Back to the Basics

The economic crisis experienced by the United States and Dubai (and other emirates of the UAE) shares common origins.

By Lanny J. Davis

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Published: Wed 18 Mar 2009, 9:23 PM

Last updated: Mon 6 Apr 2015, 1:08 AM

But it also shares common solutions. Bottom line: more trade and more transparency —not the opposite, which, we know from history, is often the counter-productive reaction of nations and peoples in the midst of economic crises.

The common origins in both the U.S. and Dubai are the collapse of the real estate speculative bubble and, very much related, the freezing of the credit markets. In the U.S., accumulated debt based on little or no hard collateral led to what was, in effect, a national “Ponzi scheme.”

In all Ponzi schemes, there is at some point a bursting of the speculative bubble when the last buyer says, no, I am not buying at that price, and the panic and collapse begins. And then lenders stop lending, consumers stop borrowing and spending, and the economic spiral heads quickly downward.

This is not unusual in recent and, for that matter, not so recent history. Let’s re-wind for a minute to the early years of 17th century Holland. In 1636, tulip and hyacinth bulbs were selling, in today’s values, for about $1.00. Then a few speculators started buying them for $2.00 and re-selling them for $4.00, promising there would be buyers who were willing to pay $5.00.

Several months later, each bulb was selling for several hundred dollars. By 1637, individuals were paying for each bulb thousands of dollars —most on borrowed money.

Here is what one writer wrote about this buying mania:

“The immense expansion of commerce [in the Netherlands] encouraged gambling upon profits to be made from speculation in all kinds of products….But now and again, speculation intensified into a frenzy of what the Dutch called, “windhandel,” literally trading in the wind, that is, buying or selling futures without actual possession of the goods….The fever kept getting wilder and wilder until suddenly at the beginning of 1637 the market cracked. In a few days, hundreds were ruined. The whole credit system, not merely for tulips, was endangered.”

Sound familiar? 

But that should put today’s crisis in the US and UAE into perspective. 

The bad news is that the speculative bubble, which drove real estate prices so high that U.S. borrowers were buying homes they couldn’t afford on borrowed money they couldn’t afford to pay back, is over. 

The good news is that it is over. 

And the better news is that like all bursts of speculative bubbles that freeze up credit markets and cause economic downturns, even though this one is as severe and potentially comparable to the Great Depression of the 1930s, this one too shall pass. 

It is important, therefore, in looking at the common solutions between the US and Dubai and the rest of the UAE that will accelerate the time when the turnaround will occur —which it inevitably will —that we learn the lessons of history rather than repeating its mistakes.

History has taught us that it is precisely during times of high economic distress when protectionism, nationalism, and non-transparency instincts reach their heights and, ironically, produce even worse economic distress. For example, during the Great Depression in the US, tariffs were increased and resistance to foreign involvements and commitments was high. This was the time when the “America First” isolationist movement was a dominant part of American political culture —until the Japanese attack at Pearl Harbor woke American up from what future President John F. Kennedy described in a book as its “sleep.”

And so now, we look at the challenges facing the U.S. and Dubai and the UAE as a whole. And learning from history, we must jointly appreciate that the answer to the economic crisis is more trade and the free flow of commerce and ideas, not less.

In his best selling book, The Earth is Flat, Thomas Friedman points out a vital form of capital in the global economy is not financial but intellectual. That may be resisted by developed countries who are concerned about the export of jobs to foreign markets where there is more economic ways of doing business. But it is vital to each nation’s long-term prosperity that free trade continue —including wages, benefits, working conditions, and environmental standards that are not unacceptably sub-standard.

It is also time to return to the fundamentals. If a business model was sound before this crisis began, it should be sound after. In the U.S., under President Clinton, free trade —hallmarked by the passage of the North American Free Trade Agreement and other bilateral agreements with other nations — and transparency and the revolution in global communications led to a period of significant prosperity in the U.S. through the latter period of the 1990s. 

In Dubai, as Afshin Molavi recently wrote in the Financial Times, the basic “fundamentals as a regional hub of shipping, services, people, trade and capital have not changed.”

The wisdom of investments in sound commercial real estate and infrastructure in Dubai for future economic growth have not changed. Or, as the late ruler of Dubai, Shaikh Rashid bin Saeed al-Maktoum, put it, as quoted by Molavi: “What’s good for the merchants is good for Dubai.”

In conclusion, the common origins of the crisis lead to common solutions for both the United States, Dubai and the rest of the UAE: greater free trade and transparency, which creates greater confidence of our respective peoples in their government and their leaders to deal with the economic crisis and to focus on the good news and good times not too far ahead.

Robert M. Kimmitt, former US Deputy Secretary under President Bush, said it very well —in words that could be echoed by the U.S.’s current exciting new president, Barack Obama,

“...[N]either the United States nor the UAE, nor the rest of the world, can afford to turn inward.

Instead, we must rely on increased interaction with each other to help drive our economies forward and make the benefits of foreign investment available to all countries.”

The American people know and appreciate the support the UAE gave to the US in the war against terror after 9/11. They know and appreciate that Dubai ports have received more US Navy ships than any ports outside the US. 

The importance the US places on its friendship with the UAE was further demonstrated by the positive and constructive discussions that recently occurred in the Middle East between the US Secretary of State Hillary Rodham Clinton and UAE President His Highness Shaikh Khalifa bin Zayed Al Nahyan.

Of course there remain policy differences between the two countries — but none that cannot be overcome by free trade, with worker’s rights and environmental standards, more transparency, and mutual trust and respect. 

These are the policies that allow for the “audacity of hope” that President Obama wrote about some years ago and that should be an accurate description of the attitudes of both Americans and the emirates.

Lanny J. Davis, former special counsel to president Bill Clinton from 1996-98, is a leader of the “Legal and Policy Strategic Communications Group” at the global law firm of Orrick, Herrington & Sutcliffe. He appears frequently in US media and writes a weekly column on US politics

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