Democrats may temporarily gloat that they are passing a gigantic ‘stimulus bill,’ but it is foreign governments that are really getting the last laugh. As the American economy spirals into deeper debt, China and Russia - and even EU nations - are now claiming greater international economic leadership and have an opportunity to extend their reach over American sovereignty. President Barack Obama must resist these efforts.
At the World Economic Forum in Davos, Switzerland last week, Chinese Premier Wen Jiabao and Russian President Vladimir Putin in essence blamed America for the global crisis and said unequivocally that there is now a loss of “confidence” in the markets that requires regulation. Translation: The American economy needs international monitors.
Mr. Wen’s explanation of the “root causes” of the financial crisis were widely perceived as being directed at the United States. He blamed the crisis on an economic model characterized by “prolonged low savings and high consumption; excessive expansion of financial institutions in blind pursuit of profit; lack of self-discipline among financial institutions and rating agencies, with the ensuing distortion of risk information and asset pricing; and the failure of financial supervision and regulation to keep up with financial innovations, which allowed the risks of financial derivatives to build and spread.” The Chinese premier called upon the international community to establish “a new world economic order” that, in his view, includes a massive expansion of regulation, oversight, supervision and transparency of global markets to guard against financial risk. In other words, the American economy needs to be under much greater international scrutiny.
Mr. Putin followed a similar pattern in his speech. “I would only remind you that one year ago we heard from this rostrum words uttered by our American friends about the fundamental stability and sparkling prospects for the U.S. economy. Today, the pride of Wall Street investment banks basically does not exist any more. They have suffered losses surpassing their revenues in the last 25 years, cumulative. Only this example, better than any criticism, describes the real situation. The time has come for a reevaluation.” He, also, called for an entire overhaul of the international financial system - one that is not predicated on a “unipolar world,” emphasizing that the lack of “confidence” in the banking sector must be addressed as the key to restoring “the confidence among nations.” China and Russia essentially said to the world that they no longer have confidence in America’s global economic leadership: The superpower has to be reigned in.
And can we blame them? For example, China has $2 trillion in foreign exchange reserves and continues to buy our debt: The nation is the largest foreign holder of Treasury notes. China was also the largest foreign investor in bonds from Fannie Mae and Freddie Mac. Chinese investors who have lost millions in their American investments are rightly incensed that their investments were not secure. The American and Chinese economies are now intertwined. This gives China leverage over our fate - and their intentions are not always benign. Despite some of the conciliatory language in the premier’s speech, there are undercurrents of tension between the U.S. and China. In fact, Treasury Secretary Timothy Geithner during his confirmation hearings even accused China of “manipulating” its currency to bolster its exports.
The upshot of all this is that the global financial crisis has now opened the door for foreign governments to demand a greater say in the American economy. Even our allies - such as German Chancellor Angela Merkel and British Prime Minister Gordon Brown - said at the forum they want more control over the international economy. Mrs. Merkel called for a U.N. economic council to police the global economy; and Mr. Brown too wants to use the opportunity to strengthen international institutions. These ideas run contrary to America’s position at a November G20 summit in which the Bush administration touted national rather than international regulation as the better course.
At the next G20 summit, to be held in London in April, Mr. Obama will have to juggle the demands by both American allies and rivals with his duty to protect American sovereignty. But how can he protect us from international intrusion when nations like China, Japan, the United Kingdom and Saudi Arabia own a staggering share of our national debt?
Individual Americans have come to realize how devastating debt is to their personal lives. But do Americans yet fully grasp how destructive excessive debt is to the nation’s well-being? Living beyond one’s means - even on the pretext that this is absolutely necessary to revive the economy - has damaging long-term consequences. Mr. Obama thinks that he is “reviving America” by leading us into greater debt. Instead, it renders us more beholden to foreign creditors who will demand - and will get - a greater say in our economy because they own us. Welcome to the new multilateral reality.