The financial crisis and world power shifts

The US financial system’s current woes have accelerated the decline in American power in the world that has already been underway for several years now. This is so for a number of reasons:

    1. The crisis has revealed the degree to which the US government and other American institutions have become indebted to non-US creditors, and therefore the antecedent (pre-crisis) reduction in the US’s ability to wield economic power in the world, as well as its current and ongoing reliance on the goodwill of non-Americans if the effects of the crisis are to be minimized.
    2. It has revealed the weakness and dysfunctionality of a whole series of American institutions, ways of doing business, and habits of mind that previously were thought to be successful and worthy of emulation. (Among these are the extensive de-regulation of the financial markets that has occurred in recent years; the rise of the myth of the financial “Masters of the Universe”, barely accountable to shareholders or anyone else; a glaring dissonance between personal incomes and social utility; etc.)
    3. Finally, the way the elected leaders in Washington have handled the crisis to date has shown a president who is now beyond even “lame-duck” status– “dead duck”, perhaps?– a congressional leadership that has had its mindset formed far more by political donors from among the mega-bucks high-flyers than by the constituents whom they are supposed to represent, and the lack of any discernible voices speaking credibly about what it means to be “a national community” in America today and stressing the mutual obligations that in any democratic country all citizens reciprocally owe to each other.

These failings matter. They matter, firstly, because the weakest and most vulnerable among our fellow-citizens– and among non-citizens– will be those who are hurt the hardest by the crisis in the bricks-and-mortar economy that still lies ahead.
They matter, too, in a different way, because our country has until now been the world’s sole “Uberpower” (to Josef Joffe’s vivid and evocative term.) So the contagion from our woes has already started to infect several other parts of the world– most particularly, Europe. Also, this financial crisis and the way it has been handled further assault the already-battered “brand” or reputation of the US around the world, making the descent of the US from Uberpowerdom much steeper and more rapid than it would otherwise have been.
I welcome this shift. Uberpowerdom was never either moral or sustainable and the US and its rich-world allies have inflicted grievous harm on the low-income world over the past 15-plus years. However, all such large-scale power shifts are unsettling and carry the potential for dislocation and violence. The fact that the present power shift is accompanied and accelerated by a financial crisis that will almost certainly morph into a much broader economic downturn within and outside the US makes such reactions more likely… We all need to be very vigilant in the coming period to watch for, and try to tamp down, any signs of surging economic nationalism, nationalist greed, jingoism, or a desire for the supposed solaces of a “cleansing” act of war.
There are, however, several reasons for hope at the present turning point– most of them coming with a distinctively Chinese accent:

    1. The whole world is more densely and complexly intertwined at the economic level than ever before. This has meant, yes, that the contagion from Wall Street’s woes has spread elsewhere. But it also means there really is a high degree of inter-dependence among the world’s major power centers. Some people write about the high prospect of “wars” for resources. There are, and will continue to be, contests for resources among the major powers, yes. But I see these being waged overwhelmingly through non-military means. Washington’s experience of war in Iraq– a war in which access to oil was certainly one key factor– showed the limited utility of the weapon of outright war. And thus far, the major non-Iraqi beneficiary of post-2003 Iraq’s oil agreements has been China, not the US!
    At a broader level, though, the economies of China, Russia, India, or other “rising” powers” are too tightly tied to those of the US and other trading partners for the rising powers to want to break those ties through outright war against the fading Uberpower and its allies.
    2. China may anyway be able to escape the worst ravages of the economic crisis to come. Although the People’s Bank of China and the China Investment Corporation have lost some money through (as it turned out) unwise investments in US entities, still Beijing has been successful in (a) keeping most of its economy protected from too many internally generated financial woes– precisely because of the under-development (in US terms) of its domestic financial structures, and (b) winning at least some protection from Washington for the $400 billion investments in Fannie Mae and Freddie Mac which remain, I think, by far the largest of its non-T-bill investments in the west.
    If China is indeed able to keep its economy significantly insulated from the downturn in the west, then its continued economic growth may–even at lower growth rates than the hard-to-sustain 10%-plus rates we’ve seen recently– end up being a considerable continuing engine for the world economy and may even help lift the battered “west” out of its doldrums over the years ahead.
    I see that today, Premier Wen Jiabao described the country’s financial market as “safe and stable with generally adequate liquidity.” A statement from the central bank welcomed the US House of Representative’s passage of the Wall Street bailout Friday noting that “China and the US share common interests in … a stable financial market.” And Wen said that “Maintaining ‘steady and fast’ growth is the largest contribution China can make to help the world overcome the current financial crisis stemming from the United States.”
    3. It is also worth noting here, once again, that China’s rise onto the world scene in the past 15 years has occurred in a quite unprecedented way. China has not emerged as a world power through force of arms outside its own borders or through arms-racing. (Its nuclear arsenal is, at an estimated 200 warheads, many times smaller than those of the US or Russia. It truly looks like a “minimum deterrent” force.) It has emerged onto the world scene instead by buying into the existing rules system as embodied in the United Nations and its institutions and the institutions of global economic governance– all of these institutions having been established by the US in the post-1945 period. The peaceful, rules-respecting manner of China’s rise is a cause for considerable reassurance for everyone who will be (is being) affected by it.

