Fall of the Lehman Wall and the US as hyperpower?

When Mikhail Gorbachev became ruler of the USSR in March of 1985 he was acutely aware of the fact that the Soviet economy had failed to post positive growth for just on a decade.

His introduction of firstly “Perestroika”, economic restructuring, and later “Glasnost”, an element of political freedom, could not, however, ward off the impending collapse of the Soviet Union. Glasnost, if anything, hastened its demise with the first free elections in 1989 signalling that the days of communist rule had run their course.

In November of 1989 the Berlin Wall fell, with the non-Russian Republics declaring independence on the 1st of December 1991 and the Soviet Union ceasing to exist on the 25th day of December 1991. In essence its demise was brought about primarily by economic factors that were inherent within its own system, coupled with a leadership failure or refusal to recognise the flaws that would result in it being unable to evolve economically along with its major rival.

This left the planet with a hyperpower, the US, as opposed to two superpowers as had been the case for the duration of the Cold War.

All of that may well be about to change with the collapse of the Lehman Wall?

John Gray of the Sunday Observer notes:
“Our gaze might be on the markets melting down, but the upheaval we are experiencing is more than a financial crisis, however large. Here is a historic geopolitical shift, in which the balance of power in the world is being altered irrevocably. The era of American global leadership, reaching back to the Second World War, is over.

“You can see it in the way America’s dominion has slipped away in its own backyard, with Venezuelan President Hugo Chávez taunting and ridiculing the superpower with impunity. Yet the setback of America’s standing at the global level is even more striking. With the nationalisation of crucial parts of the financial system, the American free-market creed has self-destructed while countries that retained overall control of markets have been vindicated. In a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of government and the economy has collapsed.”

“There has been a good deal of talk in recent weeks about imminent economic Armageddon. In fact, this is far from being the end of capitalism. The frantic scrambling that is going on in Washington marks the passing of only one type of capitalism — the peculiar and highly unstable variety that has existed in America over the last 20 years.

“This experiment in financial laissez-faire has imploded. While the impact of the collapse will be felt everywhere, the market economies that resisted American-style deregulation will best weather the storm. Britain, which has turned itself into a gigantic hedge fund, but of a kind that lacks the ability to profit from a downturn, is likely to be especially badly hit.”

Iraq, Afghanistan
Of interest will be the impact on US pre-emption and intervention in those areas she has considered strategic up to now. The wars in Iraq and Afghanistan, which have cost in excess of $1-trillion, plus the issue of Iran might well become too costly to maintain or contemplate. In terms of the Middle East, Saudi Arabia and the rest will be casting anxious glances at regional power Iran. Where will this leave the issue of the former Soviet Republics with intervention highly unlikely if Russia does begin to flex her muscles. China?

Pat Buchanan explains why the contemplated bail-out is necessary:
“Since Americans save nothing and have to borrow from abroad to finance our trade and budget deficits, wars and foreign aid, what the secretary proposes is this: that Congress authorise the Treasury to spend $700-billion to buy up the toxic paper on the books, not only of US banks, but of foreign banks operating in the United States. According to the Washington Times, the Treasury would also be authorised to buy up securities backed by rotten auto loans, student loans, and credit-card debts.

“Thus America would be borrowing from China, Japan and the Middle East to tidy up the balance sheets of the banks of China, Japan and the Middle East. And all the rotten paper will be offloaded on to US taxpayers, who hopefully will be able to recoup some of their losses, because some of the paper will be good.

“Why should we do this? Because otherwise there will be a financial panic, followed by a market collapse, wiping out pensions, 401Ks, portfolios and defined benefit plans of Middle America, forcing millions into bankruptcy and millions more to put off retirement and continue working until they drop.

“Looking at all the money being ladled out by the US government to prevent a collapse, and the diminished revenue coming in, it is hard to see how America avoids future deficits that reach $1-trillion a year. These will imperil both the dollar itself and the ability of the United States, which saves nothing, to borrow from the rest of the world. The downsizing of America is at hand.”

The obvious question that arises is who is going to fill the gaps left by a US financial retreat? In Africa we are all too aware of the Chinese presence as it is.

