"The Post-American World" by Fareed Zakaria

Over the past several years, I've become a big fan of Fareed Zakaria, who currently serves as Editor for Newsweek International and has recently released a new book entitled "The Post-American World."

Fareed was a keynote speaker at last year's Pacific Coast Builder's Conference, and I was fortunate enough to speak to him before his speech and also to grab a quick photo op (my employer at the time, Hanley Wood Market Intelligence, was a primary sponsor of this event). While it's a terrible picture of me, it's the only one I have with him!

What I like about Fareed is his courage in telling unpleasant truths to a country which often prefers to distract itself with more temporary pleasures such as obsessing over American Idol's final 3, buying more home than can reasonably be afforded or running up other debt with the hope that the future will somehow make everything work out. These various distractions have come at a cost: whether we like it or not, other countries are rising up and challenging the United States' ability to dictate to the rest of the world -- but Fareed argues that not only is that a natural consequence of a growth of other countries' economies, but can also greatly benefit Americans and the values that make our society unlike any other in the world.

But first, here's a video clip from Fareed's interview with PBS' Charlie Rose earlier in the month:

So what does that have to do with housing? Quite possibly, a different standard of living and a change in what we expect from our homes and our communities.

Following are portions of an an excerpt published in the May 12th edition of Newsweek (the link also includes another video with Mr. Zakaria on the Newsweek website). And yes, while long, it's a very interesting read:

Americans are glum at the moment. No, I mean really glum. In April, a new poll revealed that 81 percent of the American people believe that the country is on the "wrong track."... There are reasons to be pessimistic—a financial panic and looming recession, a seemingly endless war in Iraq, and the ongoing threat of terrorism. But the facts on the ground—unemployment numbers, foreclosure rates, deaths from terror attacks—are simply not dire enough to explain the present atmosphere of malaise...

In America, we are still debating the nature and extent of anti-Americanism. One side says that the problem is real and worrying and that we must woo the world back. The other says this is the inevitable price of power and that many of these countries are envious—and vaguely French—so we can safely ignore their griping. But while we argue over why they hate us, "they" have moved on, and are now far more interested in other, more dynamic parts of the globe. The world has shifted from anti-Americanism to post-Americanism...

Well, consider this fact. In 2006 and 2007, 124 countries grew their economies at over 4 percent a year. That includes more than 30 countries in Africa. Over the last two decades, lands outside the industrialized West have been growing at rates that were once unthinkable. While there have been booms and busts, the overall trend has been unambiguously upward...

We are living through the third great power shift in modern history. The first was the rise of the Western world, around the 15th century. It produced the world as we know it now—science and technology, commerce and capitalism, the industrial and agricultural revolutions. It also led to the prolonged political dominance of the nations of the Western world. The second shift, which took place in the closing years of the 19th century, was the rise of the United States. Once it industrialized, it soon became the most powerful nation in the world, stronger than any likely combination of other nations. For the last 20 years, America's superpower status in every realm has been largely unchallenged—something that's never happened before in history, at least since the Roman Empire dominated the known world 2,000 years ago. During this Pax Americana, the global economy has accelerated dramatically. And that expansion is the driver behind the third great power shift of the modern age—the rise of the rest...

The post-American world is naturally an unsettling prospect for Americans, but it should not be. This will not be a world defined by the decline of America but rather the rise of everyone else. It is the result of a series of positive trends that have been progressing over the last 20 years, trends that have created an international climate of unprecedented peace and prosperity...

A team of scholars at the University of Maryland has been tracking deaths caused by organized violence. Their data show that wars of all kinds have been declining since the mid-1980s and that we are now at the lowest levels of global violence since the 1950s. Deaths from terrorism are reported to have risen in recent years. But on closer examination, 80 percent of those casualties come from Afghanistan and Iraq, which are really war zones with ongoing insurgencies—and the overall numbers remain small. Looking at the evidence, Harvard's polymath professor Steven Pinker has ventured to speculate that we are probably living "in the most peaceful time of our species' existence."...

Part of the problem is that as violence has been ebbing, information has been exploding. The last 20 years have produced an information revolution that brings us news and, most crucially, images from around the world all the time. The immediacy of the images and the intensity of the 24-hour news cycle combine to produce constant hype...

The threats we face are real. Islamic jihadists are a nasty bunch—they do want to attack civilians everywhere. But it is increasingly clear that militants and suicide bombers make up a tiny portion of the world's 1.3 billion Muslims. They can do real damage, especially if they get their hands on nuclear weapons. But the combined efforts of the world's governments have effectively put them on the run and continue to track them and their money...

