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September 28, 2008

A World of Risk Beyond Wall Street

By Jim Hoagland

NEW YORK -- George W. Bush governs by crisis interspersed with long periods of not governing at all. Only when disaster threatens or arrives does this president summon himself, Congress and the nation to act -- in haste and extremis rather than in reasoned unison.

The latest example -- following 9/11, the Iraq War's unraveling and Hurricane Katrina -- is the international financial meltdown that Bush and Congress are trying to stave off with a go-it-alone U.S. rescue. Unfortunately, Barack Obama and John McCain also neglected the global dimension of this financial crisis when they crossed rhetorical swords in Oxford, Miss., Friday night.

Obama did explicitly promise to provide leadership "not just when there is a crisis." I think he won the debate, on points rather than by knockout, by showing a much surer grasp of the costs of Bush's gun-to-the-head leadership style and the administration's flawed economic policies.

But Obama was little better than McCain in conveying how he would lead us out of this storm. And neither indicated clearly if or how he would rally the input and help that are needed from other nations to remake international financial institutions and markets now at risk of being swamped by problems largely Made in USA.

Both men appeared overwhelmed by the scope of this crisis. They have every reason to be. The credibility of American power, brought low by the draining conflicts in Iraq and Afghanistan, would be trashed by a botched financial rescue. In poker terms, Bush has gone all in on this hand. He bets that the U.S. is too big to fail.

The rest of the world is reduced to waiting to exhale. With Bush, Hank Paulson and Ben Bernanke warning that "financial panic" is just around the corner if Congress does not act now, it is remarkable that sovereign wealth funds and central banks have not been dumping the mountains of Treasury bonds and other U.S. assets they hold -- or even attacking the dollar systematically, as happened in some past crises.

Part of the reason lies in the U.S. security blanket that is spread over nations such as Saudi Arabia and Japan, or in China's determination not to damage its market access and dollar holdings. However dim U.S. prospects are, most other markets look even riskier. The U.S. does not weaken alone. A broken America means a broken international system that others will not be strong enough to repair without the U.S. centerpiece.

Bush and his successor need to communicate now that U.S. financial unilateralism is also a relic. In this era of instant telecommunications and unfettered capital flows across borders, U.S. rescue plans will work in the long run only if they are accompanied by significant international regulatory reform and innovation.

Like newspapers and other industries, stock markets, banks and insurance companies have few defenses against a telecommunications revolution that changes the nature of time and knowledge. Computers, fiber optic networks and other instruments of globalization are rendering many of their practices obsolete and self-wounding.

The International Monetary Fund has cautioned for months that the global economy was much weaker than governments admitted. Bush missed a chance to use those and other warnings to bring international organizations and cash-rich nations together to talk about creating a global insurance fund and other steps to keep U.S. credit problems from metastasizing.

It is still worth trying. French President Nicolas Sarkozy suggests that a summit of major financial powers should take place after the U.S. elections. Such a gathering should begin to update the six-decade-old Bretton Woods institutions. McCain and Obama should take up the Sarkozy proposal.

Here for the U.N. General Assembly opening last week and to receive a humanitarian award at a black-tie dinner, Sarkozy, an unabashed admirer of the U.S., had other advice worth considering. He spoke in a hotel ballroom filled with Wall Street financiers who underwrote the gala -- but his words seemed aimed not only at them but also at Bush, Congress and ultimately the American nation:

"You cannot demand to lead and then say that you are not responsible when things do not work out. You cannot accept only the rewards and duck the bad consequences of your actions."

Americans cannot take for granted a world leadership role that comes with relatively little cost or sacrifice, as they have tended to do in the Clinton-Bush era. Leadership must be earned anew, and the costs cannot be simply passed down to future generations. Otherwise, as John Maynard Keynes might have said, in the long run we are all poor.

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