The Napoleon of Wall Street, the financier JP Morgan, supposedly had an engraved plaque in his office that said “Pense moult, parle peu, écris rien.” Think much, speak little, write nothing.
Be productive but don’t stick out, as we say in Sweden. With its near-death experience of 2008-09, the financial industry is retreating from the extravagances of the credit expansion and back to this discreet motto. The banking system will never be the same again in our lifetime, and nor will the world. 

In 1971, the investment bank Morgan Stanley had 3,500 employees, and Goldman Sachs about 1,300. In 2006, at the peak of a quarter century of capitalist madness, those figures were 55,000 and
30,000: an army of financial advisors to governments, foundations, companies and wealthy private individuals, an army that in its boldest hours generated a tenth of US GDP and almost half its corporate profits.

High salaries and bonuses meant that the industry attracted the cream of the American workforce. The best and the brightest of several generations used their creativity to design new financial instruments and business concepts, which were increasingly sophisticated, with the aim of making money on money by aggressively extending credit and shrewdly packaging risks.
The US fell victim to its own, unique innovativeness. American consumers fell victim to their incurable optimism. 

Now it’s an end to alchemy for this time. Back to a more traditional role for the financial industry and the conservative 3-6-3 rule for bankers: borrow at 3%, lend at 6% and be on the golf course by 3.
John Pierpont Morgan personally saved the financial system on two occasions, in 1895 and 1907. He would not be able to pull off the same achievement in 2009, given that the infection is too far advanced, but before he died in 1913 he sent word to anyone who would try, “No problem can be solved until it is reduced to some simple form. The changing of a vague difficulty into a specific, concrete form is a very essential element in thinking.”

The challenge today is indeed to find a simple form, a surgical tool, to contain the bad debts originating in the American housing sector. As long as they are being shifted around below the surface of the global financial market, in cryptic packages, credit will be choked, no matter what funding package politicians introduce.  

What is new and frightening about 2009 is that this financial rigor mortis encompasses the whole world, and coincides with a free fall in demand and investment.
Otherwise, crises and crashes are recurring themes in world finance, just as low pressure is with the weather. But there are signs that these are coming with greater frequency and that globalisation allows them to spread wider and faster than before.

Between 1973 and 1997, there were 139 financial crises recorded in the world, compared to 38 between 1945 and 1971. According to economic researchers, crises of this sort are now twice as common as before 1914.
What economies in crisis have in common is that rescue usually comes from the outside, in the form of loans, aid or demand. When Mexico went bankrupt in 1994, the US footed the bill. When Japan ended up in a deflationary spiral with falling prices during the 1990s, the country was helped along by a strong export market abroad, just like South Korea after its 1997-98 crisis.
But who will rescue the US?

What we have witnesses may be the crescendo in a historical cycle of globalisation. The risk of increased protectionism and the renationalisation of economies is apparent. We have already seen this pattern in the banking and auto industries. 

When representatives of the G20 countries headed home from their meeting in Washington in November, where they swore to protect free trade, it took less than 36 hours before Russia introduced higher tariffs on vehicles. India, Brazil and Argentina soon followed, perhaps inspired by the American presidential campaign, where protectionist rhetoric flourished, especially among Democrats.

The last time this vicious circle was spinning, seventy years ago, there were dire consequences. The difference from the 1930s is that the world now has three times as many inhabitants, and expectations of greater prosperity that are many times higher. A shrinking global economy would throw many developing countries into political crisis and upset the strategic balance of power that has had the US assume the role of global cop and world bank for almost a century. 

At the World Economic Forum in Davos in January 2009, the atmosphere resembled a funeral Lutheran-style. Luxury dinners cancelled, dejection over the economy, gnawing worries about the political consequences of the crisis, sheer panic over the frozen credit system, where 2.2 trillion dollars had gone missing the last time someone bothered counting (by chance, an amount equal to Chinese currency reserves). In November 2008, the same figure was 1.4 trillion dollars, and the American housing market shows no signs of turning around.

