European Union Now Has World's Biggest Economy

World Net Daily

The European Union has overtaken the U.S. as the world's No. 1 economy due to the continued dramatic fall of the dollar, according to a Reuters report.

The U.S. Gross Domestic Product, or GDP, for 2007 is officially estimated at $13,843,800 billion. The 2007 GDP for the 15 EU countries is estimated at 8,847,889 billion euros, the report said.

That means when the euro yesterday topped $1.56, the EU officially became the largest economy in the world.

In a Financial Times commentary published Monday, former Federal Reserve chairman Alan Greenspan declared the current financial crisis in the U.S. "is likely to be judged in retrospect as the most wrenching" since the end of World War II.

Greenspan further concluded the U.S. financial crisis will not end until "home prices stabilize and with them the value of equity in homes supporting troubled mortgage securities."

Dollar in crisis

WND has reported the Federal Reserve is in a dilemma.

As the Fed continues to lower rates to stimulate the sagging economy, the dollar is increasingly abandoned, hitting new lows almost every day against other major currencies.

If the Fed were to raise rates to prop up the dollar, most Wall Street experts would expect a broad sell-off of U.S. stocks across the board.

Today, before the opening of the New York Stock Exchange, the dollar was trading at a new low, $1.5787 against the euro.

Just yesterday, the dollar hit a new all-time low in foreign currency exchange markets, closing at 71.44 on the U.S. Dollar Index.

Home equity foreclosures hit bank assets

Meanwhile, the crisis in the home equity market is spreading to impact major financial institutions.

Over the weekend, the Federal Reserve and the Treasury intervened, guaranteeing J.P. Morgan Chase's bargain basement purchase for a mere $2 per share of then in free-fall Bear Stearns, the 85-year-old Wall Street investment bank that had survived the Depression and two world wars.

Today, Wall Street is pressuring the Federal Reserve's Open Market Committee to drop rates on federal funds as much as 1 percent, a nearly unprecedented one-time adjustment.

Fed Funds rates, now at 3 percent, reached a high of 5.25 percent in January 2007.

Since September, the Fed has been engaged in a series of rate cuts, trying to keep ahead of the developing financial crisis and economic slowdown that began with the downturn in the mortgage markets in the middle of last year.

The real estate bubble developed as Greenspan kept fed funds rates at a historical low of 1 percent throughout much of 2003 and 2004.

The resulting liquidity pumped funds into home equity markets, stimulating dramatic price increases that continued throughout much of 2006.

That resulted in abundant cash for mortgage lenders to fund the risky sub-prime market where typically unqualified home buyers were being offered unconventional loans with artificially low mortgage payments in the initial few months.

The nation is now experiencing the fallout of collateralized mortgage obligations in which mortgages packaged as securities and sold to banks as assets were allowed to count in the banks' legal reserve calculations.

A wave of home foreclosures across the nation has caused a resulting failure in the collateralized mortgage securities held by banks.

When the collateralized mortgage obligations are marked to market, many banks across the country are finding they do not have adequate non-borrowed reserves to continue operations under current reserve requirements.

Again, the Federal Reserve has stepped in, providing multiple facilities in which struggling banks can borrow on a short-term basis the reserves needed to continue operating.

In a series of unprecedented moves over the weekend, the Federal Reserve has now made many of these same borrowing facilities available to securities and investment brokerage firms as well as commercial banks.

As WND reported, for the first time since the Federal Reserve has published the data, bank non-borrowed reserves have begun to turn negative, reflecting the increased borrowing banks are utilizing to continue operating.