Diary

What's that sound?

Over the last week or two, the credit crises which first hit the United States has made its way across the pond. And suddenly, European politicians who were only recently chortling over American discomfort are finding themselves trapped in much the same sort of conundrum: declining prices, plummeting stock markets, the absence of business credit, and a contracting economy. And things may get even worse in Europe than they will in America. The UK Telegraph has this to say:

The $700 billion Paulson rescue plan should put a floor under the colossal dung heap known as “structured credit”. It is a bad plan, since it does not target the money on the recapitalisation of the core banking system. But it will help refloat lenders by raising the price of beaten-down securities somewhere nearer their true “hold-to-maturity” worth.

An ugly recession is coming, as debt leverage kicks into reverse. The purge will be slow and punishing. Some 12 million Americans are already trapped in negative equity, but at least they can see where this might end. After much drama, the US institutions have risen to the challenge. The Fed, the Treasury, and Congress have managed to take some sort of coherent action. The jury is out on Europe, where the hurricane is now smashing the banking system.

Those such as German finance minister Peer Steinbruck – who thought the sub?prime crisis was just an “American problem” – have had a rude shock. The collapse of Hypo Real with €400 billion of liabilities has made him face the unsettling truth that German banks have played a big part in this $10 trillion speculative venture undertaken by the whole global banking industry. So, what’s that sound we’re hearing? It’s the sound of crap hitting the fan, globally. A lot like this, only bigger: