The financial turmoil could be exacerbated if the Fed does not fulfil Wall St expectations
Blowback: As far as Iraq is concerned, there is certainly no guarantee that any decision made in Washington in the coming months - to start withdrawing the US troops from Iraq, to maintain the current level of American deployment there, or even to expand the US military presence - is going to bring stability to that countryIT might sound a bit dramatic. But make no mistake: US administration officials and lawmakers, led by President George W Bush and the chairman of the Federal Reserve Ben Bernanke, could end up making fateful decisions this month that could have huge impact on America's standing in the global economy and the international financial system as the two try to manage the two crises into which the US has fallen.
Blowback: As far as Iraq is concerned, there is certainly no guarantee that any decision made in Washington in the coming months - to start withdrawing the US troops from Iraq, to maintain the current level of American deployment there, or even to expand the US military presence - is going to bring stability to that country
In the economic arena, the continuing turmoil in the financial markets is going to force Mr Bernanke and his 19 colleagues on the Federal Open Market Committee (FOMC) to decide on their Sept 18 policy meeting whether to do what Wall Street is hoping, wishing and praying that they would do - cut interest rates. That decision could determine the long-term prospects of the US as well as that of the global economy.
And on the diplomatic stage, President Bush and members of Congress will have to respond to the US military and diplomatic officials who are directing America's policy in Iraq, and decide very soon whether or not to continue maintaining a US military presence in that country. That decision could effect American position in the Middle East and around the world for many years to come.
The credit crunch on Wall Street, which has followed the series of major mortgage defaults, is clearly going to continue for quite a while and is expected to affect the spending of American consumers, many of whom are also homeowners. It will also affect the behaviour of banks and hedge funds, some of which could be wiped out.
In that context, the question being asked in Washington and on Wall Street and Main Street is the following: What does Bernanke mean when he stressed the Fed should act 'as needed' in order to take care of the economy as opposed to bailing out irresponsible money managers? Hence it's not surprising that consumers and bankers and their representatives in Washington are waiting to see what will happen in the FOMC meeting on Sept 18 and whether the Fed will cut the federal funds rate which is currently at 5.25 per cent.
That 'waiting game' itself is going to produce daily speculation in financial reports, columns and websites which could have an effect on the decisions made on Wall Street - bad news on unemployment and the 'real economy' raises the chances that the FOMC would cut rates, producing exuberance among investors while good news makes it more likely that the Fed will not cut rates, depressing the same investors.
The conventional wisdom is that Mr Bernanke and the majority in the FOMC are probably inclined to cut rates as a way of countering the risk that the economy could be devastated if the housing market collapses as a result of credit crunch.
The financial turmoil could be exacerbated if the Fed does not fulfil the expectations on Wall Street - that it will indeed cut rates.
At the same time, some members of the FOMC will be reluctant to cut rates if they conclude, based on the available information, that the 'real economy' has not been affected in a major way by the credit crunch and are concerned that a decision to cut rates this month will only produce incentives for investors to take unwise risks that could create the conditions for new financial crises in future.
And there is even no guarantee that lower interest rates that would relieve the credit crunch will have a positive impact on the problems facing the housing market.
As far as Iraq is concerned, there is certainly no guarantee that any decision made in Washington in the coming months - to start withdrawing the US troops from Iraq, to maintain the current level of American deployment there, or even to expand the US military presence - is going to bring stability to that country.
If anything, the growing consensus in Washington is that whatever the United States does or doesn't do in Mesopotamia, the erosion in the power of the central government in Baghdad and the continuing process of ethnic cleansing by both Sunni and Shiite militias, and the massacres that occur on a regular basis in Baghdad and other mixed areas such as the Diyala Province, are creating a situation in which Iraq now resembles Bosnia and parts of the former Yugoslavia at the height of the fighting in the 1990s.
Each community is fleeing - the Kurds to the north, the Shiite south, and the Sunni to their patches - where its members are a majority and are able to defend themselves.
In a way, the recent 'surprise' trip by President Bush to Iraq, the first part of a choreographed strategy aimed to convince Congress and the American people that the 'surge' and the entire US strategy in Iraq is working, demonstrated that the American effort is now aimed at increasing the power of local Sunni tribes even if that weakens the ability of the government of Prime Minister Nouri Maliki and his Shiite-controlled government to extend its control over the Sunni areas.
This seems to suggest that President Bush and his advisers have given up on their grand designs of establishing the foundations of political and economic freedom for a unified Iraq and are instead adjusting to the reality of a slow partitioning of the country. The fierce fighting since the US invasion has led to more than a million Iraqi refugees fleeing into Syria, Jordan and other countries in the region.
Hence when General David Petraeus, the commander of the US forces in Iraq, briefs the White House and Congress about the progress achieved by the American military in Iraq, the expectation is that he will claim that the Maliki government has failed to co-opt the Sunni minority and to unify the country, but that American military presence is helping to prevent a total disintegration of Iraq and bloody civil war that could draw in other governments in the region into the fighting, including Turkey, Iran and Saudi Arabia.
The message from the Bush Administration to Democrats and a growing number of disaffected Republicans is that any sign that America is giving up on Iraq would not only produce a devastating explosion in Iraq and the entire Middle East, it would also bring about the collapse of America's position in this strategically critical region of the world.
Will the Democrats and the Republican lawmakers who are running for re-election next year buy into this message and agree to continue supporting a US military presence in Iraq? Will President Bush agree to take some steps to relieve the anxiety on Capitol Hill by agreeing to start withdrawing at least a small number of troops from Iraq? Is he also preparing for possible military action against Iran?
At the end of the day, the decision that the White House and Congress are going to make in Iraq will have a major effect on the US and global economies and could also worsen the anxiety in Wall Street and make it even more difficult for Mr Bernanke to make his critical decision.
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