About ten years ago, as part of a group visiting UN peacekeeping troops, I found myself in a meeting with the parliament of the Republic of Abkhazia, a country that had just lost the flower of its youth in a bloody war with Georgia after the Soviet Union collapsed. One of our delegation had given the lawmakers some unwelcome advice on foreign policy, but it was on me that they focused their anger, since I had been introduced as an investment banker. “You financiers love war!” their leader shouted. “You profit from it!”
It is true that sectors of the economy can profit from war in certain circumstances, but Wall Street really doesn’t like war–at least not the one now raging in Iraq, which is beginning to look like a write-off. The defense industry does like military expenditures. And US capitalists in general do appreciate the role of a robust military budget in bolstering the dollar as the ultimate reserve currency, in assuring that the rules of global finance are favorable to our interests and in protecting access to petroleum products. But we really do not like uncertainty. We like an environment we think we understand, one in which a return- on-capital analysis can be based on reliable assumptions of a predictable level of risk.
Wall Street hated the terrorist attacks of September 11, 2001. Not only were they dramatically disruptive to the business of Wall Street; they also sowed immense uncertainty in the minds of CEOs and consumers, slowing capital and consumer expenditures. Risk premiums skyrocketed for property and casualty insurance. Nonproductive investments of time and money for security were required. But in time, with the delegation of the Bush Administration’s “war on terror” to professional soldiers, for-profit contractors and first responders, and with casualties occurring at “acceptable” levels, the Street returned to business as usual.
Today, the shares of all the big investment banks, along with the Dow Jones and Nasdaq indexes, are trading at or near their five-year highs. Stimulated by the fiscal deficit, huge consumer debt and a chronic trade deficit that recycles our dollars back to us, the economy has been growing at from 3 percent to 5 percent a year since the shock of the 2001 attacks wore off. There remains, of course, the problem of too many dollars chasing too few deals, a fact reflected in corporations massively buying back their own stock, paying down debt and paying cash for acquisitions where possible. Nevertheless, although there are none of the huge capital-eating growth industries we have liked to finance in the past, such as railroads, automobiles or telecommunications, we have invented other ways, such as derivatives, securitizations and proprietary trading, of tailoring returns on capital to the risk involved.
But despite Wall Street’s golden moment, the problem of risk and uncertainty has reasserted itself in an unexpected way. The very unpopularity of the Bush Administration is threatening to create a seismic shock to the system. In financial circles, the word “incompetent” is now frequently applied to both Bush’s foreign and domestic policies. The fiscal profligacy in violation of traditional Republican principles, two weak Treasury Secretaries and the recent loss of Federal Reserve chairman Alan Greenspan’s steady hand have begun to take their toll, creating a flight to quality government bonds even as interest rates rise and the dollar weakens.