Financial crisis threatens to engulf world

As more and more nations are sucked into the credit vortex that began with the subprime mortgage crisis in the U.S., Europeans bicker and developing economies teeter on the edge

WASHINGTON -- When the White House rolled out its $700 billion rescue plan two weeks ago, its sheer size was meant to soothe the global financial system, restoring trust and confidence. Three days after the plan was approved, it looks like a pebble tossed into a churning sea.

The crisis that began as a made-in-America subprime lending problem and radiated across the world is circling back home, where it pummeled stock and credit markets on Monday. Asian markets continued to drop as they opened this morning.

While the Bush administration's bailout package offers help to foreign banks, it seems to have done little to reassure investors, particularly in Europe, where banks are failing and countries are racing to stave off panicky withdrawals after first playing down the depth of the crisis.

Far from being the cure for the world's ills, economists said, the rescue plan might end up being a stopgap for the United States alone. With Europe showing few signs of developing a coordinated response to the crisis, there is very little on the horizon to calm rattled investors.

The vertiginous drop in stock markets on both sides of the Atlantic on Monday reflected not only those fears, experts said, but a growing belief that the crisis could tip the world into a global recession.

Indeed, the ripple effects from Europe and the United States were amplified as they spread to stock markets in Russia, Brazil, Indonesia and the Middle East.

These countries had little to do with the subprime crisis but were vulnerable to a sudden halt in the flow of money. They lack even the veneer of national or regional cooperation that protects Europe and the United States. Stock markets in emerging economies recorded their worst one-day decline in 21 years on Monday, with trading in Russia and Brazil halted to stem investor panic.

"It looks pretty ugly down the road," said Simon Johnson, an economist at the Massachusetts Institute of Technology and a former chief economist of the International Monetary Fund who specializes in financial crises. "Everybody is going to get caught up in this."

The global nature of the crisis and its growing collateral damage, Johnson said, ought to galvanize countries to work together to fashion a concerted response. There is a chance to do that this week, with dozens of finance ministers and central bankers converging on Washington for the annual meetings of the IMF and the World Bank.

The trouble is that these institutions no longer have the resources or authority to lead such an effort. The IMF, which played a central role in the Asian and Latin American crises, has been relegated to the sidelines, issuing lonely warnings about the impact on developing countries.

The Group of 7, which once functioned as a sort of command center for the global economy, is similarly depleted, according to critics. It no longer represents the world's economic drivers, they said, and badly needs to be expanded to include rising powers like China and India.

"The globalization of the crisis means we need a globalization of responses," said C. Fred Bergsten, the director of the Peterson Institute for International Economics. "But most of the responses will be national. For all the institutions we have, we don't have the right institutions to do this."

Europe torn apart

That is particularly true in Europe, which has an effective central bank but lacks a unified legislature or treasury to coordinate or finance a rescue of the banking system. So far, economists say, Europe's response to the crisis in its banks has been mostly marked by denial and dissension.