Today I'm into nutshells.

Asset markets and central banks are control systems, intended to provide incentives that encourage the effecient use of human and economic resources. I believe these "macro" control systems are malfunctioning, badly. Structural weaknesses in these institutions have permitted some classes of agents to profit from the misallocation and expropriation of resources, creating strong constituencies for the continuation and exacerbation of those structural weaknesses.

Why has nothing really obviously bad happened, if the world's macroeconomic control systems are so out of whack? Economies are big, slow things. They have a lot of intertia — they like to keep doing whatever it is they do. They can be tortured a good bit and bounce back. They have a great diversity of control systems, much more fine-grained, local, and efficient than the large scale capital markets and games played by central banker finance ministers. There are margins for error. But those margins are not infinite. Self-correcting control system failures are okay. Autocatalytic failures, where ineffeciencies promote even greater ineffeciencies, are not. That's where I think we are now.

When describing the problems, they sound very big, central, "macro": currency manipulation, artificial liquidity, leverage, asset bubbles, commodity inflation. But central banks are not the answer to the problems they've helped to create. Reform, when it comes, won't be with a Plaza Accord, an IMF/G-7/OECD initiative. The solution, eventually, will involve changing the definitions of money, corporate stock, and other financial assets, and the structure of the markets on which they trade, to be less prone to self-reinforcing malfunctions, and far more grounded in specific, local, and concrete knowledge. These will be fairly radical changes, though there may be incremental paths to get there. Understanding what more robust and effective market-based control systems would look like, and developing a rich, quantitative theory relating information-work to efficient decision-making, are perhaps the crucial challenges of our time.

The one thing that the current leadership of the United States and the current leadership of Iran have in common is an interest in high oil prices. Iran's government and ruling elite live off of oil revenue. At present, macroeconomic conditions are such that high oil prices lead to a redistrubution of wealth in the US towards the Bush administration's personal and political friends without (so far, so good) damaging the broader economy in any obvious way.

A gentlemanly game of saber-rattling seems to be in the interest of both parties. Perhaps that is why we have one.

A nuclearizing Iran may be a real issue. The world is full of real issues. The current crisis might have come up any time in the past decade, and might have been delayed five years with the smallest amount of fudging and dissembing and rhetorical moderation on Iran's part. Why now?

I'm not alleging a conspiracy here. In a game of two players with a mutual interest, there need be no secret handshake to seal a deal. Nor am I alleging that everything is fabricated. Perhaps the new Iranian President really is driven by domestic power considerations in his boastful cretinism. The Bush Administration probably does want to see regime change in Iran and an end to its nuclear program, and Sy-Hersh-style deniable brinkmanship may be a defensible strategy to get there. But it can't hurt, from either perspective, that the athletes in this little game of nuclear chicken are very, very well paid.

Glenn Reynolds writes...

ARNOLD KLING ON fear of confrontation: "Unfortunately, large segments of American society no longer have the ability to confront real evil. People lack the confidence and moral clarity to stand up to intimidation. . . . One can view Islamic militants as armed versions of unruly teenagers. We should not feel guilty toward them. We should demand reasonable and decent behavior from them, rather than excuse their tantrums or their crimes."

That would require thinking of ourselves as adults, which is unacceptable to many.

I want to think of "us" as the adults. In fact, in the run-up to the Iraq war, which I supported despite the clear disingenuity of the war's justification, I took a similar, explicitly paternalistic view of the world. The Europeans in particular were behaving like petulant teenagers, protesting "the system" while enjoying a vast subsidy, in financial terms and as "moral comfort", by letting America do the dirty work ensuring their security. And I viewed much of the Middle East as locked in a kind of post-Marxist, post-colonial, Che-T-shirt-style adolescent radicalism, which mixed with Islamism and pan-Arab nationalism, and unfortunately real explosives. My view at that time was that the United States was an arbiter of reason and civilation, imperfect but sufficient to enforce certain standards and keep the peace.

But, owing partly to the incompetence which with Iraq's reconstruction has been managed, but primarly to the fact the United States has allowed the soundness of its own economy to become badly undermined, I no longer believe we are credible adults. My estimation of the Europeans and the Islamic world have not changed. I've little flattering to say about either. But now the United States reminds me of an alcoholic parent trying to keep its delinquent kids in check. Tipsy, blustering America might be well-intentioned, it might in fact know better what's right and what's wrong, but its constant bumbling, its ability to throw tantrums but incapacity to lead or to guide, and its self-destructive partying on cheap capital render it an ineffective role model. The US is in for a bad financial hangover from its subsidized home-equity binging. While I have complete faith in America's ability to take a cold shower and figure out how to right itself economically, that will take several years, and those will be years in which the US will be weakened, and manifestly in crisis. America's security burdens will weigh heavily in an era of financial pain at home and escalating US dollar prices for anything and everything in foreign lands. I'm afraid we may not have the wherewithal to carry the load.

And then I am haunted by Osama Bin Laden's tale of the weak horse and the strong horse. In a world where America is weakened and Europe is senescent, let's hope that it is India, or the Pacific Rim, or even Red China itself that rides tall for a while, and not some destructive amalgam of religion, nationalism, and fascism.