Sunday, December 30, 2007

Oh damn. We got just what we wished for.

And after that strop, I promptly read Irwin Stelzer's American Account in the Sunday Times, enjoyed every word, and felt better that a handful of sane, decent people are out there, carefully deconstructing the misguided rantings of do-gooders who hate America, capitalism, Big Oil and all those other (Zio)nasties, who are apparently responsible for every mishap in the world...

AMERICANS don’t approve of their president (his approval rating is 36%), even more heartily disapprove of their Congress (approval rating 18%), say their confidence is in free fall and believe their children will be no better or possibly worse off than they are. Three out of four think their country is “on the wrong track”. So they say.

Surprise: the American economy added more than a million new jobs in the year now coming to a close. It grew at an annual rate of between 3% and 4%. Share prices rose by 5% (tech stocks by double digits), recording increases even in recent weeks when the financial markets were supposed to be collapsing. Exports soared, bringing down the long-standing trade deficit. Last month, supposedly traumatised consumers splurged, increasing spending by the largest amount in three-and-a-half years.

In foreign affairs, the troop surge brought down the level of violence in Iraq to a point where American involvement is no longer voters’ No 1 concern. France and Germany ended their contest for the antiAmerican prize, ceding that award to a ranting Venezuelan president whose voters denied him the lifelong term he sought. The French and American presidents had a jolly get-together in Kennebunkport, and the German chancellor sampled the natural glories of the Bush ranch in Crawford, Texas. Jacques Chirac and Gerhard Schröder are hardly missed. Britain’s prime minister chose to be on the outside looking in, but the special relationship will survive his frostiness.

Meanwhile, Peter Wehner and Yuval Levin point out in Commentary magazine that crime is way down; teenage drug use, pregnancies, smoking and drinking are all on the decline; welfare reform is working, bringing down child poverty; and the divorce rate is falling. Most important of all, unlike young men and women in other developed countries, Americans have enough confidence in the future to make lots of babies. This is hardly a society in the winter of its discontent, no matter what Americans tell pollsters.

In short, 2007 was hardly an annus horribilis for Americans. It did not, however, end on a high note. Growth slowed. Houses, once cash machines, became more like ordinary investments that can decline in value a bit after a spectacular run-up. Foolish lenders found ignorant or greedy borrowers, and made loans that will not be repaid. Mathematical geniuses at investment banks built models that failed to incorporate the fact that other geniuses were doing the same thing, producing a concerted dash for the exits when the models said “sell”, but failed to say to whom. Banks, awash with cash, so distrusted their colleagues that they refused to lend to each other, creating what is now called a credit crunch. The Opec cartel decided that oil prices at about $90 a barrel are nicer than at the $28 that it once set as its benchmark. And politicians made it so profitable for farmers to grow fuel rather than food, that the prices of corn, wheat, animal feed, meat and, more important to some, the hops and barley used for beer-making, took off.

Through it all, the world learnt to be careful what it wished for. International institutions and foreign governments have been berating Americans for “unbalancing” world trade by running huge trade deficits.

Finally, the markets agreed, and drove down the dollar. The result has been an increase in the competitiveness of made-in-US goods in foreign markets, and a decline in the competitiveness of foreign-made goods in America. The world got what it wished for: a decline in the American trade deficit. So BMW is laying off thousands of workers as the dollars it gets for the cars it sells in America no longer buy enough euros to meet its payroll; Italian designers are reduced to using cotton where once they would consider only silk; and European hotels and restaurants are pining for a return of the gauche but high-spending Americans who have switched vacation plans to American resorts.

Foreigners also complained that America was presiding over an era of too-easy credit. Complain no more. Your wish has been granted. Mortgages are harder to come by, credit-card applications are being turned down in record numbers, and banks around the country are being sniffier when discussing deals with borrowers. The effect of this tightening, and of the collapse of the sub-prime mortgage and related markets, is just what the doctor ordered to put a stop to the lending so many of America’s critics railed against, and quite properly, too.

But it turns out that the greed for high returns was not confined to Wall Street. From London to Frankfurt to Sydney lenders have snapped up bits of paper into which were bundled risky promises to pay by borrowers who are not likely to do that. Result: balance-sheet wreckage, a need by many banks to raise new capital, and borrowers unable to roll over their loans.

Exit some but not all of the chief executives who presided over the misappraisal of risk, clutching multi-million-dollar golden good-byes. Enter the sovereign wealth funds. Having written down the value of so many assets that they needed infusions of equity, Citi, UBS and others followed the money, most of which turned out to be in China, Singapore, Abu Dhabi, Dubai and Saudi Arabia. The sovereign wealth funds of these countries dipped into their petty cash for the odd billion, and ended up with significant stakes in many American banks. President George Bush says he is happy to see this money come home; others worry about the political influence China and the Arab nations might inject into what were once purely commercial decisions.

What does all this portend for 2008? Watch this space.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

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