How to Manage an Empire in Decline

Do empires end with a bang, a whimper, or the sibilant hiss of financial deflation?

We may be about to find out. Right now, in the midst of the financial whirlwind, it's been hard in the United States to see much past the moment. Yet the ongoing economic meltdown has raised a range of non-financial issues of great importance for our future. Uncertainty and anxiety about the prospects for global financial markets - given the present liquidity crunch - have left little space for serious consideration of issues of American global power and influence.

So let's start with the economic meltdown at hand - but not end there - and try to offer a modest initial assessment of how the crumbling US economy might change America's global stance.

From its inception, the financial panic stemmed from, and also exposed, a form of imperial overstretch - that of Wall Street's giant financial firms. For them, it took the form of highly leveraged positions grounded on fragile, poorly assessed collateralized debt. As John Grey recently observed in the British Guardian, however, the panic also uncovered another kind of imperial overstretch - that of American geostrategic power, raising questions about how the gap between stressed political and military assets and Washington's global ambitions will be resolved.

It's important to clarify what's currently at stake globally. Otherwise, depending on one's druthers, this is a subject that tends to be either overblown or underplayed. Few in the mainstream media even countenance the possibility of catastrophic changes in the US position in the world. On the other hand, some in that world are already ascribing seismic significance to what's happening before the dust has even settled. As historian Andrew Bacevich cautions, the future has yet to be written and so neither outcome is - as yet - a foregone conclusion.

Nonetheless, it's worth trying to grasp just how today's financial crisis is converging with two other trends - the weakening of American hard and soft power - to transform the geopolitical landscape.

Melting down

Start with the financial crisis, which emerged from an industry-wide mismanagement of credit and risk. Sophisticated instruments such as credit-default swaps were intended to cushion institutions from default risk on speculative housing assets by breaking those assets into small bits and spreading them widely among financial institutions. Like any kind of insurance, this was a way of spreading risk around to minimize the consequences of catastrophe.

Instead, of course, those "instruments" seem to have cushioned investors only from a frank assessment of risk. Worse, the very splintering of risk, originally designed to insulate financial merchants from too-hard blows, meant that it would prove exceedingly difficult to assess the soundness of all sorts of other institutions.

Paradoxically, what were fashioned as tools to eliminate risk became tools for risk contagion. As a consequence, it is still unclear whether the tumbling of world markets was a consequence of a confidence-based liquidity crunch, or of a more fundamental problem of worthless assets.

For all but a hardline core of Republicans in the House of Representatives, the tenpin-style collapse or near-collapse of Lehman Brothers, AIG, WaMu, Wachovia and other outfits signaled the failure of a decades-old deregulatory approach to finance. (The credit-default swap market, in large measure the font of today's crisis, has never been regulated thanks in important part to former US Federal Reserve chief Alan Greenspan's confidence in them.) The distinctively modern American model of deregulatory fervor reached its pinnacle during the US President George W Bush years, and has now broken.

The crisis of finance, however, was also a crisis of national governance, highlighting structural weaknesses in the national political system that can render a president a lame-duck months before his term in office ends. The crisis has also highlighted the striking difficulty Congress has in sustaining meaningful legislative inquiry and action on complex issues. Since the panic began, its leaders have proven incapable of imagining alternatives to a deeply regressive and barely re-regulatory response. Not only is the nation's financial framework unsustainable, its political architecture seems seriously flawed.