Thursday, July 09, 2009

McNamara: A Knave, not a Fool

Robert Strange McNamara died last week, and with his passing virtually all the major policy players involved in the conception and implementation of the U.S.'s initial strategy in Vietnam have now died.

McNamara occupies a special place in the history of the War, first as the Defense Secretary who oversaw the escalation from 1961-1967, and much later (much much later), and almost as famously, for his public self-flagellation over what he called in his 1995 book In Retrospect the "wrong, terribly wrong" nature of the War.

For some time in the mid-1960s, the Vietnam War was often known as "McNamara's War." There was a good reason for this. One of the most disturbing things about the Vietnam War was the way it appeared to be a grotesque apotheosis of instrumental rationality bereft of all moral grounding: McNamara's decisions about strategy and tactics for killing millions of peasants were cost-benefited, game-theorized, and run through all the latest and most rigorous forms of algorithmic analysis. This approach to the War belonged entirely to McNamara, the former Ford Motor Company CEO and "whiz kid," who more than anyone else embodied what David Halberstam called, in one of journalism's most witheringly ironic phrases, "the best and the brightest." Whatever one's critiques of War, one would have been hard pressed to deny the stringently "rational" nature of the War.

I came to McNamara as a young historian of American ideas and foreign policy during McNamara's heyday, so my revulsion from McNamara was not viscerally bound up with the immediate politics of the War. Instead, it had more to do with McNamara's insidious effort to rehabilitate his moral reputation late in life with the publication of In Retropsect: The Tragedy and Lessons of Vietnam, and even more with Errol Morris's brilliant but flawed movie, "The Fog of War." I say "flawed" because Morris bought McNamara's self-perception that his late-in-life alleged mea culpa constituted some kind of "moral seriousnessness" on McNamara's part.

It did nothing of the sort. On the contrary, to his dying day McNamara never understood the moral nature of what he had done in Vietnam. The "lessons" he drew from his experiences running the Vietnam War were all operational, instrumental lessons--lessons about how to improve cognition, decision-making processes. If only we had had better information about the enemy, McNamara begs, or better communication channels with the enemy, then it all would have turned out so much better. In sum, McNamara's desperate plea in both "The Fog of War" and In Retrospect is for people to perceive his role in the War as the result of foolishness, not knavery.

In fact, however, the essential moral crime of Vietnam was not that it was operationally mishandled, but that it was evil--it was evil for the United States to kill millions of peasants on the other side of the world over an ideological dispute. Full stop. And that core moral point is one that McNamara never, ever copped to.

Yes, a better operational approach might have made some marginal difference. But the fundamental problem was not an operational but a moral one. As someone once remarked about Samuel Huntington, who suffered from the same moral blindness as McNamara, he "lost the capacity to distinguish between genocide and urbanization."

When pressed by skeptical boomer interviewers, McNamara insisted that he was not asking for forgiveness, that he was not apologizing. Indeed he was not. Because to ask for foregiveness, or to apologize in a serious way, would have meant acknowledging the moral weight of his crimes--something he never did. His much quoted phrase about the War being "wrong, terribly wrong" was widely misinterpreted as an (all-too-belated) moral reckoning. But it was no such thing. In fact, what McNamara meant by this phrase was that, in his mind, the whole war was the result of a misunderstanding. The only surprise about the fact that the Vietnamese reacted to this interpretation with polite skepticism... is the fact that they were polite.

McNamara was knave, not a fool. Or perhaps he was a fool, too, but above all and to his end he was a self-serving, morally unserious knave.

Monday, June 29, 2009

The difficulty with writing about apocalypse

I read Matthew Glass's Ultimatum this weekend. Only so-so. What's weak about it, as a scenario exercise, is that Glass creates his imaginary future by running forward a rather extreme set of climate numbers, and the most optimistic numbers about Chinese growth, but otherwise holding everything entirely static. Thus, despite the fact that vast evacuations of costal areas are now necessary (something he portrays only from the Olympian heights of the White House war room) and the Chinese economy is now twice the size of the U.S.'s, political alignments both domestically and globally are unaltered. How realistic is that?

What makes it so hard to prognosticate a couple of decades out, on virtually any subject, is that there are so many moving variables that one has to consider. Things Glass doesn't bother to consider, for example, is how radical genetic engineering may fundamentally change conceptions of practices of life; how major shifts in geopolitical alignments can take place very quickly (France-German, 1945-1951; U.S.-China in 1971; U.S.-Iran in 1979; U.S.-Russia in 1989, etc.); how aging populations may fundamentally change immigration politics; how coming egenry shortages are going to fundamentally shift adaptation options; and so on.

The result is that the book reads like a Bolshie Brit's fantasy about what it would be like if a belligerent version of Obama had been elected President in 2033, and then appointed Bill Kristol as his Secretary of State.

However, within that structurally weak frame, the novel is quite illuminating about how lefty Brits view American and Chinese politics today, and why ever getting an emissions deal done will be impossibly difficult.

Finally, Glass never considers that as the catastrophe happens, it may not even really be perceived as a catastrophe at all. That's the key insight of J.G. Ballard in The Drowned World.

Wednesday, June 10, 2009

Right wing extremists

Remember that DHS report on the threat posed by domestic "right wing extremists" -- you know, the one that got the, well, right wing extremists so up in arms (if you'll pardon the expression)? Turns out to have been pretty prescient. First in Kansas, now in DC.

More here.

Saturday, June 06, 2009

The Underground, Underwater

From the Washington Post this morning:

When anti-narcotics agents first heard that drug cartels were building an armada of submarines to transport cocaine, they thought it was a joke. Now U.S. law enforcement officials say that more than a third of the cocaine smuggled into the United States from Colombia travels in submersibles.

An experimental oddity just two years ago, these strange semi-submarines are the cutting edge of drug trafficking today. They ferry hundreds of tons of cocaine for powerful Mexican cartels that are taking over the Pacific Ocean route for most northbound shipments, according to the Colombian navy.

The sub-builders are even trying to develop a remote-controlled model, officials say.

"That means no crew. That means just cocaine, or whatever, inside the boat," said Michael Braun, a former chief of operations at the U.S. Drug Enforcement Administration..."This is definitely the next generation of smuggling conveyance," said Joseph Ruddy, an assistant U.S. attorney in Tampa who prosecutes narco-mariners.

I am in the middle of reading a book called "Wired for War" which looks at the evolution of armed and autonomous robots in military operations. The author, mostly, looks at it from the perspective of established armed forces, but one can hardly ignore the more criminal possibilities. I know that martyrdom is portrayed as a virtue in reporting of terrorist operations, but that has to be a tough recruiting pitch. The assault on Islam by neo-cons was a failure, but I wonder if --when personal sacrifice is no longer a barrier to entry-- our current policy of peace through understanding will turn out to be yet another example of “fighting the last war.”

Friday, June 05, 2009

David Carradine, R.I.P.

So David Carradine, who was found dead yesterday in a Thai hotel with a rope around his genitals and neck, apparently died from auto-erotic asphyxiation. Which prompted the director of Thailand's Central Institute of Forensic Science, Pornthip Rojanasunand, to make the following sage pronouncement:
"If you hang yourself by the neck, you don't need so much pressure to kill yourself. Those who get highly sexually aroused tend to forget this fact," Pornthip said.
Pornthip?

Friday, May 29, 2009

When you've lost Peggy...

The Republicans are in such serious circular firing squad mode that Peggy Noonan is using the WSJ op-ed page to opine that the movement to derail Sotomayor's nomination to the Supreme Court is populated by "idiots" and juveniles.

Thursday, May 21, 2009

Green shoots?


