Shadow Government

The speech: Not great, but a brave decision at long last

By Peter Feaver

It was not a great speech but it was, at long last, a brave decision and President Obama deserves (and needs) the support of the loyal opposition.

As speechcraft, it was disappointing. The front section was oddly defensive, with its graceless passive voice avoidance of crediting the old policies and its needless albeit veiled shots at Bush, its tendentious rendering of the Afghan war timeline, and most unfortunate of all, its artless spin ("there has never been an option before me that called for troop deployments before 2010, so there has been no delay or denial of resources necessary for the conduct of the war.") The discussion of the stakes and the rationale for this option over alternatives and the explanation of the logic of this strategy (and why it will work when previous ones did not) was flat. It was certainly helpful that he included the middle section with its explicit pre-buttal of three counterarguments, but he straw-manned those critiques and I did not find his counterarguments very persuasive (even on the ones I agreed with). The penultimate section, a laundry list of to do items and bromides sounded like a flat State of the Union address (mercifully without the jack-in-the-box response to applause lines).  

The brightest spot, rhetorically, was the surprising ode to America with which he closed the speech. It was Reaganesque, thick with praise for what America has done (and not merely what it should have done) and almost entirely devoid of the apology-tour lines that many have found so grating (save one that escaped the editor "... and perhaps not as innocent ..."). This was the section that got the spontaneous applause -- patriotic paeans will always please patriots who volunteer to serve in our armed forces -- and it was the high point of the speech.

(For those who had ears to hear, there was a (perhaps unintended) homage to Secretary Rumsfeld: Obama referred to the conflict-formerly-known-as-the-war-on-terror as a "struggle against violent extremism" very close to the GSAVE -- Global Struggle Against Violent Extremism -- that Rumsfeld peddled.)

But as policy, it was much better. It was almost exactly what you could have predicted (and many did predict) within days of the McChrystal leak: a "split the difference" hybrid option, not exactly what the commanders requested, but closer to that than the "security on the cheap" options that were leaked out of the review process. The president talked about timelines, but I do not think he tied himself to the mast. He didn't specify a date certain by which time he would "end" the war; instead, he identified a target for when he would begin to roll back his surge. That target was far enough into the future to allow him ample wiggle room yet, conveniently for the 2012 election, early enough to perhaps head of a primary challenge from a hard-left anti-war candidate.  

And, bottom line: He did not evoke memories of Patton but he did evoke plenty of criticism from the left (judging from the early punditry on MSNBC) because Obama ordered a surge and committed himself to successfully ending the war, not just ending it. Perhaps that is all and more than can be expected.

Shadow Government

Dubai no longer flying high

By Phil Levy

It is hard to imagine a topic more esoteric than a Persian Gulf property developer seeking a freeze on its debt payments. And yet newspapers are aflutter with special crisis sections, world markets are trembling, and analysts are opining on inter-emirate relations in the UAE. Why do we care?

The financial teetering of Dubai World looks like the next big chapter in the global financial crisis. It bears striking resemblance to some of the earlier chapters: Easy credit financed outlandish property investments (including, in this case, a ski resort in the desert). When property markets declined, it proved difficult to make payments. We discover that banks and other important financial institutions are owed tens of billions of dollars. These important institutions then turn their doleful eyes to a rich government and plead, "Help."

But here the new chapter takes an interesting turn. The governments who might plausibly help are those of Dubai and its fellow emirate Abu Dhabi. A major reason investors were willing to fund the corporate fantasies of Dubai World was its apparent backing by the well-endowed local governments. What could go wrong with a $60 billion loan to Dubai World, when nearby Abu Dhabi has a $900 billion sovereign wealth fund?

There were not explicit promises of government backing, but who has time for fine print or disclaimers? Those caveats, particularly opaque in this case, read: 

The government was "not legally obliged" to meet the obligations of related entities -- what is commonly referred to as Dubai Inc -- but might at its sole discretion decide to extend such support.

Almost a week after the company announced it could not make its payments on time, there was helpful clarification from Dubai: 

The heavily indebted Dubai World is not guaranteed by the emirate's government, a top financial official from the city state said Monday ...

Abu Dhabi said it might step in with a little assistance on a "case-by-case" basis.

This stiff-arm from the governments is the novelty. It is not unprecedented; the United States tried it with Lehman Brothers back in September 2008. Even then, the rationale was that the U.S. government did not have the tools to take a gentler approach. The disastrous aftermath of Lehman Brothers' failure was interpreted to mean that big, financially-interconnected institutions could not be left to the mercy of the markets. To address problems of moral hazard, Western governments decided they would just need to supervise big financial firms sufficiently closely that they would stay out of trouble. The Financial Stability Board, an entity promoted to deal with the crisis, just today put forward a list of thirty global banks and insurers who could pose a systemic risk. Not a single property developer made the cut.

Military planners are sometimes criticized for planning to fight the last war, not the next one. In the case of the financial planners, it is not even clear which war they are addressing. While U.S. banks have certainly received billions in bailout funds, the really big money went to government-sponsored enterprises such as Fannie Mae and Freddie Mac. As with Dubai World, they racked up substantial liabilities through unwise property investments. As with Dubai World, they were able to gain easy and cheap access to credit because it was widely assumed that the government stood behind them. As with Dubai World, that backing was not explicit. Unlike Dubai and Abu Dhabi, the U.S. government ultimately picked up the tab.

Thus, a major lesson of the financial crisis is the danger of having institutions that are too big to fail. Implicit government guarantees encourage foolish lending on the part of investors. And yet, as my colleague Peter Wallison has written, current legislation on financial reform moving through Congress would establish "too big to fail" as national policy. 

That is what makes the case of Dubai World so interesting. If the governments of Dubai and Abu Dhabi keep their wallets closed, it will be a rare test of the proposition that big, financially interconnected institutions must be bailed out. As with the other chapters of this financial crisis, it may have its scary parts, but it could also deliver a new moral to the story.