Tuesday, October 28, 2008

Attacking Syria: Neo-Con Domestic Political Strategy

Washington seems unable to think of anything except war, war, and more war. War is not constructing a very solid foundation for national security, but it does have domestic political benefits. (I say “Washington,” rather than “the neo-cons” because I see little evidence that any significant thinking about alternatives is occurring within the Washington elite. Please! Someone prove me wrong…say, by quoting a statement by Obama condemning the attack on Syria.)

On March 16, I wrote that:

Bush seems to have decided to maintain his aggressive, militant course of frontal confrontation with Islamic political actors who do not submit to U.S. leadership.

Perhaps my message is beginning to sink in. On October 27, describing the recent U.S. attack on Syria, the New York Times said:

Together with a similar American commando raid into Pakistan more than seven weeks ago, the operation on Sunday appeared to reflect an intensifying effort by the Bush administration to find a way during its waning months to attack militants even beyond the borders of Iraq and Afghanistan, where the United States is at war.

As the Times’ reference to Pakistan suggests, we have gone a long way down the road of confrontation since March. Not coincidentally, the U.S. position in that country is weakening dramatically, with the Brits warning that the war against the Taliban is unwinnable and with virtually everyone outside of Washington now talking negotiated settlement.

In Lebanon (anyone remember Israel’s 2006 onslaught to eliminate Hezbollah?), Nasrallah, leader of Hezbollah, is meeting with Hariri, leader of the pro-U.S. faction: not exactly the result the Israeli-Bush Administration neo-con team had in mind.

Even America’s new Iraqi colony is suddenly putting up serious resistance to continued U.S. military occupation of that shattered land, to the point that the U.S. has resorted to blatant blackmail to force its client to submit.

But if seven years of war against Moslems with an independent streak have mostly served to undermine rather than enhance U.S. national security, the political benefits for the neo-cons have been something else again. Not only did Bush succeed in getting reelected, neo-con policy innovations, despite the popular hostility to Bush, have yet to be rejected by the U.S. elite or the people. U.S. attacks on countries with which we are not at war is only one of several exceedingly dangerous neo-con policy innovations lurking like latent viruses in the political landscape. The attack on Syria is important because it strengthens the neo-con strategy of solving global problems through force. Each such attack, even if it fails to rescue the hapless McCain campaign, nevertheless makes it that much more difficult for an incoming Obama administration to strike a new tone.

Saturday, October 25, 2008

Eroding American Power

Power, defined meaningfully, means the ability to achieve one's goals. The world has seen the limits of brute force for achieving the goals of the aggressor since 9/11, and much of that record has been noted in this blog, so no need to reiterate the sorry record of self-defeating hubris.

Financial power is another leg of America's superpower status, and now that the leading global financial position of the U.S. is not only under attack but under attack because of policies that Washington freely chose to adopt (failure to monitor Wall Street by collecting data, failure to regulate Wall Street by constraining behavior, promoting the sale of homes to unqualified buyers), it seems reasonable to wonder if the U.S. can maintain its economic superpower status.

To what extent will the world decide to pull itself away from a dollar-centric global economy...and, of course, have the ability to achieve such a goal?

  • Will the trend toward denomination of oil in Euros accelerate?
  • Will China and Japan try to get rid of their dollar holdings?

Assuming such trends occur, the value of the dollar and the living standards of Americans will presumably decline. Would that undercut American power over the long run or might it restore a sense of balance to American citizens addicted to easy credit and American politicians addicted to a cosy elitist revolving door? Currently, government officials facilitate the pursuit of wealth by corporate officials because the government officials either were corporate officials before entering government or anticipate corporate sinecures after leaving government. The astonishing idea of imagining that Paulson would discipline Wall Street is a case in point. Where, after all, did Paulson come from? Foxes guarding the chicken coop...