All the perfervid talk of the economy showing some "green shoots" because the second derivative of some key economic variables has turned positive is producing a classic suckers' rally. In order to believe that the economy really has found a bottom, you need to believe all of the following:
  1. That the stock market won't overcorrect to the downside, the way it has in every previous major recession of the last century. Hmmm:
  2. That the real estate market is at or near the bottom. Hmmm:
  3. That the U.S. Fed has the information and tools to thread the needle between deflation and inflation: specifically, that Geithner and the other central bankers will (a) know exactly when to pull back on the massive amounts of liquidity they have injected into the markets, and then (b) actually be technically capable of doing so, and then (c) won't end up yanking the cord too hard.
  4. That the Japanese and the Chinese will keep buying Treasuries, come hell or high water.
  5. That all the various government stimulus bills are actually an efficient allocation mechanism and that there actually exists aggregate global demand such that the stimulus bills bring back jobs and growth in the medium term.
  6. That the intellectual awareness of the benefits of free trade will outweight the populist pressures of democratic polities during a major recession.
  7. That there are no big exogenous shocks, such as a major war in the Middle East, or a return of the swine flu in nastier pandemic form when the season returns in the Fall.
If you believe all that, well, then dive right in! Then again, if any of those propositions seem dubious to you, you might want to wait a little (or a lot) longer.

Bibi v. Barack

The first of presumably many meetings between Obama and Netanyahu happened yesterday, with much chatter ahead of time that Obama was planning on taking a harder line on Israel's ongoing settlement activities in the West Bank, but that he was facing a tough customer for his tough-love approach in Netanyahu, whose overriding goal is to get the U.S. willing to apply a military force against Iran (the diplomatic euphemism is "serious consequences") if Iran doesn't clear back away from militarily useful nuclear activities. So how did it turn out?

The NYTimes piece offers a pretty curious piece of reporting on the matter:
Mr. Netanyahu got his timetable. “We’re not going to have talks forever,” Mr. Obama said of Iran, assuring Mr. Netanyahu that he expected to know by the end of the year whether Iran was making “a good-faith effort to resolve differences.”

But Mr. Obama did not get his settlement freeze. In fact, Mr. Netanyahu told him it would be politically difficult for him to halt the construction of settlements. That is a hurdle to the administration’s broader peace objectives because Israel’s Arab neighbors have characterized a freeze as a precondition for them to establish normal relations....

The two leaders set up working groups to deal with Iran, the Palestinian issue and Israel’s Arab neighbors. The groups will meet periodically, Israeli and American officials said. Agreeing to meet with Israel regularly to discuss the administration’s progress with Tehran keeps the pressure squarely on the United States, analysts said.
The first thing that's striking about this is the presumption that the US-Israel relationship is now adversarial. But what's even weirder is the notion that Israel is somehow capable of "pressuring" the United States. How can Israel, which is the biggest aid recipient of the U.S. and has a population, economy, and military which are each about a 50th of the U.S.'s, "pressure" the U.S.? I suppose there may be an answer to this, but it's one that the pro-Israel crowd typically responds to with puerile screams that anyone who is critical of Israel's policies or wonders why the U.S. has unfailingly backed these policies is an "anti-semite."

The second odd thing about this adversarial framing is the way that mostly unnamed sources allegedly representing both sides claim that their guy got the worse of the exchange:
“I’m asking the question, did our president get suckered?” said Martin S. Indyk [whereas] an Israeli official said [that] “Obama may be slightly less experienced than Netanyahu, but Obama knows exactly everything that the U.S. is doing."
Pretty darn weird. Reminds me a bit of how both Reagan and Gorbachev aids claimed that the other guy was getting suckered during their Reykyavik summit--the one that basically ended the Cold War.

Wednesday, May 20, 2009

Optimists are never pleasantly surprised

I've made a number of dire predictions on this blog, some of which haven't happened (yet) and some of which have been disturbingly vindicated over the last year--notably the prediction that the money center banks would in one way or another be nationalized.

In general, I would argue that most risk and security managers are overly Gaussian in their sense of what to plan for, refusing toplan for long tail risk -- a point emphasized by the Economist's recent survey of how god-awfully the banking industry did in anticipating how bad the crisis could get:
Even Goldman Sachs, widely regarded as the best manager of risk in the industry, did not foresee quite how bad things could get. The bank's most demanding pre-crisis stress test—known as the "wow," or worst of the worst, test—took the most negative events to have happened in each market since 1998 and assumed that they got 30% worse and all happened at the same time. That still wasn't pessimistic enough.
That still wasn't pessimistic enough....

Monday, May 18, 2009

On regulatory capture, from finance to narcotics

A very useful discussion of how regulatory capture takes place:
Two archetypal scenarios for regulatory capture exist. The first is an underpowered, understaffed regulator working to control a wealthy, concentrated industry. In these situations, the sheer imbalance in resources means that the regulated parties can reward or punish the agency, but not vice versa. Predictably, rational bureaucrats will choose to cater their policies to the benefit of the subjects instead of suffering their wrath – recall, a regulatory job well done rarely carries any significant benefits to its engineers. The Department of Interior’s Minerals Management Service is a perfect example of a body that appears to have fallen prey to this pattern. Even a person of upstanding moral character can understand the difficulty of resisting the repeated entreaties of Exxon and the like for the sake of sticking to an unadulterated scheme of allocating oil and gas exploration rights. Someone sitting at the MMS desk may well wonder if anyone would ever notice a shift away from the prescribed approach towards one that favors the companies they deal with on a day-to-day basis. These incentives to cooperate exist even though the relationship between the regulator and the regulated parties is facially adversarial, with MMS holding rights that producers want but cannot get.

The second standard scenario for regulatory capture takes place when the same agency identifies items to source from the private sector and supervises the production of these items. The Department of Defense springs to mind as an example. The Pentagon almost certainly has the best interests of the Armed Forces in mind when it sets out its procurement goals. The combination of public (“free”) money and a desire to avoid saying one’s coworkers and superiors made a mistake, however, means that projects live on even when they go horribly wrong. Private-sector contractors benefit from bloated budgets for littoral combat ships that suffer from fundamental structural defects (the program has since been scrapped), military officers occasionally pick up a kickback, and the taxpayer ends up footing the bill. The political prominence of the Pentagon aggravates the effects of regulatory capture, since colonels know they can fight off most allegations of inefficiency by claiming that a critic is unwilling to support the troops.
Which raises an interesting question: which of these two archetypal forms does the regulatory capture of the drug enforcement bureaucracy represent? 

My sense is that it's a blended model. On the one hand, it's pretty clear that the current narcotics Prohibition, by providing a basis for extremely high profit margins, represents a pretty satisfactory situation for the drug lords, which is why the "facially adversarial" relationship is actually more symbiotic than it would appear, with the ongoing Prohibition regime also being extremely beneficial to the prison-industrial complex, DEA bureaucrats, enterprising prosecutors, etc. On the other hand, it's also true that the (recently surrendered?) "war on drugs" is a story littered with failures that no one in the anti-drug bureaucracy wants to come clean on, so long as the taxpayers are willing to keep footing the bill; so in that sense, it's also a bit like archetype two.

Monday, May 11, 2009

Dmitry Orlov, commenting on the swine flu:
Another thing that's peculiar is that some nations, notably China and Russia, have banned the import of American pork. Many other countries are following their example. The flu is not spread through eating pork, and so banning it is an economic move and a symbolic gesture rather than a medically motivated public safety measure. But the popular appeal of the symbolism is irresistible: here they have a chance to ban American Swine!

American Swine come in three main varieties: the Hog, the Bankster, and the Neocon. The Hog is often a public safety menace, because factory farming practices result in large groups of immunocompromised animals confined in conditions that are perfect for incubating new diseases. These practices should be banned, and banning American pork around the world seems like a step in the right direction.

The Banksters who have crashed the world financial system through their fraudulent activities should be banned around the world as well. In addition, it would be nice if they were rounded up and herded into capitalist reeducation camps, where, thanks to hard physical labor, daily capitalist indoctrination sessions, and compulsory public self-criticism, they would, over the course of months or years, be reformed into model capitalists, ready to rejoin a free market economy. Perhaps our Chinese friends would be nice enough to send over some advisers, to help us set up these camps.

