THE END OF ARROGANCE

By SPIEGEL Staff

The banking crisis is upending American dominance of the financial markets and world politics. The industrialized countries are sliding into recession, the era of turbo-capitalism is coming to an end and US military might is ebbing. Still, this is no time to gloat.

There are days when all it takes is a single speech to illustrate the decline of a world power. A face can speak volumes, as can the speaker's tone of voice, the speech itself or the audience's reaction. Kings and queens have clung to the past before and humiliated themselves in public, but this time it was merely a United States president.

Or what is left of him.

George W. Bush has grown old, erratic and rosy in the eight years of his presidency. Little remains of his combativeness or his enthusiasm for physical fitness. On this sunny Tuesday morning in New York, even his hair seemed messy and unkempt, his blue suit a little baggy around the shoulders, as Bush stepped onto the stage, for the eighth time, at the United Nations General Assembly.

He talked about terrorism and terrorist regimes, and about governments that allegedly support terror. He failed to notice that the delegates sitting in front of and below him were shaking their heads, smiling and whispering, or if he did notice, he was no longer capable of reacting. The US president gave a speech similar to the ones he gave in 2004 and 2007, mentioning the word "terror" 32 times in 22 minutes. At the 63rd General Assembly of the United Nations, George W. Bush was the only one still talking about terror and not about the topic that currently has the rest of the world's attention.

"Absurd, absurd, absurd," said one German diplomat. A French woman called him "yesterday's man" over coffee on the East River. There is another way to put it, too: Bush was a laughing stock in the gray corridors of the UN.

The American president has always had enemies in these hallways and offices at the UN building on First Avenue in Manhattan. The Iranians and Syrians despise the eternal American-Israeli coalition, while many others are tired of Bush's Americans telling the world about the blessings of deregulated markets and establishing rules "that only apply to others," says the diplomat from Berlin.

But the ridicule was a new thing. It marked the end of respect.

"Well," Brazilian President Luiz Inacio "Lula" da Silva began, standing outside the General Assembly Hall. Then he looked out the window and said: "He decided to talk about terrorism, but the issue that has the world concerned is the economic crisis." Cristina Fernández de Kirchner, the president of Argentina, said that the schoolmasters from Washington had dubbed the 1994 Mexican crisis the "tequila effect" and Brazil's 1999 crisis the "Caipirinha effect."

Are we now experiencing the "whiskey effect?" But President Kirchner was gracious and, with a smile, called it the "jazz effect."

Is it only President George W. Bush, the lame duck president, whom the rest of the world is no longer taking seriously, or are the remaining 191 UN member states already setting their sights on the United States, the giant brought to its knees? UN Secretary General Ban Ki Moon referred to a "new reality" and "new centers of power and leadership in Asia, Latin America and across the newly developed world." Are they surprised, in these new centers, at the fall of America, of the system of the Western-style market economy?

Even America's closest allies are distancing themselves -- first and foremost the German chancellor. When push came to shove in the past, Angela Merkel had always come down on the side of the United States. As a candidate for the Chancellery for the conservative Christian Democrats, she helped Bush in the Iraq war, and as chancellor she supported tougher sanctions on Iran and campaigned in Europe for an embargo against Cuba. "The partnership with the United States," the chancellor insisted again and again, "has a very special meaning for us Germans."

There was no mention of loyalty and friendship last Monday. Merkel stood in the glass-roofed entrance hall of one of the German parliament's office buildings in Berlin and prepared her audience of roughly 1,000 businesspeople from all across Germany for the foreseeable consequences of the financial crisis. It was a speech filled with concealed accusations and dark warnings.

Merkel talked about a "distribution of risk at everyone's expense" and the consequences for the "economic situation in the coming months and possibly even years." Most of all, she made it clear who she considers the true culprit behind the current plight. "The German government pointed out the problems early on," said the chancellor, whose proposals to impose tighter international market controls failed repeatedly because of US opposition. "Some things can be done at the national level," she said, "but most things have to be handled internationally."

Merkel had never publicly criticized the United States this harshly and unapologetically. In this regard, she enjoys the wholehearted support of her coalition government partner, the center-left Social Democrats (SPD). In a speech before Germany's parliament, the Bundestag, Finance Minister Peer Steinbrück of the SPD spoke of the end of the United States as a "superpower of the global financial system."

