Geopolitical Risks on Wall Street Jude Wanniski March 22, 2004

There is little doubt that Wall Street is getting increasingly concerned about an escalation of al-Qaeda attacks here and in Europe causing problems to commerce. This morning’s Israeli assassination of Sheik Ahmed Yassin, the spiritual leader and founder of Hamas, on the grounds that he has played a direct role in plotting suicide bombings in Israel, has only compounded the geopolitical risks the financial markets must now discount. The weekend political talk shows, which of course took place prior to Yassin’s death, were dominated by the topic of global terror without a single mention that I could see about the Arab/Israeli struggle. In his column this morning, Robert Novak spotlighted a Stratfor intelligence report that now believes al-Qaeda has been so emboldened by its success in contributing to the regime change in Spain last week that it now may be planning an attack on the U.S. this summer.

Novak notes Stratfor thinks it would be "summer," to help Senator Kerry defeat President Bush in November, not "autumn," where an October surprise would have the reverse effect. The hypothesis suggests the electorate would parse such an attack accordingly, but the logic escapes me. The assassination of Yassin, now being defended by Condoleezza Rice with President Bush’s support, does have a more direct bearing on homeland risks. That is because as Al Qaeda now promises retaliation against the U.S. whether or not it helps or hurts the President’s re-election chances. The reaction on Wall Street and in the gold market tells us investors worldwide are planning for a smaller global economy in the period ahead. Gold is now up $16 in the last few days to $418, but it has risen almost as much in euro and yen terms. It will hit the dollar/gold price harder because the Fed’s operating mechanism is directly tied to the demand for liquidity, while the operating mechanisms of the ECB and BoJ are not so directly linked.

Even if militant Islam cannot penetrate U.S. homeland defenses as easily as they did on 9-11, the threat against Americans is worldwide and need not be as destructive as 9-11 in terms of the loss of lives and property. A threatening cloud at the margin will cause a change in behavior of families planning a summer outing. Businessmen who were thinking of hiring new employees because profit opportunities have been remaining steady will observe these weeks of decline on Wall Street and pull in their horns again. For Mr. Bush who has been counting on a more robust job market going into the elections, these new risks to the economy could be more politically damaging to him than any attack on the U.S. communication or transportation network.

Although the Sharon government had openly announced that Sheik Yassin was “marked for death” and had tried unsuccessfully to assassinate him last September, it still had to cause some distress within the Bush Administration that it happened now. Supporters of Sharon’s policy of pre-emptive assassinations of Palestinian leaders make the argument that even though Yassin may not have been involved in planning suicide attacks, all Hamas leaders bear responsibility for their being carried out. If so, there will be no end in sight to the continued conflict that now threatens to escalate to a higher level in the Middle East generally. From the Palestinian viewpoint, whether we like it or not, Yassin really was a spiritual leader who founded what originally amounted to a Palestinian Benevolent Society. The Hamas militants who have regularly taken credit for the suicide bombings along with the Al Aksa Martyrs Brigades were as much outside his "control" as the IRA could not be controlled by the Archbishop of Belfast. This is the viewpoint that will dominate the entire Muslim world and is bound to increase the growing anti-American animosity in Europe. As the events in Madrid clearly showed, through the European public opinion polls across Europe, the U.S. war in Iraq has been seen as being the result of Washington’s blank check to Ariel Sharon and his Likud Party.

A proper response from the White House could ameliorate this dangerous threat to the world political economy, but it would have to mean President Bush putting his focus on the Arab/Israeli conflict in a way he has refused to do throughout his presidency. The only public figure I have heard make that recommendation in recent days was John McLaughlin, on his "McLaughlin Group" show a week ago Sunday. President Carter’s National Security Advisor Zbigniew Brzezinski has been more or less saying the same time for many months. That is, if the Islamic world would see Mr. Bush putting real pressure on Sharon to reverse a course that can now lead only to heightened conflict it would not turn to extralegal suicide attacks in retaliation. The chance of that happening is especially small now, given the expected "dead-heat" in the contest between Senator Kerry and Mr. Bush, with neither of them wanting to lose the Jewish vote, which is considerable in the key state of Florida. It is because of this readily observable corner of the chessboard that Prime Minister Sharon can see he will have a free hand up to November 2 and might as well make the best of it.

It bears mentioning that every important Arab leader in the Middle East has told the Bush administration that practically all of the terrorism emanating from Muslim ranks would disappear if there would be resolution of a Palestinian state. Prior to 9-11, Osama bin Laden in so many words said the same, listing as his three goals the removal of U.S. troops from Saudi Arabia, the ending of the UN sanctions against the people of Iraq, and sovereignty over the Islamic holy places in Jerusalem. A Palestinian state would remove the administration’s rationale for having control of Baghdad in order to protect Israel from hostile neighbors. It would then more easily be willing to turn Iraq over to some sort of UN trusteeship than it is now, and there would be some light at the end of that tunnel. Will any of this happen in time to rescue the world financial markets and global economy from perpetual meltdown? Probably. That’s the best I can do at the moment.

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