As the American economy reels from what could become the most dangerous crisis since the Great Depression, the view in Europe is a bit more cheery — especially on the continent, where the banking sector there does not face the same kind of dangers as here. In Germany where banks make mortgages the old fashioned way — using depositor money to underwrite a mortgage, rather than going out on the credit market — there is a sense that the ‘cowboy capitalism’ of the United States is finally being outed for what it is: dangerous and wreckless. The Europeans, often accused by the US of having too much regulation and government oversight are a bit gleeful of the fact that it is the lack of regulation and oversight which has led to the current problem in the US.
And, though one can forgive a little Schadenfreude, I was a bit taken aback by this (in the LA Times “Europeans Left and Right Ridicule US Money Meltdown”):
“The finance minister of Italy’s conservative and pro-U.S. government warned of nothing less than a systemic breakdown. Giulio Tremonti excoriated the “voracious selfishness” of speculators and “stupid sluggishness” of regulators. And he singled out Alan Greenspan, the former chairman of the U.S. Federal Reserve, with startling scorn.
“Greenspan was considered a master,” Tremonti declared. “Now we must ask ourselves whether he is not, after [Osama] bin Laden, the man who hurt America the most. . . . It is clear that what is happening is a disease. It is not the failure of a bank, but the failure of a system. Until a few days ago, very few were willing to realize the intensity and the dramatic nature of the crisis.”
In an interview Thursday in the Italian newspaper Corriere della Sera, Tremonti drew a comparison to corruption-ridden Albania in 1997, when a nationwide pyramid scheme cost hundreds of thousands of people their savings and ignited anarchic civil conflict.
“The system is collapsing, exactly like the Albanian pyramids collapsed,” Tremonti said. “The idea is gaining ground that the way out of the crisis is mainly with large public investments. . . . The return of rules is accompanied by a return of the public sector.””
For those of don’t know Italy’s history, corruption has been a major problem in Italian politics for years, and the Tangentopoli (bribe city) scandals of the 90s, which saw the destruction of major Italian political parties, and judicial prosecutions destroy careers of some of the most esteemed Italian leaders, led to a crisis that brought down the Italian system. Even though they have restructured their institutions, Silvio Berlusconi’s troubles still evoke the idea that Italian politicians are prone to corruption. To be lectured then by an Italian about corruption…well, that just doesn’t seem right! Yet it does show how far the US has fallen.
The problems that we face are not just about American de-regulation, however. Part of it is cultural. Our society is built on debt, Americans are more willing than anyone to go without savings in order not only to spend now, but to borrow from the future. That is unique in the western world, and thus mortgages and other loans are not financed through deposits from investors, but from credit markets, and more often than not foreign investors looking to profit. Freddie Mac and Fannie Mae were especially lucrative to foreign investment because they seemed to be generating continuing profit, especially during a housing boom, and were seen to be as safe as treasury bonds.
However, when the underwriting of such a vast amount of mortgages — almost half of the mortgages in the US — is done by two firms, the lack of diversification sets up the catastrophe we’re witnessing. By bundling up mortgages into mortgage-backed securities, this also allows investment and trading to affect banks world wide. The result is that the impact of a failure of these two giants would have been world wide, and could have led to a global crisis.
Back in July I wrote about our “carnvial consumerism,” noting how culturally we’ve become a hypermaterialist society, vulnerable to an “Economic Storm.” The roots of this problem are not simply deregulation, or government connections with big business and lobbyists. Rather, our problem is that we have become not only addicted to consumerism, but our economy is built on the myth that consumerism is good, beneficial, and natural. Our real crisis is, in a sense, spiritual. By that I don’t mean religious, I mean it is a crisis of meaning. We have created a world where material wealth is the goal, and pursued it in such a way that we constructed a house of cards which now tetters on the brink of collapse.
The Schadenfreude in Europe is misplaced. While we may be culturally more materialist and consumer oriented than the Europeans, they share many of the cultural attributes that made this crisis possible. The desire to have fun and gain possessions means many Europeans do not have children — thus helping create a potential demographic disaster as society ages. Moreover, the environmental problems caused by this consumer pursuit of more stuff affects everyone, and could be more consequential than the current crisis. Finally, our political parties (except, to some extent, Green parties) are focused on material/economic concerns. Socialist or free market, the concern is about economics first. Somehow, to really deal with the issues facing us going forward, we need to find a way to think differently about our values. This crisis might force the issue — here and abroad.