For 15 years, from 1992 to 2006, the World Economy has grown thanks to the demand of the United States. The 18 million new jobs that Europe has created between the last half of the 90es and now would be much less if the USA did not grow with such a quick rithm. In these years, the USA have imported anything: not only goods and services, but also people -officially 16 million immigrants-. No wonder why: the USA have been the country for which the average time in which an immigrant can buy a house is smaller: less than 10 years.
Obviously, also thanks to the immoderate ease with which the banks granted loans, and today some of those immigrants will loose their house, but if they remained in Europe, the dream of having their own house would have remained such: a dream.
When we complain about the effects that the american crisis has on our growth and on our savings, we should not forget the benefits that we had gloated. Anyway, to grow more rapidly than the rest of the world, the United States have accumulated huge impalances: the crisis of these months is the violent way in which they are coming back. The first is the huge difference between the volume of import and export, that has caused a rapid growth of the american foreign debt. Today this imbalance is reabsorbing thanks to the fall of the dollar. The weakness of the american currency is not the effect of the current turmoil in the financial markets: to restore the balance of payments USA, the dollar will have to remail weak for a long time.
The only thing that Europe can do is to remove the bareers that impeede the growth and that limit the consumptions and the investments: more growth in Europe accelerates the correction of the american deficit and means less years of weak dollar. The second imbalance is represented by the house prices that, from 2001 till now, in US, as in Great Britain, Spain and Ireland, has been dragged by a speculative bubble. On the wave of the increase in the value of their house, many american families have got into debt and increased their consumption. But, again, before claiming the financial system that has allowed them to do so, let's not forget that whithout those consumption, our economies would have grown much less rapidly. Today, the decline of the price of the houses put into trouble those families and who has lended them money. The problem is serious, but limited. In the balance sheet of Bear Sterns there were 33 billion of loans, but only 2 billions of subprime loans. A further decline of 20% in the huse prices (up to now, prices have fallen more or less just 10%) would put other 10 billions of those loans: limited numbers if we consider the dimension of the balance sheet of Bear Sterns.
So..why on sunday the bank has almost gone bankrupt? Not because it was inslvent, but because it was illiquid. It had a urgent need for liquidity, but nobody wanted to buy its loans, not even those with low risk, not even at lower prices.
This reminds the situation in which, at the market place, there come the news that within the oranges sold by some vendor there is some bad fruit: under this uncertainty, nobody approaches that vendor, even if the majority of those fruits is good and the shop is willing to sell at lower prices. The asymmetric information is a typical case of market failure, that implies the intervention of the authorities. Not because the central bank or the government are better able to recognise the good loans from the "rotten" ones, but because only the authorities take into account the costs that a failure of a huge bank would entail. And to avoid it, they are willing to run the risks that a private agent is not willing to take.
This explains why the FED, sunday night, has insured all the loans of Bear Sterns. It is Responsible Capitalism, non the end of capitalism as somebody would like to interpret. If the FED has made a mistake, it is the one of waiting too long, repeating the mistake made in september by the Bank of England.
But if the caution of the FED can be explained institutionally. In the United States, since 1934, there is a sharp division between commercial banks and investment banks. The FED can borrow to the commercial banks, not to the investment banks: on exchange, they are not under its control. This is another reason why the FED has made an intervension through a commercial Bank: JP morgan. From sunday, that separation has disappeared and the new rules issued by the Federal Reserve of New York open the way to go over the crisis.
The European model of universal bank does not distinguish between commercial banks and investment banks, so it is ready to grant liquitdity: this maybe explains why in the euro area there have not been such critical cases. Saving Bear Sterns trough Jp Morgan, the Fed has given a nice present to the shereholders of JP morgan, whose price in the stock exchange has grown 20% in two days. In London in September, Gordon Brown, facing a similar situation, decided to nationalize Northern Rock: "id the State runs a risk, it has also to exploit the potential advantages". The Nationalizaiton of Bear Stearns was one of the option on the table in Washington, but the Buch administraiton has rejected it. It is Interesting to know if a democrat president would have chosen otherwise.
Thank you prof. Giavazzi!
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