Read Online The Post-American World: Release 2.0 by Fareed Zakaria - Free Book Online
Authors: Fareed Zakaria
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what they assumed were permanently changed conditions owing to the Great Moderation. As a result, investors piled into what would normally be considered dangerous investments, all for the promise of relatively little reward. Credit spreads—the difference in yield between a U.S. treasury bond, considered the world’s safest investment, and the bonds of companies with limited track records—hit historic lows. In 2006 and 2007, volatile countries like Ecuador and teetering companies like Chrysler could borrow almost as cheaply as the U.S. government. (By 2009, of course, Ecuador had defaulted on its debt and Chrysler was kept alive only by a last-minute government bailout.) And since debt was cheap, financiers and homeowners used it to excess, spending beyond their means. The banks and investors who supplied all the cheap cash were reassured by fat corporate coffers—with profits that rose at a double-digit clip for eighteen consecutive quarters between 2002 and 2006—and bankruptcy rates that were well below normal. The good times seemed never-ending.
The world economy became the equivalent of a race car—expensive, with incredible range, and capable of performing at breathtaking speed. In the decade before 2008, everyone rode it and experienced the adrenaline rush and the highs. There was only one problem: it turned out that nobody really knew how to drive a car like this one. Over the last ten years, the global economy had become something no one had ever seen—an integrated system of about 125 countries, all participating and all going at unheard-of speeds. It was as if that race car was being driven by 125 different drivers—and no one remembered to buy shock absorbers.
There were those who wanted shock absorbers. They were seen as naysayers during the boom years. They asked why packages of subprime mortgages should be rated as highly as bonds from General Electric. But each successive year ended with another eye-boggling earnings report or billion-dollar payday for the hedge fund manager of the moment, the much promised correction failed to materialize, and the naysayers grew quieter and quieter. A kind of reverse natural selection occurred on Wall Street. As Boykin Curry, a managing director at Eagle Capital, said, over the last twenty years “the DNA of nearly every financial institution had morphed dangerously. Each time someone at the table pressed for more leverage and more risk, the next few years proved them ‘right.’ These people were emboldened, they were promoted, and they gained control of ever more capital. Meanwhile, anyone in power who hesitated, who argued for caution, was proved ‘wrong.’ The cautious types were increasingly intimidated, passed over for promotion. They lost their hold on capital.”
Warren Buffett explained that the heart of the problem was ever-rising levels of leverage—the fancy Wall Street word for debt. It is “the only way a smart guy can go broke,” Buffett said. “You do smart things, you eventually get very rich. If you do smart things and use leverage and you do one wrong thing along the way, it could wipe you out, because anything times zero is zero. But it’s reinforcing when the people around you are doing it successfully, you’re doing it successfully, and it’s a lot like Cinderella at the ball. The guys look better all the time, the music sounds better, it’s more and more fun, you think, ‘Why the hell should I leave at a quarter to 12? I’ll leave at two minutes to 12.’ But the trouble is, there are no clocks on the wall. And everybody thinks they’re going to leave at two minutes to 12.” And that, in a nutshell, is the story of how we arrived at the calamity of 2008.
At some level, debt is at the heart of the whole story. Since the early 1980s, developed countries in general and the United States in particular have consumed more than they have produced—and they have made up the difference by borrowing. This happened at every level of
The world economy became the equivalent of a race car—expensive, with incredible range, and capable of performing at breathtaking speed. In the decade before 2008, everyone rode it and experienced the adrenaline rush and the highs. There was only one problem: it turned out that nobody really knew how to drive a car like this one. Over the last ten years, the global economy had become something no one had ever seen—an integrated system of about 125 countries, all participating and all going at unheard-of speeds. It was as if that race car was being driven by 125 different drivers—and no one remembered to buy shock absorbers.
There were those who wanted shock absorbers. They were seen as naysayers during the boom years. They asked why packages of subprime mortgages should be rated as highly as bonds from General Electric. But each successive year ended with another eye-boggling earnings report or billion-dollar payday for the hedge fund manager of the moment, the much promised correction failed to materialize, and the naysayers grew quieter and quieter. A kind of reverse natural selection occurred on Wall Street. As Boykin Curry, a managing director at Eagle Capital, said, over the last twenty years “the DNA of nearly every financial institution had morphed dangerously. Each time someone at the table pressed for more leverage and more risk, the next few years proved them ‘right.’ These people were emboldened, they were promoted, and they gained control of ever more capital. Meanwhile, anyone in power who hesitated, who argued for caution, was proved ‘wrong.’ The cautious types were increasingly intimidated, passed over for promotion. They lost their hold on capital.”
Warren Buffett explained that the heart of the problem was ever-rising levels of leverage—the fancy Wall Street word for debt. It is “the only way a smart guy can go broke,” Buffett said. “You do smart things, you eventually get very rich. If you do smart things and use leverage and you do one wrong thing along the way, it could wipe you out, because anything times zero is zero. But it’s reinforcing when the people around you are doing it successfully, you’re doing it successfully, and it’s a lot like Cinderella at the ball. The guys look better all the time, the music sounds better, it’s more and more fun, you think, ‘Why the hell should I leave at a quarter to 12? I’ll leave at two minutes to 12.’ But the trouble is, there are no clocks on the wall. And everybody thinks they’re going to leave at two minutes to 12.” And that, in a nutshell, is the story of how we arrived at the calamity of 2008.
At some level, debt is at the heart of the whole story. Since the early 1980s, developed countries in general and the United States in particular have consumed more than they have produced—and they have made up the difference by borrowing. This happened at every level of
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