The current meltdown certainly is a game-changer, in that it marks the end of the American Century in an emphatic manner. Some might say that the American Century actually ended in 1975 when the United States beat a hasty retreat from Saigon. But the U.S. has indeed gone from strength to strength since then, decimating the Soviet Union and becoming the sole hyperpower.
It is also true that the U.S. did face an ever larger problem in the Great Depression after 1929, and that it bounced back nicely. Speculative bubbles have occurred many times in the past, but despite much damage, they do not cause the system to collapse. See the classic history of financial crises by Charles Mackay: Extraordinary Popular Delusions and the Madness of Crowds.
The problem this time is a combination of two things. America is facing a “Vietnam” (in fact two) and a 1929 simultaneously. This may be too much even for a nation as powerful and well-endowed as the U.S. It is caught up in two increasingly difficult wars in Iraq and Afghanistan, and simultaneously forced to face the disaster on Wall Street. This is possibly a perfect storm.
Now, it is true that Americans are justly famed for sheer drive. Eventually the economy will recover. The Japanese went through their own real-estate bubble; their bailout cost $440 billion, and seven years later, they recovered over 70 percent of that by selling the assets the government had underwritten. The Swedes did something similar, too. So the U.S. economy will come back to normal eventually, say seven-10 years down the road when the toxic mortgages and insurance have been eliminated.
But that’s not the important part: the crisis of confidence is the worst fallout of the cataclysm. Hitherto supremely confident Americans are beginning to doubt if their cherished verities, such as the belief in the wisdom of the market, are just myths. Many of us remember the essay by Francis Fukuyama, who declared, famously, “the end of history” some years ago, meaning essentially that the “American Way” had won.
Fukuyama has now changed his tune. Writing in Newsweek magazine this October in “The Fall of America, Inc.,” Fukuyama suggests that the American brand is severely damaged, because both its biggest shibboleths, the free market and democracy, are now tarnished.
But he is optimistic that America will regain its position. I am not.
Consider 1929, which hastened the end of the British Empire. 2008 may cause the end of the American Empire, and the severe erosion of its “soft power” along with its self-confidence. I think an America that limps back to normal will only be first among equals. American economic dogma and Chicago-School style free markets will never again be accepted as the gospel truth.
Rajeev Srinivasan wrote this opinion from Bangalore, India.
No, the United States will rebound from the crisis
The financial crises facing the United States, and the ripple effects being felt globally, are not vastly different from previous ones in that the underlying factors contributing to the meltdown are similar. Economic prosperity combined with unbridled optimism led investors to take more risks. The unwarranted boom that resulted was followed by an unexpected bust. There will be changes in the financial landscape, but eventually confidence in the markets will be regained, leading to renewed prosperity. That is, until the next crisis. This is how free markets work, and there is no reason to believe that the current crisis marks the beginning of an end.
What we face today is, of course, different—both in magnitude and the rescue effort. But the current crisis is by no means anything like the Great Depression. Home foreclosures and job cuts have affected many, but most Americans are not homeless and without food. The economy is weak, but it has not collapsed. The unemployment rate today is 4.8 percent—lower than what it was in 2002 after the dot-com crash and incomparable to the 25 percent in the early 1930s.
The government’s emergency role in the rescue efforts today, although controversial, is expected to prevent the crisis from becoming a calamity. The Emergency Economic Stabilization Act of 2008, commonly referred to as the “bailout,” will spend $700 billion to help banks recover from the mortgage crisis. The Federal Reserve announced that it will make $900 billion available to banks on a short term basis to assist with the credit crunch.
Governments globally have also responded to the crisis—both in working to contain the situation at home and in working with each other. The coordinated interest rate cut by the world’s main central banks is an unprecedented move.
In the middle of the mayhem, there is good news. Stock prices went up dramatically on October 13 in response to the government’s aid to banks. The Dow Jones industrial average marked the biggest single-day percentage gain in 75 years. The dollar gained strength, and the price of oil fell.
Soon, the U.S. will have a new President. This could also bring about a big change: the end of the Iraq war, helping improve both the economy and the U.S.’s image. In today’s global market, the economies of countries around the world are more interdependent than ever before. America’s crisis is the world’s crisis. It is in the best interest of all to see the American market rebound, which it certainly will given all the combined effort.
Life will go back to normal, the present crisis becoming just another crisis of the past, and the United States will continue to be a financial powerhouse for a long time to come.
Lekshmi Nair has been with GE Healthcare in Milwaukee, Wisconsin.