While the continuing wars in Iraq and Afghanistan have not receded from centre stage, the American military juggernaut seems to have lost its appetite for opening a third front against Iran. Almost out of the blue, however, a new theatre has emerged on the US home front.

As in the preceding two wars, the blame was put initially on a failure of intelligence. Like its predecessors, the new war was also to be fought against an invisible enemy, which was hiding not in the Tora Bora mountains in faraway Afghanistan (or in adjacent hideouts in Pakistan) but in the tall towers of Wall Street and other financial centres.

The enemy’s ideology transcended religious and political boundaries and was based on such indefinable characteristics as ‘greed’ and ‘irrational exuberance’. However, in the past 10 years it had received considerable encouragement from the dominant neoconservative ideology whose market fundamentalism was no less dogmatic than the religious fundamentalism of the architects of the 9/11 disaster.

The war metaphor is being used frequently in discussions of the financial crisis in the United States. Warren Buffett, the renowned financier, recently described the new instruments of financial innovation as financial weapons of mass destruction. And the way the US government and the Federal Reserve Board (which may be considered counterparts of the Pentagon and the State Department) have decided to combat the financial meltdown is clearly reminiscent of the way the decision to wage war in Iraq was made.

The congressional bill presented last week to enable the administration to clean up the accumulated financial toxicity has a price tag almost as large as the five-year-old Iraq war. It seeks unlimited authority and a war chest of $700bn, without a proper examination of consequences and with unprecedented lack of detail. However, the bill is facing far tougher resistance in Congress than the passage of the Iraq war bill five years ago, which was called Authorisation for Use of Military Force. Detractors of the current bill are calling the proposed legislation Authorisation for Use of Financial Force or, even worse, “cash for trash”.

The bill, which comes on the eve of the presidential and congressional elections in November, faces tremendous opposition from voters who perceive it as a reverse Robin Hood operation in which taxpayers, many of whom have lost their homes or who face default on their mortgage, credit card, car and college loans. Many in America feel they will be made to pay through future tax burdens in order to bail out the fat cat corporate executives with million-dollar ‘golden parachutes’. Barely three days after the bailout plan was revealed, President Bush, facing the possibility of its rejection by Congress, had to appear on prime time television to address the nation and allay its fears about the daylight robbery most people felt was being committed to save the financial barons of Wall Street.

In a veiled attempt to give an edge to Republican presidential candidate Sen McCain, who had announced the suspension of his election campaign to avert the financial meltdown through bipartisan changes in the bill, he invited the two presidential candidates to join him, the congressional leadership and officials piloting the bill to help arrive at a consensus solution regarding the scope and content of the legislation. Congress is reluctant to give the administration a blank cheque and has asked for assurances about protecting the public interest. Sunday’s parleys have culminated in a tentative bipartisan accord but the Bush administration will most probably not be granted the sweeping powers it seeks.

For one thing, the money will be released in tranches, it seems, and how it is spent will be subject to review. Also, the bill is yet to pass the House of Representatives and the Senate, and a presidential veto of an amended version cannot be written off either.

The US president, who had to cut short his visit to New York to attend the UN General Assembly session, couldn’t help referring to the new war effort in his maiden meeting with Mr Zardari, even though the latter would have liked to discuss Mr Bush’s first war on terror, which has inflicted untold damage on Pakistan. The latest manifestation of the battle against terrorism came in the shape of the bombing in Islamabad of the Marriott hotel, a symbol of the Pakistani elite’s opulence and profligacy as well as a favourite five-star billet for foreigners, including US citizens and marines. The preoccupation of Mr Bush with the US’s financial difficulties, however, puts a damper on Mr Zardari’s hopes of getting any substantial American help in bailing out his country from its own economic meltdown, at least during the remaining days of the Bush administration.

Although the main source of the current financial mess in the US is generally said to be the sub-prime crisis, stemming from the housing bubble that had been waiting to burst for the last few years, its underlying causes are much deeper and its impact much wider. The current crisis had been anticipated by many analysts, who characterised it as a train wreck in slow motion which could have been prevented at different stations had signals been in place and the red lights not been ignored.

The underlying philosophy of the US central bank, especially under the watch of Alan Greenspan — eulogised by the financial press as the greatest central banker of all time and considered by some to be the architect of the US financial bubble — has been that the private banking system is self-policing and does not need an elaborate regulatory mechanism. Any mistakes it makes are remedied by market corrections, sooner or later. The Fed’s most egregious failure as a regulatory body in the current context was to approve the creation of dubious credit instruments such as mortgage securitisation, whereby instead of holding mortgages banks would simply originate the loans and would then distribute them to investors, such as pension and hedge funds.

This technique, called originate and distribute, gave rise to a runaway process of credit creation similar to a Ponzi scheme, which ultimately becomes unsustainable and results in massive defaults. As a result, Greenspan presided over the most reckless debt binge in US history which helped create the housing bubble. When housing prices began plummeting and borrowers stopped making payments, financial institutions found themselves with huge inventories of bad loans. These investments are so intertwined and complex that no one seems able to figure out what they are worth. So no one has been willing to buy them. This is the crux of the difficulty faced by the $700bn Bernanke-Paulson bailout plan, which aims to buy these assets through the creation of a new government agency.

Even if the Treasury-Federal Reserve bailout plan clears all the hurdles, it is doubtful whether it will be any more successful in bringing stability to the US financial system than the Pentagon and State Department have been in bringing peace to Afghanistan and Iraq. America’s military and financial supremacy are both on the block.

syed.naseem@aya.yale.edu

IN a week when the wheels nearly came off the US economy, the gloves came off in the presidential race. Barack Obama and John McCain continue to say they favour a bipartisan approach to solving the nation’s problems. But vicious congressional infighting over the bailout, last Friday’s terse, testy televised debate and the ensuing raucous slanging match have again exposed and dramatised the deep political and cultural divisions lurking just below the surface of American life.

All earlier talk of a “new politics” is now dead and buried. The subliminal message from both campaigns to voters as the race enters its final month is clear: It’s time to decide whose side you’re on — and step up to the plate. Nationally, the polls show the battle finely poised at 47-43 in favour of Obama. Each party is searching for advantage. A stumble, a gaffe or a smear could yet change everything.

Obama is using the economy as an anvil on which to beat McCain. “The truth is, through 90 minutes of debating, John McCain had a lot to say about me, but he had nothing to say about you. He didn’t say the words ‘middle class’ or ‘working people’,” Obama said at a North Carolina rally following last week’s TV head-to-head. To the noisy accompaniment of crashing banks and collapsing markets, the Democrat is now unapologetically positioning himself as the champion of “ordinary folks”. The enemy? Greedy Wall Street fat cats and their governmental and Republican cronies.

Having kept his powder dry on stage in Oxford, Mississippi, McCain is loading for bear. He was widely criticised for rushing back to Washington to help negotiate a bail-out deal. Democrats called his move a “stunt”.

Now a deal has been initialled, Republicans say he did the responsible thing while Obama sat idly by, polishing his debating points. According to McCain on Sunday, Obama’s aim is to exploit the crisis for political gain first, and solve it second.

— The Guardian, London