21st Century Global Economics: The Decline of the U.S.

, the euro and the dominant Western Democracy

by: Mary Huber
This is my first attempt to write anything substantive regarding Economics. As an avid reader of noted finance journalists and authors like Michael Lewis and Andrew Ross Sorkin, I hope that I can do the world of high finance some bit of justice in what follows. I have become increasingly consumed with how readily whole nations and economies can rise and fall based on the high risk bets that investment bankers and hedge fund managers are willing to make based on the poor economic choices of the greater population. What occurred between 2006 and 2008 as a result of the mortgage meltdown in the United States will be an event for the history books, to be studied for generations to come. And we will likely see a repeat of such calamity in Europe, where Lehman-like collapses are in the works. There has also been considerable speculation about a catastrophic meltdown in regards to student loan programs in the United States. Whether we are looking at our financial prospects here at home or those of our European counterparts, it is a fascinating time for the study of global Economics and an appropriate time to dedicate due attention to the decisions we make tomorrow regarding the monetary and fiscal policies of all Western democracies alike before, like a chain of dominoes, we all tumble further down.
Looking back at the last century, what are the fiscal decisions that have had the most significant historical impact? What choices have driven whole

economies forward? What choices have left whole nations mired down in debt, desperate and deleveraged? Can any, one monetary policy be enough to make or break the well-being of an entire population? Consider GlassSteagall. The creation of the Federal Reserve. The policies of FDR amidst The Great Depression. The Volcker Rule. Dodd-Frank. Sometimes economic changes are merely the result of scientific and technological advancement, a natural progression to new forms of creating and growing wealth. And then there are those times it is not policy decisions at all, but the creation of new and savvy financial tools by profit-seeking investment bankers, hence the onset of the mortgage and junk bond phenomena and the introduction of credit default swaps in the latter half of the 21st Century. The last ten years alone have seen significant changes in the economic outlook of all Capitalist societies, and we seem on the verge of a new world order in regards to money and finance. So to limit the wealth of information that any one person must be tasked to absorb and process, the focus will remain on the last decade, more or less focusing primarily on the subprime market collapse in the United States, as well as the introduction of the euro, the creation of the European Central Bank and the subsequent decline of the EU, as of recent. These events, not withstanding countless others over the past one hundred years, have brought us to where we stand today facing possible economic ruin at the turn of another century. Youve seen the reverberations. They are spanning countries, continents, worldwide - the pulse of nations slowing, flat-lining alongside the pulse of the markets. From the flames in the streets of North London to an ever-increasing presence growing on Wall Street and in the streets of every major American city, nation-wide - the anger is palpable. The outlook is bleak. Many are calling to question the fate of Capitalism and the future of the ruling Western Democracy. So, let us begin at the beginning - looking toward the home front, to the birth of more than just a Crisis of Confidence, if you will. In regards to the events in and around 2008, that began the United

States descent into The Great Recession, it is not the goal here to discuss the exact mechanics of what occurred and where things went wrong, though a brief outline is necessary. Its difficult to say where it all began. Sometime during the Clinton Administration it became a priority that every American own a home, carving out their own piece of the American dream. The requirements to obtain mortgages became very lax, and millions of young men and women began to borrow money without the hope of ever being able to pay it back. Some financiers saw an opportunity in this phenomenon and began to bundle together mortgages and purchase new financial instruments called credit default swaps, with the belief that they could make bundles of money on the backs of struggling homeowners. With the housing market on a continual rise, most did not see the catastrophe in the works until it was right on top of them. As two-year teaser interest rates suddenly doubled, millions of borrowers found themselves unable to pay their mortgages and countless homeowners went into default. The fall of the housing market that many had guaranteed could never occur was now fully in the works. And banks that found themselves the owners of billions of dollars of bad assets (in the form of credit default swaps) were deleveraged and desperately fighting to save themselves by engaging in giant mergers and seeking out capital to inject into their dying empires. On September 15, 2008, Lehman Brothers declared Chapter 11 bankruptcy and became the first and only true martyr to the subprime mortgage crisis. The markets began to bleed, and the government took immediate action, instituting bailouts of some of the largest financial institutions in the world, those that were deemed too big to fail. The American financial market could not withstand another Lehman. And so ensued the Troubled Asset Relief Program, more famously known as TARP, originally intended to buy up the bad assets from the books of major financial institutions. Instead, it took a trillion dollars and injected it directly into the institutions themselves virtually accomplishing nothing. TARP was followed

