Wall Street Doesn't Like This War
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.
Wall Streeters now fall mainly into two camps: Those who think the war in Iraq was itself a horrible mistake and those who think it could have been a good choice but was bungled in the execution. It is not the $800 billion the Iraq War is projected to cost that drives us nuts. A $13 trillion economy can make adjustments. But the troop drawdown and failure to finish the job in Afghanistan, the bad information in the run-up to the Iraq invasion, the ever-changing rationales, the failure to develop realistic scenarios after the collapse of Saddam Hussein and the chronic bloodletting without an exit plan--these smack of the type of performance that, in the brutal meritocracy of the Street, would cost us our jobs.
Perhaps the fiscal and war-fighting failures could be forgiven, but they have metastasized into a much larger problem: a lame duck President with a weak hand on the tiller. Even as American support for Bush and his war has sunk to all-time lows, polls show that the ranking of potential terrorist attacks on the nation has faded to a third-tier concern. So we know at some level one of the hidden--and most unfortunate--costs of the war in Iraq has been the Bush Administration's successful conflation of that military adventure with the real challenge: the struggle to protect our country against radical Islamic terrorists.
There is a growing feeling on the Street that the war against those who would harm us has been and is being misfought. Democrats who once had their lack of regard for this President to themselves are finding that this position no longer distinguishes them from many Republicans. Democratic politicians claim they gave this President authority relative to Iraq, which he misused--but the electorate sees them as having voted for the war. They put forth policies that would reorder our priorities in education, energy, healthcare, the environment--policies that might have clicked in the context of a nation unified in a war against a common enemy. But the Administration remains effective in attacking its critics, portraying them as unpatriotic whiners with nothing positive to say. So no matter how the midterm elections come out, even if voters felt the Democrats had it in them to help, they have no reason to believe help is on the way.
Wall Street could like a well-organized and properly prioritized "war" on religious extremism. Reordering the education system to play a greater national role with emphasis on teaching the skills necessary to fight a long-term battle, developing an energy policy based on conservation and technology, investing in human intelligence and the type of war-fighting capabilities that the new realities imply--none of this would cause any heartburn in the bastion of finance capital because it would involve the steady, predictable investment of resources over time. Data mining and even wiretapping would go down easily in the finance community if such measures were likely to be effective in the real war on our nation. But spending billions in a theater that has demonstrably worsened the problem, creating the very haven for terrorists it was supposed to prevent: This no longer has buy-in.
And Wall Street doesn't like to hear about "the long run." We mark to market every day. It may be that in a few years, a securities position will be worth five times what we paid today, but we are still obliged to carry it on our books for what someone will really pay for it now. The Iraq War is now increasingly seen as an ideologically based experiment, one that departed radically from traditional US foreign policy. Leslie Gelb, former head of the Council on Foreign Relations, has one plan for extrication, Hillary Clinton another. But George W. Bush, who struggles to admit even the smallest error, is promoting a stay-the-course program that draws on a reservoir of trust, a pool of political capital that simply doesn't exist.
With our dollars piling up overseas and the world economy depending on foreigners' confidence in our model, it is going to be hard for us to hold our breath for two and a half years. The damage to our brand under this management has been severe, and heretofore the cost has been neither paid nor calculated. When the markets finally render their judgment for this war and this Administration, there is likely to be a very hard landing.