Econ update

The mantra “War, war, war, when will it ever start?” is coming to a head.  Like it or not we are on the verge of war against Iraq. I said last week that apparently March 17 was a big date and that proved to be correct as Bush has just completed his Azores press conference and the only way to interpret what he said was we are on our way, get on board or get out of the way.  It is impossible now to avoid the issue as it is the only current event of significance.

War with Iraq is incredibly risky and should not be taken lightly.  Although there is little doubt of who will win the battles, there is doubt if there will be any winners in the end.  No one knows the lengths to which a cornered man like Saddam might go and a occupying US force in the middle east is exactly what Al Qaeda is against and is willing to die to oppose.  Chemical or biological weapons used against our troops or Israel, or anyone else for that matter, could be the worst thing to occur on this planet since Hiroshima.  We are not going with the full support of the rest of the world, Saddam has not attacked us, there is little if any evidence of Al Qaeda and Saddam being in cahoots and the result will surely include an occupying force that will be the target of every terrorist in the region. 

Having said that, leaving Saddam in power is also incredibly risky.  Given time and his funding from selling oil, he will come up with weapons that make it much more difficult to deal with him.  Saddam with a nuclear weapon is about as bad a picture as I can imagine.  Then what do you do?

So regardless of which risks you prefer, President Bush is the one that ultimately gets to choose and he is choosing to get rid of Saddam.  But the lesson here isn’t about the decision being right or wrong, its about a decision to manage risks.  Regardless of what course of action is taken, there are risks here.  The question is which risks you want to take and which ones you want to avoid.  As you move through your career you will be put in positions to make decisions in which all sides have risks.  In weighing those decisions, I would like to suggest that our perception of risk is often misguided.  We are just human after all.  Here are a couple of common error in assessing risks.

Natural risks are less scary.  Perhaps this explains why we loathe nuclear power but ignore the radioactive threat of natural radon gas.  Risks imposed on us seem worse. We can decide if we want to risk swimming, but when a hazardous waste incinerator sprouts next door we feel powerless and panicky.  Risks with an obvious benefit are less daunting.  One reason we give appreciative ratings to X-rays and surgery is that we focus on the payoff.  Risks associated with complex technologies and catastrophes are greater. This is partly because the media dwell on catastrophes. If each day’s headline read, “One in 50 of You Will Die in a Car Crash” (and this is an amazing, true fact), we’d think twice about risking our necks in those death machines.

I guess my only point is that risks are often not easily measured and this seems to be one of those cases where both sides have risks that can’t be measured in any easy way.  Regardless, here we go.

The impact on financial markets should be positive in the short term as the uncertainty of war is removed and the anticipation of a quick end takes over.  But if the war were to draw out or have significant battles with massive causalities the markets might change their view.  The Fed meets this week and will likely do nothing as it is a very bad week to be making changes in the interest rate.

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