A shattering moment in America’s fall from power

The Guardian (H/T: Andrew Sullivan)

[..] “The fate of empires is very often sealed by the interaction of war and debt. That was true of the British Empire, whose finances deteriorated from the First World War onwards, and of the Soviet Union. Defeat in Afghanistan and the economic burden of trying to respond to Reagan’s technically flawed but politically extremely effective Star Wars program were vital factors in triggering the Soviet collapse. Despite its insistent exceptionalism, America is no different. The Iraq War and the credit bubble have fatally undermined America’s economic primacy. The US will continue to be the world’s largest economy for a while longer, but it will be the new rising powers that, once the crisis is over, buy up what remains intact in the wreckage of America’s financial system.” [..]

John Gray

4 thoughts on “A shattering moment in America’s fall from power

  1. Interesting comment about the failures of empires, there are several ‘turning points’ you can argue. For the British Empire there are a handful:

    1. Industrial: when Britain fell behind Germany and the US in coal/steel production
    2. Political: when Gladstone failed to pass Home Rule for Ireland
    3. Moral: concentration camps in the Boer War and certainly Amritsar and suppression of Indian independence
    4. Economic: when Britain became a net debtor and/or went off the gold standard
    5. Military: inability to keep the famous ‘fight two fleets at once’ doctrine (sound familar?)
    6. Social: first day of the Somme when the ordinary working class of the Empire figured out that the aristocratic officer class were murderously incompetent.

  2. THBT, I read these this morning.

    The article was by Nouriel Roubin at RGE Monitor:

    The US and global financial crisis is becoming much more severe in spite of the Treasury rescue plan. The risk of a total systemic meltdown is now as high as ever

    The article ended with this:

    “When investors don’t trust any more even venerable institutions such as Morgan Stanley and Goldman Sachs you know that the financial crisis is as severe as ever and the fear of collapse of counterparties does not spare anyone. When a nuclear option of a monster $700 billion rescue plan is not even able to rally stock markets (as they are all in free fall today) you know this is a global crisis of confidence in the financial system. We were literally close to a total meltdown of the system on Wednesday (and Thursday morning) two weeks ago when the $85 b bailout of AIG led to a 5% fall in US stock markets (instead of a rally). Then the US authorities went for the nuclear option of the $700 billion plan as a way to avoid the meltdown together with bans on short sales, a guarantee of money market funds and an injection of over $300 billion in the financial system. Now the prospect of this plan passing (but there is some lingering deal risk the votes in the House are not certain) -as well as the other massive policy actions taken to stop short selling “speculation” and support interbank markets and money market funds – is not sufficient to make the markets rally as there is a generalized loss of confidence in financial markets and in financial institutions that no policy action seem to be able to control.

    The next step of this panic could become the mother of all bank runs, i.e. a run on the trillion dollar plus of the cross border short-term interbank liabilities of the US banking and financial system as foreign banks as starting to worry about the safety of their liquid exposures to US financial institutions; such a silent cross border bank run has already started as foreign banks are worried about the solvency of US banks and are starting to reduce their exposure. And if this run accelerates – as it may now – a total meltdown of the US financial system could occur. We are thus now in a generalized panic mode and back to the risk of a systemic meltdown of the entire financial system. And US and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 bps reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis.”

    I wanted to know more about this man. I googled him and found this article on the NY Times of two years ago:

    Dr. Doom

    “On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.
    The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market….”

    At that time he predicted everything that is now coming to pass – including the fall of Fannie Mae and Freddie Mac.

    Is anyone steering this ship? Does anyone know the answer to this?
    And why did they not do something before now?

  3. Great post nwmuse…I have an answer (opinion) on why no one did anything before..Far to many were riding the gravy train and raking in the big buck’s, they figured they would ride the rich horse till it dropped and then fold up their tent’s and go home..Blessings

  4. Muse and Witch:

    “Popular Delusions and the Madness of Crowds”. It’s a great read – the Great Tulip Bubble, South Seas Bubble(s) etc etc.

    “It’s like deja vu all over again”

    “300,000,000 lemmings can’t be wrong”

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