Thursday, May 31, 2007

Al Qaeda in al-Anbar

Proponents of the Bush administration's Iraq policy (such as Frederick Kagan) point repeatedly to one phenomenon as vindicating the whole past and future US strategy in Iraq. In recent months a swell of opposition to Al Qaeda has arisen among the predominately Sunni tribes of Anbar Province. Beginning last September, an alliance of tribal sheiks has formed into the Anbar Salvation Council (ASC), a group dedicated to driving Al Qaeda and other foreign jihadists from the soil of Iraq. The group represents a substantial (if not majority) constituency within Anbar, and its formation has completely transformed the strategic situation of Coalition forces operating within the province.

The ASC has joined cooperative negotiations with the Shi'ite-dominated government of Prime Minister Nuri al-Maliki. Its member sheiks have encouraged Anbari citizens to join the local police forces and militia, substantially increasing the manpower resources and prestige of local security forces. US soldiers find themselves operating with new mobility and effectiveness throughout Anbar Province, partnered with new allies possessed of intimate knowledge of the regional terrain and local society.

Pundits such as Mr. Kagan leap from these facts to the conclusion that the US occupation of Iraq should be intensified and extended. Now that "we" have Al Qaeda on the run, so goes this logic, we should keep the pressure on. If current troop levels committed to this point have produced such positive results, more troops kept longer will work to even better effect.

Such logic is fundamentally flawed. It ignores the basic fact that the current strategic turn in Anbar is not the result of any positive action undertaken by the US. The Sunni sheiks of Anbar have not formed the ASC out of fear of US power or love of US virtue. In fact, virtually all of its members admit freely that they were actively campaigning to make Anbar a living hell for US forces not so long ago. No change in US policy shifted the allegiance of the ASC's members, rather it was the repellent policies and tactics of Al Qaeda that drove Sunni tribal leaders into the camp of the Coalition.

Such a development was virtually a foregone conclusion from the outset. The Sunni Arab society of Anbar has historically been markedly secular and nationalist, conditions which made it fertile ground to serve as a base of support for Saddam Hussein's Ba'athist regime. The US invasion made Anbar's Sunni tribes welcome Al Qaeda's jihadist to the region as allies against the foreign invader, but prior to the US invasion Anbaris had never been positively disposed toward Al Qaeda or its militant brand of Islam. Al Qaeda's zealous and sanguine campaign to create a universal Islamic caliphate was sure to alienate the denizens of Anbar Province sooner or later. In March of 2006 I wrote that a staged withdrawal of US forces was advisable because it

...will drive a wedge between the most extreme elements of the Sunni insurgency led by Al Qaeda and secular Sunni Arabs with whom they are currently allied. In the face of the threat posed by the US ideological and nationalist tensions have already somewhat undermined the operational unity of the Sunni Arab insurgency, in the absence of that threat those tensions would likely cause the insurgent “coalition” to crack and hemorrhage personnel into the political process.

Current developments in Anbar do not prove my assertions wrong- quite the contrary. The fact that a schism between Al Qaeda and its Anbari allies has emerged even before US forces begin to withdraw only demonstrates that this fracture point is extremely fragile, so much so that it can be depended upon to break under its own strain with virtually no action by the US whatsoever (as I wrote in November of 2006, "once the US leaves the Iraqis will pass [the jihadists] like a kidney stone"). Withdrawal of US forces will not rob the ASC's campaign of momentum. US troops were not half as effective in Anbar before the formation of the ASC, thus it is the ASC itself and not the presence of US troops that is of crucial importance to the strategic trajectory in Anbar.

