Economic turmoil and yesterday's unprecedented international interest-rate reductions provide the harshest reminder yet that political borders are no shield against financial avalanches.
The U.S. housing crisis has become the global credit crunch.
With rare coordination, central bankers from Washington to London to Frankfurt, Germany, cut rates, pumped out money and signaled a willingness to cut again.
Acting separately, they were unable to stop the damage. Acting together, they hoped to wield a big enough bailing bucket to make a difference and - just as important - signal competence and agreement.
"It is the policy of the federal government to use all resources at its disposal to make our financial system stronger," Treasury Secretary Henry M. Paulson Jr. said yesterday at a news conference. "We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size."
But as yesterday's events made clear, one federal government can do only so much in a worldwide economy, even if it's the government of the United States.
U.S. Treasury Undersecretary David McCormick said that "strengthened international collaboration is needed now more than ever."
Stocks later fell, however, because Paulson didn't appear to be committed enough to further global coordination, some analysts said.
The Dow Jones industrial average declined 189 points to 9,258 while the S&P; 500 dropped 11 to 985. It was a volatile day on Wall Street with the indexes gyrating between gains and losses before settling on their sixth consecutive day of declines.
Central banks have moved in harmony before, but never to this degree. Within seconds yesterday, the U.S. Federal Reserve and government banks in the European Union, Switzerland, Sweden, Canada and Britain said they would reduce short-term interest rates by up to half a point.
"This has really gone beyond the subprime problem to a more troubling issue, namely, who do you trust - on a global basis?" said Edward Yardeni, an investment strategist. "There is a recognition by policymakers that this is a global problem, and it needs to be addressed this way."
The Bank of Japan, whose rates are already rock-bottom, expressed "strong support." China's central bank cut rates on its own. By lowering rates and injecting money, central banks are trying to ease a worldwide evaporation of credit that threatens ordinary business transactions and has brought stock markets tumbling.
The United States has always been economically connected to its trading partners. But even some experts are amazed at how the housing blowup has spread across the Atlantic and beyond.
"When the U.S. economy suffers, Europe has historically suffered," says Jon Faust, a former international economist at the Federal Reserve who teaches at the Johns Hopkins University. Nevertheless, he said, "Am I surprised to see it as big as it is in Europe? Yes."
As foreign mutual funds follow U.S. stocks into the drink and the euro starts mimicking the dollar's earlier dive, it seems that the international economic gears are intertwined as never before. But the housing bubble, it turns out, was a worldwide affair from its beginning.
Hundreds of billions of dollars in U.S. mortgages were financed by China and oil producers such as Saudi Arabia looking for places to invest. Much of that money, of course, came from U.S. consumers buying overseas products.
And the housing bubble wasn't confined to the United States. Housing prices tripled in Ireland and rose 150 percent in Britain while going up only 70 percent in the United States, said David Wyss, chief economist at Standard & Poor's.
"Most of these problems were global," Wyss said. "Except for Germany and Japan, everybody had a housing bubble" among developed nations. "Home prices are correcting everywhere, and that's causing a problem for mortgage markets everywhere."
The American brand of mortgage, however, has proven especially poisonous to the world. Events have trashed the theory, popular six months ago, that foreign nations could keep growing quickly even as the United States brushed recession.
A few weeks ago, German Finance Minister Peer Steinbrueck said that the mortgage meltdown was "an American problem" and suggested German banks wouldn't need a lifeline.
Now banks across Europe are getting government aid, and Germany's Hypo Real Estate had to get bailed out twice.
The evaporation of trust between banks has also spread abroad. "It's just one big crisis of confidence," said Jay Bryson, global economist for Wachovia. "As credit started to seize up, banks became less willing to lend to some banks abroad. Now banks are really reluctant to lend to each other, and it just shows you the interconnectedness of the global banking system."
Even positive moves such as rescues can have international repercussions.
Ireland's promise to guarantee all liabilities of its biggest banks a few days ago threatened to spark a run on English banks as depositors switched from one to the other.
"We're seeing on a global basis what could be called competitive bailouts," Yardeni said. "Governments are trying to bail out their systems without consulting other governments about what they think and what the implications might be for them."
Now that Europe is fully involved, financial troubles have continued to spread eastward. Russia's stock market has crashed and shut down at least until Friday, an event that ordinarily would prompt front-page headlines by itself. Now it's a footnote in the wider emergency.
All this explains yesterday's belated attempt by world authorities to bail from the same bucket. Some economists have urged industrialized nations to go beyond coordinating short-term interest-rate moves and agree to jointly guarantee interbank loans and other credits.
Paulson, however, said it might not make sense "to have identical policies." This weekend he and other finance ministers and central bankers from developed nations will meet in Washington to plot their next move. Given that the world has one economy now, don't be surprised if Paulson and his peers move toward one increasingly identical policy.
Read more about the economy on Jay's blog at baltimoresun.com/hancockblog