The Zero Man

Obama’s greatest obstacle to re-election isn’t Mitt Romney, or rising gas prices: It’s Ben Bernanke.

It's the sort of news that strikes fear in the hearts of incumbent politicians everywhere: the cost of living is rising. And if people really do vote with their wallets, less money in their pockets is a death knell. With the U.S. consumer price index rising 0.4 percent in February -- the largest jump in 10 months, largely due to rising gasoline prices -- the trend doesn't look good. On March 23, the International Energy Agency warned that soaring oil prices risk a recession. And in a testament to the issue's political resonance, GOP candidate Newt Gingrich even pledged (however utopian this may be) to lower the price of gas to $2.50 per gallon in an effort to revive his flagging presidential hopes.

But while rising gas prices may dim President Barack Obama's reelection prospects, Federal Reserve chairman Ben Bernanke is not likely to lose much sleep over it. Bernanke's own research, dating back to 1995, has convinced him that it is central banks' decision to tighten the money supply by raising interest rates that triggers economic downturns -- not the spike in oil prices itself. And so long as the Fed doesn't raise interest rates in the face of rising oil prices, Bernanke's thinking goes, the spikes should be harmless. Even if oil prices were to jump through the roof, it is highly unlikely that the Federal Reserve would raise interest rates in an effort to combat inflation.

How can we be so sure of that? Under Bernanke's stewardship, the veil of secrecy over the Fed's actions that existed under his predecessor, Alan Greenspan, has been lifted. Back in those days, being a Fed-watcher was an actual profession -- trying to decipher what Greenspan himself dubbed Fed-speak: mumbling with great incoherence. Bernanke, on the other hand, vowed during his confirmation hearing in 2005 to make the Fed's policies more transparent. When financial markets can predict the factors that affect the Fed's monetary policy, his academic research had convinced him, it is easier for him to keep interest rates where he wants them.

When Bernanke sent his second monetary policy report to Congress in June 2006, he told lawmakers that the decision on a possible rate hike would depend on incoming economic data. No crystal ball -- simply data-driven decision-making. But this announcement didn't have the stabilizing effect that he probably had hoped for: Financial markets fell in disarray, as some data pointed to a rate hike while others suggested that the Fed would keep the rate steady. As one banker at Lehman Brothers mused at the time, "Bernanke is treating us like adults, only to find out we are behaving like children."

When credit markets choked up and international trade plunged after the collapse of Lehman Brothers in September 2008, Bernanke not only flooded the banks with money to keep them afloat, he also quickly cut interest rates. Since then, he has acted to keep rates at historic lows in an attempt to spur economic growth -- a step, however, that also appears to contribute to rising oil prices, and hence rising inflation.

With the federal funds rate -- the most important short-term rate that the Fed has to influence the economy -- at almost zero percent since December 2009, Bernanke has been forced to look for unconventional ways to stimulate the economy and combat high unemployment. He embarked on a strategy of buying trillions of dollars of bonds known as quantitative easing, which aimed to unfreeze the market for asset-backed securities and drive down longer-term interest rates.

In a bid to enhance the Fed's predictability, Bernanke also launched a policy of holding press conferences immediately after the meetings of the Federal Open Market Committee, which determines short-term interest rates. The pressers are intended to "further enhance the clarity and timeliness of the Federal Reserve's monetary policy communication," according to a press release at the time.

In the past year, Bernanke has only doubled down on his efforts to use the Fed's communications policy to drive down interest rates by giving investors still more guidance on the future path of the Fed funds rate. On Aug. 9, 2011, the FOMC released a statement saying that it anticipated economic conditions would likely warrant exceptionally low levels at least through mid-2013. This sent shockwaves through financial markets -- the volume of stocks traded rose to almost twice the daily average. The FOMC succeeded in its mission to lower bond yields, but it also effectively limited Bernanke's flexibility to alter course in the face of changing market conditions.

