OP-ED: “Seven Pillars of Folly: Will al Qaeda clean up when the bourse melts down? by Edward Chancellor, Wall Street Journal, 8 March 2006, p. A20.

ARTICLE: “Mutual Funds Look Beyond Chaos in Iraq,” by Jennifer Levitz, Wall Street Journal, 17 March 2006, p. C1.

ARTICLE: “New Business Blooms in Iraq: Terror Insurance,” by Robert F. Worth, New York Times, 21 March 2006, p. A1.

ARTICLE: “Market Slump Hits Mideast: Governments Grapple With Investor Calls to Intervene,” by Yasmine El Rashidi, Wall Street Journal, 20 March 2006, p. C8.

Fascinating op-ed about the Middle East stock bubble that’s been brewing since our invasion of Iraq. It is partly caused by the region being flush with oil money and the trickle down effect that brings. But don’t overestimate that.

It is also caused by a doubling of foreign direct investment in the region, and by Alan Greenspan’s decision to make dollars cheap going back to 2002.

But what’s really behind the speculative bubble is that, this time, Middle Eastern oil profits are staying home instead of hiding in international banks or U.S. financial instruments like T bonds. The rulers see the writing on the wall in two senses: 1) the oil profits won’t last forever, as the hydrogen/fuel-cell clock is ticking across the Core; and 2) the youth bulge must be served, and that means diversification ASAP. Getting that diversification requires financial markets that actually function, and banking systems that actually provide. So across the region there is the push to become more Core-like, at least in financial systems.

We watched this process in Asia in the late 1980s and 1990s, and we watched it flame out temporarily in the Asian Flu. Such a bubble burst is inevitable here. Scaredy cats will cry out about “yet another al Qaeda victory,” which will be the same BS we hear every time anything gets tumultuous in the Middle East.

But you know what? Tumult is good. And it beats the crap out of the alternative we’ve been fostering for decades. Globalization is coming to the region, whether we play bodyguard or not. It will be painful, and reformatting, and it will engender violent responses and political extremism, which may wield power.

Iran’s revolution in 1979 was a preview of all this, and a warning about the dangers of going too fast or trying to make it purely top-down in execution.

So should we feel bad about this speculative bubble brewing? Hell no. The journey from the Gap to the Core is more internal than external. The most important territory lies between the ears. There is a natural learning curve, that can only be taught by crashes, not bubbles.

Meanwhile, Core investors sneak into more and more dangerous pockets in the Gap, looking for better returns. How safe does it have to be? In Iraq, we can talk about a country where terrorism insurance is a big seller because no one is untouchable there.

But all this goes to show you that shrinking the Gap may begin in certain circumstances with U.S. military interventions, but it ends when states are confident enough NOT to engage in market interventions.