From the January 2, 2008 Weekly Standard
January 3, 2008
by Irwin Stelzer
Americans don't approve of their president (approval rating 36 percent), even more heartily disapprove of their congress (approval rating 18 percent), say their confidence is in free fall, believe their children will be no better or possibly worse off than they are. Three out of four think their country is "on the wrong track." So they say.
Surprise: the American economy added over one million new jobs in the year that is now coming to a close. It grew at an annual rate of between 3 percent and 4 percent. Share prices rose by over 5 percent, with tech shares up by double digits, these gains being recorded in weeks in which the financial markets are said to be in turmoil. Exports soared, bringing down the long-standing trade deficit. In November, supposedly traumatized consumers splurged, increasing spending by the largest amount in 3 1/2 years. Final figures for Christmas are not yet in, but my guess is that early pessimistic estimates will prove wrong.
In foreign affairs, the surge brought down the level of violence in Iraq to a point where American involvement is no longer voters' number one concern. France and Germany are no longer in a contest for the anti-American prize, having ceded that award to a ranting Venezuelan president whose voters denied him the life-long term he sought. The French and American presidents have had a jolly get-together off the briny in Kennebunkport, and the German chancellor has sampled the natural glories of the Bush ranch in Crawford, Texas. Britain's chancellor chooses to be on the outside looking in, but in the end the special relationship will survive his frostiness. Jacques Chirac and Gerhardt Schroeder are hardly missed; Tony Blair is.
Meanwhile, Peter Wehner and Yuval Levin point out in Commentary that crime is way down; teenage drug use, pregnancies, smoking, and drinking are all on the decline; welfare reform is working, bringing down child poverty; and the divorce rate is falling. Most important of all, unlike their counterparts in most industrialized countries, Americans have enough confidence in the future to make lots of babies. Hardly a society in the winter of its discontent, no matter what Americans are telling pollsters.
In short, 2007 was hardly an annus horribilus for Americans. It did, however, not end on a high note. Houses, once cash machines, became more like ordinary investments that can decline in value a bit after a spectacular run-up. Foolish lenders found ignorant or greedy borrowers, and made loans that will not be repaid. Mathematical geniuses at investment banks built models that failed to incorporate the fact that other geniuses were doing the same thing, producing a concerted dash for the exits when the models said "sell," but failed to say to whom. Banks, awash in cash, so distrusted their colleagues that they refused to lend to each other, creating what has come to be called a credit crunch. OPEC cartelists decided that crude oil prices upwards of $90 per barrel are nicer than those in the $28 range that they once set as their benchmark. And politicians made it so profitable for farmers to grow fuel rather than food, that the prices of corn, wheat, animal feed, meat and, more important to some, the hops and barley used for beer-making, took off.
Through it all, the world learned to be careful what it wished for. International institutions and foreign governments have been berating Americans for "unbalancing" world trade by running huge trade deficits. Finally, the markets agreed, and drove down the dollar. The result has been an increase in the competitiveness of made-in-USA goods in foreign markets, and a decline in the competitiveness of foreign-made goods in the showrooms of America. The world got what it wished for: a decline in the U.S. trade deficit. So BMW is laying off thousands of workers as the dollars it gets for the cars it sells in America no longer buy enough euros to meet its payroll; Italian designers are reduced to using cotton where once they would consider only silk; and European hotels and restaurants are pining for a return of the gauche but high-spending Americans who have switched vacation plans to American resorts, where the dollar is still king.
Foreigners also complained that America was presiding over an era of too-easy credit. Complain no more. Your wish has been granted. Mortgages are harder to come by, credit card applications are being turned down in record numbers, and banks around the country are being sniffier when discussing possible deals with borrowers. The effect of this tightening, and of the collapse of the sub-prime mortgage and related markets, is just what the doctor ordered to put a stop to the lending so many of America's critics railed against, and quite properly, too.
But it turns out that the greed for high returns from dicey paper was not confined to Wall Street. From London to Frankfurt to Sydney lenders have snapped up bits of paper into which were bundled risky promises to pay by borrowers whom it turns out are not likely to do that. Result: balance sheet wreckage, a need by many banks to raise new capital, and borrowers unable to roll over their loans.
Exit some but not all of the CEOs who presided over the misappraisal of risk, clutching multimillion dollar golden goodbyes. Enter the sovereign wealth funds, and the beginning of the reestablishment of the Caliphate, with cold cash rather than hot lead and suicide bombs powering the revival. Having written down the value of so many assets that they needed infusions of equity, Citigroup, UBS, and others followed the money, which turned out to be in China, Singapore, Abu Dhabi, Dubai, and Saudi Arabia. The sovereign wealth funds of these countries dipped into their petty cash drawers for the odd billions, and ended up with significant positions in many U.S. banks. George Bush says he is happy to see this money come home; others worry about the political influence China and the Arab nations might choose to inject into what were once purely commercial decisions.
What does all of this portend for 2008? Watch this space.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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