For many free-market conservatives, the $700 billion financial stabilization plan was a bitter pill that in the end, many swallowed. “It is financial socialism,” complained Senator Jim Bunning (R-KY), “it is un-American.”

 Indeed. Imagine the reaction in Washington if suddenly China nationalized its largest mortgage lender, semi-nationalized its largest private insurance company, and did a massive bailout for failing state banks. Oh, and if for good measure the government also threw $25 billion to auto companies who had steadily lost market share to more efficient Japanese and other foreign firms who put more attractive products on the street.  A detour from the capitalist path?  A dangerous sign of “authoritarian state capitalism” from George Bush?

 I’m only half joking. But one has to wonder if recent government interventions to socialize risk in the U.S. economy mark a historic watershed on several levels: in our perennial debate about the role of government, undermining the “American model,” in the eyes of much of the world, casting fresh doubts about how long the dollar will remain the world’s sole reserve currency, and not least, creating a dangerous dependence on increasingly skeptical investors on whom our large and growing debts rely for stability.

 “The world will never be as it was before the crisis,” proclaimed German Finance Minister Peer Steinbruck to the Bundestag, Germany’s lower house of parliament. “The United States will lose its superpower status in the world financial system. The world financial system will become more multi-polar.”
Perhaps a tad exaggerated.  Steinbruck later backed off a bit, explaining that the dollar would not cease to “lose its function as a reserve currency,” but that it will be supplemented by the Yen, the Euro and the Yuan. Despite this overstatement, he may have had a point in arguing that the world over the next decade will be dealing with four big currencies. As one after the other stock markets tanked around the globe, the price of interdependency and the deficit in global economic governance both became painfully evident.

Domestic Fallout

I would rather not think what it would mean for our budget deficit and fiscal situation if Chinese, Arab and Japanese investors have second thoughts about the US market, let alone if the dollar is challenged as a reserve currency. On the domestic level, if a Republican president can widely socialize risk gone sour by bad if not reckless decisions by the private sector, what does that bode for future debates about regulation, let alone issues like health care, the environment and climate change? As Christopher Cox, head of the SEC, conceded in congressional testimony, “it has become abundantly clear that voluntary regulation does not work.”
One big question is whether it is a case of the pendulum swinging back from a mood of deregulation űber alles to one of a new respect for the benevolent role of government, or whether it is a more enduring shift. The hope is that we do not overcorrect the problem with excessive regulation but rather find a balance that respects the power of markets but makes sure the rules of the market are carefully set – and enforced.

Certainly, it will be more difficult to argue that areas like health care and education are not public goods if rescuing failed bankers is one. The long-term impact of this crisis on American political sensibilities remains an open question. But I suspect that it will be some time before arguments for laissez faire policies get the benefit of the doubt.

Global Repercussions

Beyond European gloating, the fallout of our financial meltdown for the global economic system is an interesting question. French President Nicolas Sarkozy’s call for a new financial and monetary system was echoed by that of German Chancellor Angela Merkel, who called for more transparency and better standards. In fact, we have already seen de facto coordinated action by central banks in recent weeks to keep liquidity flowing.

Another big question is how Asia will react. It was the financial crisis of 1997-98 that spurred a new Asian regionalism and calls for an Asian Monetary Fund. If major Asian economies feel compelled to insulate their economies from the vicissitudes of dominant American financial markets, we could be headed into some very interesting times.

Certainly, the IMF has been conspicuous in its absence in all this. Nor has anyone heard from the G-8. But what new regulations and what new standards? It will likely be difficult for Washington or London to resist calls for more comprehensive global regulation. Some are calling for a new Global Monetary Authority with rules for intervention, perhaps to act as a reinsurer for some obligations of central banks and as a “bankruptcy court,” as Yale’s Jeffrey Garten suggested in a recent Financial Times op-ed. One wonders if the new distaste for speculation may breathe new life into the often derided “Tobin Tax” (.25% of international currency trading transactions). To many in  the US, the mere idea of such a global tax smacked of “one worlders” if not conjuring up images of UN black helicopters. But in the current political atmosphere, it is almost a given that some new global mechanisms to better manage and regulate financial flows and currencies will emerge.

In any case, one senses that not only are we in uncharted territory in regard to the U.S. economy and our ideological frames of reference. Who would have predicted a conservative Republican president would intervene in the economy in ways that a liberal Democrat would be reluctant to even consider?  

Globally, it also appears that we are entering a new phase of globalization, one in which the U.S. may be less dominant far sooner than many imagined. The intriguing question is how other major stakeholders will step up to the plate. I suspect Herr Steinbruck may be on to something in regard to the big four currencies sorting out the financial and monetary rules of the game in the not too distant future.

Robert Manning is a Senior Advisor to the Atlantic Council.  The views expressed here are solely his own, not those of any U.S. government agency.


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