So one can imagine two very different results from the erosion of American financial power coming on top of the erosion of American military power (again, defined not as the ability to destroy but as the ability to achieve goals):

1) Cutting the U.S. down to size;
2) Teaching the U.S. elite and people a much needed lesson in living within their means (in terms of both lifestyle and imperial hubris).

The first produces a world without a clear leader. Given the recent record of U.S. leadership, this might be advantageous for us all, but it could also lead to chaos. The second produces an America with a restored foundation for leadership. Over the long run, these two alternatives lead to very different global futures. Over the short run, they both point to a far weaker United States.

Just an Average Girl...and That's the Problem

Aw, shucks, I’m just as qualified as anyone to be vice president. After all, I’m just like you. I’m a workin’, moose-guttin’ mother and not only that a mother of a special needs child, and we all know that only special women are selected to be the mothers of special needs children…that’s why they are called special. So, I’m just like all of you…only special. We all like killin’ wolves; I just like doin’ it from helicopters, flyin’ them helicopters and shootin’ them wolves: a pro-American American havin’ good old American fun. And we Americans all like decent clothes. It’s just that I’m special so I need $150,000 of your contributions to my campaign to pay for my clothes. Do you hear what I’m sayin’? “Contributions to MY campaign…so they’re my contributions.” All pro-American Americans understand that a woman who is goin’ to be president…ah, vice-president is goin’ to have to dress decent…and have decent lookin’ hair. What’s wrong with usin’ 15,000 dollars a month of your pro-American contributions to keep me lookin’ good? I mean, that’s why I’m here, isn’t it?

Wednesday, October 22, 2008

Will Iraq Save Us From Ourselves?

Unless we the American people truly do want to be committed to that 100 years of war in Iraq that McCain alluded to, we should pray that the Iraqi government save us from ourselves (OK, save us from our Neo-Con masters) by rejecting the troop agreement.

Signing the incoming administration up to a new agreement with Iraq "allowing" continued U.S. occupation of that country would be a smooth stab in the back by lame duck Bush. In my opinion, the merits of such an agreement are dubious; it essentially cements the U.S. into its Neo-Con imperialist course of endless war with Islam. The point, however, is that any such agreement with its fateful consequences for America's role in the world should be made by the new administration.

Aside from suddenly starting a yet another war of choice, there is hardly anything that Bush could do to cripple the new administration than anchor it like this into the quagmire sands of an Arab occupation.

Saturday, October 18, 2008

Palin Finally Gets One Right!

Palin may prefer sewage and oil rigs in the ocean to Belugas, she may think she is personally responsible for staring down Putin, but she finally got one right: Washington is not the real America.

Washington is where elitist politicians turn away as their Wall Street pals wreck our economy.

Washington is where the power-hungry who were elected to protect us instead launch wars of choice against countries that are not threatening us while allowing terrorists to walk.

Washington is where people deny the existence of global warming.

I could go on, but you get the drift...Palin would fit right in with the old style Washington that we all are so desperate to change.

Wednesday, October 15, 2008

So, Yes, In the End, It is Class Warfare

Word is leaking about about yet another National Intelligence Estimate that evidently recognize the obvious without drawing the obvious conclusion.

This time, there is a still-classified NIE that reportedly recognizes that Pakistan faces disaster. Does it, I wonder, recognize that U.S. drones blowing up houses, killing women and children, plus U.S. aid to the Pakistani military even as the Pakistani economy collapses, might be part of the problem? Does it, I wonder, suggest that American emphasis on helping the people of Pakistan might persuade them to oppose extremists who favor violence?

Would anyone in Washington listen if it did? After all, Washington just patted itself on the back for giving $700 billion of taxpayer funds to the richest people in the country. If Washington thinks Wall Street executives deserve handouts while America's poor are in crisis, then who could expect it to pay attention to the economic crisis facing the minorities along the Pakistan-Afghanistan border?

