Posts Tagged ‘Council on Foreign Relations’

Obama: “I do not accept second place for the United States of America”

Friday, February 5th, 2010

I’ve been meaning to draw attention to Edward Alden’s political take on the most significant sentence in Obama’s State of the Union:

President Obama’s best bipartisan applause line of the speech–“I do not accept second place for the United States of America”–should become the mantra for his administration’s effort to revive its faltering agenda. It captured the central theme of his speech–that the failure of those in the country’s most powerful institutions to rise above their narrow, immediate interests has paralyzed America’s ability to tackle an urgent series of challenges that threaten its future prosperity and global leadership. Yet while Washington fiddles, Wall Street gambles, and the media chortles, other countries are moving ahead.

E. J. Dionne comments on the same line in a column for The New Republic identifying what he labels the sleeper issue of 2010: American decline.

Beneath the predictable back-and-forth between Obama and his Republican adversaries over government spending lies a substantively important difference over how the United States can maintain its global leadership.

For Republicans, American power is rooted largely in military might and showing a tough and resolute face to the world. They would rely on tax cuts as the one and only spur to economic growth.

Obama, Biden and the Democrats, on the other hand, believe that American power depends ultimately on the American economy, and that government has an essential role to play in fostering the next generation of growth.

One thing no one has commented upon is how well this narrative refutes the narrative the right wing is building. I noticed some time earlier that Charles Krauthammer, Rush Limbaugh, Dick Cheney and much of the right wing had been coalescing around the narrative they were pushing about Obama – which I called the Unified Theory of Obama. The conclusion of all their various claims – the story that tied them all together was this:

Therefore, Obama is using his presidency to deliberately and radically weaken America – by spending more money than it can afford to; by destroying its economy with health care reform and cap and trade; by giving up America’s moral leadership of the world (by bowing to foreign leaders and apologizing for past mistakes); by engaging in “various kinds of strategic retreat, most particularly in reversing policies stained by even the hint of American unilateralism or exceptionalism;” by moving away from the Bush administration’s foreign policy and national security approaches thus giving “encouragement — aid and comfort — to the enemy.”

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State Capitalism and Government (In)Efficiency

Wednesday, May 13th, 2009

Ian Bremmer’s most recent article in Foreign Affairs on state capitalism was rather interesting and analytical regarding the role of the government in an economy – until this sentence cropped up:

Deeper state intervention in an economy means that bureaucratic waste, inefficiency, and corruption are more likely to hold back growth.

Bremmer articles has gotten more than the usual amount of attention – George Will for example made it the basis for a column. Will rejects one of Bremmer’s basic premises though – that in the developed world, the recent forays into state capitalism are temporary:

[Bremmer] probably is wrong because he underestimates the pleasure politicians derive from using their nation’s wealth as a slush fund for purchasing political advantage.

Will implicitly accepts Bremmer’s above point here – pointing to a reason why government is less efficient than the market – because politics begins to affect it and detract from the bottom line.

Last night, I was at a discussion hosted by the Council on Foreign Relations with Bremmer and Felix Rohatyn on “the state’s growing influence on liberal market economics” – and this question came up a few times. Several people commented on this – and the questioned what I took to be the conventional wisdom on this subject. One, a banker or economist of some sort who assisted Eastern European countries by aiding their government entities (such as phone companies, etc.) transition from a Communist to a capitalist economy. He made it clear from his experience that these government entities were inefficient and wasteful. Rohatyn though made the point that this occurred in a closed, non-transparent economy – and these factors contributed to waste more than government involvement. Rohatyn also made the point – which had Bremmer nodding – that as we could see thanks to our insights into GM and the financial companies – that they seemed rather wasteful and inefficient as well. Rohatyn seemed to think efficiency was only possible if the right person was leading an organization – whether it be GM or the DMV. But I think it may be more a matter of transparency and competition. These are the essence of a free market – which for me should not be defined as the absence of the state from a market, but the presence of choice, of transparency, of competition. The state can engage in practices which destroy or undermine a free market – subsidizing certain companies and declaring monopolies by the state for example. The state must be mindful of how it affects the market if it chooses to compete with private companies.

