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The New York Times tries to explain an economic perspective which is becoming increasingly bizarre to the rest of the world:
Through this uniquely American lens, saving businesses from collapse was the sort of thing that happened on other shores, where sentimental commitments to social welfare trumped sharp-edged competition. Weak-kneed European and Asian leaders were too frightened to endure the animal instincts of a real market, the story went. So they intervened time and again, using government largess to lift inefficient firms to safety, sparing jobs and limiting pain but keeping their economies from reaching full potential.
Yeah, anyone can see what total economic failures Europe, Japan and China have become. Welfare has never been an issue in the US, just a disaster. This view has been more or less axiomatic in the US. Whole philosophies of free market capitalism have been developed. Friedman and Ayn Rand are the more notable icons of the Divine Right of Capital. (Even if neither of them said Screw Up Everything You Touch as part of their concepts.)
The bailout of Fannie Mae and Freddie Mac has started this ideological enema of the economic rationales
The mortgage giants were too big to be allowed to fail
Big indeed. Together, Fannie and Freddie own or guarantee nearly half of the nation’s $12 trillion worth of home mortgages. If they collapse, so may the whole system of finance for American housing, threatening a most unfortunate string of events: First, an already plummeting real estate market might crater. Then the banks that have sunk capital into American homes would slip deeper into trouble. And the virus might spread globally.
The central banks of China and Japan are on the hook for hundreds of billions of dollars worth of Fannie’s and Freddie’s bonds — debts they took on assuming that the two companies enjoyed the backing of the American government, argues Brad Setser, an economist at the Council on Foreign Relations.
As it happens, China and Japan are two of America’s major capital supports, in terms of investment. Those investments were supposed to be secure, and they weren’t.
Investing in the US economy has for decades been the traditional next step up the ladder for foreign capital. But investing in a shrinking, debt ridden, US economy, where even the original sacred cash cow, credit, is on the endangered species list, is something else.
Listening to people talking up the latest US fiscal and fiduciary megafiasco is also an acquired taste.
Other countries would find such huge losses embarrassing, not to say humiliating. So much sheer bad practice, (not to say outright negligence) in the case of the subprimes, and business ineptitude, in the case of reading the housing, credit, and financial malfeasances, is no recommendation to investors.
This is where the economic geography kicks in. The US has been the Roman Empire of global capital for decades. All roads really did lead to Wall Street. Now, Rome is in tatters, and the investors are looking for bargains, not advice, and definitely not imperial delusions. They have capital of their own, and favorable rates. They can buy the bits of America which are still working, and do it cheaply, relative to the wounded greenback.
Like most people, I thought the test results for American knowledge of geography were a joke. I couldn’t take the idea that half of America didn’t even know where Iraq was, seriously.
The US financial sector not knowing where the world is, however, is a lot more plausible.
The world apparently revolves around the Dow Jones index, and is flat. The world, in fact, is two dimensional, and so are the economics. To speak of the world being economically round is still heresy. Criticism of this view is unforgivable. Perish the thought that an economic Copernicus should ever refer to other investment markets. The world view is so insular it’s staggering in its primitiveness.
This picture of the rest of the world would have been familiar to Marco Polo, whose tales of Kublai Khan’s China were never believed in his lifetime. The Silk Road, the giant trade machinery of the time, was completely outside Western perception. Anything could be sold to the Europeans at the far end of the Silk Road, at any price. Silk itself was a mystery. Spices were a cause of war, they were so valuable.
Things haven’t changed much. The US economic horizon is established by rhetoric, not reality. The World’s Only Super Power has fallen for the same mistake the Romans made: Rome was so far from the realities of the rest of the world that the Romans were forever reacting to new situations. Rome actually went broke, twice, thanks partly to the spice trade.
The funny little Euro countries and backward giants like China, India and Russia, are now economic colonizers. Japan may be out of fashion, but economically still very strong. Its “failure” is relative to its own big boom of the 80s, not relative to the rest of the world.
With them come strange new economics, quite unlike US models. Sovereign wealth and lots of it, and quite different growth strategies, based on global realities, and associations which don’t include the US as a party.
