A new book by Nobel prizewinning economist Joseph Stiglitz tracks the effect that the war in Iraq has had on the American economy. The Three Trillion Dollar War — The True Cost Of The Iraq Conflict outlines the immense downside across the globe of this policy.

In terms of the current credit crunch, which arose out the sub-prime mortgage fiasco, many had blamed Alan Greenspan, then Chairman of the U.S. Federal Reserve Bank, for keeping rates too low for too long. Combined with steeply rising house prices this gave the banks a one-way bet for lending to the trailer-park poor.

However, it’s clear from Stiglitz’s book that the low rate regime was engineered to mask the terrifying cost to the American economy of the wars in the Middle East.

We can now see the extent of the disaster to American interests the war is continuing to cause. The conflicts have led to a strengthening of Gulf, Chinese and other sovereign wealth funds which have bought up large chunks of prime U.S. assets, including blue-chip bank stock, while, in some cases, simultaneously enjoying a bonanza from higher and higher oil prices.

In ten years these bank stocks should prove exceptionally rich investments as they recover from current adverse credit conditions. The war has given them a one-way bet.

Joseph Stiglitz works out the numbers and they make depressing reading.

The American economy is now in recession. A slew of new data clearly reveals both a marked slowdown in activity, combined with a rise in inflation — something not seen since the stubborn “stagflation” period of the 1970s.

Despite all this, some economists expect a robust return to growth later in the year off the back of aggressive rate cuts by the Fed and a financial package from the President that will see checks delivered to taxpayers, and others on low incomes, by June.

We shall see.

Legendary investor, Warren Buffett — the Sage of Omaha — in a move he says is designed to make money, has offered to take on $800 billion of the liabilities of U.S. municipal bonds.

The offer goes to three “monoline” bond insurers, Ambac Financial, MBIA and Financial Guaranty Insurance. One has already rejected the deal, and he is still awaiting reponses from the other two, although one of them is making favourable noises.

The move breathed new life into global stock markets yesterday. The monolines are seen as the second line of defence against the sub-prime mortgage fiasco by propping up banks’ balance sheets in the event of a repayment meltdown.

Traditionally, the bond insurers concentrate on municipal risk, but they too got caught up in the collective madness of sub-prime lending for the same reason respectable banks did : greed for perceived easy money.

However, the monolines are now short of capital and are being hit by downgrades from the rating agencies.

T J Marta, fixed income strategist at RBC Capital Markets, said it was a coup for bond insurers, which could help them avoid “the doomsday scenario”.

Pundits are still concerned that the worldwide credit crunch will not abate until the full extent of the U.S. sub-prime housing crisis is fully known.

Justin Urquart Stewart, at Seven Invesment Management said, “The market cannot start to get any composure until we can find out how much damage has been done.”

The prospect of millions of borrowers — mostly poor, black Americans — defaulting on payments they could never afford, has fueled concerns of a credit crunch, making it difficult for almost anyone to borrow money. The interbank lending market has been particularly badly hit.

In the three months to the end of June, Standard & Poor calculated that U.S. house prices fell by 3.2 percent, the steepest decline since 1987 when its records began.

The collapse of the American sub-prime market, with all its attendant woes, both to borrowers and lenders, really hit home yesterday.

The European Central Bank, regulator of the Eurozone group of countries, piled into the markets with $130 billion of cheap, emergency credit.

In what was the biggest central bank intervention since 9/11, the ECB move came after reports that commercial lenders were desperately hauling back the supply of loans.

French giant BNP Paribas suspended withdrawals from three of its investment funds because of their exposure to the U.S. sub-prime market, saying “There has been a complete evaporation of liquidity” from credit markets, which could escalate into a worldwide credit squeeze.

Rumours were rife of impending fund meltdowns and banking collapses. Trevor Williams of Lloyds TSB said, “Liquidity has dried up basically. It’s a moment of panic.”

Nick Sparks, risk manager at F&C Partners, said, “People have got caught out. There will be more pain to come.”