All of this would be moot though if government is less efficient than private companies. But I wonder – and this is a question – if there is any proof that government is more inefficient than the private market. I mean – I can tell you from my own experience that government can be inefficient. But I can also tell you that private companies also can. In terms of health care, at least some studies have found that Medicare is more efficient at providing health care than private insurers – as they eliminate the first step of illegally rejecting all payments on claims as a matter of course.

Of course – the many examples of government efficiency are legendary – but wasn’t it one of our bastions of capitalism that spent millions on his own personal bathroom. Of course, waste is less galling if it isn’t done with our own money. But I’m hoping someone out there has a study proving this – or disproving it.

It seems to be one of those ideas that are just accepted – conventional wisdom.

Former Drug Czars Against the War on Drugs (cont.)

Wednesday, March 18th, 2009

Postscript to this post: A minute or so later, General McCaffrey went on to explain that marijuana possession is effectively a “non-prosecutable offense” today:

This statement seems at odds with the more than 6.2 million arrests since 1990 for simple marijuana possession that a 2006 study analyzed [pdf]. According to that report, arrests for possession of marijuana have actually risen – as the War on Drugs was transformed from a war primarily against heroin and cocaine to one against marijuana. The main reason for this discussed by the report is that marijuana arrests pad arrests statistics, although other studies have measured a discernable increase in violent crimes as a result of every police resource wasted on combating marijuana.

Perhaps what General McCaffrey was referring to was of the enormous number of those arrested for marijuana possession, only a very small number of those arrested, booked, and otherwise put through the system are convicted of or even charged with any crime.

Former Drug Czars Against the War on Drugs

Wednesday, March 18th, 2009

Updated.

When I reported this a few weeks ago, I think I was the first to see significance in what former Drug Czar Brigadier General Barry McCaffrey said – and to be honest, I’m surprised it hasn’t been picked up more. (The full video of the Council on Foreign Relations event on US-Mexico relations is here.) One of our more aggressive drug czars who vehemently attacked those politicians who suggested even allowances for medicinal marijuana and under whom arrests for mere marijuana possession went way up [pdf] now says this:

QUESTIONER: …[W]hy not just legalize drugs?

Former Drug Czar, General BARRY MCCAFFREY (retired): …[S]ince I’m not in public life, [I can say] I actually don’t care.  I care about 6th graders through 12th graders.  If you’re 40 years old, and you’re living in Oregon, and you have 12 giant pot plants in the back of your log cabin, knock yourself out.

(Laughter.)

(For those watching the video, the first questioner who did not identify himself sounded like Ted Sorenson, the venerable former Kennedy speechwriter who is a frequent guest at Council on Foreign Relations events. )

McCaffrey is not the first drug czar to reveal more nuanced views after his tenure was over. Matthea Falco, a drug czar in the 1970s, has become a strong proponent of the harm reduction over the prohibition approach. When asked why by PBS, she responded:

It’s very hard not to change your vision if you stay in the field long enough

If you look over the sweep of time, what changed for me from 1980 until about 1990, and continuing today, is that the price of drugs has just plummeted in this country…So that’s got to be a failure [of the War on Drugs]…

It’s also a flawed strategy. Many people argue that it just hasn’t been implemented enough, that, “If you just put ten times as much money into it, it would change everything.” But, in fact, it’s a flawed strategy at its very core. [my emphasis]

Yet another former Drug Czar Peter Bourne commented on the evolution of the War on Drugs into the war on marijuana – beginning here with the claims that marijuana had significantly bad health effects:

It was policymakers trying to hide behind the skirts of science, trying to say that marijuana poses a threat to the health of young people.

