Billions for Missile Defense, Not a Dime for Common Sense

At a time of tight budgets, doubling down on a risky, easily foiled technology is more foolish than ever.

James Woolsey -- a former CIA chief -- and Rebeccah Heinrichs worry that Barack Obama's administration might inadvertently give away technical secrets in its quest for missile-defense cooperation with Russia. "Should the United States share critical information about its missile defenses with the Russians, a Russian entity -- official or otherwise -- could pass that information along to Tehran, enabling the Iranians to capitalize on the weaknesses in the U.S. system," they write.

If so, this would be just another problem to add to the long list of concerns about the deeply flawed missile-defense concept -- but it shouldn't be the main thing keeping Woolsey and Heinrichs up at night.

What they should really be worried about is that the system will never protect the United States or NATO -- no matter how many more billions of taxpayer dollars are thrown at it -- and that it may actually lead to more nuclear weapons worldwide, not fewer.

Missile defense, as it's currently being set up, can be easily defeated by any country that can field ballistic missiles -- no deep secrets leaked from the bowels of the Pentagon are needed at all. As the CIA's own top specialist in strategic nuclear programs testified in 2000, "Many countries, such as North Korea [and] Iran … probably would rely initially on readily available technology … to develop penetration aids and countermeasures. These countries could develop countermeasures based on these technologies by the time they flight test their missiles."

Nothing has changed in the intervening decade to change this calculus. The simplest countermeasures are cheap inflatable balloon decoys similar to the shiny ones at children's birthday parties. Because the missile-defense interceptors try to strike the intercontinental ballistic missile (ICBM) warheads in the vacuum of space, these balloons and the warhead would travel together, making it impossible to tell apart the decoys from the real thing. An enemy bent on delivering a nuclear payload to the United States could inflate many such balloons near the warhead and overwhelm the defense system by swamping it with fake signals. No technical secrets are needed to defeat the system because these obvious weaknesses have been repeatedly pointed out by the country's top scientists since the 1960s.

As the Pentagon's proposed missile-defense system is predominantly sea-based, an even simpler way for North Korea (or Iran, possibly in the future) to defeat it would be to wait until the weather is stormy. The missile-defense system has not been tested in really rough sea conditions and is well-known to be unreliable beyond a certain sea state.

We could certainly pray that North Korea or Iran attacks during calm sea conditions. But a faith-based missile defense is probably not what most taxpayers had in mind when they were asked to pay for it -- a tab that so far runs into the hundreds of billions of dollars.

So, if missile defense could be so easily defeated by North Korea and Iran, why are the Russians so up in arms about it? The answer is simple: Their military planners are paid to be paranoid -- just like the ones in the Pentagon -- and they must assume a worst-case scenario in which they treat the system as being highly effective, even when it isn't.

Russian planners might also be worried about the potential for a large expansion in the number of interceptors, unpredicted technical changes in the defense system (such as nuclear-tipped interceptors), and the diversity and scale of sensor systems that are being brought online to support the system.

These worries are beginning to give the Russians cold feet about their arms-reduction commitments. The Russian articles of ratification to the New START arms-reduction treaty allow Russia to withdraw from the agreement if there is deployment by the "United States of America, another state, or a group of states of a missile-defense system capable of significantly reducing the effectiveness of the Russian Federation's strategic nuclear forces."

The Obama administration's new "phased adaptive" missile-defense plan calls for roughly 440 interceptors based on 43 ships and on two land sites in Europe by the end of this decade. The plan is to be enacted in four phases, with increasing numbers of the more capable SM-3 "Block II" interceptors in the last two phases, starting in 2018.

Russia is concerned that these more potent Block II missile-defense interceptors might be capable of neutralizing some Russian nuclear forces and will therefore upset the delicate balance of arms agreed to in New START. Indeed, the treaty's preamble explicitly recognizes this interplay between strategic offense and defense. Russian Foreign Minister Sergei Lavrov has specifically warned against this action. "The fulfillment of the third and fourth phases of the U.S. 'adaptive approach' will enter a strategic level threatening the efficiency of Russia's nuclear containment forces," Lavrov said, as reported by Russian media.