Unlike the Hogs and the Banksters, the Neocons who illegally murdered, imprisoned and tortured countless civilians across the world should be exported — extradited, that is, to stand trial at an international war crimes tribunal. The list is not that long: Bush, Cheney, Rumsfeld, Rice, Gonzales and a few others. All the ones who "were only following orders" are not important enough. The United States government is bound by international treaty to either prosecute or extradite these people. Since prosecution in the US is unlikely to be carried out properly, extradition remains as the only option. President Obama's recent paying of lip service to this being "a nation of laws" is no substitute for action.

Of the three varieties of American Swine, the actual pigs seem like the least troublesome, swine flu notwithstanding. We should certainly do all we can to stay healthy, but in the meantime we should stay focused on doing something about the other two varieties of American Swine.

Saturday, May 09, 2009

Thursday, May 07, 2009

The bottom of the housing market?

Doesn't look like we're there yet, according to the number crunchers at Zillow. As shown in the purple line in the graph below, housing prices are continuing to fall at a dramatic rate, and indeed are doing so at an ever faster rate, as depicted by the orange line (e.g. the second derivative is still negative):
At this point, a third of all mortgages are under water, which means that 1 in 5 of all homes in the U.S. are underwater. If you look at housing prices relative to headline inflation over the last thirty years, we're still way overvalued:
Now think about what this means for the holders of all the securities backed by these mortgages (e.g. the banks)... then think of what that means for the real economy.
Former Baltimore Sun reporter and the creator of The Wire (the best TV show ever made), David Simon talks to Congress about the crisis of news reporting:

Money:
It's nice to get stuff for free, of course, and it's nice that more people can have their say in new media. And while some of our internet community is rampantly ideological, ridiculously inaccurate and occasionally juvenile, some of it's also quite good, even original. Understand, I'm not making a Luddite argument against the internet and all that it offers. But you do not, in my city, run into bloggers or so-called citizen journalists at City Hall or in the courthouse hallways or at the bars where police officers gather. You don't see them consistently nurturing and then pressing others—pressing sources. You don't see them holding institutions accountable on a daily basis.

Why? Because high-end journalism is a profession. It requires daily full-time commitment by trained men and women who return to the same beats day in and day out. Reporting was the hardest and, in some ways, most gratifying job I ever had. I'm offended to think that anyone anywhere believes American monoliths, as insulated, self-preserving and self-justifying as police departments, school systems, legislatures and chief executives, can be held to gathered facts by amateurs presenting the task—pursuing the task without compensation, training or, for that matter, sufficient standing to make public officials even care who it is they're lying to or who they're withholding information from.

Indeed, the very phrase "citizen journalist" strikes my ear as Orwellian. A neighbor who is a good listener and cares about people is a good neighbor; he is not in any sense a citizen social worker, just as a neighbor with a garden hose and good intentions is not a citizen firefighter. To say so is a heedless insult to trained social workers and firefighters.
Consider this: the LA Times is the only news organization that still has a reporter covering the budget state budget (which is $131 billion this year, including a $40B deficit). If that guy goes, who will be watching to prevent corruption? And obviously the politicians and lobbyists know this too. In other words, you're one reporter away from, in essence, a complete lack of accountability on the part of the government of the sixth biggest economy in the world. As he Simon says elsewhere, I'll stop worrying about the fate of investigative journalism when I see Huffington Post bloggers showing up week after week to the city council meetings of smallish American cities.

So what is to be done? Simon suggests:
But a nonprofit model intrigues, especially if that model allows for locally based ownership and control of news organizations. Anything the government can do in the way of creating nonprofit status for newspapers should be seriously pursued. And further, anything that can be done to create financial or tax-based disincentives for bankrupt or near-bankrupt newspaper chains to transfer or donate unprofitable publications to locally based nonprofits should also be considered.

Lastly, I would urge Congress to consider relaxing certain antitrust prohibitions, so that the Washington Post, the New York Times and various other newspapers can openly discuss protecting copyright from aggregators and plan an industry-wide transition to a paid online subscriber base. Whatever money comes will prove essential to the task of hiring back some of the talent, commitment and institutional memory that has been squandered. Absent this basic and belated acknowledgement that content matters—in fact, content is all—I don't think anything can be done to save high-end professional journalism.
I personally don't think that non-profit is any kind of solution: it already exists, and doesn't seem to be staunching the bleeding. Perhaps there might be some hope if all the newspapers could be given an anti-trust exemption to be allowed to collude on collectively creating a micropayment scheme for news content.

Thursday, April 30, 2009

I guess "rollback" ain't an option either

Containment of the swine flu is no longer an option, according to the WHO. My guess is that the number of cases may abate now as the flue season draws to a close, but it may come back with a vengeance in the Fall. The real question will be whether the public health officials can come up with the right vaccine to beat the mutating virus. That flu infections come in waves is well known.

Tuesday, April 28, 2009

Cognitive Capture

The idea that Washington is mentally enslaved to Wall Street has a hoary pedigree, and has received any number of articulations, ranging from socialist taunt that the state is the "executive committee of the bourgeoisie"; to the more rigorous concept of (more or less corrupt) regulatory capture; to the fashionable claim that the real reason why Washington won't cut off Wall Street's balls is not a result of "financial capture" (i.e. bribes, ahem, political contributions) but the rather because of some more sloppy kind of "cognitive capture." 

I say "sloppy" because I think this phrase is rarely defined, and in fact is confusing. The concept of "cognitive capture" is already present in psychology, but is used to refer to a different phenomenon altogether, namely the way that, when an individual focuses mental energy on one issue, it can cause her to miss out other important things. Also called "inattention blindness," this explains why, for example, drivers talking on cell phones are more likely to crash. By contrast, the idea of "cognitive capture," as applied to Washington's relationship to Wall Street, signals not that DC policymakers are distracted from or inattentive to Wall Street, but rather that they suffer from a kind of slavish worship of financiers, who they see as the rightful titans of our society whose interests must therefore be identical with those of society.

My old colleague James Kwak is doing signal work in trying to provide the latter thought with a more substantive theoretical basis. Why, Kwak asks, is Treasury Secretary Timothy Geithner apparently unable to envision that the economic interests of the country might not be full aligned with the economic interests of Wall Street financiers? Why is he unwilling to consider solutions to the current crisis that would involve dethroning these oligarchs? Invoking Pierre Bourdieu's concept of "cultural capital" to suggest the mechanism by which this mental slavery is achieved, Kwak answers that Geithner has
internalized a worldview in which Wall Street is the central pillar of the American economy, the health of the economy depends on the health of a few major Wall Street banks, the importance of those banks justifies virtually any measures to protect them in their current form, large taxpayer subsidies to banks (and to bankers) are a necessary cost of those measures - and anyone who doesn't understand these principles is a simple populist who just doesn't understand the way the world really works.
This pithily captures the main mental problem in Washington these days: policymakers simply can't imagine any solution that involves the defanging of Wall Street, even though the only meaningful solutions are precisely the ones that do that. The Democrats are every bit as useless as the Republicans on this score.

Read the whole thing.

Tea -- or Whiskey?

Among the many stupidities of the "tea party" astroturf campaign, perhaps the most annoying to me (as a historian) is that they've picked the wrong historical allusion. As everyone ought to know, the Boston Tea Party (and the American revolution more generally) was not a tax revolt per se, but rather was a revolt against taxation without representation.

By contrast, Obama's proposal to raise taxes (on the top 5% of Americans, to 1990s levels) is not being done without those being taxed having representation. The current crop of protesters had their chance to put forward candidates and vote in the 2008, and they lost.

In fact, the current protests are less like the Boston Tea Party than like the Whiskey Rebellion, when protests erupted in Appalachia over the decision of the (legally-elected) federal government to raises taxes in order to deal with a national fiscal and economic crisis (sound familiar?). 

