THE EDITOR The cause of the great financial meltdown of 2008 will likely come to be seen as the unintended consequence of weak regulators and greedy financial institutions serenading each other over a decade, rather than a handful of reckless traders holding society to ransom. Yet the resulting recession, now widely predicted to be both severe and longterm, is the result as much of household debt as institutional. The long unwinding of an enormous credit boom therefore seems to enforce rather than undermine capitalism’s most enduring ethic, its meritocracy. Almost everyone had their hands in the pot, including property-obsessed voters. It was just that the systemic risks were distilled at the level of large banks ruined by their own, greedy behaviour epitomised by an unsustainable culture of bonus payments. The most extraordinary aspect of the spectacular recent crash was just how poorly leaders responded to it on both sides of the Atlantic. At least in the US a lame-duck US president, surrounded by hostile, soon-to-be-re-elected senators and congressmen, eventually managed to push through an $840m bailout. A bailout, which some American pundits suggested was so socialistic it made France look like a bastion of the free market. In Europe though, while rescue plans were being hatched, governments luxuriated in denial. Germany’s finance minister Peter Steinbruck, demonstrating a barely comprehendible understanding of globalisation, revelled in America’s impotence. Mere days after calling the end of American superpowerdom, he contemplated the collapse of Munich-based Hypo Real Estate, whose commercial property assets totalled €400bn, roughly equal to Lehman Bros’ before it went into administration. Very few politicians attempted to explain events in language accessible to ordinary voters, hobbling democracy at every level. In this issue we chronicle the death of the independent investment bank, that symbol of rampant capitalism. Meanwhile, the 15 Eurozone nations plus the UK have staved off the worst of the banking crisis with a concerted, €2 trillion rescue plan. UK Prime Minister Gordon Brown’s action to re-capitalise the main UK banks was even copied in the US. Yet there is no proof of success until world leaders successfully re-work Bretton Woods, re-vamping the International Monetary Fund and in particular reforming the credit rating agencies. Until then, the only glint of silver in coming months is the fall in oil prices, the expectation that the US housing market will find a floor next year, and the continued, rapid growth of core emerging markets such as China, even if at reduced rates. At least this is what we are told by the IMF’s respected World Economic Outlook. Finally, we report in this issue on the importance of a united EU in facing down a resurgent Russia, now all the more dangerous because of its own, extreme financial meltdown. NATO may have lost its teeth and the US is pre-occupied with Afghanistan and Iraq (let alone Wall Street). In our extended feature (page 46), we ask what is next for Russia’s neighbours, their energy supply and – once it sorts out the current financial Armageddon – Brussels. INVESTMENT BANKING
GAMBLERS UNANIMOUS
of US investment to their knees by the collapse World markets were brought casino culture that brought the house down. at the banks. Chris Owen looks
RUSSIA
THE NEW COLD FRONT
FINANCE
SPECIAL REPORT
RUSSIA
The West is more in the Caucasu shaken than stirred by Russia’s s, but what does recent actions it mean asks Pamela Ann Smith
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2008, at the end of the t 21:30 hours on 21 September since in the financial markets most tumultuous week Reserve of 1929, the US Federal the Wall Street Crash it had approved the applications Board announced that become Morgan Stanley to of Goldman Sachs and bank holding companies.
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THE GLOBAL FINANCIAL SYSTEM STARTED TEARING ITSELF APART
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