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The economic systems of both the United States and Russia are rooted in geography. The United States boasts a large number of interconnecting navigable rivers draining massive tracts of arable land and a variety of coastal regions blessed with multiple harbors ideal for trade and city-building. A long series of barrier islands on the East Coast greatly simplifies local ocean shipping, while a series of geographic features on the West Coast — California’s Central Valley, for example — encourages development on that coast even without any linkages to the rest of the country.
All that was necessary to make the United States a well-developed country were a few transport links — road and rail — crossing the Rocky and Appalachian mountains. Transporting goods around the country is pretty simple, especially for Midwestern farmers who just need to get to a river. Wealth begets wealth, and private enterprise faces very few barriers to growth. In short, economic advancement is a breeze in the United States, and that has shaped how the economy — even the financial system — has developed. Americans tend to prefer a laissez-faire system, with the government keeping fairly well out of business simply because government is not needed very much. Americans debate what to do with their wealth after it is earned — not how to generate it in the first place.
In contrast, Russia’s rivers for the most part neither interconnect nor flow to places where it is logical to site cities. Most drain to the Arctic Ocean, while the largest that does not — the Volga — drains into the landlocked Caspian Sea. Russia’s useful coastline is also very small, and where it does have some coastline (the Black and White sea regions), it is not situated near major population centers. Because Russia’s growing season is so short, foodstuffs are produced in seasonal surges rather than year-round, making transport of produce a once-a-year nightmare that cannot be ameliorated by the use of rivers or maritime shipping. Russians are dependent on shipping everything along whatever road and rail network the government has been able to build.
The result is an economic culture that is almost a perfect inverse of the United States. Whereas economic development in America is child’s play, mass starvation in Russia can be avoided only with strict and careful central planning. Transport infrastructure is a convenient unifying factor in the United States — according to some perspectives almost a luxury — but it is a life-and-death issue in Russia. So while Americans expect their government to stay out of their business, Russians fully expect the government to play an active role in anything that involves the economy.
This backdrop does much to explain how market events of the past few days have turned out.
In the United States, the two big events were the bankruptcy of Lehman Brothers and the government intervention to salvage American International Group (AIG), both of which found themselves on the financial rocks after gorging on subprime mortgage assets. Questionable lending practices created a massive amount of mortgages being granted to people who in truth could not afford to make payments. But since the conventional wisdom in investment is — make that was — that mortgages are the safest, most reliable category of securities, many investment houses bought up such subprime mortgages in bulk and developed their own lending arms to create more subprime mortgages directly.
Eventually, the housing bubble popped and the combination of a recession in housing and all these subprime mortgages going bust — some 20 percent are in delinquency — forced an industry-wide write-down of assets. For Lehman Brothers and AIG both, the process of rationalizing their books proved too expensive, threatening their ability to operate. In the case of Lehman, the government attempted to matchmake them with a healthier firm to allow an orderly transition; but, in the end, the government was willing to step aside and simply let the firm die by its own mistakes.
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