The US Economic Crisis: A Simplistic View from outside the US

Sept. 19, 2008 - PRLog -- Many of us who live outside the United States could be forgiven for thinking that Fannie Mae and Freddie Mac are two lesser known US pop stars! I guess some of us could also be forgiven for not having heard of Sub-Prime (unless you are a hardcore, pinstriped banker!). That’s not all; we now have begun to hear of more famous names like Bear Stearns and Lehman Brothers filing for bankruptcy.  Who knows what other household names from the main street may join the list of infamous bankrupt bankers (weren’t these banks all audited, rated and risk managed in the last 12 months?!).
All of this stems from a story that is now playing like a broken record on TV channel after channel all over the world. Call it the Sub-Prime crisis, the Wall Street Meltdown or any other term you would like to coin; the bottom-line is that it spells trouble for the world’s most prosperous nation.
This week, I had the challenging task of explaining to my 14 year old daughter (who is learning Business Studies as one of her school subjects) what this all means. I started off by throwing all the usual buzz words (which gets you through most adult conversations and cocktail circuits), only to be asked “What, Why, What, Why” so repeatedly, that I had to go back to the very basics, which also got me thinking! After some deliberation, soul searching and research, I have arrived at some basic conclusions.
The problems that the U.S is facing today are caused by two basic issues; one external and one internal. In the case of the former, the US is facing strong inflationary pressure from high reliance on oil, however so is most of the world.  In the case of the latter, the US is a nation that is highly reliant on debt to fuel the nation’s desire to spend. At a consumer level, individuals borrow to buy goods from China, and at a national level China buys US debt to fund the countries excessive spending habits, making a handsome livelihood in doing so. Who is the winner in this story?
In a lighter vein, I tell my friends who live outside the Middle East that we in the Middle East, are on the other side of the recession! In simple terms, the additional monies that US consumers are spending (not just on their gas guzzling SUVs) are being collected by the Petro Powers of the Middle East, the manufacturing base in China, and the knowledge base in India. All these economies are in turn using this money to develop their economies and are even buying low priced assets in the US. For instance, Saudi Arabia earns in excess of USD 1 Billion a day in oil incomes, and is eyeing up 900 Billion USD in FDI over the next 10 years. The Abu Dhabi Investment Authority is already the single largest share holder of Citigroup.
Therefore Lesson No. 1: No recession – only Power Shifts. A recession happens only when the world has lost, destroyed or unproductively used resources; otherwise it is a Power Shift.
Lesson No. 2: The US problems are significantly self-inflicted. When the going was good, housing loans were given without due diligence and high flying executives who helped them to salaries and bonuses that borders which on insanity. A little less than two years ago, Business Week reported that Bear Stearns’ Chairman Jimmy Cayne was almost a billionaire. The value of his nearly 6 million shares (boosted by gains the firm made on sub-prime mortgages and mortgage-backed securities), soared to over US$900 million. That has all turned to dust now, but personal gains achieved by company executives while leaving investors exposed leaves a lot to be questioned.
Lesson No.3: Every dollar spent has to be borne by a consumer somewhere; and if that consumer does not see value, then they will not pay for it.
This sounds so simple, yet the World’s economic power house could not figure it out; neither could many of those unfortunate companies that are in the Fortune 500. It is not for us to grandstand and make great posthumous prophecies, but to learn “how to” and “how not to!” The question is will we learn or suffer from amnesia?

# # #

MTI Consulting is an international strategic management consultancy with operations in Bahrain, Dubai, UK, India, Austria, Pakistan, Sri Lanka, Mexico and Bangladesh, and has provided solutions to clients in over 275 projects in 33 countries across 5 continents. The company recently diversified into 7 specialist units along the lines of Branding, Corporate Finance, HRM, Legal & Governance, Channels & Sales, Supply Chain and Technology.