The banking crisis in the United States has shaken many things in recent days, not just the chancellor's affection for America and the respect the rest of the world once had for the US as an economic and political superpower. Since the US investment bank Lehman Brothers plummeted into bankruptcy two weeks ago, the financial crisis has developed a destructive force of almost unimaginable strength. The proud US investment banks with globally recognized names like Merrill Lynch and Goldman Sachs have all gone bankrupt, been bought up or restructured. The American real estate market has essentially been nationalized. And the country's biggest savings and loan, Washington Mutual, has failed and been sold at a loss.

In light of the almost daily reports of losses in the financial sector, it seemed almost secondary to note that the disaster had also turned into one of the biggest criminal investigations in American history. The Federal Bureau of Investigation (FBI) is already investigating 26 large financial corporations as well as 1,400 smaller companies and private citizens for possible fraud.

Economists now characterize what began two years ago with falling prices in the American real estate market as the biggest economic disaster since the world economic crisis of the 1930s. No one knows whether and how the meltdown of global financial markets, which would have grave consequences for the world economy, can still be prevented.

And now, of all times, the world is faced with a preeminent power that no longer seems capable of leading and a US president who is not even able to unite his divided country in an hour of need.

For weeks, Bush ignored the crisis, insisting on the strength of the market and telling Americans: "Everything will be fine."

In a televised address to the nation last Wednesday, Bush gave his oath of disclosure. He warned Americans that they could face a "long and painful recession" and that "millions of Americans could lose their jobs" unless swift action is taken.

But nothing happened swiftly, at least not at first. The crisis is happening while the United States is in a political vacuum. Bush lacks the power needed for decisive leadership, and his potential successors, John McCain and Barack Obama, seem more concerned about making a strong impression on voters.

Ironically, it is in the country of unfettered capitalism that the government now plans to intervene in the economy on a scale not seen since the Great Depression, and, with hundreds of billions of dollars, attempt to save the financial sector from failure -- out of fear of something even worse: an economic collapse with declining prices and widespread unemployment.

This is no longer the muscular and arrogant United States the world knows, the superpower that sets the rules for everyone else and that considers its way of thinking and doing business to be the only road to success.

A new America is on display, a country that no longer trusts its old values and its elites even less: the politicians, who failed to see the problems on the horizon, and the economic leaders, who tried to sell a fictitious world of prosperity to Americans.

Also on display is the end of arrogance. The Americans are now paying the price for their pride.

Gone are the days when the US could go into debt with abandon, without considering who would end up footing the bill. And gone are the days when it could impose its economic rules of engagement on the rest of the world, rules that emphasized profit above all else -- without ever considering that such returns cannot be achieved by doing business in a respectable way.

With its rule of three of cheap money, free markets and double-digit profit margins, American turbo-capitalism has set economic standards worldwide for the past quarter century. Now it is proving to be nothing but a giant snowball system, upsetting the US's global political status as it comes crashing down. Every bank that US Treasury Secretary Henry Paulson is currently forced to bail out with American government funds damages America's reputation around the world.

Of course, it is not solely the result of undesirable economic developments that the United States is in the process of forfeiting its unique position in the world and that the world is moving toward what Fareed Zakaria, editor of Newsweek International, calls a "post-American age." Washington has also lost much of its political ability to impose its will on other countries.

Bush's Failed Leadership

The failed leadership of President Bush, whose departure most of his counterparts from other countries are now looking forward to more and more openly, is not solely to blame. Nor are his two risky wars: the one in Iraq, which he launched frivolously in the vain hope of converting the entire region to the American way of life, and the other in Afghanistan, in which Bush now risks the world's most powerful defense alliance, NATO, suffering its first defeat.

But it's hard to forget how this president's mentors celebrated the power to shape world affairs the United States acquired in the wake of the collapse of the Soviet Union and the end of the East-West conflict. There was talk of a "unipolar moment," of "America's moment," even of an "end of history," now that all other countries apparently had no other choice but to become smaller versions of America: liberal, democratic and buoyed by an unshakeable confidence in the free market economy.

