If you want to understand a country could go from rich to poor within a decade, read this piece on Ireland’s boom and decline. Michael Lewis, the writer of Blindside and Moneyball, has this great Vanity Fair piece that explains how Ireland got caught in a dizzying housing boom which then collapsed suddenly during the 2008 financial crisis. Having been a “poor” country for much of its existence, Ireland saw an economic surge during the 1990s and early 2000s that earned it the fitting moniquet of the Celtic Tiger (Asia had its own Four Tigers which includes Taiwan). This economic growth was driven by heady spending on property construction which eventually totaled 100 billion euros. Despite the obvious absurdity (how much new hotels, office towers and homes could an island nation of under 4.5 million handle?), hardly anybody questioned or checked into how sustainable all this spending was. Meanwhile, an Irish professor who had taken a keen interest in his country’s rampant property price rises and realized it was built on a flimsy foundation, spoke out against it and was roundly ridiculed and condemned. A classic example of trying to ignore wise advice by shouting down those who bring it.
Lewis strikes a sympathetic note with his take on Ireland, maybe a little overly so, portraying even the supposed villains, the politicians and business executives and banks in humbling terms. In complete contrast to the American Wall Street fat cats who were heavily excoriated but walked away from the financial crisis with personal wealth intact, Irish bank heads lost a lot of their own money, having chosen to invest in their own company stocks, the value of which plummeted after the crisis. This doesn’t excuse the “get rich quick” mentality, no matter how driven by honest intentions it may have been, and the politicians and bank officials deserve much scrutiny and criticism for driving their nation into the ground.
Today stock markets worldwide including Taiwan’s are being rocked by bad news from Dubai. A Dubai government-owned company has asked for 6 more months to repay its debts, raising serious concerns about Dubai’s financial health. This former metropolis of the future and memorial to excess has already been suffering really hard times since the 2008 global financial crisis with giant construction projects going unfinished or scrapped, aid having to sought from national rival Abu Dhabi (also part of the same country UAE), property values dropping and hordes of expats fleeing. A BBC roundup of opinions from a few people in Dubai provides some excellent quotes- “The days of building big buildings to fill them with people who are going to build more buildings are gone” and “As my husband says, Dubai has been going too big too fast and now there are not enough funds to sustain this development.” What more needs to be said?
This city-state, which had been highly touted as a place of the future with its bigger is better mantra and deliberately conspicuous embrace of excess, built on the backs of exploited, wretched foreigners, arouses no sympathy from me.
Everyday brings more news on the worsening global economic crisis, and not just elsewhere but here as well. People losing their jobs, companies going bankrupt or announcing mass layoffs, industries in trouble, stock markets diving and so on. Stories like this and this though are particularly striking because they highlight how even the well-off and seemingly successful are vulnerable. It’s telling that a person can enjoy so much material comforts like a big house or a nice car, and then once he/she loses their job, they can lose everything just like that like with the UK Guardian story linked to above. Some lessons can be learned from these cases, the most obvious being that it’s not good to live beyond your means and not having any or much savings. Spending a lot of money can be alright, if one also saves up a lot of money, and it seems a lot of people just follow the first part.
The current global financial crisis has been dominating the news for at least the past three weeks and seems to show no sign of stopping soon as worried world leaders, corporations and even countries try to come to grips with it. The impact of this crisis on people is certainly tremendous in terms of causing bankruptcies, layoffs, trade reduction, recession fears and credit shortages all over the world. But what makes this crisis especially striking, and in non-financial terms, is that for possibly the first time in recent history, many people living in the developed or “First” world such as the U.S., Canada and Western Europe are truly experiencing or fearing a crisis in their daily lives. While all over the world, people suffer from truly devastating and horrendous conflicts and civil wars, famines, poverty and social instability, the Developed world aka North America, Japan, Australia and Western Europe have been living a rather easy existence where for most, none of their problems concerns necessities like food, housing or running water.
While obviously the suffering of the developing world still far outweighs those felt in the developing world brought on by the financial crisis (hunger and lack of toilets are worse than falling stock portfolio and lost investments), the onset of this financial crisis has caused a great number to actually fear for their daily lives and livelihoods. Maybe I’m reading too much into this crisis but I definitely have a solid feeling about the parallel.
Don’t feel too sorry about any of those folks working in those 5 big Wall Street firms that either collapsed or had to make big changes. Look at the whopping money they earned in the last 5 years.
While their top executives made $3.1 billion, “The five biggest — Goldman, Morgan Stanley, Merrill, Lehman Brothers Holdings Inc. and Bear Stearns — paid their 185,687 employees $66 billion in 2007, as problems with subprime mortgages mounted, including about $39 billion in bonuses.”
Of course they could do this, because they were busy making a lot of money out of nothing, taking risky assets like sub-prime mortgages and other kinds of loans and repackaging them and selling it to each other.
Wall Street firms and giant insurers weren’t the only ones in trouble as large banks also fell victims. It seems like many of these institutions, just like many American consumers and their customers, loaned too much money to the point where “Merrill Lynch commodities strategist Francisco Blanch writes in a report that the ratio of total loans to deposits in the U.S. hit 3.5 to 1 last year”. Explaining the problem with the banks and their overspending is this CNN article.
This article reveals how serious the situation was last week saying it was “the week America’s economy almost died.” Sure it’s probably a bit exagerrated but the situation was serious enough that if it continued for a protracted time, it would have had dire consequences.
Working at the copyediting desk for the past week and reading almost all the articles that appear in the paper, I’ve been inundated by the gigantic financial crisis that went on earlier this week with the collapse of Lehman Brothers, the takeover of Merrill Lynch and the AIG troubles. While I’m no financial genius and can’t fully understand some of the stuff about the crisis, what I do get is that the troubles are largely based on these banks, brokerage houses, Wall Street firms etc holding so much worthless junk assets especially those sub-prime mortgages and other such risky loans. This confirms my suspicions that I’ve had for a while on how can an economy/ financial system be driven and sustained by loans. In North American society, it seems like everything purchased or owned is based on debt whether it be houses, cars, furniture and even tuition. For instance in Toronto, all those condos and big suburban houses being built are mainly bought by people who pay off small deposits and huge mortgages. Surely a system can’t be sustained if it’s based on non-existent virtual money? Surely this “culture of debt” will crash down some time sooner or later.
Of course, the problem really started to unfold when financial companies like banks and brokers, and even an insurance powerhouse, started to play around with all this risky mortgages/loans etc. to manipulate it to get as much as they could out of them all until all hell went loose this past week.
From Mary King in the Trinidad Express: Eventually [sub-prime mortgages] were securitised and sold as financial capital to investors — creating products that earned money not only for the initial lender but other investors around the world. The accumulated risks attached to these new products, derivatives, were difficult to access and via “liquidity-puts” the risks were accepted by the seller of the security. These new financial products create absolutely no new benefit in the real economy and only redistributed the wealth from “Main Street to Wall Street”. The collapse of the US construction sector then created huge losses for the sellers.
Anyways here’s a link to an article that gives a proper account of the crisis.