大象传媒

Prompts v causes

• Evan Davis | Stars and strife |
• 28 Nov 07, 10:22 AM

I spoke to a second-hand car dealer today. A nice chap called Mike Navidi out in Arlington, just close to Washington DC.

Apart from enjoying the chance to be simply amazed at how cheap his cars are ($12,000 for a neat-looking Mustang on the forecourt) I wanted to know how easily were finding it to get car loans.

I was a bit surprised to hear that he still writes loans all the time, even for sub-prime customers, and that they rarely get turned down.

That could be seen as reassuring.

The great worry at the moment is that the credit crunch in the financial sector will lead to real economic problems as banks stop lending anymore. (That's what I was talking about in the blog yesterday in fact).

But my car dealer implied that's not been affecting him. It's not the credit crunch constraining credit.

So surprised was I, that I spoke to a second second-hand car dealer to get another opinion. He told me the same thing. He said you wouldn't get a sub-prime mortgage now, but you can still get a sub-prime car loan.

However, Mike Navidi was adamant about something... that even though credit was available, he's not selling so many cars. Not because people can't get loans, but because they don't want them.

This might turn out to be important. It might be that the credit crunch is not pulling the economy down by reigning in the supply of credit; it could be that it is simply the trigger to remind consumers that they need to reign in the demand for credit. After all, their balance sheets have suffered in the wake of housing market falls.

In this sense, one might view the credit crunch not so much as causing the problems, but as prompting them. A subtle distinction, I know, but an important one all the same.

A "prompt" launches something that you might have expected to occur anyway at some point.

A "cause" brings something about that would not have otherwise happened.

I'm not sure whether the credit crunch will turn out to cause problems or prompt them. It's worth us being wary of both, and it is possible it can cause and prompt at the same time.

But I'm perhaps increasingly thinking that the credit crunch has activated a big economic shift that was already waiting to happen, as unsustainable economic trends unravelled.

That has an interesting implication: we shouldn't just focus on the credit crunch, we should also look at the economic fundamentals.

And it also implies that although the credit crunch itself was not really predictable, all the big things apart from the credit crunch that are going on right now, could have been foreseen.

• Falling house prices in the US

• A falling dollar, leading to an improving trade balance

• Potentially slower consumer spending in the US

• Higher than expected sub-prime mortgage defaults

Just because we didn't know what form the crisis would take when the economy moved out of its unsustainable phase of low consumer saving and trade imbalances, does not mean we couldn't have known there would be big adjustments.

Being interested in why the world has apparently been taken by surprise at a turn of events that were to some extent inevitable, I asked the chief economist of the International Monetary Fund today, Simon Johnson, what he thought.

Of course he rightly made the point that no-one predicted the intensity of the credit crunch.

But he also made the point that there are lots of pieces of the crisis that you could have predicted individually, like the falling dollar, or falling house prices, or high oil prices, but not the confluence of different things that are going on simultaneously. (You should be able to hear part of that interview on Radio 4's PM programme, on Wednesday evening at 5pm).

For example, Mr Johnson argues that you might have predicted high oil prices, but not at the same time as a housing market correction. It's unusual to have a US recession threat preceding an oil price hike.

He might be right on these points. But the truth remains that when big economic shifts occur they sometimes tend to be a bit messy. And when things get messy, everything tends to get messy at the same time. Things that look unrelated, like the value of the dollar and the direction of house prices, suddenly seem related after all.

We probably ought to have known that.

We can be forgiven for not forecasting the time and the precise trigger for economic adjustment. We can't be forgiven for not realising that adjustment had to come.

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