Taking any drugs is probably not a good idea. But [marijuana] certainly posed no significant public health problem. In many ways, it’s somewhat reminiscent of 50 years ago when moralists argued that masturbation was morally wrong. They couldn’t just argue that it was morally wrong, so they argued that it made you insane. They were able to get enough physicians to say, “Yes, masturbation makes you insane,” and people argued that this was causing insanity. Therefore, you were justified in condemning masturbation. I see the same sort of process with the use of marijuana, which is a trivial health problem. 

These are the men and women who were in charge of the War on Drugs – and in running this war, they have come to see it’s madness.  As Matthea Falco said, “It’s very hard not to change your vision if you stay in the field long enough.” Those who are engaged with these issues begin to see the obvious:

The War on Drugs is a war on our citizenry which has led us to imprison a higher percentage of our population than any other country on earth. It is destabilizing our neighbors and other countries essential to our national security with the Pentagon going to far as to claim that Mexico is at risk of a complete collapse due to the effects of the Drug War. Domestically, it competes with police resources leading to a measurable rise in non-drug related serious crimes [pdf] as police attention is diverted. It competes with counterterrorism measures and resources. The War on Drugs is actively making us less safe – and it has failed to stop or even reduce the availability or price of drugs. As one wise senator said in 2004:

The war on drugs is an utter failure.

Now that senator is president of the United States of America – and though he offers better policies and a softening of the hardest edges of the Drug War (which includes refraining from calling it a war), he does not offer the bold action that we need to make us safer. The Obama administration seems content to maintain the prohibitionist policies “firmly rooted in prejudices, fears and ideological visions” that have failed decisively (in the words of the major report on the Drug War by the former presidents of Mexico, Brazil, and Columbia.) But the War on Drugs and the prohibition it is based on endanger both our liberty and our security. Both must end.

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The Story That Tells You Everything You Need To Know About US-Pakistan Relations

Monday, March 2nd, 2009

This excerpt is of David Sanger speaking at the Council on Foreign Relations, discussing “Obama’s Foreign Policy Inbox.”

The nexus of all of our fears and worries about terrorism and Islamic extremism is in Pakistan today – as Barton Gellman explained in The Angler:

The nexus, if it was anywhere, was in Pakistan – a nuclear state whose national hero sold parts to the highest bidder, whose intelligence service backed the Taliban, and whose North-West Frontier Province became a refugre for al Qaeda.

WMD proliferation, al Qaeda, assorted other religious extremists – all these combine in the unstable nation of Pakistan which the New York Times explained is “edging ever closer to the abyss.” Pakistan’s military and intelligence services are not clearly on America’s side – perhaps hoping to outlast our interest in the region. Niall Ferguson reports that Pakistan’s stabilizing middle class has been hit hard by this financial crisis; the religious extremists have fought the central government almost to a standstill in the frontier regions of Pakistan – and a truce is now being negotiated. Pakistan’s civil society movement which drove General Musharaff from power is now rising up against the civilian government thanks to political shenanigans to marginalize opposition parties. Corruption seems endemic. The military and intelligence services seem to be implicated in some way in the recent Mumbai attacks – as well as numerous other terrorist incidents and A. Q. Khan’s  nuclear black market.

All of this helps explain why America likely has special ops troops stationed over the border in Afghanistan ready to secure it’s nuclear sites in the event the nation suffers “a rapid and sudden collapse” – which the Pentagon’s Joint Operating Environment determined was a not insignificant possibility

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Former Drug Czar McCaffrey Doesn’t Care If Marijuana Is Legalized

Thursday, February 26th, 2009

QUESTIONER: …[W]hy not just legalize drugs?

Former Drug Czar, General BARRY MCCAFFREY (retired): …[S]ince I’m not in public life, [I can say] I actually don’t care.  I care about 6th graders through 12th graders.  If you’re 40 years old, and you’re living in Oregon, and you have 12 giant pot plants in the back of your log cabin, knock yourself out.

Discussing Mexico and US drug policy at the Council on Foreign Relations on February 23, 2009.

