The Housing Chronicles Blog: Third world schadenfreude

Tuesday, January 22, 2008

Third world schadenfreude

I've found that few words delight other people than learning the term "schadenfreude." A German word describing taking pleasure in another's pain -- and which literally come from the words "damage" and "joy" -- I think people are relieved to discover there's a word to define a feeling not covered by the teachings of the New Testament.

So I've got to wonder if the third world countries that have defaulted in debt in the past or suffered various currency crises are enjoying their own form of schadenfreude now that the U.S. seems to be joining their ranks. From an op-ed piece by New York Times columnist Paul Krugman:

Mexico. Brazil. Argentina. Mexico, again. Thailand. Indonesia. Argentina, again.

And now, the United States.

The story has played itself out time and time again over the past 30 years. Global investors, disappointed with the returns they’re getting, search for alternatives. They think they’ve found what they’re looking for in some country or other, and money rushes in.

But eventually it becomes clear that the investment opportunity wasn’t all it seemed to be, and the money rushes out again, with nasty consequences for the former financial favorite. That’s the story of multiple financial crises in Latin America and Asia. And it’s also the story of the U.S. combined housing and credit bubble. These days, we’re playing the role usually assigned to third-world economies.

Fortunately, we won't likely have the same fate as these other countries for several reasons:

The saving grace of America’s situation is that our foreign debts are in our own currency. This means that we won’t have the kind of financial death spiral Argentina experienced, in which a falling peso caused the country’s debts, which were in dollars, to balloon in value relative to domestic assets.

But even without those currency effects, the next year or two could be quite unpleasant.

The real sin, both of the Fed and of the Bush administration, was the failure to exercise adult supervision over markets running wild...

It wasn’t just Alan Greenspan’s unwillingness to admit that there was anything more than a bit of “froth” in housing markets, or his refusal to do anything about subprime abuses. The fact is that as America’s financial system has grown ever more complex, it has also outgrown the framework of banking regulations that used to protect us — yet instead of an attempt to update that framework, all we got were paeans to the wonders of free markets.

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