Cox & Stokes: US Foreign Policy 
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Essay questionsCox & Stokes: US Foreign Policy
Foreign policy dimensions of the US financial crisis
The US financial crisis is fast becoming the dominant issue of the US elections, and political debate more generally. The collapse of the giant American investment bank Lehman Brothers and uncertainty about other financial institutions such as the insurer AIG has led to a palpable sense of 'crisis' within the US. In response, the federal government proposed a controversial US$700 billion 'bailout' of the country's financial sector based around the idea of a government purchase of 'toxic' debts. This bailout was rejected on 29 September by the House of Representatives.
Within this context recent debates within the US have tended to treat the financial crisis as a discrete issue. Most notably the first presidential candidates debate between John McCain and Barack Obama on 29 September in Mississippi was seen to centre around two distinct points of contention: the US financial crisis on the one hand, and issues of foreign policy (such as Afghanistan, Iraq, and Iran) on the other. In truth the US financial crisis has a crucial international dimension, and its ramifications for the conduct of US foreign policy in the near future could also be highly significant.
Although the effects of the economic downturn have been most keenly felt within the US (particularly in the rapid deterioration of the housing market), the aftershocks have also been manifested globally. Consequently, when President George W. Bush addressed the United Nations General Assembly for the final time in late September, the focus of world leaders was very much on what action the US would take to stabilize world markets (in spite of the President's best efforts to maintain attention on the issues of North Korea, Iran, and the War on Terror).
The extent of the financial crisis also raises serious questions over the US position as the world's financial leader. As Peter Gowan points out in Chapter 17 of the textbook ('Global Economy'), the US has been able to exercise leadership over the post-War global economic system owing to the fact that 'American asset markets remain by far the largest and most liquid in the world.' The central problem faced by the US at the current moment, however, is one of 'illiquidity' - meaning that the US contains too many 'assets' (most notably bad debts accrued from 'subprime' mortgages) that cannot readily be converted into cash (or 'liquid') funds. In relation to foreign policy, an important question thus arises as to whether US leadership of the global economy will be challenged as a result of this financial crisis and whether or not the 'credit crunch' will impinge seriously upon US foreign relations. Reacting to the crisis on Wall Street this September German Finance Minister Peer Steinbruck boldly asserted that 'The world will never be as it was before the crisis', adding that 'The United States will lose its superpower status in the world financial system.' Steinbruck argued that the US will still be an important financial power, but that the dollar would cede its status as sole reserve currency to be joined by the Euro and Chinese Yuan over the next decade.
At a more general level, the leadership of the US in global economy has also been cited by many as a cause of the current financial turmoil. The US under the Bush administration has generally promoted a laissez faire approach to the management of the world economy, upholding the tradition of economic liberalism that has tended to be a mainstay of post-War US foreign policy. This approach has come in for strong criticism in the wake of the recent crisis, with lack of regulation and oversight increasingly seen as part of the problem rather than the solution.
With regard to the conduct of foreign policy, the fear for the future is that the US may now become beholden to states with large currency surpluses as a result of its own illiquidity. This is a question that has political as well as economic dimensions. Many of the states that hold currency surpluses are those that have strengths in the export of oil and raw materials such as Russia and several states in the Middle East. Will the US be tempted to alter its relations with these states in return for access to their reservoirs of cash? In this sense, the US financial crisis may yet have important repercussions in regard to foreign policy.
Think Points:
Why has the US been able to exercise leadership over the global economy in the post-War era?
Is US leadership of the global economy now under threat?
What are the international dimensions of the US financial crisis?
To what extent has prior US policy on global finance contributed to the current crisis?
What effect (if any) is the financial crisis likely to have on the future conduct of US foreign policy?
Are we witnessing the end of the US as a financial superpower? Assess the arguments for and against.
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