Will the US Federal Reserve’s announcement of a substantial cut in interest rates avert a recession in the United States and banish the spectre of a worldwide crash? Many experts think it will. At worst, they think the growth rate may slow down. Other observers in the capitalist camp are very worried. In France, Jacques Attali foresees a crash on Wall Street, home of the New York stock exchange and ultimate guarantor of the loan pyramid (1), and Michel Rocard is convinced that a world crisis is imminent and that the system is about to explode (2).
There are many signs of alarm. There is a renewed interest in gold reserves and a rush to buy — the price of gold rose by 32% in 2007. All the major economic institutions, including the International Monetary Fund and the Organisation for Economic Cooperation and Development, predict lower growth worldwide.
This all started when the internet bubble burst in 2001. To rescue investors, the then US Federal Reserve chairman Alan Greenspan decided to promote the property market by introducing a policy of very low interest rates, and reducing financial charges. This gave financial intermediaries and property dealers an incentive to persuade more people to invest in bricks and mortar. Hence the system of subprimes, high-risk variable-rate mortgage loans for low-income families or those with poor credit. But in 2005 the Federal Reserve raised the base rates — those it had just reduced. This threw the whole system out of gear and the effects hit the international banking system in August 2007.
With three million US families facing insolvency and debts totalling $200bn, some major credit institutions ran out of funds. To cover themselves against this contingency, they had sold some questionable debts on to other banks. The banks put the debts into speculative investment funds, and the funds passed them on to banks all over the world. So the crisis spread and rapidly engulfed the entire banking system.
Major financial institutions, including Citigroup and Merrill Lynch in the US, Northern Rock in Britain, Swiss Re and UBS in Switzerland and Société Générale in France, incurred huge losses and suspect there are more to come. To limit the damage, many had to accept funds from sovereign sources controlled by southern powers or oil-rich regimes.
The real extent of the damage is not yet clear. The central banks in the US, Europe, the UK, Switzerland and Japan have poured hundreds of billions of dollars into the economy since August 2007, but confidence was not restored. The crisis spread from the financial sector to the rest of the economy. Several factors — a rapid drop in house prices in the US, the UK, Ireland and Spain, the fall in the dollar, the credit squeeze — point to a decline in growth. Add to this the increase in the price of oil, raw materials and food products. All the ingredients for a crisis that will last for some time, the greatest crisis since the structure of the world economy has been based on globalisation.
The outcome depends on whether the Asian economies can take over from the US as the driving force. Another sign, perhaps, that the West is in decline and that the centre of the world economy is about to shift from the US to China. The crisis may mark the end of an era.
Translated by Barbara Wilson
(1) L’Express, Paris, 13 December 2007.
(2) Le Nouvel Observateur, Paris, 13 December 2007.