Raise the Hammer
Will the bursting of the US housing bubble bring down the economy?
After the US government bailed out the entire nation of Mexico in 1994 (Mexico effectively tried to default on its debts by formally devaluing the peso, which would have ruined several US banks), anything's possible.
The mortgage crisis has exposed a real vulnerability on Wall Street, because the banks packaged blocks of mortgages (including risky mortgages to subprime or otherwise overextended borrowers) and sold them as securities to investment firms, which in turn multiplied their profits severalfold through derivitives schemes.
That means the economic risk is actually significantly higher than the value of the mortgages at risk of default, and it inheres as much or even more in investment firms like Goldman Sachs and as in banks.
The House Financial Services Committee is currently holding hearings on the matter. It's in the interests of all the players - borrowers, banks, and investment firms - to prevent a wave of foreclosures, so the result will probably be something like what the US gave to Mexico: cash transfers (to the rich players, not the poor debtors), renegotiated terms, easier interest rates, and so on to keep those borrowers barely solvent and making payments for a few more years.
They'll probably get away with it, avoiding a short-term crisis but costing overextended borrowers more long-term hardship. It might even bring the US housing market into the clear.
A year or two ago I wouldn't have believed it was possible to recover from the biggest financial bubble in history, but too many powerful people have too much to lose in this brouhaha to let the bottom fall out.
However, salvaging the real estate bubble, like salvaging the dot com bubble before it, is kind of the macroeconomic equivalent of pushing down on badly applied wallpaper. The bubble will simply pop up somewhere else down the road.
With the US economy on such shaky foundations, OPEC countries starting to abandon the petrodollar system, and global oil production sliding into decline, loss of confidence in the dollar and the threat of hyperinflation will constrain the the government's capacity to spend its way out of the next crisis.
By Mats (anonymous) | Posted April 18, 2007 at 05:14:11
The GCC will launch its common currency named the “Gulf Dinar” soon and the monetary union will be in effect as of 2010. Allready rumours are spread of a Gulf Petroleum Exchange that will trade oil in the Gulf Dinar. This will lead to a loss of the grip on the oil trade for the US and that the dollar will lose its power. When you read news like this it is time to worry:
Gulf oil bourse to open soon
The Gulf Petroleum Exchange will begin operating in the near future, said the Saudi Oil Minister Ali Naimi after a meeting of the GCC sunday.
Ali Naimi said Saudi Arabia and the Gulf Cooperation Council have decided to establish a Gulf Dinar based oil exchange on the Persian Gulf in Dubai, UAE, because “there was no such oil trading body in the region.”
“The GPEX could help many countries transact petroleum under more favorable conditions,” he said.
He did not say exactly when the GPEX oil bourse would open.
The official also said that senior officials from the Oil Ministry and the Gulf Cooperation Council will meet with members of the GCC Energy Commission in the near future to discuss issues related to making the groundbreaking project operational.
Naimi said the Saudi Oil Ministry and a number of other GCC bodies have made large investments in the project.
The oil bourse would transact petroleum, petrochemicals and gas in various non-dollar currencies, primarily the Gulf Dinar. It would also establish a Gulf Dinar based pricing mechanism for oil trading, or oil marker as it is called by traders.
The three current oil markers are all US-dollar denominated.
The two major oil bourses are the New York Mercantile Exchange (NYMEX) in New York City and the International Petroleum Exchange (IPE) in London. The Gulf Petroleum Exchange (GPEX) in Dubai would establish a fourth oil marker, denominated by the Gulf Dinar.
By Neville Parker 1 April 2007
Khaleej Times
By David (anonymous) | Posted April 26, 2007 at 03:05:37
I just read where the US now wishes to talk with Iran, and may even agree to allow some of their nuclear program. I'm wondering if this is because the whole ME now seems interested in Nuclear power, and also that with Iran selling oil in other currencies, and now the Saudis themselves going for oil in other than Dollars, abandonment of the Dollar is becoming a world effort - certainly the US can't bomb everyone into submission. If the US tampers with this process, they will now be tipping their hand to their real motives. The US public seems totally unaware, especially that the word "Petrodollar" appears to be banished totally from any use in Stateside newscasts - the concept is a virtual secret in the US.
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