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Guernica: The Frugal Superpower

Author: Michael Mandelbaum, Christian Herter Professor, Paul H. Nitze School of Advanced International Studies, The Johns Hopkins University
August 1, 2010

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September 15, 2008, is an important date in the economic history of the United States, and indeed the entire world. On that day the New York-based international investment bank Lehman Brothers collapsed, creating a panic in the nation's financial system and an immense loss of wealth, and deepening an already serious global economic downturn. That day is also significant, however, for the history of American foreign policy. What happened on September 15, 2008, accelerated a series of developments that will change the resources at the disposal of policy-makers in Washington, limiting the financial means available to conduct American foreign policy. The events of that day, in combination with trends in the American economy that were already under way and will expand in the years ahead, will reduce what the United States does in the world.

Because a credit crisis of the kind that the Lehman collapse produced, if severe and prolonged enough, can inflict catastrophic economic damage, the American government took radical steps to counteract it, expanding its role in the financial system to the point that it became, in effect, one of the country's largest banks. The Federal Reserve Board offered loans to institutions that had never before been given them, and the government took control of the American International Group, a multinational insurance company, and two quasi-governmental purchasers of mortgages, known as Fannie Mae and Freddie Mac. The Congress appropriated $750 billion for the purpose of buying up bad housing loans, but the Treasury Department used the money instead to purchase shares in the nation's largest commercial banks, in an effort to keep them solvent and unclog the flow of credit they provide. Despite these extraordinary efforts, with banks fearful of lending and consumers fearful of buying, the American economy, and economies all around the world, fell into a deep recession, the worst since the greatest and most destructive economic downturn of modern history, the Great Depression of the nineteen thirties.

In addition to the impact on the American and global economies, all this will eventually affect the foreign policy of the United States. For one thing, it shook Americans' confidence in their government's capacity for economic management, and confidence in government is crucial for foreign policy, which is, after all, conducted almost exclusively by the government. For another, in times of economic crisis, Americans, like people everywhere, tend to turn inward and devote more attention and resources to their own concerns than to problems beyond their borders. Still, the country experienced recessions after the Depression, including during the Cold War, which did not materially affect America's major international commitments.

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