Some point to the dangers posed by countries like Iran. These rogue states present real problems, but look at them in context. The American economy is 68 times the size of Iran's. Its military budget is 110 times that of the mullahs. Were Iran to attain a nuclear capacity, it would complicate the geopolitics of the Middle East. But none of the problems we face compare with the dangers posed by a rising Germany in the first half of the 20th century or an expansionist Soviet Union in the second half. Those were great global powers bent on world domination. If this is 1938, as some neoconservatives tell us, then Iran is Romania, not Germany...

Today's rising great powers are relatively benign by historical measure. In the past, when countries grew rich they've wanted to become great military powers, overturn the existing order, and create their own empires or spheres of influence. But since the rise of Japan and Germany in the 1960s and 1970s, none have done this, choosing instead to get rich within the existing international order. China and India are clearly moving in this direction. Even Russia, the most aggressive and revanchist great power today, has done little that compares with past aggressors...

The underlying reality across the globe is of enormous vitality. For the first time ever, most countries around the world are practicing sensible economics. Consider inflation. Over the past 20 years hyperinflation, a problem that used to bedevil large swaths of the world from Turkey to Brazil to Indonesia, has largely vanished, tamed by successful fiscal and monetary policies. The results are clear and stunning. The share of people living on $1 a day has plummeted from 40 percent in 1981 to 18 percent in 2004 and is estimated to drop to 12 percent by 2015. Poverty is falling in countries that house 80 percent of the world's population...

The global economy has more than doubled in size over the last 15 years and is now approaching $54 trillion! Global trade has grown by 133 percent in the same period. The expansion of the global economic pie has been so large, with so many countries participating, that it has become the dominating force of the current era. Wars, terrorism, and civil strife cause disruptions temporarily but eventually they are overwhelmed by the waves of globalization...

The combination of low inflation and lots of cash has meant low interest rates, which in turn have made people act greedily and/or stupidly. So we have witnessed over the last two decades a series of bubbles—in East Asian countries, technology stocks, housing, subprime mortgages, and emerging market equities. Growth also explains one of the signature events of our times—soaring commodity prices. $100 oil is just the tip of the barrel. Almost all commodities are at 200-year highs. Food, only a few decades ago in danger of price collapse, is now in the midst of a scary rise. None of this is due to dramatic fall-offs in supply. It is demand, growing global demand, that is fueling these prices...

It is an accident of history that for the last several centuries, the richest countries in the world have all been very small in terms of population. Denmark has 5.5 million people, the Netherlands has 16.6 million. The United States is the biggest of the bunch and has dominated the advanced industrial world. But the real giants—China, India, Brazil—have been sleeping, unable or unwilling to join the world of functioning economies. Now they are on the move and naturally, given their size, they will have a large footprint on the map of the future. Even if people in these countries remain relatively poor, as nations their total wealth will be massive. Or to put it another way, any number, no matter how small, when multiplied by 2.5 billion becomes a very big number. (2.5 billion is the population of China plus India.)...

As economic fortunes rise, so inevitably does nationalism. Imagine that your country has been poor and marginal for centuries. Finally, things turn around and it becomes a symbol of economic progress and success. You would be proud, and anxious that your people win recognition and respect throughout the world...

Such divergent national perspectives always existed. But today, thanks to the information revolution, they are amplified, echoed, and disseminated...

The fact that newly rising nations are more strongly asserting their ideas and interests is inevitable in a post-American world. This raises a conundrum—how to get a world of many actors to work together. The traditional mechanisms of international cooperation are fraying. The U.N. Security Council has as its permanent members the victors of a war that ended more than 60 years ago. The G8 does not include China, India or Brazil—the three fastest-growing large economies in the world—and yet claims to represent the movers and shakers of the world economy. By tradition, the IMF is always headed by a European and the World Bank by an American. This "tradition," like the segregated customs of an old country club, might be charming to an insider. But to the majority who live outside the West, it seems bigoted...

Over the last 20 years, globalization has been gaining depth and breadth. America has benefited massively from these trends. It has enjoyed unusually robust growth, low unemployment and inflation, and received hundreds of billions of dollars in investment. These are not signs of economic collapse. Its companies have entered new countries and industries with great success, using global supply chains and technology to stay in the vanguard of efficiency. U.S. exports and manufacturing have actually held their ground and services have boomed.

The United States is currently ranked as the globe's most competitive economy by the World Economic Forum. It remains dominant in many industries of the future like nanotechnology, biotechnology, and dozens of smaller high-tech fields. Its universities are the finest in the world, making up 8 of the top ten and 37 of the top fifty, according to a prominent ranking produced by Shanghai Jiao Tong University.

A few years ago the National Science Foundation put out a scary and much-discussed statistic. In 2004, the group said, 950,000 engineers graduated from China and India, while only 70,000 graduated from the United States. But those numbers are wildly off the mark. If you exclude the car mechanics and repairmen—who are all counted as engineers in Chinese and Indian statistics—the numbers look quite different. Per capita, it turns out, the United States trains more engineers than either of the Asian giants...