Here are a few of the other things I’ve found interesting to read recently, on topics related to the above:
Bloomberg told us that today the German government agreed to a $68 billion bailout for Hypo Real Estate Holding AG, a commercial property lender. Here is some more commentary from Calculated Risk, who says the underlying problem may not be as bad as it seems: “this sounds more like a liquidity issue rather than a solvency problem.”
Here is a piece by the FT’s Wolfgang Munchau looking at some o0f the tricky economic governance issues, at this time of crisis, for a Europe that is still only partly coordinated on the relevant matters. (The crisis might have a deep affect on Europe’s governance questions– and that could happen in either direction, I think.)
Here is a piece of geopolitical analysis from the very pro-US French commentator Dominique Moisi. It is titled “A global downturn in the power of the west” and says:

    First, the shock reinforces the relative decline of the US and the passage from a unipolar to a multipolar world. Whoever is its next president, America will not only have to face more diverse and complex challenges but will have fewer means with which to confront them. The interaction between the infectious greed of its financial class and its politicians’ dereliction of duty has impoverished the country. The torch of history seems to be passing from west to east. It is true that China and India are also affected by the financial turmoil; less so Japan, a country whose financial conservatism is the product of bitter experience 20 years ago. But to paraphrase French President François Mitterrand: growth is in the east and debts are in the west. Furthermore, fear is in the west and hope is in the east, so we are equipped in very different ways to face this crisis.
    The meltdown has also revealed the depth of an identity crisis, not just in America but also in Europe. Nationalisation may have been the initial American response to the crisis. But it is nationalism that is the main obstacle facing Europe. The temptation of the “to each his own” mindset was present in Europe in the good times, but has become irresistible in bad times. Nicolas Sarkozy, French president of the European Union, may be mounting a brave and gallant fight to produce a “European answer”, but his activism is not sufficient to hide deep divisions among member states.

And here is an assessment from China’s Xinhua titled “Impact of global financial turmoil on China seen as limited.” It includes this:

    “We feel China’s financial system and its banks are, to the chaos developed in the U.S. and other parts of the world, relatively shielded from those problems,” said senior economist Louis Kuijs at the World Bank Beijing Office.
    He told Xinhua one reason was that Chinese banks were less involved in the highly sophisticated financial transactions and products.
    “They were lucky not to be so-called developed, because this (financial crisis) is very much a developed market crisis.”
    A few Chinese lenders were subject to losses from investing in foreign assets involved in the Wall Street crisis, but the scope and scale were small and the banks had been prepared for possible risks, Liu Fushou, deputy director of the Banking Supervision Department I of the China Banking Regulatory Commission, told China Central Television (CCTV).
    Chinese banks had only invested 3.7 percent of their total wealth in overseas assets that were prone to international tumult, CCTV reported…
    Kuijs… expected an impact on China’s banks coming via the country’s real economy, as exports, investment and plans of companies would be affected by the troubled world economy and in turn increase pressure on bad loans.
    Wang Xiaoguang, a Beijing-based macro-economist, said the growing risks on global markets would render a negative effect on China in the short term but provided an opportunity for the country to fuel its growth more on domestic demand than on external needs.
    He urged while China, the world’s fastest expanding economy, should be more cautious of fully opening up its capital account, the government should continue its market reforms on the domestic financial industry without being intimidated.
    Chinese banks had strengthened the management of their investments in overseas liquid assets and taken a more prudent strategy in foreign currency-denominated investment products since the U.S.-born financial crisis broke out, CCTV reported.

