Tags: us | bailout

U.S. Losing Leadership Status

Monday, 06 Oct 2008 12:32 PM

By Arnaud de Borchgrave

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It was an era of gargantuan excess not seen since the 1920s, while at the same time the United States is prosecuting two wars that have cost the same amount as the administration's bailout bill, including all the last-minute pork and earmarks, or $200 billion short of $1 trillion. The bailout was not fashioned to make the rich richer, but to make sure the rich don't get poor.

The Russian leadership could barely contain its glee over U.S. discomfiture. U.S. global economic leadership, gloated Soviet leaders, is now at an end. President Dmitry Medvedev blamed selfish "American capitalism" for the Wall Street meltdown. "Casino capitalism" was a little less disreputable than "bandit capitalism," but both were widely used at home and abroad.

European Union countries echoed Moscow's call for multilateralism in financial regulation. The Russian stock market plunged 50 percent during the U.S. financial crisis, which Prime Minister Vladimir Putin said was due to a system the United States claims to lead. For French President Nicolas Sarkozy, "laissez-faire" free-market economies would soon go the way of the dodo. Other powerful European voices said the world will never be the same again.

China, confident of its steady ascendancy to superpowerdom, let it be known through think-tank exchanges that the moment when Beijing could look Washington "straight in the eye as equals" would come a little sooner than anticipated. Say 2025 instead of 2030.

The post-World War II financial and monetary architecture, known as the Bretton Woods accords, has to go back to the drawing board. With the United States now producing 30 percent of the world's manufactured goods, the catbird seat will have to be shared. And what the world observed during America's ongoing crisis was an administration riding to the rescue of financial behemoths and behaving more like a socialist government than a capitalist one.

At the same time, the FBI launched 24 investigations for possible criminal activities in Manhattan's canyons, including four major financial houses.

Since day one of the subprime mortgage fiasco in early 2007, sleights of hand, predatory lending, and insider trading have been normal operating procedures.

Before the government stepped in, almost 1.3 million homes had been repossessed, up 79 percent from 2006, with another million soon to join the collapsing real estate market. Defaults and foreclosures increased exponentially as easy initial terms expired, and home prices didn't go up, but interest rates did.

By last July, major banks and financial institutions had reported losses of half a trillion dollars. The financial bomb that finally exploded in September saw three of the five largest financial institutions on Wall Street collapse in 24 hours.

"We have to be careful about crying 'fire' in a crowded theater," wrote columnist Daniel Gross, "but calling this a meltdown is like crying 'fire' in an inferno." Even America's closest allies were asking whether this is the beginning of the end of U.S. supremacy.

President Bush, in his TV appearances, appeared listless and discouraged. Sen. John McCain was endeavoring to widen the daylight between his campaign and Bush's eight years in the White House.

The financial crisis gave Sen. Barack Obama a widening lead at home — and louder hosannas abroad. Most commentators abroad see Obama as a leader who would initiate "multipolar multilateralism" and "smart power," with more emphasis on soft power and less on hard — military — power.

This still won't put a brake on the pell-mell scramble to join the billionaires club that has gone from 350 to 1,146 members since the beginning of the decade. They now control assets worth twice as much as those held by the world's bottom 2.5 billion, according to David Rothkopf, a visiting scholar at the Carnegie Endowment.

Not one American in 10,000 understands the financial instruments that enable a growing number of billionaires to make their second billion dollars in a year. Derivatives and hedge funds are incomprehensible to most people, yet congressional committees have heard experts testify they are time bombs that could precipitate a repeat of the Great Depression.

To understand how derivatives function, you need a modicum of "differential calculus," which is how some of the best unregulated hedge fund managers have made $300 million in a single year. The Bank for International Settlements estimates over-the-counter derivatives, which include "swaps" and "exotic options," have a "notional amount" of $596 trillion (not billion).

While some 700,000 have lost their jobs in the United States thus far this year, the crash of 2008 is still to reverberate throughout the body politic and its economic system. Osama bin Laden's Sept. 11, 2001, attacks inflicted some $700 billion worth of damage to the U.S. economy.

The government bailout is worth, again thus far, $700 billion. And the cost of the Iraq and Afghan wars, so far, is also $700 billion.

Thus far, however, the megarich have not been unduly perturbed by the maelstrom. The number of "superyachts" (anything over 100 feet, costing $2 million per foot) under construction or on order worldwide climbed to 445 in 2008 vs. 81 a decade ago.

Martin Redmayne, chairman and editor in chief of the Yacht Report, told the Financial Times about 90,000 people in the world can afford to buy what builders call a superyacht today, but only 3,500 actually own one.

Helipads, mini-submarines, and a car garage are among the options for the 250 to 550-footers now under construction for buyers in India, Dubai, Abu Dhabi, Saudi Arabia, Russia, Europe — and the United States. Charter prices range from $60,000 to $2 million — per week.

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