The mar­ket votes for the Bush plan in Iraq

The Washington Times Weekly - - Commentary - LAWRENCE KUD­LOW

Amidst all the pes­simism about the U.S. strat­e­gyshift in Iraq, world fi­nan­cial mar­kets seem to be vot­ing for Pres­i­dent Bush and his plan — not against. On the days im­me­di­ately pre­ced­ing the pres­i­dent’s speech, as its con­tents leaked out, oil prices were plung­ing and stock prices ris­ing. And right af­ter the speech, when the con­tents of the Iraq plan were clear, guess what? Oil prices con­tin­ued to fall, and share prices hit record highs.

Of course, there are a lot of fac­tors driv­ing th­ese mar­kets. Cor­po­rate prof­its are strong. Pro­duc­tiv­ity is high. In­fla­tion and in­ter­est rates are low. And the threat of re­ces­sion is nil. All this is good for stocks.

And mar­kets do work. The high oil prices of the last cou­ple of years have gen­er­ated huge prof­its and con­sid­er­ably more pro­duc­tion. Oil in­ven­to­ries are high, and the world seems to be awash in oil sup­ply. That (along with some un­usu­ally warm weather) is driv­ing prices lower.

But Pres­i­dent Bush’s over­hauled Iraq strat­egy, in­clud­ing a tougher line on Iran, is viewed by in­vestors as a plus for Mid­dle East se­cu­rity. Two large air­craft car­rier groups and 16,000 sailors have been po­si­tioned in the Per­sian Gulf. There also are in­di­ca­tions the U.S. will pro­vide Pa­triot anti-mis­sile de­fense sys­tems to al­lies in the re­gion. So, putting all this to­gether, geopo­lit­i­cal risk pre­mi­ums are

— hence lower oil prices. While pun­dits and politi­cians say the new Bush plan won’t work, mar­ket in­vestors are vot­ing with their money for a much more pos­i­tive ver­dict. And af­ter sur­vey­ing the de­tails of the new Iraq strat­egy, I’m cast­ing my lot with the in­vestors.

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The U.S. mil­i­tary buildup — in­clud­ing the strength­ened naval pres­ence — not only will pro­vide bet­ter se­cu­rity for Iraq’s demo­crat­i­cally elected gov­ern­ment, but also en­hanced se­cu­rity for the en­tire re­gion.

Cov­er­ing slightly more than 20,000 new troops, the re­vamped mil­i­tary plan will put five U.S. brigades in Bagh­dad and a sixth in Al-An­bar Prov­ince. Very sim­ply, the White House be­lieves po­lit­i­cal progress and rec­on­cil­i­a­tion in Iraq can­not come with­out bet­ter pop­u­la­tion se­cu­rity — hence the need for ad­di­tional U.S. troops and a shift in tac­tics. The rules of en­gage­ment also will change. This means no more po­lit­i­cal in­ter­fer­ence by the Ma­liki gov­ern­ment in U.S. mil­i­tary op­er­a­tions.

In essence, the whole war plan has been changed from an Amer­i­can clear­ing op­er­a­tion — where Iraqi forces would un­suc­cess­fully at­tempt to hold that cleared ground — to a strat­egy where U.S. forces will clear, hold and stay. There also will be a beefed-up “clear and hold” op­er­a­tion in the volatile An­bar re­gion, where lo­cal tribes have be­gun to move against al Qaeda and other en­e­mies.

Th­ese are all cru­cial com­po­nents of a strat­egy that, for a change, sounds like a recipe for vic­tory. How­ever, it is crit­i­cal to the suc­cess of the plan that all bel­liger­ent par­ties in the re­gion now be held ac­count­able.

“We will in­ter­rupt the flow of [en­emy] sup­port from Iran and Syria,” warned the pres­i­dent. “And we will seek out and de­stroy the net­works pro­vid­ing ad­vanced weaponry and train­ing to our en­e­mies in Iraq.”

Th­ese tough words amount to a vir­tual dec­la­ra­tion of war against the rogue states within the Axis of Evil.

Just hours af­ter the Bush speech, U.S. troops raided a build­ing in north­ern Iraq and ar­rested five Ira­nian Revo­lu­tion- ary Guard op­er­a­tives. Shortly af­ter­ward, Sec­re­tary of State Con­doleezza Rice told sen­a­tors, “The United States is not go­ing to sim­ply stand idly by” while Tehran tries to dis­rupt Wash­ing­ton’s re­newed ef­forts to sta­bi­lize Iraq. It’s about time.

Ad­di­tion­ally, the United States is wag­ing fi­nan­cial war against Iran. The Trea­sury De­part­ment froze the as­sets of Iran’s old­est bank, Bank Sepah, which has fa­cil­i­tated fund­ing of Iran’s weapons-of-mass-de­struc- tion pro­grams. The bank is now barred from Amer­i­can fi­nan­cial mar­kets.

And let’s not for­get that plung­ing oil prices — from nearly $80 a bar­rel all the way down to $52 — will do se­vere dam­age to Iran’s al­ready ten­u­ous fis­cal po­si­tion. As the new U.S. se­cu­rity blan­ket pro­tects Per­sian Gulf ship­ping lanes from any Ira­nian mis­chief, con­tin­ued oil-price de­clines will bleed the weak Ira­nian econ­omy. That, in turn, will un­der­mine Iran’s abil­ity to fi­nan­cially as­sist ter­ror­ist groups like Hezbol­lah and Ha­mas, or an­tiAmer­i­can fac­tions in Iraq. Think of it: Fall­ing oil prices not only re­flect lower war and po­lit­i­cal risk, but ac­tu­ally do enor­mous dam­age to one of the Mid­dle East’s top risk pro­duc­ers: Iran.

Po­lit­i­cal op­po­si­tion by Democrats and Repub­li­cans to Mr. Bush’s new strat­egy may be hard­en­ing, but fi­nan­cial mar­kets point to a much more pos­i­tive sce­nario. Might the pres­i­dent’s new plan ac­tu­ally work? World mar­kets are say­ing give it a chance. I agree.

Lawrence Kud­low is host of CNBC’s “Kud­low & Com­pany” and is a na­tion­ally syn­di­cated colum­nist.

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