The Greater Fool Theory

Implications: For years now, the Mortgage and Commercial Lending arena has been the subject of great debate as to whether sound credit decisions were being made. Now, finally, the proof of careless lending practices are coming to light: the question at hand is how will we deal with the fallout?

Analysis: Consumer loans, credit card/auto and mortgage alike, are now flush with a littany of problems, ranging from poor credit performance, to negative equity situations and high-LTV issues. Tiered credit risk cycles usually show deterioration in performance at the unsecured levels, then the secured levels (auto), to the ultimately secured-levels (home). Unfortunately, we are in a counter-intuitive cycle of credit performance due to the constant refinance of our revolving debt into our homes. As such, we have not truly experience a credit event to test the revolving-credit markets.

Typically, attrition for charge-offs in a credit card portfolio will take approximately 18- to 24-months: if this rule-of-thumb remains true, we will begin to see further deterioration in the credit card portfolios, and significant fallout with the aggregate FICO score-card systems for the average US consumer.

A credit cycles go, first Consumer, then Commercial: if so, there could be another credit-crunch for the Commercial markets in 2008.