It has been no secret that the diplomatic and financial institutions of the 20th century are ill-suited for the needs of the 21st century. The world of Bretton Woods, and of post-World War II dominance by the West, is changing - only no one could have suspected that it would change as precipitously as the current financial-markets crisis indicates. The question before us is whether this change is permanent and inevitable. If it is the entire global landscape will be affected.

Much of the world has reacted with glee to the financial problems facing the United States. In fact, many in the foreign media feel vindicated, having darkly predicted the fall of the U.S. economy for years. As in the attacks of September 11, there is a sense that the consumer-driven American economy had it coming.

This sense is only aggravated by the fact that financial markets throughout the developed world are now so interdependent that when markets in the United States sneeze, Europe and Japan catch the cold as well. As Financial Times columnist Phillip Stephens - who rarely has a good word to say about the United States - wrote about the crisis the United States and Western Europe no longer can take comfort in the illusion that they can shape the global order "in their image."

Even more odd perhaps is the widespread sense of comeuppance for the American consumer, who has been living on borrowed credit from abroad and felt rich based on inflated home values. It may be sound personal financial policy not to live beyond your means, but collectively, the American consumer has been a critical part of years of international boom. When indeed Chinese lenders decide to dry up credit to the United States, they will also undercut American demands for Chinese-made goods - which seems to be just about everything these days.

It is hardly in the interest of the world to have the United States cut down so many notches. Without American leadership, it is a real question whether the principles of the free market and individual enterprise that produced so much prosperity in the past half century will prevail. Do we now look at a very different world in which Russian petro-dominance and Chinese economic authoritarianism offer the most viable models? What models might India and Brazil bring to the table? Or the statist economies of much of the developing world? It is with very mixed feelings that one contemplates these possibilities.

Those feelings sink even deeper when it looks like none of the U.S. presidential candidates seem to have anything like a clear idea what to do about the crisis. Both Sens. Barack Obama and John McCain have talked about vastly expanding government powers and involvement in the economy. This of course is what brought us to this impasse in the first place with the mandates given to Fannie Mae and Freddie Mac to increase minority lending, irrespective of the default risks which the private market had no problem anticipating.

At the World Bank and International Monetary Fund meetings here in Washington over the weekend, sober-faced international finance ministers contemplated the consequences of the crisis, and what was clearly in the air was the sense that the West's dominance is over. World Bank President Robert B. Zoellick has said as much, reflecting on the anachronism of the G-7 itself.

It can certainly be argued that in the world of rising new powers, the old international structures need to adapt or go away. Those leading G-7 industrialized democracies seem almost quaint today as a group representing global leadership. But what should not happen is that the baby gets thrown out with the bath water, which is the real danger in the United States domestically as well as on the international scene.

The question remains: How does the United States recover its confidence as an international leader. This is a tough one, but it probably begins with acceptance that something fundamentally has changed internationally, which also offers new opportunities for leadership.

Some of the rising economic powers - India and Brazil, for instance - have solid ties to the United States. Some of our old European allies, on the other hand, offer very little as alliance partners these days. We should not be bashful about seeking support and doing business where American ingenuity and talents are appreciated. Nor should we abandon the fundamentals of the free market. If we do, the world will soon be far worse off than it is even today.

Helle Dale, is director of the Douglas and Sarah Allison Center for Foreign Policy Studies at the Heritage Foundation.