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19 September 2008 Charles J. Brown
02:45 pm

The Decline of American Power, Part 216


Not to go all Paul Kennedy on y’all, but I was struck by the last three paragraphs in a story in the Washington Postdated this morning:

Analysts said one of the biggest impacts of the crisis is to undo the long-held image of the United States as a fail-safe place to invest money. Hundreds of billions of investment dollars have poured into the United States in recent years, much of it from Asian economies where a powerful culture of individual savings contrasts with the earn-and-spend philosophy of the United States.

Many of those Asian investors were feeling burned by the failure of U.S. institutions once promoted as the safest of bets. Though Asian and Middle Eastern sovereign wealth funds lavished rescue money on U.S. lenders earlier this year, those funds appeared to be showing increasing caution.

“The big risk for the United States is that people will begin to feel that we really don’t know what we’re doing and lose complete confidence in the Federal Reserve, the Treasury and the U.S. financial system,” said Edwin M. Truman, senior fellow at the Peterson Institute and a former Treasury assistant secretary. “That hasn’t happened yet, but it is a risk.”

Talk about burying your lede.  The big story isn’t that governments around the world are moving to “stanch panic,” as the Post headlines the story, but rather that other governments — and perhaps more importantly, investors — no longer view the United States as a “fail-safe place to invest money.”

Contrary The Post’s assessment that investors have yet to give up on the U.S., The International Herald-Tribune is reporting that Asian investors may already be losing faith in the United States:

Tremors from Wall Street are rattling Asian confidence, leading many investors to question the wisdom of being invested in the United States to the tune of trillions of dollars.

Asian investors were starting to show hesitation even before the financial earthquake of the last week. Now, a wariness toward the United States is setting in that is unprecedented in recent memory, reaching from central banks to industrial corporations, from hedge funds to the individuals who lined up here to withdraw money from the American International Group on Wednesday.

Asian savings have, in essence, bankrolled American spending for decades, and an Asian loss of confidence in American financial institutions and assets would have dire consequences for the U.S. government and American taxpayers.

Damn straight it would.

But individual Asian investors are not the only ones who have kept the good times rolling in the United States.  As you may or may not know, one of the biggest sources of capital flowing into the United States over the past few are sovereign wealth funds — state-owned investment funds created by governments when they have budgetary surpluses.  Think of them as a government’s rainy day fund, designed to help avoid boom and bust cycles.

Guess where may sovereign wealth funds have been investing?  In the American banking sector, including Morgan Stanley and Merrill Lynch.  As Inspector Clouseau once said in one of the Pink Panther movies, not anymore.

As the American investment banking industry seems to teeter, many investors are asking why the sovereign wealth funds from the Middle East have not stepped up.

Less than a year ago, the funds spent billions of dollars for minority stakes in Wall Street banks. As oil prices peaked near $145 a barrel this year, the Middle East sovereign wealth funds amassed even more cash. Still, even as the values of banks like Goldman Sachs and Morgan Stanley are swooning, Middle East funds are not biting.

The explanation is simple, bankers in the region say. Plenty of other, more attractive assets are out there right now. With markets having been hit by the global downturn, compelling, value-priced deals are numerous — from sports teams in Britain and publicly traded companies in Russia to deals closer to home, like Middle East infrastructure buys, Youssef Nasr, chief executive of HSBC Bank Middle East, said.

When investors decide that their money would be safer in a British soccer team than in an American bank, I think we can take that as a pretty good sign that we’re in serious trouble.

For far too many years, Americans have been able to sustain our lifestyles in large part because Middle Eastern and Asian investors saw it in their best interests to prop up the American economy.  They’ve bankrolled the consumer boom and the real estate bubble, blithely confident that investing in the United States was the safest possible bet.

Right now they’re feeling burned.  The big question is whether that’s a temporary phenomenon or a permanent shift.  If it’s the latter, and you’re wondering what the consequences for the U.S. economy will be, think Lehman Brothers on a national scale.

My country ’tis of thee, sweet land of penury.

