After the large French bank BNP Parabas suspended three fundsearlier today, the European Central Bank was compelled toinject $130.1 billion into the banking system as a rushon cash caused interest rates in Europe to soar. Both the USand European stock markets reacted to the crisis bydropping, and President Bush issued a statement that thepresent financial crisis had been brought on by “improvidentlending.” The ECB said that it would provide unlimited fundsat its current benchmark rate of 4%. Meanwhile, the GermanCentral Bank was meeting to discuss details of a rescuepackage for IKB Deutsche Industriebank, which is alsoexposed to the collapsing subprime loan market. Normally,this is not a story of a type covered by Unknowncountry.com.To find out why we covered this one, read the full story.
On May 11, 1931 the Austrian Creditanstalt Bank declaredbankruptcy, setting off a chain reaction that resulted inthe worst banking crisis known to that time. By March of1933, President Roosevelt was forced to declare a two-week’bank holiday’ to stem the avalanche of bank failures thathad spread from Europe and were destroying the American economy.
The Creditanstalt bankruptcywas caused by defaults on industrial loans, but thecatastrophic effect on liquidity was the same, as was the’domino effect’ that is once again threatening Europeanbanking. The bank wasrescued by the Rothschild family, but the chain reactioncould not be stopped. In all likelihood, this will be theonly place where that comparison will be drawn, but thepresent situation is very similar, because the suddenevaporation of bank liquidity is so similar.
At present, not only subprime mortgage loans appear to be atrisk, but also many prime loans. This is because there hasbeen widespread misstatement of qualifications, and alsobecause homeowners cannot refinance in the drasticallytightening credit market, and are unable to borrow moreequity in homes that are no longer rising in value.
Add to this the fact that the savings rate in the U.S. is atrecord lows, and many consumers are already maxed out ontheir credit, and we might well be in the beginning stagesof the worst financial crisis in 75 years.
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