Not a day goes by without
a major European or US bank announcing some kind
of financial complication or the other. While much
of the problem lies with exposures to the US
subprime market, it is perhaps no exaggeration to
point out that when banks cannot or will not lend
to one another, the global financial system is for
all intent and purposes broken.
There are
multiple facets of this problem, as I described in
recent articles: first, [1] the penchant of Asian
countries to preserve fixed
currency values against the
US dollar, which has caused the massive and
unnecessary reserves buildup that underpins the
whole deck of cards that the financial system is
today. The second issue is the repackaging of
billions of dollars of US housing (mortgage) debt,
the defaults on which threaten to wipe out many
years of already meager investment returns for
Asian central and commercial banks. [2] Third, we
have the reactions from the Western central banks
such as the US Federal Reserve and the European
Central Bank that are aimed at stabilizing the
financial system but draw much on the implicit
support of Asian savers. [3]
Caveat
venditor Since the mid-1980s, the United
States has waged an undeclared war against
Colombian drug suppliers. Reeling from a mounting
problem of substance abuse in urban America and
the inevitable decay this caused across the
productive landscape, US lawmakers in essence took
international law into their own hands and
authorized their military and Central Intelligence
Agency to attack the various Colombian drug
cartels (such as those based in Medellin, Cali et
al).
I have no sympathy with drug pushers,
but the attacks on Colombia, which included
precision air strikes deep within sovereign
territory, did raise two important questions:
first on the right international protocols that
must be observed and, perhaps more important, the
second consideration of why the United States
wasn't tackling its end of the problem with equal
fervor or aggression.
I will leave the
first issue for diplomats to consider and address,
especially as the pattern has repeated since then,
with the most recent examples being the invasion
of Afghanistan and Iraq, ostensibly under the
guise of killing terrorists based there.
The second issue raised above, though,
goes much deeper, into the moral values that the
United States upholds. The principle of caveat
emptor or "buyer beware" has held for
centuries. It in essence implies that anyone
purchasing a product must bear the consequences of
subsequent performance. In the case of illegal
drugs, though, the US government changed this core
principle to caveat venditor or "seller
beware", in other words transferring the onus of
the problem to the sellers and indeed their
countries.
Attempts at destroying supply
lines without changing the demand situation, as
more and more American youngsters and their
parents get stoned, obviously runs counter to good
economic principles. Prices simply go up and, when
they do, suppliers become increasingly desperate
and therefore ruthless. Within the "community" of
US drug pushers, the "war on drugs" thus caused
the gentlemanly Italian mobsters rapidly to give
way to the ruthless Latin American gangs who left
a much greater trail of carnage behind.
The lack of a comprehensive program to
reduce drug usage by youngsters and nip the demand
problem in the bud remains an extremely relevant
one even today, well after the "war on drugs"
started some 30 years ago. The biggest weakness in
the US armory is thus its own inability to cut
demand. Without such ability the country can
pursue drug pushers to the moon (which is not a
function of how "high" they can get) and still
fail to curb the problem.
Credit is
addictive too Much like the supposed highs
from using illegal drugs, borrowing outside of
one's means provides the opportunity for people to
make more than their fair share of income. This
leveraging effect has been at the heart of much of
the value that the United States supposedly
created for itself in the past 20 years. Take it
away and suddenly the famed finance-based economy
simply falls apart like a house of cards.
A typical person would carefully examine
what he can afford before taking out a loan,
especially on an asset as important as a house. He
would then find something that fits his budget,
move in and hope for the best. This is not without
risk, but at least the basic process of taking
only risks acceptable to everyone is indeed
followed. The process also has an advantage in
that when someone makes a choice of, say, a
mortgage that cannot be afforded, the banking
counter-party typically turns him down, forcing
him to reduce his expectations.
During the
1990s, though, the US basically discarded every
basic principle of banking. First, a central
banker intent on protecting Wall Street bonuses
jumped the gun on cutting interest rates sharply,
in essence creating negative interest rates that
presaged rampant asset inflation. The moves were
already quite controversial because of what had
happened in Hong Kong during the early 1990s, when
the currency peg to the US dollar kept interest
rates below the local inflation rate, in essence
fueling a massive asset bubble that popped
painfully in the late '90s and caused house prices
to fall some 50%. Despite the wealth of historical
and recent examples, then-Federal Reserve chairman
Alan Greenspan and his cohorts chose to keep
interest rates too low.
Of course, one
shouldn't judge Greenspan too harshly either. He
found himself presiding over an economy that had
lost all of its
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