General McCaffrey as drug czar vehemently opposed medical marijuana; he accelerated the militarization of the Drug War in Columbia and Mexico; and during his time as drug czar, arrests for marijuana possession soared above those for harder drugs (See graph on page 3 of pdf). After years of failure to dent domestic demand for drugs, this chief drug warrior now admits he doesn’t care if drugs are legalized and that he sees nothing wrong with growing your own marijuana. It is incredible that someone could pursue the policies he did – and now state that he either didn’t or doesn’t strongly believe drugs should be illegal. 

Two weeks ago, another group of former drug warriors produced a report describing the failure of America’s prohibitionist policy in Latin America and in the United States:

Prohibitionist policies based on the eradication of production and on the disruption of drug flows as well as on the criminalization of consumption have not yielded the expected results. We are farther than ever from the announced goal of eradicating drugs…

Current drug repression policies are firmly rooted in prejudices, fears and ideological visions…

[T]he available empirical evidence shows that the harm caused by [marijuana] is similar to the harm caused by alcohol or tobacco. More importantly, most of the damage associated with cannabis use – from the indiscriminate arrest and incarceration of consumers to the violence and corruption that affect all of society – is the result of the current prohibitionist policies.

From Drugs and Democracy, a report by César Gaviria (former president of Columbia), Ernesto Zedillo (former president of Mexico), Fernando Henrique Cardoso (former president of Brazil) and numerous other prominent Latin American figures released February 11, 2009.

As former Governor William Weld recently explained:

There’s no one so brave and wise as the politician who’s not running for office and who’s not going to be.

It is notable that so many of our prominent politicians reveal after they leave office that they don’t really agree with the premise of the War on Drugs – a war which is consuming billions of dollars, waging war on our citizenry, jailing a higher percentage of our citizens than any other nation, destabilizing our neighbors, competing with and undermining anti-terrorism measures, and making America less safe

Instead, the best our current leaders offer is to soften the roughest edges of the Drug War on American citizens.1

Obama has taken a number of sensible positions on Drug War issues – but he has not publicly acknowledged what most informed observers can see – that the War on Drugs has failed, is wasting money, and making us less safe. It is inconceivable that a reflective, informed policy-maker such as Obama does not realize this as well.

Franklin Delano Roosevelt used to tell all of the favor-seekers who came to impress upon him the importance of certain issues:

I agree with you. I want to do it. Now make me do it.

In other words, we must put pressure on Obama if the hopes of reform advocates and Obama administration insiders are to be realized.

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  1. Yes, I know about the San Francisco Assemblymen Ammiano introduced a bill in California to legalize marijuana and tax it – but he’s clearly the exception. Texas Congressman Ron Paul would be another exception. []

The Brave and Wise Politician

Friday, February 6th, 2009

I was listening to Governor David Patterson speak at the Council on Foreign Relations podcast of a recent session – and was somewhat favorably impressed with him. His remarks were coherent and interesting and clearly showed that he was an intelligent person gathering information and acting as he saw best. He seemed to have an almost Bushian disregard for the legislature though – and a sense that he – and he alone – knew what was best.

Much more interesting than anything Gov. Patterson said though was moderator and former Massachusetts Governor William Weld’s offhand comment:

There’s no one so brave and wise as the politician who’s not running for office and who’s not going to be…

The remark certainly conveys a certain wisdom in itself – as even prosaic politicians are found to have some real insight once they leave office. It’s an interesting comment on our political system – that bravery and wisdom are seen as detriments to political success and acceptance.

Obama & Trade

Thursday, November 13th, 2008

I’ve heard from a few people that there is a growing concern that Obama is anti-free-trade.

This concern has a basis in Obama’s record – mainly from his rhetoric in Ohio during the primary fight with Hillary Clinton and to some extent the fact that he is a Democrat and needed the support of the labor unions. But to a large degree the exaggerated fears of many businessmen comes from comments made by the Republicans during the campaign – as John McCain’s campaign was first (ridiculously) calling Obama “the most protectionist candidate that the Democratic Party has ever fielded” before his campaign went on to call Obama a supporter of comprehensive sex education for kindergartner, a Marxist, a socialist, and a friend to terrorists.

