Long Volatility

An interesting look at geopolitics from the perspective of stock option pricing:

"Fifteen years ago, the United States was short vol. Now it's long vol," observed an acquaintance who trades options. By this he meant that the United States stood to lose from instability during the Cold War, and stands to gain from it now.
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Flippant as the application of finance theory to geopolitics might appear, it provides a disturbing yet convincing characterization of the present state of affairs. The elder Bush and advisers such as James Baker and Bent Scowcroft, schooled in the Cold War, flinched at the thought of instability. Any regime, no matter how corrupt and oppressive, merited American backing, as long it was "our bastard", as Franklin Roosevelt qualified Nicaragua's strongman of the 1930s. It is a stretch to accuse such men of having a philosophy. Their strategic reflex came from the simple fact that the Soviet Union stood to gain from any instability outside its immediate sphere of influence. The more chaos, the more options open to the Kremlin.
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Does the Saudi monarchy rankle at American suppression of Islamic radicalism? Hang them out to dry, as Secretary of State Colin Powell already has hinted. Pull out the American troops, and see how the Saudis fare against Iraq, Iran, and their own domestic opponents. If need be the United States will occupy the Saudi oil fields. As for the rest of the Arabian peninsula, Washington can afford to leave it to the fates. Is Yasser Arafat playing games with Tehran? Let the Israelis blockade him in Ramallah, and chop up Hamas, Islamic Jihad and other friends of Osama bin Laden as best they can.

Is India on the verge of crushing Pakistan? Tell Islamabad that Washington will not hold India back unless it accedes to Indian demands to mop up Islamic militants. Does that threaten Pakistan's stability? That's Pakistan's problem.

Just a year ago, America's cold-eyed sanction of Israel's iron hand in the West Bank would have been unthinkable. America is "long vol". If Israel crushes the Palestinian militants, one of two things can happen. One is that the militants will seem a "weak horse" (in bin Laden's phrase) and Arab public opinion will turn against them. Another is that the "Arab street" will rise up in protest, forcing America's clients in the Arab world to cling to Washington for dear life.

Coups, revolutions, wars do not faze Washington. It can sit back like the council of gods in Homer's Iliad, betting on the outcome and choosing whom to support and whom to undermine. From the standpoint of American interest, the more volatility, the more choices and the more influence.