Three Opinions from Today's Washington Post

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Three opinions from today's Washington Post, focusing on hot topics in the American political landscape, written by David Ignatius, Fareed Zakaria and Robert J. Samuelson. I don't agree - sometimes partially, sometimes more, sometimes much more - with their views, while always reading their editorials with much attention.

Opinion | We’re entering a new phase of the Trump-Russia investigation https://t.co/XYhwJ2qgIh

— Pierre Radulescu (@pierreradulescu) February 15, 2019

Opinion | Anti-Semitism has spread through the Islamic world like a cancer https://t.co/myFnpG1tny

— Pierre Radulescu (@pierreradulescu) February 15, 2019

Opinion | Most of the Green New Deal is make-believe https://t.co/q1PdrWi347

— Pierre Radulescu (@pierreradulescu) February 15, 2019

(Zoon Politikon)

Can Obama Get it Right on the Economy?

Reps and Dems differ fundamentally on how to tackle the U.S. economy's short-term problems. So, if Obama wants to compromise he should propose a strategy for the long term. Well, surprise! Reps and Dems differ also on the long-term: GOP is focused on spurring the private sector while the Democrats consider more government spending. It seems that both are right! How could that be?

You should read this op-ed of Fareed Zakaria in Washington Post...


(for any comments you should eMail Mr. Zakaria at comments@fareedzakaria.com)


(Zoon Politikon)

Fareed Zakaria: Mr. President, Asia Is Calling

It was easy to welcome the rise of China when it was an abstraction. Now that it is a reality, the geopolitics of Asia will get interesting.

You should read this op-ed of Fareed Zakaria in Washington Post...


(for any comments you should eMail Mr. Zakaria at comments@fareedzakaria.com)


(Zoon Politikon)

Fareed Zakaria about North Korea

Most of Washington's attention has been devoted to the Pyongyang regime's small nuclear arsenal. But a more disruptive scenario is a meltdown of the regime. Such a scenario is a black swan, i.e. it seems unlikely. If it comes, many things will change dramatically. Washington and Beijing should be prepared to discuss the rules of the road.

You should read this op-ed of Fareed Zakaria in Washington Post...


(for any comments you should eMail Mr. Zakaria at comments@fareedzakaria.com)


(Zoon Politikon)

Fear Is Al-Qaeda's Real Goal

Fareed Zakaria in Washington Post:

In responding to the attempted bombing of an airliner on Christmas Day, Sen. Dianne Feinstein voiced the feelings of many when she said that to prevent such situations, I'd rather overreact than underreact. This appears to be the consensus view in Washington, but it is quite wrong. The purpose of terrorism is to provoke an overreaction. Its real aim is not to kill the hundreds of people directly targeted but to sow fear in the rest of the population. Terrorism is an unusual military tactic in that it depends on the response of the onlookers. If we are not terrorized, then the attack didn't work. Alas, this one worked very well.

The attempted bombing says more about al-Qaeda's weakened state than its strength. In the eight years before Sept. 11, al-Qaeda was able to launch large-scale terrorist attacks on several continents. It targeted important symbols of American power -- embassies in Africa; a naval destroyer, the USS Cole; and, of course, the World Trade Center. The operations were complex -- a simultaneous bombing of two embassies in different countries -- and involved dozens of people of different nationalities who trained around the world, moved significant sums of money and coordinated their efforts over months, sometimes years.

On Christmas an al-Qaeda affiliate launched an operation using one person, with no special target, and a failed technique tried eight years ago by shoe bomber Richard Reid. The plot seems to have been an opportunity that the group seized rather than the result of a well-considered strategic plan. A Nigerian fanatic with (what appeared to be) a clean background volunteered for service; he was wired up with a makeshift explosive and put on a plane. His mission failed entirely, killing not a single person. The suicide bomber was not even able to commit suicide. But al-Qaeda succeeded in its real aim, which was to throw the American system into turmoil. That's why the terror group proudly boasted about the success of its mission.

Is there some sensible reaction between panic and passivity? Philip Zelikow, the executive director of the 9/11 Commission and later a senior State Department official in the Bush administration, suggests that we should try to analyze failures in homeland security the way we do airplane catastrophes. When an airliner suffers an accident, major or minor, the National Transportation Safety Board convenes a group of nonpartisan experts who methodically examine what went wrong and then issue recommendations to improve the situation. We approach airline security with the understanding that it's a complex problem, that we have a pretty good system, but that there will be failures -- caused by human beings, technology, or other factors. The point is to constantly fix what's broken and keep improving the design and execution, says Zelikow.

Imagine if that were the process after a lapse in homeland security. The public would know that any attack, successful or not, would trigger an automatic, serious process to analyze the problem and fix it. Politicians might find it harder to use every such event for political advantage. The people on the front lines of homeland security would not get demoralized as they watched politicians and the media bash them and grandstand with little knowledge.

