Markets Not Taking Iran Attack Threat Seriously

As readers doubtless know, the efficient market hypothesis states that prices of publicly traded securities incorporate all available information. We’ve also commented on the wide spread evidence that (except for the subprime sector) investors have a pretty cheery outlook these days. The US stock market has had a nice run so far this year, with only a modest pullback in the last few days, risk spreads in virtually all credit markets are very low by historical standards, and volatility measures (such as the VIX) are also low.

Yet I also reaceived a message from today asking me to sign a petition against military action against Iran. Now a message of this urgency suggests at least some people are seriously worried that the Administration might take some ill-advised initiative against Iran. Yet the markets wouldn’t be in their complacent state if they thought there was a reasonable possibility this might happen.

I suspect the MoveOn message was in part prompted by an article by Sy Hersh in the current New Yorker. MoveOn first:

Last Tuesday, a second US aircraft carrier arrived in the Sea of Oman off the southern coast of Iran1 giving a whole new meaning to the term “escalation.” The Bush administration is hell-bent on sending 48,000 more troops to Iraq against the wishes of most Americans, but now it seems like they might not stop there.

While the war in Iraq grows worse by the day, the White House seems to be turning its sights toward neighboring Iran which could escalate the current conflict into a regional one. This reckless move comes despite the fact that most experts believe diplomacy is the way to go with Iran.

President Bush is out of control, and Congress needs to step in immediately to rein him in….

The President claimed that Iran is aiding the Iraqi insurgency, but analysts continue to cast doubt on the evidence. Even General Peter Pace of the Joint Chiefs of Staff has questioned the claims that the Iranian government is directly involved. After all, we are already in a war founded on disproved claims of WMDs.

But the reporting of this news is just the latest. Already we have two aircraft carriers in the region—unprecedented outside of war—and Patriot missiles have been deployed. Neither of these will help to protect our troops in Iraq where most of the fighting is on the ground.

One thing is clear—military action in Iran would further endanger our troops in Iraq and threaten to destabilize the entire Middle East. It could even prop up the Iranian president who is quickly losing popularity in his own country.

This isn’t the first time we’ve heard sabre rattling on Iran. But the movement of troops and equipment is particularly worrisome. And the Hersh story, “The Redirection,” is chilling:

One contradictory aspect of the new strategy is that, in Iraq, most of the insurgent violence directed at the American military has come from Sunni forces, and not from Shiites. But, from the Administration’s perspective, the most profound—and unintended—strategic consequence of the Iraq war is the empowerment of Iran….

The new American policy, in its broad outlines, has been discussed publicly. In testimony before the Senate Foreign Relations Committee in January, Secretary of State Condoleezza Rice said that there is “a new strategic alignment in the Middle East,” separating “reformers” and “extremists”; she pointed to the Sunni states as centers of moderation, and said that Iran, Syria, and Hezbollah were “on the other side of that divide.”….

Some of the core tactics of the redirection are not public, however. The clandestine operations have been kept secret, in some cases, by leaving the execution or the funding to the Saudis, or by finding other ways to work around the normal congressional appropriations process, current and former officials close to the Administration said….

Martin Indyk, a senior State Department official in the Clinton Administration who also served as Ambassador to Israel, said that “the Middle East is heading into a serious Sunni-Shiite Cold War.” Indyk, who is the director of the Saban Center for Middle East Policy at the Brookings Institution, added that, in his opinion, it was not clear whether the White House was fully aware of the strategic implications of its new policy. “The White House is not just doubling the bet in Iraq,” he said. “It’s doubling the bet across the region. This could get very complicated. Everything is upside down.”….

the Pentagon is continuing intensive planning for a possible bombing attack on Iran, a process that began last year, at the direction of the President. In recent months, the former intelligence official told me, a special planning group has been established in the offices of the Joint Chiefs of Staff, charged with creating a contingency bombing plan for Iran that can be implemented, upon orders from the President, within twenty-four hours.

In the past month, I was told by an Air Force adviser on targeting and the Pentagon consultant on terrorism, the Iran planning group has been handed a new assignment: to identify targets in Iran that may be involved in supplying or aiding militants in Iraq. Previously, the focus had been on the destruction of Iran’s nuclear facilities and possible regime change.

Two carrier strike groups—the Eisenhower and the Stennis—are now in the Arabian Sea. One plan is for them to be relieved early in the spring, but there is worry within the military that they may be ordered to stay in the area after the new carriers arrive, according to several sources. (Among other concerns, war games have shown that the carriers could be vulnerable to swarming tactics involving large numbers of small boats, a technique that the Iranians have practiced in the past; carriers have limited maneuverability in the narrow Strait of Hormuz, off Iran’s southern coast.) The former senior intelligence official said that the current contingency plans allow for an attack order this spring. He added, however, that senior officers on the Joint Chiefs were counting on the White House’s not being “foolish enough to do this in the face of Iraq, and the problems it would give the Republicans in 2008.”

The article is much too long to quote more extensively, but other points it makes are: the ease with which past Presidents have used an existing war to go off on peripherally-related forays (witness Cambodia during the Vietnam War), the many avenues the Administration has for running substantial operations “off the books” and hence out of the view of Congress (Hersh cites several reports that the reason Negroponte stepped down unexpectedly as the Director of Intelligence for a much lower post in the Department of State is that he refused to be part of such an activity, not wanting a repeat of his involvment in Iran-Contra).

The markets are assuming that the Bush Administration would not be so stupid as to attack Iran (or say, have Israel do something provocative so as to incur an attack against Israel, forcing a reply by the US). And by any rational calculus, the damage that the country would take, in the long term, would be staggering. We have already lost virtually all our allies. The only friends we’d have left would be Israel, the Saudis, and maybe Poland and Australia. America lacks the fiscal resources and the manpower to engage in a wider war (unless a draft is reinstituted). The only thing that might lend popular support for a wider war would be an Iranian attack on the US. They don’t have the resources (in terms of an intelligence network) for such an effort. Their ambitions are strictly regional. If such an attack was claimed to have occurred, I’d suspect a false flag event, like the Gulf of Tonkin affair.

And has anyone in the Beltway looked at a map? All the oil from the Middle East, oil on which we depand, goes through the Straits of Hormuz. It’s 21 miles wide. Iran is on one side, Oman on the other. It wouldn’t take a very high tech effort to close the Straits. Oil prices go through the roof, and our economy goes into a tailspin.

That’s why the markets have shrugged off the possibility of an attack on Iran. It’s close to suicidal. But I am still loath to underestimate the stupidity and self-destructiveness of this crowd.

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