[ by Larry Goldfarb]

In 2004, the US was losing the war in Iraq.  The Al Qaeda network was overwhelming our conventional forces and our special forces.  According to Stanley McChrystal, the US Army general who was the Commander, U.S. Forces Afghanistan and who spoke on September 12^th in New York before the Hudson Union Society, the US’ problem was not the Iraqi insurgents or the Al Qaeda foes, it was themselves.  He said the model employed against the enemy on the ground was not working.  The insurgent network was dispersed and was so strong that they could anticipate and communicate US army movements as they were being executed.  The Special Forces that had been spawned following the Iran Hostage crisis and the failed attempt to free the hostages in 1980,  was not sufficiently countering the insurgents capability.

According to McChrystal, what changed the face of the war was not the surge or the drone attacks, but a reorientation of the Special Forces to develop into a unit that had a stronger network than their enemy and could react instantaneously at a hint of an attack. Clearly the drones were a large part of the capability.  In the end, this type of coordination was responsible for the killing of Abu Musab al-Zarqawi, leader of Al-Qaeda in Iraq, and the capturing of Saddam Hussein.  The operation to kill al-Zarqawi was so intricate that it makes FBI manhunts look like scavenger hunts.  Thus, in short, according to McChrystal, American ingenuity and resources caused Al-Qaeda and its ancillary forces to lose its will to fight.

The conversation with McChrystal made me think that the financial industry is greatly in need of a major reorientation.  Like the Army before 2004, it is losing the battle and resorting to short cuts and quasi-illegal / unethical behaviors.  It is criticizing regulatory bodies, and spending more time lobbying congress every year.  Regulators can’t plug enough holes in this environment to keep investors safe and sane.  Wall Street needs to change.

Change does not mean charging higher fees or taking staid investment vehicles and making them more risky, change in my view is creating new type of products that open the economy to new investment and more economic growth.  In the early 80s, the securitization of mortgages changed the landscape for lending and home ownership.  At about the same time, junk bonds were introduced which made borrowing for smaller corporation more attainable.  Later in the decade, credit card receivables were securitized which opened up the country to more cards and lower rates.  The growth of interest rate swaps in the 90s also allowed for more funding choices for corporations.  In 2000s, instead of creating new investments to improve the economy, Wall Street added leverage or speed.  Arguably, this has not improved the economy and hurt the smaller investor.  And then when the lenders got nervous, the house of cards collapsed.  The economy lapsed into a deep recession.

The net result has been less economic growth, more borrowed money and more risk.  What Wall Street needs is a realization that it can be the engine for our new high powered economy.  But it can only begin to act when it realizes that it is losing the war and a major reorientation is required.