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The End of Arrogance

America Loses Its Dominant Economic Role

By SPIEGEL Staff

Part 5: 'One Can See that We Are on a more Solid Base'

For far too long, the Americans and the British made fun of the Germans for their risk-averse, savings-oriented mentality, says Bernd Pfaffenbach, Merkel's chief negotiator on foreign trade issues. But now the relative conservatism that Germans have shown in financial matters is paying off. "One can see that we are on a more solid base," says Pfaffenbach, who refers to the crisis as a "purifying storm."

Pfaffenbach isn't the only one to see the problem in this light. The American bank crash has prompted economists and politicians worldwide to prepare for the end of an era of turbo-capitalism driven by the financial markets.

The financial industry -- especially in the United States -- will shrink considerably, while the significance of the real economy will increase. Once again, the government will have to base its supervisory function on the old banker's principle: security first.

This is especially true when it comes to monetary policy. For years, central bankers "paid attention almost exclusively to developments in consumer prices," complains Thomas Meyer, chief European economist at Deutsche Bank. If consumer prices were going up by 2 percent or 3 percent, the risk of inflation was thought to have been averted.

The fact that the prices of stocks, bonds and real estate were often rising at double-digit rates was usually ignored until the financial bubbles burst with a loud bang. Some economists recommend that central bankers should also consider asset inflation when reaching future decisions.

At the same time, Europe's finance ministers are calling for tighter supervision of the credit and securities markets, as a group of experts from the G-8 countries recently recommended. Their plan calls for requiring banks to maintain larger capital reserves for specific risks. In addition, they have recommended that hidden financial risks that banks have assumed be made more transparent and that better guidelines be developed for the valuation of financial instruments.

Most of all, the G-8 council of experts stresses the need to reform the risk classification of securities. The major international rating agencies, such Moody's and Standard & Poor's, have deeply embarrassed themselves in the current crisis. In many cases, they gave their highest ratings to what were really junk securities. The G-8 experts have proposed that these institutions be made subject to a code of conduct.

At the same time, the experts also warn against intervening too much in the financial markets. As was illustrated by Germany's public sector Landesbanken, hard hit by the subprime crisis, as well as state-owned lender KfW -- which transfered €350 million to Lehman Brothers the day it filed for bankruptcy protection -- the government is usually not up to the task of owning and operating banks. Simply banning certain financial market operations also makes little sense, they believe, as such prohibitions are often easily circumvented.

If the G-8 experts prevail, there will be major consequences. For now, it would spell the end of ever-rising returns with constantly changing securities. At the same time, the market position of Anglo-Saxon banks would be significantly restricted, which would benefit the up-and-coming financial institutions of the emerging Asian and Eastern European economies.

A new chapter in economic history has begun, one in which the United States will no longer play its former dominant role. A process of redistributing money and power around the world -- away from America and toward the resource-rich countries and rising industrialized nations in Asia -- has been underway for years. The financial crisis will only accelerate the process.

The wealthy state-owned funds of China, Singapore, Dubai and Kuwait control assets of almost $4 trillion (€2.76 trillion), and they are now in a position to buy their way onto Wall Street in a big way.

But they have remained reserved until now, partly as a result of poor experiences in the past. The China Investment Corp., for example, invested in the initial public offering of the Blackstone Group, a private equity firm, and invested $5 billion (€3.45 billion) in Morgan Stanley. In both cases, it lost a lot of money.

But time is on the side of the Chinese. American stocks are becoming cheaper and cheaper. And the longer the crisis lasts, the weaker American objections to buyers from the Far East will become. In fact, it is quite possible that they will soon be celebrated as saviors.

The Chinese are interested in keeping the situation in the United States from spinning out of control. In a telephone conversation last Monday, Chinese President Hu Jintao told President Bush that he hoped that the measures to stabilize US financial markets would "achieve quick results and improve the economic and financial situation."

Bush had called his Chinese counterpart to inform him about his government's bailout program. Once again, the conversation symbolized just how great the mutual dependence between the two countries has become.

No Time to Gloat

Both in Asia and the United States, expressing schadenfreude over the decline of the United States as a superpower is out of place. The risk is too great that if America goes into a tailspin, it will drag the rest of the world down with it.

Despite the anger felt toward Bush, there is little enthusiasm in Europe's capitals for the political consequences. The financial crisis will reinvigorate America's tendency toward isolationism, which never quite disappeared.

The triumphalism of the Bush years could easily be followed by the "I'll-sit-this-one-out" years of an Obama administration committed to a strict policy of belt-tightening. If that happens, both old and new Europe will have to demonstrate whether the European Union can rightfully claim to be on an equal footing with the United States.

In the past, the US government's solo efforts provided the Europeans with an all-too-comfortable excuse for simply doing nothing. But that excuse is no longer valid.

BEAT BALZLI, KLAUS BRINKBÄUMER, FRANK HORNIG, HANS HOYNG, ARMIN MAHLER, ALEXANDER NEUBACHER, WOLFGANG REUTER, CHRISTOPH PAULY, MICHAEL SAUGA

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