Saturday, December 5, 2009

The Decline of Dubai...and other tales of disaster

Thanks to the near collapse of one of the most rapidly growing cities in the world, we are once again reminded of the poison that drives such economic destruction: ego and greed.

Dubai is one of seven emirates of the United Arab Emirates, located south of the Persian Gulf on the Arabian Peninsula. Its land mass is tiny by Canadian standards—smaller than Prince Edward Island. The current population is about 1.9 million of which the vast majority are foreigners.

Around two years ago, CBC aired a television documentary (Dubai: Miracle or Mirage) about the amazing Dubai construction ventures spearheaded by its ruler, Sheik Mohammed bin Rashid al-Maktoum. He wanted to showcase this small municipality as the most impressive global city in the world. In the CBC piece, he spoke of his desire to create the biggest, the tallest, the best, and the most decadent landmarks known to man. (Have a look at Lauren Greenfield’s fascinating New York Times photo exhibit, depicting Dubai’s construction boom and subsequent collapse: Showcase: Dubai’s Improbable Tale.)

When developers and architects told the Sheik that it was unfeasible to build the amount of waterfront properties that he had in mind, he told them that nothing was impossible. They must simply take his vision and make it a reality. Since there was limited coastline, and no possibility for further development along the shore, there was only one way to conjure up more property: create it. And so they did.

Islands configured in the shape of a palm tree emerged in the Gulf, sprinkled with commercial and residential real estate.

If you’d like to do some downhill skiing in the desert, you can pack up your gear and head over to the indoor ski hill. Then there's Dubai Land, the world’s most ambitious tourism, leisure, and an entertainment complex, which was to open in 2010. I wouldn’t be booking my holidays there at this time.

We tend to think that Dubai is an oil rich nation. Well it’s not. The economy is built on tourism, property, and financial services. It has friends with oil, like Adu Dhabi next door, but it is not clear how much help will be offered.

There are those who benefited in the short term. Employment was high and big money could be made. Take it while you can, was the underlying message. Because one day, the tide will turn and the money will run out: major construction projects will be abandoned, vegetation will be left to desiccate, and cars will be deserted in empty parking lots. The workers, the most important resource, will flee. That time came too soon.

In Dubai, some foreigners who have bought property are fearful of their fate. If they can’t pay their bills and mortgages they may face a Dickensian reality—debtors prison. If you’ve ever read David Copperfield, one of Charles Dickens’ most popular novels, you’ll know what this means.

Last year’s western global melt-down is an eerie reminder of what can happen to an economy spurred by ego, greed, and too much debt. Building and buying houses with money that doesn’t exist is not much different than building sky-scrapers and waterfront properties on a foundation that cannot be sustained.

In the US, the beautiful sub-prime packages were all wrapped up in glistening prospects, and the true value was exposed only when the package was opened by the end user and the contents were revealed: nothing. After that discovery, the collapse was set in motion and the cards began to fall. Governments scrambled to stop the last card from falling by creating the fanciest packages of all (bailout and stimulus packages). Financial experts call this a "black swan" event, where many triggering factors come together simultaneously once a century or so. Nonetheless, it happened, and there is a universal price to pay.

We are still struggling to put the shattered economy back together so that hope and prosperity can be restored. According to the BBC documentary For the Love of Money we can largely thank CEOs like Richard Fuld of Lehman Brothers for the catastrophic damage. Fuld was so driven to “crush his enemies” and become number one in the investment banking industry that he made foolish ego-driven decisions. His employees report that he had a “God like status” and that “you just didn’t argue with him.” Building false confidence amongst employees and investors, Fuld was on a risk-taking rampage.

The result? The biggest bankruptcy in history, followed by a slew of other institutions participating in the NINJA program (offering risky loans to people with NO INCOME, NO JOB OR ASSETS), and those who had bought the empty loan bundles from the banks. When Enron went bankrupt in 2002, it was, at the time, the biggest bankruptcy ever. But when Lehman Brothers went down, the crisis was ten times greater.

Of course, there were numerous other contributing factors such as:

• Deregulation
• Fannie Mae/Freddie Mac low interest home ownership programs
• The lack of state regulation/oversight over fraudulent mortgage brokers
• The Feds keeping interest rates dangerously low
• US and global investors who bought the bundled sub-prime mortgages
• Credit Rating Agencies who didn't do adequate research

When unchecked recklessness occurs in business and politics, there is sure to be trouble. Richard Fuld was not the only culprit here, but he was no doubt a high flyer who exploited the situation, instigating calamitous consequences for the world.

Shockwaves travelled quickly when the global crisis was set in motion. The Feds stepped in with their recovery plans whilst citizens lost their jobs, their houses, and their life savings. Now we have debts and deficits that have never been so massive. And who will pay? Not the CEOs like Dick Fuld, or rulers like Sheik Mohammed bin Rashid al-Maktoum; rather, it will be the folks facing retirement and their children who will have to carry the debt load.

In Dubai, a foundation of greed and ego cannot hold the weight of bricks, mortar, glass, and steal. Likewise in the west, packages wrapped in greed and ego (and irresponsible debts) will have nothing inside.

Were no lessons learned from the fall of the Roman Empire? Civilization still has a long way to go, I’m afraid.

1 comment:

  1. i like how this island looks like a palm tree