Lehman’s Collapse Triggers the World’s Worst Financial Crisis Since 1929, Barack Obama Wins the Presidency, Mumbai Suffers a Coordinated Terror Attack and Israel Invades Gaza

Jamaica Homes Global Conflict & Caribbean Impact Review | Published 3 January 2009 | Reporting Period: 3 October – 2 January 2009

Quarterly Briefing

• The Emergency Economic Stabilization Act — TARP, the $700 billion Troubled Asset Relief Programme — is signed into law by President Bush on October 3, the first day of our reporting period, after an initial House vote rejection caused a 777-point Dow Jones collapse; global equity markets nonetheless continue to fall through October as the financial crisis spreads from Wall Street to every major economy.
• Barack Obama is elected 44th President of the United States on November 4 with 365 electoral votes, winning Virginia, North Carolina, Indiana and Florida; he will be the first African-American president; his election produces extraordinary scenes of celebration across the United States and internationally.
• Lashkar-e-Taiba terrorists attack multiple locations across Mumbai on November 26-29 including the Taj Mahal Palace Hotel, Chhatrapati Shivaji railway station and the Chabad House Jewish centre; 166 people are killed and more than 300 wounded; the attacks bring India and Pakistan to the brink of crisis and stall the India-Pakistan peace process.
• Israel launches Operation Cast Lead against Hamas in Gaza on December 27, beginning with air strikes against Hamas military infrastructure and police installations; the operation follows months of rocket fire from Gaza into southern Israel; as this edition is published, Israeli ground forces are being positioned for a possible ground assault.
• Iceland’s banking system collapses in October when the three major banks — Kaupthing, Landsbanki and Glitnir — fail with combined debts twelve times Iceland’s GDP; the Icelandic government takes them into public ownership; the event is a microcosm of the credit crisis and demonstrates the systemic risk created by financial institutions far too large for their host economies.
• Somali piracy reaches unprecedented scale in the autumn of 2008; the supertanker MV Sirius Star, carrying two million barrels of Saudi crude oil, is captured in November; more than forty ships are seized during the year; the Indian Ocean’s sealanes, carrying a significant portion of the world’s commodity trade, are under sustained attack.

Prologue: The Crisis Quarter

The quarter that ended January 2 will be recorded as one of the most consequential in post-war global history. In three months, the world’s financial system came closer to complete systemic failure than at any point since the 1930s; the most powerful nation elected its first non-white president; a major global city was attacked by a terrorist group that had the operational capacity to hold it under siege for three days; and a military conflict began in the world’s most watched territory. Each of these events, in isolation, would have been defining. Together they announced that the world entering 2009 was fundamentally different from the one that entered 2008. For the Caribbean, the financial crisis was the most immediate concern: an economic system whose resilience depended heavily on American consumer confidence in tourism and remittance-sending capacity was absorbing a shock whose severity was still being revealed.

The Financial Crisis and Caribbean Vulnerability

The collapse of Lehman Brothers on September 15 — just before our reporting period begins — was the event that transformed a serious credit crisis into a global systemic emergency. The US government’s decision not to rescue Lehman — following its rescues of Bear Stearns in March and its conservatorship of Fannie Mae and Freddie Mac in September — produced a panic that froze interbank lending globally. For ten days, the world financial system effectively stopped functioning. TARP’s passage on October 3, despite its initial rejection, provided the liquidity backstop that prevented total collapse; it did not prevent a severe recession.

By October, global equity markets had fallen 40 per cent from their 2007 peaks. Credit was unavailable to businesses at any price. Commodity prices collapsed: oil fell from $147 a barrel in July to below $40 by December, which had mixed effects for the Caribbean — lower energy import costs but also lower revenues for Trinidad and Tobago’s energy sector and reduced purchasing power for Venezuelan Petrocaribe transfers. For Jamaica, Barbados and the tourism-dependent islands, the critical question was the depth and duration of the US recession and its effect on discretionary spending. The answers were uniformly grim: US consumer confidence had collapsed; Christmas 2008 retail sales were the worst in decades; the February-April Caribbean tourism peak season was approaching with forward bookings substantially below prior-year levels.

Obama’s Election and What It Means for the Caribbean

Barack Obama’s election carried emotional resonance throughout the Caribbean and its diaspora communities that went beyond conventional political calculation. In Jamaica, Trinidad, Barbados and across the islands, the election of a man of African descent to the presidency of the United States was experienced as an event of civilisational significance. The practical geopolitical questions were separate: whether Obama’s stated commitment to engaging diplomatically with adversaries would translate into a less antagonistic US-Cuba relationship; whether his multilateralism would mean greater responsiveness to CARICOM concerns in multilateral forums; whether his economic programme would restore the US growth and employment that Caribbean tourism and remittances depended on. On all three counts, the region’s governments were cautiously hopeful but appropriately measured.

Mumbai and the Jihadist Threat

The Mumbai attacks of November 26-29 were qualitatively different from earlier jihadist operations in their tactical complexity and duration. Ten gunmen, trained by Lashkar-e-Taiba in Pakistan, arrived by sea from Karachi and attacked twelve locations simultaneously; they fought Indian security forces for three days before all were killed or captured. The operation’s planning, logistics and execution demonstrated a level of state-like support from elements within Pakistan that India found intolerable. Delhi’s response — public identification of the Pakistani origin of the attackers, demands that Pakistan arrest Lashkar-e-Taiba’s leadership, and implicit threats of military action — came close to triggering a fourth India-Pakistan war. The crisis was ultimately managed through American and British diplomatic pressure, but the India-Pakistan relationship had been severely damaged.

Looking Ahead

Israel’s Gaza operation, begun as this edition goes to press, has an uncertain trajectory; ground operations may follow the air campaign; the humanitarian consequences for Gaza’s 1.5 million people will be severe; and whether any ceasefire can be reached before Obama’s inauguration on January 20 is an open question. Obama will inherit an economy shedding 500,000 jobs a month, two wars and an international system that has lost confidence in American financial stewardship. The Caribbean enters 2009 with economies that will contract, governments facing fiscal stress and diaspora communities whose remittance capacity is declining with the employment markets of their host countries.

Jamaica Homes Global Conflict & Caribbean Impact Review is published quarterly, examining how wars, geopolitical tensions and major international crises have shaped Jamaica, the Caribbean and their economies.

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