Zakaria: U.S. has itself to blame for financial crisis

Editor's note: Fareed Zakaria is a foreign affairs analyst who hosts "Fareed Zakaria: GPS" on CNN at 1 p.m. ET Sundays.

NEW YORK (CNN) -- U.S. stocks joined a worldwide selloff at Friday's open, with the Dow down about 400 points, as a wave of anxiety about a global recession sent investors heading for the exits.

The Dow Jones industrial average (INDU) fell 4.5%. The Standard & Poor's 500 (SPX) index tumbled 5.2% and the Nasdaq composite (COMP) lost 5.3%.

Stocks followed the lead of plunging markets worldwide, with Japan's Nikkei index ending down 9.6%. European markets down almost as sharply, with major indexes down 8% in France and Germany and 7% in London.

Markets were down 14% in Moscow when the exchange there suspended trading until Tuesday.

"Today might be the day where everybody throws in the towel," said Peter Cardillo, chief market economist for Avalon Partners. "People are saying 'I've had it, I can't take it anymore, I'm selling everything.'"

CNN spoke to world affairs expert and author Fareed Zakaria about the financial crisis.

CNN: Are we out of the woods with this credit crisis?

Zakaria: No, but eventually, the governments will win. They have potentially unlimited tools at their disposal, especially if they act in concert. They can nationalize firms, call bank holidays, suspend trading for weeks, buy up debt and equity, and renegotiate home mortgages. Most important, the American government can print money. Watch Fareed Zakaria on the financial crisis »

CNN: But won't those actions cause more problems?

Zakaria: You're right, all of those tools have long-term effects that are extremely troublesome, but they are nothing compared with the potential collapse of the financial system.

Whatever can be done must be done, and Washington seems to have recognized that it must do whatever is required to shore up that system.

CNN: What do you think caused this crisis?

Zakaria: We did, all of us. Since the 1980s, Americans have consumed more than they produced, and they have made up the difference by borrowing. Not only on the personal consumer level but in how our government runs.

Every city, every county and every state has wanted to preserve its many and proliferating operations and yet not raise taxes. How to do that? By borrowing, using ever more elaborate financial instruments.

Easy money plus leverage equals financial crisis.

CNN: OK. So what do we do now?

Zakaria: In the short term, all the solutions require that governments take on more debts and larger obligations. This is inevitable and necessary. But that doesn't mean we should, as some noted economists advocate, stimulate the economy with more tax cuts.

That would be only one more way to keep the party going artificially, like asking a drunk to go to AA next year but in the meantime to have even more whiskey.

A far better stimulus would be to announce and expedite major infrastructure and energy projects, which are investments, not consumption, and therefore have a much different effect on the country's fiscal fortunes.

In the medium and long term, we have to get back to basics. Households, for instance, should save more. Governments should put incentives in place that make such savings more likely.

The U.S. government offers enormous incentives to consume (the deduction of mortgage interest being the best example), and it works. We have the biggest houses in the world, the thinnest flat-screen TVs and the most cars. If we were to tax consumption and encourage savings, that would also work.

Regulations on credit-card debt should be revised to ensure that people understand the risks and costs of these instruments. Moving in this direction would be good for families and for the government as well.

CNN: Seems this will be painful.

Zakaria: No pain, no gain. Ever since the collapse of the Soviet Union, the United States has operated in the world with no constraints or checks on its power. This has not been good for its foreign policy. It has made Washington arrogant, lazy and careless.

We didn't have to make strategic choices; we could have it all. We could make blunders, anger the world, rupture alliances, waste resources, wage war incompetently; it didn't matter. We had more than enough room for error, lots of error.

But it's a different world out there. If Iraq cast a shadow on U.S. political and military credibility, this financial crisis has eroded America's economic and financial power.

In the short run, there has been a flight to safety -- toward dollars and T-bills -- but in the long run, countries are likely to seek greater independence from an unstable superpower.

The United States will now have to work to attract capital to its shores and manage its fiscal house better. We will have to persuade countries to join in our foreign endeavors.

We cannot noisily denounce Chinese and Arab foreign investments in America one day and then hope that they will keep buying $4 billion worth of T-bills another day.

We cannot keep preaching to the world about democracy and capitalism while our own house is so wildly out of order.

All About Interest Rates • Taxes