One line of reasoning suggests that business cycles are really credit worthiness cycles. That in good times ever more shaky borrowers are allowed access to credit. At some point the credit bubble pops, lending standards rise dramatically and the economy slides into recession.
Looking at the above picture on subprime delinquencies are we seeing just that. A sharp decline in delquinacies in 2003 as the recovery took hold and then a big increase in 2006 -2007 as the economy begins to slide back towards recession.
Of course the other explanation is that economic conditions are driving the delinquencies but then how do you explain that they seem to lead the job market? For example, jobs were still soft in 2003 when delinquencies were low and the market is just now softening though delinquencies have risen.
Thursday, October 18, 2007
Posted by Karl Smith at 11:32 AM