Continuing with our series of excerpts from Walter Russel Mead's essay, "The Top Ten Lesson of the Global Economic Meltdown"
7. The Battle of Financial Markets is over; the Battle of State Finance has begun.
“The Battle of France is over,” Winston Churchill said in 1940. “The Battle of Britain is about to begin.” We are at a similar juncture right now in the global economy. The financial markets failed to withstand a series of speculative assaults. The world’s governments rushed into the breach with large guarantees and bailouts. Now the markets are testing the governments: will the Europeans really be able to bail out Club Med? Beyond that, can the world’s governments armed with fiat currencies and facing enormous budget deficits provide enough credible stimulus to restart the world economy before fears of debt and default cause investors to lose faith in the ability of governments to manage the economic cycle?
The bad guys lost the Battle of Britain and we can hope that governments will survive the present downturn with their financial credibility intact. However, it is now clear that governments do not have an unlimited power to bail out private firms or to stimulate the economy through deficit spending. This is not only true of smaller governments like that of Greece; it may be true even of the United States.
This means that we have passed into a new economic environment, unlike anything we have seen since World War Two. For the last sixty years, we have operated under the assumption that the world’s leading governments were ultimately sovereign when it came to the economy: that they could do whatever it took to fix economic problems. In the future, we will be living in a world where this is no longer so obvious. New, large and unpredictable risks now hang over the global economy.
Unfortunately, we here in the states seem to be fixated on the prospect that somehow the federal government will be able to "stimulate" our way out of this recession. What has happened in Europe and the pending double-dip recession here has not factored into the logic of taste-makers like Paul Krugman and the Obama economics team who are pushing for even more spending and Keynesian gimmickry.