These steps have been successful at keeping interest rates low, but they have also limited Bernanke's flexibility to raise interest rates if market conditions change. Indeed, in January 2012, the FOMC pontificated that it anticipated exceptionally low levels for the federal funds rate at least through late 2014 -- it even included a table that provided a picture of individual committee members' rate expectations, the first central bank ever to do so. The fact that FOMC members' expectations about the future Fed funds rate is now down on paper virtually ensures that the Fed will keep the rate near zero until the end of 2014 -- no matter how the economic situation develops.

Even if inflation rises even higher and unemployment continues to falls, Bernanke will likely argue that the Fed's credibility is sufficient reason to keep rates low. That's what happened at the FOMC meeting in June 2003, when the economy was growing at a healthy clip, but the Fed nonetheless decided to cut the Fed funds rate from 1.25 to 1 percent, since markets were anticipating it. And as we all know now, the Fed's ultra-loose monetary policy lay the groundwork for the subsequent housing boom, which wrecked the U.S. economy.

Once again, the Fed is at risk of letting financial markets, rather than economic fundamentals, dictate its rate decision. Bernanke's obsession with predictability aside, recent economic news has given the Fed reason to reconsider its policy of historically low interest rates. Since the January meeting of the FOMC, the unemployment rate has dropped like a brick -- albeit to a still unsatisfactory 8.3 percent -- and inflation has spiked due to rising oil prices. Given the Fed's dual mandate (maintaining price stability and promoting maximum employment) these data points suggest that a rate hike, bringing interest rates to more conventional levels, may be nearer than the committee initially predicted.

However, there is no sign so far that Bernanke is preparing to change course. The Fed chief has reiterated his expectation time and again that the Fed funds rate will remain at an exceptionally low level until the end of 2014. Asked during congressional hearings by lawmakers on February 29 and March 1 about the impact of higher oil prices on the economy, Bernanke likened the oil price hikes to a tax on income and was only willing to concede that it would temporarily lead to higher inflation. He painted rising oil prices as a temporary phenomenon, suggesting that they will at some point stabilize (at which point inflation will indeed be close to the Fed's target of 2 percent), while making the case that the Fed is only concerned with "longer-term" inflation.

Bernanke's background as an eminent economics scholar is often considered an advantage, but it may just as well be his Achilles heel. Much of his research concentrates on the Great Depression, and his central conclusion was that much of the pain during that period could have been avoided if monetary policy had been loosened, rather than tightened. In a speech on Milton Friedman's 90th birthday, Bernanke told the eminent economic theorist that the Federal Reserve was indeed responsible for deepening the Great Depression: "You're right, we did it," he said. "We're very sorry. But thanks to you, we won't do it again."

"Moderation is fatal. Nothing succeeds like excess," Oscar Wilde once said. Unfortunately, this aphorism does not apply to monetary policy. Keeping the interest rate low may look good in an election year, but it comes at the expense of higher oil prices. Excessively low interest rates create bubbles and can lead to runaway inflation -- not only ruining candidates' election hopes, but entire economies. Although Alan Greenspan has taken the fall for the 2008 financial crisis, Bernanke was the ideologue who provided the intellectual backing for the aggressive rate cuts in the early 2000s that set us up for the Great Recession. Obama may be focused on high gas prices these days, but the larger problem is that Bernanke's policies may be undermining his economic stewardship.

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Don't Fear a Nuclear Arms Race in the Middle East

The conventional wisdom has it wrong: Iran’s development of a nuclear weapon won’t spur its neighbors to get the bomb.

On March 21, Haaretz correspondent Ari Shavit wrote a powerful op-ed in the New York Times that began with this stark and stunning claim: "An Iranian atom bomb will force Saudi Arabia, Turkey, and Egypt to acquire their own atom bombs." Indeed, it has become axiomatic among Middle East watchers, nonproliferation experts, Israel's national security establishment, and a wide array of U.S. government officials that Iranian proliferation will lead to a nuclear arms race in the Middle East. President Barack Obama himself, in a speech to the American Israel Public Affairs Committee (AIPAC) last month, said that if Iran went nuclear, it was "almost certain that others in the region would feel compelled to get their own nuclear weapon."

