“The Middle East and the Fed”

Sydney M. Williams

Thought of the Day

“The Middle East and the Fed”

February 9, 2012

“I have come here to seek a new beginning between the United States and Muslims around the world;” so spoke newly elected President Barack Obama on June 4, 2009 at Cairo University. Three days ago, Egyptian officials published a list of 43 people, including 19 Americans (including Sam LaHood, son of Transportation Secretary Ray LaHood), accused of interfering in Egypt’s internal politics. In recent Parliamentary elections, the Muslim Brotherhood, an anti-Western Islamic group that had been banned under former President Hosni Mubarak garnered 47% of the vote. Al Nour, a hard line Islamic organization won 25% of the seats. The secular liberal group, Egyptian Bloc picked up 9%. Egypt looks to be becoming an Islamic state. Kamal Ganzoui, Egypt’s current Prime Minister, said he will not halt his government’s crackdown on protestors. It would be hard to argue that relations with the Muslim community have improved.

Iran continues toward nuclear capability, undeterred and unrepentant. They ignored the United States’ tacit support for the country’s demonic regime during the “Green Revolution” that began nine days after Mr. Obama’s speech in Cairo, a ‘revolution’ that followed the dubious re-election of President Mahmoud Ahmadinejad on June 12, 2009. Videos of demonstrators being bludgeoned and shot did not soften the heart of the Administration in Washington. The death of twenty-six year-old Neda Agha-Soltan, shot in the heart on June 20, was videoed and put up on YouTube. It has been described as “the most widely witnessed death in human history.” Washington stayed aloof. This past Monday, in a bid to head off a possible strike by Israel, the U.S. imposed new penalties and sanctions on Iran – the seventh announced sanction since the first in December 2006. Thus far, sanctions have had little effect. The Iranian government has persisted in their pursuit of a nuclear bomb and, should the West persist, they have threatened to shut down the Strait of Hormuz, through which pass 20% of the world’s crude production.

Since the uprisings began in Syria just over a year ago, an estimated 5400 Syrian civilians have been killed, according to UN reports. Just as the carnage was commencing in Syria a year ago, the United States reinstated diplomatic relations with the appointment of Richard Ford as Ambassador, six years after President Bush recalled Ambassador Margaret Scobey in 2005. Finally, early this week, President Obama recalled Ambassador Ford.

Eleven years after United States Special Forces, in Operation Enduring Freedom ousted the Taliban from Kabul, Afghanistan, they have returned. It was the Taliban, in control since 1994, that permitted Al Qaeda to set up the camps that trained the terrorists who killed more than three thousand – knocked down the World Trade Center towers, crashed into the Pentagon and caused the deaths of forty passengers aboard UAL Flight 93 in a field just north of Shanksville, PA. While there has been much criticism of Afghan President Hamid Karzai, he has been far fairer to women than had the Taliban who forced women to wear Burqas, prevented them from going to school and had them stoned to death for minor infractions. Now the Taliban have returned. A week ago, a leaked U.S. military report suggested that once NATO-led forces withdraw from Afghanistan, Pakistan backed Taliban would move back in. The country is in turmoil, and we are leaving.

The situation in Iraq has been deteriorating since U.S. troops were moved out at the end of last year. Yesterday the New York Times reported that the U.S. plans to cut its embassy staff by half. Americans, according to the Times, were frustrated by what they see as Iraqi obstructionism and “are largely confined to the embassy because of security concerns, unable to interact with ordinary Iraqis to justify the $6 billion annual price tag.” Seven years ago, Iraqis held their first election in their country’s history. Five years ago, the United States began the “Surge”, a military operation unpopular in planning, but successful in execution. By the end of that year (2007), it appeared that the situation was improving. Two years ago, in 2010, Iraqis held their second election, with a voter turnout of 62%, better than we get in many elections. It would be a shame should Iraq drift back into secular violence, after so much time, money and blood was spent ridding the country of its dictator and establishing the principles of democracy.

The Middle East is, as Winston Churchill once described Russia, “a riddle wrapped in a mystery inside an enigma.” It is a place the United States has been involved with for generations. Sometimes in good ways; other times not. By far the most important exports we have are the principles of democracy. While I disagreed with the OWS protestors in Zuccotti Park last fall, others argued with Tea Party demonstrators in 2009, but none of us disagreed with their right to protest. Leaders of countries have accused the United States of interfering in their affairs, but almost always the people in the streets want democracy. No matter how unpopular the Iraq War had become at home by 2008, the principle of helping a people establish democracy was honorable and millions of Iraqis are better off today for our sacrifices of yesterday. Demeaning his predecessor, as Mr. Obama did in Cairo that June, 2009 day was wrong.

The birth of a democracy is never easy. In totalitarian regimes a small number of people have all the power and control all the money. They are not the “one percent”; they are the one-tenth (or one-hundredth) of one percent. Authoritarians never give up easily; they have too much at stake. The concept of sharing, inherent to democrats, is abhorrent to autocrats. Attempts at building democracies, so popular following the fall of the Soviet Union, have become criticized. In part that is because of the success of China and in part because of failures of democracies like Greece. Vladislav Inozemtsev recently wrote a piece in the American Interest, “The Cultural Contradictions of Democracy”. He writes of the European Union facing an existential crisis and of the United States running out of arrows “in its economic quiver.” “The patina of best-practice democracy,” he writes, “is not what it was two decades ago.” I think that is shortsighted. The principles of individual rights of liberty, and of governments of, by and for the people are ageless. There is, in my opinion, another issue that confuses some advocates of democracy and that is the building of a socialist democracy, the dream of many Europeans. That carries risk. As the state assumes additional responsibilities, tries to transform the nation, arguably for the well being of its citizens, it assumes more power. That, in turn, diminishes individual liberties…and democracy.

The issues that consume the Middle East are indeed serious – nuclear weapons in the hands of a regime that has vowed the destruction of one of their neighbors and has threatened to close oil’s lifeline must be taken seriously. Islamists seizing power in Egypt will not be helpful for our relations in the region. Those two countries represent the two largest populations in the Middle East. Iraq sits strategically between Iran and Syria. The demise of its democracy would be a setback in the region.

Markets, like politics, are a continuum. There is no beginning and no end. They may change direction, tacking 20 degrees south or 15 degrees west. But they persist. The world is never without risk. There are times when risk seems more obvious, as it does today. There are those who argue that Mr. Bernanke is keeping rates low – “sedating investors” was one headline – because of macro risks, images of which flit across our screens minute by minute. And those risks are real. But the most dangerous times are those that arrive unexpected, like the near credit collapse of 2008 – the most frightening time I have known in forty-five years on Wall Street. And, in that case, we were saved by men who many of us criticize today. I worry more about monetary policy and its consequences for savers and borrowers, than I do the Middle East. I note that the Euro has held up well against the dollar and speculate that it is not because of Europe’s inherent strength, but because of U.S. monetary and fiscal policies that are causing our currency to depreciate. I worry about politicians trying to transform our democracy. These are risks to the fundamentals of our liberty, and to our markets.

However, few of these worries have gone unnoticed in equity markets. The S&P 500, despite its 20% rise since October, is still where it was thirteen years ago. On the other hand, U.S. Treasuries are to be found in that rarified air that was last seen during the Great Depression. Thus, it seems obvious that if there is a bubble we know where it lies.