America's cup of woes filled up last week when Wall Street faced its worst crash in history. As the Federal Government struggles to balance its books with a trillion dollar bailout for the economy, the Oracle ponders the economic and symbolic impact of the financial disaster.
For one, investment banking is dead. One by one, the greats of investment banking; Bear Sterns, Lehman Brothers and Merill Lynch all dropped to their deaths as Wall Street trembled. For the still surviving Morgan-Stanley and Goldman-Sachs, it was time to change to a more universal model of banking, like that of Bank of America. As the NYTimes noted, this was an "end to the high flying culture of Wall Street". It was either that or death.
The US Government's $700 bn (eventually upto a trillion) dollar bailout plan is the immediate talking point across the world. The Government will buy out millions of bad mortgages with taxpayers' money. It is patently unfair to make the many pay for the stupidity of the few. The financial crisis is a result of an era of irresponsible borrowing and irresponsible lending; hence it follows that the people who took out those bad mortgages and the banks that offered them should be allowed to suffer. That sounds easy enough, right? Not in the kangaroo world of a newly socialist America.
The interesting political feature of these events is the reaction from the Governments in Europe. The sticking point in the Federal bailout is the inclusion of non US based financial institutions and there are many who argued that US Government money should be spent only on rescuing US institutions. This, as it turned out, was not a practical proposition; since Americans have millions of dollars of their assets pegged to foreign financial firms. The next idea was therefore, to persuade European Governments to participate in the financial aid package being given to the industry. A rude shock followed. America was cold shouldered all across Europe. Chancellor Merkel, one of President Bush's most solid allies, was particularly categorical in her rebuttal. She demanded why the US had not modified its financial regulation laws to conform to the Basle II agreement, unlike most other signatories to the pact? The arrogant tone in which this message was delivered to Washington does not bode well for America.
If integrity is a consideration, the nations of Western Europe certainly owe America big time; not just for their freedoms, but also for the rebuilding of their economies after the War, for their national security in the Cold War era and even for control of nuclear weapons under NATO arms sharing agreements. That these same nations should so summarily dismiss America in a difficult situation is a sign that the US needs to rethink its alliances. It is also a symptom of how much America's image has suffered under President Bush. As such, the democratic governments of Europe will not find it hard to sell their policy of cold noncooperation towards America to their electorate. In fact, Chancellor Merkel made some of her most scathing remarks at a CDU campaign rally in Linz; as reported by Der Spiegel. This is a long way off from the more optimistic attitude of the NYTimes, which wrote last week: "The Europeans realize that, in times of need, we are all in the same boat". This mismatch of expectations one opposite sides of the Atlantic is too stark to escape notice.
Put another way, however, the Europeans did have a point. Most of this financial crisis is US made. European Majors such as Deutsche Bank and UBS suffered losses only in their US operations. In India, for instance, the home demand driven economy suffered little. When Wall Street crashed in 1929, it was due to an euphoria of post war spending. But the US has been in combat mode ever since the attacks of Sept 11; and ever since, Americans have lost confidence in President Bush, with upwards of 70% believing that their country is headed in the wrong direction. For people in the US, this should not have been an era of reckless consumption. Even so, the "wining and dining" of the Clinton years continued unabated, credit was abundant and spending was reckless. Did Americans just become much too insular for their own good?
The failure of Wall Street is a wake up call for America. The US Economy has suffered its heaviest losses in history and what is more, the nature of the financial system had to be irrevocably altered to weather the storm. Coming after a string of military and diplomatic reverses, the economic collapse is a body blow to US leadership in the world. It is time for the US to realize that certain issues have remained stuck up in the political bottleneck far too long. Issues such as global warming should not have to make a round through political circles. Issues such as reducing dependence on oil from the Middle East need not be caught forever in the political debates of an uninformed public. The answer to the latter is of course, to use renewable fuels such as ethanol extracted from corn and not to drill and drill around the US coast until there is no Earth left. And much of the solution lies in collectivizing means of transport, for instance, which will require Americans to rethink their cities. It is time for Americans to realize that some problems are just difficult.
In all this, there is a warning to both the newly consumerist nations of India and China. The dangers of narcissism, of too much confidence and overspending; have become all too apparent. The US model has been a wildly successful one, but its soft underbelly has just been exposed. India needs to adopt the European model; that of a capitalist system with checks and balances. Fortunately, Indians seem to have a proclivity for spending within their means, but with India rising fast on the global ladder, this might change pretty soon.
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