Economists ponder effect of European banking crisis on U.S.
Princeton University economist Hyun Song Shin said in a recent paper that European banks have played a much bigger role in the U.S. economy than has been generally thought — and could do a lot more damage than expected as they pull back.
Shin says European banks grew not only by making direct loans to U.S. businesses but also by sucking up vast U.S. money-market deposits and purchasing U.S. mortgage securities. During the previous decade, “European banks may have played a pivotal role in influencing credit conditions in the United States,” and that helped fuel the U.S. housing and financial bubble, Shin argued in a recent paper.
But now it could hurt the U.S. recovery as European banks shrink and bolster their capital reserves. “The European crisis of 2011 and the associated deleveraging of the European global banks will have far reaching implications not only for the eurozone, but also for credit supply conditions in the United States and capital flows to the emerging economies,” Shin wrote in a paper presented at an International Monetary Fund conference in November and which has been widely read among economists.
The vast extent of those European bank obligations to U.S. institutions, or counter-parties, helps explain U.S. policymakers’ anxiety as they watch European leaders try to head off a crisis like the one that followed the Lehman Brothers failure in the United States in 2008.
Shin’s paper “has orders of magnitude that I didn’t know,” said Kenneth Rogoff, a Harvard University economics professor and former chief economist at the International Monetary Fund.
http://www.washingtonpost.com/business/economy/economists-ponder-effect-of-european-banking-crisis-on-us/2011/12/22/gIQA0rvYCP_story.html
Shin's paper...
http://www.princeton.edu/~hsshin/www/mundell_fleming_slides.pdf