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17 September 2008 Charles J. Brown
06:45 am

Morning Buzz: Silliness amidst the Ruins


Two hurricanes hit in the past week — Ike in Texas and Lehman Brothers in New York.  Both are deeply serious situations affecting the lives of thousands of Americans.

And yet there are those who cannot help but see an opportunity for mischief.  First New York:

Now Galveston:

Just wait until AIG fails — I’m betting we’ll see gay bears.

Hat tips:  Andrew Sullivan (bear) and Slog (dudes)

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16 September 2008 Charles J. Brown
06:45 am

Morning Buzz: Music for an Economic Meltdown


The Flying Lizards, 1979.  Your love gives me such a thrill, but your love won’t pay my bills.

According to a VH1 special, the video was made for £7.  Today, that would buy you about 62 shares of Lehman Brothers stock, which closed with a value of 21 cents per share yesterday.

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15 September 2008 Charles J. Brown
04:45 pm

Compare and Contrast: Obama and Paulson on Economic Crisis


Here’s part of what Barack Obama said today about the problems plaguing Wall Street:

The situation with Lehman Brothers and other financial institutions is the latest in a wave of crises that are generating enormous uncertainty about the future of our financial markets. This turmoil is a major threat to our economy and its ability to create good-paying jobs and help working Americans pay their bills, save for their future, and make their mortgage payments.

The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren’t minding the store. Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression.

Now here’s part of what Treasury Secretary Henry Paulson said today:

We’re working through a difficult period in our financial markets right now as we work of some of the past excesses, but the American people can remain confident in the soundness and resilience of our financial system. . . . We’ve got excesses we need to work through and we need to work through them as quickly as possible, and I think we’re making progress.

I appreciate the fact that Paulson is, along with Bernanke, doing his best to prevent a total meltdown of the economy, and I recognize that both men are largely trying to fix problems created by their predecessors.  But come on — who exactly does Paulson think was responsible for the “excesses” that brought about this mess?  Or is the Bush Administration going to try to do what they did with 9/11: blame it on the Clinton-Gore team?

The reality is that for the past seven (nearly eight) years, the Bush Administration has allowed the rich to play with everyone else’s money in ways that has left many Americans exposed to real risk.  In the process, it also has failed to fix many any of the other problems the country is facing — a weakened industrial base, an eroding infrastructure, a blooming debt, a growing climate crisis, a continued dependence on foreign oil, and a declining dollar, just to name the first six that come to mind.

I do not discount the role played by people who bought houses they could not afford.  But who allowed the market to exist in the first place?  Who ignored the problems we faced until it was too late?  Republicans’ arguments that this is all somehow the fault of people who took out sub-prime loans is little more than blaming the victim.  That is so typical of Republicans:  blame the middle class and the poor for the fat cats’ mistakes.

Should things really go south, there really isn’t a safety net capable of preventing the slide.  Face it:  we’re broke.  As a government, we’re no different that Lehman Brothers:  our debits exceed our assets.  Do people really think that the Chinese are going to continue to bail us out, especially now that they’re beginning to find other markets for their goods?  (For the Chinese perspective, read between the lines of this piece.)

Large segments of the world would like nothing better than to see the United States economy crash and burn.  Yes, there will be some short-term impact on global markets, but the reality is that the rest of the world will quickly find that it can live quite well with a weakened United States.

This is, in many ways, even worse than the Depression, even if the final economic consequences prove not to be as dire (something we are not yet assured will be the case):  this time, the government doesn’t have the ability to turn this around.  Unless, of course, à la Zimbabwe, we start printing worthless money (but of course that just creates a new set of problems).

I don’t know whether Obama or McCain or anyone can reverse this slide.  I do know that an Obama administration would be far more likely to convey the reality of the situation than a McCain administration.  An Obama administration would be able to work with a Congress more likely to act on his prescriptions.  But that doesn’t mean that what he wants will work.

In my gut — and that’s all it is at this point — I can’t help believing that this isn’t merely the start of another recession/depression.  It feels much more like the beginning of America’s slide off the top of the pyramid.  I hope I’m mistaken.

In the meantime, you might want to go back and take a look at this James Fallows piece from 2005.  He gets some of the details wrong, but I think he’s scarily on target in terms of the big picture.

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