Anyone still think it was the downgrade?
Yesterday’s sharp bump upwards on the stock market following the Fed’s announcement that it would keep interest rates low for two years demonstrates all too clearly that the sharp falls the previous two days were not reactions to the S&P downgrade of U.S. government debt. I shouldn’t say it, but I will: I told you so.
The press this morning attributes the Fed action to concern about growth, which is surely in part true. But it also reflects concern about banks and the financial system, which are always close to the Fed’s heart. Low interest rates have helped to save the banks for several years now–their profits are soaring–and will continue to help in the future, as a result of the Fed’s commitment.
Does this change the picture for foreign policy? Is the Federal budget under any less pressure? The short answer is “no.” If Congress sticks with the debt deal, it still has to cut expenditures sharply starting in fiscal year 2013. All the Fed has done is to make monetary policy carry the burden of adjustment until then.
The longer answer is a bit more nuanced. Certainly U.S. government borrowing costs for the next two years will continue to be unusually low, unless the markets really do lose confidence in the dollar or inflation rears its you know what. Low interest rates will ease the government’s fiscal situation. I confess to relief about this, but it does not reduce the need for triage on foreign policy.
Nina Hachigian, who was overly optimistic about the American role in the world a few years ago, is overly pessimistic now. America is no less indispensable today that it was last week, but it is likely to be less available in the future. People who have grown to rely on the United States to help them out of the deep holes they dig for themselves–from the Balkans to Israel/Palestine to Iraq and Afghanistan–are going to find us preoccupied elsewhere, with our own top national security risks.
This is not a bad thing–most of them will discover their own capacities to manage are greater than they had imagined. And it is high time some of America’s burdens shifted to Europe and the Arab League, even if the former has financial problems of its own and the latter lots of money but little experience. Far more often than in the past, the message from America will be handle it on your own, or figure out a cheap way to get it done.
What we need to be careful about is cheap shortcuts that end up of creating expensive longterm problems. In the Balkans, that expensive delusion comes from those who advocate rearranging borders to accommodate ethnic differences, a sure formula for instability if not war. In the Middle East, it comes from those who resist defining clearly the borders of the Palestinian state or want to turn a blind eye to the Arab spring, ignoring Egypt and Tunisia because the revolutions there have been “successful.” Backing a revolution doesn’t necessarily mean paying for it or bombing a regime into submission, as Robert Ford (our man in Damascus) has demonstrated with his deft visits to protesters in Hama.
Diplomacy is not inherently expensive. Military action is. In tight financial times, we’ll do better with a foreign policy that relies less on deployed forces and more on alert diplomats.