Being Built on Debt

Andrew Ross Sorkin wrote a great piece in the New York Times, "A Financial Mirage in the Desert", where he writes that "for the last couple of years, the running joke on Wall Street was 'Dubai, Mumbai, Shanghai or goodbye.' If you were the C.E.O. of a troubled investment bank desperately looking for cash, you made a pilgrimage to one of those three cities with hat in hand. They were the places most likely to write a quick billion-dollar check; their eagerness should have also been a tip-off. Now you have to wonder about Mumbai and Shanghai, too. Are they next in line to take a fall?"

I'm wondering if debt and the service economy go hand in hand and if our new economy is all a big mirage, for where there is decreasing production what is the basis for service? What's there to service? The mirage seems not only relevant to Dubai, but to our own economy if we are not careful. It seems to me that businesses, small and large, have to largely build and people need to work in order for there to be stability in the economy. This is how our middle class was built. How these Wall Street banks are currently investing can't be the bedrock of the economy if we are going to be viable, not to mention that they will undoubtedly need a hundred billion dollar bailout out again, perhaps this time over multiple trillions.

Citigroup lent Dubai $8 billion on December 14, 2008 after being bailed out by taxpayers for $25 billion and then another infusion of $20 billion the month before. Do you think they'll need another bailout? It seems that Citgroup hasn’t learned its lesson on structuring risky derivatives even though the government (you and I) has a large stake in this bank. While Dubai is building, largely on the backs of slave labor, it seems like a capitalist city built on debt that has gone amuck. David Rubenstein, the co-founder of the private equity giant Carlyle Group pointed out in the article, "You know, they don't have any oil."

Is our economy being built on debt which is in this case a risky derivative? Investments banks hold 6 trillion in financial assets while commercial banks hold 4 trillion. (The distinction is actually murky as Wall St. banks are acting as commercial banks with backing by the FDIC although they hold no deposits.) Is an economy built largely on service a "mirage?" Is service based on debt where there is decreasing production, in essence, a risky derivative?