Tuesday’s lunch with an old friend (of South Africa’s and mine), Walter Kannsteiner, former US Assistant Secretary of State for African Affairs, yielded a useful insider insight. Walter observed that Washington DC is “the only city in America where entrée to power is more important than access to money”.
Ironically, a stone’s throw away from our downtown restaurant a drama was underway that very afternoon, which saw the fusion of power and money in a scene unwitnessed here since the Great Depression. The CEO’s of the nine largest banks were in conclave in the marbled conference room of the Treasury Department. They were presented with a one-page document by Treasury Secretary Hank Paulson that said they agreed to sell shares in their banks to the Federal Government. According to the New York Times, Paulson told them they had to sign it before they left. They duly obliged. This part nationalization of the American banking system was seen by a clearly reluctant Paulson as the only key to unlocking what had become a global financial crisis headquartered in, but by no means confined to, America. His $250 billion bank recapitalisation scheme clearly stuck in his Republican craw. As he justified it afterward: “Government owning a stake at any private US company is objectionable to most Americans, me included. Yet, the alternative of leaving businesses and consumers without access to financing is totally unacceptable.”
What Paulson failed to disclose was how strenuously he had initially opposed the very step the markets forced him to take. Because by Friday of the preceding week ,the Dow industrial average had recorded its worst decline in a week, percentage wise, in its 112 year history. On that day alone, it lurched on a rollercoaster ride of more than a thousand points. Since J M Keynes has now elbowed out Milton Friedman as the reigning intellectual prophet here, Paulson no doubt decided that Keynesian adage: “when the facts change I change my mind” was the best philosophical straw to grasp.
Whatever the explanation for the turnaround, anticipation of the step had, by Monday, seen the Dow rebound by an extraordinary 936 points (11%), the largest single day-gain since, you guessed it, the Great Depression.
The one person, however, who was having no positive effect on market sentiment (and even less bounce, except of the dead-cat sort, on the fortunes of his fast-fading presidential standard bearer John McCain) was President Bush. Somewhat gleefully, Dana Milbank wrote in the Washington Post that “for the twentieth time in recent days Bush tried to calm the markets. The previous nineteen times the markets ignored him and continued their downward plunge, and this time would be no different.” The columnist was referring to Bush’s Rose Garden speech last Friday when the President said “the American people can be confident on our economic future”. A few minutes later, 300 points were shaved off the Dow.
Given the distrust, and ineffectiveness of the political classes around here, it seemed a better bet to soak some wisdom from the intellectual sponge of the globalization guru, Thomas L. Friedman (author of the award-winning “The World is Flat”). I went to hear him speak at the Washington launch of his new work, “Hot, Flat and Crowded”, a critical look at the unsustainability of a rising world population coupled with global energy demands and the destruction of our biodiversity.
But Freidman wasn’t simply interesting on the convergence of global warming, global flattening and global crowding. He was also apt on the current financial crisis. As he put it, “in some ways we‘ve become a subprime nation that thinks it can just borrow its way to prosperity – putting nothing down and making no payments for two years. Subprime lenders told us we could have the American dream – a home of our own – without the discipline or sacrifice that home-ownership requires”. A welter of evidence supports his thesis: Since the 1980s, Americans have consumed more than they produced but made up the difference by borrowing. (South Africans, incidentally, do precisely the same – only in America, like the food, it’s all super-sized).
Two decades of easy money and innovative financial products (including the dark and unfathomable ones like the derivatives that caused all the trouble) has seen household debt balloon in this country from $680 billion in 1974 to $14 trillion today. And the government has mirrored (or led) the consumer trend by ringing up a budget deficit of $454 billion in the current financial year. Freidman noted that the worst message Bush sent out after 9/11 was to tell Americans, immediately after that disaster, to “go shopping”. A nation addicted to consumption, not saving, hardly needed any presidential encouragement.
Instead of retail therapy, a much better strategy, he suggests, would have been to promote investment in energy efficiency, cut America’s dependence on energy-guzzling fossil fuels and the “petro- dictatorships” on which American oil imports depend.
Understandably, various American doomsayers have triumphalised about “a shattering moment of America’s fall from power”, to quote the Guardian of London. But its ideological opposite, the Wall Street Journal, suggests that despite current travails, America will remain a superpower. Two figures were striking in their analysis: its staggeringly large bailout of nearly a trillion dollars constitutes only 5% of U.S. Gross Domestic Product (whereas Britain’s slightly more expensive version amounts to a whopping 30% of its GDP). And last week’s historic plunge in the Dow still meant that the U.S. bourse outperformed nearly every single major stock exchange throughout the world, from Germany to China.
As the old Nedbank advert used to say, “It makes you think, doesn’t it?”