Thursday, July 10, 2008

The reality behind sub-prime and the credit crunch

A few days ago I read about a book that has the thesis that there is more to the credit crunch and its originating cause in the sub-prime market in the US than meets the eye. The idea goes like this: that the sub-prime bubble was created as a final salvaging mechanism for a US economy in a current-account deficit nose-dive. People were offered a mortgage who could never realistically continue to pay for it should property prices dip by a few points. This was part and parcel of the myth of an exponential increase in home ownership in the US - a tacit Bill of Rights amendment. This tactic has a precedent: Margaret Thatcher exploited a similar feel-good factor with the sale of council houses to their tenants in the 1980s.

The larger historical narrative at play is of course the shift of all large-scale commercial activity to Asia, spelling the death rattle of the US car market and agribusiness, followed by high-end outsourcing to India and China (even local American newspapers are now being produced in India). Sub-prime was simply a feel-good patch to cover over this inevitable shift. The credit crunch, under this analysis, is not the usual bust part of a boom-bust cycle, nor is it simply the inevitable bear market correction of over-inflated asset values, nor is it simply a financial services sector losing out after under-regulation. Rather, the credit crunch marks the end of the global hegemony of Western/Northern economies.

An interesting thesis. What do you all think?


me,  7:49 pm  

Some good points.

I remember reading about this earlier this year.

However, it should be pointed out that Sub-prime lending (in all its forms) has always existed and will always exist (some companies go in purely for the profit-maximising hell of it). It is not something that was just created/popularised recently.....

gungun 7:55 pm  

I have been thinking hard about what may bring about a turnaround in the US economy and I haven't been able to come up with any easy answers. However, I believe the US economy will recover, not to its previous heights, but still a significant financial powerhouse because I suspect china and the rest of the gang will continue to lend to the US. The greenback will keep taking a hit, but this should boost export and help agric and manufacturing.

The US will be ok for as long as it's the preferred destination for sovereign funds (Nigeria included), but sometime in the next few decades the competition for those fund will increase from emerging economies ala crude oil and that's when I think the death knell will sound for 'superpower' US.

internationalhome 8:21 pm  

If anything else, the credit crunch underlines the position of western countries in international relations. This thesis appears to ignore the concept of a global economy and in effect, the economics of international relations and globalization. What about the effects of its "sister" markets in other western countries, actions by BNP paribas in particular and the peculiarities in other markets, with the British financial sector and the LIBOR?

olu,  8:32 pm  

Some insightful writing has mushroomed around this topic.A common thread:historically,a slow down in the US economy meant a slow down globally.Not this time however.The current climate is an exception to the 'rule'.Fareed
Zakaria calls it the 'rise of the rest'.

In retrospect,its not surprising. Americans are 'masters of illusion'.What else do you expect when you play around with economic juju?

You would think some cold, calculating objectivity would take precedence.But no.You have McCain spouting free market mantras and Obama playing the bleeding heart liberal

Maybe its my third world angst,but there's some perverse pleasure in all this.

Long live the Dragon..

Ola,  3:37 am  

Not sure about the argument in this book you refer to but an Interesting analysis:

A'dele 6:19 pm  

I am on two sides on this one. Whilst I agree that this may be the 'rise of the rest' like Olu quoted I also think that the US should not fall as it will possibly take down some of her allies... third world angst or not Olu, one has to think which other country has built herself like the US?
Anyway, gungun, I think that a turnaround for the US could be in amalgamation with surrounding countries to increase population/workforce consequently the economy.
Also Nations should shift their focus to manufacturing and agriculture... I do believe Agriculture is going to become the new Crude Oil... particularly for Nigeria when the rigs finally dry up.

Naapali 7:09 pm  

Interesting but blown out of proportion. It belongs in the same category of works that announce with every crisis; Armageddon is here. Back in the 80s during the last great recession in the US the cry was how America was finished and the Japanese were now buying up everything. The Asian tiger had roared and the West was no more. Almost thirty years later Japan remains the second largest economy in the world and remains caught in the throes of the same economic crisis the US finds itself (Japan's has its own unique flavor).

Surely the subprime crisis will change life and how business is done in the US (and the rest of the West) but it is premature to sound the death knell.

Naapali 7:12 pm  

@ Olu
- you don't think there is a slow down in the rest of the world? Decoupling, which you allude to was popular last Summer. I have not heard or read any serious economist mention decoupling except with the same embarrassment one confesses to having once listened to the Spice Girls.

Ola,  4:56 pm  

@OLU: I suspect you missed the thrust of Zakaria's book which is that the 'rise of the rest' does not inevitably mean the decline of the west-it's not a zero sum game.

I think Naapali is spot on about 'decoupling'. We have had several cycles of 'decline' and recovery. I'm not sure there's ever been a 5 year period in the last 40 years that there wasn't some intense speculation about the fall or decline of the US-this is not to suggest it's an impossibility- but it helps to put things in perspective. Just check news-stories about the US/western economy from the 70s and early 80s

And @ Olu and other Dragon-lovers-i think this pining for China to take the place of the US in world leadership is rather short-sighted-except you and I don't share the same democratic values-before you quickly point out America's shortcomings or instances of 'not living up to democratic ideals', please note that no matter what america arguably does wrong, the good thing about a well-developed democratic system is that it is openly self-critical and ultimately self-correcting. Why? Because 'the people' are the ultimate custodians of democratic values-and they do have a lot of leverage. I'm sure you can't quite say the same for the dragon-yet.

Naapali 7:00 pm  

@ Ola
- I could not agree more.
- Dubya and the last 7 years have called into question every democratic ideal the US expounds. However those debates are being had publicly and will result in rolling back some if not all of the departures from democratic values that the US has undergone. Same cannot yet be said about China

olu,  8:41 am  

@ Naapali and Ola - Yes, the 'rise of the rest' is not a zero sum deal, but it sure feels that way in my 'hood'(wash.DC) The paranoia in the air is just stifling.

Whether we like it or not,Yankee is on shaky ground: ridiculous current account deficits,bigtime unfunded liablities
( etc),even Fannie May and Freddie Mac, THE government sponsored enterprises and the guarantors of last resort for these loans, MAY HAVE TO BE BAILED OUT BY THE FEDS! Just how long can this go on ?

I guess what gets my goat is that these indicators may just be 'tremors'. We're at the stage where we may or may not experience the "big one".Something to really send shite flying. The numbers are still very much malleable.

You know,deep down we are all Americans
(yikes,did i say THAT ??).Those founding principles,the 'open self-criticism' you mentioned, all admirable...

The Dragon worship on my part is really a just me on my soap box (Dubya, is just the latest incarnation. There is a WHOLE LOT to DESPISE about Yankee foreign policy.Just ask the Haitians)

Kai! but you know,i may not be able to chop its head off o. But i'd like to give that American bald eagle a black eye.Just once.

About This Blog

  © Blogger templates Psi by 2008

Back to TOP