U.S. "Hedge Fund" Diplomacy in Egypt

By Michael Clauser

Like many Americans, I am conflicted about recent events in Egypt and even more so about what the U.S. government should do.

On one hand, the United States has an immediate interest in the stability of Egypt and its government--and not just to keep the peace in the Middle East or secure the two million barrels of oil that pass through the Suez Canal every day.  But also because ditching a longtime U.S. ally like Hosni Mubarak at his moment of need does not send a reassuring message to other embattled pro-American leaders in unstable countries.  Especially when you consider what type of leader may be waiting in the wings in Egypt or elsewhere in the world.

On the other hand, it's hard for any American to watch a pro-democracy movement and not root for dismissing an autocrat after a thirty-year term.  After all, American taxpayers spent almost $800 billion in nearby Iraq to get rid of one; Egyptians are ready to do it for free.

This is the recurring tension between securing American interests and promoting American values.  Often Washington has refused to decide between the two.  In Egypt, it has invested in both in what looks to be a kind of "Hedge Fund Diplomacy."

In his best-seller on hedge funds, More Money than God, Sebastian Mallaby identifies several features peculiar to hedge funds as a class: (1) investment managers always have some sort of "skin in the game;" (2) managers leverage their bets through debt to go in big; and its signature feature--(3) hedge funds minimize market risk by hedging investments in the "short" against the "long."

U.S. diplomacy in Egypt over the last thirty years bears striking similarity to all three of these characteristics.

Certainly the U.S. has "skin in this game."  The last thirty years has shown that the U.S. is nothing if not an investor in Egypt and its future.  Egypt receives roughly $1.3 billion in aid from the U.S. annually, just slightly less than Israel.  Most of that goes to President Mubarak's impressive military, which strengthens his regime.  In return, the U.S. has counted on Mubarak to keep Egypt secular, stable, and western-oriented.  And he has--until now. The current discord in Egypt has destabilized the region, caused oil and other commodity prices to rise, while some stock markets sink.

America's position in Egypt and the region is highly leveraged.  The U.S. spends roughly $700 billion annually on its military, only slightly less than equal to the sum of the defense spending of every other country on the planet.  And that geopolitical leverage used in Egypt and elsewhere in the world is debt leveraged by America's annual federal budget deficit, which ranges in a given year between $500 billion and $1.7 trillion.

The stability of Mubarak's regime has been Washington's biggest, but not only, investment in Egypt. At the same time that the U.S. pumps billions into Mubarak's military, the U.S. government has hedged its bet on Mubarak's military and supported broadcast media outlets such as Al Hurra Television, Voice of America Arabic, and Radio Sawain the country.  These stations provide forums for debate, dialogue, and differing opinion encouraging civil society and giving breath to pro-democracy movements; an altogether different and longer-term investment than annual military aid.

If what is going on in Egypt is a kind of "Hedge Fund Diplomacy," the decision President Obama faces now is whether to exit America's relationship with Mubarak's regime in favor of leveraging its other, long-term investment in public democracy.

It's clear by watching the news that President Mubarak's time as the guarantor of stability in Egypt has come to an end.   Not only was he unable to prevent the destabilizing mass protests and rioting, the consequences of his long rule were in part the cause of them.  Many in Egypt have come to believe that the continued existence of his regime has become destabilizing in itself.  This has significantly reduced his value to the United States.

At the same time, America's long-term investments in public diplomacy--freedom of speech and the Internet to name but two--are rapidly maturing.  And each new day brings news reports of ever-swelling crowds in Cairo, Alexandria, and elsewhere.

As a long-time friend to America and its interests, the U.S. must ensure President Mubarak's personal safety.  But as an investment, President Obama should seize on this moment to restructure the American position from its short-term orientation and bet the farm on democracy in the long-term.

As President, Barack Obama does not want to be on the wrong side of history.  As a major investor, he does not want to be left holding onto a losing investment.

Michael A. Clauser served in the George W. Bush Administration in the Pentagon and later as national security staff in the U.S. House of Representatives where he co-managed the bipartisan Strategic Communication and Public Diplomacy Caucus. Michael blogs at michaelclauser.com.

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