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Commentary :: International
Is the Great Crash Imminent?
30 Aug 2007
Several US mortgage banks have gone bankrupt and their European creditors have written off hundreds of billions of euro as losses. Billions dissolve in thin air. Governments step into the breach when a collapse of the financial markets threatens.

The first speculative bubble bursts on the real estate market. The next bubbles will follow

By Michael R. Kratke

[This article published in: Freitag 33, 8/17/2007 is translated from the German on the World Wide Web,]

Such frequent announcements about what is now happening are unusual. For months pundits forecasted the great crash, the next world economic crisis. Remembrance of the stock market crisis when the New Economy passed from its high-altitude flight in October 2000 to a sudden downturn and destroyed billions of fictional capital in the shortest time has not faded away. Everyone knows or suspects the boom is driven by speculative bubbles. What the governing applaud is an upswing on credit and on a speculative basis. The last time the bubble went along with a wave of innovations in information- and communication technology. Not this time. Today’s economy is based on speculation with real estate, raw material prices and financial derivatives.

In February/March and again in May, the first harbingers of the impending dilemma appeared. Twice the stock exchanges in Asia dramatically fell but the turbulences seemed to ebb away. Since the end of July, everything looks different. This time a huge speculative real estate bubble burst. The US mortgage crisis strikes banks and financial markets in Europe and Asia. Fueled by the exploding trade with financial derivatives, the global trade with debts and credits has made real estate speculation into an international business. Banks and investment funds all over the world joined in and ignored the risks. What was feared for a long time has occurred. Many hedge funds speculated. And behold, we have the greatest international credit- and money market crisis.

When hedge funds worth billions go bust, those banks, insurances and investment funds are the fools that they financed. In the US, the famous Harvard University lost $700 million over night with such “money investments.” Several US mortgage banks have gone bankrupt – and their European creditors like Deutsche Bank, Commerce Bank, the French BNP-Parisbas and the Belgian-Dutch Fortis have written off hundreds of billions of euro as losses. Several big European banks have even closed because of massive losses in their hedge funds. Billions dissolve in thin air. The West German bank, the Saxony regional bank and a middle class bank like the German IKB risked and lost billions. The flight of investors followed the bankruptcy of funds. The panic leads to a worldwide decline of the exchange rates. All the great share indexes- Dow Jones, NASDAQ, Standard & Poor’s, DAX, Nikkei and so on – have lost massively, some more than three percent per stock market day.

Losses in the billions for banks and investment funds and the mass flight of investors have produced a classic credit crisis. The banks that had to refinance billions in credits week after week suddenly have problems in gaining credits and being accepted on the market. The money market jams. However the governments step into the breach when a collapse of the finance markets threatens. In a first concerted action, a small bank like the IKB could be saved from the crash. But a credit market crisis that goes beyond the world of finance markets requires bringing in the big guns. This must happen quickly. For the first time since September 2001, the European central bank massively intervened and pumped over 200 billion euro in the money market in a few days.

The fear of the great crash is stronger than the officially cultivated fear of inflation. The central banks of the US, Australia, Japan, Switzerland, Canada and other western countries reacted in a few days and put more than 500 billion euro in circulation.

Economists soothe people. The worst is past, the mortgage crisis is corrected, and the world economy is doing well. We only witness the bursting of a speculative bubble (amounting to ten trillion US dollars), not to mention the other speculative bubbles than recently formed. The next act in the drama around the new division of the world will certainly be staged between the capitalist nations – even if the intermezzo between the money-market and the world trade crises takes weeks or months. Still all “fundamental data” of the world economy point to over-capacities and over-production.
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