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Dubai: A Modern Parable
When future generations sit their children down to tell the story of the great crash of the early 21st century, they will surely begin with the parable of a place called Dubai. As the decades pass, and the details become hazy, it will sound like a Bible story or one of Aesop’s fables. “This, children, is the tale of a desert king who yearned to rule the most luxurious kingdom in the world. He wanted the tallest building on the planet and hotels of an opulence beyond imagination. Gold and silver tumbled from the sky, until the sands were covered with the fastest cars, champagne flowed all night and people dined on gold-dipped, foie-gras-fragranced, lobster-infused maki rolls — each one costing ￡100.
“Even nature itself could not stand in the way. Where there were no beaches, the sheikh ordered that beaches be made, crafting them so that, when the gods looked down from the heavens, they would see the shape of a palm tree or a map of the world. He spent so much money, so fast, it was impossible to keep up. There was only one problem. The money was all borrowed. And one day, it began to slide back into the sand...“
Perhaps it won’t end exactly that way, but the story is bound to have staying power. For Dubai is a perfect metaphor for the crisis currently crippling global capitalism. The dream of Sheikh Mohammed bin Rashid al-Maktoum, the autocrat who rules Dubai, was unsustainable in every sense: economically, morally and environmentally. But there is no room for first world condescension here, wagging a finger as we tell the Arabs they were deluded to think they could build a financial centre to match the western citadels of London, New York and Frankfurt. We cannot condescend to Dubai because its flaws are ours — even if they are lit in outlandishly vivid colours.
That’s why the money men are already asking themselves who will be next; will it be Greece, wonders the Financial Times, while others fret for Latvia, Hungary and even Ireland. They all made Dubai’s mistake, if not quite at the same pace. They pulled out the credit card and went on a wild spending binge-and now the bill has fallen due. But it wasn’t just them: we’ve all been at it. Japan is on course to have a public debt twice the size of its gross domestic product next year, while the US debt is set nearly to equal the country’s economic output. The United Kingdom is not far behind, with a debt forecast at 89% of GDP. We’ve all been living on tick [credit].
In this sense, the sheikh who wanted the Burj al-Arab to be the world’s only seven-star hotel is not that different from the Florida couple who moved out of the trailer park and into a condo. They both bought something they couldn’t afford with money that wasn’t theirs. Dubai was simply a sub-prime statelet in a sub-prime world.
Of course it was economically unsustainable, but the difference between us and them is one of degree rather than kind. Their boom was fuelled by rising property prices that nobody thought would ever fall, and by cheap money that kept flowing through the tap marked low interest rates. That sounds familiar, and not only as a description of our recent past. It fits our present, too. Today’s regime of near-zero interest rates means that we’re trying to get ourselves out of the current hole by the very means that got us into it: spending cash that was borrowed on the cheap.
We in Britain have more reason than most to avoid smugness in our view of Dubai. The great criticism of the emirate that sought to be a magnet for finance and tourism is that it was built on nothing. There was no real economy; Dubai didn’t actually make anything. Can post-industrial Britain, reliant on the City [London’s traditional financial district] and on service industries, really say we are so different? The truth is, we don’t make much either.
Nevertheless, something else sticks in our craw about Dubai. It’s that the eye-popping luxury was built on the backs of foreign workers, toiling in a form of human bondage. Over a million men and women from India, Bangladesh, Nepal and across Asia have turned Dubai from a sleepy village of pearl-divers and fishermen into a shimmering Arabian Las Vegas — and have been rewarded with next to no rights and meagre pay. They sleep in labour camps, each one crammed with 3, 000 or more people. In the strict hierarchy of the emirate, their role is to serve the expats and wealthy natives. It is all but a slave society.
We are right to find that morally repugnant. But we should beware the mote in our own eye. For if the west enjoyed economic boom times for the 15 years that preceded 2008, it did so thanks to low inflation. How did inflation stay so low? Because labour costs were kept down, thanks to millions of Chinese workers prepared to sweat for wages we would consider close to slavery. So, yes, we can be repelled at those ladies buying Hermes bags and Manolo Blahniks by the crateload in the Dubai shopping mails. But they weren’t that different from the folks snapping up the bargains at [the European budget-store chain] Primark. Both groups rely on the fact that, far away and out of sight, somebody is prepared to work very hard for very little money.
Environmentally, Dubai makes the jaw drop. The air conditioners blowing full blast into the open air, to make the gardens cooler, the de rigueur 4x4s and the indoor ski resort, where sub-zero temperatures are maintained even in the middle of a baking desert — no wonder the UAE ranks second in the global league table of per-capita carbon emissions(beaten only by its Gulf neighbour, Qatar). But our own consumption of fossil fuels hardly makes us blameless. In this, as in so much else, Dubai is just like us — only more so.
