From Lehman Brothers’ Collapse to the Greek Debacle: Exposing Shifts in the World Economic Order

Prof. Bulent Gokay*


On 15 September 2008, the supposedly safe and perpetually prosperous world of post-industrial global economic order blew itself up when Lehman Brothers filed for Chapter 11 bankruptcy in the United States. The 158 -year-old iconic investment bank was forced into this extreme act when the collapse of the US sub-prime mortgage market turned into the securitized mort- gage-backed debt obligations into toxic assets(1). Today, 20 months after Lehman Brothers’ sensa- tional collapse, the entire world economy is still in the grips of the most severe synchronized global recession, the worst in over 75 years. Growth in advanced economies remains very sluggish, and unemploy- ment continues to rise to dangerously high levels. The enormous stock market bubble (massive amount of money that have been injected into the financial system) that has formed over the past  20 months is considered the main source of another possible crash, reflected in Der Spiegel’s front-page headline, ‘The Trillion Bomb’(2). The huge budget deficits in Greece, Ireland, Italy, Portugal and Spain threaten to break the euro’s back. The huge budget deficit of Britain, exposed re- cently during the general election campaign, is now nearing Greek territory, according to the latest figures on government borrowing (3). The probability of an eventual British default on debt remains quite likely.

At the same time, without any real eco- nomic recovery in sight, with sharp declines in household income and fast rising unem- ployment, social and political conflict is in- creasing in Europe. Greece offers the most serious example of how the financial crisis has moved into a new phase and exposed the deep-rooted contradictions within the current global system. ‘ The Greek financial crisis has put the very survival of the euro at stake,’ Nobel laureate economist Joseph Stiglitz wrote recently (4). It is feared that Greece will be a window into the next phase of the global economic crisis. That is because the global crisis, which started with the col- lapse of the Lehman Brothers in September 2008, was never really resolved. Huge state bail-outs simply trans- ferred all the debt to the public sector. Countries in the weaker periphery of the eurozone, such as Spain, Greece and Por- tugal, lack both the physical   and   human infrastructure required to make themselves more competitive in the global marketplace. Yet, it is in those areas (spending on roads, telecommunica- tion, universities and skills) the IMF -imposed cuts will fall, which presents a serious prob- lem not just now but for the future, as the ageing baby boomer generation presents Europe with a steady decline in its working age population. Europe is now facing a dou- ble-dip recession as debt crisis intensifies in Greece. All indications point out a scenario that eurozone economies will fall into a long prolonged no growth, or very low growth, period for the foreseeable future.

A 110 billion euro plan, accepted in May 2010, to bail out Greece has reduced the risk of a debt default this year for the coun- try, but is unlikely to end the crisis of confi- dence shaking weak economies on Euro- pean Union’s periphery. The Greek crisis risks destabilizing eurozone and marks the beginning of the most serious crisis in the history of the European Union. The risk of default is evident in countries other than Greece. There are clear concerns about Portugal, and questions have been raised about Italy and Spain. But this profound sovereignty debt crisis is not only a Euro- pean problem. It is merely another indicator of a severe systemic crisis afflicting the US – centred Western economies and Japan.

“It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sover- eign debt crisis that is unfolding will re- main confined to the weaker eurozone economies … it is a fiscal crisis of the western world”(5). 

One of the most interesting results of the global economic crisis is the acceleration of the global economic power shift toward emerging economies. The economies to watch now are the E-7 (Emerging Seven): China, India, Brazil, Russia, Mexico, Indone- sia and Turkey. According to a Pricewater- houseCoopers forecast, their combined gross domestic product could overtake that of the G-7 countries this decade, but this parity will not last for long, due to their much stronger growth potential, E -7 econo- mies will break away from the G-7 with com- bined E-7 GDP being projected by PwC to be around 30% higher by 2030 than total G -7 GDP(6). IMF predicts that ‘despite the emerging economies’ cooling momentum, they are still expected to provide a source of resilience, benefiting from strong productiv- ity growth and improved policy frame- works.'(7) In its November 2008 report, Global Trends 2025: A Transformed World , the US National Intelligence Council alerted that ‘The international system as con- structed following the Second World War will be almost unrecognisable by 2025 ow- ing to the rise of emerging powers, a global- izing economy, and historic transfer of rela- tive wealth and economic power from West to East, and the growing influence of non-state actors’(8).

“One of the most interesting results of the global economic crisis is the acceleration of the global economic power shift toward emerging economies.”

