I believe we are witnessing a belated “re-pricing” of risk in financial markets that is entering a new stage where there is a “spillover” toward the set of asset classes and global investors worldwide. Evidently, the fall of the US real estate market will deepen and thus affect growth.
Defaults on low-quality mortgage loans are being largely absorbed by financial institutions; therefore, the effect on aggregate demand will depend on how they requirements for new loans are being adjusted. The Fed will react more aggressively only if the phenomenon goes beyond an expected (and even welcome) “correction” of financial asset prices and becomes a credit crunch threatening economic stability.