Rich Florida has just put an interesting post on this blog about understanding the current crisis. I am in complete agreement with his analysis, but what are some of the other dimensions of this crisis?
I want to reflect upon three largely unrecognized changes that this crisis is driving in global finance. This also links back to a portion of my post on the necessity of a global new deal.
First, one of the most interesting features of the current “Wall Street Golden Parachute Bill” that will probably pass the U.S. House of Representatives tomorrow is that any global bank with a U.S. subsidiary will be able to sell its bad U.S. securitized debt to the Federal government. This feature is a critical part of the Bill because it places the U.S. government’s full faith and credit (what little there is) behind these toxic securities. This was necessary as both European and Chinese leaders have demanded that the U.S. government “clean up the mess” that it allowed U.S. banks to create.
For example, according to Bloomberg, the British Prime Minister directly intervened in supposedly “sovereign” U.S. discussions about internal economic matters when he said, “The rescue plan for the United States is an essential element now for the U.S. to build confidence in its financial system. This plan has got to go through, and I think it will in the next few days. People are starting to realize that we {read the U.S.} must take action.” Merkel of Germany and Sarkozy of France openly doubt the U.S. model, while the Chinese have demanded the U.S. meet its financial obligations. Bloomberg reported that Russian Prime Minister Vladimir Putin said yesterday that U.S. “irresponsibility” led to the global financial crisis, discrediting the country’s claims to world leadership.” Further, there seems little doubt now that the takeover of Fannie Mae and Freddie Mac were in some important measure driven by demands by foreign creditors.
Second, the rash of collapsed European banks is challenging the European Union itself. For example, many of the largest European banks are so large that even an economy like Germany might not be able to save its largest banks. Can the EU stay together and cooperate to save their banks.
Third, U.S. and European banks are desperate to get Asian and Middle Eastern banks and sovereign wealth funds to bail them out. However, they wish to surrender no control to the rescuers. In other words, these nations should be philanthropists, while, if the shoe was on the other foot, our banks are more than willing to extract a pound or two of flesh.
The previous suggests that the crisis and any solution must be global. But, unfortunately for the U.S. and Western Europe, this global solution will require that all parties are treated with respect. Those that control the bankroll will no longer be treated as second-class citizens when it comes to decision making. Those that are bankrupt cannot dictate the rules for the solvent.
Do you think the U.S. “gets” this yet? Do the Europeans and the Canadians get it?
Tags: Fannie Mae, Freddie Mac, Wall Street Golden Parachute Bill
October 3rd, 2008 at 8:16 am
I don’t know if it can be said that the U.S. as a whole doesn’t “get” this, but I do think that the majority of the powers-that-be don’t get it, hence the crisis at hand. Just because you’re the loudest, doesn’t mean you’re the smartest.