The US, still working on models where cheap production, not efficiency, has been made dependent on these economies. If they don’t work, the whole US strategy of outsourcing its production falls to bits, and quickly.
The US interests in other countries would be the first to suffer if the US found itself disadvantaged by currency rates or costs of capital. The domestic economy is in very poor shape, with many of the 50 states having spent years trying to avoid the abyss.
Heirloom national problems are still on the US To Do List. Infrastructure, health, education, deficits, crime, and industries have been on the list since the early 90s, at the latest. The Rust Belt has been getting rustier, and economic change has been largely cosmetic, much gizmology, not much New Economy. Even the inefficient, expensive, traditional working week still lives on in Main Street USA, and God alone knows why.
Not knowing where the world is, let alone what it’s doing, may not be such a good idea. Other countries have moved on, and the US is lagging further behind, hanging on to its Reagan dolls and Thatcher pinups. That’s ancient history, everywhere else on Earth.
Fannie Mae and Freddie Mac, instead of being seen as dangerous liabilities, huge financial toxic waste dumps, have become ideological issues in the US. The anti-bailout thinking goes as follows:
For one thing, this argument goes, taxpayers — who now confront plunging house prices, a drop on Wall Street and soaring costs for food and fuel — will ultimately pay the costs. To finance a bailout, the government can either pull more money from citizens directly, or the Fed can print more money — a step that encourages further inflation.
Using public money to spare Fannie and Freddie would increase the public debt, which now exceeds $9.4 trillion. The United States has been financing itself by leaning heavily on foreigners, particularly China, Japan and the oil-rich nations of the Persian Gulf. Were they to become worried that the United States might not be able to pay up, that would force the Treasury to offer higher rates of interest for its next tranche of bonds. And that would increase the interest rates that Americans must pay for houses and cars, putting a drag on economic growth.
You’ll notice that the idea that “This is our mess, we need to clean it up” isn’t on the map here. Nor is there any general admission, “We screwed up super ultra mega colossal”. Just more political rhetoric. Every try paying a bill with political rhetoric?
I also have yet to see any interest from anyone, particularly the financial media, in the possible reactions of America’s creditors.
The main commentary is that the world economy isn’t at all disconnected from the US, whether it likes it or not, so the world has to put up with whatever damn neuroses and series of hopeless, transparent excuses America's unemployable business geniuses produce.
It doesn’t, in case anyone was wondering. That's not the case. Huge amounts of money can get up and go anywhere else on Earth, at a click. Racking up trillion dollar losses is an American hobby, not necessarily anyone else’s.
There are still people on Earth who think they’re in business to
make money, not lose it.
Just not in America, apparently. The mortgage securities alone should have had lynch mobs forming in every American board room, regulator, legislature, fund, and university. The reaction has been, to put it mildly, understated, if not downright hypocritical and utterly useless.
Here’s a rationale that needs shooting
In the global economy of the moment, the United States itself is too big to fail.
The logic for that assurance goes like this:
The American consumer has for decades served as the engine of world commerce, using borrowed cash to snap up the accoutrements of modern living — clothes and computers and cars now manufactured, in whole or in part, in factories from Asia to Latin America. Eliminate the American wherewithal to shop, and the pain would ripple out to multiple shores.
Drivel. The American domestic economy is huge, but it represents less than 5% of the potential global market. Disposable incomes in the US are going down, at breakneck speeds. Basing economic policy on spending sprees in US malls is like basing your military on astrology.
This is sheer wishful thinking. There’s not a damn thing to prevent foreign capital just going where it makes more money. That would create a huge influx of money into big economies which know what to do with that capital.
America was discovered by someone who thought he’d found India. The superpowers of that time are long gone. History changes the power balance, and it changes with capital as the main driving force. Money doesn't hang around waiting for an opportunity to be lost.
When Rome eventually fell, there was no Roman Empire left, except in name. Lots of statues commemorating people who actually did something, but no living people in that mold. The Goths walked into a defenceless relic.
