The unravelling that started with the Freddie and Fannie conservatorship has exacted a toll not just on dollar-denominated paper but on financial assets around the world. As they have fallen, so too has the standing of the US, which zealously promoted liberalized capital markets and saw US firms establish dominant positions when those rules were adopted.
America already had few friends thanks to our prosecution of the war in Iraq, and our reputataion is testing new lows. From the Telegraph:
In a remarkable outburst at the German parliament, Mr Steinbrück said the world would never be the same after “Black September”. He demanded a sweeping code of regulations to “civilise the financial markets” and clamp down on speculators.
Mr Steinbrück announced a swingeing eight-point plan to reorder the global markets – which will heighten fears in the City of London of interference by the European Commission.
“The US will lose its superpower status in the global financial system,” he said, predicting a new multi-polar order where power is spread across the globe.
“The financial crisis is above all an American problem. The other G7 financial ministers in continental Europe share this opinion,” he said, a pointed turn of phrase that excludes Britain’s Alistair Darling.
“This inadequately regulated system is now collapsing, with far-reaching consequences for the US financial market and contagion effects for the rest of the world,” he said….
Senior politicians in France and Germany have in recent weeks called for a radical shake-up of the market system. A powerful EU faction that has always been hostile to the City of London – which is known in Brussels as “the casino” – see this crisis as a rare chance to ram through irreversible changes.
“They want to regulate the capital levels of every firm and partnership, limit takeovers and regulate asset stripping. In short, they want to regulate the Anglo-Saxon version of capitalism out of existence,” said John Whittacker, MEP and UKIP’s economic spokesman.
Mr Steinbrück said the deft response of the world leaders in recent days had averted catastrophe. “Crisis management worked. We did not have a collapse of the international financial system,” he said.
Mr Steinbrück said the drive for short-term profit and huge bonuses in the Anglo-Saxon world was the root cause of the gravest crisis in decades. “Investment bankers and politicians in New York, Washington and London were not willing to give these up,” he said.
Update 3:45 AM: More on the same speech from the Financial Times:
He later told journalists: “When we look back 10 years from now, we will see 2008 as a fundamental rupture. I am not saying the dollar will lose its reserve currency status, but it will become relative.”
The minister, who has spearheaded German efforts to rein in financial markets in the past two years, attacked the US government for opposing stricter regulations even after the subprime crisis had broken out last summer.
The US notion that markets should remain as free as possible from regulatory shackles “was as simplistic as it was dangerous”, he said…..
The US, Mr Steinbrück said, had failed in its oversight of investment banks, adding that the crisis was an indictment of the US two-tier banking system and its “weak, divided financial oversight”.
He blamed Washington for refusing to consider proposals Berlin had made as it chaired the Group of Eight industrial nations last year. These proposals, he said, “elicited mockery at best or were seen as a typical example of Germans’ penchant for over-regulation”….
Mr Steinbrück’s proposals include a ban on “purely speculative short selling”; a crackdown on variable pay for bank managers, which had encouraged reckless risk-taking; a ban on banks securitising more than 80 per cent of the debt they hold; international standards making bank managers personally responsible for the consequences of their trades; and increased co-operation between European super visors.