Still, the universality of the Dubai parable should not obscure an equally important, and specific, part of the story. Despite the sheikh’s best efforts to pretend otherwise, Dubai is not some invented wonderland that could have existed anywhere. It is part of the Persian Gulf — and utterly revealing of that region’s ugliest face.
For Dubai, like the rest of the emirates and the other Gulf states, did not use its enormous wealth to develop its own people, let alone the peoples of the wider Arab region. Instead, as Durham University’s Christopher Davidson puts it, “they just imported what they needed ready-made. “
So the oil-rich Gulf states buy in the architects and the chefs who might present the glitzy front of a westernized society-skipping out the awkward intermediate stage of nurturing the talents of their own people. A choice example is Qatar, which solved the problem of sporting achievement, not by training its children at athletics, but by paying foreigners to become Qataris. It worked a treat in 2000, when Saif Saeed Asaad won an Olympic bronze for weightlifting. Only the pedantic pointed out that Asaad was actually Angel Popov of Bulgaria, competing under his new name.
There is another route open, one that would dream not of hotels shaped like sails, fake archipelagos and parties fit for Paris Hilton, but of a region packed with universities and seats of learning to rival the great scholarship of the Islamic golden age. Imagine that, a Gulf region that might serve as an inspiration for the whole Arab world, rather than a playground for its richest kids. There could be a fable in that, too.
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American Youth Issues
For years now, we’ve heard the gripes by and about millennials. Their plight seems so very 21st century: the unstable careers, the confusion of technologies, the delayed romance, parenthood and maturity.
Many of the same concerns and challenges faced the children of the industrial revolution, as the booms and busts of America’s wild 19th century tore apart the accepted order. These Americans were born into an earthquake. During the 1800s America’s population exploded from 5 million to 75 million. The nation went from a rural backwater to an industrial behemoth — producing more than Britain, Germany and France combined — but every decade the economy crashed.
For rootless 20-somethings, each national shock felt intimate, rattling their love lives and careers. Many young adults could not accept that their personal struggles were just ripples of a large-scale social dislocation. So each New Year’s, they blamed themselves.
Romance worried them above all. Today some fret about the changing institution of marriage, but we are used to such adjustments; 19th-century Americans were blind-sided when the average age of marriage rose precipitously to 26 — a level America didn’t return to until 1990. In a world where life expectancy hovered below age 50, delaying marriage until 26 was revolutionary.
While some looked for love, others looked for jobs. Before the modern era, young people found work within family networks, laboring at home or on a farm. The industrial economy changed that.
The good news was that there were more jobs; the bad news was that they were isolating and temporary. Work now meant small factories or lumber camps or railroad crews of strangers. For young people this meant chronic instability. A young man might brag about his new job one week and find himself begging for money from his father the next.
While 19th-century young adults faced many of the anxieties that trouble 23-year-olds today, they found novel solutions. The first was to move. Young men and women were notoriously transient, heading out on “wander years“ when life at home seemed stalled. Another solution was to find like-minded young adults to share their baffling discouragements and buoyant hopes. Nineteenth-century young people were compulsive joiners. Political movements, literary societies, religious organizations, dancing clubs and even gangs proliferated. The men and women who joined cared about the stated cause, but also craved the community these groups created. They realized that while instability was inevitable, isolation was voluntary.
Today’s young adults are constantly rebuked for not following the life cycle popular in 1960. But a quick look at earlier eras shows just how unusual mid-20th-century young people were. A society in which people married out of high school and held the same job for 50 years is the historical outlier.
Americans considered young adulthood the most dangerous part of life, and struggled to find a path to maturity. Those who did best tended to accept change, not to berate themselves for breaking with tradition. Young adults might do the same today. Stop worrying about how they appear from the skewed perspective of the mid-20 th century and find a new home, a new stability and a new community in the new year.
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A dozen years ago, James Grant — one of the wisest commentators on Wall Street — wrote a book called The Trouble with Prosperity. Grant’s survey of financial history captured his crusty theory of economic predestination. If things seem splendid, they will get worse. Success inspires overconfidence and excess. If things seem dismal, they will get better. Crisis spawns opportunity and progress. Our triumphs and follies follow a rhythm that, though it can be influenced, cannot be repealed.
Good times breed bad, and vice versa. Bear that in mind. It provides context for today’s turmoil and recriminations. The recent astounding events — the government’s takeover of Fannie Mae and Freddie Mac, the Treasury’s investments in private banks, the stock market’s wild swings — have thrust us into fierce debate. Has enough been done to protect the economy? Who or what caused this mess?
