Our journey through New World 3.0 begins right at home this week, the central point from which the global financial earthquake diffused its violent tremors.

A Wall Street chasm has swallowed up Lehman Brothers (NYSE: LEH), Merrill Lynch (NYSE: MER) and American International Group (NYSE: AIG).

And as of this writing, Morgan Stanley (NYSE: MS) is deep in talks with China’s government about selling another stake in the company. Singapore Investment Corp (GIC), the world’s second-biggest sovereign wealth fund (SWF), said it would consider Morgan Stanley if approached; the guess here is GIC might be more assertive in a hunt for Goldman Sachs (NYSE: GS).

A systemic failure requires a systemic solution; former Treasury Secretary Nicholas Brady, former comptroller of the currency Eugene Ludwig and former Federal Reserve Chairman Paul Volcker laid the foundation for one in the Sept. 17 issue of the Wall Street Journal. First, the soiled paper clogging the system must be removed; until Congress creates a vehicle along the lines of the savings-and-loan era Resolution Trust Corp, real-estate backed instruments will obstruct proper functions on Wall Street and Main Street. This requires a massive commitment of taxpayer money.

The government still has the muscle to hold onto shaky and rapidly deteriorating mortgage assets for a longer period of time than public companies strapped to the quarter-by-quarter gurney. The liquidation process would be more orderly, and the paper could regain some value when the economy rebounds. It also has the flexibility to negotiate terms to keep people in homes, reducing the number of foreclosures and supply as well. At that point, one assumes, home prices–“the heart of the crisis,” according to Brady, Ludwig and Volcker– would stabilize.

It’s too bad responsible authorities didn’t have the foresight to understand potential risks to the US economic foundation deregulation exposed.

Understanding the sovereign wealth role–filled by central banks at times and by SWFs at others–in recent weeks’ drama is critical to understanding the changing global financial landscape.  

The nationalization of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) was driven in large part by the need to shore up international financial standing.

Central banks in China and Russia, for example, and Middle East petro-powers bought a lot of Fannie Mae and Freddie Mac debt between 2003 and 2008. The government sponsored entities (GSE)–and their implicit guarantee–were considered as safe as US government bonds but with a higher yield.  

Official foreign authorities held about 8 percent of the total agency/GSE debt in 2003. As of the first quarter of 2008, they held 21.4 percent. It seems they, too, experienced at least a little greed, chasing a higher interest rate. Frannie’s existence came into question, and foreign central banks had a lot of exposure.

Bank of China cut its portfolio of Frannie securities by a quarter between the end of June and the end of August, reducing its holdings by USD4.6 billion. In fact, foreigners didn’t like US long-term debt in July, and the quality of the financing of the US deficit fell dramatically. Almost all the inflows, including almost all the net official inflows, were short-term. Foreign demand for US corporate debt–including mortgage-backed securities and collateralized debt obligations–was way down, at the lowest point since 1995.

The bailout of the mortgage finance giants hung shareholders out to dry while protecting bondholders; it was meant as a clear sign the US understands the importance of foreign capital. This level of influence of foreign investors is a significant shift from previous government interventions in the financial markets.

Whether the US can rely heavily on other governments for financing or to recapitalize its banks without giving up some policy autonomy is an open question. When the US financed others, it certainly made “policy leverage” a prerequisite.

And that reliance on a limited number of foreign governments could open strategic vulnerabilities, particularly with governments that aren’t so enthusiastic about democracy. It’s a difficult but necessary task to see beyond current US economic and financial realities; in the long term, the US may have more to lose than its creditors if they sell American assets, a posture that gives potentially hostile governments some leverage.