This decision infuriated whiskey-producing farmers and led to a rebellion, which Washington put down by personally leading a large militia out to Western Pennsylvania to demonstrate the authority of the federal government.

Sunday, April 26, 2009

The Taliban as modernizers

One of the greatest misconceptions of the War formerly known as Global-on-Terror was that theTaliban  in Afghanistan (now also in Pakistan) was somehow a backward and "medieval" anti-modern sect. This misonception was largely driven by a focus on the rhetorical content of their ideology, with its emphasis on Koranic scripture, and their barbaric, profoundly anti-liberal attitude toward women, in particular.

In fact, the Taliban is much better conceived as the most effective and revolutionary modernizing force that this region has ever seen. The central social and economic fact of life in Pakistan is its unreformed, feudal economic system, with a tiny absentee landlord class literally lording it over a vast, impoverished peasantry which often suffers under the yoke of bonded labor. After independence from Britain in 1947, Pakistan never engaged in any kind of land reform, and the result is vast social and economic resentments in the countryside -- which the Taliban is now exploiting.

The Taliban's appeal, first in Afghanistan and now in Pakistan, has been to challenge this social system in the countryside. As John Robb puts it, the Taliban's "plausible promise" is to deliver "economic and social justice through land distribution and sharia courts." This doesn't need to be centrally organized in a classic 20th century command-and-control insurgency, because modern technology allows political entrepreneurs throughout the Western subcontinent to tap into local resentments.

But this also suggests why the U.S. faces has few reasonable political options in Pakistan. One faction we could partner with is the Taliban itself, which is what a replay of the allegedly successful strategy in Iraq would entail. This seems implausible, not so much because of the Taliban's barbarism (which we could surely learn to ignore) but more because of their refusal to give up Bin Laden and Zawahiri. It's one thing to propose partnering up with the Saddam-sympathizing Sunni leadership in Western Iraq, once Saddam is deposed and dead. It's another thing to propose partnering with the Osama-sheltering Taliban. 

Another option might be the Pakistani military, which was our main partner for a long time. The Pakistani military has long been considered the most "modern" faction in Pakistani life, and the kind of institution the U.S. could do business with. There are a number of challenges with this option, though. First, and perhaps least important, the Pakistani military is a fundamentally anti-democratic institution -- not just in that it often overthrows elected regimes, but also in its basic orientation toward popular control. Second, the military is increasingly Islamist and anti-American in its sympathies, particularly in the middle ranks, where the legacy of Zia's post-1971 push to Islamicize the Pakistani military. Third, the Pakistani military is clearly playing a double-game with the U.S. It wants to keep getting the multi-billion dollar military aid grants from the U.S., and to do this it needs to keep fighting the Taliban -- but also not to succeed in defeating the Taliban, which would also cause the U.S. money to dry up.

Which brings us to the apparently obvious third option, which is the official U.S. policy, namely to support the legally elected "democratic" government of Pakistan, now led by Benazir Bhutto's widower, Ali Zardari. Alas, the problem with these people is that they in fact represent the landlord classes. So-called "democratic" politics in Pakistan is generally a contest between feudal elites from Punjab versus feudal elites from the Sindh (the northern and southern reaches of the Indus valley). Neither group, obviously, has any interest in addressing the fundamental social resentments of the countryside, and the result is that these resentments have continued to fester for several generations. What happens when such social resentments are ignored is that eventually a political entrepreneur arises who can exploit them. And that exploiter is the Taliban. Thinking that a guy like Zardari, once described as the most corrupt man on earth, is going to address this social question is absurd.

Friday, April 24, 2009

Thursday, April 23, 2009

The Bushies' Monte Cassino moment?

One way to look at the shifting debate over torture in this country is to see the Bushies as having been, almost continuously, backpeddling -- engaged in a carefully planned series of retreats to previously prepared lines of defense, much akin to the Nazi defense of Italy against the Aliies during WW II.

Line 1
During Bush's first term, the line of defense was: "We do not torture. There was no torture! You've got nothing to prosecute us for. Nothing!"

Then the Abu Ghraib pictures happened. 

And with it fell that first and most robust line of defense.

Line 2
Over the course of Bush's second term, the Bushies' main line of defense was: "OK, yeah, sometimes we torture. But it's our POLICY not to torture. You can't prosecute political leaders for what a few 'bad apples' do!"

Now the OLC memos have come out.

After a bitter last stand by some brave footsoldiers, it's clear that this line of defense is being abandoned, and the Bushies are scrambling to assume their positions at the third line of defense, which they have been carefully preparing for some time.

Line 3
That new line of defense is: "OK, yeah, yeah, torture was our policy. But torture WORKED. You can't prosecute political leaders for doing stuff that worked to keeping the country safe!"

We'll see if that line works.

Line 4
If it doesn't, you can already see the next (and presumably final) line of defense, which is even now being prepared: "OK, yeah, yeah: we do torture, and yeah, doing so was in fact our policy, and yeah, OK, it didn’t work. But we thought in GOOD FAITH that it would work. You can't prosecute political leaders for something that was done in good faith!"

Saturday, April 18, 2009

Quote of the Day

Reinhold Niebuhr, in 1952, with words that should have given pause six years ago:

A democracy can not of course, engage in an explicit preventive war. [However] the power of such a temptation to a nation, long accustomed to expanding possibilities and only recently subjected to frustration, is enhanced by the spiritual aberrations which arise in a situation of intense enmity. The certainty of the foe's continued intransigence seems to be the only fixed fact in an uncertain future.

Nations find it even more difficult than individuals to preserve sanity when confronted with a resolute and unscrupulous foe. Hatred disturbs all residual serenity of spirit and vindictiveness muddies every pool of sanity. In the present situation even the sanest of our statesmen have found it convenient to conform their policies to the public temper of fear and hatred which the most vulgar of our politicians have generated or exploited. Our foreign policy is thus threatened with a kind of apoplectic rigidity and inflexibility. Constant proof is required that the foe is hated with sufficient vigor. Unfortunately the only persuasive proof seems to be the disavowal of precisely those discriminate judgments which are so necessary for an effective conflict with the evil, which we are supposed to abhor.

There is no simple triumph over this spirit of fear and hatred. It is certainly an achievement beyond the resources of a simple idealism. For naive idealists are always so preoccupied with their own virtues that they have no residual awareness of the common characteristics in all human foibles and frailties and could not bear to be reminded that there is a hidden kinship between the vices of the most vicious and the virtues of even the most upright.

(The Irony of American History, p. 146-147)

Friday, April 17, 2009

The Torment of Secrecy

I suspect that this statement by former CIA Director Michael Hayden is a litmus test for how people feel about government secrecy:



Money:
There are a lot of things that governments do, that aren't naturally or in the course of events immediately made public.

After all this [torture] began life as a covert action, whose definition is that the hand of the United States government is never acknowledged and the details of the operation are never revealed.

So, I don't think it automatically fits into the class of "the American people need to know."

Tuesday, April 14, 2009

Quote of the Day

Herbert Hoover, American Individualism (1922):
This guarding of our individualism against stratification insists not only in preserving in the social solution an equal opportunity for the able and ambitious to rise from the bottom; it also insists that the sons of the successful shall not by any mere right of birth or favor continue to occupy their fathers' places of power against the rise of a new generation in process of coming up from the bottom.