Pretending to be "concerned" and "unbiased" by intoning that a problem exists while careful avoiding pointing out either the cause or the solution is an old and repugnant game. Too bad for the U.S. that candidates willing to be honest--e.g., Kucinich in the Democratic primary and Nader, who remains in the race but is of course ignored by both halves of the conservative elitist Republican-Democratic group that got us in this mess--get no popular support.

It is not necessary for the poor, confused American voter to become an expert in high finance or Pakistani politics. The anti-democratic mindset of the powerful aiding the powerful, while the weak and poor struggle to survive the resulting financial crises and serve as fodder in the resulting (and highly profitable) wars is the very simple cause that underlies both problems.

Tuesday, October 14, 2008

Social Complexity & Crises

Washington politicians and pundits are shocked that the bailout led to another drop in stock value, just as they were shocked that Iraqis did not welcome a brutal American invasion with flowers and just as they were shocked that the marginalized people of Pakistan’s border regions did not flock to support the Pakistani government as it adopted Washington’s tactic of attacking populated areas with helicopter gunships (not to mention the odd American missile). And if McCain wins and succeeds in transforming the health insurance system into an unregulated, private system (like the unregulated, private credit default swap system that has just made its seminal contribution to our financial stability), then we may soon see the collapse of the nation’s health insurance system.

It’s worth thinking about that last point for a moment. What would a “collapse” of the nation’s health insurance system look like? Premiums would skyrocket – except for those who could prove they were absolutely healthy. As with car insurance, those who got sick would be socked with penalties. Insurance agents would be increasingly aggressive about ordering doctors to kick the sick out of hospitals. And just maybe, health insurance would simply disappear. We would all have to invest money when young to pay for our health needs when we aged. Where would we invest? Obviously…in the stock market!

The lessons:

Don’t expect to make a profit on stocks any time soon;
Don’t expect terrorist attacks on America to end any time soon;
Don’t get sick.

The U.S. foreign policy system, financial system, and health care system are all huge, complicated social systems that are increasingly out of control, suggesting that some common underlying set of factors is to blame. Overwhelming violence has been the method of choice since 9/11 for resolving problems in U.S. foreign policy. An unrestricted rush for short-term profit has characterized the behavior of financial institutions, not to mention many individuals who knowingly bought houses they could not afford. The McCain health care plan would take the responsibility for providing Americans with affordable health care out of the hands of the Government. These are all examples of the same decision-making concept: relying on maximum force to achieve simplistic “solutions.”

Admittedly, the alternative in each case is messy. In foreign policy, long years of agonizing diplomacy plus step-by-step police work and, perhaps, a $700 billion bailout of the Islamic world’s poor. Who in Pakistan’s tribal areas would be supporting the Taliban now if, say, $100 billion in new roads, schools, and jobs were being offered to those people who as recently as this summer were still risking their lives to send their children (girls included) to modern schools and demanding that their officials provide economic opportunities for them?

In financial policy, Government regulation would have had to be beefed up significantly, always difficult in the absence of a crisis. Wall Street’s new instruments would have had to be banned or made less risky by requiring Wall Street to tell the Government exactly what it was doing and by providing costly collateral. Wall Street executives would have lost millions from their annual bonuses and golden parachutes because company profits would have declined.

In health care policy, a serious, good-faith effort would have to be made to provide a minimum level of coverage for all Americans: easy to say, tough to do. Kucinich took a stab at it during the primaries, and look what it got him.

So, we took the easy way out.

In foreign policy, the result, so far, is five years of war in Iraq; seven years of war in Afghanistan; two years of war in Somalia; the transformation of Gaza into a concentration camp; a war in Lebanon; the start of a new war in Pakistan; the destruction of the moderate democratic movement in Iran; rising nuclear tensions in the Mideast as Israel continues to threaten aggression against non-nuclear (so far) Iran. Not one of these situations has been resolved. The Iraqi situation is better than it was at the worst point (a low point caused by the U.S. invasion, not by Saddam, who was long dead) but decidedly worse than it was before the U.S. invasion. Each of the other situations is steadily worsening. U.S. national security is getting more tenuous; al Qua’ida is gaining support, enhancing its strategic position in Pakistan by the day and nearly fighting the West to a draw in Afghanistan. The U.S. image in the world is significantly more tattered than before 9/11.

