WASHINGTON – Trillions of dollars in government spending might stabilize the economy, but for now it may have weakened some U.S. security interests abroad and hampered the nation's ability to respond financially to an attack at home.
That curious conclusion by security and financial analysts reveals one of the unexpected consequences that could emerge from the government's bailout and stimulus plans. It also shows how intertwined the economy and national security have become. The top U.S. intelligence official, Dennis Blair, recently said the economy was the nation's foremost security concern.
"We have set the stage for a catastrophe," said James Rickards, a financial consultant at the research firm Omnis Inc. of McLean, Va., who provides security research for the Pentagon and others in the intelligence field.
Security officials long have worried about threats to financial institutions. In 2004, police increased security at the New York Stock Exchange and elsewhere in response to a perceived al-Qaida threat. But the focus was on car bombs, suitcase nuclear weapons or hijacked airplanes, not economics.
That's the way it has been for years.
The FBI and the Homeland Security Department's joint report on potential terrorist attack methods last year did not mention economic sabotage. The Homeland Security's five-year threat assessment focused primarily on weapons of mass destruction, leaving the limited discussion about economic attacks to a section on computer hackers.
If terrorists or countries wanted to send U.S. financial markets into a tailspin, they would not need an explosion. Several financial doomsday scenarios have circulated in intelligence and financial circles.
One goes like this: A foreign government or a terrorist group with substantial financial backing sets up several overseas hedge funds. Acting together, they dump U.S. stocks, perhaps by short-selling a major financial index or by targeting key U.S. companies. The attack begins slowly, picking up speed over several hours as it creates panic and confusion in the market.
The U.S. is more susceptible to such an attack today, analysts say, because Wall Street is so shaky. For instance, after the 2001 terrorist attacks, the government pumped money into the banking system to bolster the economy. Doing so again wouldn't be as easy. The government has already spent trillions on bank bailouts and short-term lending to try to prop up banks, with mixed results.
"Now, if the stock market crashes, banks are not going to be in a position to jump in. We're on our own," Rickards said.
To pay for the bailout and stimulus plans, the government must issue bonds, many of which will be bought by China and other countries. Beijing could use those bonds as a weapon. Selling them in bulk would send U.S. interest rates rising, providing a new drag on the economy.
Such a move could backfire on China because the economies of the two countries are closely tied. But U.S. officials have expressed fear about the threat. In January 2008, the Congressional Research Service said the best way for the government to allay those fears would be to stop spending so much and start saving more.
Yet spending in the name of economic recovery has reached record levels. That will make it harder for the U.S. to get tough with Beijing on human rights or threaten economic penalties during a diplomatic dispute, said George Foresman, a former Homeland Security undersecretary who now provides security consulting to financial companies.
When Secretary of State Hillary Rodham Clinton traveled to China this month, she said human rights concerns could not interfere with talks about the economic crisis. She then thanked China for continuing to invest in U.S. bonds and encouraged the nation to keep buying.
"The national security community is awakening to a new era," Foresman said. "They can't be overly focused on the Middle East at the expense of the rest of the world. And they can't be overly focused on the military at the expense of the global economy."
Blair, the national intelligence director, told Congress that the slumping economy could foster extremism and anger at the U.S., which is seen as having caused the global economic meltdown.
That surprised some lawmakers, including Sen. Kit Bond, R-Mo., who questioned any change of focus away from threats such as al-Qaida, Iran and North Korea.
"My intent in drawing attention to the economic crisis was more to inform policy of the things that could really cause real problems for the United States if they developed a certain way," Blair replied.
But Blair said he wouldn't be using the nation's spy satellites to look at economic data.