NATO has responded by insisting that the system is not intended against Russia. Rather, the group says, it is aimed at possible future threats from Iran. But the Russians are clearly more concerned about capabilities than intentions. Given that future U.S. administrations -- can you say President Palin? -- may radically change their outlook toward Russia, it is hard to blame the Kremlin for being skeptical.

Russian President Dmitry Medvedev had already explicitly threatened to terminate New START over this perceived violation of "parity" -- i.e., the precise balance of arms agreed to in the treaty. "If missile-defense systems are to be developed, which would mean the disruption of strategic parity," Medvedev said last month, "the treaty could be suspended or even terminated."

Although the missile-defense system may not offer protection in actual combat, Russian military planners may still view it as effectively neutralizing some Russian warheads -- which they could legitimately present as an infringement on the numerical parity at the very basis of New START. The fielding of Block II interceptors on ship-mobile platforms would certainly break the spirit -- and, possibly, even the letter -- of New START.

The narrative in the West so far is that the main problem Russia has with the system is the two proposed land sites in Poland and Romania -- that NATO would be stepping on Russia's toes by installing bases in what Russia considers its sphere of influence. That is surely part of Russian concerns, but it is not the whole story. Ted Postol of the Massachusetts Institute of Technology and I carried out a detailed study of the planned system. Our analysis found that the system could, in fact, easily be reconfigured to have a theoretical capability against Russian ICBMs, especially post-2018, when the more potent interceptors are brought on-line. But even a theoretical capability -- which the Russians could, in practice, neutralize through use of decoys and other countermeasures on their missiles -- will give their military planners pause.

A NATO decision to proceed with fielding Block II interceptors will result in an apparent paradox: "defenses" with little or no combat effectiveness, but with technical and quantitative uncertainties that will cause cautious Russian military planners to treat them as if they could be effective in the future.

Russia -- and China -- could react by increasing their stockpiles or perhaps blocking future nuclear-arms-reductions negotiations with the United States.

What's really needed is an independent, nonpartisan evaluation of the costs -- and not just the gargantuan monetary costs, but also the security costs -- versus the benefits (if any) of the proposed system. The possible disclosure of sensitive U.S. secrets that so preoccupies Woolsey and Heinrichs is just one of the many risks of an ineffective missile-defense system, from engendering a false sense of security that could lead to serious policy miscalculations to greater worldwide stockpiles of military plutonium to a relaunching of the nuclear arms race with Russia.

Is it really worth giving up the Russian queen in trying -- and failing -- to protect from an Iranian pawn?



Don't Blame Goldman Sachs for the Food Crisis

Blame the meat-loving middle class.

Frederick Kaufman's article "How Goldman Sachs Created the Food Crisis," ignores a number of important facts about the underlying economic, social, and political factors that have driven the rise in food prices.

The assertion that Goldman Sachs introduced speculation into commodity markets is incorrect. The Commodity Research Bureau (CRB) Index has been investible since the early 1970s, and futures on the CRB Index have been traded since 1986, five years before the creation of the Goldman Sachs Commodities Index (GSCI). Gary Cohn, the president of Goldman Sachs, was not involved in the creation of the index, contrary to the article's assertion. The GSCI was purchased by Standard and Poor's in 2007 and retains a connection to Goldman Sachs in name only.

More importantly, the article does not present any credible evidence that commodity index investing is responsible for the rise in food prices. Serious inquires, such as one conducted by the OECD in the wake of the 2008 price spike, have concluded that "index funds did not cause a bubble in commodity futures prices." Rather than destabilizing futures markets, commodity index funds provide them with a stable pool of capital, improving farmers' ability to insure themselves against the risks inherent in agricultural prices. This, in turn, can allow farmers to produce more food at a lower cost. The pension and endowment funds providing this vital capital are investing the savings of individuals. They are not faceless "speculators." They represent people, often pensioners, who seek to protect the value of their savings against inflation and rising food prices.