Sunday Telegraph‘s Anne Applebaum calls Lehman Brothers the economic 9/11:
She says that it is too early to predict the end of American dominance and should rather be considered as an end to Cold War prosperity. She is also of the view that financial giants like China and Dubai will feel the backlash of America’s lack of spending power.

R Koenig, a business columnist for the Sunday Telegraph, suggests:
“Less clear is how diplomacy will factor into efforts to move beyond last week’s financial panic. The 15-month-old credit crisis marks a dramatic shift in economic power from West to East, from the US to China.

“Some economic realignment, integrating China’s role as both banker and factory to the world into the global economy, is essential if stability is to be achieved. Traditionally, this kind of realignment would be on the agenda of the annual meetings of the International Monetary Fund and World Bank starting October 10 in Washington.

“Yet China’s role at this year’s meetings remains opaque. Even if the Group of Eight were to invite China to join its club, it is unclear if the party leaders in Beijing want to belong.

“Lawrence Summers, who served as President Clinton’s US Treasury secretary, wrote recently: ‘There has been a shared premise behind international economic policy discussions — the goal of increased economic integration, the spread of market institutions and more rapid growth for all nations. While companies may compete, the premise has been that nations cooperate to build a stronger economy in the interests of all.’

“In the case of China and other authoritarian governments focused on wealth accumulation and geo-political strength, rather than improving the living standards for their populations, ‘it is no longer clear this premise remains valid,’ Summers concluded.”

‘Agony’
Simon Jenkins of the Times of London gives a decent insight to how this credit crunch arose and the battle to turn it around:
“America can be at its best with its back to the wall: argumentative, unpredictable, certainly not pretty, yet still the rock on which Western security — and financial credit — rests. This crisis is not passed. When it is, its immediate legacy will be a presidency from hell, George Bush’s final poison pill to his successor.

“Yet the knowledge that all America has been involved in the rescue is a security rather than a shock. Whether Obama or McCain wins this election, he will endure agony paying for the crash of 2008. He should at least take strength from the manner of its rescue. It was executed by the mob, not the club.”

Jim Hoagland of the Washington Post writes:
“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 the US.

“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 United States 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 US assets they hold — or even attacking the dollar systematically, as happened in past crises.

“Part of the reason lies in the US 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 US prospects are, most other markets look even riskier. The United States does not weaken alone. A broken America means a broken international system that others will not be strong enough to repair without the US centrepiece.”

Cees Bruggemans FNB — featured in Moneyweb:
“Lesson number two. Don’t be stupid. The country in question this time is the only superpower left standing, but increasingly looking like a huge undisciplined emerging country on the make, and possibly about to blow all its advantages, and reap the whirlwind.

“And the process? Detonate your financial system, thereafter cleaning up by hugely increasing public burdens. Give foreigners something to worry about.

“The world may wake up some day, and decide it doesn’t like the risk profile. And proceed to sink the dollar, boosting US inflation, and walk away from supposedly safe-haven Treasury bonds, boosting US interest rates, and devastating its growth.

“Can’t happen? Kenneth Rogoff, ex-IMF chief economist sees this as a major US risk scenario.

“The most unbelievable financial irresponsibility was allowed to mushroom into incredible financial leveraging, which is now being brutally imploded, taking out respected financial names three at a time.

“So far, the write-offs this past year amount to $500bn. But there is another $1trn looming that will need to be settled fairly shortly.

“Even if miracles do happen, and they do, and private bank provisioning, predatory bank take-outs and ultimately the government bail-out of a lifetime cleans up the US financial system, its sovereign reputation will have been burnished, its good name no longer what it used to be, the penalties lingering for years, in an impaired fiscal burden and underperforming growth story trying to pay off this generational folly.”

Whichever way we look at it, the shape of the world is going to be transformed far more by the events of what Applebaum styles the “Economic 9/11” than it ever was by planes crashing into the World Trade Centre.

At this stage it is hard to comprehend the enormity of it all or to even begin suggesting the impact it is going to have on the planet, let alone countries or individuals.

One thing is certain: 20 years from now September 2008 is going to be regarded as a defining point in the planet’s history.

Let’s hope it is for the better.