It  seems that  emerging economies recovered more quickly and robustly: many producers in emerging mar- ket economies are not suffering as much as their counterparts in the developed world economies in the current global crisis. It is obvious that their exports have been hit, but many of them have found that domestic demand is relatively buoyant. That is be- cause their own economies are on an up- wards growth path that is not so cyclical, so they can turn to the domestic market and exploit pent-up domestic demand. Of course not all emerging market economies are the same, and the recent troubles have con- firmed that a separation is occurring be- tween the more and less robust emerging economies(9).

‘The data so far suggest the economies of China and India are growing (not as fast as in the past but still growing), while America’s economy shrinks in absolute terms’(10). Thanks to its capital controls, its huge sav- ing surplus and its publicly owned and state – controlled banking system, China seems to be well shielded from the Western financial and economic difficulties(11). Mortgage assets and the housing market in China shows much greater stability and strength compared to the shaky and risky mortgages and lending structures set -up in the US and other Western economies. China’s banks are now the strongest in the world, with capital ratios far above al- most all other large banks  in  the  world and debt  levels  that are far lower(12). China has already be- come a major actor in world currency and financial markets. The country holds $1.8 trillion in foreign exchange reserves. In particular, China’s dollar holdings are a source of con- siderable financial leverage in the global financial markets. China has an especially effective financial system, which seems to be well positioned to finance the next phase in its economic expansion. Many observers also agree that the Chinese economy has a much bigger margin of maneuver, because its exposure to those speculative toxic as- sets, which lay at the root of the recent fi- nancial crisis, is much lower than the expo- sure of the American and West European economies. Furthermore, China’s yuan re- mains basically stable at a reasonable equi- librium level, which helps to prevent the in- ternational financial and currency market from further turbulence. In a way, China faces the global crisis from a position of strength(13).

“In financial terms, China is little affected by the crisis in the West. Its entire finan- cial system plays a relatively small role in its economy, and it apparently has no exposure to the toxic assets that have brought the U.S. and European banking systems to their knees. China also runs a budget surplus and a very large cur- rent account surplus, and it carries little government debt(14).” 

It seems that while the rest of the world is grappling with the global slowdown, China is figuring out ways to exploit it. Squeezed between falling profits and the credit crunch, a growing number of troubled  corporations  and countries (including the IMF) are turning to cash -rich China for a bailout.

“China’s banks are now the strongest in the world, with capital ratios far above almost all other large banks in the world and debt levels that are far lower.”

China now appears to be in a much stronger bargaining position than they have been in the last few years: Flush with cash at a time when most coun- tries and global corporations are struggling to gain access capital, China has spent nearly 60 -billion US dollars in less than a week in February 2009 in a series of deals that will secure a long-term supply of iron ore, copper, zinc and oil. Brazil signed a deal to supply China with 100,000 to 160,000 barrels of oil a day in exchange for billions of dollars of investment. Under the agreement signed in Brasilia, state -owned China Development Bank will provide fi- nancing to Brazil’s state-run energy com- pany Petrobras to develop its massive oil reserves. In 2008, trade between China  and Brazil totaled $36 billion making China Brazil’s second largest trading partner(15).

Peter Dicken describes this ongoing process as ‘the changing global economic map’, arguingthat ‘old geographies of production, distribu- tion and consumption are continuously be- ing disrupted and that new geographies are continuously being created. In that sense, the global economic map is always in a state of becoming …’(16). If one looks at China’s economic figures for the last 20 years, one realises a truly global power ris- ing at a stunning rate. If one considers that ultimately geopolitical power is built on eco- nomic power, then there exists every rea- son to anticipate that China will soon be- come one of the two or three super – players on the global arena. Former US dep- uty treasury secretary Roger Altman has written in Foreign Affairs: ‘the financial and economic crash of 2008, the worst in 75 years, is a major geopolitical setback for the United States and Europe… No country will benefit economically from the financial crisis over the coming year, but a few states most notably China will achieve a stronger relative global position… Beijing will be in a position to assist other nations financially and make key investments in, for example, natural resources at a time when the West cannot (17).’

To explain the current financial crisis and economic downturn, from the collapse of the Lehman Brothers to the recent Greek debt crisis, within the context of an epochal shift in the world-system away from North American/ West European dominance and towards emerging economies, to southeast Asia in particular, would provide us a longer term and deeper understanding of the global system in the current century. The 21st century looks set to be fashioned by the rise of China, India, Brazil and other emerging economies at the state level; and the formidable rise of Pacific-Asia (Chindia)(18) as the foremost eco- nomic zones at the regional level.

