The US Credit Problem (Similar Signs Here in Singapore)

Fed Reserve Continuing Bailout
Fed Chief Bernanke Hints Further Rate Reduction May Be Needed to Head Off Economic 'Headwinds'

Mr Bernanke hinted that another cut may be needed to bolster economy. The credit crunch, housing slump and rising energy prices will cause further agony to consumers in the coming months. There were already two rate cuts this year and the coming Fed meeting on 11 Dec 07 may see a third cut. How much more can Fed cut it's short term rate to bail out the economy?

The cuts have helped in some ways, to contain the current housing and credit problem from collapsing, and the economy falling into a recession, but

As he mentioned, "The odds have grown that the country could enter a recession. A sharp cutback in consumer spending could send the economy into a tailspin". The deepened housing slump and consumer confidence has already caused them to reduce spending.
(source : http://biz.yahoo.com/ap/071130/bernanke.html)

The current credit problem are actually created over the years. Banks comes up with attractive loan packages (low interest in initial years) that sucks consumers to be oblivious of the consequence of later years where interest rates hiked hit these consumers hard.

With the sudden constrain, consumers turned to credit facilities to tide over but in fact, sinks further into the credit pit.


Credit Problem in The Brewing?
Coming back to Singapore, this problem was experienced through the Asian Crisis till post SARS (Severe Acute Respiratory Syndrome) period. Back in the late 90s, property prices hit sky high but nosedive through the triple economy impact faced here. Unemployment was high, wages were cutted to save jobs, etc. Bankrupcy was at an all time high.

As the situation worsen till 2003, many property owners are no longer able to hold onto their property thus flood the market though the demand was low. Such situations are hard to avoid when buyers are unrealistic during good times and forgetting that what goes up will come down.

Could we be seeing another such credit problem in Singapore? Turning the attention to cars. Many car buyers are attracted to the low COE (Certificate of Entitlement) and low car price (as compared to the high prices years ago). Some car buyers are actually not in the position to afford a car years ago, but with fallen COE and car prices, they are not able to marginally afford a car.

Such car buyers may turn to 10 years loan, with no down payment. This means, 100% loan over the full 10 years COE lifespan. Isn't this the same as US' sub-prime problem? Houses has the potential of appreciated value, but can the same theory be applied to cars? Unlikely! Yet why does these car buyers choose to delude themselves that they could afford a car with their miserable monthly $2,000 gross income?

With an efficient public transport system here in Singapore, is there really a need for cars? A car is an luxury item that is nice to have, but not need to have. But more often than not, I hear people saying they need a car, when they actually don't.


Remedy
I can only hope that such hard times don't come too soon. If people doesn't start realising the need to be prudent and practical, to know what they could truly afford, I am afraid such folly will be a painful lesson to them.

The education system has to undergo some change to educate people the economics of money.