In financial policy, the result is a nice crisis for everyone except the leaders of Wall Street, who all walked away with tens of millions of other people’s money in their pockets. The result is also a government in Washington that now appears utterly corrupt and incompetent, and this result is probably more important to U.S. national security than the collapse of the utterly immoral, irresponsible, and unpatriotic system of unrestrained greed that Wall Street had become. It is a sobering thought to wonder how the evident bumbling and declining mastery of events by Washington will affect the status and behavior of extremists in Tehran or Beijing or Moscow…or Tel Aviv.

As for health care policy, that system too is clearly under stress and appears, like the first two, to be slipping out of control. But if we draw general lessons from our mistakes in managing foreign and financial policy, perhaps we can avoid once again dropping the rock of simplistic solutions on our own feet.

Monday, October 13, 2008

Israeli Elite Trash Talk Undercutting Israeli Security

Israeli president Peres just warned Iran not to attack Israel. What is the point of this gratuitous and bellicose warning from the Mideast's only nuclear power against non-nuclear Iran, which is 1,000 miles away from Israel and surrounded by an American naval armada in the Persian Gulf, a chain of enormous U.S. military bases, and an American army in Iraq?

Not only does it take some imagination to conceive of how Iran might attack the infinitely more militarily powerful U.S. client Israel, one may also be forgiven for wondering why. Ahmadinejad would spoil his bully pulpit if he started a war he would be sure to lose, whereas now he can make an easy name for himself as leader of Islamic nationalism by pointing out the injustice of Israel's treatment of Palestinians. Beyond the career interests of this one man, it is surely clear to most in the Iranian elite that Iran's strategic position has improved considerably as the U.S. has become mired down in Iraq and as Iran's Shi'ite allies have consolidated control over Iraq.

The history of Iran and Israel is also informative. One must go back a couple centuries to find an example of Iran starting a war, and Iran has no forces occupying foreign territory. Israel, in contrast, has launched a series of wars against helpless Lebanon, occupies and has carved into "Bantustans" what remained after 1947 of Palestine, launched an aerial attack on Syria last year, and in recent years has repeatedly allowed its officials to threaten unprovoked nuclear attack on Iran.

Yet Israel goes out of its way to raise tensions by "warning" Iran not to attack. No doubt it plays well domestically. Politicians elsewhere have been know to pour the same gasoline on the fires of international tension, and, no, I am not just referring to Ahmadinejad. Is there more to it? Is Israel laying the groundwork for its own weapons of mass destruction lie, its own Gulf of Tonkin Resolution, its own Reichstag fire? Whatever the thinking of Peres, he is playing a dangerous and irresponsible game in these tense times.

Saturday, October 11, 2008

Resolving the Financial Crisis - Step 2

Next month a new President will be elected, after which an utterly distrusted and discredited lame duck will sit in the White House until January while Congress goes on vacation and the President-elect cools his heels, taps his fingers, and watches the ship of state float rudderless in the storm. We of course have survived this ridiculously outdated set of rules for two centuries, despite the fact that newly elected presidents no longer travel to Washington on horseback. But the lame duck this time is probably as distrusted as any lame duck in U.S. history, and the coincidental timing of the crisis worse than ever before. It is not clear that we can afford to waste two months.

