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Commentary :: International
Global Casino Capitalism
05 Mar 2008
What began with cheap money for American homebuyers has expanded to the greatest financial market crisis since the war. The whole extent of bad credits with banks is not yet known, let alone the effects on the world economy. $500 billion worldwide may have dissolved in thin air.

$500 Billion in Write-Offs. Honest Regional Banks Sit on Toxic Waste

By Helmut Schneider

[This article published in: Sudwestaktiv, 2/8/2008 is translated from the German on the World Wide Web, In the banking section of Frankfurt, no one knows the extent of the crisis spilling over from the US.]

What began with cheap money for American home buyers has expanded to the greatest financial market crisis since the war. The whole extent of bad credits with banks is not yet known, let alone the effects on the world economy.

Interest in the data of the Deutsche Bank was greater than ever when its head Josef Ackermann announced yesterday that Germany’s largest bank could make record profits despite the worldwide financial market mess. These days bank balances are only anxiously examined whether they confirm or placate the fear of economic collapse. The earthquake on the financial markets has reached historical dimensions.

- The Trigger: To the attacks of September 11, 2001 in New York, America reacted with a policy of cheap money to prevent a collapse of the economy. The former head of the Federal Reserve Alan Greenspan lowered the already trifling interest rate to one percent. Credits almost free of charge made possible the dream of their own home for hundreds of thousands – even without their own capital – on the assumption that the real estate would increase in value and provide security to the money-lending banks. US housing prices doubled in a short time. The system functioned to everyone’s advantage.

- The Interconnection: Without a new financial innovation, the violation of the classical mortgage rule that borrowers should be solvent would not have led to the worldwide shock of the branches. Risky so-called “sub-prime credits” were bundled into enormous packages traded on the stock exchanges. Financial professions thought the risk with insolvent debtors would diminish by bundling them with less risky securities. The “sub-prime” business was the game of billions in the investment branch. Ultimately high profits for cheap money were enticing. Later the term “casino capitalism” was coined.

- The Grasshoppers: Owing to the interconnection, no one evaluated the substance of the new financial commodities any more. The investment bankers lacked an overview on the very complex, dynamic and open system they created. The control authority also broke down in the complexity. The rating agencies that judge the creditworthiness of banks often only rely on the banks’ data.

- The Collapse: For a long time, there were warnings of the real estate bubble. The house of cards collapsed after the building boom led to an oversupply in living space forcing down prices. The customers buoyant with favorable initial credits now faced their money lenders without the security of more valuable assets and had to pay higher interests. That brought them and their financial backers to the edge of ruin. The first US mortgage banks capsized.

- The Chain Reaction: What happened overseas was registered in Germany in connection with the IKB and Saxony LB regional banks. Honest banks turned the big wheel and transferred their money to investments that promised greater profits. They were in the best society. If globalization is nearly boundless anywhere, it is in the capital markets.

A quarter of the cosmetic packaging of the US real estate market spilled over to Europe and is now stored as toxic waste in the balance sheets of the best banks. Its decontamination is called value correction or writing off and has not ended.

According to the latest estimates, $500 billion worldwide may have dissolved in thin air. Insurance companies that must answer for credit losses of the big banks are infected, not only the best banks.

- The Rescuing Action: What began as a mortgage crisis in the United States has grown into the greatest crisis of the global financial system. One big bank in England had to be rescued from bankruptcy by the state. In Germany, the forced sale of Saxony LB regional bank to the Baden-Wurttemberg regional bank and the rehabilitation of the ailing West LB regional bank will ultimately be paid by the taxpayers. The US has already reacted with state interventions in the market. Lower interests and an economic program of $145 billion should drive away fear of a recession and regain trust.

- The Consequences: More than global money streams are involved. The real commodity- and labor markets are already affected. The big question is how far the financial crises will grow into an economic crisis. The economic control circuits are multilayered.

Banks give less and credits are more expensive. The consumption of consumers and investments of businesses fall. Jobs are lost forcing down consumption and growth. The stock exchanges, seismographs for economic tremors, have already been enormously shaken. No one can predict what tomorrow will be like.

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