Dubai: Free markets, Unrestrained, Unregulated Capitalism. Phooey

As the world awaits the opening of U.S. markets, the heralded example of free markets and unregulated capitalism, Dubai, sent markets tumbling from Singapore to London.Dubai default fears push futures sharply lower and Dubai debt crisis raises financial turmoil fears

HONG KONG — The fallout from Dubai's debt crisis rippled across the globe Friday, raising concerns of another wave of financial turmoil and showing how vulnerable the world economy remains despite signs of recovery

Touted as an example for the United States to emulate by right wing economists and talking heads, What Dubai could teach the US about capitalism  (2007)

Dubai is a key center of hawala, an unregulated private system of payments and currency trading between the Middle East, South Asia, and Southeast Asia. Similar to a banking system of clearing checks, hawala brokers facilitate transactions and money transfers for a 1%-2% commission. For less money than a typical bank rate, the centuries-old payments system eases currency and gold transfers between Dubai's many migrant laborers and their families abroad.

Unfortunately, hawala is under pressure from the US government, which is trying to impose its own bank reporting and record keeping regulations throughout Dubai. The US regulatory efforts are a misguided attempt to prevent money laundering and the financing of terrorism. (emphasis added)

Dubai is delivering a sucker punch to investors who hoped that the steady recovery of American markets since last March would modestly correct and then keep advancing.

Obviously Americans are not the only skeptics.

 Free Market flawed, says survey: In the global poll for the BBC World Service, only 11% of those questioned across 27 countries said that it (free-market capitalism) was working well.

For a long time, progressives expressed skepticism about the ability of Dubai to maintain its unregulated commercial growth, October, 2006: Fear and Money In Dubai

The irony is that the Dubai failure slows the U.S. recovery.  Rush Limbaugh and Sean Hannity will not doubt blame it on President Obama.

Comments

[Jeremy R. Shown]

If the default (or possible default) of Dubai is evidence of capitalism's failings, I'd be curious to know what you thought the lesson of the collapse of the Soviet Union was.

[Tim E.]

Unfortunately the mainstream press and the most of the American public will completely miss the connection. Most people couldn't even tell you where Dubai was unless they happened to see the cool artificial palm tree peninsula in National Geographic.

[Lou K.]

Western style capitalism doesn't run more wild anywhere than in the mid-east. But just the same, their example will need the collectivism to socialize the risks and cover for the losses. Sucker Punch - commonly used as "That mother****** came up and sucker punched me!" But they can't say they were sucker punched. The investors were willingly participating in a "unregulated private system of payments and currency trading." They knew it was coming, gambling they weren't the suckers to get punched. Otherwise known as "capitalism."

[Replacement Windows]

Dubai is crazy. I hadn't heard of hawala before, but now things are starting to make sense.

[Paul]

Lou K. - sorry, bad sentence structure and punctuation. I was referring to US investors in our domestic markest, not the people who invetsed in Dubai. Those who invested directly in Dubai get no sympathy here.

[Michael Weiss]

It stinks not having oil.
Dubai Background

Dubai is one of 7 Emirates that make up the United Arab Emirates. Abu Dhabi, with huge energy reserves and a sovereign wealth fund thought to be worth $630 billion, is the richest of them. Its banks are major creditors of Dubai and its companies, but news that they are no longer willing to keep buying or refinancing the debt of Dubai’s major companies shocked the global markets.

Dubai and U.S. Housing Speculators Play the Same Game

Dubai has very few energy resources and raises little money via income tax due to its competitive tax policies. The state has consistently run deficits and the Emirate's growth has therefore been funded via the money markets.

A huge property-led boom saw money pile into infrastructure and construction projects (sound familiar?). Similiar to being on the cover of Sports Illustrated, building the world’s tallest building has always been viewed by investors as a sign that a local economy is about to head south.

Dubai World, the most indebted of Dubai’s state-sponsored companies, owes $60 billion of which $22 billion must be refinanced by 2011.

Worries About Impact Of Dubai Crisis Generate Substantial Selling Pressure

The U.S. stock market opened sharply lower (down roughly -3%) on Friday, November 27, 2009 in a reaction to the financial crisis in Dubai. The downward momentum comes after Dubai World asked to postpone payment on some of its $60 billion in debt. Worries about a default by the city-state have raised significant concerns about the impact on banks.

The markets closed down roughly -1.5%.

Mark Minervini Comment on Dubai Sell Off

I view short term turmoil in countries and nations outside the U.S. as a long term positive for U.S. stock and bond markets. Similar to the Asia crisis in the late 1990's, these foreign calamities highlight the relative safety of the U.S. and bolster U.S. credibility. I made this same comment during the Asian crisis, which turned out to have the same effect.

A Counterintuitive Scribe
I will leave you with one counterintuitive comment by James Hillman from his book, Kinds of Power: A Guide to Its Intelligent Uses:

“Wherever we see an increase we feel its weight. All the numbers going up no longer portray the optimistic spirit, but instead indicate monstrosities, epidemics, ugliness, future disaster, extinction. Growth has taken on a cancerous tinge. To use the word now sends a message of potential danger, whether the growth be in debt, the population, the underemployed, the homeless, the dimension of cities, the size of government, the particles in the air, the tax rate, the cost of living, the cholesterol count, even the rising numbers on the bathroom scale. Going up now means decline. What was before the measure of progress has become a sign of
problems.”

You might be thinking that this was written to describe the current economic challenges, however his book was written in 1995. Did the world recover, indeed. Will the U.S. and global growth recover this time around...indeed.

[R.J.]

Barclays, RBS, HSBC...all home-based in Socialist economies. I wonder why they looked elsewhere for growth?
I'm sure if Dubai had a Timmy Geithner at the helm all would be ship-shape and Bristol fashion.

[Matt]

Reading drivel like this still makes it hard to believe that you were once the mayor of a major American city.

It's funny how you folks who, like, totally heart the government completely ignore thousands of years of empirical data that people acting in their own self interests raises everybody's standard of living. The Pilgrims experimented with socialism/communism before Engels and Marx were even born, and they failed.

If anything, Dubai is a gleaming example of why free markets are a complete success. Risk too much of your nation's capital on concentrated sectors like real estate, and it can fail. Problem is, in Dubai, they are allowed to fail, and here Citi is a zombie bank.

Believe it or not, fear of failure is the ultimate risk management tool; examining various failures like this one will only serve to better capitalism, not underscoring the need for more statist/socialist/communist action.

[Bob Morant]

Yes, capitalism is the worst economic system in the world, except for all the others.