System Shock?

According to an article in the Guardian, the Financial Services Authority has issued a warning to the city (I’m guessing London, but I couldn’t tell) regarding the economic impact of three areas of concern – any one of these could trigger what it calls a “shock to the financial system:”

• A Flu Pandemic
• Consumer Debt
• Change in the Way the Markets Price Risk

Ms Carlson quoted Franklin D Roosevelt, saying: “The time to repair a leaky roof is when the sun is shining.”

The FSA highlighted nine priority risks, in particular the possibility that a “significant minority” of customers could experience financial problems because of their high level of borrowing. The FSA has found 34% of consumers are having difficulty paying their bills. Many of them live in rented accommodation but the FSA notes that if house prices were to fall, homeowners would no longer be able to use equity in their homes to refinance other debts.

Ms Carlson admitted the regulator had been “rather surprised” by the rise in bankruptcies and individual voluntary arrangements given low interest rates.

“Even at low interest rates people are struggling,” said Lyndon Nelson, head of risk at the FSA.

Fascinating stuff…this is geared toward the economy in the UK, but is it that different over on this side of the pond? What would happen if there was even a modest rise in interest rates and people were unable to comply with even minimum payments on their debt? It just validates the decision my wife and I made to get rid of this enormous burden.

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