From The Sunday TimesOctober 5, 2008
Old ‘friends’ are happy to blame US for the chaos
Irwin Stelzer: American Account
If Americans think our economic difficulties are only about sub-prime mortgages, securitisation, the drying up of credit, falling house prices and the like, they should think again. That’s not how the rest of the world sees it. Yes, all these problems are on the list of difficulties. But, more importantly, foreigners see this as the end of what Henry Luce memorably called the American century. America caused the world’s economic problems; America will pay a terrible price.
“Everything happening now in the economic and financial sphere began in the United States. This is not the irresponsibility of specific individuals but the irresponsibility of the system that claims leadership,” gloated Vladimir Putin, Russia’s prime minister. Better that than to blame the collapse of his country’s stock market and the flight of capital on his confiscation of foreign investment and invasion of Georgia.
But Putin is not alone in pillorying the US. “The origin and centre of gravity of the problem is clearly in the USA,” German finance minister Peer Steinbrück pronounced. And Gordon Brown, prime minister of our closest ally until recently, said his nation’s economic problems were imported from America, a view shared by opposition leader David Cameron. How the Americans forced Northern Rock and Bradford & Bingley to write mortgages for more than the value of the homes being purchased or persuaded B&B not to check the veracity of mortgage applications remains unexplained.
Name an economic problem and its origin is George Bush’s US and the allegedly radical deregulation policies of the neoconservatives. In the blame game that is now fashionable, the sensible made-in-the-UK-and-EU policies were overwhelmed by the failure of the American authorities to supervise their financial-services industry properly.
There is worse.
The failure of US politicians to agree immediately on a $700 billion bailout package shows its politicians are interested only in getting reelected. Never mind that the package passed easily on Friday, and that Treasury secretary Hank Paulson and Federal Reserve Board chairman Ben Bernanke have loosened credit while the Bank of England and the European Central Bank keep interest rates high. Or that America has put in place a huge, industry-wide rescue package in less time than it took the British government to decide what to do about a single bank, Northern Rock.
And in far less time than the Europeans, who after a period of denial are reduced to squabbling over how to cope with Ireland’s decision to ensure all bank depositors against loss. The French call for a coordinated EU-wide bailout has fallen on deaf ears: the Germans, who contend that their banks have largely escaped the US contagion, fear such a programme will end up as a raid on their treasury. And Brown prefers ad hoc responses to specific bank failures, and the establishment of still another committee to coordinate a general response, should he decide on one.
But all is not gloom in Europe. Its leaders are overjoyed at what they see as the discrediting of the American model. France’s Nicolas Sarkozy contends that the “idea of an all-powerful market without any rules and any political intervention is mad . . . [and that] self-regulation is finished. Laissez faire is finished. The all-powerful market which is always right is finished.” That no American politician or policymaker ever proposed that the financial system operate “without any rules” matters not to America’s critics. Neither are these same critics embarrassed to have spent years criticising Sarbanes-Oxley as an example of American overregulation before switching to the position that more rather than less US regulation is needed.
The important thing is that the American model is dead. Or so they think - hope, to be precise.
No longer can the US force its version of capitalism on the developing world or turn its nose up at the alternative models of authoritarian capitalism offered by China and Russia. Or at France’s protection of vital infra-structure companies, such as Danone.
There’s more.
The burgeoning federal deficit marks the end of the dollar as a reserve currency. And good riddance to it. Its exalted status only served to shore up America’s prestige and allow the US to borrow to support unwise adventures such as those in Iraq and Afghanistan.
As an American here in London who happens to be an economist and is known as a conservative believer in democratic capitalism, I seem to be the guest-of-choice on television programmes hunting desperately for someone, anyone, willing to support the US system. The critics to whom I find myself responding range from politicians on the left, who are delighted that capitalism has run into difficulties, to those on the right, who blame the US for the loss of their friends’ City jobs.
Some complain that by bailing out Bear Stearns, America let loose the force of moral hazard on the world, encouraging sinners to sin again while others complain that by not bailing out Lehman Brothers the US cost thousands of well-paid Brits their jobs. Some complain that the Paulson rescue plan rewards the greedy bankers who unleashed the American disease on Europe, while others complain that by not passing the Paulson plan on the first try we exacerbated the problems of European financial institutions.
America’s policymakers pay this cavilling and caterwauling no heed. Their job is to get the recovery package up and running. That will be no easy thing: the US Treasury can’t just pick up the phone and place an order for $250 billion - the first tranche of the $700 billion package - of dicey assets. An auction system has to be devised, advisers put in place, and - most difficult - values assigned to the paper for which there might be no market.
Then they have to get on with reforming the regulatory system. The net effect will be to make capitalism, described by the great economist Joseph Schumpeter as a force for creative destruction, a bit less destructive and probably a bit less creative. But it will nevertheless get on with its task of delivering and fairly distributing steady improvements in material wellbeing.
Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute
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