Multiple nuclear powers on a hair trigger in the Middle East -- the most volatile region on earth, and one that is undergoing massive political change -- is a nightmare scenario for U.S. and other security planners, who have never before confronted a challenge of such magnitude. But thankfully, all the dire warnings about uncontrolled proliferation are -- if not exactly science fiction -- further from reality than Shavit and Obama indicate. There are very good reasons for the international community to meet the challenge that Iran represents, but Middle Eastern nuclear dominoes are not one of them.

Theorists of international politics, when pondering the decision-making process of states confronted by nuclear-armed neighbors, have long raised the fears of asymmetric power relations and potential for nuclear blackmail to explain why these states would be forced to proliferate themselves.

This logic was undoubtedly at work when Pakistan embarked on a nuclear program in 1972 to match India's nuclear development program. Yet for all its tribulations, the present-day Middle East is not the tinderbox that South Asia was in the middle of the 20th century. Pakistan's perception of the threat posed by India -- a state with which it has fought four wars since 1947 -- is far more acute than how either Egypt or Turkey perceive the Iranian challenge. And while Iran is closer to home for the Saudis, the security situation in the Persian Gulf is not as severe as the one along the 1,800-mile Indo-Pakistani border.

Most important to understanding why the Middle East will not be a zone of unrestrained proliferation is the significant difference between desiring nukes and the actual capacity to acquire them. Of all three states that Shavit mentioned, the one on virtually everyone's list for possible nuclear proliferation in response to Iran is Turkey. But the Turkish Republic is already under a nuclear umbrella: Ankara safeguards roughly 90 of the United States' finest B61 gravity bombs at Incirlik airbase, near the city of Adana. These weapons are there because Turkey is a NATO member, and Washington's extended deterrence can be expected to at least partially mitigate Turkey's incentives for proliferation.

But even if the Turks wanted their own bomb, they have almost no capacity to develop nuclear weapons technology. Indeed, Turkey does not even possess the capability to deliver the 40 B61 bombs at Incirlik that are allocated to Turkish forces in the event of an attack, according to a report released by the Carnegie Endowment for International Peace.

Given the changes in Turkey's foreign policy and its drive for global influence, it is conceivable that it will want to develop a Turkish version of France's force de frappe. However, Ankara would literally be starting from scratch: Turkey has no fissile material, cannot mine or enrich uranium, and does not possess the technology to reprocess spent fuel, all of which are required for nuclear weapons development.

This does not mean that Turkey is not interested in nuclear technology. Yet Ankara's efforts, to the extent that they exist beyond the two small-scale facilities in Ankara and Kucukcekmece, are directly related to the country's predicted energy shortfall resulting from the combination of a booming economy and growing population. The Turkish government has announced plans for civilian nuclear power to provide a quarter of Turkey's electricity  needs by 2040. But even this three-decade timeline seems overly optimistic given the inchoate nature of Turkey's nuclear research.

The Egyptians are way ahead of the Turks in developing nuclear infrastructure, but don't expect to see the rise of a nuclear power on the Nile anytime soon. Egypt's nuclear program is actually older than India's, and was established only three years after Israel founded its Atomic Energy Commission. The Egyptian Atomic Energy Commission, which Gamal Abdel Nasser established in 1955, was exclusively dedicated to the development of peaceful atomic energy, though there were suspicions to the contrary. The 1956 nuclear cooperation agreement with the Soviet Union transferred to Egypt a 2-megawatt light water reactor that only produced small amounts of plutonium.

There were, of course, worrying signs about the Egyptian program -- specifically Cairo's refusal to open the Inshas reactor to International Atomic Energy Agency (IAEA) inspection until after the peace treaty with Israel. Yet neither President Anwar Sadat nor his successor, the recently deposed Hosni Mubarak, ever made any effort to develop nuclear weapons technology. Sadat signed the Nuclear Non-Proliferation Treaty in 1980, and Mubarak negotiated with the United States, France, Canada, and Germany for reactors and funding for Egypt's nuclear program. Nothing, however, ever came of these discussions because of the 1986 Chernobyl disaster -- and the fact that the Egyptians never signed what is known as the Additional Protocol, which gives the IAEA enhanced powers to inspect nuclear facilities. Given the trajectory of Egypt's nuclear development, Cairo's rejection of the Additional Protocol had more to do with politics and sovereignty than plans for a clandestine weapons program.