Friday, October 10, 2008

Resolving the Financial Crisis - Step 1

The brand new 2009 U.S. defense budget – a World War II-level extravaganza nearly the size of last week’s bailout of the rich – that was slipped through v-e-r-y quietly in the midst of the financial meltdown is the most obvious source for funding to deal with that meltdown. Instead of a frenzy of military spending equivalent to the total defense budgets of the whole rest of the world that builds nothing of value for society and, worse, tempts us to undertake all sorts of ill-advised adventures, our U.S. national offense budget should be downscaled to a legitimate defense budget. That is, the 2009 budget should be thought through again, with the explicit requirement of cutting, say, one-third, leaving $200 billion that could be applied to emergency small-business loans or helping people facing foreclosure stay in their homes or some other specific project.

Would this solve the financial crisis? Of course not. The point is to make a dramatic gesture about new national priorities but a gesture of substance that would make a significant contribution to the needs of a real group of disadvantaged people (specifically not a group of millionaire Wall Street types). To see a substantive policy decision giving real help to a specific group of common people would encourage all the rest.

It would also do something even more important. It would signal that the Government takes the financial crisis seriously enough to admit that it must alter its own behavior, that the adventurist party—the wars of choice, the construction of huge new military bases throughout the world—is over. Perhaps the American people would get the message that their own party is also over—that cutting back on the fun and focusing on rebuilding both personal and national finances is long, long overdue. We do not need a World War II-level military budget; we need World War II-style determination and sacrifice.

Thursday, October 9, 2008

Paying Your Debts

When you spend more than you can afford, eventually you have to pay the piper. It is easy to blame the extraordinary greed of Wall Street executives with their multi-million dollar homes and golden parachutes, but all Americans who have credit card debts and all U.S. politicians are to blame. The whole nation has been living the good life by borrowing. Now it is time to pay. Since Americans don't like paying their way through life any more, we call that a "financial crisis."

If there is an honest politician in the land, that politician will tell apologize to the world for the trouble that American greed has put them in and will tell the American people that the way to resolve the financial crisis is through (pardon my French) "sacrifice." It is really quite simple - since Americans individually (credit card debts, "creative" mortgages, etc.) and the American government (wars of choice here and there to gain power and influence) have been living beyond their means--and grossly beyond their means over the last decade, all will now have to tighten their belts in order to start paying back that borrowed money. Let's be very clear about this - the Wall Street executive greed, the personal "max out my credit cards" greed, and the foreign policy greed of demanding that the world do things the neo-con way are morally equivalent examples of the same character fault.

If any aspiring leader had the courage to say this to Americans, then we could start talking about real solutions. Specifically, exactly how does a country calmly, with minimum disruption, and with maximum fairness, intentionally go about downsizing? And, now that the financial markets are in free-fall, do we still have time?

Could we devise a way of putting two foreclosed families in one house to ensure that everyone at least continues to have a roof over their heads, with some payments still flowing into the banks?

Could we change tactics in our incredibly spendthrift "American way of war" to cut costs?

Could some of the huge city-style military bases in Iraq with families and swimming pools be cut back?

Once we admit that we have been living beyond our means, then we can surely come up with creative measures to cut back to the level of power internationally and the level of wealth individually that our resources will truly support. The first step is to get it through our heads that life is going to be more modest than it has been...starting now.

Monday, October 6, 2008

Managing Social Complexity: Can We?

Is modern society becoming so complex that we are no longer capable of managing it? If so, can we either learn to manage it or find the willpower to pull back, living a simpler lifestyle that will be poorer but more manageable? The deepening financial crisis in the midst of declining U.S. national security and spreading warfare suggests that the survival of our system may depend on how seriously we start taking these questions.

Imagine society as a system composed of four subsystems: the government (governing bodies, democratic procedures, civil rights); the financial system (banks, Wall Street, financial regulators, mortgage companies, personal financial behavior); the health system (hospitals, health insurance, personal health care behavior); and the national security system (military and foreign policy). As the subsystems interact, the structure and behavior of the overall society is in constant flux, evolving in directions that were not necessarily ever planned.

Society is not a static structure; rather, it is a composite of smaller structures, in turn composed of still smaller structures – all in flux. At each level, the interactions are only partially planned by any official, central authority. In addition are a multitude of individual actions.

