You know those days when nothing seems to go right? You sleep through the alarm. The cat is sick on the mat. You’re late for work. Pity the German money trader who pressed the Send button on her keyboard last month and transferred €300 million to Lehman Brothers just hours before the US investment bank filed for bankruptcy protection. Of all the days of her life, that was the one she should have stayed in bed. Or at least, dawdled at home and washed her hair. As one newspaper put it, the state development bank KfW is ‘Germany’s dumbest bank’.
Credit Crunch may sound like a breakfast cereal but it’s not nutritious – at least for Western capitalism. The crisis has cost America its status as the global financial superpower. Asian, Russian and Arab banks and funds are rushing in to fill the gaps, creating new centres of power in the financial – hence political – world. Today Wall Street bankers don’t walk as tall, paying ‘the price of arrogance’ according to Der Spiegel. We will be paying for the bailout for years.
How will the Almost-Crash effect Mrs. Cat as she orders a hot chocolate for Maus at our corner cafe? Consider personal debt, an area of the economy which the crisis hasn’t touched…yet. In the UK many of my friends have an overdraft, as well as a stonking monthly credit card bill. Consumer debt stands at shocking 172% of disposable income. That means the average British household spends almost twice as much money as it has available, a conjuring trick made possible only by years of easy credit. This is going to change. Banks and credit card companies are already racking up interest rates to cover their subprime losses. Brits will be forced to tighten their belts, relearning the virtue of prudence, but as a result of the reduction in private consumption, shops and manufacturers will lay off workers. This in turn will leave more families struggling to make ends meet, and so on, round and round, down into a vicious spiral.
The German Finance Minister Peer Steinbrück has said that people who expect a recession here have ‘sado-masochistic tendencies’. Perhaps the Minister likes a joke, or is blessed with unbridled optimism, but most observers (Mrs. Cat included) expect Germany to suffer. That said, its recession will not be as long or as deep as in the Anglo-American world. The reason for this is Germans tend not to buy their homes. Only 11% of Berliners are owner-occupiers. Property prices have performed none of the aerobatics experienced by Brits, Aussies and North Americans. In part it's a legacy of the last war, when Allied bombing reduced all large cities to rubble. Housing was rebuilt – often by the state -- with rents subsidised and below market value. Plus Germans have learnt the value of financial caution and a regulated market from the rollercoaster ride of their economic history (i.e. for the most part German banks don’t loan money which they don’t have).
Of course this doesn’t mean double-hot chocolates all round. Hypo Real Estate, a German commercial property lender, has just received a whopping €50 billion in credit guarantees from the state and some banks. More than half-a-dozen other continental financial institutions have been rescued by their governments in recent weeks. And in the past two weeks alone, Germans have shifted more than one billion euros away from foreign banks and into accounts at the country's massive network of government-owned Sparkasse savings banks.
As the BBC’s business editor Robert Peston pointed out a few days ago, if you want to know which economies are perceived to be strongest, you should look at the price of insuring sovereign debt in the Credit Default Swap market.
Those CDS prices judge Germany (alongside Austria, Belgium, Denmark, Finland, France, Sweden and the Netherlands) to be more credit-worthy -- to be in a better position to service their national debt -- than either the US or the UK.
So how will Mrs. Cat cope in this new world café? By paying off her credit card bill, by practicing a little German financial virtue and by crossing her fingers that the world's financial system doesn’t plunge into systemic meltdown. She’ll also be ordering Maus’ hot chocolate WITHOUT whipped cream over these next months, perhaps even years.
UPDATE 15 February 2009 : Without whipped cream? How about without the hot chocolate? What a difference four months can make. The slump is the worst experienced in 50 years, with German GDP down 2.1% in the last quarter. People have lost their jobs, their pensions, even their homes. These are deeply worrying days.