This has led to a series of conflicting impressions of Obama and his position on trade – from statements during the Ohio campaign that “we can’t keep passing unfair trade deals like NAFTA that put special interests over workers’ interests” to his later point – when asked about his rhetoric about NAFTA during the Ohio campaign that, “Sometimes during campaigns the rhetoric gets overheated and amplified.” Indeed – despite the appeal of populist protectionist rhetoric (some 60% of Americans think free trade and NAFTA have been bad for people like them), Obama chose to attack protectionism in the general campaign: “[n]ot only is it impossible to turn back the tide of globalization, but efforts to do so can make us worse off.” At least in part, Obama’s friendlier stance towards free trade has to be understood as a tactical move on his part as he was certain to be to the left of McCain on this issue. McCain has never even made an issue out of any labor or environmental protections relating to the issue and would have had serious problems with economic conservatives if he moved to the left on this issue as they never trusted him to begin with.

Even aside from the change in rhetoric, there is considerable evidence that has led numerous reasonable observers to believe Obama is, in fact, in favor of trade even as he is concerned with some of free trade’s side effects on American workers and the economy. Obama, for one, described himself as a “pro-growth, free-market guy.” Even the arch-conservative Weekly Standard was forced to concede in the midst of the general election campaign that Obama’s two main economic advisors Jason Furman and Austan Goolsbee, while liberals, were “centrist, pro-free traders.” George F. Will, my favorite columnist and a paleo-conservative – described Goolsbee as the best sort of liberal economist his conservative leanings could imagine:

Goolsbee no doubt has lots of dubious ideas – he is, after all, a Democrat – about how government can creatively fiddle with the market’s allocation of wealth and opportunity. But he seems to be the sort of person – amiable, empirical and reasonable – you would want at the elbow of a Democratic president, if such there must be.

Naomi Klein attacked these two herself as ideologically impure in a piece in The Nation magazine – and while I find Klein to be provactive, I think a pro-free trader could hardly have a better endorsement than an attack by Klein.

Obama’s official position on trade has remained consistent – even as his focus has changed over the course of the campaign. What has struck me about all of Obama’s positions is the extent to which they begin with an appreciation of conservative ideas – as his health care plan works within the market rather than by goverment fiat; as his stance on affirmative action reflects traditional concerns about whether we are trying to ensure the equality of oppurtunity or equality of the ends. His views on trade seem similar – as he embraces free markets and free trade – but wants to mitigate the negative side effects.

The Council on Foreign Relations, a group with a considerable interest in free trade, vouched for Obama’s support:

Sen. Obama (D-IL) generally supports free trade policies, though he has expressed concern about free trade agreements that do not include labor and environmental protections.

Tim Hanson and Nate Weisshaar of the Motley Fool probably best described the most reasonable concerns about Obama’s record on trade in their piece asking “Will Obama End Global Trade?” (the answer was, “Nope.”):

While Obama’s campaign literature will tell you that his goals are fairer trade, more assistance for displaced American workers, and greater global environmental protections, there is some global worry that an Obama administration might impose and sustain protectionist policies in order to reward labor union support for his campaign and get our economy back on its feet.

As private sector labor unions have been decimated in the global economy, and as Obama and the liberal consensus views them as part of the solution rather than a major problem, it’s hard to see exactly what steps Obama can take to rejuvenate unions.

