How Deleveraging in Europe Might Doom the U.S.
Conclusion: the European banking sector provides about as much credit to the U.S. as the American banking sector does. So when the European banking sector deleverages, as it must, it will have a very substantial effect on credit conditions in the U.S. In Shin’s bland phrasing, “The European crisis carries the hallmarks of a classic ‘twin crisis’ that combines a banking crisis with an asset market decline that ampliﬁes banking distress….The global ﬂow of funds perspective suggests that 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.”
…or as economist Tyler Cowen put it: “If true we are doomed.”