by QE1, QE2, and QE3. One Administration was ushered out the White House doors and a new one back in, and still our unemployment rate sits at 9% and economic growth hovers around an anemic 1%. So, what did we learn? More important than the actual events themselves are what we can glean from their happening, what they reveal to us about the nature of modern economics. First and foremost, there is a disease of misinformation in the financial markets. Hernando deSoto, writing for Bloomberg Businessweek, made light of this disease in his article The Destruction of Economic Facts, declaring that over the past twenty years, Americans and Europeans have quietly gone about destroying [economic] facts, (deSoto 60). Markets have outgrown themselves. Mortgages have been granted and recorded with such inattention that homeowners and banks often dont know and cant prove who owns their homes, (deSoto 60). Securities, in their vast complexity, have been sold around the world without any clear understanding of how they are valued or who holds the risk. There is no accountability. Second, the governments reaction to the 2008 financial crisis has allowed for the existence of moral hazard. Moral hazard can be understood as the tendency for financial institutions to engage is risky behavior with the belief that someone will always be there to rescue them that the government is standing on the sidelines, ready to bail them out. It would seem that this is the case. But a simple glance at the U.S. debt clock should be enough to scare financial casinos to their senses. The U.S. government doesnt have the money to save not one more failing institution. Tell that to the teachers and firefighters that have lost their jobs or their pensions, while JP Morgan Chase and Goldman Sachs have declared record profits in the midst of a global shitstorm. Finally, and most importantly, modern economics are global economics. The old saying, a butterfly flaps its wings in Canada and it rains in China or however it goes is exactly true to the nature of modern economics. U.S. markets influence European markets influence Japanese markets, etc. The U.S. financial catastrophe had devastating effects worldwide.

The U.S. and European markets, in particular, are robustly intertwined. More recently, when Bloomberg News was given access to a list of recipients of private loans from the Federal Reserve post-financial crisis, it was revealed that almost half of the Feds top thirty borrowers were European firms (Keoun 1). Clearly, reverberations in U.S. markets travel across the pond. Dont be foolish to think that the connection doesnt go both ways. It has been more than three years since the United States saw its great unraveling. The year is now 2011. Travel 5000 miles across the pond to Athens, Greece - the epicenter of the next great financial catastrophe. And recognize that Greece is just one piece in a giant puzzle that is on the verge of being torn apart. The European Union, particularly the seventeen member nations that make up the Euro Zone, has become the central focus for economists and political leaders alike. To think that the consequences of epic bank failures in Europe, defaults and a decline or all out collapse of the euro will have no effect 5000 miles across the Atlantic in the heart of New York City is foolish and absent-minded. Therefore, every action that the EU takes in the coming months is of great consequence to us to the entire financial world. Let us take a deeper look across the pond. The European Union began as a cooperation between the coal and steel industries of six member nations in 1951, including France, Germany, Italy, the Netherlands, Belgium and Luxembourg. Seeing the success of the Coal and Steel Treaty, the cooperation was expanded to include other economic sectors, and in 1957 the European Economic Community, or the EEC, was born, with the intention of allowing for the movement of people, goods and services freely across the borders of European nations. Gradually, economic incentives drove more nations to enter into the Union, including Denmark, Ireland and the United Kingdom. In 1979, they established the European Parliament and elected representatives to hear their national interests. Greece joined the Union in 1981, followed by Spain and Portugal.

