U.S. Economic Presence Abroad

Never has it been as necessary as it is now to remember the American writer Mark Twain (1835-1910) when he said, “History does not repeat itself, but it does rhyme.”

When, in September of 2007, the so-called real estate bubble burst in the U.S., unleashing a wave of banking catastrophes, not a few officials in the European Union thought the turbulent waves of this financial crisis would arrive without much force on the coasts of the Old Continent.

Even amid the Lehman Brothers bankruptcy and the financial difficulties of Fannie Mae, Freddie Mac, Bear Stearns and AIG insurance, some European bankers began to think, naively, that the collapse of the so-called subprime mortgages (bad contracts with delinquent clients who used their homes as collateral) would be beneficial for them, without stopping to think that in this era of globalization, flows of capital are interconnected.

These naïve optimists very quickly realized that the vaults of European banks were full of useless financial papers (toxic assets) contracted with American banks. During the two-year period from 2008-2009, the real estate crisis that took hold in the U.S. spread over the entire globe in the blink of an eye, particularly in the EU.

European governments came rushing back to knock at the doors of their respective central banks, especially those of the Central European Bank (CEB), the International Monetary Fund (IMF) and the Group of 20 (G-20), in search of money to implement costly bailout programs to avoid massive bank bankruptcy as well as a worsening of the economic crisis. All of this created an astronomical public debt and the serious fiscal imbalances that are cropping up everywhere today.

The above issue comes up because statements made by James Bullard, the president of the Federal Reserve Bank of St. Louis, in reference to the impact that a European financial crisis would have on the world economy, suggested superficiality.

Without blushing, Bullard declared, “If it just kind of tumbles along for a long period — which is the most likely outcome — then I’m not sure you’d get much feedback to the U.S.” Big mistake.

In contrast to the above judgment, the governments of Latin America and the Caribbean are closely following the financial upheavals that are darkening the global economic outlook, especially the debt crisis and the lack of fiscal coordination present in both the EU and in the U.S., while at the same time pondering the true magnitude of China’s entry as a lead player in the flow of international finance. The reasons are obvious.

A financial crisis in the euro countries (where the euro is the only currency) will slow economic growth throughout the continent, which will reduce the internal demand for goods and services, thus affecting Latin American and Caribbean exports, the flow of investments and the sending of remittances by nationals living in Europe. In these times of economic interdependence, there are no insurmountable financial barriers.