With the stock market tanking and Wall Street’s top firms either vanished or trembling under the skirt of commercial banks, is finance as we know it over? Will the Credit Crisis of 2008 turn New York dominance into submission—to London, Shanghai, Dubai, or even Moscow?
Not a chance. First, globalization has proved itself out. Some schmuck defaults on his 3,000-square-foot exurban dream home, and Fortis Bank in Belgium gets nationalized. It wasn’t just Wall Street buying stupid toxic securities—everyone was. Right now, nearly $200 billion is trying (unsuccessfully) to prop up Russian markets, hundreds of billions of euros are trying to resuscitate European banks. Wanna bet over/under on Chinese financials next year?
Second, when you think of markets, remember this saying: Money sloshes around the globe seeking its highest return. You would think that it ought to be sloshing away from the U.S. But it isn’t. If anything, it’s sloshing toward us, buying into the safety of U.S. Treasuries. So much so that they’re sold out. Short-term rates are almost negative. The dollar has been on a tear against all but the Japanese yen. Weird, I know, but we are the port in the storm, even though the storm started in this port.
Third, we make valuable stuff. One cause for alarm, even before the financial meltdown this year, is that the U.S. has gone from around a third of world economic output to something closer to a quarter, at the same time that the BRIC (Brazil, Russia, India, and China) have doubled their share to about 16 percent. But that doesn’t tell the whole story. It’s not so much what your output is, it’s how much you profit doing what you do. The Chinese make us stuff at very low profits, while India answers our customer-support calls. Apple makes more money selling iPhones than any subcontractor in these two countries. And a rising Russia was based on over $100-a-barrel oil, probably a thing of the past, with perhaps a similar future for Brazil’s output of less and less valuable sugarcane and soccer players.
Sure, China and South Korea and the entire Middle East sheikhdom community are sitting on trillions of our dollars, from years of reckless trade and fiscal deficits. But it’s not where the money sits that’s important—it’s what you do with it, where you turn it into more. The U.S. is the largest-valued market, with the most wealth: approximately $50 trillion in financial assets vs. $30 trillion in the eurozone and maybe $2 trillion in China. Innovation remains America’s biggest export—in the form of software, network equipment, pharmaceuticals, search engines, and the next wave of funky energy products—and productivity is the only thing that leads to long-term wealth. Wall Street is not the stock market; it is the gatekeeper for great and future great companies that want to tap it for growth capital. Oddly, it’s what happens outside New York that will keep New York the financial capital.
And finally, the U.S. dollar still rules. Our accounting is legit, more so post-Enron, and years of regulation mean that corporate numbers are, for the most part, transparent. Investors know what they are buying. Not true with Gazprom or even Daimler. Remember all those companies that did their IPOs (initial public offerings) in Europe, on the AIM (Alternative Investment Market)? They all learned their lesson the hard way. They went public in name only. Few shares traded, prices were suspect, and you could never really sell any shares. A word of warning. Policy is the one thing that can screw up Wall Street. Tighter regulation is in the air. Some will be good, like higher reserve requirements for banks, and some will be awful, like restricting short selling or guaranteeing mortgages. New York will remain the world’s financial center—but beware that its biggest risk is just a three-and-a-half-hour Amtrak ride to the south.