Core and Periphery: The Logic of What Happens Next

Posted by: Michael Mandel on February 05

Here’s how to understand what comes next. Think about the credit crisis in terms of core and periphery. The core includes those markets which are at the heart of the crisis: The mortgage markets, and secondarily, consumer credit in general. The periphery are the markets which are being hit by the side-effects.

The Fed has to cut rates deeply enough to stop a full-time unravelling at the core of the crisis. But in doing so, it will pump life into the periphery. So the mortgage and consumer credit markets will be dead for a few years, but corporate credit and the rest of the economy will recover pretty quickly.

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Reader Comments

Bill J

February 5, 2008 02:30 PM

Michael, this dovetails with what you said in your Consumer Crunch story.

However, I'm still puzzled. If consumer spending has contributed so significantly to the economy, and if consumer spending is going to be be curtailed by tighter consumer credit and borrowing against home equity, won't the larger economy still suffer? Particularly those companies that depend on consumer sales?

Certainly, companies exporting to growing markets (such as emerging markets, assuming they continue to grow rapidly, and the cost of American exports remains competitive) are going to do better. As are the companies selling to _those_ companies.

But still, consumer spending has been such a large part of the economy that if it falls off, how can its effects be isolated from the periphery?

(It would help to know what portion of consumer spending leaves the US economy and travels overseas. You touched on this in your Consumer Crunch story. If it's a large enough chunk of every consumer dollar, then perhaps that will help insulate the periphery.)

Meanwhile, it's interesting to note that Jeremy Grantham (whose judgment I respect) is recommending cash ("the ugly answer that no one ever wants to hear") over securities. Which implies that he's none to sanguine about the periphery.

Mike Mandel

February 5, 2008 03:50 PM

Think healthcare and education. Government-funded, but officially show up in the consumer spending numbers.

Kunst

February 6, 2008 01:24 AM

The key fact is that Fed rate cuts aren't going to accomplish what they want. No matter how low the interest rates go, the fact is that there is little demand for credit now. People have reached the realization that they are overextended, and credit doesn't solve that problem. People are cutting back on spending, trying to get their cash flow positive, reduce or at least control debt, and if possible build up some reserves to protect against hard times ahead. None of this involves spending any more than necessary. That's death to our consume/spend/borrow economy, but it's rational. Getting back to economic sanity is like kicking heroin -- painful but necessary, and damn the secondary effects.

Mike Mandel

February 6, 2008 08:49 AM

Fed rate cuts will stop the financil system from falling apart, which is what the Fed really wants.

Pierre A

February 6, 2008 12:36 PM

As a non-resident American perhaps you can put the so called housing crises into perspective for me. Surely there must be a large percentage of Americans who own their houses outright or who have manageable mortgages, with the large drop in interest rates this group will be better off than before this crises. For long term owners changes in property values are not train smashes.

Mike Mandel

February 6, 2008 08:11 PM

Pierre...Not unless they have borrowed against the values of their homes..which many have.

The real issue is that the lenders are being traumatized (and even losing their jobs!) So they will be less willing to lend in the future.

Thank you for your interest. This blog is no longer active.

 

About

Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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