Brad Setser of the Council on Foreign Relations’ Center for Geoeconomic Studies suggests in his September 2008 report Sovereign Wealth and Sovereign Power:

Framed most harshly, the current financial crisis raises the question of whether the United States–and the US-led international institutions–can provide the public good of global financial stability when it has outsourced the maintenance of its own financial stability to China and the Gulf region. The rapid rise in the financial power of the emerging world has created a large gap between the existing institutional architecture and current reality. The formal architecture for international monetary and financial cooperation continues to be centered around institutions created on the assumption that the United States and the large European economies are the world’s leading creditor countries. If existing institutions do not evolve to reflect the growing financial clout of the emerging world, the risk being bypassed–or replaced. But new (or reformed) institutions that better map to the current distribution of financial power have not been created–let alone tested in a crisis.

The relative economic importance of China, Russia and the Gulf States as well as India and Brazil will rise in the 21st century. The increase in the foreign assets of the emerging world’s governments in 2008 could reach USD1.5 trillion, accounting for the entire net flow of funds from the emerging world to the US and Europe. China, Russia and Saudi Arabia are likely to account for more than USD1 trillion of the increase.

While US dependence on foreign capital flows–from country’s that don’t necessarily share in western liberal ideas (in the classical sense)–opens up a strategic gap, those countries won’t necessarily exploit the advantage.

The vulnerability is that they could; Russia’s exertion of supremacy in the vitally important Caucasus may be only the first manifestation of the aggressive pursuit of geopolitical self-interest. Russia is the world’s second-largest oil producer and the world’s biggest producer of natural gas. Other states in the region, including neighboring Kazakhstan and nearby Azerbaijan, also have emerged as significant producers with massive reserves of oil and natural gas.

This emerging energy wealth has troubled the Kremlin’s relations with some former Soviet states, including Georgia, Belarus, Turkmenistan and Ukraine. The director of Moscow University’s Information Analytic Center, Natalya Kharitonova, says “There are too many interests” intersecting in the region “to ignore the ways in which those who produce oil, those who transport it and those who consume it are in geopolitical competition.”

Perhaps the single most important step in reducing US reliance on the flow of foreign capital is to make a serious move toward energy independence, ostensibly the goal of bills passed (in the House) and proposals floated (in the Senate) this week.

The House of Representatives passed a sure-to-die energy bill late Tuesday by a basically party-line vote of 236 to 189. There aren’t enough votes to overcome a presidential veto, and crafting legislation that gets enough Senate votes to defeat a filibuster will be exceedingly difficult.

The House bill includes a measure to repeal USD18 billion in oil industry tax breaks and uses the money to promote renewable energy and energy efficiency. The bill would require utilities to generate 15 percent of their electricity by 2020 from cleaner sources. It would also force oil companies to pay additional royalties for drilling in the Gulf of Mexico.

The measure would let states decide whether to permit energy exploration 50 miles off their coasts, ending a drilling ban that was put in place for much of the California coastline in 1981 and expanded across much of the US in 1985. It would allow drilling 100 miles offshore regardless of a state’s wishes.

Democrats wrote a bill full of poison pills; drafters had to know Republicans want access to new areas of Alaska and within 50 miles of coastlines. But “Drill, Baby, Drill” is too good a slogan for the Republicans to surrender this close to an election; Democrats now at least have material for rebuttal ads.

It’s a political axiom that energy is a national security issue; reducing dependence on hostile foreign nations’ oil is a goal Sen. James Inhofe, former Vice-President Al Gore, the US Chamber of Commerce and the Sierra Club all agree on. How to get there is an entirely different question.

The US has never had long-term clean-energy subsidies in place; usually they’re renewed for a year or two at a time. Many industry heavyweights blame that unpredictability for the stop-and-start pattern the clean energy industry’s developed over the last two decades. New projects generally come to a standstill the year after tax credits expire. One to remember amid all the wailing and gnashing of lobbyists: Since they were introduced, the US renewable-energy tax credits have never lapsed.

According to the American Petroleum Institute, areas within 50 miles of US coastlines probably contain the vast majority of recoverable oil reserves. Whether that potential supply comes in line in a fashion timely enough to reduce costs at the pump for Americans is immaterial at this political moment. Voters “feel” like drilling will help.

This particular game of chicken suggests the road to economic and energy security will be long and bumpy.