The Phantom War has begun

The Phantom War will be different from all the others that came before it. There will be no triggering incidents, no frantic diplomatic efforts to stave off conflict, no declaration of war, no battles, and there will be no end to it. It will certainly, however, take a huge toll, destroy lives, shake great nations, and, ultimately, almost certainly result in death and mayhem. It may even result in more traditional forms of conflict.

And make no mistake about it, the Phantom War will touch you personally and, in all likelihood, it will rock your world ... and I don' t mean that in a good way.

Indeed, you will understand just how different Phantom warfare from the fact that it has already begun and most people don't even know it.

Some dimensions of the war have made headlines, such as the successful Stuxnet attack on Iran's nuclear program. Others are hinted at in reports, such as the just released report from the U.S. Office of the National Counterintelligence Executive (ONCIX). The 2011 report, produced in compliance with an act of Congress, details the degree to which foreign powers are actively invading U.S. cyberspace and conducting thousands upon thousands of operations that in a more traditional sense might be called reconnaissance, spying or sabotage.

The report is particularly striking in that it calls out Russia and China as particularly egregious violators who pose "significant and growing threats" to America's security and economic vitality. Calling them "the most aggressive collectors of U.S. economic information and technology," the ONCIX report goes on to predict that the two rival powers "will almost certainly continue to deploy significant resources and a wide array of tactics" in support of their efforts to level the playing field between themselves and the United States. But of course, the implication is clear, particularly in the wake of Stuxnet, cyber-reconnaissance and spying are just the tip of the iceberg. They test our defenses, test our borders and prepare for the days ahead of deeper engagement.

Said one experienced U.S. diplomat with whom I spoke this week, "the war is already under way and we are ill prepared for it. We know it is going to happen but we don't have the doctrines or the strategic awareness we need to manage the growing threat." Said one investor with whom I spoke this week, "This is the black swan I worry about. One day...one day soon, in the next couple of years...I expect a power grid to go down or a stock market to be penetrated in a way that will cause a massive disruption, even a panic."

There are signs everywhere that the issue is growing in importance and being viewed with a sense of urgency by those who are aware of it. Take this week's cybersecurity forum in London designed to address a problem that Britain alone estimates already costs it 27 billion pounds per year. Or look to the story that stirred some notoriety earlier this week when it was revealed the international group of online hackers known as Anonymous were challenging Mexico's brutal Zetas, a cartel that has been reaping havoc near the U.S. border for years. (See the New York Times: "After a Kidnapping, Hackers Take On a Ruthless Mexican Crime Syndicate.") The latter story indicates that just as modern conflicts are often between state and non-state actors, so too will this new form of conflict involve a plethora of groups all with very different objectives, often very difficult to trace or tell apart.

"America still hasn't quite understood that we are opening Pandora's box. Take drones. We feel we can use them anywhere, soon others will be using them against us. There are dozens of countries around the world developing their own drone technology or buying what is out on the market. The same is true for technologies like those associated with Stuxnet," said the former senior diplomat who has worked closely throughout his career with the military and intelligence communities. Or as another journalist friend of mine put it who has been covering the issue closely, "The day after Stuxnet was like the day after Hiroshima. We had the technology and no one else did. But within a matter of a few years that had changed." So had the nature of modern warfare...and by extension of modern diplomacy and that's what is going to happen here.

Imagine wars that were conducted constantly, wars in which both sides might not be bent on destroying one another but would rather focus on capturing resources or slowing down economic performance or producing popular frustration or distributing misinformation or manipulating elections or markets. Shutting down power grids or stealing money from bank accounts or spilling pollutants into a river are old hat with current technologies. Imagine what the future might hold.

This is already triggering an arms race but unlike past such races, new technologies will be deployed all the time and small groups of non-state actors will be able to produce almost identical results as massive state-sponsored efforts might. Technological advantages will also have a much shorter shelf-life. Launch a worm and you provide your enemy with the means to replicate it or defend against it the next time. And because this really is Phantom War, retaliation is going to be challenging and international treaties about respecting borders or sovereignty will be worthless. In many respects, they already are, vestiges of another era in which conflict wasn't invisible and conducted at the speed of light.

The costs to individuals and companies trying to defend themselves will be hundreds of billions...much higher after the first few publicized attacks. And, as a scenario I once helped out with at Davos a few years indicated, the attacks don't have to be successful to have a devastating impact. Imagine the consequence of simply a rapidly spreading perception that a stock market's security had been compromised and that prices were being manipulated. We'd be back to paper trading or no trading at all in a matter of hours.

