Good news! It's Monday morning, and global stock markets aren't dissolving into a downward spiral of panic and despair (at least not yet). Two hours after the opening bell, the Dow is down a paltry 30 points, and more importantly, Asian markets performed well starting the week -- Japan's Nikkei ended up nearly 3 percent.
Why should we care? Because as most people in the U.S. sat down to eat their turkeys last Thursday, the rest of the world was wondering whether Dubai World's decision to ask for a six month delay in making payments on around $59 billion in debt was going to precipitate another round of global economic meltdown. Markets fell hard on Thursday and Friday, and those economic commentators who weren't paralyzed by a trytophan-induced coma speculated wildly about the potential consequences.
But so far this Monday morning, investor reactions appear more muted than the worst-case scenarios would justify.
How seriously we should take this momentary calm is unknowable at this juncture. Sometimes economic disasters occur in slow-motion, and at this point, nobody would be surprised if Dubai's woes incited a chain of events -- sovereign debt defaults across the planet -- that short-circuited the fledgling global economic recovery. But Paul Krugman and Willem Buiter, neither of whom are ever shy at warning about impending chaos, are both complacent about Dubai World's "intrinsic" significance. Buiter's two posts, here, and here, are particularly worth reading.
Buiter's fundamental observation -- that Dubai World is essentially a commercial real estate developer that overextended itself, and commercial real estate developers are notoriously prone to bankruptcy during recessions -- is compelling. As Buiter writes, Dubai engaged in "the craziest construction boom seen in the Middle East since the construction of the Great Pyramids." One of Dubai World's key subsidiaries, the property developer Nakheel "was at the acme of property development pushed to excess, competing with God, nature and the Netherlands by constructing islands, which it hoped to sell to gormless rock stars and European football geniuses."
For years the financial press doted on stories of Dubai's extravagant excess as symbolic proof that the center of the world economy was migrating to the Gulf. But the real symbolism should have been much more obvious. Excess is a bubble waiting to pop. And stubborn hubris is not a sound investment strategy.
Which brings us to the Lehman Brothers comparison. As many have noted, when Lehman declared bankruptcy, it had liabilities of over $600 billion, which makes Dubai World's $59 billion worth of debt seem relatively insignificant. But symbolically speaking, there are interesting parallels. The millstone around Lehman Brother's neck was bad real estate investments. Not just stupid subprime mortgage security bets, but also actual massively unwarranted investments in real estate developments -- precisely the kind of stuff that gets hammered during an economic downturn.
As is documented in the various accounts of Lehman's fall that have been trickling out all year -- most notably Joseph Tibman's "The Murder of Lehman Brothers" and Andrew Ross Sorkin's "Too Big To Fail" -- Lehman's executives, in particular CEO Dick Fuld, refused to recognize the extent of their liabilities, and waited too long to seek a way out. Possibly the most important reason why Lehman was eventually forced to declare bankruptcy is that Fuld had earlier resisted selling off all or a portion of Lehman at a price he believed to be too low. In other words, Lehman's demise was its own fault.
The same seems to be true of Dubai World. The crash in Dubai's economy has been apparent for many months, but Dubai's ruler, Sheikh Mohamed bin Rashid al-Maktoum, did a pretty good Dick Fuld imitation, and refuse to ask for help or admit reality until it was too late.
As theorized in the Financial Times:
Why so long? Because the proud Sheikh Mohammed, it seems, was reluctant to be bailed out by his richer neighbor, possibly fearing it would put a damper on Dubai's image and constrain its independence. Nor was he willing to part with some of Dubai's crown jewels at distressed prices. Some people suspect that it is the same dogged resistance that has landed Dubai in this week's mess.
The lesson? The complexities involved in modern finance sometimes make what is going on seem inscrutable and hard to understand. Economists consequently argue endlessly about the real causes of the global financial crash in language that the layman has a difficult time deciphering. But when you look more closely at the flashpoints of disaster, whether in Dubai or in New York, the real problems seem to be caused by bad decisions by stubborn executives, whether blinded by greed or stupidity or the satisfaction of excess.
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