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August 29, 2007

What spooked the stock market?

The stock market has been up big one day but down big the next. Just what's causing all the volatility? Economist Mike Walden weighs in.

"That's the big question today ... and I think that experts say that the cause is centered in the financial market, particularly over companies that have high-risk mortgage loans," says Dr. Walden, a professor of agricultural and resource economics at N.C. State University.

"What has really set the table for this is that, for a number of the recent years, we've had a situation where interest rates are very low, there's available money, and rising home prices have made lenders want to push the envelope, if you will, in making loans to homebuyers," he adds. "Now, many people say, the chickens have come home to roost, because house prices have stalled, interest rates on many of these loans now have gone up, and as a result we have seen an increase in delinquencies and bankruptcies -- certainly not on all home loans, but on a significant percentage.

"And the stock market, I think, is just coming to realize the extent of this problem. On the other hand, the economic fundamentals of the economy remain very good. So I think the seesaw nature that we've seen in the stock market is really reflecting these two issue: On the one hand, the bad news coming out of the financial markets, when that dominates the market goes down. On the other hand, the relatively good news coming out of the broader economy, when the market focuses there the market goes up.

"This is a constant tug of war, and we have yet to see which side will win."

Posted by deeshore at August 29, 2007 09:37 AM