In an interview where he displayed to the full his immense self-regard, and incidentally engaged in his now customary tease about his future in politics, Peter Costello was asked by Tony Jones to comment on his warnings during the election campaign last year about financial tsunamis from China. He didn’t exactly address that front on, but he did comment that Asian sovereign wealth funds were providing a force for stability in world financial markets. That’s intriguing, because Ian Welsh at Firedoglake highlights what isn’t being openly discussed in the political reaction to the proposed Paulson bailout of Wall Street, in the context of the Japanese company Namura acquiring a 20% equity stake in Morgan Stanley after Henry Paulson’s announcement:
Investors, and especially foreign investors, want to know that if they buy in again, they’re protected. Since they aren’t going to be allowed to buy up the US’s financial sector for pennies, that means they need to know that prices will be maintained so they aren’t buying pigs-in-a-poke.
Which is also why the Paulson or Dodd bailout is still on the books. Because if the US doesn’t bail out its own financial sector (by borrowing money it doesn’t have) then the only people with enough money are foreign sovereign funds and large investors. And they willbail it out for cents on the dollar at fire sale prices. The end result is that New York would definitively no longer be the world’s financial center. Odds on favourite to be the new one? Dubai. London doesn’t want it (they want to be middlemen). Tokyo can’t quite do it. Shanghai isn’t ready.
But Dubai is raring to go. And that’s one real reason why Congressional leaders and Wall Street CEOs are panicking. If Wall Street isn’t bailed out by Congress, the executives will all be either working for Chinese and Arabs, or they’ll be out on the street, drowning their sorrow in their 50 feet yachts drinking $100,000 dollar bottles of whine. Er, wine.
What the US government is really seeking to do (among other things) is to engage in its own version of state capitalism in order to fend off the accelerating shift of power from America to Asia. And that’s one of the motivations they don’t particularly want to foreground, because the US taxpayer will be footing the bill. Make no mistake, this is just as much about geopolitics as finance.
Elsewhere: More at BBC blogs from Robert Peston:
It’s a world in which the Chinese state, if it co-ordinated the investments of its cash-rich institutions, could end up owning more-or-less the entire financial system of the US and the UK.
Update: Guy Rundle reports in Crikey that Bernanke and Paulson got more than they bargained for (or rather, less) in testifying before Congress:
Heading towards the middle of the last week of September, with the first debate only days away, it suddenly became clear to everyone that America was lurching towards genuine crisis. Not problem, not dilemma, but crisis. As Fall — season of death and tragedy — came to the northern half of the country, the Senate banking subcommittee assembled in Washington to hear evidence from Fed Reserve chief Ben Bernanke and evil disembodied floating head Treasury secretary Hank Paulson.
In the days prior, Paulson had made a few preparatory noises about how there was no alternative to this move, dire consequences etc, and in his testimony he really dialled it up to eleven. After a few preparatory remarks by Committee chair Chris Dodd, Paulson basically said that if the plan wasn’t voted in immediately the whole American economy would grind to a halt, as major corporations wouldn’t be able to make the short-term loans they need to cover week-to-week payroll demand surges, etc.
If he was hoping that this would stampede the committee, he was direly mistaken. One by one the committee members went on the record with their “frustration, desperation, anger” at this desperate and hastily put together measure. “We don’t want to be stampeded,” Dodd said. “There is no second act.” “I’m going to have to answer to the people after january 21,” another said. Jim Bunning, Republican Senator from Kentucky said “this is financial socialism, this is un-American”.
This was rather more token resistance than either Paulson or Bernanke had counted on, and you could see the consternation in their faces. You could also hear in Paulson’s voice, unless I am mistaken, genuine fear, as he detailed the cascading process by which the whole economy would fall apart.
The whole thing wrapped came off the airtubes mid-morning, with everyone suddenly realising that this bailout wasn’t a done deal anymore. As the full cost began to focus people’s minds – a four person American household is paying ten thousand dollars for this thing, with no guarantee that it’s the last ask — the sort of zombie drift to passing the thing was halted. What were we really getting for this?
How about Perth as the centre of Global finance,at least it might make it interesting place to live,and it will give the pensioners friend Sattler something to really complain about
Great post, Kim, which really gets to the heart of the matter.
If you’ve ever been to Dubai, you can see that they’re ready, willing and able.
I have heard stories about Dubai — there is a shopping mall that contains a ski field, made from artificial snow…
Dubai doesn’t want to be the Financial Centre – they want to be the play ground for those who work in the Financial Centre.
And those that work in the financial capitals and their families generally wouldn’t want to live in Dubai – last and only time I was there it was 52 degrees Centrigrade and oppresive humidty plus a dust storm. Hardly Conneticut or Cowes. I have heard it is lovely in the cooler months.
Just because a bank is foriegn owned, or part there of, doesn’t mean it moes an hence the financial centre moves. BankWest is owned by the Scots and yet I haven’t seen too many West Aussies moving to Inverness recently.
