The signs that point to a US crash

As cheap credit dries up, can the US economy afford to pay its bills, asks edward helmore

It's an accepted truism that the US economy can never falter because of the value of its land and property. Now that theory is being put to the test: the radiating fall-out from the collapse of the low-end mortgage business threatens to end the economic boom of the last seven years.

Last week's market falls, following the collapse of two mortgage-focused hedge funds at Bear Stearns and the sacking of the co-president in charge of bond investments, Warren J Spector, is just the start.

Now, the market for high-priced homes is faltering; cheap credit that's been fuelling record company takeovers is drying up; private equity funds and hedge funds are suddenly suspect. Banks, who have been providing the cash to fuel the boom, say they are unable to sell the loans they've already agreed and are wary of taking on more. And who is to blame? The bankers themselves.

For economies that run on cheap debt and cheap energy, the signs are worrying

It turns out they've been lending to businesses in the same way they lent to under-qualified home buyers - without guarantees or scrutiny. With money so cheap, and banks keen for the business, banks have waived their fees, their rights to monitor borrowers and even accepted IOUs as interest payments. Money has been essentially free.

Now comes the bill: US banks are holding at least $400bn in unsecured merger debt; almost 50 leveraged buy-out deals have fallen apart in the last two months for lack of funding. Shares in Blackstone, the US private equity fund and totem of this era's greed-as-fashion, are falling. Energy costs are rising.

For economies that run on cheap debt and cheap energy, the signs are worrying. Bankers say the conditions are the worst they've seen in 20 years. It's the onset of a 'liquidity crunch': a credit freeze. Bear Sterns is unlikely to be the only victim, but it will take time for other the others to be teased out and no one really knows who is going to be left holding this baby.