The G7 and the G20 did about all they could think of over the weekend. Some thought their interventions would stem the panic. Apparently what they agreed on didn't work. I'm not certain, but my guess is that now everyone will simply have to sit back, wring our hands, and let the market run its course and correct itself. Intervention doesn't seem to have worked.

The problem I see with that is that the recovery from the bottom will be very, very slow. Basically, the entire credit market will have to be rebuilt, relationships re-established, central banks tested for the value of their support, relationship of currencies re-established. The effect will be long term damage to every free economy in the world.

I use the adjective "free" because if I haven't forgotten too much economics, the "closed" economies like China will be able to recover much faster than those, like us, that rely on the operation of free markets. China has all the factors of production necessary for an economy to operate except customers with money. They have the labor, raw materials, manufacturing and the national wealth to make it all work. But their economic capacity is much greater than their own people are able to consume. If the recovery develops like I think it might, when consumers in the U.S. finally recover economically enough to ramp up their consumption, only the Chinese will have retained their capacity to manufacture and sell products to us. In time our productive abilities will recover. But in the meantime, China will have grown even stronger.

I'll use the U.S. auto industry as an example. A few months of very low sales will test the ability of our auto companies to survive. At best, they will have to lay off most of their work force. This will ripple thru their supply chain, of course. Demand for Chinese-made cars and trucks will lag as well. But the Chinese, not being driven by the need for profits, can afford to keep their productive capacity in place, even without the throughput of orders. When demand ramps up again, which it surely will in time, the Chinese will be able to react and supply the demand much faster than we will. We will have to recall workers, retrain them, open mothballed plants, re-establish the supply chain, which surely will have been disrupted, and so on. Eventually, we will recover. But in the meantime, the Chinese will have become an even stronger economic force in the world. And it goes without saying that political strength and influence follows economic strength.

In my opinion, this financial crisis will have far deeper and longer term effects than just the loss of money from 401k's and retirement accounts. If my theory is correct--and I certainly hope it is far from accurate--this crisis will cause a long term rebalancing of economic and political power in the world. The countries on the winning end will be the closed or semi-closed economies like China and India. They were headed in that direction anyway, but the damage done by this crisis will elevate those countries to more world prominence and power pretty quickly for the reasons I have theorized above.

Of even greater concern is the increased power that will likely accrue to those countries with an inordinate amount of raw materials compared to tbeir populations. Specifically, I mean the Middle East countries that control a huge porportion of the world's oil. They too will benefit from a rapid economic decline in the economies of the free world. Unfortunately, thier political influence in the world is also likely to increase.

It's been a long, long time since I studied macroeconomic theory. I hope I forgot something and that I'm dead wrong. If there are any other economists out there, tell me I'm all wet. I hope I am.