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in the Age of Empire
Behind The Costly Fannie/Freddie Mortgage
8 September 2008
Thank you Gulf States. Thank you for believing more in America than we may believe in ourselves.
Thank you Abu Dhabi for investing a billion dollars in the Hollywood film industry last week. Thank you Dubai for opening American style malls and welcoming Donald Trump's latest hotel. And thank you Saudi Arabia for recycling some of your oil profits into purchases of American military hardware year after year. (Under pressure, Iraq is about to shell out $10 billion do the same!)
We are thrilled that even as we pay more for your oil, you pay out more and more for loans and investments in the US from your sovereign wealth funds, banks and investment portfolios.
And on behalf of these overseas investors and customers, thank you America, Mr. Obama AND Mr. McCain for not speaking out about our dependence on foreign money even as they both now denounce dependence on foreign oil.
Attention Drill, Baby Drillheads: they don't mind us drilling more oil pumps as long as you don't mess with their money pumps. In the end, piling on debt here is more profitable for overseas investors than supplying oil.
As CBS reports, "Forty-four cents out of every dollar our country owes in public debt is now owed to foreign investors - $2.2 trillion worth. That's nearly 10 percent more than just a year ago.
Because our debt at home is growing so fast, we've had to go abroad to borrow from the world's booming economies. The six Gulf States, including Kuwait, sit on $1.7 trillion in cash reserves; China's fund has $200 billion and Russia has $125 billion."
We clearly need the infusion of these funds to keep our economy afloat.
Last Friday, after the markets closed, The US government announced plans to take over the troubled mortgage giants Fannie Mae and Freddie Mac. This happened when their share price collapsed in part because they had trouble issuing debt to fund their operations. This bailout may cost taxpayers more than the Iraq War. (In other words, forget all tax cuts now. This is going to be expensive!)
Close to collapse, these institutions were kept alive in part through foreign investments. As everyone knew, they were too big to fail not only in terms of their domestic impact but because their failure would undermine global confidence in the U.S. economy. Ie. stop the inflow of big bucks. Watch what happens: foreign investors will be protected one way or the other even as American shareholders take a bath. The question is: what will happen to American homeowners. So far they have been the last to be helped.
Confidence is already in short supply. When Wall Street plummets, world markets take a dive. AP reported last week: "Asian stock markets plunged Friday in the wake of a sell-off on Wall Street amid mounting concerns about a slump the U.S. economy and its impact on the global economy...No Asian market was spared from the carnage..."
China is affected too. The Central Bank there is short of capital. Why? The New York Times reported: "China's central bank is in a bind. It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie MacNow the central bank needs an infusion of capital.
Welcome to a growing GLOBAL crisis as the Busheviks turn to socialism to save capitalism while China turns to capitalism to save socialism.
Bizarre, but true.
In the Gulf, money managers are aware of the depth of our financial crisis. They read the dismal IMF and Federal Reserve forecasts and know what's happening in the markets second by second. Ironically, just as billions from overseas are loaned DAILY to help with our debts, many of their lenders are going into debt themselves.
They can't escape the first law of karma: What goes around comes around.
They are not alone. Increasingly, there are foreclosures in wealthy areas like the Hamptons in New York, just as there are in our poor ones. (I was just told that an alternative newspaper in Columbus Ohio moved into a historic mansion in foreclosure for just $1 a year because lenders there want to insure that criminals don't wreck the place.)
9 percent of all housing units are late or in default on payments-a new record. A bleak situation is growing bleaker.
Greed and financial mismanagement, aided and abetted by a lack of regulation and media scrutiny, has not only forced our banks to write down billions, but is "blowing back" into the worlds of wealthy lenders in other countries who, in wanting to emulate our booms, are at risk of sharing our busts.
Case in point: The Gulf. Writer Peter Cooper notes in Emirates Business 24.7 that the Gulf States are now being impacted by the collapse of key sectors of our economy.
"What will this slowdown or recession in the world mean on the other side of the world for the Gulf States," he asks. "Is this the foot coming off the accelerator of the global economy?"
In a globalized entangled and interconnected economy, no region can expect not to be impacted when the world's number one economy goes south.
Until recently Americans have been traveing the world, cup in hand, in search of partners and help from overseas banks and investors.
Some $7.5 billion in funds from Abu Dhabi was pumped into CitBank last Fall after Citi board member, ex-Goldman Sachs chief, and former US Treasury Secretary Robert Rubin went calling.
