Daniel Steinmann
4 July 2008
opinion
Windhoek — Do not believe analysts who claim the worst of the world's financial crisis is over. It is not. The worst is yet to come. I get the impression those analytical reports that say we can now take a breather say so only because they don't know the full extent of the damage. The only aspect where I more or less agree with them is in acknowledging the fact that the losses are so big, we'll only know towards the end of the year really how much.
There is a striking similarity between the financial crunch and Zimbabwe. With both, we hoped it will be over soon, but with both we have misjudged the size and scope of the calamity. Furthermore, with both we seem to be unable to solve it, and as we move along, both tend to grow in severity. The only difference is that the Zimbabwean crisis can be solved with the removal of one man while the financial crisis probably needs the removal of half of the human population.
But back to the bubble. In 2002 I started criticizing Mr Allan Greenspan's easy money policy while market pundits lauded it. Most and loudest praise came from those speculators who made good profits in Fanny Mae type stocks. Why? Because the American consumers did not use the lower interest rates to save, but to refinance, especially their home loans. This put thousands of dollars in the pockets of millions of Americans, and they spent it. Meanwhile, as a result of supplying the insatiable US appetite for cheap consumer goods manufactured in China, a second bubble developed - this time, on the opposite side of the globe, where the prosperity was quickly forming a Chinese middle class.
This gave us another new economic concept, the so-called unbundling. This simply refers to the ability of emerging markets to sustain their growth from their own domestic demand, independent of what the developed economies require. This notion has died a silent death as brighter economists start comparing numbers and find that all the noveau riche in all the emerging markets put together, fail to make up 10% of the world's consumer spending. I mean, how many Ferraris do you see in a Chinese movie? Compare that to how often and how many Ferraris there are in a typical Hollywood movie.
In a reverse way, the same applies to the deflation of an asset bubble. Greenspan's money has created the biggest asset bubble in history. But very little of the money went into improving homes or savings, no, it went into an improved lifestyle and into Las Vegas banks where casino owners are saving it.
Meanwhile, as their own homes reduced in value, American homeowners started defaulting on their loans, finding themselves in the predicament that they could not sell as this would mean a bigger loss. This lead to a downgrading of the value of stocks in mortgage companies, in turn leading to the downgrading of many of the debt stocks exchanged by investment banks. These debt-based instruments are a very important part of their balance sheets, so when their value decreased, so did the banks' balance sheets. Default followed default, and the rest is history. That part we know. The part we don't know is the scariest part.
How many more American homeowners will find themselves in trouble with their mortgages over the next six months? Given the exponential rises in food and fuel, how many more families will also be affected by this? And then when the phenomenon really becomes contagious and the credit of the other developed economies is also affected: How long before it turns into a line of dominoes?
In August this year, it will be one year since the troubles started. Elsewhere in this edition is an article by Dr Kavari, which gives, in a nutshell, a summary of the credit losses we know so far. Read it, it may save you in future by avoiding the same mistake or by accepting more credit from your local bank when you know you cannot afford it. Or worse, when you do not know how long you will be able to afford it.
And that is the problem with trying to determine the bottom of the trough of the end of the credit crisis. One simply does not know when and how far. Once it hits a household, it is already too late and there does not exist a single economic model that can predict the combined effect of the gradual, but persistent, default rate of private homeowners.
We simply do not know when it will turn or end. Economists cannot help us. Philosophy is perhaps a better call but it only states what we know already - the fact that we don't know, and that possibly, our ethics and our social values are wrong. The more people there are that want more things, the quicker we are going to get to the end of the road because mother earth contains only so much.
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