THE RECENT subprime mortgage crisis and the slump in the housing market are starting to take their toll on the American economy. Last week Citigroup, the nation's second largest bank, posted its largest quarterly loss in history: $10 billion.
With more and more loans going into default, the leading financial companies in the country are starting to run low on capital and are turning to foreign investors to get more cash. Within the last few months, Citigroup turned to Saudi Arabia, Singapore, Kuwait, and Abu Dhabi-based companies for nearly $30 billion in fresh capital.
Pundits and politicians criticized this injection of much needed money into the American economy as a dangerous sign. They claim that it shows there is not enough domestic capital and we are losing too much of our economic sovereignty. It was even mentioned at last week's Democratic presidential debate, with the leading candidates saying that they are deeply troubled by these developments.
Behind all this hysterical worrying over the American economy, the truth is that these developments are not actually bad for the economy. These capital investments infuse the economy with much needed cash and demonstrate that foreign investors have confidence in our economy or they would not have put their money here. Based on these investments, it is clear that our economy is still going to do fairly well in the future. The bigger issue we should focus on is the fact that these foreign investors are not investing in their own countries to improve the lives of their own citizens. These foreign investments in our economy help to spread extremism abroad and undermine our own national security by hindering economic development in the rest of the world.
These investments in the American economy by foreign investors are not necessarily an indication of economic weakness; they reflect the current world economy. With the record rise in oil prices and large trade deficits, billions of American dollars are moving abroad. Many of the recipients of this cash are private individuals looking to invest this capital to increase their wealth, and they naturally look to the largest economy in the world for the most secure investment.
The real losers in this international economic game are actually those foreign countries pouring billions of dollars into our economy. These countries do not invest in their own economies to increase goods and services for their own citizens. They are simply perpetuating the current global economic conditions that favor Western economies instead of expanding their own.
Economists call the phenomenon of investing in foreign economies instead of reinvesting in your own economy "capital flight." It perpetuates the underdevelopment of these countries, especially those countries completely dependent on oil revenues for their entire economies. Countries such as Kuwait and Saudi Arabia do not develop their own domestic industries to improve the lives of their citizens for the present and future.
Corrupt governments, especially among oil rich countries, rank among the main practitioners of capital flight.. Much of the revenue coming in from foreign countries from external sources such as oil goes to the pockets of top government officials and fails to help the average citizens in those countries.
President Bush's recent trip to the Middle East included stops in Kuwait and Saudi Arabia. The trip helped to legitimize these regimes that use large amounts of oil revenues to enrich the small minority at the top. Capital flight matters to us because it breeds discontent and poverty in those countries, factors that leads to the rise of religious extremism.
These regimes could spend more of this money to develop better schools, hospitals, roads, and other necessary infrastructure. The money would improve the lives of their citizens and combat the message of religious extremists who gain support by railing against the regimes that control these countries.
The next time you hear concerns about foreign companies investing large amounts of money in the American economy, you should worry. You should worry that corrupt governments are spending billions of dollars in our country instead of their own. This is not because it is bad for our economy, but because it is dangerous for our national security. We should not support regimes that perpetuate these sorts of economic actives but support those that look to better the lives of their citizens to combat terrorism.
Sam Shirazi's column appears Mondays in The Cavalier Daily. He can be reached at sshirazi@cavalierdaily.com.
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