THE OTHER COST OF THE $700 BILLION BAILOUT: ALL FOREIGN CREDIBILITY

Analysis by Jim Lobe

(IPS) WASHINGTON -- While the White House and U.S. lawmakers hash out final terms of a proposed 700-billion-dollar Wall Street bailout, foreign policy analysts are warning that the current financial crisis could very well hasten the decline of U.S. power and influence overseas.

Of course, much depends on whether the impending bailout will be sufficient to quickly restore international confidence in the U.S. economy, and particularly the U.S. dollar whose status as the world's preferred reserve currency has long encouraged foreigners to buy U.S. Treasury bills, thus propping up an economy which consumes far more than it produces.

But coming on top of unprecedented deficits racked up by the Bush administration, especially in its ongoing 15-billion-dollar-a-month wars in Iraq and Afghanistan, the current crisis -- and the major new burden it adds to U.S. taxpayers -- will almost certainly damage Washington's ability to get its way abroad, according to many experts.

"It's not as if the rest of the world is looking at America's financial crisis and jumping to the conclusion that they can now test American power," Charles Kupchan, an analyst at the Council on Foreign Relations who teaches at Georgetown University. "But I do think that, from a psychological perspective, this financial crisis, coupled with America's troubles in Iraq and Afghanistan, will take a toll on respect for and deference to American strength as concerns both hard and soft power."

Coincidentally, it was just two weeks ago that the nation's top intelligence analyst, Thomas Fingar, warned that, while Washington "will remain the (world's) pre-eminent power in 2025, "...(its) dominance will be much diminished." Moreover, he told other intelligence professionals, Washington's leadership will "erode at an accelerating pace (in the) political, economic and arguably cultural arenas."

The subsequent collapse, or nationalization, of several of the country's leading financial institutions seemed to confirm that prognosis all too quickly. Notable was not entirely sympathetic reaction of foreign leaders who, assembling in New York for the annual opening of the UN General Assembly, seemed agreed that the drastic measures taken by the U.S. Treasury marked the effective end of the "Anglo-Saxon" model of free markets and unfettered capitalism that Washington has been avidly exporting for several decades, often through the World Bank and the International Monetary Fund (IMF).

"Models in history are very important, and I think this clearly damages the prestige of the Anglo-American model that we've been pushing," according to Michael Lind, a senior fellow at the New America Foundation (NAF), a Washington-based think tank. "The Chinese model could now be seen as more the wave of the future."

"People in Latin America, the Middle East, and elsewhere are probably saying, 'The Americans have been preaching this free-market ideology, and look what it did to them, so maybe we should try a different model,' he said. "In terms of competing in terms of soft power, reputation and prestige, I think we've been severely damaged right now."

Indeed, China in recent years has already become a much bigger player in terms of aid and investment in Africa and Latin America, and, what with the "U.S. banking sector in a shambles...it's much less likely that countries will go to New York to get finance and do business" than before, according to Dean Baker, co-director of the Center for Economic and Policy Research (CEPR) here.

Moreover, the latest crisis is likely to contribute to growing dissatisfaction both with the neo-liberal model at home and with the public willingness to make economic sacrifices for other countries.

"I don't expect the United States to be the enthusiastic supporter of free trade that it has been over the last several decades," Kupchan told IPS. "If there were to be a serious economic crisis abroad, would the U.S. today serve as the lender of last resort as it did in the 1997-98 financial crisis? I doubt it. We're too busy bailing ourselves, as opposed to bailing out Malaysians or Mexicans."

Similarly, Congress is certain to be tempted to reduce the skyrocketing budget deficit by cutting traditionally unpopular programs, such as foreign aid, that Washington has used as another means of leverage to influence the behavior of countries overseas.

Whether that budget-cutting pressure will apply as well to more than half-trillion-dollar defense budget (not including spending on the Iraq and Afghanistan wars) -- the largest single pot of discretionary spending in the national budget -- is not so clear, although one key lawmaker, the chairman of the House of Representatives Appropriations Defense Subcommittee, Rep. John Murtha, predicted Wednesday that it would.

"If I were in the Pentagon, I'd be as worried as one of the people at investment banks, because its budget is going down," according to Lind. "Suddenly all kinds of cuts in the military that were unthinkable up to a couple of weeks ago will become clear."

"Depending on the actual expense, this package is going to be put a huge squeeze on all kinds of security-related spending," said Bill Hartung, who heads NAF's Arms and Security Initiative. "It'll force the Pentagon to finally make some trade-offs [among weapons systems] and will make it a lot easier for advocates of getting rid of some of the Cold-War conventional systems, like the F-22 fighter, the Osprey [warplane], and attack submarines that don't seem relevant to wars in Iraq and Afghanistan to prevail."

Other analysts, however, are not so sure the Pentagon, which currently accounts for nearly half of the world's total military spending, will be forced to cut back.

"One would think that an economic crisis like this would produce a re-ordering of priorities," said Boston University Prof. Andrew Bacevich, an author and retired Army colonel whose just-released book is entitled 'The Limits of Power: The End of American Exceptionalism.'

"But I'm not sure that it will because there seems to be this strange unwillingness on the part of our political leaders to simply acknowledge that American power has limits and then to examine the implications of that fact," he said.

Indeed, Kupchan noted that, while the financial crisis "will encourage a more restrained and less costly foreign policy, national security will still trump economic expediency."

Nonetheless, depending on the seriousness and duration of the crisis, he said, "there is likely to be a rising inner voice [in the public] saying it's time for the United States to tend its own garden and focus on its own problems instead of other peoples.' It necessarily means a more inward-looking and pre-occupied America."

Indeed, a poll by the Pew Research Center just before the Treasury announced its bailout package earlier this month found a sharp decline in public support for an assertive foreign policy compared to four years ago. Forty-five percent of respondents said that reducing U.S. overseas military commitments should be a top policy priority of a new administration, up from 35 percent in 2004.