But America's hidden secret is that most of these engineers are immigrants...Half of all Silicon Valley start-ups have one founder who is an immigrant or first generation American. The potential for a new burst of American productivity depends not on our education system or R&D spending, but on our immigration policies. If these people are allowed and encouraged to stay, then innovation will happen here. If they leave, they'll take it with them...

American society can adapt to this new world. But can the American government? Washington has gotten used to a world in which all roads led to its doorstep. America has rarely had to worry about benchmarking to the rest of the world—it was always so far ahead. But the natives have gotten good at capitalism and the gap is narrowing. Look at the rise of London. It's now the world's leading financial center—less because of things that the United States did badly than those London did well, like improving regulation and becoming friendlier to foreign capital...Twenty years ago, the United States had the lowest corporate taxes in the world. Today they are the second-highest. It's not that ours went up. Those of others went down...

American parochialism is particularly evident in foreign policy...Rather than narrowly obsessing about our own short-term interests and interest groups, our chief priority should be to bring these rising forces into the global system, to integrate them so that they in turn broaden and deepen global economic, political, and cultural ties. If China, India, Russia, Brazil all feel that they have a stake in the existing global order, there will be less danger of war, depression, panics, and breakdowns. There will be lots of problems, crisis, and tensions, but they will occur against a backdrop of systemic stability...

To bring others into this world, the United States needs to make its own commitment to the system clear. So far, America has been able to have it both ways. It is the global rule-maker but doesn't always play by the rules. And forget about standards created by others. Only three countries in the world don't use the metric system—Liberia, Myanmar, and the United States. For America to continue to lead the world, we will have to first join it...

Americans—particularly the American government—have not really understood the rise of the rest. This is one of the most thrilling stories in history. Billions of people are escaping from abject poverty. The world will be enriched and ennobled as they become consumers, producers, inventors, thinkers, dreamers, and doers. This is all happening because of American ideas and actions. For 60 years, the United States has pushed countries to open their markets, free up their politics, and embrace trade and technology...Yet just as they are beginning to do so, we are losing faith in such ideas. We have become suspicious of trade, openness, immigration, and investment because now it's not Americans going abroad but foreigners coming to America. Just as the world is opening up, we are closing down...

Generations from now, when historians write about these times, they might note that by the turn of the 21st century, the United States had succeeded in its great, historical mission—globalizing the world. We don't want them to write that along the way, we forgot to globalize ourselves.

How OPEC may extend the housing slump

There's a very interesting article by Newsweek columnist Robert Samuelson on OPEC's recent success in acting as a true cartel and keeping oil prices high by limiting production. So how will that prolong the housing slump? In three ways: (1) every additional dollar spent on gasoline, heating oil and other petroleum products is a dollar not available for housing, clothing, food and entertainment; (2) since so many products and services in the U.S. are predicated on cheap energy, higher oil prices directly raise the costs for food (both in grocery stores and in restaurants), travel (both cars and airlines) and daily operating costs for just about every business; and (3) people will resist buying in suburbs -- where most of the new housing has been built over the last 40 years -- as long as gas prices are high and still rising:

For much of its 47-year existence, the Organization of the Petroleum Exporting Countries (OPEC) has been a cartel in name only. It could not, in practice, control oil prices because many of its members regularly breached the production quotas that were intended to regulate the market. So OPEC generally followed oil prices up and down, as supply and demand conditions shifted. But now OPEC may be the real deal: a cartel that works. If so, that's bad news for us...

What's wrong is that a fall of oil prices is one of the mecha­nisms by which a recession or economic slowdown corrects itself. Lower prices for gasoline, home heating oil and diesel fuel improve consumer purchasing power. They muffle inflation and in­crease confidence. In this sense, they're an important "automatic stabilizer" for a faltering economy. If the automatic stabilizer is disarmed—or, worse, transformed into an automatic "destabiliz­er"—then the slowdown or recession may get worse...

Two massive oil miscalcula­tions both aided OPEC. First was a widespread underestimate of world demand, especially from China. Since 1999, China's oil use has almost doubled, to 7.5 million barrels a day (mbd) in 2007. (In 2007, world oil use was 86mbd, up 13 percent from 1999. American oil use was 20.8mbd, up 7 percent.) Second was an overestimate of supply. War, civil strife and nationalization have depressed production in Iraq, Nigeria, Iran, Venezuela and elsewhere. Total global capacity might be 4.5mbd higher with­out these setbacks, says the Energy Policy Research Foundation (EPRINC), an industry research group. The combination of higher demand and stunted supply has pushed up prices...

