Opinion

The Edgy Optimist

Our imperial disdain for the emerging world

Zachary Karabell
Aug 23, 2013 12:14 UTC

August this year has been exceptionally unkind to the emerging world. We know that Egypt has been plunged into political and economic turmoil, yet that is only the most extreme case. Elsewhere, stories proliferate about economic slowdowns in Peru and China, and protests in Brazil and Turkey (among others).

Yet rather than viewing these events in the larger context of the past decade, the most common response is to write the obituary of emerging world development. As a lead article in the New York Times said this week: “with expectations mounting that the Federal Reserve, led by its departing chairman Ben S. Bernanke, may soon begin to tighten its monetary spigot, Istanbul’s skyline could well be a harbinger of an emerging-market bust brought on by unpaid loans, weakening currencies and, eventually, the possible failure of developers and banks.” The Wall Street Journal even got a tad cheeky, saying about the investing landscape, “Buying Dips? Stick To Hummus, Not Emerging Markets.”

These obituaries are likely to be premature. Our imperialist mindset — a hangover from the 20th century — suggests that developing countries are always helpless without the West. That says more about our limited analytical abilities than about how the emerging world will fare.

Sentiments of gloom, however, are widely shared by investors and analysts. The inside-baseball version involves a complicated narrative that judges emerging world growth by global money flows that move hither and yon depending on currency levels, interest rates and central banks actions. As one economist recently explained, “Cheap financing allowed emerging economies to temporarily live beyond their means, borrowing the difference from abroad: capital flows into such countries enabled them to import more than they exported.”

Such analysis posits that emerging world growth has rested on two increasingly shaky pillars: easy money emanating from the Federal Reserve and other central banks and the explosive growth of China over the past decade. With signs that money may soon be less easy to come by, and that China is turning away from big industrial projects and real estate and toward domestic consumption, there is a widely shared sense that the emerging world is about to go from golden to ugly.

Fannie, Freddie and our flawed ‘Ownership Society’

Zachary Karabell
Aug 9, 2013 19:09 UTC

More than four years ago, President Obama assumed office promising dramatic reform to the housing market. After all, it was the housing market that triggered the financial crisis, and the vast proliferation of low-quality loans that had fueled the housing bubble. But politics delayed those reforms, and now the president is reopening the issue with a call to wind down the two main federal mortgage agencies, Fannie Mae and Freddie Mac. “For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag,” the president said this week. “It was ‘heads we win, tails you lose.’”

Well, not entirely. The U.S. government and taxpayers did rescue these agencies in 2009 (to the tune of nearly $200 billion), and, after injecting them with capital and essentially nationalizing them, these companies started to turn a profit as the housing market slowly recovered. This month, they contributed more than $15 billion to the U.S. Treasury, and have been one factor in sharply reducing government deficits.

Even more, Obama’s targeting of Fannie and Freddie is part of a larger narrative — on both the left and the right — that banks and government colluded to produce the financial crisis and the continuing drag on the United States. To be fair, Obama in the same speech this week acknowledged that much of the housing crisis was the product of “banks and the government…[making] everyone feel like they had to own a home, even if they weren’t ready and didn’t have the payment.” But that chord is a decidedly minor one in a general atmosphere of blame.

What difference does it make who runs the Fed?

Zachary Karabell
Aug 2, 2013 17:43 UTC

As this week’s release of government numbers on unemployment and jobs highlight, the American economy is puttering along in the slow lane. And while few things in life are more frustrating than being stuck in the passenger seat of that car, it certainly beats crashing.

The second gear syndrome of our current economic life doesn’t sit well in a culture that demands more. Our macroeconomic numbers may be stable, but they obscure vast differences in affluence and opportunity, depending on where you live, what you do, what ethnicity you identify with, and how educated you are. The official unemployment rate, now at 7.4 percent, has been ticking down, but it is simply a statistic. It says nothing about the quality of those jobs, hours worked, wages paid, and needs met. Those are the questions we need to attend to.

Instead, in Washington at least, the economic discussion is currently dominated by the debate over who will be the next chair of the Federal Reserve. The story has the perfect makings of a Washington horse race. The lead contender, Larry Summers, engenders passions both for and against, while the main challenger, longtime Fed governor Janet Yellen, has captured the anti-Summers vote. Meanwhile, former Fed governor and current head of TIAA-CREF Roger Ferguson, has emerged as a compromise candidate, though no one is quite clear how his name first surfaced, and the New York Times is reporting Obama is interviewing only three people — Summers, Yellen and Donald Kohn, a former Fed vice chairman.

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