Gary's views

Gary's weekly views

Each week an article by Gary has appeared in the Plympton Plymstock and Ivybridge News in South West Devon. The articles are published here

MARKET CORRECTION

Market correction. It sounds so innocuous, so technical. In fact, although absolutely necessary now more than ever, it is to be feared. It is the cuddly name we give to house prices (or share prices) crashing down so that people can afford to buy them in the future. Any young couple trying to buy a home in these parts knows only too well how the affordability gap is unbridgeable for all but a few.

Who can doubt that we need a correction in the housing market and rising interest rates are hastening its arrival. The recent turbulence in financial markets brought about by imprudent lending by young men in a hurry can only deepen the impact that interest rate rises were already starting to have. Now that the rate at which banks borrow from each other has risen, it is only a matter of time before these hefty increases are passed on to us the end borrowers. The trouble is that inflationary pressures remain in the wider economy, so the scope of the Bank of England to reduce borrowing rates is limited.

The turmoil of recent days is a reminder of how fragile and inter-connected our world banking system is. It is all based on confidence, and when that buoyancy is shattered it can all come crashing down.

This problem has largely been kick-started by irresponsible lending in the USA. America sneezes and we catch a cold. Oil and gas prices are controlled by a few robber barons in unstable parts of the world. We now truly have a global economy. All it now needs is some major global crisis and the market correction could become a raging recession. Keep your eye on disturbing noises emanating from the White House about bombing Iran as a possible flashpoint. Would Russia just sit idly by this time and let the US flatten their allies when they are looking to flex their gas- rich hardened muscles on the world stage again?

I am by nature an optimist, but I am quite gloomy about what might be around the corner. We have had so many years of peace and plenty, unprecedented in historic terms. But the history of the planet also teaches us that it is unlikely to continue.

So what is to be done? We keep forgetting the lessons of the past. Banks must stop lending irresponsibly and we all should fasten our safety belts.

What do you think?

posted by Nigel on Tuesday, October 09, 2007