To some extent, we are paying for past shortsightedness. De­pendence on oil imports, now almost 60 percent of our supply, is inevitable. We simply use too much and produce too little. But we could limit OPEC's market power by curbing our demand and increasing our supply. As the worldwide gap between supply and demand rises, it becomes harder for producers to control the market. More have spare capacity; more are tempted to increase production to raise revenues. Controlling supply today is easier because most producers are operating near their potential...

The American approach is to rant at foreign producers on the silly presumption that they should subordinate their interests to ours. The resulting self-righteousness rationalizes a refusal to do much that would actually influence their behavior and limit their freedom of action. It was only last year that Congress raised fuel-efficiency standards for new cars and light trucks: the dampening effects on oil consumption will be years in coming. We have steadfastly re­jected higher gasoline taxes to curb unnecessary driving and strengthen demand for fuel-efficient vehicles (better to tax ourselves than let foreigners tax us through higher prices). And we have consistently restricted oil drilling in Alaska and elsewhere.

It is a fair commentary that, by doing so little to check its own thirst for imports, the United States has unwittingly con­tributed to OPEC's present triumph. The extent of that tri­umph will be tested this year and next...

Even OPEC may be unable to hold prices at today's high and undesirable levels. Whatever happens, the long-term threat of a global oil cartel will remain. We should be taking the hard steps to limit its power. Considering our past complacency, we probably won't.

And THAT is why the recovery in housing -- especially in the suburbs -- may take much longer than in previous downturns.

A former subprime broker tells all

A major argument about fixing the mortgage crisis is the issue of culpability: is the collapse in housing and credit due to speculative borrowers or greedy lenders? When I've asked this question of people who worked in the mortgage business, the answer, somewhat to my surprise, pointed to other brokers who engaged in questionable practices. This is an important distinction, because any government bailout will only be palatable to the American people if borrowers can be portrayed as victims. And that's just what a story in Newsweek does:

Over the last six months the public has learned much about the business of subprime lending, the practice that put millions of Americans with low credit scores into homes—which many may soon lose to foreclosure.

Richard Bitner, in contrast, received his subprime education earlier than the rest of us. In 2000 he and some friends founded a Dallas-based subprime mortgage company. For a few years he profited handsomely from this sector's boom, earning a paycheck in the high six figures. In the early days Bitner felt a bit like a modern-day George Bailey, as he helped marginal but deserving buyers achieve homeownership. But as lending standards slipped and mortgage brokers began gaming the system, he began to see more borrowers signing on to mortgages he suspected they couldn't afford.

Disillusioned and realizing the subprime business was becoming less and less profitable, Bitner cashed out of the industry in 2005. And when the subprime market collapsed last year, he decided to tell his story in a new self-published book, "Greed, Fraud & Ignorance: A Subprime Lender's Look at the Mortgage Collapse," which is for sale on his Web site and at Amazon. Today he's promoting the book full-time. "I could afford to take a year off and do this," he says in an interview. "I want some positive change to come from this."...

As Bitner portrays it, a complicated mixture of factors led to the subprime boom and bust. Some of his colleagues credited the Federal Reserve's easy money policy. One friend boasts that Alan Greenspan’s rate cuts during the early 2000s helped him earn more in four years than he had in his entire career. Ratings agencies like Fitch, Moody's and Standard and Poors also played a part by giving investors confidence to buy repackaged securitized mortgages, which gave big mortgage companies seemingly limitless capital to lend out.

His biggest criticisms, though, are reserved for mortgage brokers and appraisers. As Bitner describes it, lenders like his company, which underwrote loans offered up by brokers and resold them to giants like Countrywide, spent much of their workdays trying to spot the stupid tricks brokers routinely used to get unqualified borrowers approved for loans. They'd say a buyer intended to live in a house when it was really an investment property. They'd falsify the buyer's income by having a relative pose as his employer, or use scanners and software to forge W-2 forms. They'd find ways to hide debts (like a car payment) by looking for a credit report that omitted key data. They also routinely gamed the appraisal system, encouraging appraisers to look for "comparables" that were far nicer homes in better neighborhoods—all in an effort to drive up the appraised value of the home they were mortgaging...

In Washington, Congress has been holding hearings to explore what went wrong in the subprime industry—and how to fix it for the future. Bitner has his own ideas. He believes mortgage brokers should have to pass national licensing exams, and he's a fan of the growing concept of "up-front" mortgage brokers, who charge a set and transparent fee for their services. He thinks the appraisal process should be overhauled to give appraisers more independence, and he believes subprime borrowers should attend mandatory debt counseling before their loan closes.

But he doesn't believe subprime lending should vanish entirely. Before they became infamous as "liar's loans," so-called "no documentation" loans worked just fine when they were offered only to self-employed people with good credit scores and hefty down payments.

So a few greedy people ruined it for everyone else? How utterly American.