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Tyler Cowen - 


KAI RYSSDAL: Stan O'Neal may well lose his job at Merrill Lynch over subprimes. The Fed may or may not cut interest rates on Wednesday because of subprimes. But the very banks that led the way into those risky credit investments seem to have found a silver lining.

You know that "superfund" they're setting up to get some liquidity back into the system? There's a report out today saying the banks could pull down more than $1 billion in fees from managing it.

Commentator Tyler Cowen says American banks have managed to protect themselves from the subprime crisis even better than you might imagine.

Tyler Cowen: We've all heard about the defaults on subprime mortgage loans. But so far, the real story is how little the broader American economy has suffered. That is partly because of sophisticated trading networks.

More than ever before, banks can spread their financial losses very broadly, including to foreigners.

In the old days, banks lent out mortgage money and kept those loans on their books. If enough borrowers could not repay, the bank went out of business. That was a big problem in the Great Depression of the 1930s.

Today, banks usually sell their loans to third parties -- this is called "securitization." You might have originally borrowed money from Wells Fargo, but now a bank overseas cashes your mortgage checks.

If a large group of people can't pay their mortgages, they might lose their homes. But the banks don't suffer as they used to -- local American lenders have already converted those loans into cash and sold off their risk.

In fact, German regional banks suffered some of the most significant losses from bad American mortgages. Other European and Asian banks and hedge funds took their lumps as well. American banks essentially bought insurance by exporting their risk overseas.

So far, we don't know the total damage from subprime failures, but it probably is less than 1 percent of the American economy. Those are big losses if concentrated in a few institutions, but the global or even the U.S. economy can handle them. Lots of American domestic banks have suffered losses, but there have been no massive failures.

Now European real estate markets are weakening. Soon some American banks will be returning the favor and bearing some losses for others. But we're still better off for sharing our risks, and that is why most U.S. stock prices remain high.

You're hearing lots of bad economic news from the media. The secret is that we're learning to cope with it better each time.

RYSSDAL: Tyler Cowen is professor of economics at George Mason University. His latest book is called Discover Your Inner Economist.