In the end, the best way to understand and predict Obama’s trade policies is as part of his view of economics in general. Obama’s economic positions are consistent with a broad Democratic consensus that has emerged in the past decade – bringing together the two warring sides of the Clintonian era, short-handed as Robert Rubin versus Robert Reich for Clinton’s Labor and Treasury Secretaries. The Rubin school believed in expanding free trade, reducing deficits, encouraging overall growth without regard to it’s distribution, and deregulation. The Reich school believed in protecting labor unions, mitigating the effects of globalization through an expanded safety net and job-retraining programs, environmentalism, and was concerned with inequality. Over the past decade, many figures on both sides of this ideological divide have found worth in the ideas of their one-time competitors – as David Leonhardt’s New York Times Magazine piece called “Obamanomics” explained.

This Democratic consensus views free trade as a positive force in the world – but one that has numerous side effects that are negative. The role of government in this picture is to try to mitigate the negative effects of free trade – especially those temporary effects of the transition to a more globalized economy. Most of Obama’s domestic agenda is designed to accomplish these purposes – from the investment in a green energy industry to investment in infrastructure to health care reform to financial reforms. His nuanced position on trade reflects this same desire – to mitigate the destabilizing effects of globalization while acknowledging it’s benefits.

11 Things I Learned While Trying to Figure Out the Financial Crisis

Thursday, October 9th, 2008

Like a lot of people, I’ve been struggling to understand this financial crisis over the past few weeks. I don’t pretend to be an economic expert – I’ve always been more interested in foreign policy, politics and history – but the issue of this crisis is obviously so important, it seems that it is everyone’s responsibility to find out what went on, what caused this.

I also feel that this is an issue which is confusing our politics, our partisan impulses. Both the right and the left have many reasons to hate the bailout – yet the pragmatists on both sides agree that something must be done. Everyone is angry. Very few predicted this. I only came across a few who prominently warned about a crisis such as this – subscribers to the Austrian school of economics such as Ron Paul; liberal capitalists such as Warren Buffet and George Soros; and economists like Nassim Nicholas Taleb.

This crisis has succeeded in confusing ideological categories – which is probably part of the reason it has spwarned so many interesting and non-ideological takes, as people struggle to understand these momentous events in terms they are familiar with. (Here’s one ingenious example.) On the whole, Republican politicians instinctively trusted the market and although some attempted to reign in Fannie Mae and Freddie Mac, they saw no imminent threat to the financial system. A few Democrats saw the need for more oversight to prevent excessive risk-taking that might endanger the financial system; many more Democrats (especially as the party in Washington is dominated by neo-liberals), didn’t see the profit in warning of an unknowable future catastrophe. Those financial firms whose main purpose was to minimize risk and maximize profit accomplished this by reducing the risk of any individual transaction while placing greater and greater stress on the system – trading many small risks for a giant catastrophic risk. But theyse firms didn’t know this because the entire system was opaque and oversight was minimal. As long as things were going well, there was no reason to figure out what was going on.

Now, here we are today.

I don’t pretend to understand the cause or the cure of this crisis. But here are 10 things I’ve learned, 10 things worth sharing, in my attempts to figure out what’s going on:

  1. The “real” Great Depression of 1873: “[T]he current economic woes look a lot like what my 96-year-old grandmother still calls ‘the real Great Depression.’ She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.” This depression also featured mortgage issues, a housing bubble, an emerging economy undercutting global prices (America instead of China), amd a lack of transparency leading banks to refrain from lending. From Scott Reynolds Nelson in the Chronicle of Higher Education.
  2. The Martingale. Wall Street fell for a 400 year old sucker bet, the martingale. You always win in this betting game – as long as you can cover your losses. But once your losses are too great, this “double-or-nothing” game leads to catastrophe. The formula to understand this is simplified as:

    (0.99) x ($100) + (0.01) x (catastrophic outcome) = 0

    In other words, playing for $100, there is a 99% chance that you will make at least $100 dollars playing this game. But there is a 1% chance of a catastrophic outcome. If you never stop betting, the catastrophic outcome is inevitable.

