- The Washington Times - Wednesday, November 26, 2008




Make no mistake. What happened to Wall Street and to Main Street threatens the Department of Defense.

As Wall Street and Main Street have imploded, if strong action is not taken now, America’s military will suffer a similarly disastrous collapse. For those who dismiss this warning as too alarmist, the shocking demise of Lehman Brothers, Bear Stearns, Merrill Lynch and possibly the nation’s Big Three auto makers should be chastening and illuminating. Many of the same symptoms of danger ignored for the economy are present in defense.

These similarities are striking and instructive. Oversimplification aside, the meltdown of financial markets and global economies arose from a combination of overstretch and overreach; policies too often driven by ideology removed from reality; and denial. None of this happened overnight.

In the United States - and this radiated across world markets - overstretch and overreach produced too much cheap money that led to too much unsecured credit that induced an excess of leverage. Leverage meant accepting huge multiples of debt to assets or cash in hand ranging from between 30 to 100 to 1. Many jumped aboard this gravy train as billions of dollars were made, unsuspecting of the looming wreck.

Ideology evoked both too much and too little oversight. The left embraced the siren call of extending the American dream of home ownership beyond sensibility. The right shoved deregulation over a cliff first by ending the separation of investment and commercial banking; allowing hedge funds freedom from any oversight; and then legalizing credit default swaps that had been illegal since the 1907 financial crash.

As a result, banks, insurance companies and hedge funds made billions by slicing and dicing this explosion of mortgages into derivatives that few on Wall Street understood, particularly the down side risks. The subprime mortgage market was the fuse for the explosion. Main Street is still recoiling from the impact. One banker put it this way: “We may only be in an economic recession but we surely are in a psychological depression.”

Now look at the Defense Department.

The Pentagon is suffering from huge cases of overstretch and overreach in terms of commitments it is fulfilling; money it needs to sustain them; and strategy it is meant to carry out. Overstretch and overreach, as with financial markets, can be measured in invertible budget and dollar deficiencies. The Pentagon has an annual appetite of about $650 billion to 750 to sustain the military. A good chunk of that has been appropriated through emergency supplementals to support the wars in Iraq, Afghanistan and against terror but in which a great number of other programs have been funded.

With our national debt approaching $12 trillion, the annual federal budget deficit ballooning to more than half a trillion dollars and tax revenues shrinking, the chances of maintaining this level of defense spending, let alone increases, are about zero. Over the coming years, defense will be facing crippling shortfalls of possibly $100 billion to $200 billion a year. Intensifying this potential implosion are other time bombs.

Virtually all of the Pentagon’s major weapons programs have at least doubled in costs in real terms; are taking about twice as long as planned to procure; and will be bought in roughly half the original numbers. Furthermore, there is no agreement over strategy. Will the military be largely shaped to fight “small wars” as are being waged around the world in crucial regions? Or will “big wars” against a resurgent Russia or China provide the military’s main rationale?

Many of these implosive forces were ideologically driven. The war in Iraq was largely about spreading democracy to pacify the greater Middle East. Because the rest of the U.S. government lacked the tools to support this vision, the Pentagon was leveraged to undertake these tasks that should have been the responsibility of other departments, exerting further pressure on its ability to carry out its basic missions. There was both too much and too little oversight. Congress was AWOL in the way it rubber-stamped these huge spending increases. Yet, it still tried to micromanage the spending it authorized.

What does this mean? Because spending for “things” such as weapons systems and infrastructure are long-term, immediate large-scale savings cannot be derived from cancellation or reduction of these programs. Current operations will take the biggest hit as American families and businesses have been forced to cut back drastically in spending. But given the size of defense, this contraction can be implosive.

We have seen this movie before. After every war, we downsized. And as Vice President Dick Cheney famously remarked, each time “we screwed it up.” The Obama team needs to know that if we are not careful, what happened to Wall Street and Main Street will happen to the Pentagon. Denial is not an option.

Harlan Ullman is a columnist for The Washington Times.

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