A new “component” may be created by a Wall Street trader or mortgage company. New components that have contributed to the current financial crisis include:

  • High-risk mortgage packages that took multiple high-risk mortgages, then sliced and diced them to generate complicated financial packages Wall Street could sell;
  • Credit default swaps, essentially insurance policies issued by Wall Street to “insure” their high-risk mortgage packages but called “swaps” so Wall Street could avoid holding collateral;
  • Zero-down mortgages for people who really could not afford the house they were buying.

These new financial instruments will of course affect the rest of the system, though not necessarily in anticipated ways.

For more evidence on mismanagement of the financial system, see Calculated Risk on how the SEC was implementing its regulatory

Similarly, new “links” (e.g.,) arise. New links that have complicated the process of understanding how the financial system now behaves include:
  • Pressure from Congressional Democrats on Fannie Mae to back risky mortgages so the poor will have access to houses they could otherwise not afford during a housing bubble;
  • Letters originated by Fannie Mae urging potential homeowners to accept “creative” mortgage instruments;
  • Wall Street competition with Fannie Mae to back risky mortgages;
  • The sale of risky mortgages to foreign banks.

Laws and regulatory procedures to control these new instruments or forms of behavior in the system will probably not exist or be created in a timely fashion. For example:

  • Fannie Mae increased the proportion of risky mortgages it was willing to back without accordingly increasing the requirement for collateral backing the mortgages;
  • Congress pressured Fannie Mae to back riskier mortgages without accordingly upgrading its oversight;
  • Individuals bought “creative,” high-risk mortgages without calculating the long-term commitment they were making;
  • Wall Street “insured” credit default swaps without setting aside the high levels of collateral that would have been normal for such risky loans;
  • Government (the White House, Congress, and regulatory agencies) failed to create regulations in step with the creation of the new Wall Street financial instruments, such as credit default swaps;
  • Banks, U.S. and foreign, failed to understand the level of risk inherent in the high-risk mortgages that they were taking over.

New components, new links, and new procedures (or the lack of them) all contributed to a rapid rise in the complexity of the financial system without a parallel rise in the understanding of those charged with managing it.

Therefore, the system moves out of control, with its various components (other jealous traders or competing banks or home buyers) making their own independent decisions. In other words, the system self-adjusts and evolves into something new and unplanned.

In a large, vigorous industrial society, this endless process of self-adaptation could easily outrun the ability of even the most dedicated, patriotic government to keep up. The system is of course characterized by a multitude of interconnections. But knowing that in theory does not make it possible for any governing authority to keep track of them in practice. As Yaneer Bar-Yam pointed out in his Dynamics of Complex Systems, the amount of information necessary to manage a system can in theory reach the point where no person can know enough to make the proper decisions, and modern society may indeed now have reached this point.

The Soviet Union, with its determination scientifically to control everything, was an extreme example of a system intentionally designed to work only if all details were known and fit into an official plan. The current U.S. financial crisis is an example of the opposite extreme – relying on the invisible hand of the market to generate the right decisions without regulation. As we see, a modern industrial society can easily reach the point where neither approach works.

Beyond the mere fact of a multitude of interconnections, which makes system management enough of a challenge, lurks the subtle threat of the system not just fluctuating out of control but moving consistently in some unforeseen direction, like a swimmer caught in a rip tide. In the current financial crisis, obviously risky behavior (e.g., selling mortgages with less and less security even as the bubble expanded) seems to have been used as the justification by others to copy the process. It is obvious that the fact that others engage in risky behavior in an inherently risky situation (a bubble, by definition, must come to an end) logically compels one to behave in a LESS risky manner in order to hedge against the foreseeable instability in the rest of the system. Nevertheless, greed trumps logic. Similarly, the very violence of Bush’s foreign policy undermined the search for stability: the invasion of Iraq, for example, provoked terrorism and ethnic conflict in that country. In both cases, mismanagement of a very complex system allowed (or provoked, if you prefer) the system to evolve rapidly and steadily in an unforeseen direction.