We Americans want problems with instant solutions. We want victories and defeats with clear heroes and villains. We crave a world of crisp moral certitudes, when the real world is awash with murky ambiguities. So it is now. Start with the immediate question: has enough been done? Well, enough for what? If the goal is to prevent a calamitous collapse of bank lending, the answer is probably “yes“.
Last week, the government guaranteed most interbank loans(loans among banks) and pressured nine major banks to accept $ 125 billion of added capital from the Treasury. Together, these steps make it easier for banks to borrow and lend. There’s less need to hoard cash. But if the goal is to inoculate us against recession and more financial turmoil, the answer is “no“.
We’re probably already in recession. In September, retail sales dropped 1. 2 percent. The housing collapse, higher oil prices( now receding), job losses and sagging stocks have battered confidence. Consumption spends — more than two thirds of all spending — may drop in the third quarter for the first time since 1991. Loans are harder to get, because there’s been a “correction of lax lending standards,“ says financial consultant Bert Ely. Economist David Wyss of Standard & Poor’s expects unemployment, now 6.1 percent, to reach 7. 5 percent by year-end 2009.
Ditto for financial perils, “ the United States has an enormous financial system outside the banks,“ says economist Raghuram Rajan of the University of Chicago. Take hedge funds. They manage nearly $ 2 trillion and rely heavily on borrowed funds. They could destabilize the markets as they’re pressured to sell. They’ve suffered heavy redemptions — $ 43 billion in September, according to the Financial Times. There’s also a global chain reaction. Losses in one market inspire losses in others; and nervous international investors sell everywhere. Brazil’s market has lost about half its value in the past year.
In this fluid situation, one thing is predictable: the crisis will produce a cottage industry of academics, journalists, pundits, politicians and bloggers to assess blame. Is former Fed chairman Alan Greenspan responsible for holding interest rates too low and for not imposing tougher regulations on mortgage lending? Would Clinton Treasury Secretary Robert Rubin have spotted the crisis sooner? Did Republican free-market ideologies leave greedy Wall Streets types too unregulated? Was Congress too permissive with Fannie Mae and Freddie Mac?
Some stories are make-believe. After leaving government, Rubin landed at Citigroup as “senior counselor. “ He failed to identify toxic mortgage securities as a big problem in the bank’s own portfolio. It’s implausible to think he’d have done so in Washington. As recent investigative stories in the New York Times and The Washington Post show, the Clinton administration broadly supported the financial deregulation that Democrats are now so loudly denouncing.
Greenspan is a harder case. His resistance to tougher regulation of mortgage lending is legitimately criticized, but the story of his low-interest rate policies is more complicated. True, the overnight fed-funds rate dropped to 1 percent in 2003 to offset the effects of the burst tech bubble and 9/11. Still. The Fed started raising rates in mid-2004. Unfortunately and surprisingly, long-term interest rates on mortgages(which are set by the market) didn’t follow. That undercut the Fed and is often attributed to a surge of cheap capital from China and Asia.
There’s a broader lesson. When things go well, everyone wants to get on the bandwagon. Skeptics are regarded as fools. It’s hard for government — or anyone else — to say, “Whoa, cowboys; this won’t last. “ In this respect, the tech bubble and the housing bubble were identical twins.
We suffer cycles of self-delusion, sometimes too giddy and sometimes too glum. The next recovery usually lies in the ruins of the last recession.
As the housing boom strengthened, lenders overlent, builders overbuilt and buyers overpaid. Existing home prices rose 50 percent from 2000 to 2006. Lending standards weakened. Investment bankers packaged dubious loans in increasingly opaque securities. But bankers — to their eventual regret — kept many bad loans themselves. Almost everyone assumed that home prices would rise forever, so risks were minimal. Congress was complicit. It allowed Fannie and Freddie to operate with meager capital. They were, in effect, giant hedge funds backed by government congress also increased the share of their mortgages that had to go to low — and moderate-income buyers, form 40 percent in 1996 to 52 percent in 2005. This blessed and promoted supreme mortgage lending.
So Grant’s thesis is confirmed. We go through cycles of self-delusion, sometimes too giddy and sometimes too glum. The only consolation is that the genesis of the next recovery usually lies in the ruins of the last recession. Optimistic Americans “recognize error and put it behind them,“ Grant writes in the current Foreign Affairs. The Pew survey reports this contrast: though half of Americans believe there’s a recession, almost half also think the economy will improve in the next year.(by Robert J. Samuelson, from Newsweek, October 27, 2008)