  3. April 28, 2004. Stephen Labaton of the New York Times examines the SEC decision to relax regulations and create an exemption for the biggest investment banks (those with assets over $5 billion) that would allow them increase their leverage ratio, and borrow as much as 33 times their assets as Bear Stearns did. This made the big investment banks especially susceptible to any downturns, as if their overall investments declined by even 3%, they would lose all their assets.
  4. Goldman Sachs always wins. David Weidner of MarketWatch explains how Goldman Sachs looks to come out of this crisis stronger – and why their political connections had nothing to do with it. (Really. It’s just a coincidence that their main competitors have been ruined, the institution they relied on most was bailed out, and the Treasury Secretary is a former CEO.)
  5. Financial Interdependence. Which means that if one bank trips, the entire financial system falls down. Why? Because the key innovations of the past thirty years in the financial markets have been geared towards reducing risk. Often this was accomplished by spreading risk among many actors. An investor would borrow money to invest in some security; to hedge in case the investment went south, an investor would buy insurance; to hedge against the insurance company not being able to pay, they would purchase a credit default swap. Mark Buchanan described in a New York Times editorial how some economists had begun to create models of markets which projected the actions of many agents acting independently. As the economists allowed greater interdependence in these models: “The instability doesn’t grow in the market gradually, but arrives suddenly. Beyond a certain threshold the virtual market abruptly loses its stability in a ‘phase transition’ akin to the way ice abruptly melts into liquid water. Beyond this point, collective financial meltdown becomes effectively certain. This is the kind of possibility that equilibrium thinking cannot even entertain.”
  6. The American System. The American economic system is not and has never been pure capitalism. As Robert J. Schiller wrote:

    No, our economy is not a shining example of pure unfettered market forces. It never has been. In his farewell address back in 1796, 20 years after the publication of Adam Smith’s “The Wealth of Nations,” George Washington defined the new republic’s own distinctive national economic sensibility: “Our commercial policy should hold an equal and impartial hand; neither seeking nor granting exclusive favors or preferences; consulting the natural course of things; diffusing and diversifying by gentle means the streams of commerce, but forcing nothing.” From the outset, Washington envisioned some government involvement in the commercial system, even as he recognized that commerce should belong to the people.

    Capitalism is not really the best word to describe this arrangement. (The term was coined in the late 19th century as a way to describe the ideological opposite of communism.) Some decades later, people began to use a better term, “the American system,” in which the government involved itself in the economy primarily to develop what we would now call infrastructure — highways, canals, railroads — but otherwise let economic liberty prevail. I prefer to call this spectacularly successful arrangement “financial democracy” — a largely free system in which the U.S. government’s role is to help citizens achieve their best potential, using all the economic weapons that our financial arsenal can provide.

    Americans may assume that the basics of capitalism have been firmly established here since time immemorial, but historical cataclysms such as the Great Depression strongly suggest otherwise. Simply put, capitalism evolves. And we need to understand its trajectory if we are to bring our economic system into greater accord with the other great source of American strength: the best principles of our democracy.

