Editor's note: Fareed Zakaria is a foreign affairs analyst who is the host of "Fareed Zakaria: GPS" on CNN at 1 p.m. ET Sundays.
"America will have to fight to attract capital and investment like every other nation," says Fareed Zakaria.
NEW YORK (CNN) -- The crisis in global financial markets will top the agenda as finance ministers from the world's top industrialized nations and central bank governors meet in Washington.
In an effort to breathe some life into economies around the world, the Federal Reserve, in tandem with five other central banks, lowered its key lending rate to 1.5 percent from 2 percent.
However, the global financial crisis has sunk its teeth in to the point that analysts say the $700 billion bailout plan and coordinated rate cut were merely steps in the right direction, and it will take much more to really get credit moving.
CNN spoke to world affairs expert Fareed Zakaria about the most recent developments.
CNN: Is the economy as bad as everyone is saying?
Zakaria: What is happening now is a deep, wrenching financial crisis unlike any we've seen since the 1930s. It's contributing to a broad slowdown of the American economy. The pain is spreading across the world. It's ugly. But the history of capitalism is filled with credit crises, panics, financial meltdowns and recessions. It doesn't mean the end of capitalism.
CNN: Then why can't we just let the free markets resolve the current economic problems without the federal government getting involved?
Zakaria: We just can't accept the downswings that used to be routine for Western countries in the 19th century, when we saw much less intervention by the government. Can you imagine the political fallout from 20 percent unemployment or 5 percent growth rates? The government must experiment with massive interventions in the market to ensure credit starts flowing smoothly again. These interventions have become part and parcel of modern capitalism.
CNN: So what should the government do?
Zakaria: That is the real question: How to regulate the markets so you get the maximum innovation and growth, but temper their wilder movements? The government will have to do this by trial and error. No one knows in theory what the perfect system would look like. In the short run, whatever it takes, including buying up mortgages, debt, equities.
Clearly, America's financial system needs new, different and better regulations for the 21st century, and this crisis should help produce those.
CNN: What does it mean for the United States?
Zakaria: People around the world once saw the United States as the most modern, sophisticated and productive economy in the world. Now they wonder, was this all a house of cards? They listened to American policymakers with respect, even awe. Today, they wonder if these officials know what they are doing. This loss of credibility will have hard consequences. For decades, the United States has attracted massive amounts of capital -- 80 percent of the surplus savings of the world -- which has allowed it to live beyond its means. That era is drawing to a close. America will have to fight to attract capital and investment like every other nation.
CNN: What can we do?
Zakaria: We need to wake up and get serious about our challenges. We must address all these issues, and fast -- restore confidence, reform the system, return the country to fiscal sanity. We have the opportunity to remain the pivotal player in a richer, more dynamic, more exciting world. But we have to take a substantial shift in our approach.