A year since the meltdown of world financial markets and the bleeding appears to have been staunched, but still there is no agreement on the proper reaction to and path out of the crisis.
For proponents of the free market, governments did the wrong thing by throwing money at the problem — instead, mismanaged companies should have been allowed to sink. This would have saved the phenomenal expenditure of funds that will impose a heavy burden on taxpayers for years to come, while resolving few of the structural problems in the rescued companies.
Defenders of government intervention, in turn, say there was simply no way to allow large companies to fall. This would have undermined all confidence in both the markets and in the role of government. It was better to save the companies and later reform them than to preside over the disintegration of interconnected markets.
In retrospect, neither side has succeeded in answering the worries of the other. The fact is that in the United States and Western Europe many companies that should have been sunk were saved because the financial and political cost of allowing them to collapse were prohibitive. But the financial cost of saving them is almost as prohibitive, as taxpayers will remain fiscal hostages for the foreseeable future to misconduct they were not responsible for.
Free-marketers have to convincingly explain how Western governments could have avoided intervening in the midst of widespread panic last year, amid metastatic breakdowns in interlinked sectors. After all, a fundamental argument of supporters of the free market is the high degree of market integration, so it’s perfectly reasonable to understand that even companies that were not mismanaged but were tied into the larger economies of those that were, would suffer the consequences of government inertia. One of the immediate results of the meltdown was higher unemployment, which happens to be a legitimate government concern with implications for social stability.
The net result of the financial crisis is that it has yet to offer any real method out of similar such situations in the future. To an extent this is understandable, since each crisis is unique. We all recall that the chairman of the Federal Reserve, Ben Bernanke, was a student of the 1929 crash, yet his reaction to the crash of 2008 was sometimes characterized more by improvisation than by academic deductions.
Rather than looking backwards, however, we should examine how the financial meltdown may play out in the future realm of politics. Perhaps not surprisingly, this will have significant implications in the broader Middle East, where the presence of vital US interests, combined with high expenditures related to American military operations, will impact Washington’s economic and financial position.
We might want to focus on one scenario in particular: the American strategy for dealing with Iran in the event the Iranian regime is on the verge of building a nuclear weapon. The conventional wisdom is that the US administration, if all else fails, will resort to military means to prevent Tehran from getting the bomb. That may very well be true, but that assessment is built entirely on political considerations, and even then fairly narrow ones: for even politically, how would an attack against Iran affect the US withdrawal from Iraq, a priority of President Barack Obama? Or the stabilization of Afghanistan and the sponsorship of Middle East peace, two other priorities of the American president? The likelihood is that it would substantially undermine these aims.
But let’s talk financially. An Iran attack would almost certainly develop into a regional conflict, extending to Lebanon. Fighting in the Gulf would almost certainly raise the price of oil at a moment when the fragile world economy is rebuilding itself and adjusting to the high price of hydrocarbons. Washington would quite possibly have to respond to the political instability by reinforcing or boosting its military presence in Iraq and Afghanistan in the medium term, which would add to its financial liabilities at an already difficult time. While we would need accurate models to compute the likely costs, even a speedy evaluation leads to a straightforward dilemma: Is the US better off deterring a nuclear Iran or trying to prevent Iran from acquiring a nuclear weapon, particularly when an attack might not even halt its nuclear program?
Such questions as these highlight the real impact of the financial crisis of 2008, transcending theoretical debates over how Western governments should or should not have responded financially to limit its damage. If markets are profoundly integrated, so too are economics and politics and economics and power. Governments know that, especially when it affects the social mood. But as we look forward, we need a wider perspective to gauge how the West’s financial tribulations, particularly those faced by the US, may neutralize its activities in the Middle East.
Michael Young
