COMMENT: The market needs to be corrected

3:28pm Tuesday 15th April 2008

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INTEREST rates fell to five per cent on Thursday in the latest attempt by the Monetary Policy Committee to stimulate the economy and stave off a recession.

Several doom mongers have appeared in the national press recently talking about full blown depression and severe economic downturn, but I'm more inclined to believe that we are experiencing a market correction that had to happen and was virtually inevitable.

The insatiable hunger for credit that has developed in the Western World has, in my view, grown to dangerous levels. My dad is always telling me how, when "he were a lad" credit cards didn't exist and you couldn't get a mortgage without a three hour personal interview with your bank manager. He also regularly comes out with the classic line "If you can't afford it, don't buy it".

This may be a little extreme these days - money is still what makes the world go round, the economic world at least. Business is driven by it, which in turn creates jobs and wealth. We don't want to move into a situation where debt is impossible to get, but we do need to analyse the risks more carefully.

Taking out mortgages of five or six times your annual salary, that suck up half your pay packet in interest every month, is a fairly risky strategy and many people will find that out to their cost this year when they try to remortgage.

Businesses will also need to halt their love affair with debt, particularly private equity houses which went into a frenzy prior to the credit crunch, buying up any decent business they could lay their hands on with the aid of cheap debt.

This correction will give businesses and individuals a chance to draw breath and reflect on how their finances operate, it will bring house prices back down to more realistic levels and, in the long term, put the UK and world economy into a much better position.