Wednesday, April 08, 2009

Tuesday, April 07, 2009

I love religion

From here, via here:
When Jaaber Hussein signs an agreement with Israel's Chief Rabbis tomorrow, he will be inking the only Arab-Jewish accord sure to be meticulously observed by both sides. The deal will make him the owner for one week of all bread, pasta and beer in Israel - well a huge amount of it anyway. The contract, signed for the past 12 years by the Muslim hotel food manager, is part of the traditional celebrations ahead of the Jewish holiday of Passover. Jews are forbidden by biblical injunction to possess leavened bread, or chametz, during Passover and ironically an Arab is needed to properly observe the holiday. The agreement with Mr Hussein offers a way of complying with religious edicts without having to wastefully destroy massive quantities of food.
...
Tomorrow, Mr Hussein will put down a cash deposit of $4,800 (some 20,000 shekels or £3,245) for the $150m worth of leavened products he acquires from state companies, the prison service and the national stock of emergency supplies. The deposit will be returned at the end of the holiday, unless he decides to come up with the full value of the products. In that case he could, in theory, keep them all. At the close of the holiday, the foodstuffs purchased by Mr Hussein revert back to their original owners, who have given the Chief Rabbis the power of attorney over their leavened products. "It's a firm, strong agreement done in the best way," Mr Hussein said.

Saturday, April 04, 2009

How, Not Who

Earlier this week we saw this:

Justice Department lawyers concluded in an unpublished opinion earlier this year that the historic D.C. voting rights bill pending in Congress is unconstitutional, according to sources briefed on the issue. But Attorney General Eric H. Holder Jr., who supports the measure, ordered up a second opinion from other lawyers in his department and determined that the legislation would pass muster.
And now this:

The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials...The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials.

Although some experts are questioning the legality of this strategy, the officials said it gives them latitude to determine whether firms should be subject to the congressional restrictions, which would require recipients to turn over ownership stakes to the government, as well as curb executive pay. The administration has decided that the conditions should not apply in at least three of the five initiatives funded by the rescue package.
My ire of the past eight years was on, usually, both the what and the how. In one of these cases I am ok with the what, but the how, in both, is strictly Bush league.

Sunday, March 29, 2009

Obama at the G20

How will the other members of the G20 regard the recommendations, hectoring, or even ingratiating solicitations of the Americans at the upcoming G20 meeting in April? Who knows, but the following passage from Fitzgerald's Tender is the Night, on how Americans between the wars came to regard the English, gave me a sense for how non-Americans (and particularly Asians) probably regard contemporary recommendations from Americans regarding macroeconomic policy and financial regulation. Dick Diver, the protagonist, reflects:
He found something antipathetic about the English lately. England was like a rich man after a disastrous orgy who makes up to the household by chatting with them individually, when it is obvious to them that he is only trying to get back his self-respect in order to usurp his former power.
Which in turn suggests an interpretation of where the current crisis is putting the United States, in terms of imperial decline -- in some place analogous to where the European Great Powers found themselves after the war: bankrupt both financially and morally, but not yet at the point where another power is ready to formally replace them as the hegemonic center.

Update: Confirmation of this perspective in today's news.

Friday, March 27, 2009

The Great Looting, Part II

Simon Johnson makes the case for why the economic crisis can't possibly get resolved until we nationalize the insolvent banks throw the entire existing banking class under the the bus.

The failure to do so shows how profoundly corrupt our political system is -- indeed, perhaps fatally corrupt.

Wednesday, March 25, 2009

Quote of the day

"It may well be that the determination of the government to punish certain malefactors of great wealth has been responsible for something of the trouble; at least to the extent of having caused these men to combine to bring about as much financial stress as possible, in order to discredit the policy of the government and thereby secure a reversal of that policy,so that they may enjoy unmolested the fruits of their own evil-doing.... I regard this contest as one to determine who shall rule this free country—the people through their governmental agents, or a few ruthless and domineering men whose wealth makes them peculiarly formidable because they hide behind the breastworks of corporate organization."
- Theodore Roosevelt, August 1907, commenting on bankers' responsibilities for the Panic of 1907

Tuesday, March 24, 2009

The great looting

Read the whole thing:

The state is now being asked not just to call off its regulators or give tax breaks or funnel a few contracts to connected companies; it is intervening directly in the economy, for the sole purpose of preserving the influence of the megafirms. In essence, Paulson used the bailout to transform the government into a giant bureaucracy of entitled assholedom, one that would socialize "toxic" risks but keep both the profits and the management of the bailed-out firms in private hands. Moreover, this whole process would be done in secret, away from the prying eyes of NASCAR dads, broke-ass liberals who read translations of French novels, subprime mortgage holders and other such financial losers....

As complex as all the finances are, the politics aren't hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below....

These people were never about anything except turning money into money, in order to get more money; valueswise they're on par with crack addicts, or obsessive sexual deviants who burgle homes to steal panties. Yet these are the people in whose hands our entire political future now rests.

The game of chicken that the American oligarchs are playing with the Obama administration is to say: "The only way we're going to stop looting the system is if you engage in forcible mass repression of capitalism (e.g. pay caps across all exec compensation, confiscatory taxation of the wealthy, etc.), which we're betting you don't have the brains, balls, or political capital to do."

Monday, March 23, 2009

A Postmodern Coverup

I can't believe I am writing this, but I really do feel sorry for the CIA, which is looking like it will be institutionally blamed for the torture policy which was initiated by the Bush White House and acquiesced to by the entire Washington establishment.

The bottom line is that Cheney, Bush, et al. ordered the CIA and other interrogators to "take the gloves off." The turn to torture was a political decision--and as such, it's one that the political decision-makers, not just the bureaucratic implementers, should be held ultimately responsible for. George Tenet was eager to please, to be sure, but there's no denying that the decision to torture was made by the highest politicians in the land, and that at the end of the day, it's those political decision-makers who should be indicted.

But that's not going to happen, as the Newsweek article inadvertently makes clear. Why? Because many of the politicians who participated in the decision to torture are still in power. To understand the political dynamic of these investigations of the CIA, it's crucial to understand that the spineless Democratic leadership, in the form of Feinstein, Rockefeller, etc, knowingly acquisced the decision to torture. They intentionally didn't ask too many questions -- precisely in order to give themselves the political wiggle room in which they are now self-righteously wiggling.

Feinstein's current posturing is merely designed deflect blame from herself and her class, positioning the CIA to take the political fall. Indeed, the CIA anticipated that this day would come, which was why they insisted that those infamous "torture memos" be written: to protect them when the political mood shifted. Alas, the Agency misunderestimated the profundity of the ethical corruption in Washington's political class.

What we're seeing is a political process analogous to holding Lubyanka interrogators responsible for Stalinism. The way that these hearings are trending, it's looking more and more like we'll end up with an Abu Ghraib-style "postmodern coverup" -- where a few underlings are brought into the docket, as the political class declares itself shocked, shocked that their underlings were following their orders. Such a process gives the appearance of justice being done, without it actually happening. This is to justice as truthiness is to truth. 

The litmus test for whether the process involves an actual ethical and legal accounting for the decision to torture, or in fact is a postmodern coverup, is whether the political decision-makers become the focus of the investigation.

Friday, March 20, 2009

The End of Wall Street's Cognitive Hegemony

Simon Johnson explains how the rage over AIG bonuses is transforming the politics of the bailout more generally:
We have moved far beyond financial policy and into the kind of scandal that really gets taxpayers’ backs up.  The greed of bankers slaps you in the face while the hubris of their leadership remains unchecked.

There is no sense of responsibility, no feeling of shame, no acknowledgment of any kind of mistake: read Lloyd Blankfein’s FT article again - or print it out and tape it to your wall.  Because we now know, from the newly disclosed AIG counterparties list, that the wealth of Goldman Sachs insiders remains high solely because we saved their sorry bank, their failed risk management strategy, and their pretence of wisdom with our cash in mid-September.

This resentment against bankers pervades Congress, and even the Administration begins to get the message - being called "asinine" yesterday by Richard Kovacevich, the Chairman of Wells Fargo, may have helped underline to Treasury how deeply the bankers appreciate the help they have received.  There can be no resolution and no moving on until there has been a proper congressional investigation, with full subpoena powers, into exactly what did and did not happen around AIG.  This will take months and may well slow down the economy (Jamie Dimon’s clever point: if you vilify us, you will lose), but it is now inescapable.  And, if channeled productively, this kind of hearing may lead to a better regulatory system (and smaller big banks) than the current anemic proposals on the table - as last weekend indicated, the G20 process is currently worse than useless on this issue.