Well, I expect that things are not quite as rosy in China’s economy as this reporting makes it sound. Here’s a recent FT assessment– registration required.

2 thoughts on “The financial crisis and world power shifts”

  1. Helena
    Listening to the news here at 4.00 am (I rise early) it sounds quite gloomy.
    The German Finance minister is said to be furious that people didn’t come clean about the liabilities in Hypobank.
    The government of Iceland have apparently been up all night trying to figure out how to pay for their food imports now that their currency has collapsed.
    Pension funds were being urged to repatriate foreign assets, while the Central Bank was looking to bolster its foreign exchange reserves. The government may on Monday announce plans for several billion euros to be injected into the Central Bank, people with knowledge of the talks said, although others warned there was no certainty that a deal would be reached or that it would be sufficient to reassure nervous markets.
    I am impressed at the stealth with which a trifling $25 Billion has been made available to US car makers.
    Almost unnoticed as the United States Congress approved a $700 billion bailout for banks last week, it also agreed to guarantee $25 billion in loans for America’s troubled automakers. European automakers said Sunday they would seek similar aid from the European Commission
    The EU has survived financial crises before but what we are seeing is in a way the result of the progressive failure of the EU to pass the European Constitution and Lisbon treaties.
    Europe’s need to scramble is in part the legacy of a decision to establish the euro, which 15 countries now use, but not follow up with a parallel system of cross-border regulation and oversight of private banks.
    “First we had economic integration, then we had monetary integration,” said Sylvester Eijffinger, a member of the monetary expert panel advising the European parliament. “But we never developed the parallel political and regulatory integration that would allow us to face a crisis like the one we are facing today,” he added.
    In Brussels, Daniel Gros, director of the Center for European Policy Studies, agreed. “Maybe they will be shocked into thinking more strategically instead of running behind events,” he said. “The later you come, the higher the bill.”
    While the European Central Bank has power over interest rates and broader monetary policy, it was never granted parallel oversight of private banks, leaving that task to dozens of regulators across the Continent.
    This patchwork system includes national central banks in each of the euro-zone’s 15 members and they still retain broad powers within their own borders, further complicating any regional approach to problem-solving.
    The European economic landscape today bears little resemblance to the 1990s, when the groundwork for the euro was laid. Back then, Mr. Pisani-Ferry recalled, few banks in Europe had cross-border operations on a significant scale.
    I somehow doubt that despite their ambitions that Ukraine has a cat in hells chance of being put on a path to join the EU.
    What is going to be painful however is the effect on the Midddle East and the Arab world which are major aid recipients.
    The financial crisis will mean cutbacks of some sort allied to a shortage of cash in the hydrocarbon producers as the oil price collapses due to the global recession.
    We have already seen bread riots in Egypt and the situation in Iraq may deteriorate once they realise that they are going to have to pay for rebuilding their country themselves without payment of damages by the US.
    Kurdistan’s ambitions to keep the proceeds of the oil in that area are looking quite fraught.
    I still don’t believe we are going to get out of this without serious shooting breaking out somewhere.

  2. I still don’t believe we are going to get out of this without serious shooting breaking out somewhere.
    Frank, get some sleep. There is some serious shooting going on in many countries, thanks mostly to the USA, and with both US presidential candidates promising to expand and modernize the military there will be more. Even without US aggression the US has over 700 foreign military bases as well as over 150 foreign embassies. An attack on any one of them would escalate matters greatly. The US itself, particularly in the west, is extremely vulnerable to a terrorist attack which no doubt could be linked to the enemy du jour.
    The Pentagon has recently stood up the new Africa Command, but not to worry: “AfriCom’s mission is not to wage war, but to prevent it – not to show United States military presence, but to enhance the security forces of our partners,” Defense Secretary Robert Gates said. This is the concept that the military are not in fact warfighters but peacekeepers! Sure. I guess I’m not the only one who kissed the Blarney stone (Americans conflate Blarney with baloney — go figure).

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