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post #1 of 45 Old 09-26-2008, 5:51 AM Thread Starter
 
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No Longer The Biggest And The Best?

Can the US stop the rot is is the writing on the wall? History tells us that global super powers have a limited shelf life, has the US reached it's used by date? History also tells us the last to recognise the fact is the country in question, in the case of the French they still have not come to terms with it.

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Since the late U.S. President Ronald Reagan came to power in 1980, U.S. capitalism has shone for three decades until recently, demolishing socialism in 1989 and ruling the global financial market and economy.

Leaving the glory years behind, U.S. or neo-liberal finance capitalism, is facing its demise or at least a major overhaul, due to the Wall Street crisis caused by the collapse of giant American investment banks, the icon of this form of capitalism.

Many argue that the demise of the banks is not the end of capitalism characterized by ``small government'' and ``deregulation,'' but its doom is inevitable as every passing day brings worse news.

Financial crises in Asia and Mexico have consumed the credibility of capitalism but no one then cast a serious doubt about it. However this time is different becasuse this meltdown happened on Wall Street, its very heart.

The U.S. has passed the point of no return by stepping heavily into the market, negating the fundamental principle of capitalism, ``laissez faire,'' French for ``let do'' and meaning that the government leaves people alone regarding all economic activities.

The burst of the property bubble and the demise of U.S. investment banks have exposed inherent flaws, forcing Washington to fix its financial system with public money and to find ways to keep its markets afloat.

In the last weekly report under Lehman Brothers banner, chief economist Paul Sheard said, ``The current crisis seems to transcend the usual pattern of asset price boom and bust, damaging balance sheets and threatening the stability of the financial system and the health of the economy.

``The severe impairment of the originate-to-distribute securitization model and the demise of the standalone investment bank are starting to look more structural than cyclical.''

Regardless of the outcome of the U.S. government's bailout plan, the Wall Street crisis is expected to transform U.S. capitalism into a ``more regulated'' and ``less profitable'' form, replacing its investment banking saga with universal banking ― a cocktail of commercial and investment banking.

What went wrong in the US?

Under the ``laissez faire'' economic liberalism, an economic system that espouses minimum government intervention, maximum competition and free flow of capital, the U.S. economy thrived for 30 years but two big mistakes were made. The government de-regulated finance too much, while encouraging unsustainable debt-financed consumption.

The collapse of giant U.S. investment banks is the outcome of these mistakes. Lehman filed for bankruptcy and Merrill Lynch was taken over by the Bank of America. Goldman Sachs and Morgan Stanley are poised to become regulated banks as the Federal Reserve approved their applications to become bank holding companies.

What made the investment banks face a forced exit from the market? How could a financial system once touted as the most sophisticated in the world fall into a debacle so suddenly? Lax monetary policy, the illusion of financial innovations and excess deregulation were the three culprits behind the fall of Wall Street.

Greenspan's lax monetary policy was the root cause for the current Wall Street crisis as it triggered excessive borrowing for property purchases, creating a real estate bubble.

``The common problem across much of the crisis has been excessive leverage,'' Mauro F. Guillen, director of the Lauder Institute at the Wharton School of Business told The Korea Times.

``Pressured by investors, many banks and investment houses borrowed heavily to multiply their client's returns,'' he added. ``Their exposure is 30 to 40 times their capital base, meaning that both gains and losses are multiplied many times over.''

When the U.S. economy was slipping into recession following the burst of IT bubble, the Federal Reserve relied on loose monetary policy to keep the economy afloat. Greenspan cut key rates by a total of 5.5 percentage points between 2001 and 2004.

Capitalizing on low interest rates, many households rushed to borrow to purchase homes and land, which led to surging property prices, causing asset inflation.

Andy Xie, an independent economist and former Morgan Stanley chief economist, said that Greenspan's lax monetary policy led other central banks to keep monetary policy equally loose to prevent appreciation of their currencies.

``Through the currency market Greenspan was effectively setting monetary policy for the world. Not only the U.S., the whole world should blame him for the catastrophe today,'' he added.

Financial innovations made market participants believe that they could reduce the risks to zero by diversifying the risks through securitization, which encouraged banks to borrow heavily to multiply their clients' returns.

Xie said that financial innovations in recent years purported to decrease risks to credit investors, which allowed less capital and more debt for property purchases.

``As it turns out, the risk reduction from financial innovations was an illusion. The perceived reduction in risk was due to the bubble that the belief in risk reduction caused,'' he added.

With the high home prices and low interest rates, hundreds of billion of dollars of mortgages were extended and these were then bundled together in financial investments known as mortgage-backed securities, the epicenter of the subprime mortgage crisis.

With the development of mortgage securitization, the role of financial innovations expanded and credit derivatives became more complicated, making bankers miscalculate the risk of those securities.

``The development of collateralized securities provided a big push for the creation of subprime loans, which could now be bundled, spreading risk,'' Peterson Institute senior research fellow Marcus Noland said.