For details about the links between economics and foreign policy, see
troubling report on the rapid rise in Chinese dollar holdings.

We either need to pull back from the edge of chaos by simplifying our major social systems or improve our management skills over those systems.

Friday, October 3, 2008

Vice Presidential Candidates Drop Ball on Foreign Affairs

For a good review of what Biden and Palin said on foreign policy, plus a brief note in conclusion on what they left out, see Anti-War.com.

What they ignored about the dangerous state of U.S. national security is, unfortunately, far deeper than the comments made in that article, however. Neither candidate did much more than nibble around the edges of the dramatic shift in U.S. behavior rammed through after 9/11 by Bush. Details on that shift have been the focus of this blog since its inception and will not be reiterated here. In one sentence of gold, Biden at least referred to them, deploring neo-con concepts like "preventive war." He also supported diplomacy in the face of an utterly twisted and hypocritical attack on talking with opponents from Bush-mouthpiece Palin.


We Had Alternatives
by Dennis Kucinich
Statement presented on the floor of The House of Representatives after Congressman Kucinich voted against the Wall Street bail out plan, H.R. 1424, the Emergency Economic Stabilization Act of 2008.


Unfortunately, Biden did not present a well-argued alternative vision of the kind of foreign policy the U.S. should have.

  • Instead of arguing about the size and duration of a surge in Iraq or Afghanistan, the candidates should have addressed whether or not U.S. foreign policy should be based on the principle of using violence as the first choice solution for problems.
  • Instead of shooting at the easy target of Ahmadinejad, the candidates should have discussed whether or not it is moral for Washington and Tel Aviv to threaten nuclear war against non-nuclear countries.

Biden wasted much of his time arguing with Palin instead of taking the opportunity to present a vision that would enable the Democrats to do what they say they want to do - restore America's tattered reputation as the symbol of freedom. Biden may not be a neo-con, but he is far too close to offer a clear choice.

The Democrats need to stop wasting their breath falling into the trap of Republican red herrings. It is time for Obama to speak out clearly about the principles on which U.S. foreign policy should be based. If he cannot do so, then he should ask Dennis Kucinich and his elegant, eloquent wife to serve as his foreign policy spokespeople for the rest of the campaign.

Thursday, October 2, 2008

Making the Financial Crisis Worse

Congress did not pass the financial bailout bill last weekend. The sky did not fall. The nation was given by the fates another week in which to come up with a solution. What was that solution?

Add to the bailout of Wall St. Fat Cats a bailout of sundry smaller special interests in an effort to bribe more people to jump on the shaky bandwagon, and use the excuse of a minority's religious holiday for everyone to leave town on vacation. What happened to the separation of church and state? Get this: the sky was supposed to be falling. We supposedly had to pass the bailout bill last weekend or face disaster, so, when it did not pass, Congress went on vacation.

Washington did not try to determine what is wrong with our nation’s financial system. The guilty are not being investigated for punishment. Reforms are not being proposed. Regulations are not being tightened.

  • Fat Cats are not being arrested for endangering national security.
  • Financial officers who created risky investment processes that cost us so much money are not being arrested.
  • Government regulators who failed to regulate are not being chastised.
  • And, of course, the politicians who have been looking the other way for the past decade while all the now well-known fraud and abuse of the mortgage system and Wall St. investment system occurred are not being held to account.
Punishment is not the priority at this point; it might suffice if all the irresponsible players who risked the nation in the mad rush to maximize profits would simply acknowledge their immorality, apologize, and promise to cooperate in an effort to reform the system.

The priority is to figure out what is wrong with our laws and rules and regulatory mechanisms and to start fixing them.