Overreacting to terrorist attacks plays into al-Qaeda's hands. It also provokes responses that are likely to be large-scale, expensive, ineffective and possibly counterproductive. More screening for every passenger makes no sense. When searching for needles in haystacks, adding hay doesn't help. What's needed is a larger, more robust watch list that is instantly available to all relevant government agencies. Almost 2 million people travel on planes in the United States every day. We need to isolate the tiny percentage of suspicious characters and search them, not cause needless fear in everyone else.

As for the calls to treat the would-be bomber as an enemy combatant, torture him and toss him into Guantanamo, God knows he deserves it. But keep in mind that the crucial intelligence we received was from the boy's father. If that father had believed that the United States was a rogue superpower that would torture and abuse his child without any sense of decency, would he have turned him in? To keep this country safe, we need many more fathers, uncles, friends and colleagues to have enough trust in America that they, too, would turn in the terrorist next door.


(for any comments you should eMail Mr. Zakaria at comments@fareedzakaria.com)


(Zoon Politikon)

Fareed Zakaria: The Center Has the Cards

Fareed Zakaria in Washington Post:

The bottom line on last week's elections: The Republicans did well. Yes, these were a grab-bag collection of races with local particularities and low turnout. But notice that independents, who had shunned the GOP over the past few years, voted for Republican candidates in large numbers. And the overall results are consistent with a surprising trend across the Western world -- the rise of the right.

Imagine you had been told five years ago that a huge economic crisis would erupt, prominently featuring irresponsible financiers, and that governments would come to the rescue of firms and families. You probably would have predicted that, politically, the right (the party of bankers) would do badly and the left (the party of bureaucrats) would do well. But you would have been wrong.

It's not just the Republicans who are coming out ahead. In late September a conservative coalition swept into power in Germany. In France, Nicolas Sarkozy's party has considerable public support. In Britain, conservatives are poised to win their first national election in 17 years. Even in Denmark and Sweden, where social democrats usually win, the right is in power. Across continental Europe, only one major country, Spain, has a left-wing ruling party.

Part of the reason is that despite the economic turmoil, this is not a systemic crisis of capitalism. Few people seriously believe the answer to our troubles is a turn to socialism. But it is worth looking at the conservative parties that are thriving. Britain's Tory leader, David Cameron, calls himself a progressive conservative. Sarkozy argues passionately for tight regulation of the financial industry, with pay caps on executive bonuses and more. Angela Merkel staunchly defends the German social market system. In Europe, the right is firmly at the center.

The United States has always been one step to the right of Europe, but even here the center held. The Republicans who won did so by emphasizing mainstream issues and traditional GOP criticisms of Obama -- on spending and taxes. They did not espouse radical economic ideas or highlight their conservatism on social issues. When they did, it alienated voters, as in Upstate New York.

The post-Cold War political landscape was best mapped out by two politicians early in the 1990s. Bill Clinton and Tony Blair saw that the collapse of communism created a new reality. The dramatic left-right divide had given way to a mushier middle, with people converging on the idea of a market-based economy but with a substantial safety net. The electorate wanted not ideological clarion calls but competence. Clinton persuaded Americans to trust Democrats as stewards of public finances by empowering smart technocrats such as Robert Rubin rather than left-wing politicians.

Barack Obama's handling of the financial crisis has mostly been marked by such intelligent centrism. He eschewed calls from the left to nationalize banks, ignored criticism from scholars that the stimulus was too small and has largely avoided business bashing. In all these areas, the left wing of his party is dissatisfied, but the right has been defanged.

On health care, however, the story looks different. There are two great health-care crises in America -- one involving coverage, the other involving cost. The Democratic plan appears likely to tackle the first but not the second. This is bad economics and bad politics: The crisis of cost affects 85 percent of Americans, while the crisis of coverage affects about 15 percent. Obama's message to the country appears to be, We have a dysfunctional health-care system with out-of-control costs, and let's add 45 million people to it.

Americans see a health-care bill that has been produced by the old Democratic machine rather than the new Democratic technocrats -- more Lyndon Johnson than Larry Summers. It might be the only way to get a law passed, and it might please the party's base, but it will dismay independents. If costs skyrocket over the next few years, the Democrats will have squandered a hard-won reputation for economic competence.

When Clinton and Blair moved their parties to the center in the 1990s, conservatives were initially paralyzed, then responded by shifting even farther right to distinguish themselves from the opposition. In Europe the left has similarly been paralyzed or drifted toward radicalism. Things are still in flux here. But over the next few years, if the Republican Party moves decisively to the center, Obama would face the most serious challenge of his presidency.

(for any comments you should eMail Mr. Zakaria at comments@fareedzakaria.com)


(Zoon Politikon)

Fareed Zakaria, Roger Cohen About Surge in Afghanistan

What strategy to follow in Afghanistan? Here are the opinions of two well-known political pundits, Fareed Zakaria and Roger Cohen.


Fareed Zakaria in Washington Post:

Dick Cheney has accused Barack Obama of dithering over Afghanistan. If the president were to quickly invade a country on the basis of half-baked intelligence, would that demonstrate his courage and decisiveness to Cheney? In fact, it's not a bad idea for Obama to take his time, examine all options and watch how the post-election landscape in Afghanistan evolves.