Beginning to withdraw US troops now will not lessen the ASC's animosity toward Al Qaeda, it will only compel the Sunni sheiks into closer partnership with the Maliki government. Such a development is profoundly to be desired, both from the perspective of the US and of Iraq itself. The only long-term hope for Iraq lies in the establishment of an effective and sustainable Iraqi central authority, and the extension of the Maliki government's reach into Anbar would be a critical first step in the development of just such a state apparatus. If anything, developments in Anbar evince the danger of withdrawing US forces too late rather than too early. One must not forget that members of the ASC were killing US soldiers until they decided that their hatred of Al Qaeda eclipsed their hatred of the US. When the moon eclipses the sun it does not mean that the sun is altogether gone, the good money is always on its reappearing. Keeping US forces in Anbar risks producing "occupation fatigue" that could cause cooperation between the tribes and the Coalition to fray, if not collapse. A timely and well-coordinated withdrawal of US forces from the region (coinciding with an expanded presence of the Iraqi military) is the best strategy for maintaining positive momentum in the struggle against Al Qaeda.

Saturday, May 12, 2007

Of China and Sub-Prime Bondage

Much attention has been focused recently on the potential impending crisis of sub-prime mortgages on the U.S. housing market. The past few boom years of soaring real estate prices both fueled and were fueled by a spate of irregular mortgages issued to financially insecure borrowers. Loans made on little or no collateral with widely variable interest rates have left many homeowners in danger of bankruptcy and foreclosure, as they find that their yearly interest rate has skyrocketed even as the value of their property has dropped far below its previous market price. Analysts fear that a wave of defaults could create a vicious cycle of foreclosures and fire-sale liquidations that would bleed U.S. real estate markets of massive equity.

While this situation is well reported, little has been said about its link to Chinese fiscal policy and U.S.-China trade relations. My brother, Lee Meyer, a securities analyst and salesman specializing in East Asian markets, observes an integral link between the forces sustaining the endemic Sino-U.S. trade imbalance and the growing crisis of sub-prime mortgages. China's foreign currency reserves have grown to 1.2 trillion dollars U.S. The reasons for this mounting pile of cash are well-understood: China has kept the value of the Renminbi (RMB) relative to the dollar artificially low so as to keep prices in China low and spur employment and economic growth. The ancillary effects of this policy have not been widely commented upon, however.

What relation may be drawn between Chinese fiscal policy and the sub-prime mortgage market? $350 billion of China's foreign currency reserve is held in U.S. T-bills. A further $230 billion of this cash, however, is held in bonds issued by U.S.-backed agencies such as Freddie Mac and Fannie Mae. These latter instruments are bonds that consolidate the debt of homeowners toward the purchase of their houses, much of which was generated by the issuance of risky sub-prime mortgages.

When one parses out the motives for Chinese fiscal policy, the link between it and the sub-prime mortgage crisis becomes clear. The PRC can only keep the value of the RMB against the US dollar artificially low by parking the profits from its massive trade surplus in U.S.-denominated assets. This has created a constant fund of cheap cash available to lenders in US housing markets. Bankers do not need to stringently calculate the risks associated with sub-prime loans because they know that they can always sell off that debt to an eager Chinese treasury in the form of a US-backed bond. The chronic need of the Chinese fisc to hypercirculate RMB has thus created a number of economic aberrations, including a Shanghai Stock-market bubble at home and a US real-estate market bubble abroad.

What the long term effects of this situation will be is anyone's guess, but most economists would agree that when there is a bubble it is bound to burst. The effects will not be good, the only open question is their ultimate severity. One lesson from the situation is clear: US complacency about the domestic political situation in China is self-defeating. US leaders express frequent frustration over Chinese fiscal policy and the distorting effect it has on Sino-US trade, but this ignores the deeper structural motives that perpetuate the anomaly. Chinese leaders continue to prime the economic pump that is causing securities and real estate bubbles for fear of the political consequences of any degree of economic slowdown. They hope that they will not be held to account for failing to deliver fundamental political reform as long as the Chinese economy continues to enjoy robust growth. How long this inherently unstable situation can be sustained is an open question. The political consequences of acute economic collapse are likely to be far more grave than the instability that might be engendered by proactive and preemptive reform, but this contingency does not seem to have registered upon China's leadership. If such an acute collapse does occur it will most likely cause the US suffering to parallel that of China, and at that moment America, having enjoyed the prosperity that inflated real estate markets brought, will have reaped the whirlwind.