Commentary

The Moral Hazard of U.S. Global Interventions

By Leon T. Hadar
This article appeared on Huffington Post on December 18, 2009.

Critics of the policies adopted by Washington in the aftermath of the Wall Street meltdown have argued that bailing out financial institutions encourages risky lending in the future since those taking the risks end-up operating under the assumption that they will not have to pay the full costs of future losses. Or to put it differently, insulating a certain player from future risk is a “moral hazard;” the same player would behave differently than if it is fully exposed to the risk.

It is safe to assume that even non-economists who have followed the debate over the government’s Wall Street bailout have become familiar with this moral hazard dilemma which reflects common sense and everyday experience whether one is studying the behavior of business entities or for that matter, family members or nation-states.

Indeed, while Americans have been considering the moral hazard of their government bailing-out the American International Group (AIG) and other irresponsible risk-takers in Wall Street, they could also have pondered the way American global intervention in support for foreign governments and groups tends to encourage them to engage in risky behavior — Georgia provoking a conflict with Russia; Pakistan supporting radical Islamists; Israel building-up settlements in the West Bank — whose costs end-up being paid by American soldiers and taxpayers, and could therefore be considered a case of moral hazard.

The most recent example has been the decision by President Barack Obama to escalate the U.S. military intervention in Afghanistan. Notwithstanding the Obama administration’s announcement of a timeline for a start of the withdrawal of U.S. forces from Afghanistan, America’s top client there, the government led by Hamid Karzai, concluded that Washington was making an open-ended commitment to maintain U.S. military presence in the AfPak region.

Indeed, not unlike America’s too-big-to-fail financial institutions, U.S. foreign clients tend to make their strategic calculations based not on what Washington says, but on what Washington does. That the banks and the other financial firms rescued by the Treasury and the Fed (read: American tax-payers) are already in the midst of new and risky speculative sprees - just one year after the bailout — demonstrates that despite all the public rage and the tough populist rhetoric emanating from Congress and the White House — coupled with some meaningless regulatory “reform” — all the “fat-cat bankers” are quite confident that this administration and the one coming after it, will bail them out once again if and when their risk-taking will force us into another financial meltdown. They know it, and let’s face it, we know it.

Similarly, that the Obama administration has decided in an aftermath of a rigged election to increase its military commitment and financial assistance and to what is probably one of the most corrupt regimes on earth, headed by a politically illegitimate and shady Afghani president - whose brother happens to be a CIA-backed drug lord - provides even more incentives for Karzai and his cronies to continue maintaining the current status-quo and to stall any serious efforts to reform the political and economic system (a process that, in any case, would have taken many, many years, if it is to produce any long-term results).

Obama can continue talking about building Afghani political and military institutions and setting artificial deadlines for U.S. withdrawal. But Karzai and the other political and military players in the AfPak region recognize that the existence of a nuclear-armed Pakistan guarantees that no U.S. president is going to cut and run from Afghanistan, in the same way that oil/Israel/Iran make it almost certain that no White House is going to terminate U.S. military intervention in Iraq anytime soon (again, all the deadlines notwithstanding).. They know it - and we know it.

In fact, many of the others AfPak players — the political and military leadership of Pakistan, the Taliban, Al Qaeda - benefit from the continuing U.S. military presence that helps them to maintain their power and to mobilize support for their cause, knowing fully-well that the Americans would never be able to deploy the kind of military force -at least 600,000 troops - that they would need to in order to destroy the guerrilla forces in the region. And that using military force to do a regime-change in Islamabad is out of the question.

From that perspective, the half-pregnant military solution embraced by Obama - enough troops to fight in Afghanistan, but not enough to control the entire country - ensures that America will not pull-out from Afghanistan without becoming the dominant power there - corresponds to the interests of both our clients and our enemies who are going to continue pursuing policies that will raising the costs of our military intervention.

Recall that Obama was perceived by both supporters and opponents as being left-liberal on economic issues and non-interventionist on foreign policy. That he has expanded the efforts to bailout irresponsible corporate giants and foreign clients only tends to accentuate the moral hazard dilemma here. If Obama couldn’t break away from the modus operandi of Washington, there is little doubt that his Democratic or Republican successor would not turn his back on the customers who continue to depend for their survival and security in Washington. Unless that is, American economic and military power would be so diminished that it could not play its role as the global sugar-daddy anymore.

Leon T. Hadar is a research fellow in foreign policy studies at the Cato Institute, specializing in foreign policy, international trade, the Middle East, and South and East Asia. He is the author of Sandstorm: Policy Failure in the Middle East.