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Global Crossroads
Garrick Utley, President, Levin Institute 
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Subprime as the Defining Test for Globalization?
Thu,04/17/08
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What is the most frightening thing about the anxiety generating financial crisis that bears the label: “Made in the USA”? It is the unsettling fact that no one knows where it is taking us, or how it will end: with the bang of collapse, or a painful and prolonged whimper as we all adjust to the excesses of sub-prime mortgages, contracting credit and weakening economic growth?
I don’t know how it will end, and you (most probably) don’t know either. That’s one thing. But when the world’s finance ministers, central bankers, IMF and World Bank leaders meet (as they did the weekend of April 12-13) in Washington, one listens closely for insights, or signs of action. This time we heard nothing that is reassuring or even specific. US Treasury Secretary Henry Paulson told the assembly of financial officials, “we must expect more bumps on the road”, and that 2008 will be “a more difficult year”. At least he was being honest about what he and other experts simply don’t (and perhaps can’t) know. And the Washington meetings made clear that there will be no coordinated global effort to deal with the problem; each nation will address its issues on its own.
What began as the sub-prime mortgage problem in the United States and has now become much more. It is a defining test of globalization in this first decade of the 21st Century. When the US Federal Reserve intervened to prevent the collapse of Bear Stearns the reason given was not the familiar one; that the investment bank was too big to be allowed to fail. Rather, it was that Bear Stearns was too “interconnected” to and within the American, and indeed the global financial system, to be allowed to fail. Let’s pause and reflect on that. One original rational (or justification) for the sub-prime mortgage lending, and the subsequent repackaging of these questionable debts into even more questionable and opaque financial instruments that were sold, then repackaged and sold again, was that this would spread the original risk of the lender and hence provide greater financial stability. Instead it has simply spread bad debt and led to today’s crisis.
There is plenty of opportunity for finger pointing and the blame game in all this. The banking industry is offering its mea culpa while at the same time warning against stronger government regulation. Governments are saying if they are to provide safety nets (bail outs) to the financial industry and mortgage holders, they have a duty to ensure stricter oversight. This debate will go on for some time. In the meantime I am more concerned about Treasury Secretary Paulson’s warning of more bumps in the road in 2008. They are more than financial. Economic growth is slowing in much of the world while commodity prices are soaring. Worldwide it is becoming more expensive to put fuel in the car and food in the stomach.
At a recent symposium held at The Levin Institute (the sponsor of Globalization 101.org) economists, corporate executives and others observed that is not just the financial credit crisis that is at issue. The concern that was voiced is the combination of that malady plus commodity prices, plus inflationary trends in key economies such as China, plus a host of other economic problems that are coming together at the same time. Globalization may not have caused any of these, but today’s global connectivity means each problem is felt more rapidly in more parts of the world than before. 2008 is shaping up as a year of considerable uncertainty and discontent. 2009 may be no better.
What do you think? |
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Tue,04/29/08
By : Howard Bonabardt
I find all of this very confusing. You need to know what you're talking about and none of you do. |
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Sun,04/27/08
By : Steven J Rayls
What goes up must come down. In part it is my sincere gut feeling that our economy is crashing and has been for sometime. I say this because of the artificial stops that were placed into the stock market several years ago. These bailouts are much similar to the artificial stops. When we use these kind of principles to try and control the economy all we do is make a jumbo jet that is out of fuel soar a little higher making the crash all that much harder. Had we not interfered in the first place the market would have corrected itself naturally and the brunt of that correction would have been painful to say the least but it would not have been total annihilation. Now we stand to lose all. The United States of America is the closest thing to the old Roman Empire that has ever existed since that time. Lets hope the politicians are not choosing the attitude of Nero and are all on the hill watching Rome burn. |
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Fri,04/25/08
By : KatyKate
Hello whats up I think globalization is very important and you do the right thing:) |
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