Gates fights the last war

By Kori Schake

There is an interesting, if unsurprising bit of news in today's Post:

Defense Secretary Robert M. Gates is expected to announce on Monday the restructuring of several dozen major defense programs as part of the Obama administration's bid to shift military spending from preparations for large-scale war against traditional rivals to the counterinsurgency programs that Gates and others consider likely to dominate U.S. conflicts in coming decades.

Gates is setting a course to focus on counterinsurgency that will likely come at the expense of other military capabilities when budget trade-offs need to be made. The wars we are fighting do not refute transformation. Much of what Rumsfeld identified as the central advantages and central weaknesses of our military actually have been validated: our space infrastructure is too weak for the increasing demands we place on it; integrating battlefield information with long-distance precision strike allows U.S. forces to react with a dominating speed; and persistent surveillance is revolutionizing our operations.

Gates's emphasis on institutionalizing counterinsurgency sounds remarkably like fighting the last war, and too little effort has been directed toward redressing those vulnerabilities in U.S. military power most likely to produce losses in future wars. The United States is already reasonably good at counterinsurgency, as a result of the Iraq war, and the equipment has adapted relatively quickly despite a balky Pentagon bureaucracy. Gates is adopting a conservative approach that will make other, harder adaptations -- like handling cyber attacks -- more difficult in the future.  

All of this comes at a time when, despite two years at the helm of the Defense Department, Gates did not put his stamp on the medium-term spending plans that shape America's defense effort. With the important exception of his emphasis on Mine Resistant Ambush Protected (MRAP) vehicle acquisition, he submitted two budgets and several supplemental spending requests that did not make hard choices. While questioning the need for some systems, Gates has continued to fund them. Indeed, he developed a FY2010 budget last fall -- after the election of his current boss -- that would have increased annual defense spending to $584 billion, a significant jump over even the Bush administration's sustained seven percent yearly spending increases. 

These budgetary issues are important in their own right, but they also serve as a reminder that Gates's strategy for this year's Quadrennial Defense Review (QDR) is focused on the wrong set of questions for defining U.S. defense policy. Last year, just as Obama was being inaugurated, Gates preempted the new administration's defense program by publishing a National Defense Strategy and excerpting it in Foreign Affairs. His strategy is a paean to "balance," but it and Monday's likely announcement will set a course for the QDR strongly weighted toward counterinsurgency. In judging that "the most likely catastrophic threats to the U.S. homeland ... are more likely to emanate from failing states than from aggressor states," Gates has set in motion a substantial revision to U.S. defense strategy that goes much further than institutionalizing counterinsurgency warfare capabilities or wrestling with the means of fighting and winning hybrid wars. 

No president can relegate catastrophic threats to the homeland to second place in the hierarchy of defending our national interests. In determining that failing states are the major threat to the U.S. homeland, Gates has said the military means to prevent them from affecting our security is job number one. This will require a much different emphasis in the number and type of our military forces, and in the balance between them and the civilian agencies.

Gates's approach is likely to perfect our counterinsurgency capabilities, but seeing the excellence we have developed because of the wars we are fighting, even insurgents will surely probe for other vulnerabilities. And our future wars will not be waged exclusively against insurgents. Nor will they focused merely on stabilizing weak and failing states.

Rumsfeld denigrated the human element of warfare to focus on high-tech innovation. His successor is about to make the reverse mistake.

Shadow Government

The G20 pushes on a string

By Phil Levy

The G20 leaders meeting wrapped up in London with a long list of promises of virtuous behavior in the future. Close followers of global summitry may remember back to the last such meeting in November, when solemn vows of fealty to open trade were broken in short order. If a skeptic were to set aside the more nebulous statements of intent and dismiss the self-congratulations on policies already adopted, what did the meeting really accomplish?

The headline number was $1.1 trillion of new money, with most of that flowing through the International Monetary Fund and some through the World Bank. According to the Financial Times,

When all the sums are added together, rather than $1,100bn, the new commitments appear to be below $100bn and most of those were in train without the G20 summit.

