Dubai, Shanghai, Mumbai, or the Highway

In early December, I spoke at a Yale Law School breakfast on the current financial crisis — focusing on Robert Shiller‘s book, The Subprime Solution. (Several of my earlier posts — here and here — were actually preparation for my presentation.) The first question to Shiller from the audience began: “Lots of my investment-banker friends are saying: Dubai, Shanghai, Mumbai, or the Highway …”

Shiller interjected: “What does that mean?” And the questioner explained that her friends were thinking that going forward, these foreign locales were likely to be much more economically successful than the West. She ultimately rephrased her question: “So I guess what I’m asking … Is America over?”

Shiller was no nattering nabob of negativism, saying that in 15 years the United States would be back “stronger than ever.”

The mention of Dubai in connection with the subprime crisis reminded me that just after the election, I was in Dubai for the World Economic Forum’s Summit on the Global Agenda, which focused on the world economic crisis. Sheikh Mohammed bin Rashid al-Maktoum, the Ruler of Dubai, addressed the conference. (You can read Peter Ubel‘s description of the address here. The ruler’s most jarring assertion: “In Dubai, we are building our future with our own hands.”)

Until hearing this speech, I had failed to realize how upset the rest of the world might be with the U.S. for its subprime crisis.

Think about it. U.S. banks make ill-advised loans to poor U.S. citizens. And what happens to the rest of the world? They lose half the value of their stocks. The annoyance over our high-leverage loans is particularly high in Muslim countries, where mortgages are inconsistent with Shariah.


Chris Partridge

Sheik Maktoum's assertion that in Dubai they are 'building their future with their own hands' is very jarring. In fact they are building their future with the hands of hundreds of thousands of underpaid and exploited Pakistanis.

griff

I am glad Mr Ayres you have finally noticed how upset the rest of the world is with the US over the crisis your country has caused...

Even the UK Prime Minister has taken to blaming the US for the crisis!

And its not just a 50% stock fall - we have lost tens of thousands of jobs in the UK in the last few months as a direct result of either greed or incompetence in the US mortgage market. We really aren't happy with you...

At least President Obama may soon address the other very real causes of upset - the Iraq war, Guantanamo, extraordinary rendition and the wilful refusal to recognise climate change while wasting massive amounts of scarce oil resources....

thomas

“In Dubai, we are building our future with our own hands.”

I am going to have to call BS on this. Most of the construction work done in Dubai by migrant worker, whose status is roughly equivalent an indentured servant. They are shipped out of the country every six months to prevent labor organization and representation.

seth

Well, there's risk inherent in any investment. They weren't complaining when they were making money hand over fist during the real estate bubble. If you piggyback for long enough you are bound to get dropped.

Jason

Well, maybe not building their future with their OWN hands, considering 90% of their workforce (and probably 100% of the construction workforce) is foreign. But with their own oil money I suppose.

jonathan

Can anyone imagine a day when the Muslim world is not blaming the US for something? Dubai is a giant speculative bubble, perhaps the largest localized bubble ever. I keep asking people: do you know anyone in Dubai who isn't involved in real estate related deals and deal servicing?

There was a world credit bubble. We didn't make decisions for the Icelandic banks. We didn't inflate the Irish or Spanish or British or Czech or Polish or Rumanian or Bulgarian property markets. Most of recent Spanish prosperity: their local real estate bubble. Even China, while it makes so much stuff, has a giant real estate bubble. We had nothing to do with that either.

John

The charade that Muslims go through because you supposedly can't have a loan with interest according to Sharia is ridiculous. It is true that you can't call it "interest", so what the lender does is purchase a property, mark it up by whatever profit that they want to make over the term of the loan, then make a loan with no "interest" for the new amount. The buyer is obviously paying interest, even though it isn't broken out separately or called "interest".

I also find it interesting that all of the pundits are using the current economic problems in the US to predict our downfall, while ignoring the fact that our problems have hurt the rest of the world's economies worse than our own. It seems to me that it has reinforced how dependent the rest of the world is on our econonomy.

jblog

"At least President Obama may soon address the other very real causes of upset - the Iraq war, Guantanamo, extraordinary rendition and the wilful refusal to recognise climate change while wasting massive amounts of scarce oil resources…."

Wow, it's as if you read the brochure.

Amy

Well, they're really spending Abu Dhabi's oil money to pay foreign workers to build a future for Iranian traders and assorted opportunistic expats...

