World Economy: Wait for the day of no hope - by Robert Gottliebsen
The big stock market fall in Europe tells us that monoline insurance is as big, if not bigger, than sub-prime. Worse still, it will eat into the heart of European banks and institutions who were handed huge surplus money piles by the middle eastern countries that did not want to invest in US dollars directly. Accordingly, the European banks invested much of this money in 'AAA' American securities, as determined by the rating agencies, which relied on monoline insurance company guarantees that are now not worth the paper they were written on. I suspect European banks will represent a significant slice of the $US2,300 billion in the now non-guaranteed loans, many of which will be bad. In the UK, again encouraged by the big middle eastern deposits, banks and institutions have financed an incredible splurge in office building without tenants locked in. These buildings will cause huge losses, so the banks face a double blow.
Fear of the unknown is engulfing the world. The US sub-prime crisis has been joined by the global monoline insurance disaster which may be even bigger. The two are, of course, linked, because monoline insurers guaranteed sub-prime debt. Worse still we have the head central banker in the world’s biggest economy with his head firmly in the sand. Ben Bernanke made the foolish claim over the weekend that there would be no US recession, and did not even mention the monoline insurance disaster. It would have been far more reassuring to the market if he had told the truth and admitted a recession was a likelihood and recognized the impact and dangers of the twin disasters.
The current world problems arise
ReplyDeletedirectly from 2001 when the Fed
decided to protect over-priced
US stocks. They used 9/11 as a
guise for the real reason for the
decline in stock prices - they
were simply PE-wise overpriced.
The resulting low interest rates
resulted in a predictable housing
boom. The unknown factor was the
extent of the sub-prime mess.
Their cure is still the same -
lower interest rates. What is
needed is an adjustment of asset
values, and that will result in a
recession. Failure to recognise
this will prolong the cure and
result in continuing uncertainty
and erosion of the USD and
worldwide instability.