``But this also had the effect of greatly reducing the risk aversion of the originators of the loans since they were selling them and no longer bearing the risk,'' he added. ``The result was a predictable decline in quality and eventually criminal behavior on the margins.''

With the manufacturing industry drying up, the United States focused on expanding its financial sector through deregulation. The deregulation drive generated the so-called shadow banking system, a secret network built on derivatives and untouched by regulation.

Under the system, non-bank financial firms borrowed short and in liquid forms and lent or invested long in more illiquid assets via the use of credit derivative instruments, which allowed them to evade normal banking regulations.

This system, which has been blamed for aggravating the subprime mortgage crisis, served as momentum that allowed the U.S. financial sector to grow bigger and bigger before becoming out of control, outgrowing the real economy.

``The deregulation of financial markets in the late 1970s encouraged the creation of the `shadow banking system' of non-bank entities such as hedge funds,'' Noland of the Peterson Institute said.

``Besides, the financial market deregulation also encouraged the development of complex derivative instruments that were very hard to price since they embody so many contingencies,'' he added

Lessons from Crisis

The U.S. rescue package may help avoid the worst but it cannot solve the fundamental problem behind the crisis. In order to solve the issue going forward, restoring financial sector regulations will be the first step.

Also, market participants should not have overconfidence in financial innovations as these made them focus too much on maximization of returns, overlooking systematic risk that such innovations created.

Stijn Van Nieuwerbur, Stern School of Business at New York University, said that the problem of the mortgage and banking crisis is a standard externality issue.

``Everybody acted individually rationally in the process of originating, securitizing, and selling these contracts, but nobody took into account the systematic risk that this process created,'' he said.

``Regulators should force banks to hold a fraction of these securities on the books instead of selling them off or holding them off the balance sheet,'' he said. ``Also, transparency should be secured in how much of each type of asset each firm is holding and how the book value of these assets is calculated.''

What's coming?

Many argue that the Wall Street crisis triggered by the demise of American investment banks could bring an end to U.S. neo-liberal capitalism. However, global market experts countered that argument, claiming that it is not dead but mutating into a new form.

Policymakers and regulators are now desperate to find ways to keep the financial system afloat through regulatory reform. The look of the financial markets is expected to change toward ``bigger government'' and ``more regulation'' going forward.

``I see a smaller, more regulated, and less profitable finance sector re-emerge over the next two-three years,'' Nieuwerbur of New York University said.

This is well manifested in Morgan and Goldman's move to transform into a bank holding company, which will usher the global financial economy into a new era.

``Commercial banks like JP Morgan Chase, Bank of America or Barclays are now buying some of the distressed investment banks,'' Guillen of the Wharton School said.

Commercial banks have a deposit base, meaning that they have more capital available for investment. They do not need to leverage themselves so much

``We are entering a new era in which universal banks ― those combining investment and commercial activities ― will rule the global financial economy,'' he added.
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post #2 of 45 Old 09-26-2008, 6:02 AM
 
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Re: No Longer The Biggest And The Best?

Its early so brain not totally switched on but Im not sure its the demise of superpowers but more a metamorphasis, lessons will be learnt and with a slight change in operations, they (it) wil still remain a power to recon with. Take it from a different angle not so long ago Russia was f"$ed now look at the financial power it can weild.
If being a superpower means holding enough nukes to scare the crap out of the rest of us then nothings changed




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post #3 of 45 Old 09-26-2008, 6:21 AM
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Re: No Longer The Biggest And The Best?

So, in about six to ten years - once the heat's off - it will be business as usual... if there's any money left.
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post #4 of 45 Old 09-26-2008, 6:32 AM
 
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Re: No Longer The Biggest And The Best?

Never forget mans capacity for greed, there will always be people that will create huge wealth in the most dire of situations, its these same type of people that have created the wealth that is running the world now. I personaly believe that the people that created this scenario should be treated like criminals, brokers making billions on betting on the failure of institutions that were safe until they upset the market. Its pure greed at an individual level, thus the reason therre will be big changes in the future. Just my




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post #5 of 45 Old 09-26-2008, 10:17 AM
 
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Re: No Longer The Biggest And The Best?

We go the world goes.
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post #6 of 45 Old 09-26-2008, 10:22 PM
 
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Re: No Longer The Biggest And The Best?

I agree with Steingar's comment above "if we go the world goes". Despite the condition of our country and of the financial markets, I still cannot think of another place I would rather live or raise my kids (no offense to any other country). In my biased opinion, I still think it is the best, whether or not it is the biggest. We will bounce back, as history have proven, from whatever it is we face. We may not have seen the worse yet, but I hope we have.
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post #7 of 45 Old 09-26-2008, 10:33 PM Thread Starter
 
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Re: No Longer The Biggest And The Best?

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We go the world goes.
Yeah I don't think so, not now. It would cause damage but Asia is already a giant economic power. China and India?

