Special Edition Article: Reshaping the World Order: The 2008 Financial Crisis, Decline of the United States and China’s Ascent

By Tierra Sorensen

A Global Power Shift

The 2008 financial crisis wasn’t just a meltdown of the global economy—it was a turning point in the balance of world power. In the years leading up to the crisis, the United States held a dominant position as the world’s economic powerhouse. But once the US housing bubble burst and mortgage-backed securities collapsed, everything changed. The effects were felt across the globe, and while the US and many European nations struggled to recover, China found itself in an advantageous position to step up its global game. This shift in power is the focus of the paper.

At the core of the paper is the argument that the 2008 financial crisis marked a decline in the US’ global dominance and a rise in China’s influence. Before the crisis, the US economy operated on the principles of neoliberal capitalism, an economic framework that prioritizes policies which encourage free markets, minimal government intervention, and rapid growth. Unfortunately, this approach also contributed to risky practices like subprime mortgage lending and the widespread use of mortgage-backed securities, which ultimately led to the collapse of the US housing market.

Subprime mortgage lending is the practice of giving loans to homebuyers with low creditworthiness, typically at a high interest rate to compensate for their increased risk of defaulting on their loans. Mortgage-backed securities (MBS) are financial instruments that pool together these loans and sell them to investors as a way to invest in the housing market. Leading up to the financial crisis, an increased demand for MBS by investors led lenders to issue out more subprime loans. This caused home prices to skyrocket as more buyers entered the market, resulting in a housing bubble. When interest rates rose and subprime borrowers began to default on their loans, the value of MBS plummeted, resulting in a burst of the housing bubble (See Figure 1.)

Figure 1: Image Source: "File:U.S. Home Ownership and Subprime Origination Share.png" by Farcaster at English Wikipedia is licensed under CC BY-SA 3.0. To view a copy of this license, visit https://creativecommons.org/licenses/by-sa/3.0/?ref=openverse.

When the bubble burst, the ripple effects spread throughout the global economy, triggering what became known as the European sovereign debt crisis. While the US and its European allies were reeling, China, following its state-led economic model, was able to weather the storm. This period saw China not only stabilize its own economy, but also begin to expand its global influence in a way that directly challenged the US’s leadership position.

What happened post-crisis?

One of the most significant findings in the paper is how different the responses to the 2008 crisis were between the US and China. For the US, the crisis exposed the vulnerabilities of its neoliberal economic system. The collapse of key financial institutions and the subsequent recession significantly damaged the country’s global reputation as an economic leader. Recovery was slow, and the US’ domestic and foreign policy decisions during this time further weakened its standing.

China, on the other hand, came out of the crisis relatively unscathed. Thanks to its centralized, state-controlled economic system, China was able to implement economic stimulus measures that kept its economy afloat and even allowed it to grow while others struggled. This success boosted China’s global reputation, and over time, it began using its economic strength to build international alliances and expand its economic and political influence.

The paper also discusses how tensions between the US and China intensified after the crisis. As China became more assertive, the US took a more confrontational approach, labeling China a “revisionist power” in its National Security Strategy. This set the tone for a more adversarial relationship, with ongoing disputes over trade, intellectual property theft, and military competition.

What does this mean for the world?

China’s rise brings with it a different approach to global governance. Unlike the US, which has traditionally promoted free-market capitalism and democratic values, China’s state-led model offers an alternative that some developing nations find appealing. This shift could have major implications for the future of international relations and global economic policies. As countries around the world begin to weigh their options, we may see a more fragmented global order, where the US and China represent two competing visions of how economics and governments should be run.

Additionally, the ongoing rivalry between the two powers has introduced new challenges in areas like trade, technology, and military influence. The growing tension between the US and China, especially in regions like the Indo-Pacific, could lead to further instability if not managed carefully.

Connecting the Dots

This paper’s significance lies in its understanding of how a financial crisis can go beyond the numbers and reshape global power structures. The 2008 financial crisis wasn’t just an economic event—it was a wake-up call that highlighted how fragile the US’ position was and how easily it could shift the global balance of power. Understanding this shift is crucial for anyone interested in geopolitics, international relations, or the global economy.

The paper also emphasizes the importance of learning from history. The US’ policy missteps after the crisis, including alienating allies and adopting a confrontational stance with China, are examples of how poor decisions can have lasting effects. As we move forward, recognizing the importance of maintaining strong international relationships and managing global rivalries with diplomacy will be key to ensuring a more stable future.

Figure 2: Image Source: President Trump Meets with the Vice Premier of the People’s Republic of China" by The White House is marked with Public Domain Mark 1.0. To view the terms, visit https://creativecommons.org/publicdomain/mark/1.0/?ref=openverse.

In sum, this paper reminds us that the world is constantly changing, and the events of 2008 set off a chain reaction that we’re still seeing play out today. As China continues to rise and the US tries to maintain its influence, the next decade will be crucial in determining how these two powers coexist–or clash–on the world stage.