Greater continental involvement ensued in the 1990s. But, more importantly, the 1990s saw the birth of the European Unions singular monetary policy. A single market was created in 1993 and, finally, in 1999, the EU established the European Economic and Monetary Union (EMU) and introduced the euro in eleven of its fifteen member nations. According to Rana Foroohar, in her article The Decline and Fall of Europe, the exceptional period of rapid global growth from 1991 to 2008 was the stage upon which the European Union, the euro and the dream of greater European integration were born, (Foroohar 25). So, it can be inferred that the period of stagnant growth and economic decline that characterizes our current era is the stage upon which the European Union and the euro may die. If you look at the Standard and Poors credit ratings for Europe, by country, it is clear the disease of sovereign debt is spreading. Spain, Italy and Portugal have all seen consistent downgrades. But it is the petite nation of Greece, encircled by her speckled islands, that has been afforded the most toxic title in regards to its credit rating in all of the EU member nations. Therefore, this CC rated, highly speculative nation is where our focus begins. Some would say the debt crisis in Greece has been like a cancer that has infected the entire European Union. And, certainly, the financial conflict that has taken place there has taken its toll on Continental Europe. But the problems with the EU extend beyond Greece. They concern the divergence of a myriad of differing cultures, immigration policies, financial priorities and individual national interests. Yet, understanding what has happened in Greece will allow us to understand what is likely to happen next in Italy and then Spain and on and on - like a disease infecting Union nations. Membership into the European Union issues nations certain rights, financially speaking, particularly greater access to international capital through the credit window of the European Central Bank. This allows less stable EU economies like Greece to take on more debt than they can handle, while strong member nations like Germany have no way to stop weaker states from undermining

the viability of their shared currency, (Foroohar 26). It is fair to say that Greece exploited its position in the Union to finance increased government spending and soft revenue policy. The result was a doubling in deficit from 7% of GDP in 2001 to a whopping 14% in 2007. And then along came the United States great financial crisis, resulting in an overall increase in sovereign debt levels worldwide (Kokkoris 257). In laymens terms, to calm the markets amidst the global financial crisis, governments injected large amounts of capital into the system, resulting in catastrophic degrees of government, or sovereign, debt. The second most critical problem concerns the euro and how it affects the ways in which EU nations are able to tackle issues with sovereign debt. Seeing that Greece has no monetary independence, or control over its currency, they are unable to take essential measures, by means of printing money, devaluating the currency and external inflation, (Kokkoris 259). Over the past two years, we have watched in earnest from across the pond as the European Union has fought to keep Greece from defaulting on its sovereign debt fearing the contagion it may spread and the end result for the euro if such defaults were to play out. The United States, long renowned as a rescue boat for Europe since the days of The Marshall Plan, is at a loss to help, fighting its own financial woes here at home. Most of the focus has turned to Germany, the strongest and most financially stable of, not only the EU nations, but of all the wealthy, developed nations in the world. German chancellor Angela Merkel may just be the most important international figurehead of our time, pressured daily into guaranteeing the debt of struggling European nations and flailing European banks calming the markets on the backs of the frugal German people. This is not to say that Germany is faultless or that her books are pristinely clean. Germans play the European markets like a casino just as readily as moneyhungry Americans. But is Germanys stable, manufacturing-heavy economy truly strong enough to support the weight of the entire European Union? Certainly not. And the idea of it is politically contentious, in the words of

Rana Foroohar. A meager 25% of Germans express confidence in the euro. Without the support of the German people, Merkel is hesitant to take action. Where do we go from here? And what does the future look like for Americans? For Europeans? For the Western world? In the United States, 8% of the American public approves of the job of Congress. There is little faith that either party Republican or Democrat has the stones to solve our economic problems. And, in Europe, one must question whether the dream of continental integration is slowly dying alongside the euro? Most important, as we look deeply to the East and the economic successes of the Chinese, are we forced to wonder if, perhaps, we are on the verge of a new world order? Could the men and women Occupying Wall Street, K Street, Burbank, Seattle, Phoenix, London, Rome could these men and women be marching the drumbeat that is sounding out an end to Capitalism as we know it?

Sources: deSoto, Hernando. The Destruction of Economic Facts. Bloomberg Businessweek, May 2011. Foroohar, Rana. The End of Europe. TIME, August 2011. Keoun, Bradley and Phil Kuntz. Wall Street Aristocracy Got $1.2 Trillion in Secret Loans. Bloomberg News, August 22, 2011. < http://www.bloomberg.com/news/print/2011-08-21/wall-street-aristocracygot-1-2-trillion-in-fed-s secret-loans.html>

Kokkoris, Ioannis. The Greek Tragedy. Journal of Banking Regulation 11, no.

4 (2010): 257-259. Unknown Author. The History of the European Union. Europa: Gateway to the European Union. < http://europa.eu/about-eu/eu-history/index_en.htm> With additional information garnered from Lewis, Michael. The Big Short. New York: W.W. Norton & Company, Inc, 2010. Sorkin, Andrew Ross. Too Big To Fail. New York: Penguin Group, Inc, 2009.