The bursting global security bubble

In the 1930s and 1940s, the West’s financial and security structures collapsed. In the grip of a speculative bubble, and in the absence of proper oversight, banks had been allowed to lend more money than they responsibly could. (Sound familiar?) When queasy depositors sought to withdraw their money en masse, the result was a massive collapse of banks and the stock market, followed by the Great Depression.

The world was then engulfed by World War II, during which about 70 million people were killed–partly because jingoistic nationalism is always exacerbated by economic depression and dislocation, but also because the victors of World War I imposed what historians now see as an unfairly punitive settlement on Germany, facilitating the rise of fascism there. In the absence of a stable system either of treaties or deterrence, aggressively nationalist European powers were unable to manage their rivalries with restraint. The consequence was war on a scale beyond imagination.

Human history is the story of complaisance. While disaster is fresh in our memory, we take precautions. But as the memory of disaster recedes, we start to take risks.”

The post-World War II order was supposed to be one in which wise men had fixed these problems, ensuring that supersized stock market crashes, great depressions, and genocidal wars would never happen again.

On the economic side, banks were regulated to make sure they lived within their means, and government spending and monetary policy were used to smooth out the business cycle and keep unemployment within parameters that didn’t threaten the social order.

On the security side, a combination of alliances and treaties evolved to manage and balance the competition of the day’s two superpowers–the United States and Soviet Union. After the near calamity of the Cuban Missile Crisis, the superpowers learned to avoid each other’s red lines, engage one another in a sustained conversation about their military programs, use treaties to keep these programs within bounds, and cooperate in reining back the proliferation of nuclear weapons to other countries. They also added features such as permissive action links to their nuclear weapons to make an unintended explosion less likely.

But human history is the story of complaisance. While disaster is fresh in our memory, we take precautions. As the memory of disaster recedes, kept alive only in history books and the fading memories of the aged, we assume that the fruits of precaution are the natural order of things. So we start to take risks. And if the risks pay dividends in the short term, we take more risks, finding reasons not to see that we’re building an edifice of risk that can only eventually collapse under its own weight.

So it was that financiers, economists, congressmen, and regulators talked themselves into believing over the last decade that the economic laws of gravity had somehow been repealed. Otherwise intelligent people professed to believe that house prices could climb far in excess of any other indices of wealth and that a substantially unregulated new banking system, based largely on mortgages and their derivatives, could arise without calamity. If in the short term this produced great prosperity–especially for Wall Street and the politicians and regulators who enabled such a pyramid scheme–the longer-term consequence was a calamity whose full extent we don’t yet know.

And what of the other shoe? Are we at least doing a better job of keeping World War III or a nuclear calamity at bay? I think not. The wars in Iraq and Afghanistan show that we have already, sooner than I would have thought possible, unlearned the main lesson of Vietnam–that occupying faraway countries usually ends badly. (This lesson was articulated in the so-called Powell Doctrine back when former Secretary of State Colin Powell was a reasonable person.) U.S. troops are now involved in direct military attacks against the territory of a nuclear power, Pakistan. Thus, Washington is violating a principal rule of the road the two superpowers worked out during the Cold War: Never let the troops of two nuclear powers engage one another directly.

In addition, Washington is going to extraordinary lengths to weaken the Nuclear Non-Proliferation Treaty so that U.S. companies can reap the short-term financial benefits of selling nuclear fuel and technology to India. (A side note: One benefit of the financial meltdown is that Congress is now too busy to approve this deal.) Ignoring the advice of many arms control experts, the five U.S. presidential administrations in power since the end of the Cold War have been slow to secure loose nuclear material and reduce the number of nuclear weapons in the world, and have failed to de-alert nuclear weapons still on hair-trigger alert or negotiate a fissile material cut-off treaty. Not to mention, the air force has become so careless about nuclear safety that it recently flew nuclear-armed cruise missiles around the country without realizing it.

Then there’s the matter of Russia. George H. W. Bush and Mikhail Gorbachev had a handshake agreement that NATO wouldn’t expand to Russia’s borders if the Soviets allowed Eastern Europe to go free. But in one of the most short-sighted and dishonorable decisions in recent U.S. history, Bill Clinton and George W. Bush found it convenient to violate this agreement. Currently, Washington is busy absorbing Russia’s former allies into NATO and building military bases and missile interceptor sites close to Russian territory. This is the military equivalent of building a financial empire based on credit default swaps. It’s also Versailles all over again, and we should hardly be surprised that the Weimar figure of former Russian President Boris Yeltsin has been replaced by the efficiently brutal neo-fascism of current Russian Prime Minister Vladimir Putin, that Russia is back in the business of invading neighbors, or that the Russians are planning to increase their military spending by 25 percent this year.

When financial systems and security orders collapse, we learn that everything is connected. This is a hard lesson for Americans to learn since they’re ideologically predisposed to believe that every man is an island who can be prosperous and secure while others are not. But now we’ve learned that when poor people in modest neighborhoods lose their homes, the money drains out of our retirement funds and investment banks collapse; and when U.S. banks collapse, they can take European banks and the Russian stock market with them. We’re (hopefully) about to see CEOs lose their mansions because they didn’t care that plumbers and mechanics were losing their three-bedroom starter homes.

Economists like to talk about soft and hard landings when economic bubbles burst. At the moment we’re in the midst of a very hard landing. And what about the security bubble we’ve created? Will that be a soft or hard landing when it bursts?