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Private equity, derivatives, bubbles and busts

By James Cumes - posted Wednesday, 3 January 2007

A current blog in Sydney put the question whether “What's good for Wall Street is good for …” well, the rest of us. It went on to ask: “Is Goldman Sachs' astounding $16.5 billion payout to its employees a triumph of capitalism or an obscene example of the greed-is-good philosophy?” It added the comment that “New York media can't decide”.

If the New York media can’t decide, I have suggested in America’s Suicidal Statecraft that, although Goldman Sachs - and other operators like Macquarie Bank and Texas Pacific - might deliver some short-term bonanzas for some people, the risks for the longer term and for most of us, are potentially - and it would seem inherently - terrifying.

At least one member of the European Union, though not a member of the currency Eurozone - the United Kingdom, has been eager to follow the United States into what many see as the minefield area of highly speculative finance-capitalism.


This is no less, of course, than Britain has done in following the United States into other economic, political and strategic escapades.

Britain is consequently exposed to much the same dangers as the United States. So is Australia. Indeed, the group of economies which the ever more threatening financial hurricane will particularly assail is that which we might loosely call the "Anglo-Saxon" economies, whose policies are modelled, in general terms and in much of the detail, on a wide range of American concepts and policies.

Those policies are set to be - in some ways and for some economies - as devastating for the “Anglo-Saxon” economies as they are at home in their place of origin in the US.

So we should be clear that, although so much of current finance capitalism has its genesis in the United States, the self-destruction that it threatens will not be confined there nor will it be only the Americans who are grievously hurt. Many countries outside the United States stand to be directly and indirectly affected by “the Goldman-Sachs” finance-capitalism phenomenon.

There are similarities in the market trends in housing in the US and the UK - as well as, to a large extent, in Australia. There has been a boom of quite extraordinary proportions in the UK centred particularly on London - and it continues. It continues for reasons that are at least partly distinct from the driving forces in the United States but the impact of the bubble when it bursts, is likely to be quite as sensational.

On December 2, 2006, the International Herald Tribune (IHT) reported, "Already the most expensive place in the world to buy a luxury property, this city [London] is expected to set a new price record with some apartments going on sale for as much as ₤4,000 a square foot".


Recently apartments have been selling for more than ₤3,000 pounds or about $US5,800 a square foot compared with $US5,100 for the equivalent in New York and, it is said, the next contenders for the most pricey accommodation are Tokyo at about $US1,700 and Hong Kong at $US1,300.

It can’t fail to remind us all of the heady days in Japan in the late 1980s when a studio in Tokyo, offering just about standing room only, could turn you into a millionaire overnight.

That boom went bust - along with the Nikkei stock-market bust - and led to a deflationary recession or near-recession lasting more than a decade.

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America's Suicidal Statecraft is available most readily through Amazon, at $26.99 a copy.

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About the Author

James Cumes is a former Australian ambassador and author of America's Suicidal Statecraft: The Self-Destruction of a Superpower (2006).

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