The Housing Chronicles Blog: The long-term consequences of the housing crisis

Monday, January 28, 2008

The long-term consequences of the housing crisis

There are always consequences to pay for bad decisions, and in the case of borrowers getting mortgages they can't afford and Wall Street pooling them into securities sold around the world, it looks like the ultimate consequence will be a gradual slipping of the U.S.' domination of financial markets in favor of emerging markets in Asia and the Middle East. But is this just defeatism or basic math? Newsweek International Editor Fareek Zarakia would argue it's the latter:

As the American economy slows down, there are no indications that other countries are tumbling. In particular, the fastest-growing big economies in the world—China, India, Brazil—appear set to continue with their robust growth. While a sharp American downturn will surely slow them down somewhat, those emerging markets will all continue to expand—to buy, sell and trade—and this will help the United States...

Another group of countries is bailing out the United States in a different way. The past few years have been very good to the world's energy-rich lands—Kuwait, the United Arab Emirates, Saudi Arabia, Norway. Add to the list China and Singapore; they may not be big oil exporters, but they still have huge surpluses. These vast savings have to go somewhere, and sovereign wealth funds—the investment arms of these nations—have provided infusions of cash to otherwise desperate American financial firms. Imagine what the U.S. economy would look like without these investments. Many of its most illustrious banks and financial companies would have gone bankrupt, triggering cascades of gloom and doom across America. The fact that there are large pools of capital available to shore up faltering giants might actually add substantially to the stability of the system as a whole.

These trends represent a large, ongoing shift in the global economic order. Power is moving away from the traditional centers of the global economy—the Western nations—to the emerging markets. To put it more bluntly: the United States is in the beginning of a period of relative decline. It may not be steep or dramatic, but the fact that it's happening is clear. Even if one assumes a slowdown, the other big economies will still grow at two and three times the pace of the West. Over time they will take up a larger share of the global economy—and the United States and Western Europe will have thinner slices. This is not defeatism, it's math...

On the American campaign trail, the candidates talk about a world utterly unrelated to the one that is actually being created on the ground. The Republicans promise to wage war against Islamic extremists and modernize the Middle East. The Democrats deplore the ills of globalization and free trade, and urge tougher measures against China. Meanwhile Middle Eastern fund managers and Asian consumers are quietly keeping the U.S. economy afloat.

Newsweek writer Daniel Gross also takes on this subject in a long and detailed article:

More and more business people and economists think the United States and the rest of the world may be moving in different directions. "We're seeing a general decoupling," said James Owens, chairman of U.S. machinery giant Caterpillar. While demand is weak in the U.S., he says, "South America, Asia, Russia, Eastern Europe, all have very strong commodity-based exports. The fundamental economic health in these markets is strong." In addition, companies and consumers in these countries no longer rely mostly on U.S. financing to buy tractors and construction equipment.

"Decoupling" was one of the hot buzzwords to emerge from Davos. A bestselling book is "The World Without Us," about the fate of the globe without humans. But that could well be the title for the global economy in 2008. For while the U.S. may not be contributing materially to economic growth, cocky newcomers to the global party say they can take it from here...

Last year's bears and scolds at Davos have become this year's sages. In 2007, U.S. private-equity and banking executives were the rock stars on the Swiss slopes. This year, the managers of sovereign-wealth funds from the Persian Gulf and Asia were the main attraction. What was generally regarded to be the world's strongest financial system now seems one of its weakest, while emerging economies are practically paragons of fiscal and monetary health. In the 1990s, crises in the developing world—Latin America, Russia and the Far East—roiled the global markets. Today problems in the most-developed countries—subprime in the United States; the failure of mortgage lender Northern Rock in the U.K.; the rogue-trading scandal at France's Société Générale. A new financial order is clearly dawning...

We've heard over the past few years that the U.S. churns out far fewer college graduates in engineering than in places like China, and has become a service-based economy that increasingly relies on consumer spending to keep growing. It is possible that the consequences of a "I want it NOW!" culture has sped up an inevitable transferring of economic strength to emerging countries?

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