It is extremely hard to know how big a crisis is while it is actually unfolding. Retrospectively, we tend to think of crises, whether financial or geopolitical, as one-day wonders: think of "Black Monday", the stock market crash of October 19, 1987, or 9/11, the terrorist attacks of six years ago. This notion of short, sharp shocks fits in well with our human inclination to live for the moment. Perhaps it is also a symptom of our era's chronic attention deficit disorder.
Yet the really big crises in history unfolded over months and years, not mere days. In these protracted sequences of events, there were many gloomy nights, but also many false dawns. Because hope springs eternal, people tended to attach more importance to the latter than the former, mistaking them for real dawns and blinding themselves to the underlying downward drift.
I think we are in one of these protracted crises now - or, rather, in two of them. An encouraging word from the Chairman of the Federal Reserve, Ben Bernanke, persuades investors that the "sub-prime" mortgage crisis is going to blow over. A few scraps of good news persuade at least some newspaper readers that the "surge" in Iraq is working. My strong suspicion is that both crises still have a long way to go.
advertisementTo illustrate the point, think of the 1997-98 Asian Crisis, which started on July 2, 1997, with the speculative assault on the Thai baht, but was not really over until after the bail-out of Long Term Capital Management (September 23, 1998) and the Fed's three successive interest rate cuts of September 29, October 15 and November 17. In total, that crisis may be said to have lasted 503 days. Even the crash of 1987 was no mere 24-hour affair. It took 651 days for the Dow Jones index to return to its pre-crash peak.
What, I wonder, will we see in the next five or six hundred days? The consensus view at the moment is that aggregate losses due to the crisis in the United States housing market could amount to $100 billion (arising directly from the defaults by uncreditworthy borrowers) and another $100 billion or so (arising indirectly from the "Collateralised Debt Obligations" secured on their mortgages). What nobody knows yet is exactly who has been hit hardest by these losses. In the coming weeks, we are likely to see a dash for the exits as investors try to redeem money from suspect hedge funds. That, in turn, could add to the pressure on the banks that act as the hedge funds' prime brokers. Ben Bernanke has shown himself willing to help temporarily illiquid banks, opening the Fed's discount window when the market for short-term commercial paper seized up last month. But there is very little chance that he will bale out an insolvent bank, much less a bust hedge fund.
As the shockwaves spread through the financial system, jobs are already being shed. And it's worth remembering how much more important financial services are today than they were 20 - or even 10 - years ago. Meanwhile, American homeowners are experiencing something that has happened in only a handful of years since the Sixties: average house prices are actually declining. According to the highly respected Case-Shiller index, the US real estate market fell by 3.2 per cent in the second quarter of this year, following a 1.4 per cent drop in the first quarter. Some analysts believe that house prices will be down at least 10 per cent before it's all over. They also expect many more foreclosures in the next 18 months, as mortgages worth roughly a trillion dollars "reset" to higher rates.
The combination of tighter borrowing conditions, job losses in finance and housing, and a growing mood of pessimism among consumers could prove to be a more toxic cocktail than many investors still want to believe. I spent Thursday at the New York Stock Exchange, the biggest in the world. The pre-Labor Day atmosphere was almost serene, belying the record-breaking trading volumes the past month has witnessed. Volatility is back with a vengeance, with the market up one day and down the next. But the swing downwards will be bigger still if people start to believe that a US recession is around the corner. Nor will the pain be confined to North America. Despite all hopeful talk about the economic "decoupling" of Asia from the United States, the coming year and a half may yet expose the Orient's continued reliance on exports to the Occidental consumer. If Uncle Sam has to tighten his belt, the whole world will have to breathe in.
Today's geopolitical crisis is playing out in a similarly extended timeframe. Just as investors seize on scraps of good news as they track the stock market from hour to hour, so it's still possible for die-hard Bush supporters to point to improvements in the security situation in Iraq. Since the "surge" of additional US troops got under way, there's no question that things have improved.
Indeed, the admirably impartial Brookings Institution's most recent Iraq Index report states that "civilian fatality levels in Iraq now seem to have declined substantially. In particular, the monthly civilian fatality rate from sectarian violence appears about one-third lower than in the pre-surge months". The latest figures reveal marked declines in Iraqi military and police fatalities, and in the number of victims of multiple fatality bombings. August has almost certainly been the best month in Iraq for over a year.
Yet the monthly death tolls scarcely tell a story of incipient peace. At least 655 Iraqi civilians lost their lives last month as a result of bombings. Seventy-five American military personnel were killed, and 402 were wounded. Meanwhile, the prospects for an enduring and peaceful political solution to the conflicts between Shias, Sunnis and Kurds seem as remote as ever. And, back at home, public confidence in President Bush's strategy is at an all-time low.
This is one important respect in which President Bush may be right in drawing a parallel between Iraq and Vietnam. The American people had lost faith in the war in Vietnam as early as the Tet Offensive, which began at the end of January 1968. From October 1968 onwards, a clear majority of Americans were telling pollsters they regarded the war as a mistake. By that time the Paris peace talks between the United States and the North Vietnamese had already been initiated. Yet it was not until January 27, 1973, that the Paris Peace Accords were finally signed. In other words, the agony of ending the Vietnam War lasted more than 1,800 days. Nor was that the end of the story. It was not until April 30, 1975, that Saigon fell and the last American ambassador to South Vietnam was helicoptered off the embassy roof.
In just the same way, the outcome of the American intervention in Iraq will be determined not in Baghdad but in Washington, even if the final act in the tragedy is indeed another airlift, this time from the Green Zone. Sooner or later, this President or his successor will come under irresistible public pressure to start drawing down the number of American troops in Iraq. This will almost certainly happen, as in Vietnam, before the country they are leaving has genuinely been stabilised. And the eventual end of a united Iraq, like the fate of South Vietnam, will be bloody.
This great crisis of American foreign policy, like the slow-burning financial crisis we are living through, will play out over hundreds, if not thousands of days. Throughout that time, we shall read many reports in the newspapers that the surge is working and the markets are rallying. But these reports will just be so much "noise" - mere static on the airwaves of history.
As in the early Sixties, the underlying geopolitical and financial crises of our time are intertwined and inexorable.