The Credit Crunch – November 2008

Unless you have been living blissfully under a rock or in a well placed hunting cabin located deep in the Maine woods, you have been following the rapidly unfolding turmoil that is gripping the global financial system.  As an employee of AIG Capital Partners, an affiliate company of the American International Group, I have spent the last several months on the front lines of this phenomenon.  For me, this period has been characterized by frequent day dreams about picking up my things and moving to a cabin somewhere in the brush north of Moosehead Lake. 

The economic events that have taken place over the last several months are shocking and disturbing, but they are not as uncommon as one might think.  While we are continually told that the United States has not faced as grave a crisis since the Great Depression, in places like Turkey or Argentina, this is not the case.  Since the turn of the century, both of these nations suffered financial meltdowns that were far more traumatic than what we are living in the United States today.  In fact, outside of the United States and Western Europe, there is a long list of countries that have periodically lived through harrowing economic crises over the last fifty years.  The difference this time is that the United States and Europe are part of the crowd. 

As I’ve spent my entire career working with emerging markets (or developing economies), I was pretty much accustomed to seeing groups of economies crash every couple of years.  In 1996, the Mexican Peso Crisis took down Mexico and South America.  In 1998, the Asian Financial Crisis devastated Southeast Asia and managed to take down Russia and Brazil shortly thereafter.  Turkey lived through crises in 1998 and 2001 while Argentina entered a tailspin in late 2001.  While these events were all different due to the specific qualities of the economies involved, they had common threads.  Undoubtedly, these nations suffered a combination of the following:  a stock market crash, the fall of the government, street riots, a steep fall in the value of the local currency, foreign debt default, the evaporation of credit, massive economic contraction, and the failure of major companies.  In all of these cases, ordinary citizens were subjected to tremendous uncertainty, stress, and shock at the sudden loss of personal and national wealth. 

As I watched these events unfold on a computer monitor in New York or on the ground on a business trip, I never envisioned that I would someday live through something even remotely similar in my own country.  Rather, I would tend to think something like: “It’s shame, but they had it coming to them given their blatant mismanagement of their economy.”  Now that the shoe is on the other foot, I recognize that things may not have been so cut and dried. 

The good news, if you’ll indulge me a bit, is that the current situation in the United States, while it is certainly difficult, cannot compare (so far) to the kinds of things that have historically taken place in the emerging markets.  Let’s take Argentina for example.  While we have all suffered through strong increases in food and gas prices over the past year, this doesn’t hold a candle to the hyperinflation that has periodically gripped Argentina over the last 40 years.  An Argentine friend of mine tells me that during the late 1980’s employees would chase shoppers around supermarkets with price guns in order to increase prices since annual inflation at that point exceeded 3000% per year.  We also haven’t seen the kind of unrest that caused mass street violence in Argentina in early 2002.  I’ll never forget when my colleague Marcelo called me frantically from JP Morgan’s offices in Buenos Aires to tell me that a mob had started to break into the building to express its rage at the international financial community.  Thankfully, Marcelo managed to sneak out undetected.  

Thus, while the current financial crisis has certainly been painful, both in personal sense and as a citizen of the United States, I have tried to find a silver lining.  This experience has given me a profound sense of empathy for those around the world who have suffered far worse conditions.  It has also served to remind me that in a world that is ever more economically interconnected, crises will spread faster than before.  After all, our government has spent the last 70 years, since the end of World War II, promoting exactly the type of global economic integration – from trade agreements to deregulation – that causes these types of events to spread from nation to nation like a bad case of the flu.  While I’m still a believer in the merits of these policies, I also feel that the best thing that we can do as Americans is to take our medicine, learn from the experience, and recognize that events like the credit crunch are global in nature.  Of course, if things don’t get better soon, you might have to find me contemplating these lessons from a remote cabin somewhere in Maine.


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