Maybe we are finally witnessing the undoing of what John Robb acutely characterized as "an utterly complete cognitive regulatory capture of the US government" by the finance sector.

The worthiness of the rich

This kind of a column would have been unthinkable just a year ago. Here's the LA Times pointing out the growing public skepticism about the legitimacy of vast wealth inequality:
For decades, the wealthy have been held up as people to be admired, victors in the Darwinian economic struggle by virtue of their personal ingenuity and hard work. 

Americans consistently supported fiscal policies that undermined middle- and working-class interests partially because they saw themselves as rich-people-in-waiting: Given time, toil and the magic of compound interest, anyone could retire a millionaire.

That mind-set has all but been eradicated by the damage sustained by the average worker's nest egg, combined with the spectacle of bankers and financial engineers maintaining their lifestyles with multimillion-dollar bonuses while the submerged 99% struggle for oxygen. 

(The price of admission to the top 1% income-earning club last year was roughly $400,000.) That may account for the near-total absence of public outcry over President Obama's proposal to raise tax rates on the wealthiest Americans -- except of course from the wealthiest Americans.

[snip]

The shift in sentiment should surprise no one. As the management sage Peter Drucker once predicted, "In the next economic downturn there will be an outbreak of bitterness and contempt for the super-corporate chieftains who pay themselves millions. In every major economic downturn in U.S. history the 'villains' have been the 'heroes' during the preceding boom." Drucker was speaking in 1997, two downturns ago.

[snip]

There's a social value in suppressing income inequality. In a country with only a slightly less ingrained tradition of civility than the United States, the AIG affair would provoke rioting in the streets. 

"We live in a country with tranquillity and good feelings toward each other, and that's precious," says Robert Shiller, a Yale University economist and coauthor of Animal Spirits, a new book about the psychology of economics. In the current crisis, "there's anger and a sense of injustice taking hold, and it's not in the interest of wealthy people -- you don't want people on the poor side of town to be angry with you." 

[snip]

Thanks to the financial crisis... the claim of the rich to play an indispensable role in the American economy will be treated with more skepticism than in the recent past, and their ability to preserve their loopholes and other advantages in the tax code will diminish

Will the economy suffer as a result? The experiment is about to begin.
As Michael Ledeen likes to say, Faster Please!

Executive compensation

So the banks are upset at limits to executive compensation at firms receiving bailouts, because they think these firms won't be able to compete for talent

The executives and compensation experts quoted treat this as an insoluble dilemma. But it's no dilemma, but merely a problem, and one, in fact, with a ready solution: cap executive compensation at ALL companies, or (to be less interfering) slap a 90% tax rate on all earnings over a certain point. 

Just sayin'.

Update: Simon Johnson and James Kwak point out that retaining all those employees who made the messes probably isn't a good idea, anyway. Money:
When insiders have broken a financial institution, the most direct remedy is to kick them out. Traders are hardly in short supply, and you don’t need to rely on the ones who made the toxic trades in the first place. Companies must always plan around the potential departure of even their star traders, or they are certain to fail. A.I.G. does not need to keep all of its traders, especially since it takes far fewer people to unwind a portfolio than to build it up.

Thursday, March 19, 2009

Two thoughts on the AIG bonus outrage

A lot of commentators have pointed out the disproportion of public and Congressional outrage being directed at the $165M in “retention bonuses” being paid to certain executives from the multiply-bailed out AIG Corporation. Why are people so angry about the $165M in bonuses, while remaining at least (proportionally) passive about the $173B+ in bailout money that is largely going to AIG's counterparties--e.g. other banks and nonbanks? I have two thoughts about this.

The first is that I think part of what’s happening here is a corollary to Hitler's famous thesis about the role of "Big Lies" in politics (something Small Precautions has commented on in other contexts, as well). What Hitler acutely observed was this:
The magnitude of a lie always contains a certain factor of credibility, since the great masses of the people in the very bottom of their hearts tend to be corrupted rather than consciously and purposely evil, and that, therefore, in view of the primitive simplicity of their minds they more easily fall a victim to a big lie than to a little one, since they themselves lie in little things, but would be ashamed of lies that were too big.
The bailouts are the macroeconomic equivalent of a "Big Lie" – they represent a grandiose gesture, one ratified by Bush's admonishment in October that if the bailout wasn’t authorized, then "this sucker could go down." People were outraged by the bailouts, but at the same time, the very scale of the government's action signified the awesomeness of the executive. In other words, the bailouts represent a classic case of the political sublime – terrifying, and yet somehow worthy of respect by sheer grandeur in scale.

By contrast, using taxpayer money to pay the executives bonuses at a failed company seems like mere everyday corruption, petty and small. Instead of a sign of the government's awesome power, it is a sign of the Obama administration's weakness and impotence, a point underscored by AIG's message to Geithner that heand the taxpayers could basically drop dead.

Unlike Bush, Obama clearly hasn't mastered the political art of the Great Lie. Readers can judge for themselves whether they consider this a good or bad trait in his governing style.

My second thought about the anger about the bonuses is that what's really in play here is not just anger at taxpayer money funding executive bonuses, but a deeper resentment about executive excess in general. Whereas the bailout money could be justified as a necessary payout to prevent the sucker from going down, and thus as having some positive social benefits despite its hideous price, it's almost impossible pettyfogging to try to justify AIG executive bonuses as being somehow about protecting the system. What's more, the claim that those bonuses are a necessary part of the system (which is the basic argument for why the bonuses need to be paid), then it seems to underline the essential corruption of that system.

This explains the tentativeness of the GOP's and the wingnutosphere's attacks on the AIG bonuses. On the one hand, they recognize that it’s a useful stick with which to beat up on the impotence of the Obama administration. On the other, its underlying political emotion comes from a place that is dangerously at odds with the GOP's political culture, namely anger at arrogant executives. What's risky here for the GOP is that anger about AIG executives’ bonuses (or Citi's $10M executive suite remodel, or car company CEO's riding on executive jets, and so on) can easily spill into a generalized revulsion to outsized executive compensation and perks in general—which is of course what the GOP stands for, culturally.

And therein lies the real danger for the GOP's Richistan constituency: that one of the longer-term outcomes of the economic crisis is a cultural shift away from tolerance for the excesses of the corporate elite. Long-term economic downturns, particularly ones that seem directly linked to the excesses of the rich, usually do produce "Soak the Rich" demands.

Update: Kevin Drum gets it: it's the culture of executive overcompensation "that deserves to be dismatled brick by brick."

Helicopter Ben

Bernanke famously remarked that the key lesson he learned from his study of the Depression is that in the event of a collapse in liquidity, the Fed should do everything it can to revivify the market, up to and including dropping money from a helicopter. Hence the moniker "Helicopter Ben."

After yesterday's announcement that the Fed will be printing another trillion dollars, however, it occurred to me that the right way to envision Bernanke's use of the helicopter is not as a kindly humanitarian drop of necessary resources on suffering refugees, but rather something more like this:



Snark aside, isn't a U.S. hyperinflation rapidly becoming an inevitable surprise?

Tuesday, March 17, 2009

Here's an idea I like

Congress is proposing that executive bonuses at firms receiving bailout monies be taxed at 98 percent (over $100K).

Monday, March 16, 2009

Modernization Theory, Redux

Unbelievable, but Foreign Affairs is actually back to promoting modernization theory. I'm truly flabbergasted.

The End of American Hegemony?

Fareed Zakaria thinks Obama is conceding to the reality that the United State is not (indeed never was) a complete hegemon -- which of course has the hegemonists (which include the neocons, but which is absolutely not limited to them) hopping mad. Zakaria, on the money:
The problem with American foreign policy goes beyond George Bush. It includes a Washington establishment that has gotten comfortable with the exercise of American hegemony and treats compromise as treason and negotiations as appeasement. Other countries can have no legitimate interests of their own—Russian demands are by definition unacceptable. The only way to deal with countries is by issuing a series of maximalist demands. This is not foreign policy; it's imperial policy. And it isn't likely to work in today's world.
Who cares if it works, though, if it makes you feel morally righteous?

