Is this the end of the Washington consensus?

Several commentators saw in the financial crisis that rattled stock markets around the world signs of the inevitable decline of American primacy.

The balance of power is changing, they argue, with the rise of China, the resurgence of Russia, the political integration of the European Union, and the growing economic clout of India and Brazil.

Referring to the $700 billion (Dh2.57 trillion) bail-out plan for US financial institutions, Paul Craig Roberts, Assistant Secretary of the Treasury in the Reagan administration, writes: "As the US Treasury has not got $7, much less $700 billion, it must borrow the bail-out money from foreign creditors."

"No one consulted China, America's principal banker," he said.

American historian Howard Zinn boldly stated in the British newspaper The Guardian, that: "This current financial crisis is a major way-station on the way to the collapse of the American empire."

It may be the end of the Anglo-American model of aversion to government regulations, but not the end of American power.

Trustworthy

Firstly, China and other creditors have not been consulted about the bail out because they did not ask to be consulted. Unlike the World Bank and the IMF who attach conditions to their lending, America's creditors attach none.

Clearly, the world continues to consider the American government as trustworthy and capable of repaying its debt. America's creditors also believe that this is a passing storm and that responsible and competent leadership in Washington can put an end to the unaffordable luxury of living beyond one's means.

Secondly, American military might remains formidable despite its current difficulties in Iraq and Afghanistan. Recently declassified documents show that Washington was ready to use force to seize the oil fields in the Middle East and end the Arab oil embargo of 1974.

The Bush administration doctrine of preemptive strike and its wars in Iraq and Afghanistan as well as the Nato's push eastward, all attest to the fact that Washington will not hesitate to use its military force to ward off the possibility of being relegated to a second or third rate power.

Maintaining global hegemony was declared an American strategic priority: "America has," Bush said, "and intends to keep, military strengths beyond challenge."

Thirdly, the process of globalisation created more integration of the world economies and their financial markets. It also created inter-dependency.

When the cracks in the highly unregulated financial system began to appear with the housing crisis and dubious mortgage-backed securities in the United States, it quickly exposed the fragility of the banking system and spread to the major financial markets around the world.

It is in the self-interest of America's creditors to save the American economy from the calamities of depression.

But the crisis may mark the end of a particular economic model.

With the Reagan and Thatcher ideological revolutions in the 1980s, the laissez-faire free market ideology came into sharp relief as the two leaders worked out what came to be known as the Washington consensus: the promotion of market policies free from government intervention, privatisation of national corporations, elimination of government subsidies and ending of the welfare state.

The adoption of these policies became necessary conditions for the World Bank and the International Monetary Fund to lend money to developing countries.

"An open, competitive and liberalised financial market," US Secretary of Treasury Paulson told a Chinese audience in March 2007, "can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than government intervention."

Greed and irresponsibility

But open and liberalised financial markets failed to guard against personal irresponsibility, and greed.

The financial meltdown was provoked by what the New York Times described as "reckless and even predatory mortgage lending." Its editors stated that President Bush's "contempt for regulation is a significant cause of the current mess."

French Prime Minister François Fillon said, "The world is on the edge of the abyss because of an irresponsible system."

Perhaps no one is more responsible for this environment - beside American lawmakers and dogmatic politicians - than former chairman of the US Federal Reserve Alan Greenspan. Once held in awe by Republicans and Democrats alike, he is now described by commentators as having failed to exercise his responsibility to regulate the financial markets.

At a recent congressional hearing, Congressman Henry Waxman told Greenspan: "You had the authority to prevent irresponsible lending practices that led to the sub-prime mortgage crisis. You were advised to do so by many others. Do you feel that your ideology pushed you to make decisions that you wish you had not made?"

Greenspan admitted, as quoted in the New York Times: "Yes, I've found a flaw. I don't know how significant or permanent it is. But I've been very distressed by that fact."

Greenspan had an aversion to regulation and fought hard to protect the highly speculative market of derivatives - contracts that promised to protect investors from losses, but led to highly risky and speculative practices.

American investor Warren Buffet, as quoted in the New York Times, described derivatives as "financial weapons of mass destruction, carrying dangers that, while not latent, are potentially lethal."

Greenspan now blames the crisis on greedy individuals and lack of integrity on the part of some bankers, forgetting that the people he blames usually thrive in the unregulated financial environment he aggressively promoted.

At the very least, the current crisis has discredited the Washington consensus in the US and globally.

John Snow, former US treasury secretary eloquently drew the inevitable conclusion: "The Anglo-American model has suffered a big setback," he recently said. "We don't have the moral authority we might have had a few years ago to get others to follow our model."

Adel Safty is distinguished visiting professor at the Siberian Academy of Public Administration, Russia. His latest book, Leadership and Democracy, is published in New York.