Even after Mubarak's son Gamal triumphantly declared at the ruling party's 2006 convention that Egypt was going to ramp up its nuclear development program, it is hard to believe that Egyptians ever really took him seriously. Mubarak spent $160 million on consultants to tell him where to build 10 planned nuclear power plants, and selected a location along the Mediterranean for the first one. But each of the power plants comes with a price tag of $1.5 billion -- and this is a country that in the last 15 months has spent approximately $26 billion of its $36 billion foreign currency reserves just to stay afloat.

One has to wonder about the pundits' warning of an Egyptian bomb: Have they even been to Egypt lately? If so, they might have a better grasp of Egypt's ramshackle infrastructure and the dire state of its economy, neither of which can support a nuclear program.

What about Saudi Arabia, then, the Sunni power that is on the tip of most analysts' tongues when it comes to Shiite Iran getting the bomb? Saudi Arabia has the cash to make large-scale investments in nuclear technology. Indeed, the only factor that makes warnings about Saudi proliferation -- such as that delivered by former Ambassador the United States Prince Turki al-Faisal last year -- even remotely credible is the resources the Saudis can muster to buy a nuclear program. Yet, while Riyadh can outfit itself with nuclear facilities with ease, it does not have the capacity to manage them. Mohamed Khilewi, a former Saudi diplomat, claims that the kingdom has been developing a nuclear arsenal to counter Israel since the mid-1970s -- but he offers no substantiated evidence to support these claims.

In fact, the country has no nuclear facilities and no scientific infrastructure to support them. It's possible that Saudi Arabia could import Pakistanis to do the work for them. But while Saudis feel comfortable with Pakistanis piloting some of their warplanes and joining their ground forces,  setting up a nuclear program subcontracted with Pakistani know-how -- or even acquiring a nuclear device directly from Islamabad -- poses a range of political risks for the House of Saud. No doubt there would be considerable international opprobrium. Certainly Washington, which implicitly extends its nuclear umbrella to Saudi Arabia, would have a jaundiced view of a nuclear deal between Riyadh and Islamabad. Moreover, it's one thing to hand the keys to an F-15 over to a foreigner, but letting them run your nuclear program is another matter altogether.

The concern about Saudi proliferation stems from fears that the kingdom would be forced to act if both Iran and Israel possessed a nuclear arsenal. "We cannot live in a situation where Iran has nuclear weapons and we don't," an unnamed Saudi official declared to the Guardian on the sidelines of a meeting between Prince Turki al Faisal and NATO officials in June 2011. "It's as simple as that. If Iran develops a nuclear weapon, that will be unacceptable to us and we will have to follow suit."

Yet given the fact that the Saudis have very little nuclear infrastructure to speak of, this kind of statement is little more than posturing designed to force the U.S. hand on Iran. Unlike similar warnings by Israel, which has the capacity to follow through on its threat to attack Iran's nuclear sites, Riyadh's rhetoric about acquiring nuclear weapons is empty. What is amazing is how many people take the Saudis seriously. If Khilewi had been telling the truth, now would seem like a good time for the Riyadh to give Tehran a look at what the royal family has been hiding in the palace basement all these years -- but so far, we have only heard crickets.

Despite its flimsiness, it is hard to ignore the utility of the Middle East's nuclear dominoes theory. For those who advocate a preventive military strike on Iran, it provides a sweeping geopolitical rationale for a dangerous operation. But the evidence doesn't bear this argument out: If Washington decides it has no other option than an attack, it should do so because Iran is a threat in its own right, and not because it belives it will thwart inevitable proliferation in places like Turkey, Egypt, and Saudi Arabia. It won't, for the simple reason that there is no reason to believe these countries represent a proliferation risk in the first place.

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