Populist reaction to the bailout -- left or right?

On the one hand, this is the headline I was worried about.

On the other hand, this is much better.

Sunday, March 15, 2009

In praise of class warfare

What he said.

Sea Levels Rising Much Faster Than Models Predicted

More bad news on the climate change front.

Snapshots from the future

As William Gibson famously remarked, the future is already here, it's just unevenly distributed. If you want to glimpse one of our emergent futures, start with this stunning photo gallery depicting Detroit's infrastructural decay:

The pictures are haunting not just because of the physical destruction they portray, but because of the absence of any humans -- they are physical symptoms of abandoned dreams.

Saturday, March 14, 2009

Requiem for a Business Section

Online, halfway down the More News section the headline is "Post Modifies Its Print Editions"
The Washington Post, taking another step toward trimming the size of its newspaper, is folding its stand-alone Business section into the A section six days a week and drastically reducing the publication of stock tables...Columnists such as Steven Pearlstein and Joe Davidson will be moved..."What we're doing is eliminating things that readers can easily get elsewhere, where we don't necessarily bring value," Brauchli said.
While the New York Times reports:
But in a change from previous downturns, CNBC is now a place for politics, to borrow a phrase from its sister channel MSNBC. The network’s journalists have been encouraged to speak their minds, making the line between reporter and commentator almost indistinguishable at times.
Leading Nancy from Texas to opine:
"Get rid of the entertainment aspect and give us the news. Opinions and banter make me turn off the TV."
Nancy is lying. I keep going back to Stewart Brand:
Information Wants To Be Free. Information also wants to be expensive. Information wants to be free because it has become so cheap to distribute, copy, and recombine---too cheap to meter. It wants to be expensive because it can be immeasurably valuable to the recipient.
While the value may truly be immeasurable:
There’s also the not-inconsiderable question of capitalism’s ability to decide, if not on the value of a commodity, at least on some sort of price for the damn thing.
Content is ubiquitous, commands almost no price, but nonetheless has a cost. To increase their returns the traditional media are shifting to context - bringing value in the words of the WaPo. But they are fighting the last war; context is also nearly ubiquitous, and since little of it is clever the price will bifurcate. To high-end prostitution:
Unlike most industries, escorts can charge higher prices when they are in greater supply. This is because price is one of the few metrics sex suppliers can use to convey quality. (In this way it is not unlike the hedge-fund industry.) The customer demographic is also wealthier, and a higher price deters customers from bargaining, which is considered poor taste.

The traditional media will never be able to compete on cachet and thus will have to be increasingly shrill and polarized to attract even a non-paying niche. On the high-end side a succession of saviors will continue to bilk the rich, both the new and the inbred. And all of this sound and fury will accomplish nothing, as Megan McArdle reminds us anyone who has:

"a good way to make money above and beyond broad, boring strategies like stock indices or bond funds, will not tell you about it."

Thursday, March 12, 2009

Of Bailouts and bondholders, pt 2

I wrote yesterday lamenting the lack of transperency about which counterparties are effectively getting the taxpayer dollars via the bailout of AIG. And as far as the empirical question of untransparency, I found this piece by Roubini buttressing:
Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.

News and banks analysts' reports suggested that Goldman Sachs (nyse: GS - news - people ) got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)

But some things are known: Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.
However, on further reflection about the political wisdom of insisting on transparency, I've become a little more ambivalent. On the strict merits, transparency is obviously a good thing, and I continue to support it.

But what I've also realized is that the political reaction to the revelation of the counterparty beneficiaries might not be the one that I might wish. Specifically, while there would undoubtedly be some left-populist outrage at the hedge fund plutocrats who are getting their taxpayer-funded checks from AIG, there would also likely be right-populist outrage at the foreign banks that are also inevitably getting some of this money. And that's a disconcerting prospect, since the one thing that would turn the current crisis from merely a possible Depression into a certain one, would be a series of jingo-inspired attempts to attack foreigners, including foreign banks, investors, and producers. Competitive nationalist financial reactions would really recapitulate the spiraling political economy of the 1930s.

The unfortunate fact of the current situation is that we must all hang together, or we will surely all hang separately.

Tuesday, March 10, 2009

Of Bailouts and Boldholders

So where is all that AIG bailout money going?  AIG itself is already bust, so the money we're pouring into it is entirely going to rpotect AIG's so-called counterparties. Josh Marshall yesterday laid out why the government feels it needs to do this:

If you've got a big insolvent bank and you need to make up a big hole on the balance sheet you've got, broadly speaking, four groups of people you can get the money from, or put a different way, who can take the hit: shareholders, depositors, bondholders and taxpayers.

Now, for most of these banks the stock price has essentially fallen to zero. So they're pretty much already wiped out. Not much to be accomplished there, although those folks want to hold on to their equity in the hopes that they may recover on the upside. Then you have the depositors. But in FDIC insured accounts, they've got a federal guarantee up to $250,000. And presumably those with really big sums on deposit have been proactive enough to spread their money around several institutions. So not much luck there either.

Which leaves you with bondholders (the companies creditors rather owners) and taxpayers. Now, on the one hand, this sounds like a no-brainer. If you lend money to a company that goes bankrupt, that's tough luck. Maybe you recover a percentage on the dollar of what you were owed. But too bad. Why taxpayers should cover those loses is really hard to answer. But let's try it. 

The counter-argument is that if bondholders, especially the most 'senior creditors', take a big hit it, will create a big shock to the financial system worldwide, making bond-investing money extremely risk-averse for a long time and making the credit markets seize up again on far worse a scale than happened last fall in the wake of the Lehman bankruptcy.

A second issue is that a lot of these bondholders are other financial institutions, so you create a cascade of failure.

"A cascade of failure" certainly sounds ominous, like something the government should do its best to prevent. But it begs the question of which institutions, exactly, is it that are going to suffer from that cascade of failure? My friend AB lays out one obvious set of beneficiaries:
I am almost certain that many of the counterparties to AIG's credit default swaps, and thus the ultimate recipients of bailout expenditures, are hedge funds. There is no way to be sure because the information is confidential to AIG and the government has not forced public disclosure of those parties. Why am I so sure? Because 1) AIG was only one of a handful of entities that sold this type of protection and 2) the vast majority of protection buyers did not actually hold the underlying debt, but were instead making "naked" short trades betting that the paper would default, in other words, exactly the kind of trades hedge funds would make.

If this is true, then bailout money is not being spent to shore up core capital ratios of our most important lending institutions, but instead is going to benefit hedge fund managers and their investors. Hedge fund losses, even up to the point of liquidation, do not threaten the overall economy. When Amaranth lost 9 billion within a matter of weeks a few years ago, the government did not step up. There was no systemic risk then when a few very wealth investors lost their shirts. Why should there be now? And, needless to say, counterparty risk -- the risk that a counterparty like AIG will not honor its contracts -- is a well-established business risk, one that investors pay their money managers to avoid. When the managers do not properly avoid the risk, the resulting losses are just like any other losses that a hedge fund may experience. Besides, the entire legal basis for the light regulation hedge funds is that their investors are savvy and wealthy, a group seemingly in little need of tax-payer-funded largesse.
In sum, taxpayer dollars are going, in large measure, to protect the profits (or at any rate staunch the losses) of hedge funds--organizations run for the wealthy by the superwealthy. The urge to go grab a pitchfork when you realize this becomes almost unbearable. It's hard to escape the conclusion that it turns out that the old socialists were right when they claimed that the main point of the state is to protect the property interests of the bourgeoisie.

Let me accept, however, that as of now there is not yet enough popular outrage to spark the wholesale dispossession of these insipid denizens of Richistan. After all, Obama's already being called a socialist as it is -- imagine the reaction if he actually did take a socialistic approach to this crisis. 

