Carnegie Live... The U.S. Elections and the Financial Crisis

IMGXYZ1058IMGZYXThe financial crisis signals a “watershed moment” for not just the global economic order, but also for the United States’ approach to the world. In a live video briefing from Washington, D.C., David Rothkopf predicted that the financial crisis will prompt the Obama administration to emphasize multilateralism and play a major role in reinventing the international system to a degree not seen since President Truman.

Fixing the global financial system
The financial crisis, Rothkopf began, has revealed serious fundamental flaws in the existing international financial system. National level regulation and central bank intervention are insufficient to prevent crises when the main repository of value is complex tools such as derivatives created by private companies, not money. What is needed, Rothkopf explained, is a new global regulatory financial system to set standards for these tools and regulate them. This could take the form of a Global Monetary Authority, he said, mentioning the EU as an example of “creating super-national structures.” The key issue, he added, will be enforcement.

A new international order
Addressing the financial crisis, however, will require larger changes to the international system than just the creation of a global financial regulator. Existing international institutions such as the IMF, World Bank and G7, Rothkopf continued, must be revised to reflect the reality of today’s key economic players. This means ensuring that the rising powers—such as China, India and Brazil—that are the new repositories of capital and the big players in terms of trade are given greater representation and influence. Revision to these institutions will likely require changes in others, such as the UNSC and WTO.

An Obama administration, Rothkopf predicted, will push for these changes. The combined effects of the financial crisis, the U.S. deficit and high debt burden mean the U.S. can no longer act alone. Burden sharing is absolutely necessary. Moreover, Democrats in general are more comfortable with multilateralism. In this spirit, Rothkopf said the Obama administration will also likely strengthen its ties with the EU, both to push for changes to the global economic order and to facilitate cooperation on a broader array of issues.

Alternatives to “hyper-capitalism”
A final effect of the financial crisis, Rothkopf said, is the end of what the French call “hyper-capitalism,” the unfettered, leave-it-to-the-markets mentality. The legitimacy of the Washington consensus, already weak before the crisis, has been obliterated as the U.S. broke all of its prescriptions when it moved to nationalize parts of its banking system. Instead, he predicted a “regulatory renaissance” and the rise of “fusion capitalism,” meaning that European and Asian models of capitalism will assume greater prominence internationally.