02 December 2009

Messages from Dubai

Two articles about the lessons from the Dubai debt issue stand out here:

The first by Anantha Nageswaran talks of the underlying problem - a mindset that demands instant gratification - and its implications for the developing world.


Amid all the hand-wringing over Dubai, what is being forgotten is that what has happened in Dubai over the last several years is only a manifestation of a global phenomenon. That is the problem of instant gratification. This affliction lies behind the global financial crisis. ....
Cities cannot be built in half a decade. Cities are not about tall concrete, steel and glass structures. They are breathing, living organisms with culture. Culture is historical. It takes time. Similarly, economic growth has to occur at a sustainable pace. Debt seduces us into thinking that we can have more of it than what is good for us.
If the hubris about breaking speed limits to growth and the achievement of permanent great moderation in economic cycles has brought the severest test yet of the US’ global supremacy, the prevalence of the same mindset in the developing world does not augur well for the great decoupling that some have taken for granted and some await with bated breath.
Hence, to be generous to today’s wannabe leaders in the developing world, the 21st century might ultimately be viewed as the period of transition for the hitherto poor nations but, on current evidence, it may not be the century of their arrival.
All this might be good for op-eds. But investors would be questioning its relevance for their actions. The answer is the same. Mind the risk and mind the price one pays for assets, and those are the equivalent of accepting delayed gratification in life.
On behalf of all of us, praying for a year of learning to accept delayed gratification.

 The second article by Simon Johnson 'Does Dubai matter?Ask Ireland' highlights not just the interconnectedness of the world in the matter of flows of activity, but also the impact of responses taken by certain regions to combat crises in other parts of the world:

The thinking is that a partial bailout – with creditor losses – for Dubai from Abu Dhabi implies something about how Ireland will be treated within the European Union (and the same reasoning is also more vaguely in the air for Greece).  ...

The main effect will be to strengthen the hand of Ben Bernanke in Fed policymaking discussions – so US interest rates will stay low for a long while.  If financial intermediaries draw the appropriate lessons from Dubai, Ireland, and Greece (and Iceland, the Baltics, Hungary, etc), they will be more careful about extending credit to places that are becoming overexuberant – even when it is cheap to increase debt levels.
But an outbreak of caution and care on the part of our biggest banks (and other investment managers) does not seem likely.

Both these articles point to greater issues of unsustainable/unwarranted debt levels, but both appear to be pessimistic over the question whether better sense will prevail.

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