THE SUBPRIME TSUNAMI REACHES THE EUROPEAN UNION
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,
http://www.freitag.de/2008/03/08030501.php. 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.
STOCK MARKET GAMES OF BANKOCRATS
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.
EUROPEAN CENTRAL BANK IN A QUANDRY
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.
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