Monday, December 6, 2010

World Financial Woes

by Richard Crews
It is impossible to describe in simple terms the disastrous state of the world's finances, but I will try.

A couple of years ago several huge banks teetered on the brink of failure because they had loaned trillions of dollars to U.S. home-owners whose property values had declined, and who had therefore decided not to pay back to the banks the money they had borrowed to buy their homes. The U.S. government rescued these huge banks to the tune of several hundred billion dollars because they were so big and far-flung in their investments that their collapse would have destroyed worldwide economic systems.

Strong new financial regulations were enacted to prevent such a near-catastrophe from happening again. We do not know how effective these regulations will prove to be as they are put in place over the next few years. We do know, however, that the banking industry is lobbying hard (and expensively) behind the scenes to weaken them.

There are still hundreds of thousands of bad private mortgages overhanging the market. In addition there are several trillion dollars of bad commercial property loans (think--vacant office buildings) that the huge banks must somehow deal with over the next couple of years. So the banking crisis is far from over.

This past year another ominous player entered the field. The bonds that countries sell to investors in order to borrow money to run their governments turned out to be, in several cases, very weak. The countries simply did not have the money to pay back what they had borrowed. Greece--with Spain, Portugal, Ireland, and Italy close behind--threatened national bankruptcy. The EU (Economic Union), largely on the strength of the German economy, came to the rescue with loans and guarantees, but also requiring austere programs of increased taxes and reduced government spending to assure future financial solvency. Several other huge countries--such as the U.S., U.K., and France--are not far behind on this bond-crisis path.

And another factor is soon to come into stark view: most U.S. states are severely in debt. California and New York, for example, have recently had very public, huge debt crises, exceeding in amount, in fact, any of the European bad-debt countries mentioned above. Imagine, for a moment, the rise in taxes that will be necessary throughout the U.S., and the closing of schools, fire stations, police stations, and other public buildings and services that will be necessary to avert state financial disasters.

The world's finances are very complicated--too complicated, in fact, and too cloaked in economic jargon to be fully understood. But the problems are ominous--they are severe and near at hand.