U.S. Image Tarnished By Financial Meltdown

The White House plan to bail out the U.S. financial sector is likely to have major geopolitical ramifications. The U.S. owes its global dominance to its vast economic power. In recent years, indebtedness to China and other major creditors has put the U.S. in an increasingly vulnerable position. The failing financial sector could further undermine the country's standing in the world.

It's the job of intelligence officials to highlight threats facing the country. They focus on worst-case scenarios and sometimes seem to specialize in bad news.

In a speech earlier this month in Florida, the chairman of the National Intelligence Council, Thomas Fingar, said one assumption underlying intelligence projections about the next 15 years is that the position of the United States in the world will diminish and at an accelerating pace.

He said that before Wall Street went into crisis. Richard Cooper, chairman of the National Intelligence Council under President Clinton, says the U.S. image will take a hit over the financial meltdown as people around the world review what happened.

"The question will arise, how could this have happened?" Cooper says. "There must have been a screw-up someplace. The Americans are not as skillful at managing their own affairs as we assumed they were."

On Capitol Hill Tuesday, Treasury Secretary Henry Paulson said the credit crisis is "embarrassing" for the United States.

Cooper, now an economics professor at Harvard, says it's scary for everyone else.

"The generic question is, is the world falling apart? Here's the United States, which has the strongest economy in the world, and all kinds of bad things seem to be happening," Cooper says.

The result: a loss of confidence in U.S. economic leadership.

"The financial sector was the flagship sector, or one of the flagship sectors, of the American economy — the envy of the whole world — and people didn't just say they believed in it, they were pouring money into it," says Kenneth Rogoff, who was chief economist at the International Monetary Fund from 2001 to 2003.

"And now that they see it melting down, they're nervous about its future. I mean, it's not something that is going to lead to the United States not being No. 1 anymore all of a sudden. But it undermines and weakens our position. It's very important that we try to rebuild it so that we can re-establish our pre-eminence in the area."

The apparent mismanagement of U.S. credit markets follows what many around the world see as a bungling of the war in Iraq. But while the United States' problems in the Middle East have may have strengthened the hand of U.S. adversaries, the crisis on Wall Street could hurt everyone.

"By and large, the global economy is going to lose from this," Rogoff says. "This is very painful. This is probably going to deepen the global downturn, meaning we're going to have a global recession. Of course, when markets move this much, there are winners and losers, but I don't think anybody's cheering about it at the moment. I think everywhere in the world, they're very concerned."

If the U.S. government is to come up with $700 billion quickly, it will most likely need to sell Treasury securities to other governments. China already holds more than $1 trillion worth of dollar assets.

But turning to other countries for help doesn't necessarily mean those countries will have vast new leverage over the United States.

George Friedman is chief executive of Stratfor.com, an intelligence analysis firm. He and others point out that the more the United States owes other countries, the more those countries will depend on the United States managing its economy successfully.

"We will need not only Chinese, but Saudi and to some extent Russian money to fund some of this," Friedman says. "But it is in the national interest of all these countries to see the American markets come through it, and the only way the Chinese could really hurt us is by cutting their own throats."

Indeed, analysts who specialize in economic intelligence see a possible upside to the current crisis: They say it could make clear to all global players how interdependent they have become. That could actually lead to greater international cooperation.

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