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Foreign Policy and Main Street

Author: Robert McMahon, Editor
September 26, 2008

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The flagging fortunes of Wall Street and Main Street commanded the attention (CFR/Pew poll) of many Americans as the U.S. presidential campaign entered its final forty days. But while the financial crisis has nudged aside foreign policy issues as a priority for voters, broad geopolitical implications remain in how Washington resolves its economic woes. Underscoring this was the opening of the annual UN General Assembly debate with expressions of alarm (NYT) from world leaders about the threat posed by U.S. financial contagion. French President Nicolas Sarkozy, a past admirer of U.S.-style capitalism, used his UN address to call for reform of the global financial infrastructure and proposed a summit for later this year. Meanwhile, U.S. Federal Reserve Chairman Ben Bernanke, pressing Congress for the passage of a financial bailout measure, spoke of international markets under "extraordinary stress" (IHT).

In the middle of this financial storm were the two presidential candidates, Sen. Barack Obama (D-IL) and Sen. John McCain (R-AZ), whose votes on the eventual bailout package amid a hotly fought campaign will draw close scrutiny. As this CFR.org Issue Tracker notes, both campaigns support reforms of the country's regulatory infrastructure. On a broader policy level, Obama has linked lax regulatory policies, which he said McCain supports, to conditions that fed the crisis. McCain has responded by pointing to ties between Obama and Fannie Mae and Freddie Mac, the failed mortgage giants enmeshed in the crisis.

Some analysts were looking for signals from both campaigns on how Obama and McCain would restore the economy, and thus maintain the ability to project power abroad. "U.S. power is bound up with economic power, and economic power in the 21st century is about having clusters of competitive advantage in super-innovative industries," CFR Senior Fellow Sebastian Mallaby told a recent Council on Foreign Relations election briefing. "And finance is one of them." An NPR report quoted experts warning that a failure to resolve the crisis in a leading sector of the country's economy would undermine U.S. credibility and influence abroad. The Wall Street Journal reports that the crisis has raised questions about the country's economic model from Europe to Asia. The paper also notes the $700 billion bailout proposal involving the government purchase of sour assets from U.S. banks has rattled confidence in the U.S. dollar among foreign investors. CFR Fellow Brad Setser, in a new Council Special Report, warns of the threat to U.S. power and influence created by its indebtedness to foreign creditors.

Energy is another economic area where domestic and foreign policy intersect. McCain and Obama have both decried U.S. dependency on foreign sources and called for spurring energy alternatives but McCain has been a more vigorous backer of increasing domestic drilling. At CFR's recent election briefing, Senior Fellow Michael Levi urged the candidates to consider broadening their search for solutions. "This is a foreign policy challenge, too," Levi said. "So I'd like to see some recognition of that, perhaps looking at how we work with other consuming nations like China and India, to deal with demand that's driving up the price of energy, that's driving up the price of oil."

As Wall Street's woes dominate the news agenda, there were steady reminders of the national security threats in the world. North Korea kicked out international monitors and raised concern it would restart its nuclear weapons program. The bombing of a Western hotel in Pakistan's capital showed the lethality of the country's militants. Mounting violence in Afghanistan vexed U.S. military planners even as they began a gradual troop drawdown from Iraq. Sizing up the landscape (Newsweek) for the next U.S. administration, CFR President Richard N. Haass writes: "Only Washington, Lincoln, and FDR faced comparable international challenges and domestic constraints upon taking office."

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