TIME: Even a month ago, the global economy seemed poised to weather the U.S. sub-prime crisis with relative aplomb. But, suddenly, something approaching panic has gripped the world's financial community. The headlines are grim. The U.S. housing slump is worsening. Banking giants such as Merrill Lynch and Citigroup are posting record losses. The U.S. dollar is getting pounded by the British pound — and virtually every other currency. Oil has run up as high as $98 per bbl., and gold — the traditional doomsday investment — has topped $800, its highest level since the early 1980s.
But despite the fear, the end is not, in fact, nigh. After an orgy of excesses in the credit and housing markets, a measure of sobriety and restraint may have a useful cleansing effect. That said, tremendous risks remain — not least a mounting threat of a U.S. recession. Surveying this treacherous landscape, Paul Donovan, a global economist at UBS, predicts: "It's going to be very unpleasant but it's not a disaster."
Of course, the "core problem" is the U.S. property market, says Han de Jong, chief economist for ABN Amro in Amsterdam. "In hindsight, the housing market in the U.S. was a bubble." The cause? Superlow interest rates that encouraged lenders to offer loans to virtually anyone, even those with bad credit. Those loans were then bundled together into exotic derivatives and sold off to financial institutions worldwide; when borrowers began to default on their mortgages, money managers from São Paulo to Seoul suffered huge losses. Bottom Dollar (more)
Mark Alexander
