Friday, September 26, 2008

How Republican Economic Policy Hurts Us Abroad

Crisis Stirs Critics of Free Markets -

"In South Korea, the news has been seized by opponents of plans to liberalize the country's financial industry. German chancellor Angela Merkel has refreshed her defense of a law that gives the state an effective veto over takeovers of Europe's largest auto maker, Volkswagen AG. The U.S. effort to convince China to let the market determine the value of its currency may be undermined, analysts in China say."


In a world much more economically and financially intertwined than in the past, the U.S.'s troubles of the past several weeks seem to have done more than any downturn in recent decades to sow doubt about the U.S. approach. That has given ammunition to foreign critics while undercutting those who share the American preference for capitalism.

Already, the Bush administration's proposal to spend $700 billion buying troubled assets from U.S. banks has shaken confidence in the dollar among foreign investors who feel the plan could dangerously increase already-high U.S. debt levels. That concern could further weaken the dollar's status as the dominant global currency. China and other countries with huge holdings of U.S. dollars could also seek to shift more assets elsewhere, hurting the already wobbly American currency.


But America's problems could undercut support for its international priorities including expanding access for American financial companies in foreign markets, and pushing greater deregulation in continental Europe. "The U.S. model had a limited attractiveness for Europe before," says Nina Hauer, a Social Democrat member of Germany's parliament. "Now it has lost its attraction entirely."


The U.S. problems are also helping reshape the global financial industry. Japan has begun playing a larger role, after years of relative conservatism. Mitsubishi UFJ Financial Group Inc. has agreed to buy up to 20% of Morgan Stanley, and Nomura Holdings Inc. has acquired the Asian and European operations of Lehman Brothers Holdings Inc., which filed for bankruptcy last week. Wall Street firms' profitability has consistently been higher than that of their Japanese counterparts, but so has their leverage. Now that the Japanese own chunks of the U.S. financial system, risk tolerance may decline and profitability could shrink -- along with financiers' salaries.

In Latin America, the U.S. crisis provides a rhetorical opportunity for politicians who espouse greater state control of economies, and who argue the U.S.-backed free-market nostrums are at the root of the region's income inequality.

Thank you, Mr. Bush.

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