The Bush administration wanted to cement forever this unique moment in history, in which the United States was undoubtedly the strongest power on earth. It wanted to use it to clean house in chronic crisis zones around the world, especially the Middle East. Far from relying on the classic, cumbersome and often unsuccessful tools of multilateral diplomacy, the Bush warriors were always quick to threaten military intervention -- just as quick as they were to make good on this threat.

The strategists of this immoderately self-confident administration formulated these principles in the "Bush doctrine" and claimed, for themselves and their actions, the right to "preemptive" military intervention -- with little concern for the rules of alliances or international organizations.

The superpower even claimed privileges over its allies, even offending some of its best friends during Bush's first term. Bush withdrew the American signature from a treaty to establish the International Criminal Court, he refused to ratify the Kyoto Protocol to combat climate change and he withdrew from an agreement with the Russians to limit the number of missile defense systems.

Washington sought to divide the world into good and evil -- and did so as it saw fit.

Now, in the wake of the crash on Wall Street, the debate in the UN reveals that the long-humiliated have lost their fear of the giant in world politics. Even a political dwarf like Bolivian President Evo Morales is now talking big. "There is an uprising against an economic model, a capitalistic system that is the worst enemy of humanity," Morales told the UN General Assembly.

The financial crisis has uncovered the world power's true weakness. The more the highly indebted United States has to spend to stabilize its own economic system, the more trouble it has performing its self-imposed duties as the world's policeman.

The new US president will only have been in office for a short time when a document titled "Global Trends 2025" appears on his desk. The report is being prepared by analysts at the National Intelligence Council. Its chairman, Thomas Fingar, has already released a preview, and reading it will not exactly be enjoyable for proud American. "Although the United States will remain the most important power, American dominance will be sharply reduced," says Fingar.

According to the preview of the report, the erosion of American supremacy will "accelerate in the areas of politics and economics, and possibly culture."

The century that just began is unlikely to be declared the American century again. Instead, "Asia will shape the fate of the world, with or without the United States," says Parag Khanna, a young Indian-American political scientist whose book "The Second World: Empires and Influence in the New Global Order" has attracted a great deal of attention in the United States.

There is much to be said for Khanna's assertion. Beijing is already funding a large share of the gigantic American trade deficit, while at the same time selling many consumer goods to the United States. In other words, it benefits from the US's weakness in two ways. And politically speaking, the newly self-confident Chinese will no longer allow themselves to be domineered by the West. Reacting to worldwide criticism of political oppression in Tibet, the Chinese encouraged their nationalist youth to assault Western institutions and refused to allow themselves to be lectured on human rights.

Republican Senator Chuck Hagel has acknowledged that the "world's largest debtor nation" cannot simultaneously shape the course of the world. The challenges America faces have multiplied, especially in recent times.

After the collapse of the Soviet Union and a decade of weakness, resource-rich Russia now expects to be treated as an equal to its former Cold War rival. The invasion of Georgia by Russian troops showed NATO where Moscow sees the limits of expansion of the Western military alliance. Indeed, some time ago, Russian bombers resumed patrolling the borders of the Western defense alliance.

Iran has also been unimpressed by Washington's approach to force it to terminate its uranium-enrichment process by threatening to use military force. The expansion of the nuclear facility at Natanz is progressing at a brisk pace, as expected, and Iranian President Mahmoud Ahmadinejad now considers his adversary, Bush, to be finished. "The American empire in the world is reaching the end of its road," he said in his speech to the UN General Assembly, "and its next rulers must limit their interference to their own borders."

Even before the financial crisis, there was lively debate in the United States over whether the world's largest economy could become overtaxed in the long run as a result of its international obligations and the global deployment of its armed forces. The war in Iraq costs the country $3 billion a week. And it is already clear that Bush's successor will find his powers in the White House further limited by the enormous mountain of debt he inherits.

And then there are the costs of the financial crisis -- and the recession that will inevitably follow.

Most Americans are opposed to Treasury Secretary Paulson's plan to buy the banks' bad loans for $700 billion (€483 billion). A rare coalition of the left and right reject this one-time bailout package as "un-American" and as a completely excessive act of government intervention that, in fact, rewards those responsible for the debacle: the key players in New York's financial industry.

