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Damages of the Subprime Crises

Von Dr. Oliver Everling | 19.März 2008

When will be the end of the subprime crises and how big will be its damages? This is to-day’s issue“, says Willem D. Okkerse, MBA, CEO of OK-RATING INSTITUTE. In view of the recent developments such as the $2.00 bidding for Bear Stearn as well as the blank cheques produced by the FED only further disturbances can be expected, he believes (see Seeking Alpha).

„However, we must try hard to remain academic and not to follow the day’s illusion by sorting out and establishing the real facts and figures.“ His attempt: Firstly the size of the subprime crises. Under the flag „better roughly right than exactly wrong“ it might be possible to estimate its maximum size. Only if the size of the problem is known it can be calculated when it will be over.

„Starting from the US GNP of 13,500 billion we estimate that the extra monetary volume that was created and not covered will be approx. 5% of the GNP, which means 650 Billion. It is beyond this small article to explain the underlying algorithm, however it is bases on adequate assumptions.“

These 650 billion is the size of the balloon that has to be absorbed by the GNP’s growth. Since this growth is only happening in time, it is evident that the subprime problem will only be resolved in time. Since the FED is now distributing blank cheques the related banks will firstly go for their survival instead of helping the economy to grow, an aspect that Bernanke could have missed, warns Okkerse.

„Facing the fact that the crises started end 2006 and in respect of the GNP growth figures of 4.3% in 2007 and 2008 we need 28 months to digest the bubble. Calculated from November 2006 we might encounter that position somewhere in February 2009.“ Okkerse concludes: „It is time to have some patience with the patient.“

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