Over the last few weeks, the world’s governments, bankers, economist and media have been fixated on a Financial Crisis. It seems to have started as a consequence of the sub-prime mortgage practices in the US. This crisis has gripped the world with fear and panic not seen since the 1930s. It seems to be all anyone can talk about.
Some of the dimensions of this crisis are staggering. Trillions of dollars of public money has been injected into the financial system. Politicians of all complexions have become fiscal interventionists. The Swiss and American governments have bailed out their nations’ principal private banks. The UK and other European governments have nationalised some failing banks. Governments around the world have put some form of guarantee on deposits to bolster confidence in the system.
Coordinated multilateral action, albeit faltering at first, seems to be working. Central bankers from the world’s developed and emerging economies are cooperating in a way not seen since the end of World War II. At the same time, the EU now want to re-write the rules of their financial system to depart from the system agreed at Bretton Woods in 1944. Then, as I believe it will now, the US got what it wanted. But things are very different today than they were in the dying days of the War.
Today, the centre of financial gravity has moved from the US and Europe to Asia. When all the accounting has been done, I believe the recent financial crisis will mark the official transition in that process. It will declare that Asia is wealthier than America or Europe in real net present value terms. It will be a passing of the torch from the old world of money to a new world of money that will dominate this century. It is a stark and sudden way for this to happen but history is full of these disruptive transformations.
Americans, Australians and many Western Europeans have been living well beyond their means for some time now. What started with continuously improving living standards in the post-war generation (largely borne of hard work and savings) became obsessive materialism. What began as ‘keeping up with the Joneses in the streets of pre-fab suburbs like Levittown, NY in the late-40s has become almost obscene conspicuous consumption by the upper-middle-class. Even the behaviour of an entire generation (Gen "Y") is profoundly unsustainable in economic and financial terms.
Modern banking was probably invented by the Templars during the Crusades. There’s even some suggestion that after Friday 13 October 1307 (Friday the 13th), some Templars & their treasure helped establish the Swiss banking system. In the 1500s, Philip of Spain needed the House of Rothchild in Paris to finance his wars with England. Last century, the American Lend-Lease program was probably the greatest example of buy-now, pay-later. After the War, the web of financial services available to an ever-more prosperous and ever-growing middle-class scaled up into the billions of consumers. Now, as some of the titans of Wall Street, of The City (London), of Zurich and other places fall into insolvency, the road ahead looks very uncertain.
I can’t imagine Visa and Mastercard going broke. I wouldn’t want to live in a world where people had to pay cash for their houses and cars. I can see an awful lot of "McMansions" selling for a fraction of their construction price. I can see executive compensation retreat from the extraordinary levels it has been at for some years now. I can see a great deal more people (and perhaps and number of different kinds of people) returning to saving part of their net-disposable income as a habit.
But the greatest change I can see is that what constitutes "middle-class" is going to change. It will be much less about a two-car garage in a suburban housing estate with a double-income family with two kids and a dog and/or cat. It’ll be much more about living at 75% of household income after tax and making do with less. Who knows, a few billion people saving some money might just repair the world financial crisis better than knee-jerk government intervention.
Perhaps the SEC could’ve paid more attention, e.g. http://blogs.reuters.com/great-debate/2009/01/06/why-did-the-sec-fail-to-spot-the-madoff-case/