Some countries do not have a sophisticated banking system. Americans take this for granted, I’m sure. It wasn’t very many years ago that Russia did not have bank credit cards. Mortgages yes, but not structured like ours. In many foreign lands real estate loans do not exist; you pay cash, bundles of it. In other nations checking accounts suffice for the closing of real estate loans. But no mortgages. Hard to believe. But that is one reason housing access is poor in many countries. Inadequate credit mechanisms hamper economic growth in those places.
Nations borrow funds. Most often it is from their own citizens. America does. Has for generations. Most of our national debt is owed to ourselves.
Other times, nations borrow from corporations and the banking system. The sale of bonds, treasuries and other financial instruments to other parties is common around the globe. It is a means of investing in another country. These transactions help them finance new industries and economic activity. The payment of interest is an attractive investment for those with idle funds available to invest.
Normally assets are the object of debt: roads, bridges, technology, dams, waterworks, sewage treatment facilities, desalinization plants, defense systems, and the like. Big purchases. Assets which are building blocks to further economic development. Think oil fields and refineries in the Middle East financed in the main by the American government and oil companies.
The International Monetary Fund and the World Bank have been major players and collaborators in these matters. Financial credit sharing on a global basis has performed brilliantly. But there are rough times occasionally. Now is one of those times.
Some nations overstepped their ability to repay their debts on schedule. Greece is one of these faltering nations. In the wings are Portugal, Spain and Italy. The timing for Italy is now, thus we witness major disruption in foreign markets, stability of affected governments and any related stock markets to the problem. The latter explains how the stock markets in the US are affected as much as those stock markets in London, Bonn, Brussels, and Rome.
Global markets mean we are not in financial transactions merely for the good of our own self interest. We are in this situation out of interest for all of the global players.
Other nations are struggling under a mountain of debt as well. How well they perform in the coming months will determine how much more disruption is likely in international markets including our own.
All nations will have to participate in the solutions to these problems. That means us, too. We have benefitted hugely from these transactions and we thus bear a responsibility to be there for the problem times as well. Perhaps better rules and regulations will avoid similar problems in the future.
The problem is a familiar one: appetites have been larger than the stomach or digestive system of the nation taking on the debt in the first place. Managed economies require attention to detail. And yes, all economies of importance are managed in some degree or other. The global ‘system’ is not a free market in the true sense. Government participations make much of it possible. Without the guarantees, monitoring and regulations much of the world’s economic development in the past 65 years would have been an unmet dream. But the opposite is true and we have witnessed unprecedented gains throughout the world. That’s a good thing.
Some nations overstepped their means. That’s the downside of this mechanism of world cooperation. But all is not lost. There is still much to do to correct the current situation.
Before closing this blog session I want to make two observations.
First, the United States exported much economic turmoil via collateralized mortgages. Poor quality mortgages were packaged with good mortgages as an attractive means of our banks selling them overseas; the transactions both produced lower credit risk for US banks and expanded liquidity for more mortgage lending with a declining credit quality. The failure of real estate/mortgage/banking markets combined to make our banks very sick as well as our partner banks in other nations. Shame on us for this travesty.
Second, our country continues to be committed to a one-sided energy policy based on oil. Until America reduces its reliance on oil and replaces it with alternate energy expansion, foreign financial markets will remained skewed against the dollar and global stability, including unrest in the Middle East.
I’ve made those two points in earlier posts. They are recurrent themes because nothing is done about correcting their cause. Where are the political candidates on these primal issues? Good question.
Why do we allow them to remain silent?
November 14, 2011
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