In A Few Fateful Days

You've heard the story. On the heels of tumbling shares and dire warnings from the U.S. president, as well as business and government officials across the globe, the British prime minister says, "The world economy is facing its greatest risk in decades." To halt the slide, he calls for a global response to prevent the crisis from spiraling out of control.

Sounds familiar, yes? Yet the prime minister described above is not Gordon Brown, the current occupant of 10 Downing Street, but rather Tony Blair in 1998, responding to the Asian crisis that had been accelerating since the collapse of the Thai currency many months before. There were many financial crises in the 20th century, several of which triggered panic that the system was on the brink of collapse: the oil shocks of the 1970s, the stock-market crash of 1987 and the collapse of the Mexican peso in 1994 all come to mind. But the Asian crisis was particularly acute. Throughout the fall of 1997 and into the spring of 1998, the Clinton administration held numerous meetings with various heads of state throughout Asia and Europe to work on a coordinated response. Eventually, the pieces came together, and the spiral was halted, but not quickly and not without considerable inertia.

Contrast that with what took place last week: over the course of one weekend, finance ministers of the G7, a club of the world's largest economies, sized up the extent of the financial crisis. They recognized that the credit system had simply ceased to function. Led in part by U.S. Treasury Secretary Henry Paulson, and also by European leaders including Gordon Brown of the U.K. and Nicolas Sarkozy of France, as well as IMF head Dominique Strauss-Kahn, they worked throughout the weekend to make a series of rolling announcements on Monday, Oct. 13. First, more than $3 trillion of funds would be committed to shore up banks and jump-start a frozen system. In addition, trillions of dollars of deposits would be guaranteed by governments around the world. China's central bank maintained its commitment to purchase U.S. Treasuries, a controversial issue for the presidential election, but an imperative part of a functioning global financial system. All this followed a global, coordinated rate cut by more than a dozen central banks.

The magnitude of the action was staggering, but even more extraordinary was that it happened so quickly, and that it happened virtually. If this is the first financial crisis of the Internet age—a crisis triggered by vastly complex quantitative models on the one hand, and global flows of capital facilitated by electronic trading systems on the other, then it is also shaping up as the first solution of the Internet age. It is a solution that takes place nowhere and everywhere, with no governing body, no place where everyone gathers to speak, and at a pace that earlier generations could not have fathomed.

Think about it. After the financial crisis of the Great Depression, followed by World War II, there was universal agreement that what was needed to prevent the next collapse was more global governance. The United Nations and the Bretton Woods system emerged from the ashes of war after many months of meetings and more months of debate. Other institutions followed, all connected by the principle that there had to be someplace where people could gather at times of crisis to talk until things were resolved. These institutions were governed by mutually agreed upon protocols and rules, and were maintained by permanent staffs and bureaucracies.

They had the virtue of giving physical form and substance to diplomacy for both economic and political crises, but they were not made for the world we live in today, where trillions of dollars of capital flow in dark pools that no government controls and no bank ever physically holds, where unregistered hedge funds domiciled in the Cayman Islands or on the island of Guernsey transact and borrow and trade, and where triggers in one place become triggers in every place.