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.

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.

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....

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.

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.

Telling it like it is

Bill O'Reilly makes explicit the conservative political agenda: to defend "the white, Christian, male power structure."

Methland

A portrait of Sarah Palin's "Real America."

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.

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.

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.

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.

Divorced from reality

I'm not normally a big Bill Maher fan, but this is pretty good.

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!"

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)

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."

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.

Climate Change - Leadership is Honesty

This is exactly my position on cap-and-trade and climate change.