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US Crisis Sends Europe's Housing Market into Free Fall

Investor George Soros sees the worst economic crisis since the Second World War as consequences of heavy debts and the credit crunch. Speculative greed for profits and myopic contempt for whistle-blowers led to the banking crisis. Will there be system correction or cosmetics?

By Meinrad Ballmer

[This article published in: Sonntagszeitung, 2/1/2008 is translated from the German on the World Wide Web,  http://www.sonntagszeitung.ch/.]

At the end of January 2008, the US Federal Reserve (Fed) rushed to help the ailing crisis-laden financial system since the stock markets were in free fall. Fed chief Ben Bernanke announced a key interest reduction of 0.75 percent - the most massive lowering of interest rates since 1982.

The surprising emergency assistance came only a week before the regular meeting of the group. The next enormous lowering of the interest rate will occur according to the will of Wall Street.

The bond prices in the last days show what investors expect with another interest reduction of 0.75 percent. The markets signal that the American economy is in a serious crisis. The house is on fire. As the fire department, the Federal Reserve is expected to put out the fire with the cash injection.


The New York economics professor Nouriel Roubini predicts a grave recession for the US beginning in the first quarter of 2008 and lasting at least all of 2008. "This recession will lead to massive losses of assets intensifying the liquidity- and credit crisis."

Fundamental problems stand behind the crisis. For an epoch - since 1980 - Americans became quickly richer. The assets and debts of American households grew much faster than the gross domestic product, the economic output of the country. Less and less was saved. In the last years, the savings rate was even negative. US households have net debts.

American families became increasingly prosperous because property prices - above all home prices - continuously rose. This development is not sustainable. In the long term, the prosperity of households cannot rise more quickly than the output of the national economy. The bursting of the real estate bubble now announces a turn of the times.

For many years, the assets of Americans will increase less rapidly than the gross domestic product of the country, predicts Horace Woody Brook, the founder of the American think tank Strategic Economic Decisions at the capital investor meeting of the ZfU economic institute in Regensdorf. Massively indebted US households now actually see their assets melting away since home prices are falling. New credits are harder and harder to get from the banks since the financial system is in a terribly tight spot.

Like dominos, different classes of credits threaten to become shaky in the near future. After the sub-prime mortgages, the home credits for debtors of low creditworthiness, certain loans are now also losing value because some bond insurers are ailing.

Losses in credit card debts and auto-credits also threaten the banks. Individual financial institutions could lose all their capital through the losses in credits and credit papers. The credit crisis increasingly takes away possibilities from financial institutions as creditors since the credits must always be partly covered with their own capital. "The credit crunch intensifies and prolongs the imminent recession," professor Roubini says.

Obtaining credits is becoming increasingly difficult for households and firms. Prospects for higher incomes are also poor since the financial sector along with car companies and retail trade are forced to cut jobs.

Falling property values and an uncertain future will force US consumers to tighten their belts and save in the near future. The US is experiencing a recession for the first time in many years triggered by declining consumer spending.

Consumer spending amounts to over two-thirds of the US gross domestic product. The first signs of a decline in consumer spending cannot be ignored. Many department store chains like Macys for example have started closing stores. Altogether 50 million square feet of department store space in the US are now empty.

Investor George Soros sees the worst economic crisis since the Second World War as the aftermath of heavy debts and the credit crunch. The recession in the US, the largest national economy of the world, will affect the rest of the world directly and indirectly through the trading streams.

The hope for uncoupling from the US is an illusion. With a delay, the development in the US also impacts Europe. Several European national economies face similar developments as in the US. There are also real estate bubbles threatening to burst in Great Britain, Spain, Ireland and certain regions of France. The risk of a recession exists in Italy, Portugal and Greece, Roubini says.

Experts like property manager Felix Zulauf who predicted the stock crash of 1987 now expect a new massive reduction of capital market interests to a crisis level. The bond markets also expect tremendously lower interests in Europe. In contrast to the solemn declarations of the European Central Bank (ECB), the expectation of a half-percent lower interest by the ECB is already clear in the bond prices today.

The markets signal that investors do not believe that the economic downturn of the US will pass by Europe without a trace. Obviously the financial markets do not believe that the US Federal Reserve or the US government can avert a sharp recession in the United States. The most frequent commentary on the measures is: "too little, too late."

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