Both in 2006 and 2007, expert panels in Davos promised another “Goldilocks year,” with porridge that was neither too hot nor too cold. In January 2008, the tone had changed. Perceptive analysts like the American economist Nouriel Roubini predicted the collapse of the financial system. Billionaire George Soros gathered a group of newspaper editors for a lavish lunch at the foot of the Alps and proclaimed the end of the 60-year credit expansion, the worst blow since the Second World War. 

It took another six months before the prophets of doom were proved right. Tensions between deficit in the West and surplus in the East had been developing for decades, just as the consumption and housing bubbles had been fuelled by credit. In the end, it only took a 20 percent fall in prices for the house of cards to collapse.

The year 2009 is set to go down in history as a new 1914 or 1929. According to International Labour Organisation forecasts, 50 million people will be thrown out of work. The IMF predicts global growth of at most 0.5 percent, when the world has become used to 5. The flow of investments to developing countries is falling from 900 billion dollars a year to zero, with incalculable consequences in countries like Turkey, Indonesia, Mexico and Brazil.

We are now experiencing “the perfect storm,” as Prime Minister Vladimir Putin termed the multiple, overlapping crises. He himself should be worried about Russia’s economic situation as a result of falling oil prices, although so far it seems like “the I told you so’s” have prevailed in Moscow.

If the high mass of capitalism in Switzerland is any kind of barometer, we can expect a blow to Anglo-Saxon world dominance and thus to Anglo-Saxon ideas. The winner, if there is one, is China.
The Chinese prime minister, Wen Jiabao, held an optimistic and particularly well-structured speech in Davos. He described a national crisis package that had been subjected to “scientific tests.” His forecast for China was 8 percent economic growth in 2009, and his underlying message was that now it’s the Asians’ turn.
Wen Jiabao controls the tap on the money that the US will be dependent on over the coming years, once the gigantic stimulus package – even larger loans – is injected into the economy. He also holds the reins on an authoritarian system that gains ground when an open society is discredited.

China stands ready to take over the role of top dog. The question is simply whether the country is sufficiently stable to manage the undertaking, and what this will mean for the world.

We seem to be facing a shift, from market to policy, from West to East. In Davos, this was symbolised by the number of heads of state and heads of government, which was over 40, twice as many as in 2008, and the players with the highest profile in fact being Vladimir Putin and Wen Jiabao.
A third strategic shift is that from globalisation to protectionism. Every leader had fine words for free trade and coordinated crisis management, a new transnational architecture, but because politicians are still national, in actuality they do the opposite.

Britain’s prime minister, Gordon Brown, passionately condemned the same financial  protectionism that he was applying at home. Financial Times editor Martin Wolf called him hypocrite-in-chief.
JP Morgan also coined an expression for this phenomenon: “A man always has two reasons for doing something. A good reason and a real reason.”

Gordon Brown’s good reason for singing the praises of free trade at the World Economic Forum was that the world needs leaders who look after the global public interest. His real reason was to win political points, gain time, perhaps even convince others to assume the international responsibility that he himself is not powerful enough to take on in a Britain brutally hit by the financial crisis.
 
Everything is now upside-down. The most ardent friends of free trade are invoking mottos like “Buy American” and putting capital protectionism into practice, forcing banks to retreat back to the national arena.
Britain and the US are nationalising credit institutes and auto industries just as the old Communist countries have privatised theirs. According to Max Weber, those Confucians who were not good enough to be industrious capitalists have turned out to be precisely that, whereas Weber’s tight-fisted Lutherans have spent borrowed money like drunken sailors. 

Socialism, decadence and irrationality in the West – goal-oriented virtuousness and scientifically calibrated politics in the East. The values of work, saving, education, family and country that raised the US to the position of superpower in the first half of the twentieth century are now more clearly represented by China. It doesn’t look at all good for the free world.

“When the house is on fire, good girls have to get out as well as the bad ones,” JP Morgan said. When the global economy catches on fire, everyone rushes to the same exits, and it is clear how dependent we have become on one another, how everything is connected.

Some economists date the origins of the current crisis to 1997-98, when the Asian crashes taught the Chinese an expensive lesson. In order to be protected against sudden currency flows, a developing country, even the largest one, has to run a heavy surplus. Therefore, the Chinese state collected piles of money and exported goods so that the factories were running full out with the help of an undervalued currency – while at the same time, Chang and Ching regularly saved 40 percent of their income.

