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March 19, 2008

Futile Surges and Bailouts


by Leon Hadar

There is a lot of talk in Washington these days about "containment." Foreign policy pundits insist that the U.S. must contain Iran, whose rise as a political-military power poses a threat to Western strategic and economic interests in the Persian Gulf region.

At the same time, economic experts maintain that the U.S. should contain its mounting financial crisis, which first raised its ugly head in the obscure sub-prime mortgage market and now seems to be having a devastating effect on the entire economy, and perhaps across the global financial system.

So Washington has been doing a lot of "containing" in both the foreign policy and economic arenas this year. In the Middle East, the Bush administration has been trying to reassert U.S. power in the region by:

  • Increasing the number of U.S. troops in Iraq to 160,000 while providing support to the Shi'ite-controlled government and to Sunni forces.
  • Isolating Syria and Lebanon's Hezbollah.
  • Re-energizing the Israel-Palestine peace process.
  • Imposing economic and diplomatic sanctions on Iran.

The result of the grand U.S. strategic designs in the Middle East? The anti-American and sectarian violence continues in Iraq, and there has been no progress toward political reconciliation between the Shi'ites and Sunnis in the country.

Pressure from Syria and Hezbollah is preventing the election of a new president in Lebanon. The peace process is stalled, and Israelis and Palestinians are continuing to kill each other. And to dramatize the scale of American failures, Iran's anti-American President Mahmoud Ahmadinejad has been received on a red carpet in Baghdad, while Saudi Arabia and Egypt have been strengthening ties with Iran, getting closer to Syria, and negotiating with Hamas.

On the economic front, the Federal Reserve has been leading the way, and the administration and Congress have been protecting the rear. They are slashing interest rates again and again and again. They are promoting new plans to stimulate the economy and assist those who are finding it more and more difficult to finance their mortgages, make payments on their credit cards, and even fill their car's gas tanks.

And then there have been several "creative" efforts by the Fed to provide new sources of liquidity for troubled American banks.

But coming up with new fiscal rescue plans by the federal government – paid by the same American taxpayer who is enduring the current economic pains – and printing more and more money do not seem to provide the needed "containment." Instead, they are igniting inflationary pressures and putting more downward pressure on the U.S. dollar, whose value has been declining as investors have been pulling money out of the U.S.

And there are no signs that the banks and the other financial institutions are ready to provide new credit to business and consumers. If anything, they seem to be in panic.

Indeed, if the visit by President Ahmadinejad to Iraq made it clear that America is failing to secure its position in the Middle East, last week's emergency rescue of Bear Stearns, one of Wall Street's respected financial institutions, by J.P. Morgan and the Federal Reserve demonstrated that the credit crisis is spreading to the broader economy and could threaten the U.S. financial system. Last Friday, Bear Stearns' stock was worth $30 a share. By Monday, rival bank J.P. Morgan Chase reached a deal to buy the troubled firm for $236 million, or just $2 a share.

And there is a point – the Arab oil fields – in which America's strategic woes in the Middle East are intersecting with its growing economic problems. Hence the humiliating images of President George W. Bush – and now Vice President Dick Cheney, who is in the Middle East – pleading with the Arab oil sheiks to please try to keep those energy prices down.

But the oil producers in the Middle East – whose economies are suffering from inflation because of the weak U.S. dollar to which their currencies are tied while their sovereign wealth funds have been keeping alive several distressed U.S. financial institutions – are reminding their American guests that the resurgence of Iran is the direct result of the U.S. ousting of Saddam Hussein in Iraq. And its current economic problems are the outcome of the mismanagement of U.S. monetary and fiscal policies.

This reality also reveals the constraints operating on the dual American containment policies in the Middle East and the financial markets. Officials in Washington are aware that the threat of using American military force against Iran is not credible under the current tight economic conditions, in particular, rising energy prices. But the continuing costly U.S. military intervention in the Middle East also makes it difficult to put America's economic house in order.

It is clear therefore that the next U.S. president will have to find a way to go beyond military surges and economic bailouts, which tend to be both expansive and futile, and readjust U.S. global strategy and economic policies in accordance with the changing realities of American power.

Copyright © 2008 Singapore Press Holdings Ltd. All rights reserved.

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  • Leon Hadar is the author of Sandstorm: Policy Failure in the Middle East (Palgrave Macmillan). He is the former United Nations bureau chief for the Jerusalem Post and is currently the Washington correspondent for the Singapore Business Times. Visit his blog.

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