While the world looks to the economic crisis in Europe this week, acknowledging that international finance is the first place we are feeling the risks associated with living in such a closely interconnected world, there are rumblings of further such risks. But how long will it take for us to come up with a strategy to defend ourselves and limit damage in this already on-going war....or an appropriate code of ethics for conducting it...this war that it seems quite likely no one can ever win.



20 Things the G-20 Could Have Done -- But Didn't

As the Cannes caucus begins, here's what would have saved the world economy -- and Barack Obama's job.

Americans are under the quaint, even vaguely poignant illusion that they will actually elect a president next year. But, of course, the voting that will determine who leads the United States from 2013 onward will take place not in the United States but in Europe, in China, and in a handful of other distant locations. As a consequence, this week's G-20 meeting in Cannes, France, should be viewed as an even earlier and more influential caucus than the ones taking place in Iowa. And upcoming meetings among eurozone finance ministers, the U.S.-EU summit in late November, the EU summit on Dec. 9, and the just-announced Greek referendum -- which will likely come in January -- should all be seen as key primaries.

These summits and votes will offer all the circus-sideshow color that U.S. voters have come to expect from their own primaries. (Italian Prime Minister Silvio Berlusconi will someday have tragicomic operas produced about him -- that is certain.) That Republican front-runner Herman Cain may not know where they are taking place or why does not diminish their importance or the attention Americans should be paying to what is going on. Because should Europe's top officials -- one really can't call them leaders, given their resolute resistance to doing anything like leading -- fail to stop an economic meltdown on that continent, the consequences, from global banking crisis to worldwide economic slowdown, will be so severe that they would virtually ensure Barack Obama's loss in next year's elections.

There is no current risk to the well-being of the United States so great as a disorderly, protracted financial crisis continuing throughout the year ahead. It would crush recovery, push unemployment back up, reintroduce the risk of recession, and, worst of all, likely produce a series of bank failures that would crush markets and retirement accounts and force the U.S. government to choose between a new series of bailouts and sitting on the sidelines watching the country sink into what could be a decade-long slump.

For this reason -- and because the political consequences of such a slump are so grim for their president -- Americans have no priority greater than working with the Europeans to find a plan that will result not just in defusing the Greek debt time bomb but will also head off even graver crises in Italy, Spain, France, and the European banking system. As Helene Cooper notes in her story "A Silver Lining to America's Waning Influence" in today's New York Times, helping to engineer such an outcome won't be easy for the president, given the real and perceived limits on U.S. influence these days. But Obama and his team, led by Treasury Secretary Tim Geithner, have been working this issue intensely. The president himself has participated in a variety of sometimes fractious exchanges with European leaders via telephone and video conference. Geithner has forcefully allied himself with new IMF Managing Director Christine Lagarde in seeking to goad the Europeans into action. And the Europeans have made some, albeit fitful, progress, each step forward sadly being undone by a large lurch backward, as was the case during the past week when Greek bailout euphoria was quickly squashed by the Greek prime minister's sudden, badly orchestrated decision to put the deal to a popular vote in his country.

But the new reality for the United States is it can't bully anyone into action or make problems go away with a sweep of its check-writing pen. Nor, for that matter, can the Chinese, despite the size of their reserves. The Europeans will have to play a central role, and the rest of the world's leading countries will have to collaborate. Indeed, a central irony to this entire crisis is that though it looks like a debate about how tightly linked European countries wish to be, it is actually a demonstration that virtually all the world's countries are already linked far more tightly than any electorate would willingly approve in a national referendum. The markets have engineered the integration without benefit of public consultation, and it is now up to people everywhere to pay into this system of someone else's devising -- one which serves the interests of global bankers rather better than it seems to those of average citizens, lofty rhetoric about rising tides aside. (While rising tides may lift all boats, those without boats are left to sink or swim.)

Given this new collective reality, all eyes naturally turn to the G-20. The question is, can they do anything other than large photo-ops, vigorous but superficial discussions, and crafting more or less meaningless communiqués? To help them in a more productive direction, here's a list of 20 things the G-20 could have done or should do to help get us out of this mess:

1. They could have met earlier and more often. For long stretches, this year the rest of the world seemed to be buying the Euros' assertions that they had everything under control.

2. They could have been more skeptical of the Euros' assertions that they had everything under control, especially given all the clues the markets were giving that everything was spinning wildly out of control.