That is exactly the opposite of what Washington continues to insist on doing. The Senate yesterday just stumbled further down the road of pouring bad money after good in a fraudulent effort to evade responsibility. Now the bailout is not just $700 billion; it’s $800 billion. And now they’re on vacation – in the middle of the second week of the crisis, they just all went home. One thing is clear: despite all the noise from Washington, they obviously don’t think this is much of a crisis, so why should the rest of us?

Wednesday, October 1, 2008

Professionally Managing Financial Crisis

If Washington had the best interests of the people at heart, here is the approach it would be taking to the financial crisis it's lack of oversight created...

Two issues related to the financial crisis have caused limitless confusion and anger throughout the country. Both problems were easily avoidable. The first is that Washington focused on a bailout as the immediate response rather than focusing on ending malpractice.

The second problem flows from the first – the growing debate over who is responsible. It was the effort of politicians to try to spend (the taxpayers’) money to overcome the crisis that generated the debate on responsibility; throwing money at the problem without doing anything to correct it was an obvious dodge by guilty politicians and their corporate buddies to evade responsibility.

Bush instantly reacted by trying to convince the country that a financial fire that could only be put out by money was threatening to burn the U.S. to the ground. His approach was that “we are all in this together – guilty and innocent alike.” By implication, only a traitor would stop to ask who actually was guilty and, God forbid, actually try to punish the guilty. Just as with the Neo-Con reaction to 9/11 that “terrorism came out of the blue” to strike innocent America, Bush’s tactic was to pretend that instant retaliation was the only way to survive. Well, he had a point…it was, perhaps, the only way for him personally to survive a problem he had done much to create.

But neither 9/11 nor the current financial crisis was a fire requiring instant doses of water to enable the country to survive. The 9/11 horror was a one-shot deal: bin Laden did not have a follow-up; he was not invading. After all, it took weeks to put together the invasion of Afghanistan – not exactly an instantaneous reaction, and leaving plenty of time for any analysis of the situation that a calmer, more professional, more honest leadership might have wanted to do. In fact, there was time to consider police action against the international criminal gang that was guilty, not to mention long-overdue adjustments to American foreign policy that could have undercut, rather than enhanced, al Qua’ida’s appeal.

Similarly, the financial crisis did not require instant reaction. It has now been a week, and the U.S. economy continues to function. More seriously, the politicians’ (for Democrats largely jumped into Bush’s arms and echoed his Chicken Little screams) panic-stricken claims that an immediate bailout was the only way to survive just deepened the sense of doom at precisely the time we all needed to calm down and think.

What the American people needed to hear was not that Washington would instantly reward the guilty Wall Street executives whose greed tempted them to the near criminally risky gambling that created this crisis but that Washington would clamp down on the guilty.

At a minimum, Washington should:

  1. Create new oversight measures and tighten regulations to prevent the mindless exploitation of bubbles. As everyone but the experts are well aware, bubbles—by definition—are short-term phenomena. Betting that they will last is simply stupid. The betters who lose get what they deserve. When the betting is done with other people’s money, it is “near criminal” behavior.
  2. Make it clear that no Federal assistance whatsoever will be allowed to the individuals guilty of such behavior.
Then and only then might it be reasonable for the Government to offer enormous guarantees of taxpayer funds to prop up the irresponsible institutions that created this mess. Let the threat of severe oversight, regulation, and legal proceedings against corporate management be the sticks that persuade Wall Street to clean up its mess.

Can we afford to wait that long? Well, yes, I suspect so. Given the enormous underlying power of the American economy, a message from Washington of clear apology to the people for its part in allowing Wall Street’s misbehavior plus absolute commitment to significantly tighten regulation, seasoned with steps to punish corporate leaders would reassure everyone about America’s long-term prospects.

And no, I am not advocating tossing any Wall Street pin-stripe in jail. No, I think six months of 80-hour-weeks without pay working in a soup kitchen would send just the right message about the value of other people’s money.