In today’s “Newshour with Jim Lehrer” at least one commentator mentioned E Asian purchases of large slabs of financial institutions (20% of Goldman Sachs) as part of his position that the market caused the problem, so the market should solve it, and seemed to see no problem with partial Asian buy-outs. I did read earlier in the week (UK online news – ?Guardian) of Saudi interest (for a while) in Lehman Bros and UK’s HOBS.
The possibility of FBI investigation was raised on Brisbane’s Channel 10 5.00pm news, especially in regard to Freddie Mac, Fannie Mae & AIG, as it has by Huffington Post’s <FBI Investigating Companies At Heart Of Wall St Crisis
Another HuffPost’s article on the Senate’s Banking Committee’s response to Bush’s latest bail-out asks Gut Check Time: Will Congress Stand up to Wall Street? It’s a good article – with good “quotable quotes”, like Most Americans would just as soon the Masters of the Universe were allowed to sink in their own folly. They had the party; let them clean up the mess. and Banks and investment houses carry weapons of financial mass destruction.
Quotable quote seemed to be “flavour of the day”. Nancy Pelosi, in a “carnival is over” type of response, claimed it was the end of “Privatising the gain and nationalising the risk”.
Seems Congress is not prepared to be pressured into handing Bush a blank check before Congress is due to finish before the Election by the end of the week.
These 20% stakes are hilarious – it’s the battle for second place, knowing that the top dog is on his deathbed.
Buy too much and you might resurrect the old bastard though…but at the same time you don’t want your competitors (Shanghai, Dubai, Tokyo) to be too far ahead when the jump to light speed actually happens.
Anyone think that someone foresaw this coming and though Iraq was the only way out?
And why am I not surprised that this is the “most read” article at the Times?
CEO murdered by mob of sacked Indian workers
Someone once said the Japanese don’t belive WWII really ended -they’re still fighting it, but by economic means now. Maybe the Sheiks will adopt a similar logic an make a pre-emptive strike on US military-industrial interests? To what degree are US military contractors quarantined/inocculated against foreign buyouts? Damned interesting times we are codemned to live in!
John Quiggin say Paulson should be sacked. Sounds good to me.
Couldn’t agree more, but do you think anyone in our ‘free’ media dare discuss it?
Carl
First, they’d have to think….bzzz;
then, they’d have to understand our position in the world…bzzz;
and then they’d have to have access to sources to back up their thinking…bzzzz.
Geopolitics to an MSM reporter means us vs them, and that’s about as complex as you’re going to get.
I agree with Razor, Dubai isn’t ready. If you look at the stats (http://www.world-exchanges.org/WFE/home.asp?menu=395), no stock exchange comes close to the two US exchanges in turnover – Nasdaq and NYSE. London, Euronext and the Deutsche Borse (plus Shanghai and Tokyo) can be mentioned in the same room. While stockmarket turnover is a weak measure of the effectiveness of a financial centre, it’s an important one. Not sure why you say “London isn’t interested”, but London is really the only alternative as a financial centre (as opposed to shareholder of banks).
Asia will certainly own more, going forward. And it is clear from the stats that I quote above, that Asia (east asia, not the middle east) is increasingly a real counterweight to Europe. But as a financial centre, the US (and particularly NY) still is miles ahead of everyone else.
Jennifer, I think all the stats are somewhat out of date – having said that, it may not be Dubai.
Note that what you’re attributing to me is not what I wrote but what I’m quoting.
There was a bit of a stir in the US earlier this year when Fakeed Zakaria wrote a book about declining US power and the shift to Asia. That’s been a continuing theme in America for about two decades – it was one thing Paul Kennedy was raising in the late 80s and it also kinda contributed to doing George H. W. Bush in.
The US has been at the mercy of Asian sovereign wealth funds for some time – someone has had to fund the enormous deficits. And prop up the dollar via buying US Treasury bonds. This is the belated fightback. It won’t work, for all sorts of reasons…
I don’t know about ‘at the mercy’ of Asian sovereign wealth funds, Kim. Let’s take the classic example: China. China has been willing to throw its savings at the US government because, as you suggest, it keeps the dollar higher and therefore underwrites vast volumes of Chinese exports. A significant contraction in US demand for Chinese manufactures would be pretty catastrophic for the regime. Sure the Chinese could smash the dollar if they wanted to, but then all that US Treasury paper wouldn’t look so good on the balance sheet, would it? So it’s a little more symbiotic than you’re suggesting.
BBB
Oh to be sure, BBB, I’m simplifying a bit, but it’s also wrong to say that China’s exports are wholly dependent on the health of the US domestic market.
Yes that’s right, not wholly dependent. But substantially so, which is of course why the Chinese bother to prop up the dollar in the first place. In the longer term, Chinese manufacturing will increasingly service its domestic markets. Presumably then so-called ‘excess savings’ will be applied internally. So let’s hope that the Chinese “dollar exit strategy”, whatever it is, can be executed in an orderly fashion. I’m sure it will be. After all, the financial markets are rock solid these days…
BBB
I think the point is, BBB, that the Chinese want some equity bang for their buck, rather than just propping up the dollar via Treasury Bonds (on which the return is basically zero at the moment).