Zakaria "travels the globe" in search of like-minded idealogues whom he can quote to give credence to his philosophy of a global multilateralism. The majority of the world was not enraged at George Bush's "unilateralism" or look at the US as an economic sham - only Zakaria's left wing social contacts in other countries. Zakaria has continuously promoted Obama even to the extent during the campaign of stating that a brown man would have more appeal and believability in the rest of the world than any of the past Presidents. Now he states that the US is considered an economic carnival act by other countries whose very existence was provided for by the deaths of hundreds of thousands of American soldiers and their own economic situations are far worse. Looking back on the Presidential campaign, of all the candidates who were prepared to intelligently deal with the economy, Mitt Romney is the only one who stands out. He doesn't fit Zakaria's racial matrix but he had a proven track record. Obama has chiefly concerned himself with the establishment of radical social change, the bizarre appointment of social misfits like Van Jones as the Green Czar, and his constant vacations.
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There’s More To Fear Than Fear
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There remains a spirited debate over what should be done now. But at its heart everyone seems to agree with former Treasury secretary Hank Paulson's original diagnosis—the problem is that banks have huge amounts of bad assets (related to mortgages) on their books. These assets are "toxic" because they infect the rest of the banks' balances, making it difficult for them to operate. These assets must be disclosed, written down and quarantined for the financial system to start functioning again.
Some now argue for a national "aggregator bank" that would buy up all the toxic assets, still others for a set of government guarantees and insurance, others still for outright nationalization of the worst-off institutions. Paulson's January rescue of Citicorp seemed to use TARP money in an effective way, getting a large bang for the buck. Each policy has its merits and drawbacks, and I am not expert enough to judge which is the right approach. But it does appear crucial that the government's response be systemic. Ideologies need to be suspended in this period of crisis—we don't hear much about "moral hazard" anymore. We might temporarily limit practices that are causing a downward spiral—such as "marking assets to market," the practice of forcing banks to keep lowering the price of securities (even those that they do not intend to sell), which then forces them to raise more capital. Overall, the government must send markets a clear signal: it is futile to bet against us; we have unlimited tools at our disposal and will use them; and in the end we will win.
Tackling the banks will not be the end of these problems. As President Obama has often pointed out, until the housing market stabilizes, the crisis will continue. Housing is what underpins many of these toxic assets. If prices continue to fall, the assets will only become more toxic. A veteran investment banker, Thomas Patrick, has circulated an innovative proposal that would have Fannie Mae and Freddie Mac close out the securitizations and then refinance all the underlying mortgages, thus dispensing with the toxic paper and stabilizing the mortgages in one swoop. No matter what course is taken, the United States will run trillion-dollar deficits for years, the Federal Reserve will accumulate trillions on its balance sheet, and the American financial and mortgage system will have been semi-nationalized, whatever the euphemisms used to disguise that fact.
This current crisis has resulted in a deep erosion of American power that we have not fully understood. Even in the depths of the Iraq War, when much of the globe was enraged by George W. Bush's unilateralism, people everywhere believed that the United States had the world's most advanced economy and that its capital markets in particular were the most sophisticated and developed. American officials, businessmen and economists lectured far and wide on the need to copy the American system. That system is now seen across the world as a sham, a casino game in which highly paid participants mismanaged risk and highly respected regulators cheered them on. I have traveled to Europe, Asia and the Middle East in the past three months and am writing this from Canada. The attitudes of officials and businessmen range from shock to rage at what they see in the United States.
When he began his run for the White House, Barack Obama thought he could restore American power and leadership by righting our foreign policy, winding down the Iraq War, closing Guantánamo, ending torture. These are all important policies, and I am glad that he is pursuing them. But right now, the most important way for him to restore America's credibility and influence in the world is to rescue the American model.
Obama's rhetoric suggests that he understands this issue. But does Congress? Can the American political system rise to the challenge? The United States will have to enact extraordinary measures, many of them unpopular, run up huge deficits, then just as quickly start to unwind these guarantees and commitments, get onto a path of strict fiscal prudence, reform entitlements and bring our financial house in order. If we don't, the world will talk not of American power but weakness. America will be a model, all right, but of pride and its fall.
© 2009
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