Finally, the article suggests that because commodity indices are "long-only" they, therefore, inflate prices. This is not the case. Futures contracts expire on a set date, meaning that "rolling" them over simply involves a re-investment of the original funds by selling one contract and buying another. This "roll-over" is akin to renewing home-owners insurance from year to year and is not like purchasing a second or third home, which could inflate prices.

The real drivers of food inflation and food shortages are long-term trends, like increased meat consumption by the growing middle class in emerging markets and greater use of biofuels in the developed markets. Monetary policy, climate change, and protectionism also play key roles. Historical facts and demonstrable economic trends cannot be disregarded if there is to be a productive discussion about this vital issue.


Lucas van Praag
Managing Director
Goldman, Sachs & Co.

Frederick Kaufman replies:

Instead of working to undo the damage Goldman Sachs and other banks have done by transforming our daily bread into nothing but a financial product, and instead of elucidating the murky world of over-the-counter swaps and baroque derivatives, Lucas van Praag has chosen to offer up yet another example of the fact-twisting and blindness that have unfortunately become the 21st century banking industry's norm.

My article "How Goldman Sachs Created the Food Crisis" did not accuse Goldman of introducing speculation to the commodity markets. To the contrary, the editors at Foreign Policy allowed a great deal of space for the history of American commodity markets, including an explanation of the traditional role of bona-fide hedgers and speculators. Of course, it is not traditional speculation that has sparked the historically unprecedented rise in the price of food, but the demand-shock Goldman and their industry followers introduced to the markets with their long-only Goldman Sachs Commodity Index fund -- the two-decades-old food, energy, and precious metals derivative that has come to be widely imitated throughout the financial industry.

Regarding the role of Gary Cohn, we need only review his testimony to Congress in September of 2008, in which Goldman's president articulated the ideas and concepts that lay behind the birth of the GSCI: "There was no natural long in the market," Cohn explained to the Senate. "The consumers are so fragmented that they don't amalgamate to a big enough position. So we actually, as a firm, came up with the idea in the early 1990s to create a long only, static investor in the commodity markets." In other words -- and contrary to van Praag's assertion -- the traditional buy/sell or sell/buy activity of the commodities futures market did not satisfy Goldman, nor allow them nor their largest clients (in this case, multinational oil firms) the market position they desired, a position which had little to do with the long-standing price discovery function of the futures market. Long-only indexes subsequently hijacked this role from this market.

Van Praag's assertion that the index funds were created to help "pensioners, who seek to protect the value of their savings against inflation and rising food prices" is a classic case of Wall Street posing as Main Street. Spurred by the institutional sales force of Goldman and other banks, the weight of hundreds of billions of dollars of new money from hedge, pension, and sovereign wealth funds has pushed up the slope of the agricultural price curve. Meanwhile, the contango markets caused by the demand shock the long-only indexes themselves introduced have created a negative yield for investors -- who lose money five times a year as commodity prices surge and the price-insensitive funds buy. The regular, 5-times-a-year "roll" of long futures has given commodity insiders the opportunity for immense profit at the expense of investors, and it is simply misleading for van Praag to compare the unnatural, subversive market behavior of the banks to a responsible property owner who regularly renews her home insurance policy.

While the OECD study has turned a blind eye, both the United Nations and the Senate Committee on Homeland Security and Government Affairs -- in their investigation of the role of long-only index funds as a threat to interstate commerce -- concluded that these funds must bear some of the blame for the rising cost of food. Of course, supply and demand matter, as do monetary policy, climate change, and nationalistic policies of protectionism. But despite all protestations of innocence, the long-only index funds have added regular doses of kerosene to the commodity conflagration that has come to mark the new millennium. No surprise, then, that both the U.S. Commodities Future Trading Commission and the G-20 agricultural ministers have put long-only index fund speculation near the top of their lists of the most egregious financial abuses.

Frederick Kaufman is the author of A Short History of the American Stomach. 

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