Saturday, November 01, 2008

How high's the mortgage, Mama?...

I sense many of us are breathing a little sigh of semi-relief, and anticipating a steady recovery from the current credit crisis/financial meltdown.  I know I was.

Until I saw this.

The memories of the 80's still haunts me, as I fudged my land values to get the right answer, and my banker pretended not to notice.  But we farmers were a small part of a big economy, and this is homeowners all over the US.

No I don't know how this will unwind.  But consider the case of Iceland, which I mentioned earlier.
The details of the financial settlements in Iceland are still unclear but the FT reports that the International Monetary Fund plans to lend Iceland $6bn. The British government reportedly is contemplating lending Iceland £3bn, which the country must then use to compensate individual Icesave depositors in Britain. The Dutch have offered Iceland a similar deal, involving €1.1bn. And there are more loans and foreign obligations in the pipelines.

These loans correspond to a little less than one half of the support that Hungary is receiving to deal with its financial crisis. Hungary has a population of 10m; Iceland, 320,000. The government of Iceland has now been offered foreign loans that roughly equal the country's gross domestic product. The annual interest payments, say 3-4 per cent, approximately correspond to the country's annual economic growth. Additionally, the loans must be paid up.

The burden is unrealistic. The most likely consequences are: extremely high inflation, economic decline, mass emigration and political disorder. I am reminded of the situation facing Germany in 1919 following the Versailles Peace Treaty, which John Maynard Keynes famously analysed in Economic Consequences of the Peace. [More] [More]

The connection between the two?  Both are unprecedented economic developments, and both have economists scratching their heads.

It seems they are better at autopsies than treatments.

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