Colin

"while wasting massive amounts of scarce oil resources"

The price of oil would indicate that this is not in fact a particularly scarce resource.

john

With respect to mortgages "....are inconsistent with Shariah..." - that is correct interest is not allowed... so instead when someone wants to borrow money, they have to pay a "commission", or have the bank buy the car/house or whatever, and they pay it back at a premium over time...

Dubai's real estate is no different than elsewhere...there has been a huge bubble, with "off-plan" houses being bought and sold three or four times before it's built...

Take everything you here about Dubai with a grain of salt...

James A

Guess I missed the part where he expressed sympathy at the extremely high oil prices earlier this year were causing pain to our poor. What a poor attempt by Ian to make us think that the woes of the world rest soley on the feet of the U.S.

ktb

"The price of oil would indicate that this is not in fact a particularly scarce resource."

By that logic it would indicate that it was a scarce resource in the first half of the year, but suddenly became less scarce in the later half. Oil price is may not the best indicator.

What is true (and I work in the oil industry) is there is a certain amount of oil that can be obtained at the current oil price profitably (most of it in the middle east), and when that runs out the price will have to rise before any one's willing to spend the money to get at more expensive to find/produce oil.

Sharad

I was in Dubai last month and I can tell you that even though they have majority of the worlds cranes they are barely using half of them at the moment...there are a very surprising amount of construction properties that were stopped halfway due to the lack of funding, espeically from foreign investors.

Currently oil only accounts for 6-8% of its GDP while the rest comes from financial services (foreign backed of course) and tourism

Like some of the other comments have already stated, the Milddle East and the rest of world just prove that they need our inventors to further their own countries progress, maybe not as much anymore since we have already invested so much...but it is still the case.

Mercutio.Mont

"They weren't complaining when they were making money hand over fist during the real estate bubble. "

"There was a world credit bubble. We didn't make decisions for the Icelandic banks. We didn't inflate the Irish or Spanish or British or Czech or Polish or Rumanian or Bulgarian property markets. Most of recent Spanish prosperity: their local real estate bubble. Even China, while it makes so much stuff, has a giant real estate bubble. We had nothing to do with that either."

Those two statements bear repeating. The world can blame the US for all of their problems all they want, but that doesn't mean they're correct.

Joe Smith

No one forced those European banks or Arab countries to buy American securities.

On the other hand, American business leaders and their government puppets have been fairly obnoxious over the last decade lecturing the world about the joys of free markets while protecting favored sectors in the US (farmers, lumber). The rest of the world can be forgiven for being annoyed when it turns out there was rampant fraud and that the US government was turning a blind eye to the abuses.

JW

The rest of the world is upset with the U.S. because of our economic troubles? While there's no doubt that the our economic woes have spread worldwide, I didn't hear anyone complaining when the rest of the world was cashing in when the U.S. economy was strong. Exporting countries received huge economic gains when the U.S. consumer was buying their stuff, oil countries raked in the dough when the U.S. economy was consuming more and more oil to fuel its economy, many nations made money off of the U.S. stock and bond markets.

If these countries want to ride the wave when times are good, they have no cause for complaint when times are challenging.

The U.S. does have regulatory and protectionist problems, no doubt. But when compared with the governance, corruption, and oppression in other countries, I'll take America's problems any day of the week.

jonathan

Another point: why should we care what Dubai thinks? When I grew up, the most important lesson was consistently: don't do what your friends do, think for yourself. Or "If everyone jumped off a cliff, would you?" Or more succinctly: be yourself.

So what exactly does the opinion of Dubai matter to us? There are fewer Dubai nationals than fit in a decent-sized ballpark. They have hundreds of thousands of migrant workers whose passports have been taken away, who live in squalor, who have no rights. And we're supposed to care what Dubai thinks?

It's far more important to think for ourselves and to be true to ourselves than to worry about public opinion elsewhere. It's like when the buzzword was "the Arab street" and what they think about America. Who the heck cares what the Arab street thinks? Let them worry about their own dysfunctional, autocratic, repressive governments. We can deal with our own problems.

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Tristan

"I had failed to realize how upset the rest of the world might be with the U.S. for its subprime crisis"

Are you kidding? Are all American's so oblivious?

I'm from Australia and we're upset you!

Jules

jonathan or 7,

Correction of fact: Morgan Stanley had played a huge role in Shanghai's real estate bubble, which was the peak of China's real estate bubble. I'm not sure about the RE bubbles in these other countries you mentioned, but it's not hard to imagine some big American banks are behind them. That said, I don't think these banks' mere involvement is to be blamed. What's to be blamed is the manner in which they conducted business in those RE markets as well as in the US RE market.