The government and large parts of the establishment disagree. They fear that if the program fails, it could drag the American financial markets and then the global economy into the abyss.

With only five weeks to go before the presidential election, the emergency Wall Street bailout has turned into a high-stakes political drama. Last Tuesday's hearing before the US Senate, which lasted several hours and included Paulson, Federal Reserve Chairman Ben Bernanke and the chairman of the Securities and Exchange Commission (SEC), Christopher Cox, was reminiscent of a show trial, with the government and the Federal Reserve playing the role of prosecutor.

The administration struck back the next day, when Bush gave his dramatic televised address to the nation. But then the Republican Party base revolted. For many Republicans, the idea of giving away $700 billion in tax money to Wall Street banks is tantamount to the introduction of socialism on American soil.

They believe that Bush and Paulson are betraying the ideals of their party, and their fears were confirmed elsewhere on Thursday. The mood did not improve when, without further ado, the government seized one of the country's largest savings & loan institutions and sold it to JP Morgan Chase.

Many experts are also skeptical. Allan Meltzer, an advisor to former President Ronald Reagan, is critical of what he calls "intimidation tactics" designed to serve "private, not public interests."

"We are applying cold compresses to the fever patient instead of fighting the actual infection," says Christopher Mayer of Columbia University in New York. According to Mayer, the billions would be better spent reducing mortgage interest. This would reduce the number of foreclosures and attract buyers back to the market.

But as divided as Washington is, doing nothing would still be the worst alternative.

"There is no other option now than to move the plan forward," says Ed Yardeni, the former chief investment strategist at Deutsche Bank, who now heads his own research firm outside New York. "The US treasury secretary and chairman of the Federal Reserve predicted a financial Armageddon," says Yardeni. "Unless action is taken now, it'll get really ugly on the markets."

At the end of last week, investors' loss of confidence worldwide led to the credit markets becoming essentially frozen once again. This could cause the flow of money in the broader economic environment to run dry, as happened once before in the world economic crisis. This explains why Paulson, Bush and Bernanke are so nervous.

The bailout plan they unveiled at the end of last week was arrogant and incomplete. The Democrats, in particular, fought for some key changes. They want to give Congress more control over the treasury secretary and the ability to monitor his spending on an ongoing basis. Instead of approving $700 billion in one fell swoop, the Democrats want the funds to be disbursed in portions. Banks wishing to take advantage of the government bailout would also have to impose limits on executive compensation.

Finally, the Democrats want taxpayers to get something in return for their sacrifice: The government would buy the financial institutions' toxic mortgage securities at a preferred price. In return, it would receive bank shares that it could later sell, if and when prices recovered.

Overall, the hope was that this would reestablish relatively normal market conditions. Banks would be able to unload their junk securities for a clear price, their balance sheets would no longer be adversely affected by virtually worthless mortgage-backed securities, and transparency and confidence would be restored.

Wall Street's Central Values: Avarice and Greed

It is an optimistic scenario, but with no guarantee of success. Still, what's the alternative? "Maybe we can let Wall Street implode," writes Princeton economist Paul Krugman in the New York Times, "and Main Street would escape largely unscathed." But, he continues, "that's not a chance we want to take."

The effects of the financial crisis are already serious, both for the American taxpayer, who will end up footing the bill no matter what, and for the relationship between the government and the economy. An era of American economic policy is coming to a close. Ironically, and surprisingly to many, the last few months of the Bush administration will mark the end of the so-called "Reagan revolution."

Since the early 1980s, the United States has radically emphasized deregulation, which has meant lowering taxes, eliminating regulations and generally leaving the markets to their own devices. Ronald Reagan began his presidency in 1981 with this program, and it was following by a prolonged economic upturn.

