Again and again in these past few months, financial markets have appeared to be on the verge of something very scary. It happened first and most jarringly in February, when subprime-mortgage woes made headlines in the U.S. and a market crashlet in Shanghai sent global stocks into a swoon. Lately the scares have been smaller but more frequent: a sharp rise in interest rates in May, runs on a couple of hedge funds in June, a sudden drop in demand for risky mortgage and corporate debt in July.
During each of these episodes, the financial pages filled with fret: Would this be the moment when markets turned south, when credit dried up, when hedge-fund managers and private-equity partners started applying for work at Wal-Mart?
Then markets calmed, the Dow cracked 14,000, and the world got back to business. Don’t count on that happening forever–today’s jitters do probably presage something worse. “Rather like a brontosaurus that has been bitten on the tail and most of the body hasn’t noticed it yet, the signal is working its way up the vertebrae,” says Jeremy Grantham, chairman of Boston money manager GMO. But even the bearish Grantham doesn’t see the reckoning coming tomorrow or even necessarily next year. And in the meantime, something with far more impact on most Americans’ lives than a stock-market correction has already happened.
That something is the close of a remarkable era of easy money. Cheap credit helped fuel the stock bubble at the end of the past millennium and almost entirely fueled the real estate boom of the first years of this millennium. It kept us spending through the tough years that followed the stock market’s collapse, and it allowed the Bush Administration to finance big budget deficits without strain. Easy money also helped enable the rise of private equity as a major economic force.
Now, though, it’s history. With each new market minipanic this year, interest rates have gone up a tad, lending standards have gotten a little tighter, and the easy-money era has receded further. Rates are still low by historic standards, and some kinds of loans are still cheaper than they were last summer. But the economy was growing at more than 3% then. This year it has sputtered. Interest rates are supposed to sink when that happens. They haven’t. Read more.
I’m not making any kind of financial Armageddon argument here. To a large extent this is a healthy development, indicative of a world economy on much stronger footing than it was in the late 1990s and early 2000s. But it’s definitely different.