A Cleansing Storm

It is easy to describe the mechanism behind the current global financial crisis.

For years now, American banks have been giving increasingly risky real-estate loans, and passing on the debt -- bundled into compact financial products -- to hedge funds. The hedge funds, in turn, speculate on these securities. In addition to that, in the US, mortgages are often "floating," which means they can change daily (unlike in, say, Germany, where they are fixed for a particular period.)

With interest rates on the rise, more and more risky borrowers in America are failing to make their mortgage payments. The banks and the hedge funds are feeling the pinch, the stock market is getting nervous, and investors are insecure. Following the market indexes is like going on a roller-coaster ride.

The last time the markets saw this much instability was around Sept. 11, 2001.

The question now is whether this market crisis will bleed over into the "real" economy. Will businesses and consumers be pulled into the fray, or are there two worlds that exist alongside one another, the financial world and the real economy?

One argument in favor of the parallel-world argument is that the crisis has mostly hit artificial products. Financial wizards spend their time thinking up ever more complex investment models, which increasingly resemble highly risky, abstract bets. If these go off course because interest rates rise, a sudden, cleansing storm crops up that washes away the worst excesses of profit-greed -- but nothing more. On the contrary, after the storm, investors can see more clearly than ever.

But there is another point of view that says that abstract speculation can have real effects. An investor who gets himself a bloody nose one time is likely to be more careful thereafter. Now, banks will become more careful, they'll take a closer look at risk, or will more closely examine traditional, solid financial products that are less risky -- but also offer lower yields.

The danger therein: If the banks refuse credit to concerns with better creditworthiness, it could lead to less investment, slower growth, and fewer jobs. And private investors are more careful, as well. Wherever stocks, funds and mortgages count as part of old age retirement plans -- like in the US, for example -- dropping stock- and real-estate prices could lead people to rein in their spending, because they need to look out for their future. And the motor of the real economy would start to sputter.

Oddly, the bankers and analysts -- otherwise so full of opinions -- don't seem to be able to say which of these scenarios is the real one. They are conspicuously silent on the matter, preferring instead to wait and see which fund will be the next to declare bankruptcy, which bank will be the next to make headlines.

In fact, a lot would need to happen in order for the current world economy to be shaken. Global growth is expected to be around 5 percent for the current year. Unlike a few years ago, this growth is not solely dependent on the US and China. Europe is contributing, and Japan's economy seems to have recovered as well.

On top of all that, a number of companies are expecting to book record profits, and the situation for raw materials is looking good in a number of sectors. And there is enough money out there looking for profitable investment opportunities -- just ones that are probably not as risky, speculative and high-yielding as a few months ago.

Rolf Wenkel is a business editor for DW-RADIO (jen).