3. They could have stopped being the G-20. As World Bank chief Robert Zoellick has long pointed out, G-14 is more like it. A senior diplomat from an emerging power was the latest to make this point to me. With 20 countries in the room plus a bunch of IFI hangers on, the G-20 is turning into the college seminar you only took because you knew the professor would never get around to learning your name.

4. They could have helped contain the Greek crisis earlier by standing up months ago for the principle that banks that make risky loans need to take haircuts when their efforts to profit from those loans blow up in their face.

5. They can help avoid such crises in the future by enshrining that principle as policy. The private sector wants to get paid for risk without actually taking the risk. Nonsense. Who should pay for overborrowing: banks that enable it or citizens, by forking over their pensions after the bad deals blow up? Tighter money means more responsible government fiscal policies. (It would be useful if, future career plans and political patrons aside, those attending the G-20 meeting remembered they represent the people in this crisis, not the financial community.)

6. They could promote the idea of Greece's departure from the eurozone as in everyone's interest. This is the world economy that's at risk here. The European Union would be better off without Greece. The European Union would be better off with a system for the orderly dispatch of countries that are fiscally reckless. The Greeks would be better off being back with the drachma for at least the short term (it's not going to be an easy next few years in either case). It's time to lop off a toe or two to save the patient.

7. They could have arrived at a single international scheme for paying into this program (via the IMF) rather than having it evolve in that direction haphazard as it has.

8. They could have actually made real strides toward genuine bank reform and meaningful stress tests after the last crisis -- including calling the Euros out on their sham tests and lax practices.

9. While they were at it, they could have made far more serious progress toward promoting more transparent, closely monitored, more tightly regulated global derivatives markets. Because when the banks start teetering, everyone will be worried about these issues again in a flash.

10. They could have set up parallel processes to deal with all the multiple issues that are currently in play rather than buying into the notion that somehow the Greek crisis was what this was all about and if we could just get that under control (easier said than done) everything else would fall in place. That would mean:

11. Pressure on the Euros to resolve the fundamental structural problems of the eurozone if they want to have access to international funds for the bailout and safety net funds they will need. This means coming to grips with the fallacy that you can have a monetary union without a fiscal union. But it also means demanding that the eurozone enforce its own fiscal responsibility standards which, since introduced, have been honored more often in the breach.

12. It would also mean listening to Lagarde's admonitions that too much focus on austerity in places like Italy or Spain (or Greece) will kill growth and make the prospect of getting the debt-to-GDP ratios back in shape (not to mention generating the revenue to pay the debt) increasingly slim.

13. It would mean recognizing that Italy and Spain have problems all their own that will not be solved by dealing with Greece. Pressure on those governments could involve an agreement by G-20 countries to resist supporting them with bond purchases, for example, if they did not take their problems more seriously. Italy is far more precarious than many people realize, and were it to tumble, this Greece dust-up will look like a happy memory.

14. It would mean recognizing that the deepest problem lies in the area of banking contagion and that national plans for addressing a daisy chain of failures need to be in place now.

15. It would mean recognizing that the IMF needs more money and beginning a campaign to send a clear message to key national governments -- beginning with the one here in Washington -- that this is essential if stability and/or recovery are goals they share.

16. The G-20 would also listen carefully to initial murmurs of discomfort from borrowers in the emerging world that they are at least starting to worry that credit will tighten more -- perhaps significantly. There is only one train in the station right now that people are counting on to help pull the world out of recession -- and that is emerging world (and particularly Chinese and Asian) growth. In an interconnected world, we need to see that as an essential part of the solution to Europe's problems. Imagine where Europe's engine, Germany, would be if Chinese growth were to slow appreciably.

17. In the same vein, the G-20 needs to continue with some of the long-term reforms it has discussed but paid only lip service to. These include -- in addition to those mentioned earlier -- reform of the international monetary system, seeking to reduce commodity market volatility.

18. They ought to have a serious debate about big ideas. We need the equivalent of a global central bank (or better functioning, more tightly coordinated system of central banks) and global market regulatory mechanisms. We may resist them, but that is the clear implication of this crisis. How do we get there from here?

19. Part of that debate ought to include the discussion of Tobin taxes and other revenue-generating mechanisms that might also have a salutary effect on certain market activities.

20. G-20 members need to acknowledge that with the United States facing an election, China facing a leadership change, and France, Germany, Italy, and other European countries facing political challenges, that the group has to be an antidote to the weakening of resolve and timidity such circumstances bring. It would be helped if some of the problem children, like Mr. Berlusconi, were sent a clear message that it was time to go. Overreaching? In an interconnected world, summits like this one are not just politically significant for U.S. presidents.