Peter Cooper offers more details:
"When Citibank and Merrill Lynch were hemorrhaging money because of the subprime crisis, they needed cash quick. It was Kuwait that came to the rescue, reported CBS
"You put $3 billion in Citibank and $2 billion in ..."
"Merrill Lynch," Banker Al-Sa'ad said.
"That's a big vote of confidence in those companies," the CBS reporter said.
"It is," Al-Sa'ad said.
But as he looks for the best investments for Kuwait, he is growing increasingly concerned for America's free-spending ways. "You have a fundamental worry about what's happening in the U.S?" the journalist asked. "This is fundamental. This a fundamental issue," Al-Sa'ad said. "This is a structural issue in the U.S. economy."
Nothing concerns him more than our spiraling debt. Neighbours like Turkish Finance Minister Kemal Unaktan warns the US economy is unstable.
It is no wonder that neighboring states like Turkey warn that investing in the US today is dangerous and encourage the Gulf to put its money in Turkey: "... These guys will leave you bankrupt. Is there any point in taking the money to the United States, investing there? Turkey is just next to you. Nobody's money will be lost here..."
At the same time, Gulf countries are piling up their own debt. The Memri Economics blog reported that Gulf region debt shot up by 50% in 2007.
"UAE-based companies defied the international credit crunch last year and raised 50% more funds through debt issues.
Another local financial tracker, AME, reports a debt crunch infiltrating into the consumer sector in part because what their oil wells make, their malls take.
"A potential debt crisis is beginning to worry analysts due to rising inflation in the UAE. Inflation is seen as fueling consumers to turn to borrowing to finance the soaring cost of living in the UAE," Khaleej Times has reported.
The UAE central bank data has recorded loans advances and overdrafts surging with a 38% increase over the same period in 2007. It also noted the UAE's daily per capita consumer spending is among the highest in the world at $27, against an average of $3.50 in the rest of the Arab world."
And now, according to Arabian Business.com: "Consumer loans in the UAE have increased 46 percent during the past 12 months.
Bank data also showed that consumer loans have risen more than 73 per cent since the end of 2006 and almost doubled during the past four years. The strong growth in personal loans is seen as a major contributory factor to higher inflation and the central bank recently raised the possibility of placing limits personal loans."
A financier I spoke to in Abu Dhabi finds this alarming and adds: "Also, interesting how one report cites inflation as a CAUSE of increase in consumer debt, as people borrow to meet higher prices, another report cites rampant increase in consumer debt as the cause of inflation."
It seems as if our debt addiction is catching. Call it a virus, or a contagion. But don't call it good for anyone's economic future, theirs or ours. In America, normally prudent business investors believed their own hype, until they no longer could. Due diligence went out the window because everyone was doing so well. They aren't now.
Others overseas seem to now be making the same mistake.
I have been tracking these issues for years as a filmmaker, writer and author. My documentary IN DEBT WE TRUST warned of the growth of this debt burden. It was called "alarmist" until the credit collapse was undeniable. My new book, Plunder, on the unregulated markets in America shows how Wall Street greed led to illegal and fraudulent practices that helped undercut the global economy leading to a loss of trillions.
The media and the financial press did not do a good job in exposing these practices when they might have been stopped. Transparency was inadequate. Writing in the Columbia Journalism Review, financial analyst Dean Starkman slams the quality of financial reporting by major news outlets for their failure to scrutinize illegal and unethical practices in the mortgage, investment banking and ratings industries.
Funny, isn't it how for years, Americans pointed its finger at corruption in the Arab world and emerging economies when the USA itself may have been the "mother of all corruption," all along.
Alas, the political parties are still avoiding these issues. One writer who analyzed the convention speeches of the four major office seekers, found that none of them mentioned the words, banks, financial crisis, Federal Reserve Bank or the collapse of Fannie and Freddy. Total references by Obama, Biden, McCain and Palin: 0.
(Later after the government take over became news, Barrack Obama said that he supports whatever can stabilize the economy; Sarah Palin said the problem was the two agencies are too big, not displaying any awareness that these were public-private institutions, not government agencies.)
Having recently returned from the Gulf, I found an "it can't happen here" attitude in cities that are growing office towers instead of food while expanding with landfills filled with environmental risks. Some thoughtful businessmen I met said that, of course, that bubble could burst too, but like the investors in subprime securities, no one thinks it will or can happen on their watch.
As the economy continues its decline, the denial all over the world is not just idiotic, it is dangerous. This crisis ain't over yet.