OPINION:US was the architect of globalisation, but will play a reduced role once it sorts itself out, writes Tony Kinsella
THE US financial system is incapable of deciding what its products are worth. As Washington writhes, the rest of the world oscillates between holding its breath and shrugging its shoulders. Are we witnesses to the death of the familiar or participants in the birth of the new? Probably - and uncomfortably - both.
The US was the head and the heart of our financial system. Wall Street has lost itself in a delusional dream of its own making to such an extent that it now qualifies for a title inspired by less prestigious organs.
The US financial system, public and private, inhabited a world of froth fed mainly by its participants' fantasies. Froth that proved to be as corrosive as it once appeared seductive, as the December 2001 Enron collapse illustrated.
Enron was the biggest pipeline operator in the US, making handsome, if unexciting, profits. Its executives used those profits to provide the leverage for a flashy speculative empire. An empire that, however, lost money hand over fist to the point where Enron could no longer borrow enough to sustain it. A highly profitable enterprise crashed.
Alan Greenspan, the former chairman of the Federal Reserve, thundered at a White House crisis meeting on Enron that "there's been too much gaming of the system. Capitalism is not working! There's been a corrupting of the system of capitalism".
These same corrupting gambles have now produced financial instruments for which the market cannot determine a price. Many believe it will take months, if not years, to discover what, if anything, they might be worth.
Bear Stearn's $1.3 billion Alt-A Trust 2006-7 is a good example. Thirty seven different kinds of bonds were based on a package of 2,871 mortgages. Most of these were "liar loans", based on insufficient or fraudulent documentation.
Twenty three per cent of the trust's remaining mortgages are now in serious trouble while the US average is 9 per cent. Similar bonds have been sold for as little as 22 cents on the dollar, so how much is that trust worth today?
The dicing-and-slicing process was repeated to the extent that George Soros estimates there is $45 trillion worth of esoteric debt derivatives, as compared to $12 trillion of US mortgages, sloshing around.
Across the US there are empty homes where it is not clear who is legally responsible for the property, never mind who holds the title. Who will cover the legal and accountancy fees to determine ownership? Who will pay contractors to secure or maintain empty properties when two-bedroom homes in Detroit are selling for $1,500?
The only entity capable of providing the markets with life-saving oxygen is the federal government. Republicans balked at the White House's "un-American" TARP plan, only to swallow much of their ideological rigidity rather than risk tossing the country's economic architecture in the air just to see where the pieces might land. TARP is only the beginning.
The death throes of a market gone mad have overshadowed the birth, for the first time ever, of a truly global economy.
When Germany's centre-right chancellor, Angela Merkel, a former scientist who grew up in the Soviet-era GDR near Berlin and Brazil's centre-left president, Luiz Inácio Lula da Silva, a former metal worker who grew up in the back streets of São Paulo under a military dictatorship, independently arrive at similar conclusions, you get something approaching a global consensus.
The two leaders have publicly stated that their countries are not going to contribute to the public rescue of the US financial services sector.
During a visit to Austria, Merkel spelled it out: "I'm criticising the self-image of the financial markets which have unfortunately resisted voluntary rules for too long with the support of the governments of Great Britain and the United States."
Lula was even sharper when he responded: "What crisis? Go ask Bush."
Recent foreign sources of capital for troubled US institutions have also headed for the hills. The managing director of the Kuwait Investment Authority, Badr al-Saad said: "We are not responsible for saving foreign banks." Kuwait pumped $3 billion into Citigroup last January, an investment that has lost one-third of its value.
The state-based China Investment Corporation invested $8 billion in Morgan Stanley and the Blackstone Group, only to see that investment plunge by over 40 per cent.
The US and the EU account for about one-quarter of our global economy each. The emerging BRIC economies (Brazil, Russia, India and China, and others) add another quarter, with the rest of the world chipping in the remaining 25 per cent.
The earlier phases of globalisation were more an Americanisation of economic models and approaches around the planet. We are now seeing a truly globalised economy emerging where the US will be only one of several major players.
Our few global structures were, however, designed for a world system with the US at its core, or if viewed from Washington, at its pinnacle.
The five permanent (veto-wielding) members of the UN Security Council are the victors of 1945 - China, France, Russia, UK and the US. There is no Latin American or African member, and key players like Germany, Japan and India are also excluded.
Our global economic architecture is based on the US dollar and the 1944 Bretton Woods agreements which created the World Bank and the International Monetary Fund.
Nicolas Sarkozy has, in his grandstanding way, called for an emergency summit next November to review our global economic institutions and systems. A precondition for any hope of success is that such a summit represents today's world, not that of our grandparents.
We, the other 95 per cent of humanity, have to sort out our world while the US sorts itself out. We can and it will.