A Failure of Imagination

A rather chilling report from June 2009 was declassified a few days ago.  The report, prepared by forensic financial analysts contracted by the Pentagon, dealt with the near-crash of the US financial system in fall of 2008.  Pajamas Media tatler titled its post on the report with a question: Was the U.S. a victim of an economic 9/11 in 2008?

Evidence outlined in a Pentagon contractor report suggests that financial subversion carried out by unknown parties, such as terrorists or hostile nations, contributed to the 2008 economic crash by covertly using vulnerabilities in the U.S. financial system.
The unclassified 2009 report “Economic Warfare: Risks and Responses” by financial analyst Kevin D. Freeman, a copy of which was obtained by The Washington Times, states that “a three-phased attack was planned and is in the process against the United States economy.”


While economic analysts and a final report from the federal government’s Financial Crisis Inquiry Commission blame the crash on such economic factors as high-risk mortgage lending practices and poor federal regulation and supervision, the Pentagon contractor adds a new element: “outside forces,” a factor the commission did not examine.
“There is sufficient justification to question whether outside forces triggered, capitalized upon or magnified the economic difficulties of 2008,” the report says, explaining that those domestic economic factors would have caused a “normal downturn” but not the “near collapse” of the global economic system that took place.
Suspects include financial enemies in Middle Eastern states, Islamic terrorists, hostile members of the Chinese military, or government and organized crime groups in Russia, Venezuela or Iran. Chinese military officials publicly have suggested using economic warfare against the U.S.
In an interview with The Times, Mr. Freeman said his report provided enough theoretical evidence for an economic warfare attack that further forensic study was warranted.
“The new battle space is the economy,” he said. “We spend hundreds of billions of dollars on weapons systems each year. But a relatively small amount of money focused against our financial markets through leveraged derivatives or cyber efforts can result in trillions of dollars in losses. And, the perpetrators can remain undiscovered.”

According to the report, this attack was to be in three stages:

The first phase was a speculative run-up in oil prices that generated as muchas $2 trillion of excess wealth for oil-producing nations, filling the coffers of Sovereign Wealth Funds, especially those that follow Shariah CompliantFinance. This phase appears to have begun in 2007 and lasted through June 2008.
The rapid run-up in oil prices made the value of OPEC oil in the ground roughly$137 trillion (based on $125/barrel oil) virtually equal to the value of all other world financial assets, including every share of stock, every bond, every private company, all government and corporate debt, and the entire world‘s bank deposits. That means that the proven OPEC reserves were valued at almost three times the total market capitalization of every company on the planet traded in all27 global stock markets.
The second phase appears to have begun in 2008 with a series of bear raids targeting U.S. financial services firms that appeared to be systemically significant. An initial bear raid against Bear Stearns was successful in forcing the firm to near bankruptcy. It was acquired by JP Morgan Chase and the systemic risk was averted briefly. Similar bear raids were conducted against various other firms during the summer, each ending in an acquisition. The attacks continued until the outright failure of Lehman Brothers in mid-September. This created a system-wide crisis, caused the collapse of the credit markets, and nearly collapsed the global financial system. The bear raids were perpetrated by naked short selling and manipulation of credit default swaps, both of which were virtually unregulated. The short selling was actually enhanced by recent regulatory changes including rescission of the uptick rule and loopholes such as ―the Madoff exemption.
While substantial, unusual trading activity can be identified, the source of the bear raids has not been traceable to date due to serious transparency gaps for hedge funds, trading pools, sponsored access, and sovereign wealth funds. What can be demonstrated, however, is that two relatively small broker dealers emerged virtually overnight to trade―trillions of dollars worth of U.S. blue chip companies. They are the number one traders in all financial companies that collapsed or are now financially supported by the U.S. government. Trading by the firms has grown exponentially while the markets have lost trillions of dollars in value.
The risk of a Phase Three has quickly emerged, suggesting a potential direct economic attack on the U.S. Treasury and U.S. dollar.
Such an event has already been discussed by finance ministers in major emerging market nations such as China and Russia as well as Iran and the Arab states. A focused effort to collapse the dollar by dumping Treasury bonds has grave implications including the possibility of a downgrading of U.S. debt forcing rapidly rising interest rates and a collapse of the American economy. In short, a bear raid against the U.S.financial system remains possible and may even be likely.

Apparently, the third phase has not yet taken place, which, Ed Morrissey believes, helps discredit the theory:

First, Freeman issued this warning in June 2009, when the US had just managed to get back on its feet after the financial collapse.  The US sunk hundreds of billions of dollars into shoring up American financial institutions through the end of 2008 and beginning of 2009 under both George Bush and Barack Obama.  The time to strike in Freeman’s model of Phase 3 would have been at that point, when the US needed Treasury sales to rescue the banking and investment communities.  While we have piled up even more debt and find ourselves lurking towards a Greece-like crisis, the short-term instability has mainly dissipated.  Furthermore, the nations Freeman cited are no less hostile to American interests than they were in 2008.  So if this was the plan all along, why no Phase 3?
Furthermore, one of those nations — China — has extensive holdings in the US. While it’s certainly possible that the Chinese autocracy might be so hostile to the US as to risk destabilizing their own country to bring down the American economy, it hardly seems likely.  China’s government has no love for the US, but does have a love of economic success.  They have even introduced capitalism back into their economy over the last several years (in a limited fashion) to improve their economic performance and prevent full-scale uprisings as seen in the Arab world this year.  China’s rulers may be brutal, but they’re rational and rather predictable, too.  Russia has enough problems in its own economy and hardly has the resources to conduct an economic war against the US, and their rivalries are mainly with Europe.  Iran has every incentive in the world to attack the American economy, but few allies to join them in that region — and the Saudis would prefer to unseat the mullahs in Tehran rather than destroy the US economy that both feeds and protects them.
The report is very useful in underscoring the potential vulnerabilities in our system, especially in relation to sovereign-wealth funds, and should get attention from policymakers in protecting the US from financial wars.  However, just because something is possible doesn’t mean it happened.

Ed has a point.  On the other hand, similar coordinated economic attacks have taken place before for reasons as yet unclear.  The "Asian flu" of the late 1990's was spurred in part by the collapse of the Thai economy caused by manipualtion of its currency.  A similar tactic was used against the British pound sterling, with results that, while not as bad as those in Thailand, were nevertheless serious.

This does seem to highlight what seems to be a failure of imagination on the part of people whose duty is to protect us.  Perhaps government service helps suffocate imagination; the legal profession can certainly have that effect. 

But it sure seems as if at least one person possessed that imagination: Tom Clancy.  And he used it in his novel Debt of Honor.  Which not only had a 9/11 style attack, but featured an attack on the US financial system, with driving down the value of the dollar and a compuiter virus that wiped out the computer records of the New York Stock Exchange, which meant no one knew who owned what.

Apparently we need some Tom Clancy's in government.