Standard of living in India - Wikipedia, the free encyclopedia And China is off the charts, lots of poverty and lots of wealth and they have massive amounts of low cost labour to drive manufacturing & exports. How can the west compete with this?
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post #8 of 45 Old 09-27-2008, 3:57 AM
 
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Re: No Longer The Biggest And The Best?

I agree with .org on this, i think ryoungs view is the typical insular American view (not being offensive here btw). I think a huge country where only 1% of the nation holds the wealth says a lot for it. Also New Orleans isnt a shining example of a country loves for all of its people.
No as far as huge economic powers go the states isnt alone anymore, the Asian countries have fail safes put in place years ago so that something like this couldnt happen there.
As they say its time for a new broom and a new beginning




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post #9 of 45 Old 09-29-2008, 9:53 AM
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Re: No Longer The Biggest And The Best?

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Originally Posted by .OrgOwner View Post
Yeah I don't think so, not now. It would cause damage but Asia is already a giant economic power. China and India?

Standard of living in India - Wikipedia, the free encyclopedia And China is off the charts, lots of poverty and lots of wealth and they have massive amounts of low cost labour to drive manufacturing & exports. How can the west compete with this?
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Originally Posted by setanta View Post
I agree with .org on this, i think ryoungs view is the typical insular American view (not being offensive here btw). I think a huge country where only 1% of the nation holds the wealth says a lot for it. Also New Orleans isnt a shining example of a country loves for all of its people.
No as far as huge economic powers go the states isnt alone anymore, the Asian countries have fail safes put in place years ago so that something like this couldnt happen there.
As they say its time for a new broom and a new beginning
In addition to the excellent points made above, we should remember that the Chinese banks stayed well clear of the sub prime markets and have been focused on managing their risk for quite a while now.

Perversely, an American official recently stated that the Chinese have only been making money because they've largely been selling junk that nobody needs and that now the US won't be buying any of it China will fall too.

Well, I got news for him. If the Chinese government had done what the US and Europe had been demanding over the last thirty years, he might have a point. However, there are so many unemployed there and such a small percentage of the workforce actually in work that they can carry on for years with very little change. Indeed, as their money is pretty safe they can now buy in to some pretty big projects and get them for next to nothing.

You see, your average chinese worker will happily bugger off to Cambodia, Vietnam and the like for several years to work on construction sites for next to nothing and not even get paid for several months. By which time, the Unions of America, the UK and Europe would have crippled business causing riots and mayhem, which oddly would help turn the tables on who is to become the next super power.

One thing the Americans do seem to forget is that you didn't beat Russia in the super power race through a physical war, you did so through a war of attrition, which is exactly what the Chinese and Indians will end up doing and, right now, they got more money than you or us put together.
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post #10 of 45 Old 09-29-2008, 9:56 AM
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Re: No Longer The Biggest And The Best?

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Originally Posted by ryoung1 View Post
I agree with Steingar's comment above "if we go the world goes". Despite the condition of our country and of the financial markets, I still cannot think of another place I would rather live or raise my kids (no offense to any other country). In my biased opinion, I still think it is the best, whether or not it is the biggest. We will bounce back, as history have proven, from whatever it is we face. We may not have seen the worse yet, but I hope we have.
You'll feel very differently if the crises the US currently faces cannot be dealt with adequately.
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post #11 of 45 Old 09-29-2008, 9:59 AM
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Re: No Longer The Biggest And The Best?

I have been in a buy anything but Chinese for the past year. I'll gladly pay the few extra bucks for something that says something other than China. More people need to start doing this.
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Re: No Longer The Biggest And The Best?

The major customers for China and India (and Japan) is us.
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Re: No Longer The Biggest And The Best?

to late - China owns US....big time.
Banking + a few other institutes.
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post #14 of 45 Old 09-29-2008, 10:07 AM
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Re: No Longer The Biggest And The Best?

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Originally Posted by lanbrown View Post
I have been in a buy anything but Chinese for the past year. I'll gladly pay the few extra bucks for something that says something other than China. More people need to start doing this.
For what reason? It won't make enough of a difference because it's too late. And anyway, if the quality was no good why did you buy in the first place? Believe me, Ian, they'll out last you if the US can't get this sorted.

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The major customers for China and India (and Japan) is us.
I think you missed the point. They've not got the fiscal concerns that the US and Europe have. Wealthy Chinese never live beyond their means. In fact they always live well below it. Generally speaking China (and India to a large extent) isn't going to notice a drop in their standard of living because for the majority they haven't had one.

The US and Europe have got far too used to their luxuries. Many of which we have lived with for so long we don't even view them as luxuries any more...
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post #15 of 45 Old 09-29-2008, 10:09 AM
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Re: No Longer The Biggest And The Best?

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Originally Posted by MCR001 View Post
to late - China owns US....big time.
Banking + a few other institutes.
Never too late. China is trying for outsiders not to be able to buy a dominant position in China. It is only a matter of time that other countris start saying no to Chinese money in their economy. It is not like China can object to it; they are doing the same today.

Coke offers $2.5 billion for China juice maker - U.S. business - MSNBC.com
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