It was driven in part by an aggressive policy of cheap money, for which a second icon of the American boom was responsible: former Fed Chairman Alan Greenspan. During the 18 years of his tenure, whenever there was trouble brewing in the stock market and financial markets, Greenspan would drown the crises in a flood of fresh money. Whether it was the 1997 market crash in the Asian tiger countries, the selloff of Russian government bonds a year later, the collapse of the LTCM hedge fund or, finally, the bursting of the New Economy bubble at the beginning of the new millennium, Greenspan's rescue operations could be counted on to return growth to the world's markets. But there was one thing Greenspan overlooked: By repeatedly printing money, he also laid the foundation for the next financial bubble, and its destructive energy grew from one intervention to the next.

Over the last 15 years, Greenspan was opposed to oversight and control over those companies that used the ready cash made available by his policies to introduce a wave of so-called financial innovations. As long as he was in office, he blocked all attempts to impose government collateral requirements on the credit, stock and financial markets. In Greenspan's view, it would only hamper "necessary flexibility."

His policies were borne out by the successes of two decades. Fed by cheap money and freed of most regulations, the American financial industry experienced an unprecedented boom. The industry's excessive growth was reflected in exorbitant salaries and ostentatious skyscrapers but also in the withdrawal of a large share of American value creation.

In 2007, at the beginning of the crisis, the American financial and lending sector was responsible for 14 percent of economic performance, while collecting 33 percent of all corporate profits.

The financial boom also set the turbo-charger in motion that would lend a new face to worldwide capital from then on. Avarice and greed have always been the central values on Wall Street, but now they had become a benchmark for the real global economy. The American banking industry paid for globalization and the Internet revolution, the Asian upswing and the boom in the commodities markets. "We need a 25-percent return," or else his bank would not be "competitive internationally," Deutsche Bank CEO Josef Ackermann said, thereby establishing a benchmark that would soon apply not just to banks but also to automobile makers, machine builders and steel companies.

But, as is often the case with recipes for success, at some point the healthy dose is exceeded and soon the risks and side effects begin to accumulate. The result: The supposed medicine instead becomes a pathogen instead.

In the United States, this process began after the collapse of the New Economy. Once again, Greenspan flooded the economy with money and, yet again, Wall Street started looking for a new market for its growth machine. This time it discovered the American homeowner, convincing him to take out mortgages at favorable terms, even when there was practically no collateral.

The total value of all outstanding mortgage loans in the United States -- $11 trillion (€7.6 trillion) -- is almost as large as the country's gross domestic product. At the same time, with the help of Wall Street's financial engineers, the Americans managed to sell a portion of the risk to other parts of the world, reasoning that if the risk was out of sight it would be out of mind.

But the fact that risks do not disappear when they are distributed around the world became clear at the beginning of last year. Interest rates rose across the board and house prices came down, triggering a chain reaction with collateral damage that was bringing down ever-growing segments of the financial sector from one week to the next. Today, 18 million single-family homes and condominiums in the United States are empty. More and more Americans can no longer afford the high interest rates they are being charged. Many consumers have even been forced to bid farewell to their beloved credit cards because the banks are no longer willing to extend credit to them.

To make matters worse, because a large share of the mortgage loans are now distributed all over the world, the crisis is spreading halfway around the globe like an infectious disease. In recent years, many of the industrialized countries deregulated their financial markets based on the American model. This has led to a relatively unimpeded flow of capital around the world today.

The financial assets that economies hold abroad have grown more than sevenfold in the past three decades. By late 2007, the market volume for derivatives, which are used to bet on interest rate, stock and credit risks worldwide, had reached a previously unthinkable level of $596 trillion (€411 trillion).

At the same time, the number of players has multiplied. The banks stopped being the only ones in control of the industry some time ago. Nowadays, hedge funds bet on falling stock prices and mortgage rates, private equity companies buy up failed banks and bad loans, and wealthy pension funds keep the fund managers afloat.

The "greater complexity of linkages within and between the financial systems" now has one man worried, a man whose profession ought to provide him with a better idea of what's going on: Jean-Claude Trichet, president of the European Central Bank. In a recent speech at New York University, Europe's highest-ranking central banker complained about the "obscurity of and interactions among many financial instruments," often combined with a "high level of borrowing."

The inventors of these complex securities hoped that they could be used to distribute risk more broadly around the globe. But instead of making financial transactions more secure, they achieved the opposite effect, increasing the risks. Today the notion of using "many shoulders for support," the constant mantra of the gurus of financial alchemy, has proved to be one of the catalysts of the crash.

