From US subprime mortgage crisis to European sovereign debt crisis – Part 1

30 May 2010

We have seen the globalisation of trade, the globalisation of investment, the globalisation of the production and consumption functions. We have been told that these globalisations were good for all nations, rich and poor alike.

Now we are experiencing the reality of globalisation. We have already seen the globalisation in exploitation of cheep labour, cultural invasion targeting vicious marketing agenda of multinational business giants, pollutions and food contamination.

Ironically, we are now witnessing the collapse of capitalism in its very home; USA and Western Europe.

The US subprime mortgage crisis
The current global financial crisis began with the bursting of the United States housing bubble and the consequent high default rates on "subprime" and adjustable rate mortgages (ARM). What are the ''subprime mortgages''? They are the products of ingenious and reckless bankers.

Many financial institutions had made enormous investments based on the expected continuation of housing price appreciation. As housing prices declined, the value of the mortgage-backed securities (MBS) representing these investments declined and became uncertain. Due to financial leverage, what had magnified profits during the housing boom period now drove large losses after the bust.

Financial institutions and investors holding MBS suffered significant losses as a result of widespread and increasing mortgage payment defaults or mortgage asset devaluation beginning in 2007 onward. The MBS crisis caused panic in financial markets and encouraged investors to take their money out of risky mortgage bonds and shaky equities. This has triggered a global financial crisis through 2007 and 2008.

The consequences of the US subprime mortgage crisis
Initially the companies affected by the crisis were those directly related to home construction and mortgage lending, and financial institutions which had engaged in securitization of mortgages.

On Sunday, September 14, 2008, it was announced that Lehman Brothers would file for bankruptcy after the administration had refused any bailout package. At the same time, the sale of Merrill Lynch to Bank of America precipitated dramatic drops in market values on Monday, September 15, and Wednesday, September 17.

The US Federal Reserve stepped in to prevent the company's collapse and announced the creation of a credit facility of up to US$85. On September 26, Washington Mutual, the largest savings and loan in the United States, filed for voluntary bankruptcy.

Bailout of failed American Banks
A plan, known as Paulson plan from the Treasury Secretary Henry Paulson, was floated on September 19 giving the United States Secretary of the Treasury US$700 billion of entirely borrowed funds with which to purchase distressed assets (''toxic assets'') resulting from the subprime mortgage crisis from troubled financial institutions.

Proponents of the bailout plan argued that the unprecedented market intervention called for by the plan was vital to prevent further erosion of confidence in the U.S. credit markets and that failure to act could lead to an economic depression.

In fact, the bailout plan was the last psychological card Washington could play before the foreign dollar and US asset owners became fully aware of the fact that the USA no longer had the means of its monetary policy.

Dollar loosing supremacy
What used to be a deliberate policy of currency drop (in order to reduce the country's trade deficits and the real value of its debt (labeled in Dollar), turned against its perpetrators entailing capital outflow and increasing trade deficits. When it will be confirmed that there is no way to stabilise the US currency because the US economy is sinking always deeper into debt and recession and because the world is already filled with US dollars no one knows what to do with, then the global financial system will not be dominated by the Dollar as it used to since the Second World War.

Recession or start of collapsing of capitalism?
When US economy is in trouble pro capitalist pundits (some of them are paid by multi national companies and investment firms) hurriedly called it a recession. They described it as a temporary set back in world economic growth and predicted soon recovery. Now it’s more than three years since collapse of capitalism started and now it has spread to its twin brother, Euro Zone in the name of ‘sovereign debt crisis’. In USA it was companies that were bailed out, but in Western Europe we are now seeing capitalist countries being bailed out one by one in the name of survival of capitalism!

Related posts:
- USA - The living hell of the world
- Globalization in reality
- Capitalism - Understanding the vicious monetary system

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