U.S. Economic Problems Have Worldwide Effect

The high default rate among U.S. homeowners is not simply a domestic problem. There are distinct indications the housing crisis is also having an impact on world financial markets.

Markets in Frankfurt and Tokyo have been jolted by news of the severity of the U.S. housing slump. As a result, housing prices in America could decline further, worsening the crisis. In addition, because of a decrease in the value of investments, American consumers may be led to spend less on both domestic and imported items.

As one economist noted, the declines in world stock markets could result in a significant decrease in consumer wealth, which could also have an effect on spending.
Americans who hold mutual funds may see a noticeable decline in the value of their funds. It's unclear at the present time whether the decrease is a passing fad or a long-term trend.

The volatility in the markets makes it more difficult for both businesses and individual consumers to obtain both loans and cash. If businesses are unable to obtain loans, they may have to cut expenses through layoffs.

The situation is reminiscent of what occurred in the 1980s, when hundreds of savings and loan institutions folded. However, thanks to a U.S. government bail out, the savings and loan crisis did not have a worldwide impact.

In the 21st century, however, globalization has changed the face of financial markets, meaning that financial sectors around the globe are more interdependent than they used to be. This means that what goes on in American households can have a negative impact on businesses and financial institutions on foreign shores.
Experts are now predicting that the U.S. housing market could experience a turnaround in 2008. However, that will be too late for many homeowners who have already been forced to give up their homes in the wake of spikes in the rates on their adjustable rate mortgages.