American economist Raghuram Rajan, whom ECB President Trichet is frequently quoting these days, had a premonition of the current disaster three years ago. The total integration of the markets "exposes the system to large systemic shocks," Rajan wrote then in a study. Although the economy had survived many crises before, like the bursting of the Internet bubble, "this should not lead us to be too optimistic." "Can we be confident that the shocks were large enough and in the right places to fully test the system?" Rajan asked. "A shock to equity markets, though large," he continued, "may have less effect than a shock to credit markets."

There was certainly no shortage of warnings, and there were many voices of caution. As long ago as 1936, John Maynard Keynes recognized the risk that "speculation may win the upper hand" in the markets. Its influence in New York, the British economist wrote, was "enormous," and the situation would become serious "when the capital development of a country becomes the by-product of the activities of a casino."

Irrational Exuberance

US economist Robert Shiller, who predicted the bursting of the dot-com bubble at the turn of the century, was one of the first to notice that the value of houses and condominiums in the United States was rising at a suspiciously fast rate. In Shiller's view, this was another case of irrational exuberance. In December 2004, Stephen Roach, the former chief economist at investment bank Morgan Stanley, cautioned against the "grimmest of all financial bubbles."

New York economist Nouriel Roubini presented the most accurate scenario of a crash, from the bursting of the real estate bubble to the domino-like demise of major banks. Roubini, known as a notorious alarmist, now predicts a prolonged recession in the United States that will drag down the entire global economy with it. "The US consumer has consumed himself to death," says Roubini.

Paul Samuelson, the doyen of the world's economists, predicted this bitter outcome three years ago. "America's position is under pressure because we have become a society that hardly saves," Samuelson, 90 at the time, said in an interview with SPIEGEL. "We don't think of others or of tomorrow."

And now the global conflagration is a reality, triggered by cleverly packaged US subprime mortgages sold around the world, even to bankers in the provincial eastern German state of Saxony. So-called credit derivatives, which banks and investment funds used to hedge against the failure of commercial loans, could soon add new fuel to the fire. In the wake of the subprime crisis, could credit derivatives be the next bad thing? Is the world facing a wave of bankruptcies that could soon bring the financial world crashing down through the mechanism of credit derivatives?

US market guru Warren Buffett calls derivatives " weapons of mass destruction." They are the creations of inventive financial alchemists, concoctions that blend classic forms of investment, like stocks, bonds and commodities.

In fact, within this discipline, derivatives used to hedge against credit risk are among the most dangerous gambles and, as one would expect within the global financial casino, they have experienced dizzying growth. In the last five years, the volume of credit derivatives has grown thirtyfold to about $55 trillion (€38 trillion), or about 20 times the gross national product of Germany.

The world is encased in a tightly woven network of reciprocal payment obligations. "The core problem is that it is no longer possible to know where the risks have ultimately landed," warns Thomas Heidorn, a professor at Frankfurt's Institute for Law and Finance. This is because traders pass on credit risks an infinite number of times, which explains the dizzying market volume. Where the risks end up is anyone's guess.

Nevertheless, only a handful of firms set the tone in this high-stakes game of bingo in which trillions are on the line. According to a survey by Fitch Ratings, an international credit rating agency, about four-fifths of all credit derivatives bought and sold worldwide in 2004 was on the books of only 15 banks and major dealers. Lehman Brothers was one of the Top 10 players in the business, and its bankruptcy has torn giant holes in the fragile network of credit insurance. "Not saving Lehman was a huge mistake," says a banking executive in Frankfurt, who notes that the shock waves will be extremely difficult to control.

Germany, where banks have had to write off about €40 billion ($58 billion), has managed to come away relatively unscathed until now. Experts believe that that number will be increased by significantly more than €10 billion ($14.5 billion).

German banks are now concerned that they will be at a competitive disadvantage if their US competitors are permitted to unload their bad debt with the government in the future, thereby improving their credit ratings. The Germans are demanding equal treatment. Last Thursday, leading representatives of the industry informed Finance Minister Steinbrück of their wishes -- and were rebuffed.

