Behind the Global Markets' Meltdown

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Global Problem, Global Solution
In the event of a severe economic downturn, the U.S. — like other countries — would find it much harder to export its goods and services around the world. According to the U.S. Chamber of Commerce, 12 million American jobs depend on trade, including 1 in 5 factory jobs. One in 3 acres of U.S. farmland is planted for export, and many of the nation's biggest corporations, from Coca-Cola to Microsoft and Google, depend on substantial revenues from overseas.

Beyond the immediate economic impact, there are already signs that this meltdown will have longer-term repercussions. One is that policymakers everywhere will have to go back to the drawing board to figure out a more effective system of financial-crisis management. "Governments are making the same mistake over and over again. They're trying to deal with the crisis on a piecemeal basis," says Dennis J. Snower, president of Germany's Kiel Institute for the World Economy. He advocates a far more ambitious solution, including the creation of a new international agency that can act as a lender of last resort to stricken banks. In Washington, Robert B. Zoellick, president of the World Bank, concurs that only a multinational solution can really work. "While American eyes are on the intersection of Wall and Main streets, there is much more to the story," he says. "The response to these crises will have to be larger and global."

Finance has become one of the most international of industries, with major banks spreading their activities across numerous countries and continents, yet regulation still takes place on a national or even more local basis. When banks run into trouble, it's unclear who is supposed to help or how. The favored solution so far — direct government intervention, like the $700 billion rescue package approved by the U.S. Congress or the British plan — isn't an option everywhere. Banks have become so big and so leveraged that their balance sheets can exceed the gross domestic product of the country in which they are based. That's the case in Belgium, the Netherlands and a host of smaller countries, including Iceland, where on Oct. 6 the Prime Minister warned about the possibility of a "national bankruptcy" because several banks with assets larger than the country's entire economy ran into trouble. Uncertainties about crisis-management efforts are contributing significantly to the market instability.

Another possible repercussion: a reexamination of the freewheeling, free-market practices — what the French like to call "Anglo-Saxon capitalism" — that led to this crisis. French President Nicolas Sarkozy kicked off that debate as Wall Street was reeling from the collapse of Lehman Brothers and Congress was first debating the bailout package. In a speech in Toulon on Sept. 25, he said the crisis marked "the end of a world that was built on the fall of the Berlin Wall and the end of the Cold War — a big dream of liberty and prosperity." As for capitalism, he called for a "new balance" between the market and the state and added, "The idea that markets are always right was a mad idea."

Among Equals, No Longer First
Wherever the debate over ideas leads, it's clear that some things will never be the same. Wall Street's primacy as the world's capital of capital won't disappear, but it will face even tougher challenges not just from London but also from regional financial centers, including Dubai and Singapore. And since financial services are such an important part of the U.S. economy, accounting for a massive 15% of New York's alone, any diminishing of its status as a financial center will have big repercussions on jobs. The dollar too may lose its long-held status as the currency of choice for central bankers everywhere. Snower of the Kiel Institute believes that in the future, "this will be seen as a historic period in which the U.S. will give up some of its reserve-currency role." Asian and Middle Eastern nations that currently hold on to dollars will want to diversify into other currencies, including euros.

The advantage in having the rest of the world use your currency is that you can borrow easily: that's why the U.S. government and U.S. companies have long been able to borrow cheaply and why mortgage rates in the U.S. have historically been low. If the dollar has to share top billing with other currencies, it will be harder for the U.S. to finance a profligate lifestyle and run big deficits, as the nation currently does. Expect mortgage rates to shoot up and your overseas vacation to get a lot more expensive. In the past, Snower says, "the U.S. could live off the fat of the rest of the world. Now it won't be able to."

For the moment, though, the priority remains trying to stabilize a global financial system that has become worryingly volatile. Announcing Britain's plans to recapitalize its major banks and reach out for a broader international solution, Prime Minister Gordon Brown didn't mince words. "This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem," he said. The big yawn with which global stock markets greeted the move said it all: given the beaten-down state of the financial system and the questions that continue to swirl around it, far more concerted action is needed if confidence is to be restored.

— With reporting from Massimo Calabresi / Washington, Bill Powell / Shanghai and Michael Schuman / Hong Kong

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