The worst financial crisis
since the Great Depression is claiming another casualty: American-style
Since the 1930s, U.S. banks
were the flagships of American economic might, and emulation by other nations
of the fiercely free-market financial system in the United States was expected
and encouraged. But the market turmoil that is draining the nation's wealth and
has upended Wall Street now threatens to put the banks at
the heart of the U.S. financial system at least partly in the hands of the
Bush administration is
considering a partial nationalization of some banks, buying up a portion of
their shares to shore them up and restore confidence as part of the $700
billion government bailout. The notion of government ownership in the financial
sector, even as a minority stakeholder, goes against what market purists say
they see as the foundation of the American system.
Yet the administration may
feel it has no choice. Credit, the lifeblood of capitalism, ceased to flow. An
economy based on the free market cannot function that way.
The government's about-face
goes beyond the banking industry. It is reasserting itself in the lives of
citizens in ways that were unthinkable in the era of market-knows-best
thinking. With the recent takeovers of major lenders
Fannie Mae and Freddie Mac and the bailout of AIG/a>, the U.S. government is now effectively
responsible for providing home mortgages and life insurance to tens of millions
of Americans. Many economists are asking whether it remains a free market if
the government is so deeply enmeshed in the financial system.
Given that the United
States has held itself up as a global economic model, the change could shift
the balance of how governments around the globe conduct free enterprise. Over
the past three decades, the United States led the crusade to persuade much of
the world, especially developing countries, to lift the heavy hand of
government from finance and industry.
But the hands-off brand of
capitalism in the United States is now being blamed for the easy credit that
sickened the housing market and allowed a freewheeling Wall Street to create a
pool of toxic investments that has infected the global financial system. Heavy intervention by the government, critics say, is further robbing Washington of
the moral authority to spread the gospel of laissez-faire capitalism.
The government could launch
a targeted program in which it takes a minority stake in troubled banks, or a
broader program aimed at the larger banking system. In either case, however,
the move could be seen as evidence that Washington remains a slave to Wall
Street. The plan, for instance, may not compel participating firms to give
their chief executives the salary haircuts that some in Congress intended. But
if the plan didn't work, the government might have to take bigger stakes.
"People around the
world once admired us for our economy, and we told them if you wanted to be
like us, here's what you have to do -- hand over power to the market,"
said Joseph Stiglitz, the Nobel Prize-winning economist at Columbia University. "The point now is that no one
has respect for that kind of model anymore given this crisis. And of course it
raises questions about our credibility. Everyone feels they are suffering now
because of us."
In Seoul, many see American
excess as a warning. At the same time, anger is mounting over the global
spillover effect of the U.S. crisis. The Korean currency, the won, has fallen
sharply in recent days as corporations there struggle to find dollars in the
heat of a global credit crunch.
"Derivatives and hedge
funds are like casino gambling," said South Korean Finance Minister . "A lot of Koreans are asking,
how can the United States be so weak?"
Other than a few fringe
heads of state and quixotic headlines, no one is talking about the death of
capitalism. The embrace of free-market theories, particularly in Asia, has
helped lift hundreds of millions out of poverty in recent decades. But
resentment is growing over America's brand of capitalism, which in contrast to,
say, Germany's, spurns regulations and venerates risk.
In South Korea, rising
criticism that the government is sticking too close to the U.S. model has
roused opposition to privatizing the massive, state-owned Korea Development
Bank. South Korea is among those countries that have benefited the most from
adopting free-market principles, emerging from the ashes of the Korean War to
become one of the world's biggest economies. It has distinguished itself from
North Korea, an impoverished country hobbled by an outdated communist system
and authoritarian leadership.
But the repercussions of
crisis that began in the United States are global.
In Britain, where Prime
Minister Margaret Thatcher joined with President Ronald Reagan in the 1980s to herald capitalism's
promise, the government this week moved to partly nationalize the ailing
banking system. Across the English Channel, European leaders who are no
strangers to regulation are piling on Washington for gradually pulling the
government watchdogs off the world's largest financial sector. Led by French
President , they are calling for broad new
international codes to impose scrutiny on global finance.
To some degree, those calls
are even being echoed by the International Monetary Fund, an institution charged with the
promotion of free markets overseas and that preached that less government was
good government during the economic crises in Asia and Latin America in the
1990s. Now, it is talking about the need for regulation and oversight.
"Obviously the crisis
comes from an important regulatory and supervisory failure in advanced
countries . . . and a failure in market discipline mechanisms," Dominique Strauss-Kahn, the IMF's managing director, said
yesterday before the fund's annual meeting in Washington.
In a slideshow
presentation, Strauss-Kahn illustrated the global impact of the financial
crisis. Countries in Africa, including many of those with some of the lowest
levels of market and financial integration and openness, are now set to weather
the crisis with the least amount of turbulence.
Shortly afterward, World
Bank President Robert Zoellick was questioned by reporters about
the "confusion" in the developing world over whether to continue
embracing the free-market model. He replied, "I think people have been
confused not only in developing countries, but in developed countries, by these
In much of the developing
world, financial systems still remain far more governed by the state, despite
pressure from the United States for those countries to shift power to the
private sector and create freer financial markets. They
may stay that way for
China had been resisting
calls from Washington and Wall Street to introduce a broad range of exotic
investments, including many of the once-red-hot derivatives now being blamed
for magnifying the crisis in the West. In recent weeks, Beijing has made that
position more clear, saying it would not permit an expansion of complex
With the U.S. government's
current push toward intervention and the soul-searching over the role of
deregulation in the crisis, the stage appears to be at least temporarily set
for a more restrained model of free enterprise, particularly in financial
"If you look around
the world, China is doing pretty good right now, and the U.S. isn't," said
C. Fred Bergsten, director of the Peterson Institute for International
may see a push back from globalization in the financial markets."
writers Blaine Harden in Seoul and Ariana Cha in Washington contributed to this