Notes:

* Bulent Gokay is a Professor of Interna- tional Relations at Keele University.

1) ‘Toxic security’ has become shorthand for the various asset classes hard hit by the financial crisis, such as sub prime mortgages. In simple terms, ‘toxic’ assets mean things that may not be worth what the price tag says.
2) Spiegel Online, December 2009, http:// w ww . s p i e g e l . d e /i n t e r n a t i o n a l / zeitgeist/0,1518,668729 3,00.html [accessed in January 2010].
3) The Independent, 19 February 2010, http://www.independent.co.uk/news/ business/news/shock-as-british-deficitequals-that-of-greece-1904129.html [accessed in February 2010].
4) ht tp://www.dayl i fe.com/topic/ Joseph_Stiglitz [accessed in May 2010].
5) Niall Ferguson, ‘A Greek crisis is coming to America’, Financial Times, 10 February 2010.
6) ‘Shift in World Economic Power means a decade of seismic change’, 21 Jan 2010, http://www.ukmediacentre.pwc.com/ c o n t e n t / d e t a i l . a s p x ? releaseid=3547&newsareaid=2

7) IMF Survey Magazine, « IMF Predicts Major Global Slowdown Amid Financial Crisis »,: IMF Research, 8 October 2008, http://www.imf.org/external/ p u b s / f t / s u r v e y / s o / 2 0 0 8 / res100808a.htm.
8) National Intelligence Council, « Global Trends 2025 : The National Intelligence Council’s 2025 Project, p.27, http:// w w w . d n i . g o v / n i c / NIC_2025_project.html
9) The shift in global economic power is not just reflected in GDP. The G-7 group of richest countries has already expanded to the G-20, a forum designed to promote dialogue on financial and global economic governance issues, while it was the China and the US that took the lead in the Copenhagen climate change talks.
10) Kennedy, Paul, «American Power Is on the Wane », The Wall Street Journal, 14 Januar y 2009, ht tp:// o n l i n e . w s j . c o m / a r t i c l e / SB123189377673479433.html.
11) China’s banking sector is controlled by the so-called “Big Four” (China Construction Bank Corp., Industrial and Commercial Bank of China, Bank of China Ltd, Agricultural Bank of China).
12) Chinese banks have recently cemented their position as the most highly valued financial institutions, taking four of the top five slots in a ranking of banks’ share prices as a multiple of their book values. China Merchants Bank, China Citic, ICBC and China Construction Bank lead the table, followed by Itaú Unibanco of Brazil, all with a price-to-book multiple of more than three. Financial Times, 10 January 2010, http:/ / www.ft.com/ cms/ s/ 0/ 1c13f7f2 -fe16 -11de-9340 -00144feab49a.html?nclick_check=1 .

13) Keidel, Albert, « The Global Financial Crisis : Lessons for the United States and China », Carnegie Endowment for International Peace , October 16, 2008, http:/ / www.carnegieendowment.org/ f i l e s / C h i n a _ a n d _ t h e _ G l o b a l _Financial_Crisis3.pdf.

14) Altman, Roger Altman, « The Great Crash, 2008, A Geopolitical Setback for the West », Foreign Affairs, January/ F e b r u a r y 2 0 0 9 , h t t p : / / www.foreignaffairs.org/ 20090101faes say88101/ roger -c-altman/ the -great- crash-2008.html [accessed in January 2010].

15) Simpkins, Jason, « China Continues its Commodities Binge with Brazilian Oil Deal », Money Morning, 24 February 2 0 0 9 , h t t p : / / www.moneymorning.com/ 2009/ 02/ 2 1/ china -brazil-oil/ .
16) Dicken, Peter, Global Shift. Mapping the Changing Contours of the World Econ- omy, New York: Sage 2007, p. 32.
17) Altman, Roger, « The Great Crash, 2008, A Geopolitical Setback for the West », Foreign Affairs, January/ F e b r u a r y 2 0 0 9 , h t t p : / / www.foreignaffairs.org/ 20090101faes say88101/ roger -c-altman/ the -great- crash-2008.html .’

18) In Mapping the Global Future, a report by the National Intelligence Council, ana- lysts concluded: ‘In the same way that commentators refer to the 1900s as the ‘American Century,’ the 21st century may be seen as the time when Asia, led by China and India, comes into its o w n . ’ ( h t t p : / / www.foia.cia.gov/ 2020/ 2020.pdf , ac- cessed in January 2010)

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