One much-overlooked ramification of America’s imploding subprime mortgage debacle and the resultant global credit crunch is becoming clear: the huge blow to the U.S.’s reputation as an economic bastion of safety. As banks, investment houses, and lenders around the world deal with the subprime fallout, fingers are starting to point. And they are all pointing in one direction: America. This could turn into a big problem.

America’s economic system is built on trust. In a fiat system, currencies are not backed with tangible assets; they are backed by confidence—confidence that the government will act responsibly, confidence that the government will honestly pay its debts (not just print more money), and confidence that the currency will remain a store of wealth.

Confidence in America is buckling—and with it, confidence in the global economic system. The trend is threatening the world economy.

“The U.S. economy, once the envy of the world, is now viewed across the globe with suspicion,” wrote Hamid Varzi in an International Herald Tribune report. “America has become shackled by an immovable mountain of debt that endangers its prosperity and threatens to bring the rest of the world economy crashing down with it.

“The ongoing subprime mortgage crisis, a result of irresponsible lending policies designed to generate commissions for unscrupulous brokers, presages far deeper problems in a U.S. economy that is beginning to resemble a giant smoke-and-mirrors Ponzi scheme. And this has not been lost on the rest of the world.”

An American financial innovation known as securitization, which is the packaging and selling of mortgages and other debt obligations to international investors, has allowed America’s housing slump to destabilize financial markets worldwide.

For a little more than a half decade, Chinese, German and French bankers and investors have invested their hard-earned savings in American mortgages. Over that time, foreign loans to help Americans purchase homes quadrupled to almost $1 trillion.

Foreign investors readily lent to America because the “made in America” stamp supposedly made U.S. mortgage securities safe investments. That folly has now been exposed.

Here is how America got itself into this mess.

From 2000 onward, the U.S. Federal Reserve Bank slashed interest rates to stave off recession and stimulate the economy. Low interest rates made mortgages cheaper, fueling a nationwide housing boom. As house prices skyrocketed, doubling, tripling and even quadrupling in many areas, the bubble fed on itself, as prospective homeowners rushed to get into a home before they could no longer afford to.

As home prices rose, fewer people could afford traditional loans. To keep their profits growing, banks and lenders began offering easy-to-get subprime mortgages—mortgages to borrowers normally considered risky due to credit history, income status, etc. Oftentimes these loans were adjustable-rate, or had initial teaser rates that ratcheted up later.

However, American banks and lenders understanding the risk did not want to keep all the chancy subprime mortgages on their own books, so they sold them to foreign investors.

But here is the catch.

American banks sliced and bundled their subprime mortgages together into packages before selling them like bonds. Using complex computer models, and by geographically and otherwise diversifying the bundled mortgages, American banks convinced well-known and trusted American investment-rating agencies like Moody’s and Standard & Poor’s to rate the securities higher than regular subprime mortgages would typically rate.

These credit-rating agencies gave the bundled mortgage securities (known as cdos) ratings similar to those of corporate bonds—even though they carried, in some cases, up to 10 times the default risk.

Later it became public knowledge that these same ratings agencies were being paid by the very banks and lenders that were bundling and selling the mortgage cdos.

American banks happily issued subprime mortgages because they were not only able to quickly remove them from their books, but they also were able to get top dollar for them thanks to the high ratings. And foreign investors (as well as domestic investors) confidently purchased these supposedly safe mortgage investments—that is, until interest rates started to rise and subprime borrowers began defaulting in droves.

As the U.S. housing market slumped, all of a sudden nobody wanted American mortgage cdos anymore. Investors around the world tried to dump the American cdos, but by this time, the shoddy cdo credit ratings had become public knowledge. American credit-rating agencies embarrassingly began to downgrade the cdos and foreign investors found that to even get any bidders on their American cdo portfolios, they had to accept steeply marked-down prices.

Hedge funds and other investment vehicles began to seize up as people tried to pull their money out of any and all businesses associated with U.S. mortgages. Panic ensued, inciting a global credit crunch. Banks and mortgage lenders across Europe and America began to fail.

German and French banks got hit especially hard, as did stock market investors around the world, as the credit crunch and fears of new restrictive lending practices shook international bourses.

“If you allow a bank in France to have a piece of the mortgage market, it should in theory be better because when things go sour everyone takes a little bit of a loss,” says Jay Bryson, an international economist at Wachovia Bank in North Carolina. “What we’ve found is that people don’t even like these little losses.”

It shouldn’t take an economic guru to realize nobody likes to lose money, especially in today’s precarious world of borrowing and leverage where little losses can quickly turn into big losses—and especially when highly regarded foreign credit-rating agencies incorrectly overrate investments.

Over the past two weeks, fear that a systemic financial failure was occurring became so intense that central banks around the world acted in coordination to inject hundreds of billions of dollars into the banking structure.

Just how dangerous is the situation? America’s financial and banking sectors may not have entered cardiac arrest, but they definitely missed more than just a beat or two over the past couple of weeks. Leveraged debt and borrowing is the lifeblood of today’s economic system. And last week, the blood came uncomfortably close to clotting up.

“The truth is, no one knows how serious the financial problem in the U.S. is, nor how it will unfold,” said stock market historian David Schwartz. “We do know central banks are scared out of their minds.”

Warnings also come from Switzerland’s top banker, who cautioned that massive losses from the unfolding credit crisis were coming, laying the blame on “unbelievable” U.S. lending standards. Questioning the security of the American economy, Jean-Pierre Roth, president of the Swiss National Bank, warned that the banking crisis may be just starting to unfold.

That said, there are plenty of economists who think the worst is over. And America may continue to chug along for the next while.

However, even if the immediate crisis becomes, as optimists hope, just a temporary flatline on the cardiac monitor, significant long-term damage may have already occurred.

Confidence in the health of the American economic system may be wavering.

America relies on trust to finance its massive debts and deficits. Without trust, foreigners may stop lending money to America. If confidence in America’s economic wellbeing begins to falter, America may lose its reputation as a safe haven in times of economic instability.

America’s “made in the U.S.A.” subprime mortgage collapse is undermining confidence in America and the global economic system that is built around the dollar. If dollar confidence is lost, look out below. Remember, international support and acceptance are the two main things that give value to a country’s currency in a fiat-based system, especially when that country relies so heavily on foreign imports.

The finger-pointing has begun. How far it escalates and the future ramifications remain to be seen.

To understand how important confidence is in a world of fiat currencies read “New Global Trend: Dump a Dollar, Buy a Euro.”