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March 7, 2003
Most people in the credit markets assumed the economy slowed in February, and interest rates fell this week in anticipation of a lousy employment report this morning. However, nobody expected the reported loss of 308,000 jobs, and low-fee mortgage rates fell through the brand-new 5.625% floor set Tues-Thurs to 5.50%.
The call-up of reserves explains some of the job loss, but other data are consistent with approaching "double-dip": the purchasing managers' index, the Fed's "beige book," chain-store and auto sales, and unemployment claims all concur.
Mr. Greenspan announced on Monday that refinancing activity had peaked, an assertion made wrong more quickly than any of his assurances of economic recovery in the last two years. When consumers discover what has happened to rates, they will unleash a wave of refinances as big as any. The Great Man is off his game.
Economics be damned; Iraq remains the overwhelming focus of the financial markets. Wags refer to markets reconstituted as the "Wall Street War College."
This preoccupation with Iraq is misplaced. The week's events have made clear that a great deal more is at stake.
The system of collective security which has protected the West for a half-century has passed into history. The joint press conference of Joschka Fischer, Dominique de Villepin, and Igor Ivanov marked the moment. NATO, formed to prevent another European war, was the foundation of the old security system (not the UN), and NATO has rested on a common conviction: the need to "keep the Americans in, the Germans down, and the Russians out." None of these three desires exists today.
At some point, the American guardianship of Europe was bound to expire, and a moment of conflict might have been the inevitable catalyst. France, Germany, and Russia will no doubt enjoy working together, out from under the suffocating American blanket; but, historically, they have never been good at it for long.
As of this week, we are on formal notice that the West has no idea how to defend itself against the new, intertwined threats of militant Islam and proliferation of weapons of mass destruction in undeterrable hands.
Mutual misunderstanding abounds among ex-allies, a condition much more dangerous than disagreement. America has accepted the responsibility to arm itself, and thinks it should have corresponding authority; hence, we appear overbearing without meaning to be so. The combined armed forces of France, Germany, and Russia would not present a credible threat to Saddam, yet these nations demand authority, speaking of "disarmament by peace," assuming the over-eager American cowboys will always ride to the rescue when called.
The deeper misunderstanding may be America's. For a century, America repeatedly defended allies vulnerable to hazards more grave than any facing America. Now, America faces greater threat than any of our allies except Israel (our unlimited support for that nation, and natural resistance to our immense power and success are the causes of that threat). Our ex-allies feel safety in inaction; we do not. Whether the failure in the Security Council is more our ex-allies' or ours, I lean toward belief that America's now-greater need for collective security requires deference on our part in search of support, holding unilateral action for extremis.
It will take a long time to cobble together a new security system, and markets, businesses, and civilians had best get used to the idea of semi-permanent re-introduction of risk of war as high as any in the Cold War.
There's no decisive help for the economy coming from the Fed, or from either party's "stimulus packages." Recovery is up to us, to our ability to shed anxiety and move on. Buckle up, just as after 9/11; look after friends; disagree, sure, but try to stay out of the blame-and-black-anger pit of partisanship. Collective security, right?
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