime losses

Reaction: Buffett’s offer and the White House plan

Opinion: Spend, don’t hoard

Related Topics: A sub-prime miscellany


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