The Morning After

In the summer of 1998, during the Asian financial crisis, I went to Japan with Larry Summers, the Harvard economist who was then deputy secretary of the Treasury. Back then, American politicians often flew around the world telling other countries how to manage their economies, a task Summers, who often referred to "the power of the American idea," took to with gusto. Shortly before Summers arrived in Tokyo, the Japanese government had asked the United States for assistance in propping up the yen. Vanloads of reporters followed him around town, in part because he didn't refrain from telling his hosts that, in return for American help, they needed to overhaul their antiquated financial system: make it more competitive, more modern, more freewheeling, and-he didn't use this precise phrase; he didn't have to-more American. When I put it to him that he sounded like a triumphalist, he retreated into academic jargon but didn't deny the charge. Summers, like most of his compatriots, took it as self-evident that the American model represented the best way to organize an economy-and the proof was the fact that the U.S. had emerged as the sole economic superpower.

Ten and a half years later, American economic hegemony looks much less secure. The U.S. economy is suffering through a serious slump, the second in a decade; many American families face eviction from their homes; American workers haven't received a decent pay raise in almost 10 years; and U.S. taxpayers are being railroaded into committing the better part of a trillion dollars to bail out feckless Wall Street institutions. The Iranian president isn't the only one hailing the end of the American era. Take, for example, this passage from George Soros' latest book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means: "I contend that it means the end of a long period of relative stability based on the United States as the dominant power and the dollar as the main international reserve currency. I foresee a period of political and financial instability, hopefully to be followed by the emergence of a new world order."

Is Soros right? Up to a point, he is. Three pillars of American economic supremacy have been badly dented: the unrivaled power of Wall Street, our ability to dictate policy to other countries, and the appeal of the dollar. With the U.S. government heavily dependent on foreigners' purchases of Treasurys to finance its deficit, American officials, when they visit places like China and Japan, are already less arrogant than they used to be. In the future, they will surely be even more reluctant to sound off, which is just as well. Today, many Japanese and Chinese officials would struggle to keep a straight face upon hearing an American policymaker dispensing economic advice.

But the humbling of the U.S. doesn't mean that the Asians and Europeans are going to be bossing us around the way we used to boss them. The U.S. may no longer be the bully on the block, but its economy is still by far the biggest in the world, and even now it attracts money and talent from around the globe. After a punishing period of wealth destruction and rising unemployment, the financial markets will stabilize and growth will resume. America will be a bruised giant, but a giant it will remain.

One of my first assignments in journalism was covering the Big Bang-the deregulation of Britain's financial markets-which took place in October 1986. All too aware that the City of London was slipping behind Wall Street, Margaret Thatcher's government abolished the regulations that had prevented foreign investment firms from competing with the snooty, undercapitalized British banks that had dominated Britain for centuries. Within a few years, the titans of Wall Street-Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers-had barged into town, buying out many local outfits and eliminating many venerable British customs such as the three-hour liquid lunch.

In today's City, cocktails at noon are a thing of the past, but so too is the cocky American investment banker. Lehman is bankrupt; Merrill is a subsidiary of Bank of America; Morgan and Goldman, fearful they were about to become subsidiaries of the People's Republic of China or perhaps even meet the same fate as Lehman, have converted themselves into commercial banks; and Goldman has sold a chunk of itself to Warren Buffett. Washington Mutual is gone. Citi, another big player in London, is referred to in some circles as the Bank of Arabia. (Following the firm's latest mishaps, Arab investors own about 20 percent of its equity.)