  7. The Shadow Banking System. Existing alongside the regulated banking system is what is called a shadow financial system – including money market accounts, hedge funds, investment banks, and countless other financial creatures. This system was invented in order to avoid government regulation of various sorts. This crisis has been mainly but certainly not exclusively in this shadow system – and those regulated banks have been the big winners in all of this (aside from Goldman Sachs.) Even the remaining independent investment banks – Goldman Sachs and Morgan Stanley have chosen to be subject to greater regulation. Nouri Roubini speaking at the Council on Foreign Relations explained that the shadow banking system is on the verge of collapse because of their lack of transparency and because they took risks they would not have been able to if they were subject to regulation.
  8. Market Fundamentalism. I am a person suspicious of fundamentalism of any kind – and perhaps that makes me more prone to see reflections of the true believers in Communism during the collapse of the Soviet Union in the true believers in capitalism during the current crisis. The difference of course is that we today are not in a pure capitalist system – which is at least part of what has prevented this crisis from destroying our economic system so far. The government shored up essential institutions and is taking various measures now to restore liquidity to the markets – from the bailout to the Federal Reserve’s unprecedented actions. But what is evident to most observers – that the market failed to regulate itself, that the market mispriced risk, that short term profits were prioritized over long-term value, that the actions of thousands of individual actors acting for their own best interest created a systematic risk – is not clear to market fundamentalists. They insist that it was the fact that the government was involved in the market at all that led to these risks – specifically in the form of Fannie Mae and Freddie Mac. They have a point – in that Fannie Mae and Freddie Mac were only lightly regulated in recent years, and that though they got into the subprime lending market late and were forced out by regulators early, they underwrote a significant amount of these loans during that time, and that these institutions were able to overleverage themselves because of an assumed implicit government guarantee. All of this is to say that Fannie Mae and Freddie Mac were part of the problem. They weren’t the first companies to be hit by the crisis; and other companies came quickly afterward. Perhaps it is because of my limited experience, but I haven’t heard any serious economists on the right or left pushing forward the theory that this was all Fannie and Freddie’s fault – only right-wing partisans trying to throw some political blame the Democrats’ way. What these market fundamentalists want to insist is that though even the remaining investment banks have taken themselves out of the shadow banking system and voluntarily subjected themselves to regulation, what we really need is less government intervention in the market. All this is based on the distinction between economic activities of the government as decided in a democracy by the people, which in market fundamentalism are inherently oppressive, and economic activities of private individuals and corporations, which are free. Which means that a single individual controlling hundreds of billions of dollars is freedom while a government of the people controlling a similar amount is oppressive.
  9. Cognitive errors. Megan McCardle of The Atlantic has compiled a useful list of cognitive errors that seem to have played a role in the crisis – both in creating the conditions that led to it and in compounding it. For example, she discusses the recency effect:

    People tend to overweight recent events in considering the probability of future events. In 2001, I would have rated the risk of another big terrorist attack on the US in the next two years as pretty high. Now I rate it as much lower. Yet the probability of a major terrorist attack is not really very dependent on whether there has been a recent successful one; it’s much more dependent on things like the availability of suicidal terrorists, and their ability to formulate a clever plan. My current assessment is not necessarily any more accurate than my 2001 assessment, but I nonetheless worry much less about terrorism than I did then.

  10. The Black Swan. Nassim Nicholas Taleb is my kind of economist. The basis of his philosophy is that, “The world we live in is vastly different from the world we think we live in.” He advocates “tinkering” as our best mean to change the world – and his theory of the markets take into account many of the previous points. While he was running his own hedge fund in the 1990s, he turned his own knowledge of his lack of knowledge – and others’ lack of knowledge – into enormous profits. It came at the expense of losing a little money 364 days of the year – but making enormous profits in that one remaining day. He would bet on market volatility – which he understood financial firms repeatedly underestimated. Taleb’s key insight is that we know very little of the world itself – and will be more often fundamentally wrong than right. The example he uses is the Black Swan as described by David Hume:

    No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.

    This fundamental unknowability of the world must inform our actions, and perhaps points to some solutions. We must attempt to resolve this crisis by tinkering with different solutions, and seeing what works, while being mindful that our actions will inevitably have consequences we do not imagine. And remember – at any point – a black swan could come around and reshape our world suddenly – as 9/11 did, as the assassination of the Archduke Ferdinand to start World War I, as did the invention of the personal computer, as has this financial crisis. The solution will not come from our determined application of fixed ideas, but by our openness to the possibility that we may be wrong, even as we are determined to act. We must see the shades of gray and acknowledge that we do not fully understand the world, yet still act – tinker, if you will.

  11. Damn, it feels good to be a banksta!

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Optimistic v. Pessimistic Views of the Financial Crisis

Wednesday, October 1st, 2008

An optimist thinks this is the best of all possible worlds, and a pessimist fears he may be right.

Mortimer Zukcerman responding to an especially astute and frightening description of the current financial crisis while moderating a panel of economic experts for the Council on Foreign Relations.