Subprimes-Nervousness – Revenge of the poor or first sign of an upcoming doom?
The Subprime crisis is in the German Media after the German government together with the large German banks and a federation of smaller private banks have saved the German Bank IKB.
Why are the markets so nervous? Why does every little hint of vulnerability of a Financial Actor cause stock markets to plunge down into unkown depths? What is the real deal behind the Subprime crisis?
The Stern has tried to explain to its readers why the American Subprime Crisis is causing havoc on Stock Markets worldwide. Their story goes like this:
After the last stock market crash, interests went down, thus also loans for housing. This caused more loans being given to people who normally wouldn’t have received a loan. The banks who handed out the loans sold these “risks” on the capital market, being bought by Hedge Fonds and other actors who are interested in high returns and don’t mind a little volatility.
With the interests rising in the U.S. again, more and more Americans can not serve their credit lines anymore and especially the “faulty” loans can not be repaid. Which is a big problem for some because basically the risk from the “faulty” loans was just pushed further out into the market – the risk was not diminished completely, it was just moved to another level in the market (sort of like a revenge by the poor on the big players in the financial markets). And some hedge fonds now pay the price, they are the last ones to buy the “foul plum”
and have to eat it now. (Needless to say that this is the big day for some other financial actors who are just waiting to pick the diamonds out of the rubbish and sell them big once the crisis is over – just not many people now which ones are the diamonds.)
The German media is turning a little story over to keep average stock market buyers calm. For sure, with the Germans strong belief in public institutions, the collapse of some of these financial institutions would cause a domino-effect that would take down quite some other markets as well. Paradoxically despite the overall growth of the German economy, the fizzy-bizzy of the financial markets could turn things around easily.
In order to prevent all of this, we can hear from all sides that the German financial markets are mostly safe. Probably that’s true, maybe they all speculated a bit on the American mortgage market but the big banks have lots of other horses in the race. So even if all hell turns loose, it shouldn’t affect the German Financial Market very much.
The problem is that the story started off the wrong way. Not only interests went up in the U.S., but also prices for food (see for instance this report from USAToday) and other products of daily need. Why is that? Well, it’s the same reason why in Europe food prices go up: high costs of energy, strong demand from Asia, small yields from formerly big food producers like Australia. Also prices for gas went up, the price for a barrel of crude oil reached alarming heights. Again, demand from Asia helped getting the prices up.
The USA could adopt to a less energy-intensive lifestyle – but it is quite unlikely that they will. Or can. The American Trade deficit is enormous and China on the hand is hording large junks of American Bonds. That’s in fact the only reason why the U.S.-Dollar has not lost its strength completely, because all over the world investors into the US finance the consumption of Americans and keep the dollar up.
The half-hearted attempts to persuade the Chinese in weaking their currency are not very succesfull. For one, the US has smaller leverage against the Chinese than the Chinese have against the US. Secondly, only with a weak Chinese currency, American prices can be kept down. If the Dollar is devalued against the Renminbi, American consumers will have to pay a high price. And it is not sure that investors would continue to float into the Dollar, it is more likely that they will strengthen the Euro.
The underlying scenario is this: the American Market, no, the American consumers to be more specific, know very well that an era of foreign-financed American consumption is soon over, because China is not going to hord more Dollars, energy prices are not going to go down anytime soon, food prices are going to soar and in terms of productivity countries like India are getting closer to the US (not to speak of Europe).
And knowing this, Americans are slowly changing their consumption habits. They know that their lifestyle will change drastically in the next decade – and the markets react to this. Maybe the subprime crisis is just the first of many signgs of this change.
Januar 12th, 2009 at 09:40
At the time of financial crises we need to come together united and try to solve the problems which are responsible for such a hazard. We need to overcome it. It is meant to bring calm to the population and markets and display government strength and stability.