One suggestion for the future is to keep on eye on American pop culture, because soon this creeping Chinese takeover of power will be transformed into entertainment through good old-fashioned industriousness. Remember the Hollywood wave of mystifying depictions of Japan in the 1980s, when that dynamic island bought Rockefeller Center in New York and was thought to be economically invincible, with feature films in the style of “Rising Sun” and “Black Rain.”

Remember the depictions of the stone-cold, super-efficient Soviet Union during the Cold War, often in allegorical form like “Invasion of the Body Snatchers” or for that matter every depiction of murderous Arabs in the wake of 11 September, 2001.
Now it’s China’s turn. You don’t have to be paranoid to interpret Chinese export and currency policy over the last quarter of a century as a springboard to global dominance – it’s enough to be irresponsible and self-absorbed.

When the new US Treasury Secretary Timothy Geithner accused China of tampering with its currency, it was a taste of things to come. Nobody forced the Americans to take advantage of the Asian surplus, and the low interest rates that were the result, in order to pawn their future for an extra house and an extra jeep with a boat in tow, specially equipped for bass fishing and a built-in grill and TV.
Pimp My Ride is an entertaining programme on MTV, but as economic policy, it is a failure. If the US had instead saved and invested in productive operations, rather than financial voodoo, China would have been forced to follow another policy.

No matter how you twist and turn the situation, the US will be dependent on lenders abroad for a long time to come. China is the only country that can match this vacuum cleaner of capital, alongside a few other countries with a structural surplus, like Singapore, the Arab gulf states and Germany.

The great depression following the stock market crash of 1929 has been invoked repeatedly in recent months. What many people forget is that it was not President Roosevelt’s New Deal that finally broke the downward spiral of the 1930s but the Second World War.

Initially, the Keynesian stimulus policy worked – between 1933 and 1935 American unemployment fell from 25 percent to 14 – but by 1937, it had risen again to 19 percent. The US had a depression within a depression, because the government and the Fed, overcome by concerns about deficits and inflation, tightened too soon. The lesson learnt is to really go at it from the start, and then go even harder until economic growth is assured. What is ironic, of course, is that, as a result, the US is aggravating a structural problem that was behind this decade’s crash: the country’s indebtedness. Of all the options available, the stimulus route seems the least painful. First stop the bleeding, then build up the social body in a more robust form.

However, cementing this imbalance with Asia at an even higher level for the foreseeable future is not without risk. The US will incur the wrath of developing countries that will go without investment and credit when the global currency flows are sucked toward Washington, and China will gain an advantage in areas the US has been accustomed to dominating.

It may mean a race for raw materials and strategic partners. It may mean influence in international organisations, or precedence in interpreting fundamental values.
China may be a disagreeable police state and a one-party dictatorship with no rule of law or personal freedom. However, the country has not caused anything like the global financial crisis of 2009, which clearly started in the US. Blaming the industrious Chinese for the imbalance in the flow of currencies and goods is like blaming the scantily clad girl for rape.

Asians who have a good memory will probably remember what requirements the IMF imposed, for instance, on South Korea during the crisis in 1998: keep interest rates low, tighten the budget and avoid rescuing unsuccessful banks. When the Western world winds up in trouble, this bitter medicine is obviously no longer prescribed.

The US has historically been a source of capital for the rest of the world, as well as the country that has been an invaluable source of ideas of freedom. Now this stream of capital has changed direction. The financial crisis also means an epic setback for the Anglo-Saxon ideology of capitalism, free trade and openness. Not because it’s been exhausted in competing with something better, but because it’s thrown into the bargain when the whole liberal package loses its attractiveness.

If the baby is the market economy, then the bath water has been dirtied in the financial market. If 50 million people lose their job as a result of this collapse, there is a risk that the tub will be emptied in a thorough cleaning. For anyone who has been laid off, unemployment does not rise from five percent to ten, but to one hundred percent.

Socialism, protectionism, mercantilism, Islamism and other boring isms can once again expand. Perhaps we shouldn’t mention these ghosts from the past or the risk of long-term depression and deflation in the world. Because JP Morgan had something indispensible to say about that as well:
“When you expect things to happen – strangely enough – they do happen.”