From Project Syndicate:
PRINCETON – The protracted financial and economic crisis discredited first the American model of capitalism, and then the European version. Now it looks as if the Asian approach may take some knocks, too. Coming after the failure of state socialism, does this mean that there is no correct way of organizing an economy?
In the aftermath of the subprime crisis and the collapse of Lehman Brothers, fingers were pointed at the United States as an example of how badly things could go wrong. The American model had supposedly failed, its reputation weakened first by the Iraq invasion, and then by the financial crisis. Anyone who dreamed of the American way of life now looked stupid.
Immediately after Lehman Brothers’ collapse, German Finance Minister Peer Steinbrück put this diagnosis as a challenge not only to the US, but also to other countries – notably the United Kingdom – that had “Americanized” their financial system. The problem, Steinbrück argued, lay in over-reliance on highly complex financial instruments, propagated by globalized American institutions: “The financial crisis is above all an American problem. The other G-7 financial ministers in continental Europe share this opinion.”
Criticism of America did not stop there. Steinbrück’s successor, Wolfgang Schäuble, persisted in the same tone, attacking “clueless” American monetary policy, which was supposedly designed only to feed the American financial monster.
But such criticism ignores the problems faced by banks that did not use or deal in complex financial products. Bank regulators had long insisted that the safest possible financial instrument was a bond issued by a rich industrial country. Then came the eurozone’s sovereign-debt crisis, with its roots in lax government finance in some (mostly southern European) countries.
Critics now had a new focus. Naturally, many conservative Americans were delighted by the imminent failure of what they saw as Europe’s tax-and-spend model, with its addiction to a costly and inefficient welfare state.