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DUBAI CITY - Traffic is bumper-to-bumper and the shopping malls are full. It's Wednesday, and columns of smoke rise from barbecues in the public parks. No, this isn't how the people of Dubai are coping with the worst financial crisis they've ever known. It's a national holiday.

It has been 38 years since British rule ended and the seven Gulf emirates - Abu Dhabi and Dubai are the largest being - formed a single federal political entity, the United Arab Emirates.

Just one week earlier Dubai World, the country's biggest investments firm, dropped a bombshell: It needed to reschedule $60 billion in debt. The announcement shocked the investment world out of its complacency and the belief that the worst of the global economic crisis was over. The news caused a downtick, but only briefly. Markets quickly resumed their northward trend, in most places. Not in Dubai, though.

The people of Dubai must be feeling the pain, but those who spoke recently to a foreign journalist - whether Dubai nationals or the many foreigners living in the emirate - did not seem particularly upset. They're shopping on.

"I don't feel anything in particular, nor do the people who work with me or the people I know," said John (all the names in this piece have been changed), a Western businessman who has been in Dubai for 10 years. He has a business selling industrial products. John had heard about the financial crisis and the debt moratorium, but did not know the details.

Mark, another long-term Western expatriate, is much more involved in the local business community. He says members are aware of the trouble but are not worried. "People are pretty confident that the situation can be handled. They trust the leadership to deliver. There's no reason for it not to - the local government has tremendous resources. It's recruiting the best brains to help - economists, bankers and consultants," Mark said.

Build till you drop

Behind the general sense of optimism is the obvious fact that the boundaries of the crisis are very clear. It's confined to the real estate sector; commerce is untouched. Also, for all the jaws dropping worldwide at Dubai World's sudden refusal to service its debt for six months, the local business community was not surprised.

Mark related that a year ago people told him that real estate prices were out of control. They knew that at some point it would all come falling down, after which a new balance would be achieved, he said.

Even if Mark's confidence is a tad premature, it's possible that people are downplaying the problems Dubai faces simply because it's early days yet. Even in New York of October 2008, the month of the great financial meltdown, confidence still prevailed. The layoffs, the sharp drop in consumer spending, the uncertainty and the depression only hit later.

In either case, the people of Dubai seem to be unconcerned. They celebrated Id al-Adha, the Muslim feast of the sacrifice, early last week and immediately afterward, without blinking an eye, set off to celebrate their independence from Britain. Of course, when they wake up this week reality will come a-knocking again.

Meet the sheikh

Steven works at the local office of an international company. He spreads a tourist map of Dubai on the table. "You see? Ten years ago, almost all this you see here south of Dubai creek didn't exist," he said, pointing.

"All this" apparently refers to what may be the most ambitious, expensive, impressive and modern property development on the planet. And "all this" happened in a narrow strip of desert, no more than 15 kilometers in length.

Inside that tiny area is the biggest mall in the world, Dubai Mall, with more than 1,000 stores and the world's biggest aquarium. It cost $20 billion to build. The mall is just part of a large commercial project, the crown jewel of which is the tallest building in the world, the Burj Dubai ("Dubai's fortress"). How tall is it? Well, if you pile the three Azrieli Towers in Tel Aviv on top of one another, you aren't there yet. Dominating the landscape, the Burj is 818 meters tall, almost five times the average height of one Azrieli tower. Its construction is almost complete.

To the south is the Burj Al Arab, at 322 meters including its antenna. The hotel was completed in 2000 but it's on the shore, sitting on land reclaimed for its construction. It is just as eye-catching, being shaped like a sail. Its vast interior and perhaps the insane prices it charges, from $1,000 to $30,000 a night, have made it immensely popular. But most tourists have to settle for taking its picture from 100 meters away, which is where the security guards will politely stop them.

The great development and present difficulties can all be attributed to one man: Sheikh Mohammed bin Rashid Al Maktoum, also known as simply Sheikh Mohammed, the Emir of Dubai and the Prime Minister and Vice President of the UAE. Since 1995, when his older brother, Sheikh Maktoum bin Rashid Al Maktoum, declared him crown prince, he has built dozens of skyscrapers around the historic port of Dubai and beyond. He built wide streets that today buzz with costly, ostentatious cars. At the feet of the towers, restaurants, cafes and stores serve the wealthy people working above.

As if all that wasn't eye-catching enough, there are the four artificial islands. Not like the tiny strip on which the Burj al Arab sits: These are sprawling things being built for homes, hotels and commerce. One such project looks like a map of Earth, while three are shaped like palm trees.

Secrets of success: Vision, and tax breaks

The scope of the businesses owned by the ruling Maktoum family is not public knowledge. They include three vast investment companies - Emaar, Dubai Holdings and the crown jewel, Dubai World, which owns the development company Nakheel.

Nakheel ("Palms") is the worm in the apple. It triggered the panic when nearly two weeks ago it announced that it cannot meet its next bond payment. Nakheel is the company that builds the land reclamation projects.

The Maktoum family has controlled Dubai since 1833. But the ambitious vision, far beyond petrodollars, originated with Sheikh Mohammed's father, Sheihk Rashid bin Saeed Al Maktoum. Fifty years ago Dubai was a trading hub, but Sheikh Rashid saw greater things and built the great Jebel Ali port, which was inaugurated after his death in 1977. Sheikh Mohammed saw beyond mere trade, however: He saw a future in which merchants, bankers, businessmen and tourists would come to the emirate, with their business.

Sheikh Mohammed's vision was based on a model developed by Michael Porter of Harvard University, which advocated clustering similar or complementary businesses close together. The idea was to attract businesses from around the world to a specific locale, along the lines of California's Silicon Valley.

Dubai didn't have top-notch universities, but it could offer tax breaks and low operating costs. Sheikh Mohammed set up a free trade zone in Dubai that became a huge success, luring in giants such as Oracle, Microsoft, IBM, CNN and Reuters. They brought with them Western standards and norms of construction, public services, entertainment, communications and spending.

Not only Dubai's skyline but also its demographics changed beyond recognition. By 2005 only 17% of Dubai's 2.3-million residents were locals; a whopping 42% were Indian, and 13% were Pakistani. Living standards in the emirate soared: According to the International Monetary Fund GDP per capita was $55,000 in 2008, double that of Israel.

Where did Sheikh Mohammed get it wrong? It's hard to pinpoint, given the sheer scope of his vision, but two things come to mind.

The first is megalomania: the biggest mall, the tallest tower, giant artificial islands. Sheikh Mohammed is also the world's biggest single investor in horses. The second is the real estate market, such as a grandiose project in Las Vegas that became the first of Dubai World's projects to seek an arrangement with creditors, six months ago.

But Dubai World's biggest problems are at home. "Half a year ago you couldn't find a place to live here," Karen, a Westerner working in Dubai, said. Show a blueprint and you'd sell out a project before a single brick was laid. That's how Dubai's real estate market was: fast construction, rising prices and cheap credit.

Now prices are 50% lower and you'll have to prove you can afford the house you buy. How times change.

Dubai is still full of construction sites, some working around the clock. But there are more "For Sale" signs up, say locals.

Is Dubai going to collapse? The sheikh's image is bruised. Dubai World fed the bubble and is now victim to it, too. But Dubai is no Iceland. Its economy is more diversified and has one foot firmly planted in the stable world of trade. Barring a much worse global recession, there's no reason for the giants that moved to Dubai to leave. The madness has passed, leaving scars. But business rolls on.