The US economy could be brought down by the ordinary American family, says edward helmore |
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The American family may be traditionally cautious in social and economical affairs but since 2001 the epic spending of these modern-day Waltons has been the driving force of the US economy. They have borrowed heavily to buy new homes, and they have borrowed against the rising value of those homes to buy more things.
But now that the Waltons are defaulting on their repayments in large numbers, lenders who specialise in loans to these 'sub-prime' borrowers are in crisis, and no one seems to know what's coming next.
On Monday, New Century Financial Corp, the largest US sub-prime lender, said its creditors had pulled the plug. The firm is now heading for bankruptcy.
While some banks, like HSBC, have put billions aside to cover such losses, others may have not. Analysts warn their losses may be widely felt.
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| Modern-day Waltons are defaulting on their mortgage repayments in large numbers |
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The sub-prime meltdown has an echo about it of the technology stock collapse of seven years ago. Then, as now, Wall Street analysts were issuing optimistic reports up to the very moment of collapse; again, banks and investors are behaving like sleepwalkers.
With nearly 15 per cent of high-risk borrowers defaulting - and signs that more credit-worthy borrowers are also struggling - the day of reckoning is coming when mortgage securities are marked down to below investment grade.
But whose fault is it? Banks have loaned to the Waltons carelessly, offering mortgages with little documentation (one study found 60 per cent of borrowers inflated their incomes by more than half to get 'liar loans'), or without any down-payment.
The Waltons, far from being epitomes of prudence and responsibility, could unwittingly take the US economy down with them. "I think the unwind is just starting," says Charles Peabody, founder of Portales Partners, an independent research boutique. "The moment of truth is not yet here." 
FIRST POSTED MARCH 13, 2007
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