November 30, 2011

The Euro & Sub-Prime Lending

The Euro is the official currency of 17 countries in Europe comprising what is called the euro zone. Presently the Euro is under stress that has many similarities to the 2008 sub-prime loan meltdown in the United States. The current Euro problems may cause a similar, perhaps worse, financial setback as the sub-prime debacle did. These problems, if not solved quickly, will cause a further set back to the economy in the United States and the world. This is why the U.S. and China must help in any way we can. It is in our self interest to do so.

Sub-prime lending allowed borrowers to purchase homes that they could not afford. The creation of the Euro allowed some countries to borrow more money at lower rates then they could afford. Eventually the sub prime borrowers could not afford to make their payments and they defaulted resulting in an over supply of housing and a steep fall in home prices. Many countries in the Euro zone did the same thing by overextending their debt and they are now in jeopardy of defaulting

These countries ran up high debt, borrowing primarily from European banks. These banks were happy to buy the bonds of Euro zone countries because their thinking was a sovereign country would never fail and the credit rating agencies gave this debt their highest rating. The credit rating agencies also gave very high ratings to bonds secured by sub-prime loans.

We averted a depression during the sub-prime crisis because the Federal Reserve was able to print money and flood the market with liquidity and thus restore confidence. Today’s problem is the Euro Zone does not have a central bank that can print money. As a result, credit is drying up. No one is willing to lend money to many of the Euro Zone countries so they can repay debt that is maturing.

The Euro will either collapse or something similar to a central bank of the euro zone will be created. Time is running out.

Here is a good, two part, 50 minute podcast discussion about the Euro crisis with a few minutes break in the middle.

1 comment:

  1. The funny thing is, those bank executives who were responsible for this got away with their huge bonuses and commissions while still maintaining their jobs. This is one of the biggest robberies ever made to the people.