Even if one were willing to credit the G20 with the much larger figures, there was an oddity about their IMF ardor. It seemed to suggest that one of the key difficulties so far has been a shortage of resources at the IMF. In fact, the IMF just had to rework its loan offerings since a recent attempt at a no-conditions loan facility attracted not a single customer. When the IMF assessed its own likely needs prior to the London meeting, it requested $250 billion. So the G20 promised $500 billion.

This seems like a new twist on John Maynard Keynes's "pushing on a string." The phrase usually describes a situation in which monetary policy cannot work anymore. Central banks drive interest rates to zero and then have real challenges getting more money out the door. The exhaustion of traditional monetary policy is the rationale behind the rediscovered passion for fiscal stimulus, as well as unorthodox measures by the central bank.

In the case of the IMF, the problem is that many countries are determined to avoid these measures. In Asia, after the financial crisis of the late 1990s, this has been a major motivation for the large buildup of currency reserves: no reserve crisis, no IMF. There is similar antipathy in Latin America and Africa. Traditionally, countries have complained about the policy conditions the IMF has attached to its loans. Now, there is a sufficient stigma that even condition-free loans are a hard sell.

This is not to argue that all of the IMF money will go unused. There seems to be enough trouble looming in central and eastern Europe that the IMF will find some takers. That, in turn, should help western European banks that made extensive loans to the region. But doubling the IMF's request is unlikely to double the impact.

Increasing regulation was the other key focus of G20 attention. It has its own string-pushing issues. The fascination with regulation stems from a belief that the current crisis was caused by either a lack of regulatory power, or through wild American deregulation over the last 8 years. There are some oddities about this belief. As my colleague Peter Wallison has argued, the major financial deregulation that is cited, the repeal of restrictions on mixing regular and investment banking, was undertaken at the end of the Clinton administration. The only important role it seems to have played in the crisis was to allow Bank of America to take over a troubled Merrill Lynch.

Poor regulation was certainly an important cause of the crisis. There is a fascinating story in the Washington Post about the regulation of major banks such as Citigroup. The key U.S. financial institutions were under the supervision of the New York Fed, run at the time by now-Treasury Secretary Tim Geithner. The Post concludes:

A confidential review ordered by Geithner in 2006 found that banking companies could not properly assess their exposure to a severe economic downturn and were relying on the "intuition" of banking executives rather than hard quantitative analysis...

Records and interviews show that Geithner and his colleagues did not employ some of the harsher tools at their disposal to bring the banks into line. From 2006 through the start of the credit crisis in the summer of 2007, they brought no formal enforcement actions against any large institution for substandard risk-management practices. The Fed also did not use its confidential process during that period to downgrade any large bank company's risk rating, according to two people familiar with the process, a step that could have triggered costly consequences for the firms.

At least Mr. Geithner knew enough to worry. In the context of mortgage regulation, former Senator Phil Gramm writes: "It was not that regulators were not empowered; it was that they were not alarmed." Nor is this a uniquely American problem. The troubled European banks that relied heavily on dubious AIG credit default swaps to avoid capital requirements were under the watchful gaze of European regulators.

Poor regulation and inadequate regulation have very different implications. If our difficulty was that regulators were human and fallible and unwilling to use the tools at their disposal, it is not clear how expanding the tools at their disposal will solve the problem. We can at least be grateful that President Obama resisted French and German attempts to go even further on the regulatory front.

Thus, it appears the G20 did little harm, but did little to save the world either. At the core of the current global crisis lie failed banking systems. As the communiqué noted, "Our actions to restore growth cannot be effective until we restore domestic lending and international capital flows." The leaders promised to work on that in unspecified ways.

Perhaps it's better not to examine these things too closely. We can be happy that the whole thing went off without walkouts or fisticuffs (at least not inside the meeting hall). It can be reassuring just to close one's eyes and try to believe the leaders' grand proclamations that they are taking dramatic joint action and that we are swiveling around at an historic turning point.