Analysis: U.S. meltdowns - History lessons for the euro

Wed Sep 19, 2012 6:00am EDT
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By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters) - In the early 1870s, property prices in Vienna, Berlin and Paris soared on the back of a state-promoted building boom fuelled by easy credit extended against the collateral of unbuilt or unfinished houses.

The crash that followed parallels what has happened more recently and may, with other lessons from U.S. history, provide pointers for the euro zone crisis.

As the property prices soared, Europe's world was turned upside down. Thanks to grain elevators, conveyor belts and huge steamships, American farmers opening up the fertile Midwest were able to export vast quantities of wheat and then processed food.

Grain producers from Russia and central Europe simply could not compete with what came to be known as the American Commercial Invasion.

The crash came in central Europe in May 1873 as the low costs of the new industrial superpower exposed long-held growth assumptions as unrealistic. Continental banks collapsed, prompting British lenders to hold back their capital, unsure who was most exposed to souring mortgages. Interbank rates rocketed.

The banking crisis soon spread to the United States. Railway companies were among the first casualties, burdened by complex financial instruments that promised investors a fixed return.

Fast forward 135 years and this tale of woe, by U.S. historian Scott Reynolds Nelson, bears an uncanny resemblance to today's chronic banking and debt problems, according to Stephen Ross, a professor of financial economics at the Massachusetts Institute of Technology's Sloan School of Management.

"Substituting Asia for America and the West for Europe, we get a description of what has happened in the current crisis. The West has been financed by the new producing economies of the East and that fueled a housing and consumption binge," he said.   Continued...

The Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt September 6, 2012. REUTERS/Alex Domanski