American economy teeters on brink
The rest of the world may not know who, or what, Fannie Mae and Freddie Mac are, but Americans do. They are the financial institutions that guarantee 60 percent of the U.S. home loan market. Both are on the edge of meltdown.
The U.S. Federal Reserve Bank
They are also the leading players in a top-tier of lenders that control $11 trillion of mortgage lending. A collapse would trigger a catastrophe of unprecedented proportions across the world’s largest economy with swift knock-on effects around the globe.
What is emerging now is the greatest financial crisis since the Great Depression in the 1930s. If America’s huge mortage banks are no longer rock solid, nothing is safe anymore.
The Fed is pulling every string available to it to neutralize the toxic effects of the subprime disaster. It’s predicted to lower rates by another 75 basis points within days, and is now offering Treasury bonds in exchange for mortgage debt. By soaking up some of the poison, the central bank is temporarily providing a shoulder to lean on for jumpy bankers whose world is disintegrating around them.
Like the British mortgage bank, Northern Rock, Freddie and Fannie may have to be nationalized — or their dubious collateral underwritten by government agencies — to shore up the economy against plunging over the edge. And Bear Stearns is in serious trouble too.
All this makes the UK Chancellor of the Exchequer’s budget today rather small beer. And that’s just what we expect — taxes on beer and faux “green” measures to raise a little cash here and there.
The real action is in Washingtom, where the Fed is leading the charge against a U.S.-generated global meltdown of potentially epic proportions.
Bernard Connolly, Global Strategist at Banque AIG, believes Fed action won’t solve the problem of eroded of bank capital. “There is the risk of a very damaging credit contraction. We face the most serious global crisis since the Great Depression. But this time at least the North American central banks are doing their best to stop it spreading to the real economy. We should be thankful that we have people in charge who appreciate the gravity of the situation.”
True enough, but the “perfect storm” is gathering perfection by the hour.
After our specialist retail information site (corporate subscriptions only) gets underway soon, we will start to set up a similar project in the real estate sector — first in Britain, then the U.S.
