Look out! 2008 on the horizon
August 9, 2011
THERE'S a certain irony that one of the key villains in the great financial meltdown of 2008 once again is creating economic havoc.
It was Standard & Poor's, along with fellow ratings agencies Moody's Investor Services and Fitch, that in the early part of the century conspired with caffeine and cocaine-fuelled Wall Street bankers to flood the world with trillions of dollars of worthless junk masquerading as rock solid, risk free investments.
By dishing out thousands of AAA ratings - for a handsome fee of course - the agencies ensured that governments, banks, and financial institutions across the developed world were loaded to the gills with toxic time bombs, all loosely based on high risk loans over marginal American real estate.
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Having man-handled global finance to the precipice, forcing the US government into a massive and prolonged bail-out of Wall Street and the economy, S&P, in a breathtaking display of arrogance and denial, has now sagely concluded that America is a credit risk.
Of course, America and Europe along with Japan are afflicted by a range of other quite fundamental problems.
But the disaster formerly known as the Great American Property Boom still looms large over the collective psyche of the northern hemisphere's richest nations.
Bailing out their cash-strapped banks merely transferred the problem to government finances while the prospect of bank failures and the ensuing recession clearly scared the pants off consumers, who now universally want to save rather than spend, regardless of how much stimulus is injected.
Even before S&P downgraded the US over the weekend, the rush to cash across the globe during the past fortnight has been nothing short of astounding.
Equities are being abandoned en masse in favour of fixed interest deposits as investors seek to preserve their capital. In Europe, meanwhile, banks are depositing cash with the European Central Bank rather than risk on-lending to each other as authorities bicker and argue about how to stave off defaults by Italy and Spain.
With nowhere to hide, investors out of desperation have settled on US Government bonds and gold, making life even tougher for European banks trying to raise cash, raising the spectre of another credit squeeze.
Meanwhile, the brains trust at S&P warned that, should America and Europe implode, we here in the South Pacific will also be affected. What tremendous insight!
Read more: http://www.theage.com.au/business/look-out-2008-on-the-horizon-20110808-1ij6c.html#ixzz1UaXTpd5a