It’s my job to research developing markets around the globe—and their different approaches to growth.
But these days, it’s the U.S. economy that’s searching for a way forward.
Last Thursday, for example, the world witnessed a beaten Alan Greenspan cop to dropping the ball in terms of monetary policy. When he decided to play fast and loose with interest rates in the 90s, he let a parallel market for mortgage-backed securities develop without government regulation or transparency standards.
Greenspan is “in a state of shocked disbelief” at how much damage sliced-up, securitized sub-prime mortgage debt has wrought from Wall Street to frontier markets like Iceland.
The man we thanked for all the wealth created in the dot-com and real estate boom markets is now being blamed for the collapses of both.
His view was that markets would take care of themselves because fundamental capitalist principles should lead traders to demand information and make investments, not place bets.
But when all the action in collateralized debt obligations, credit-default swaps, and other obscure financial instruments became so far removed from underlying assets, a casino mentality took over. As time went on, the bets got further and further out of sync with market movements.
Sure, massive wealth was created in that environment of big risk and big reward, and much of that money was reinvested in luxury items, property, and other assets.
Americans have essentially been the captains of the world economy since World War II and the development of the Bretton Woods system.
Bretton Woods is the name of the New England ski resort and spa where world leaders met to plan out the post-war international financial system in the summer of 1944. Between mud baths and cocktails, dozens of central bankers and heads of state decided to make the dollar the global reserve currency. They also placed the World Bank in U.S. hands, while the Europeans got the top position at the International Monetary Fund.
When the U.S. suspended the dollar’s gold basis in 1971, Bretton Woods was undermined, but this country’s leading position among western economies was already cemented.
So when Greenspan took a hands-off approach in the late 90s, other developed countries did, too.
For Better or Worse, the World Wants U.S. Leadership
Turn the clock forward to 2008, and international stock indexes are at or below their levels when the sub-prime bubble started inflating. What the market giveth, the market taketh away… and then some.
Still, a week away from what is agreed to be the most important election in a generation, the world is looking to Washington and New York for a way out of the ditch we dug.
French newspaper Le Figaro featured an opinion article Friday wherein a French historian studying in New York praises America’s “pioneer spirit in times of crisis.”
The author, Esther Benbassa, is an expert on the American past from an outside perspective. So what’s her prediction for what’s to come?
“Capitalism might change face in the coming years, the crisis will touch all sectors, but in the U.S. the fighting spirit remains the rule, despite the hard knocks.”
In America, Benbassa adds, creativity awakens when everything goes wrong.
So at this time we have to look for creative capitalism that doesn’t end up knocking us backwards in the end, as has happened with subprime.
Does Greenspan’s predecessor know the best way to a more solid financial future?
We Need Fewer Financial Engineers
“It seems to me what our nation needs is more civil engineers and electrical engineers and fewer financial engineers.”
Those are the words of former Federal Reserve Chairman Paul Volcker, speaking earlier this month to Charlie Rose in a television interview. His view is that real, tangible growth can come from construction of things that will last.
Ian Cooper detailed the roots of the credit collapse in his Saturday edition of Wealth Daily last week, remarking on the understandable urge many of us have to get payback from Wall Street.
But in the eyes of Volcker and other top policy veterans, the best reparations for subprime will come in the form of organic growth and hands-on employment.
Whether it’s roads, bridges, or new on-ramps to the information superhighway, America needs to build and improve infrastructure for today’s generation and for posterity.
Rural electrification, adult literacy programs, and flood control were part of the legacy of the Great Depression, because Washington’s response to Wall Street’s calamity targeted the real economy first.
Those steps brought more economic growth into the realm of possibility, rather than squeezing the same dollars until they yielded off-market gains, which is what we have done recently.
Volcker was something like the anti-Greenspan in his eight years of steering the Fed, fighting skyrocketing inflation (13.3% in 1979) with historically high interest rates, and working with Ronald Reagan to combat the wage-price spiral.
Now, he’s a top economic advisor to Barack Obama, joining with former Treasury Secretary Robert Rubin and billionaire Warren Buffett, who has used the current downturn to acquire downtrodden companies like Baltimore’s Constellation Energy.
Volcker is a man with a successful record of bi-partisan cooperation, which is at a premium now that the problems we face need forceful, joint action.
I’m glad to know that the world is still confident in America’s capacity to create wealth and do the right thing. Whether we justify that confidence in the coming months and years of recovery and restructuring remains to be seen.
One thing’s for sure though: With new kinds of growth will come new fortunes. Hopefully this time around those fortunes won’t turn out to be illusory.
Regards,
Sam Hopkins
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