The Elephant In The Room
February 3rd, 2008A few days ago, around the time that the Fed announced a surprisingly generous 0.5% interest rate cut on lending (and the time that the average person had started to realize the true impact of the current lending crisis), I heard a talk on public radio analyzing the crisis that banks have been finding themselves in. The Citi group had just disappointed Wall Street by posting a loss of nearly $10B billion.
One line in particular, stood out through the report - that Citi would not be looking to expand its operations in the US. Instead, they would be more interested in seeking out greener pastures in countries that are known to be better savers. While anyone can guess that the consumerist United States is not quite in the habit of saving, I was intrigued to find out which countries are best known for squirreling away a major portion of their paychecks for a rainy day. Get this - average personal savings amounts to only 2% of the US economy, while it is 40% in the case of China.
Robert Rubin, Citigroup’s director and executive committee chair, has a ready answer. Speaking about Citi’s credit hangover, he chided American consumers for their spendthrift ways - but also acknowledges that over the next few months, the country’s economic fate shall rest with the nature of consumer spending. The upcoming economic stimulus package passed by the government is also banking on that same premise. What is not being addressed (neither in political debates nor in general open discussions), is the direction to be taken so that long term financial habits see much-needed change.
The interest rate cuts and stimulus packages are being met with some cynicism. On one hand, it is hard to believe that such indicators are not signaling an upcoming trend of rates falling further and supply being more abundant (particularly illustrated by the current housing market). On the other, frivolous spending in a time of economic slump seems counterintuitive to a solution for jump-starting the economy. As the article concludes:
… Rubin was stumped when asked where the U.S. fit into a world where China has become the global factory, Brazil the world’s farmer, and India its back office. “We can do all of these things, but we have to invest in what we have to invest in, which is education,” he said.
But his answer was uneasy. After all, globalization has made the U.S. the world’s manager and financier, a job that his bank has just screwed up on a massive scale.
The elephant in the room, of course, was the fact that risky bets at leading financial institutions like Citi, Merrill Lynch (MER, Fortune 500), and Bear Stearns have damaged Wall Street’s reputation as the world’s leading financial hub.
