Read Online The Next Decade by George Friedman - Free Book Online Page A
Authors: George Friedman
Tags: Non-Fiction
Ads: Link
Such bonds are also considered all but risk-free, the assumption being that government entities will never default on their debts so long as they have the power to tax. In the 1970s, however, New York City couldn’t meet debt payments and couldn’t or wouldn’t raise taxes. If New York defaulted, the entire financing system for state and local government would devolve into chaos, so the federal government bailed out New York, making it clear that Washington was prepared to guarantee the market.
During that same period there was a surge of investment in the Third World, primarily to fund the development of natural resources such as oil and metals. Mineral prices were rising along with everything else in the 1970s, and investors assumed that because minerals are finite and irreplaceable, the prices would never fall. Investors also assumed that loans to the Third World governments that usually controlled these resources were safe, given the perception that sovereign countries never defaulted on debt.
In the mid-1980s, the belief in rising prices and stable governments, like most comfortable assumptions, turned out to be misguided. Mineral and energy prices plunged, and the extraction industries predicated on high prices collapsed. The money invested—much of it injected as loans—was lost. Third World countries, forced to choose between defaulting and raising taxes (which would further impoverish their citizens and trigger uprisings), opted to default, which threatened to swamp the global financial system. This prompted a U.S.-led multinational bailout of Third World debt. Under George Bush, Sr., Secretary of the Treasury Nicholas Brady created a system of guarantees, issuing what were called “Brady bonds” to create stability.
And then came the savings-and-loan crisis. Savings-and-loan institutions, which had been created to take consumer deposits and generate home loans—think Jimmy Stewart in It’s a Wonderful Life —were given the right to invest in other assets, which led them into the commercial real estate market. This appeared to be only a small step beyond their traditional residential market, and the expansion carried the same “conventional wisdom” guarantee that prices would never fall. In a growing economy, or so it was thought, the price of commercial real estate, from office buildings to malls, could only go up.
Once again, the unimaginable happened. Commercial real estate prices dropped, and many of the loans made by the S and Ls went into default. The size of the problem was vast and cut two ways. First, individual depositor money was at risk on a large scale. Second, the failure of an entire segment of the financial industry, which had resold its commercial mortgages into the broader market, was poised for catastrophe.
The federal government intervened by taking control of failed S and Ls—meaning most S and Ls—and assuming their liabilities. Mortgages in default were foreclosed, and the underlying property was taken over by a newly created institution called the Resolution Trust Corporation. Rather than try to sell all this real estate at once, thereby destroying the market for the next decade, the RTC, backed by federal guarantees that potentially could have risen to about $650 billion, took control of the real estate of failed savings-and-loans.
The crisis of 2008 was based on the same desire for low risk, and on the same assumption that a certain class of assets was indeed low-risk because its price couldn’t fall. It was met with a similar federal government intervention to bail out the system, and, just as before, everyone thought it was the end of capitalism. What is important to note is the consistent pattern, including the overstatement of the consequences. To some extent, this is a psychological phenomenon. With pain comes panic, and the management of panic is a question of leadership. Consider how it was managed in the past.
Both Franklin Roosevelt and Ronald Reagan came to
During that same period there was a surge of investment in the Third World, primarily to fund the development of natural resources such as oil and metals. Mineral prices were rising along with everything else in the 1970s, and investors assumed that because minerals are finite and irreplaceable, the prices would never fall. Investors also assumed that loans to the Third World governments that usually controlled these resources were safe, given the perception that sovereign countries never defaulted on debt.
In the mid-1980s, the belief in rising prices and stable governments, like most comfortable assumptions, turned out to be misguided. Mineral and energy prices plunged, and the extraction industries predicated on high prices collapsed. The money invested—much of it injected as loans—was lost. Third World countries, forced to choose between defaulting and raising taxes (which would further impoverish their citizens and trigger uprisings), opted to default, which threatened to swamp the global financial system. This prompted a U.S.-led multinational bailout of Third World debt. Under George Bush, Sr., Secretary of the Treasury Nicholas Brady created a system of guarantees, issuing what were called “Brady bonds” to create stability.
And then came the savings-and-loan crisis. Savings-and-loan institutions, which had been created to take consumer deposits and generate home loans—think Jimmy Stewart in It’s a Wonderful Life —were given the right to invest in other assets, which led them into the commercial real estate market. This appeared to be only a small step beyond their traditional residential market, and the expansion carried the same “conventional wisdom” guarantee that prices would never fall. In a growing economy, or so it was thought, the price of commercial real estate, from office buildings to malls, could only go up.
Once again, the unimaginable happened. Commercial real estate prices dropped, and many of the loans made by the S and Ls went into default. The size of the problem was vast and cut two ways. First, individual depositor money was at risk on a large scale. Second, the failure of an entire segment of the financial industry, which had resold its commercial mortgages into the broader market, was poised for catastrophe.
The federal government intervened by taking control of failed S and Ls—meaning most S and Ls—and assuming their liabilities. Mortgages in default were foreclosed, and the underlying property was taken over by a newly created institution called the Resolution Trust Corporation. Rather than try to sell all this real estate at once, thereby destroying the market for the next decade, the RTC, backed by federal guarantees that potentially could have risen to about $650 billion, took control of the real estate of failed savings-and-loans.
The crisis of 2008 was based on the same desire for low risk, and on the same assumption that a certain class of assets was indeed low-risk because its price couldn’t fall. It was met with a similar federal government intervention to bail out the system, and, just as before, everyone thought it was the end of capitalism. What is important to note is the consistent pattern, including the overstatement of the consequences. To some extent, this is a psychological phenomenon. With pain comes panic, and the management of panic is a question of leadership. Consider how it was managed in the past.
Both Franklin Roosevelt and Ronald Reagan came to
Similar Books
