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On tenterhooks
International anxiety has followed the American sub-prime crisis with fears of a domino effect around the world. Laura Collacott finds out if these fears are justified.
The world is hesitantly moving forward in its business transactions at the moment, fearful that the global economy will implode any second and plunge the international community into free fall.
Images of the Great Depression that followed Wall Street's 1929 crash are hastily pushed to the back of public conscience but even the strongest minds cannot help but entertain black images of international financial stagnation.
This may be an exaggeration but a very Malthusian angst is detectable amongst investors. When at the end of 2006 Nouriel Roubini, president of Roubini Global Economics, predicted a recession that he said would be "nastier, deeper and more protracted" than the 2001 recession, he was accused of being histrionic.
Critics heartily disagreed with him; one went as far as to call Roubini "the current archetypal Eeyore [Winnie the Pooh's eternally gloomy friend]", in reference to his economic pessimism. By his logic the growth phase that America had been enjoying was in large part supported directly and indirectly by housing.
A burgeoning housing market had fuelled the consumer market as a whole and been responsible for about 30% of the employment growth in the expansion period. A collapse in the housing market would have a domino effect on the rest of the economy.
And yet so far we have not seen a disastrous fallout from the American credit crunch. Global markets have continued to function more or less as normal. The large financial institutions have reported substantial losses and the US is generally considered to be in recession, but international business has not suddenly atrophied.
Though opinion is very much mixed, the truth about the sub-prime mortgage crisis and subsequent effects is, according many experts, far less gloomy than commonly thought.
The problems in the USA have all hinged on the credit systems available and a bubble in the housing market. Convention in America allows for consumers to move their mortgages around, refinancing to get the best available deal on interest and release some of the equity in their properties. The easy availability of credit and popular use of home-equity have fuelled a spending boom that came to an abrupt halt when the sub-prime market crashed from overexposure.
In the wake of this collapse, financial institutions have had to rally to protect themselves from losses as far as possible but the damage has been difficult to avoid, as demonstrated by the figures.
As big losses have been reported by major banks, confidence in certain investment vehicles has wavered. Risk aversion has become the order of the day, having a knock on effect on investments such as equities. Conversely, gold is seen as a much more stable asset and so has seen a surge in prices as people choose safer options.
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