The financial storm has even been felt in the most unexpected of places, such as the offices of German town halls. At the turn of the millennium, hard-up German cities like Bochum, Recklinghausen and Wuppertal, used complex agreements, to sell large shares of the municipal family silver to US investors -- and then turned around to re-lease it. In many cases these so-called Cross-Border Leases (CBL) -- in which entire sewage systems or municipal transport operations were sold off -- were insured by the US insurance giant AIG, which was recently nationalized to avoid bankruptcy.

Naturally, the small print of the CBL agreements contains an explosive clause. It stipulates that if the guarantor loses its top-rated AAA credit rating, additional collateral must be provided. Despite government intervention, AIG was downgraded. Under their CBL agreements, the affected city councils have only a few weeks to come up with a solution.

By contrast, their counterparts in the cities of Münster, Troisdorf, Munich and Frankfurt can only wait and hope. They invested portions of their tax revenues with the Frankfurt subsidiary of now-bankrupt Lehman Brothers. By offering generous terms and citing a deposit insurance fund, the Americans managed to drum up urgently needed liquidity in Germany shortly before their bankruptcy.

The funds that German cities coughed up to help the Wall Street gamblers survive are not likely to be repaid anytime soon. BaFin, Germany's Federal Financial Supervisory Authority, has imposed a moratorium on the German subsidiary, freezing all transactions until further notice.

On August 15, when the US investment bank was already on shaky ground, Helga Bickeböller, a member of Münster's city council, transferred €15 million ($22 million) to Frankfurt in two tranches. "The offer was 0.004 percent higher than the next-best offer," Bickeböller says in justifying the transaction.

The credit crunch is tearing holes in the balance sheets of municipalities, companies and private households across the world. Banks hardly lend each other money anymore, consumer confidence is evaporating, and investors are questioning whether new sales will help them recoup money already spent on new equipment. In Germany, Arcandor -- a major holding company in the mail order, retail and tourism industries that reported €21 billion in 2007 sales -- threatens to become the first victim of tighter credit terms.

As the bad news accumulates -- in recent days, especially in the United States -- the mood around the world is growing increasingly dire. In August, sales of new homes in the United States dropped to their lowest level in 17 years. In comparison to last year, which was already a bad year, new home sales have dropped by more than 34 percent. At the same time, more and more US citizens have applied for unemployment benefits. And the manufacturing industry is reporting significant declines in order volume.

"The United States cannot avoid an 18-month-long, severe recession and a deep-seated financial crisis," warns Roubini, the New York economist. He would consider it a success if the country manages not to plunge into years of stagnation, as Japan did in the 1990s.

The consequences of the economic downturn in the United States are being felt around the world, especially in Germany, which is currently the world's leading exporter. Hans-Werner Sinn, president of the Munich-based Ifo Institute for Economic Research, calls it an "extremely worrisome situation." According to an analysis by the German Economics Ministry, the economy is exposed to "external shocks" and a "noticeably worsened external economic environment." The report even mentions the dreaded word "recession," although it adds that that recession is "not a foregone conclusion."

This is all the more vexing for the German government because it was the one that warned against the current malaise some time ago. During the G-8 economic summit in Heiligendamm more than a year ago, for example, Chancellor Angela Merkel tried to convince her state guests of the need for tighter controls on the financial markets. But President Bush and then British Prime Minister Tony Blair gave the chancellor the cold shoulder.

'One Can See that We Are on a more Solid Base'

For far too long, the Americans and the British made fun of the Germans for their risk-averse, savings-oriented mentality, says Bernd Pfaffenbach, Merkel's chief negotiator on foreign trade issues. But now the relative conservatism that Germans have shown in financial matters is paying off. "One can see that we are on a more solid base," says Pfaffenbach, who refers to the crisis as a "purifying storm."

Pfaffenbach isn't the only one to see the problem in this light. The American bank crash has prompted economists and politicians worldwide to prepare for the end of an era of turbo-capitalism driven by the financial markets.

The financial industry -- especially in the United States -- will shrink considerably, while the significance of the real economy will increase. Once again, the government will have to base its supervisory function on the old banker's principle: security first.

