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Ferguson On The Mortgage Crisis

A day does not go by when there aren't at least a few articles in the papers about what has come to be called the "sub-prime crisis." The Times has a top-front page piece this morning plus others elsewhere in the publication; there are several dispatches sprinkled around the Wall Street Journal; even the provincial Boston Globe has two reports in today's three page business section. The coverage in the Financial Times seems almost to be about nothing else. In the end -- or is it in the beginning? -- this is about private greed going haywire with glee and private greed then going desperate to get public relief.

Today's op-ed page in the FT carries a trenchant piece by Niall Fergusson. The article is titled, "An Ottoman warning for America," and displays a pill-quote, "As in the 1870s, the upshot of this debt crisis is the sale of assets and revenue streams to foreign creditors." This time, however, "creditors are buying bank shares not (Suez) canal shares. And the resulting shift of power is from west to east."

But that is not the end of it. So read on in Fergusson:

Since September, Middle Eastern and east Asian sovereign wealth funds have made a succession of investments in four US banks: Bear Stearns, Citigroup, Morgan Stanley and Merrill Lynch. Most commentators have been inclined to welcome this global bail-out : better to bring in foreign capital than to shrink balance sheets by reducing lending. Yet we need to recognise that these “capital injections” represent a transfer of the revenues from the US financial services industry into the hands of foreign governments. This is happening at a time when the gap between eastern and western incomes is narrowing at an unprecedented pace.

In other words, as in the 1870s the balance of financial power is shifting. Then, the move was from the ancient oriental empires (not only the Ottoman but also the Persian and Chinese) to western Europe. Today the shift is from the US – and other western financial centres – to the autocracies of the Middle East and east Asia.

In Disraeli’s day, the debt crisis turned out to have political as well as financial implications, presaging a reduction not just in income but also in sovereignty...

It remains to be seen how quickly today’s financial shift will be followed by a comparable geopolitical shift in favour of the new export and energy empires of the east. Suffice to say that the historical analogy does not bode well for America’s quasi-imperial network of bases and allies across the Middle East and Asia. Debtor empires sooner or later have to do more than just sell shares to satisfy their creditors.

These are serious consequences.