The Global Financial Crisis took place in 2007 and 2008, including a series of banking breakdowns, credit starvation, and devaluation. large-scale securities and currency devaluations in the US and many European countries, originating from the financial crisis in the United States.
Pundits and partisans have assigned blame for its causes, evaluated policy responses, and debated what measures, if any, are necessary to prevent “it” from happening again. Less attention has been paid, however, to the fact that the crisis punctuated a turning point in the international order, marking distinct eras that came before and after. And what has come after is an environment characterized by the relative erosion of U.S. power and influence, and by the emergence of new and varied thinking about how to best organize the international monetary and financial system.
Turning points are rarely obvious in the moment-harried decision-makers, often improvising in the context of crisis, are lost in the hurried urgencies of the now – but they become increasingly recognizable in retrospect. And they share a common footprint: critical junctures are inevitably forged by the combination of new thinking and new realities.
Two previous formative moments illustrate this. After World War II, the architects of the post-war economic order operated in the context of enormous U.S. power and the shadow of the emerging Cold War. At the same time, they were eager to draw on the lessons of the past: that unfettered capitalism had led to ruin – a catastrophe exacerbated by American isolationism and self-serving, go-it-alone economic policies more generally. Thirty years later, the high costs of the deflation that finally crushed what had seemed to be the untamable inflationary demons of the 1970s presented new lessons for policymakers – in particular the idea that macroeconomic policymaking need be first and foremost hyper-vigilant against any hints of new inflationary pressures. In each case, patterns of economic activity and policy choices made in the decades that followed can only be understood in the context of those formative episodes.
The Global Financial Crisis was also transformative with regard to both ideas and interests – and it marks the end of what I have dubbed the “second post-war American order.” Established in the mid-1990s, the second American order was characterized by the U.S. embrace of financial globalization as the touchstone of its post-Cold War grand strategy. Few in the late 1980s would have seen this coming – it was more common then to talk of U.S. decline – but the unexpected collapse of the Soviet Union and the (similarly unanticipated) stall of the Japanese economic juggernaut and resurgence of the U.S. economy put America back in the world order business. At the same time, the transition at the Fed from old-school Paul Volcker to libertarian Alan Greenspan and the rise of Clinton and the “new Democrats” eager to forge ties with Wall Street, unleashed the forces that led to the dominance of the financial sector within the U.S. political economy.
From there it was a very short intellectual trip to the conclusion that all good things went together: pushing aggressively, as only the world’s sole superpower could, for uninhibited financial deregulation not only at home but abroad was seen as good economics, good for U.S. firms, and good for American power. At about the same time, the U.S.-dominated International Monetary Fund reached similar conclusions, and, in a reversal of its long-standing traditions, embarked on a project to force its members to renounce the right to deploy capital controls. The zeal of the U.S. and the IMF was undiminished by mounting evidence that such measures might increase the risk of financial crisis – or by the actual financial crises that followed in Asia, Latin America, and Russia.
Nor has the U.S., even now, much changed its mind about these things. But what has changed is the global reception of these ideas. In much of the world, for example, there was great bitterness and resentment about how the U.S. and the IMF responded to the Asian Financial Crisis of 1997-1998, and other crises that followed. Those dissents, however, were muttered through gritted teeth – a tacit acknowledgement that convergence towards the American financial model was essentially inevitable and irresistible.
After the Global Financial Crisis, this is no longer the case. What is different this time is that for many, this was the second catastrophe brought about by unfettered finance within a ten year period. Moreover, and astonishingly, the U.S. economy was the epicenter of the 2007-08 upheaval. The apparent unique invulnerability of the American economy to such crises was one of the things that made both the U.S. economy and the American financial model so attractive. Worse, not only was the U.S. vulnerable to financial crisis, there is the widespread perception that it remains vulnerable. Efforts at reform, in the words of Financial Times Columnist Martin Wolf, reflect “an attempt to preserve the essence of a system we already know is extremely fragile, and which is sure to implode once again.”
You may disagree with Wolf’s assessment; the crucial point is that others share it. In the wake of the crisis, the perception of a singularly correct American model has been replaced by the search for alternative approaches, a preference for choice and variation, and widespread disenchantment with the way that the U.S. has managed its domestic affairs, dominated international institutions, and orchestrated global governance.
As with all turning points, this new thinking is enmeshed with new material realities that reinforce the implications of both, and add to the momentum for change. Notably, the crisis accelerated underlying trends already visible in the world economy-trends that even then were suggestive of the relative erosion of U.S. power. This observation is too easily caricatured, or misunderstood. To be clear, the American economy remains colossally large, innovative, rich, and robust-the U.S. is also extraordinarily secure and does not face a peer military competitor.
Nevertheless, in international politics, the only assessments that matter are relative, and it is hard to dispute the fact that, relatively speaking, both economic and political power are diffusing. This is plainly seen in a comparison between the U.S. and China. In the ten years leading up to the crisis, China’s economic growth averaged 9.95% per year while the U.S. averaged 3.02 percent; in the five years that followed, China’s economy grew by over 50%, the U.S. economy by less than 3%. As a force in the world economy, China is not “rising” – China has risen.
Not to be underestimated is that the diffusion of economic activity is a general phenomenon, and not simply (or simplistically) a story of Sino-American relations. In the five years before the crisis, the average annual rate of economic growth in emerging market economies was 7.6%, obviously outpacing the performance in the advanced economies. And, again, these trends were accelerated after the crisis: from 2007-2012 emerging market economies grew by 31%, high income economies by 3%.
In sum, actors throughout the world are disenchanted with the American model and with the U.S. orchestration of global economic governance. Many are now searching for alternative conceptions, and, feeling empowered, for greater voice in determining the rules of global governance and recognition of their own, often distinct, interests. This is the impetus behind the emergence of new international institutions such as the Asian Infrastructure Investment Bank-both the willingness of states like China to bankroll them, and the eagerness of others to participate. New institutions and varieties of policy experimentation will likely become more common, pointing towards a new era that suggests a bumpy ride ahead for international monetary and financial cooperation, and the relative erosion of U.S. power and influence.