This is especially true when it comes to monetary policy. For years, central bankers "paid attention almost exclusively to developments in consumer prices," complains Thomas Meyer, chief European economist at Deutsche Bank. If consumer prices were going up by 2 percent or 3 percent, the risk of inflation was thought to have been averted.

The fact that the prices of stocks, bonds and real estate were often rising at double-digit rates was usually ignored until the financial bubbles burst with a loud bang. Some economists recommend that central bankers should also consider asset inflation when reaching future decisions.

At the same time, Europe's finance ministers are calling for tighter supervision of the credit and securities markets, as a group of experts from the G-8 countries recently recommended. Their plan calls for requiring banks to maintain larger capital reserves for specific risks. In addition, they have recommended that hidden financial risks that banks have assumed be made more transparent and that better guidelines be developed for the valuation of financial instruments.

Most of all, the G-8 council of experts stresses the need to reform the risk classification of securities. The major international rating agencies, such Moody's and Standard & Poor's, have deeply embarrassed themselves in the current crisis. In many cases, they gave their highest ratings to what were really junk securities. The G-8 experts have proposed that these institutions be made subject to a code of conduct.

At the same time, the experts also warn against intervening too much in the financial markets. As was illustrated by Germany's public sector Landesbanken, hard hit by the subprime crisis, as well as state-owned lender KfW -- which transfered €350 million to Lehman Brothers the day it filed for bankruptcy protection -- the government is usually not up to the task of owning and operating banks. Simply banning certain financial market operations also makes little sense, they believe, as such prohibitions are often easily circumvented.

If the G-8 experts prevail, there will be major consequences. For now, it would spell the end of ever-rising returns with constantly changing securities. At the same time, the market position of Anglo-Saxon banks would be significantly restricted, which would benefit the up-and-coming financial institutions of the emerging Asian and Eastern European economies.

A new chapter in economic history has begun, one in which the United States will no longer play its former dominant role. A process of redistributing money and power around the world -- away from America and toward the resource-rich countries and rising industrialized nations in Asia -- has been underway for years. The financial crisis will only accelerate the process.

The wealthy state-owned funds of China, Singapore, Dubai and Kuwait control assets of almost $4 trillion (€2.76 trillion), and they are now in a position to buy their way onto Wall Street in a big way.

But they have remained reserved until now, partly as a result of poor experiences in the past. The China Investment Corp., for example, invested in the initial public offering of the Blackstone Group, a private equity firm, and invested $5 billion (€3.45 billion) in Morgan Stanley. In both cases, it lost a lot of money.

But time is on the side of the Chinese. American stocks are becoming cheaper and cheaper. And the longer the crisis lasts, the weaker American objections to buyers from the Far East will become. In fact, it is quite possible that they will soon be celebrated as saviors.

The Chinese are interested in keeping the situation in the United States from spinning out of control. In a telephone conversation last Monday, Chinese President Hu Jintao told President Bush that he hoped that the measures to stabilize US financial markets would "achieve quick results and improve the economic and financial situation."

Bush had called his Chinese counterpart to inform him about his government's bailout program. Once again, the conversation symbolized just how great the mutual dependence between the two countries has become.

No Time to Gloat

Both in Asia and the United States, expressing schadenfreude over the decline of the United States as a superpower is out of place. The risk is too great that if America goes into a tailspin, it will drag the rest of the world down with it.

Despite the anger felt toward Bush, there is little enthusiasm in Europe's capitals for the political consequences. The financial crisis will reinvigorate America's tendency toward isolationism, which never quite disappeared.

The triumphalism of the Bush years could easily be followed by the "I'll-sit-this-one-out" years of an Obama administration committed to a strict policy of belt-tightening. If that happens, both old and new Europe will have to demonstrate whether the European Union can rightfully claim to be on an equal footing with the United States.

In the past, the US government's solo efforts provided the Europeans with an all-too-comfortable excuse for simply doing nothing. But that excuse is no longer valid.

BEAT BALZLI, KLAUS BRINKBÄUMER, FRANK HORNIG, HANS HOYNG, ARMIN MAHLER, ALEXANDER NEUBACHER, WOLFGANG REUTER, CHRISTOPH PAULY, MICHAEL SAUGA