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A House of Cards

With the collapse of Bear Stearns, the cocky, hard-charging Wall Street investment bank, America and the world have turned a new page in their understanding of the financial and economic troubles unfolding around us. Ever since the so-called sub-prime mortgage crisis erupted last year, discussion has been centered mostly on questions of how long it will take for the American economy to rebound and what the fix will cost. This week, in a sobering twist, the question being asked over and over at press conferences and on editorial pages was whether the American economy will recover at all.

The question is not an idle one. As the economy goes, so goes America’s place in the world. So, too, goes this nation’s ability to project its power, to protect its interests and those of its friends, to maintain its global primacy.

For most of the last century, America has been the most powerful economic engine on the globe, and from that power came vast influence on events around us. America could out-produce any other nation, dictate the flow of resources and capital and provide bottomless markets for its own products and those of others. Its currency has been the world’s standard. Standing on that economic platform, America has risen to become the world’s superpower, its hegemon, beacon and policeman.

This week, all that came into question as America’s fifth-largest investment bank collapsed like a house of cards. Surveying the wreckage and the underlying weaknesses it revealed, bankers, economists and political leaders alike were asking whether the rest of the world will continue to place its faith and credit in the American dollar or be forced to put its trust — and its business — elsewhere.

Treasury Secretary Henry Paulson, asked repeatedly this week about the future of the American economy, insisted that we have “strong long-term fundamentals,” which should guarantee the recovery of our currency and our economic leadership. If only that were so clear to the rest of us.

In fact, the bursting of the housing bubble and the unraveling of the sub-prime mortgage industry have revealed a financial system that is vastly overleveraged, balanced on mountains of debt so complex and opaque that no one knows where the bottom is. The collapse began with mortgage banks, but it is cascading throughout the financial system here and around the world, paralyzing lenders and bringing business to its knees. Lending institutions throughout the American economy could face losses totaling in the hundreds of billions of dollars in the months ahead; indeed, some sober-minded analysts suggest that the losses could top $1 trillion, nearly one-tenth of the Gross Domestic Product.

Cascading bank failures bearing down on us will quickly cripple the economy unless the Federal Reserve comes up with the vast fortunes that will be needed for major rescue operations. If the Fed does produce such sums, however, it risks weakening the credibility of the dollar beyond repair. Already, the reckless indebtedness of America’s government and economy are driving some of our major creditor nations, particularly China, to begin scouting other markets for their goods and other currencies for their transactions. The free fall of the dollar is just the first alarm bell.

Some leading experts here and abroad were predicting this week that the federal government will have to turn to our foreign creditors for the cash to cover the necessary bailout. Our creditors, however, are growing skeptical of our ability to manage our money. They’re going to be reluctant to lend massive new sums to a system that might not be able to repay. The talk in the U.S. Treasury, reportedly, is that lenders will have to be offered collateral in the form of American assets — businesses, banks, real estate — to provide us with new capital as the crisis grows.

Back in September 2004, this newspaper warned in an editorial that America’s appetite for living beyond our means and borrowing the difference — much of it from the central banks of Britain, Japan and China — would sooner or later be our undoing. “No one but the most starry-eyed administration boosters think this level of borrowing can be sustained indefinitely,” we wrote in an editorial titled “Mortgaging Our Future.” “Sooner or later, our over-mortgaged economy will start to look like a bad bet, and our creditors will start calling in their loans. The question is not if, but when and how.”

We did not realize at the time how quickly our warnings would come to pass. Nor did we know that the catalyst of our undoing would turn out, literally, to be mortgages.

We went on to argue that friends of Israel need to take the long view when they try to assess Israel’s best interests and plan their own actions. We recalled the collapse of the British pound in 1956, and Britain’s long, slow decline from global dominance to second-tier status. We recalled, too, that America’s refusal to bail out the pound back then was a direct result of President Dwight Eisenhower’s anger over the British-French-Israeli operation in Sinai that fall. And we speculated that an America overly dependent on foreign capital could one day find itself in the very same position, handcuffed because of disagreements with its creditors over the Middle East.

An American administration that huffs and puffs about protecting Israel and standing up to its enemies, but undercuts its own freedom of action by mortgaging itself to foreign governments, is no friend at all. Without a sound economy, built on foundations of stability and responsibility, America can neither wage war nor forge peace.


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