I have, however, a concrete proposal -- why not pass a law mandating that any counterparty to any institution that is receiving a bailout, if it wishes to collect on its contract, must publicly disclose its contractual obligations? Such a law would have two obvious benefits. 

At a policy level, it would rapidly help to shine light on who holds the liabilities for the losses in the system right now. Given that a huge amount of the financial markets jitteriness has to do with the unknown nature of all the untransparent transactions that Wall Street has done over the last decade, this would immediately help to end the uncertainty which may not be the cause of the crisis, but iscertainly an exacerbating force.

At a political level, moreover, this law would be enormously beneficial, since it would mean that the real beneficiaries of the bailout monies would become much clearer. This would force naked political reckoning -- which of course, is precisely why such a law is unlikely ever to pass. Once it became clear who was getting the bailout money, populist outrage would likely get even worse, probably mandating the passage of laws putting politically unpopular counterparties at the back of the queue. Of course, this is exactly why I like the idea.

Monday, March 09, 2009

How low the Dow?

I wrote last week that it wouldn't be unreasonable to expect the S&P500 to bottom out around 150. That estimate was based, among other things, on the explicit assumption that profit for the S&P500 would fall by only a third.

Well, Warren Buffett said today that Berkshire Hathaway's 2008 profit fell by 62 percent, and its fourth quarter 2008 profit fell by 96 percent. If those are benchmarks for the profits of the entire industrial sector, we may be looking at an S&P500 bottoming out around 75, and the Dow in three digits, much as Professor Casti predicted.

(Comic footnote: In an apparent attempt to prove that American conservatism is the cognitive twin of Monty Python's Black Knight, AEI "scholar" James K. Glassman is still defending his claim that the Dow will soon hit 36,000.)

Saturday, March 07, 2009

Sign of the times

We know the stock market is in a terrible funk. But for certain industries, the future apparently looks brighter than ever.

Update: In the Google Finance user comments on the Sturm, Ruger & Company stock, we have this lovely thread:
A: Whats up with this stock?

B: Everybody is buying guns, seeds, and other survival neccesities [sic] because Obama is destroying the country. Don't believe me? Try buying some ammo in the south.

C: The south. Try the northwest... I didn't even think about investing in firearms stocks until I went to our local gun store and saw the Obama full print with the caption "Employee of the Month" underneath

The worst case scenario for the meltdown

I don't necessarily buy all the particulars, but if you want a distilled expression of the terror felt by people who spend their time thinking about the global financial crisis, here is a succinct summary of how dire the situation is, and what we potentially face in terms of second-order political and social impacts:
It is high time for the general population and socio-political players to get ready to face very hard times during which whole segments of our societies will be modified, temporarily disappear or even permanently vanish. For instance, the breakdown of the global monetary system we anticipated for summer 2009 will indeed entail the collapse of the US dollar (and all USD-denominated assets), but it will also induce, out of psychological contagion, a general loss of confidence in paper money altogether (these consequences give rise to a number of recommendations in this issue of the GEAB). 

Last but not least, our team now estimates that the most monolithic, the most "imperialistic" political entities will suffer the most from this fifth phase of the crisis. Some states will indeed experience a strategic dislocation undermining their territorial integrity and their influence worldwide. As a consequence, other states will suddenly lose their protected situations and be thrust into regional chaos.
This is couched as a prediction, rather than as a possible scenario, and as such I am not convinced. With that said, the case for the realism of this scenario is well made.

And just to be clear, when the authors talk about "imperialist political entities" being likely to suffer the most, they're talking about the United States. Even the NIC hasn't had the temerity to say this directly.

Dmitry Orlov looks more prescient by the day.

Thursday, March 05, 2009

Tuesday, March 03, 2009

How low will equity markets go

No one knows where the bottom of this bear market will be because, as I just pointed out, nobody knows how bad the economic contraction will be. 

But let me provide some food for thought. If you look at the S&P500, the historic average price/earnings ratio is about 15 (based on trailing net earnings). Currently, with the S&P trading around 700, the P/E ratio for the S&P is about 18 (having peaked during the 2003 Bush bubble at around 60). That suggests that just on the mere earnings merits, the market is still overvalued, though not by much.

But to guess where the bottom of the market is likely to be, one should keep two additional facts in mind.

First, markets almost always overshoot on the way down. In fact, if you look at the two historically bad bear markets during the twentieth century -- the 1933 bear market and the 1974 bear market -- the bottom only came when the P/E ratio for the S&P500 had fallen to 6. Replaying that history suggests that the S&P500 may drop to around 230.

Second, because we're in a horrible real-economy contraction, corporate earnings are going to drop precipitously. Let's conservatively estimate that collective corporate earnings are likely to contract by a third before we hit the bottom. If you combine that with the previous assumption, namely that the P/E ratio will bottom at 6, then it suggests that the S&P500 may bottom out closer to 150.

Run the same logic for the Dow Jones Industrial Average, and it suggests that the bottom may be around 1400 -- which would represent a 90% decline from the peak, the same as took place during the Great Depression.

Note that this is not the worst case scenario, but rather a "historically average" scenario. I went to talk in Switzerland last Fall where I heard John Casti predict that the Dow would be in three-digit territory before this is all said and done.

The Dow, the Economy, and the Stimulus

As always, I recommend reading the National Review's Corner to get a sense for the current shape of right-wing's political id. The latest bee in their bonnet is how the continued collapse of equity prices shows that Obama's stimulus plan isn't working, and then they speculate how far the Dow is likely to fall.

First, it's just idiotic -- big fat idiotic, you might say -- to argue (or, actually, to assume) that there is a direct and immediate relationship between the state of economy and the level of the Dow Jones industrial average. In fact, during recessions, stocks typically start to recover many months before the real economy hits bottom. 

The simple truth is that the extent of the current crisis, or recession, or Depression (or whatever we eventually decide to label this downturn) is only slowly becoming apparent, and as its scale and scope becomes more apparent, it is weighing down stocks. The stimulus package was never designed to help with short-term equity prices; as I say, it's an idiotic metric of the success of the package. It's designed to help the real economy, and as long as the second derivative on the real economy remains negative, there's just no hope for an equity recovery.

Politically, the Democrats should contest the idea that the level of the stockmarket six weeks into Obama's term (or even six months in) is an indication of success. I think most people know that, but apparently there's a gathering consensus (or perhaps more accurately, a symptom) on the right that stock performance is the only relevant barometer of economic success. 

Actually, when you think about that a little bit it almost starts to become a parody of what's wrong with the way Republicans think about economics.

I'll address the question of where stocks are likely to fall to in a separate post.

Sunday, March 01, 2009

On Our Blindness

I have not been counting, but I believe Marc Fisher has penned the one millionth screed by an old-school reporter against those dang-ole, dang-ole blogs. Beyond the usual carping I found this exchange enlightening, my bold.
"Because of the Web, we've actually increased the number of words that we write about state government and politics," says Robert McCartney, The Post's assistant managing editor for metro news. Reporters who may find it harder to get stories into the paper write in more detail, often several times a day, for the Virginia Politics and Maryland Moment blogs.

Critics say that shift serves only the elite that's intently interested in state news, not the broader audience. "The insiders are still getting a full report on the blogs, but the rest of us see only what we want to see instead of the news we need to see," says Bob Gibson, executive director of the Sorensen Institute for Political Leadership at the University of Virginia and a former politics reporter for the Daily Progress in Charlottesville.
Again with the assumption that because something was in print it was seen; like the newspaper is a daily multi-vitamin that if swallowed distributes its contents equally throughout the mind. As is evident by McCartney's statement newspapers are increasingly posting "o'er land and ocean without rest" and contrary to Gibson's accusation of elitism they clearly "also serve who only stand and wait." The fact that this audience is blind is not a failure of the press, it is a failure of the people.