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Friday, 14 November 2008

The next big crisis

NEW YORK: Just as the financial credit crisis seemed to be waning, another, potentially bigger crisis, has begun: the consumer crisis. This crisis is global in nature but is most dire in the United States.
As a measure of how dire, the US government has abandoned its plan to buy up banks' toxic mortgage debts and will use some bailout funds to help consumers.

Announcing this on Wednesday, Treasury Secretary Henry Paulson acknowledged the consumer credit market has frozen. In recent years, sales of securities provided the funding for 40 per cent of consumer loans, Mr Paulson said.

Lenders issued US$42.5 billion (S$64.2 billion) worth of such securities in October last year. Last month, they issued less than 2 per cent of that.

'This market...has for all practical purposes ground to a halt,' Mr Paulson said at the news briefing. 'Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs.'

US consumers, who usually account for about 70 per cent of economic activity, are slamming their wallets shut as they worry about retirement funds and job security. These changes could tilt the economy into a deeper recession.

On Wednesday, the No. 1 US electronics retailer Best Buy warned of a nightmare before Christmas, slashing its earnings forecast and saying changes in consumer behaviour have been nothing less than 'seismic'. This comes just days after its main US rival Circuit City filed for Chapter 11 bankruptcy protection.

The tech industry is not immune. Intel, the world's largest computer chips producer, warned on Wednesday sales could fall as much as 19 per cent in the fourth quarter. Intel's and previous forecasts suggest the industry is about to enter a slump to rival or exceed the dot.com bust of 2001.

ASSOCIATED PRESS, NEW YORK TIMES, WASHINGTON POST

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