OPINION> Commentary
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OPINION> Commentary
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Financial crisis signals coming of 'nonpolar' era
By Yoichi Funabashi (China Daily)
Updated: 2008-10-16 07:43 There are forebodings that something has clearly come to an end as an age reaches its end. An editorial in the Wall Street Journal described the decision by US investment bank Morgan Stanley to transform itself into a commercial bank holding company as "the end of Wall Street". Much like a tail wagging the dog, investment banks had engaged in practices that reaped huge profits using debt totaling several dozen times the capital held by the company. However, that system has now collapsed. The US strategy of allowing its manufacturing base to dry up and turning to a financial plan specializing in finance and information technology has also reached a dead end. The American people will no longer be able to enjoy consumption patterns well in excess of their incomes that were made possible by an expanding credit line. Reaganomics, or the neo-liberal economic policies that emerged since the 1980s, was based on two main pillars - tax cuts and deregulation. Those policies will likely face a critical review.
It will become increasingly difficult for the United States to sustain its current account deficit-disparagingly referred to as a "deficit without tears"-by simply printing more dollars. Problems with the dollar as the world's key currency will emerge in the future course of the current financial crisis. Financial institutions took on many layers of indirect guarantees to shift the risks elsewhere. However, such leverage, which was extended around the world, carried a much higher risk and, therefore, became much more toxic the further down it went. That toxicity has now poisoned the global financial system. Banks have become increasingly wary of lending to each other. Bank of Japan Governor Masaaki Shirakawa warned, "The liquidity of the dollar is now in a situation of near-exhaustion." Still, the US Congress passed a financial bailout bill that will allow the US government to buy up bad debt while financial institutions will find it imperative to vastly increase their capital. The US government could find itself in a situation of injecting public funds into financial institutions and gaining ownership of some of those institutions. As the financial system restructures itself, fears of huge corporate bankruptcies are strong. If consumer spending is further dampened, an economic downturn would be unavoidable. The situation is so grave that the US government may have to take action to rescue the automobile industry. Stephen S. Roach, chairman of Morgan Stanley Asia, predicts the coming of another lost decade, US-style. This could also mean the true end of the Cold War. Although then US President Ronald Reagan caused the eventual collapse of the Soviet Union in the late 1980s, the United States 20 years later now faces both a quagmire in Iraq and Afghanistan, and the collapse of Reaganomics. After the Cold War ended, it appeared that we had entered a unipolar age with the United States as the sole superpower. At one time, there were signs of a future multipolar world, with the emergence of the European Union and the growing economic strength of China and India. However, faced with such problems as the challenge following the Sept 11, 2001, terrorist attacks on the United States, nuclear proliferation, soaring petroleum and gas prices, the failure of multilateral trade negotiations and global warming, the United States has been unable to exert leadership, and the major powers were unable to create a multilateral framework. The financial crisis triggered in the United States has inadvertently revealed that the world may have entered into a "nonpolar" era brought on by both globalization and the accompanying weakening of nations' control functions. Are there signs that a new age is beginning? The Western media has played up a "Japan-is-back" image. During its lost decade, Japanese financial institutions strengthened their foundations and moved back onto the international stage through investments in US investment banks. Such supplementary actions contribute to a credit recovery in the global financial system. Japanese financial institutions could also contribute internationally by further polishing their knowledge of corporate finance that has helped to build up companies in Japan and developing nations. In addition, the country's experience with the Industrial Revitalization Corp of Japan could help resuscitate companies. China will also have an important role to play. At the Davos economic forum held in the summer in Tianjin, Chinese Premier Wen Jiabao said, "China's greatest contribution to the world will be continuing its strong, stable and relatively rapid economic growth." Wen also said the markets needed "confidence, ethics and innovation", pointing to the concepts vital for market resuscitation. The Japanese government faces the problem of improving liquidity, fairness and transparency in the country's financial and capital markets. There are already signs of a credit crunch, and the lack of yen funds for new domestic ventures is proving a barrier to investment. Financial and other companies are avoiding the domestic market and looking abroad. An urgent task will be revising financial functions and the investment environment. The lessons of the financial crisis should not be simplified into anti-free market and anti-globalization. Opposition to the financial bailout bill in the US Congress stemmed from criticism by taxpayers who felt an injection of public funds would be unfair in terms of benefits and burdens. One reason for Japan's lost decade following the delay in injecting public funds during the Japanese financial crisis of the 1990s was due in part to lack of public trust in the government. Another important lesson for Japan, especially now, is recognizing the importance of the role and the quality of government in maintaining trust in the financial market and rebuilding social welfare and fiscal systems. The financial crisis and economic slowdown could tilt the world toward protectionism. Japan should maintain its market-opening and free-trade stance and further deepen its efforts at economic integration and cooperation with the Asia-Pacific region. There had been signs of a geopolitical power shift from the West to Asia. The financial crisis and economic stagnation in the West will accelerate that trend. History shows that military conflicts are more likely during tectonic shifts in international politics accompanied by economic crises. While cooperating with China, Japan should firmly connect the United States to the Asia-Pacific region and work with it to construct a resuscitation strategy. The author is Asahi Shimbun's editor in chief The Asahi Shimbun (China Daily 10/16/2008 page9) |
