How Bush made the economy a global political football

Tony Karon

• Last Updated: October 18. 2008 10:46PM UAE / October 18. 2008 6:46PM GMT

Fans of Liverpool and Manchester United have long groused about the price our beloved football clubs have paid for the privilege of being owned by Americans: both clubs have been saddled with debt and huge annual interest payments to service the loans taken out by the new owners simply to acquire them. The Americans shrug. Leveraged buy-outs (using borrowed money to acquire new assets) are an integral part of the US business culture that has brought the international financial system to the brink of collapse.

Iraq, it may be argued, was the consummate leveraged acquisition. Rather than raise taxes, as nations entering protracted conflicts have typically done, the Bush Administration actually slashed them to wage a war that has already cost America close to $1 trillion.

Iraq wasn’t supposed to be a drain on resources. The Deputy Defence Secretary Paul Wolfowitz told Congress a month before the invasion that “to assume we’re going to pay for it all is just wrong”. The occupation, he said, would be financed by Iraq’s own oil revenues.

The Iraqis, of course, had other ideas, which is why Iraq has long been viewed, even within the US national security establishment, as a catastrophic strategic blunder: it demonstrated the limits on Washington’s ability to impose its political will through the deployment of its awesome military power.

Now comes a financial crisis that will profoundly alter the international economic balance of power. Washington’s dominance of the global financial system and the institutions that manage it, such as the International Monetary Fund (IMF), has been unquestioned since the Second World War, even if their antiquated nature is reflected in China, to which the US owes trillions of dollars, having fewer votes than the Benelux countries. And the G8 group of industrialised nations, in which Canada, Italy, Russia, France, Germany, Britain, Japan and the US pretend that they run the world economy, excludes the world’s second largest economy (China, which will almost surely become the largest during the current downturn) and its fourth-largest (India). Even Brazil’s GDP exceeds that of Italy and Canada.

There has been no doubt among leaders of other countries, rich and poor, that the roots of the financial meltdown lie in the reckless financial stewardship of the US government, whose free-market fundamentalism prevented it from applying commonsense regulations to its banking system. Even as the Treasury Secretary, Hank Paulson, a Wall Street banker himself until recently, flailed about for a coherent response, it was the British Prime Minister Gordon Brown who led the way with a programme of partially nationalising banks that the US was ultimately forced to emulate.

Now Brown and other G8 leaders want the US to agree to new mechanisms for regulating global finance that will apply internationally agreed standards to the US as much as to anyone else. Brown wrote in the Washington Post that the Europeans will push for a system based on the principles of sound banking and “global governance”, which will require “cross-border supervision of financial institutions; shared global standards for accounting and regulation; a more responsible approach to executive remuneration that rewards hard work, effort and enterprise but not irresponsible risk-taking; and the renewal of our international institutions to make them effective early-warning systems for the world economy”.

The subtext is clear: the US can no longer shape the global financial system on its own terms, and it will be forced adopt international standards anathema to the conventional wisdom of post-Reagan Washington if it wants to keep playing the global financial game on which its economy depends.

And the erosion of the financial hegemony of the US will accelerate the decline of its geopolitical hegemony. One obvious example is Iran: unable to secure international backing for significant sanctions, the Bush Administration has aggressively used its dominant position in the international banking system to enforce sanctions simply by threatening foreign banks that do business with Iran with exclusion from the US financial system. It’s a safe bet that the effects of the meltdown will substantially trim the ability of Washington’s neocons to use that particular cudgel.

On an even grander scale, a bailout that already looks likely to cost a lot more in the end than the Iraq war will prompt the US to begin wrapping up a military commitment that may already have achieved as much as it’s going to achieve politically. The Iraqi government has demanded that the US begin scaling down its involvement next year and be gone by the end of 2011. Given the dire state of the US economy, Washington may oblige.

And the idea that drawing down troops in Iraq will free them for another unwinnable war in Afghanistan may not survive beyond the presidential election. A combination of the limits of military force and the growing financial burden of waging war are likely to force a new realism on Washington. Expect negotiations with Iran and, perhaps more covertly, with the Taliban. And it will be some time before any more countries find themselves victims of leveraged US military campaigns. The implications for Liverpool and Manchester United are less clear, although if the latest threat from UEFA to ban debt-laden clubs from the Champions League are to be taken seriously (don’t bet on it), even leveraged buyouts of major football clubs could go out of fashion.

Tony Karon is a New York based editor and analyst who blogs at Rootless Cosmpolitan(www.tonykaron.com)