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Commentary :: International
The Subprime Tsunami Reaches the EU
01 Feb 2008
Subprime mortgage credits in the US should not have been issued. Nevertheless subprime credits were extended in the volume of $1.3 trillion. An avalanche of expropriation roars in the valley. Banks and funds try to socialize their losses. The banking crisis spills over into the credit system.

US Real Estate Crash. The international financial crisis will overshadow wage negotiations in Germany

By Elmar Altvater

[This article published in: Freitag 03, 1/18/2008 is translated from the German on the World Wide Web, Elmar Altvater is an emeritus professor of political science at the Otto-Suhr Institute of the Free University of Berlin.]

All prognoses about the economy in Germany are now made with a proviso. The effect of the international financial crisis cannot be foreseen. Far more real estate credits in the US will have to be paid back in 2008 than in 2007.

“Sub-prime” mortgage credits in the US should not have been issued. The incomes of borrowers were and are too low to pay back the credits when the interests climb. Nevertheless sub-prime credits were extended in the amount of around $1.3 trillion. Enormous money was made in this market. These “knights” “work without reserve capital or any capital and therefore operate entirely on money credit,” as Marx described the origin of a speculative bubble.

The “knights” of the 19th century are today hedge funds and big banks as well as the conduits founded by them for the purpose of real estate speculation. All set out “hunting for profits” on the mortgage market.

At first, the credit mechanism was orderly. As long as American homebuilders received mortgage credits, sufficient demand existed on the market to ensure the value enhancement of real estate. Rating agencies confirmed this, often without careful scrutiny and risk assessment. This was a great advantage for individual homeowners and the US economy. They received new credits on their real estate that was appraised higher and higher. With these credits, they could pay for their increasing consumer spending. The US middle class thrived.

Foreign countries also profited. The imports from China, Japan, Latin America and Germany soared. As a result, the deficits in the US balance of trade grew to over $800 billion in 2007 which was also reflected in enormous German export surpluses. These surpluses compensated for the weak domestic demand on account of stagnant real wages. The German export economy prospered.

Some countries – above all China and Japan – have amassed currency reserves with which they take over businesses in the US and elsewhere and help US banks out of the mess. For example, Citigroup received $14 billion in Chinese liquidity assistance. This provokes economic nationalists like the German Roland Koch who wants to protect the German economy from foreign state funds.

The 2007 sub-prime mortgage business went off course when real estate prices fell and new credits were expensive. In August 2007, 16 percent of mortgage credits in the US were ailing. This percentage may be even higher in 2008 since the variable interests for mortgage credits from 2005 and 2006 will be raised. This could drive many real estate debtors to ruin and threaten their houses since the real estate prices will fall even more than in 2007. The real estate assets estimated at more than $20 trillion (the US gross domestic product is approximately $13.5 trillion) may be lightened by more than four trillion dollars. This is an opportunity for vultures like the “real estate guru” Donald Trump who hunt for bargains in the mass forced sales.


Under these circumstances, banks had to write-off losses in the double-digit billions and included the risks of the wild sub-prime “hunt for profits.” Ben Bernanke, head of the US Federal Reserve, repeatedly warned of this while the Bush administration tries to prevent worse things with an interest-freeze.

The “KVV-business model” no longer functions in creating, confirming and selling credits. Earlier – as Bernanke raves about the “good old times” – the mortgage banks held loans in their balances. Today on the other hand, they bundle mortgage credits with the most different quality and safety and issue “structured” papers (“speculative vehicles”) whose quality is verified by rating agencies. Whoever acquired and bundled too much like the German IKB bank and the Saxony regional bank is now threatened with perishing in the “t6sunami of payment failures” (DIW).

This is no longer a “stock market game of bankocrats” (Marx). An avalanche of expropriation roars in the valley. Banks and funds are now trying to divest and socialize losses. The diverse methods of shifting the losses have a global range and go beyond the financial sector. The real economy and society are affected.

Therefore the World Economic Forum (WEF) has set “economic uncertainty" in the globalized world starting from the "core meltdown" in the US sub-prime market” at the top of the agenda of its annual meeting on January 23 in Davos. The WEF does not have much to offer except for a series of questions raised for years by critical observers of globalization and already answered in part.

The mammoth central banks have already answered the “open question” about the role of the central banks in “markets with many unregulated market participants.” After the private institutes had turned the credit tap, both the US Federal Reserve and the European Central Bank (EZB) leaped in the breach and pumped liquidity into the system. On December 19, 2007, the EZB injected 348.6 billion euro which reduced the stress without removing the cause of the crisis.

The sub-prime collapse is a banking crisis, not a liquidity crisis. Many banks are flush but unwilling to give away money. They distrust each other since they do not know what risks are hidden in the books. Therefore businesses that have nothing to do with the real estate sector have problems receiving credits. The banking crisis spills over into the credit system in the real economy.

On top of this, the losses of real estate owners and banks may lead to a consumption loss of $200 billion. The European Union will feel the demand collapse as well as exporters in Asia.


While the American Federal Reserve together with the Bush administration pursues a policy of lower interests, the European Central Bank keeps the interest rates high. This gap accelerates the devaluation of the dollar compared to the euro and other currencies so the US increases its exports and restricts imports since they become more expensive. The exporters of other countries keep the dollar price stable by lowering the costs and reducing the profit margins – or sending their currencies on a downward slide with the dollar and beginning a devaluation race with disastrous consequences.

The European Central Bank is in a quandary. Low interests and massive liquidity stabilize the financial system in the short term. Therefore the bank before Christmas 2007 provided a 350 billion euro liquidity injection. Capital rejoiced over a stock market high – despite the swelling sub-prime crisis, high oil- and gold prices and worsening export prospects in the US. The European Central Bank did not raise interest rates although the inflation was fueled with the liquidity injection. Price stability is important but the stability of the banking system is more important. The EZB has also reserved higher interests for the case that rising prices for energy and good justify higher wage contracts. EZB-head Jean-Claude Trichet wants to prevent this with regard to wage negotiations in Germany. The stability of the financial system, that is the profits of the financial actors, has precedence over stable mass incomes. In wage negotiations, the unions face employers, an economically-pious public opinion and harsh blows threatened by the EZB against wage-earners.

In other words, the sub-prime crisis has arrived in local wage negotiations. Globalization is above all an ideology and does not have much to do with reality.


“The US Will Experience Its Big Surprise”
“The End of Capitalism as We Know It”
“Dislocations and Crises”
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