The real question we should be asking about Afghanistan is: Do we need a third surge? The number of U.S. forces in Afghanistan in January 2008 was 26,607. Over the next six months, the total rose to 48,250. President Bush described this policy as the quiet surge, and he made the standard arguments about the need for a counterinsurgency capacity -- the troops had to not only fight the Taliban but also protect the Afghan population, strengthen and train the Afghan army and police, and assist in development.

In January, 3,000 more troops, originally ordered by Bush, went to Afghanistan in the first days of the Obama presidency. In February, responding to a request from the commander in the field, Obama ordered an additional 17,000 troops into the country. Put another way, over the past 18 months, troop levels in Afghanistan have almost tripled. Sending an additional 40,000 troops would mean an over 300 percent increase in U.S. troops since 2008. (The total surge in Iraq was just over 20,000 troops.) It is not dithering to try to figure out why previous increases have not worked and why we think additional ones would.

In fact, focusing on the number of additional troops needed misses the point entirely, says Gen. Stanley McChrystal, the commander Obama put in place this summer. The key takeaway from his now-famous assessment is the urgent need for a significant change to our strategy and the way we think and operate. The quotes are from the third paragraph of his 66-page memo. These changes in strategy have just begun.

To understand how U.S. troops had been fighting in Afghanistan, consider the Battle of Wanat. On July 13, 2008, a large number of Taliban fighters surrounded an American base in that village, in the southeastern corner of Afghanistan. After a few hours of fierce fighting, nine American soldiers lay dead, the largest number killed in a single engagement in years. Former Post reporter and defense expert Tom Ricks points out that Wanat is in a mountainous region with few people, many of them hostile to outsiders. So, he asks, Why are we putting our fist in a hornet's nest?

McChrystal has since pulled U.S. forces out of Wanat. The Post's Greg Jaffe, reporting on the town a year later, concluded recently that ceding territory to the Taliban is more effective than maintaining small, vulnerable bases in forbidding terrain. In the past several weeks, U.S. commanders, based about six miles outside the village, have detected growing friction between Wanat residents and the Taliban commanders responsible for last year's attack. So why not let the Taliban try to set up bases in these remote areas with prickly locals? NATO forces can then periodically disrupt the Taliban rather than the other way around. In these places, counter-terrorism -- now often associated with Vice President Biden -- could work well with the grain of Afghan society.

Advocates of a troop increase act as if counterinsurgency is applied physics. McChrystal's team, having done the mathematical calculations, has apparently arrived at the exact answer. There is no room for variation or middle courses, the argument goes. But the theory that it's 40,000 troops or no counterinsurgency is absurd. The best evidence is that senior military officers assured me at various points over the past year that with the latest increase in troops they finally had enough forces to do counterinsurgency.

The crucial judgments that have to be made involve what the troops will do and how much of Afghanistan to cover. One option is the idea Ricks recently suggested to me: Why not do the Petraeus plan [counterinsurgency] for the major population centers and the Biden plan [counterterrorism] for the rest of the country? Following that middle course might be the most practical solution; more forces could still be needed, as McChrystal suggests, or perhaps we can make do with the almost 100,000 coalition forces already there. Obama should carefully consider all the options before racing to demonstrate how tough he is.


Roger Cohen in NY Times:

In Afghanistan there’s the United States, Britain and then the rest. Britain has lost 85 soldiers this year, more than all other European NATO allies combined. For both countries the annual death toll has been rising steadily since 2006, and with it the drumbeat of public opposition to the war. In all, more than 1,100 U.S. and British troops have died.

Special relationships are forged in blood; the U.S.-British bond is no exception. So, as President Obama hesitates, his decision on American troop levels ever weeks away as the weeks pass, the British view of the war offers as good an indication as any of what Obama will do. An hour-long conversation with David Miliband, the British foreign secretary, suggests reinforcements are on the way.

When I asked if the mission needed substantially more troops, Miliband said, What I think that you can see from the prime minister’s strategy is that we believe in serious counterinsurgency. Counterinsurgency is a counterterrorist strategy.

He continued: The Taliban has shown what it means to provide safe space for Al Qaeda. Describing the fights against the Taliban and Al Qaeda as distinctive but related missions, Miliband said the badlands of Afghanistan and Pakistan are the incubator of choice for international terrorism, adding that, Ceding ground happened in the ’90s and then we all know what happened.

That’s a clear rebuttal of the ever-larger school, most often identified with Vice President Joe Biden, advancing the view that Al Qaeda is the real threat, the Taliban much less of one; and so the United States should not commit more military resources to a nation-building struggle in Afghanistan that’s an expensive diversion from core U.S. strategic interests.

Wrong. Counterinsurgency in the Af-Pak theater is indeed a counterterrorist strategy. I see no workable distinction.

As Prime Minister Gordon Brown has noted, three-quarters of all terrorist plots uncovered in Britain in recent years had links to Islamic extremists in Afghanistan or Pakistan. The defense of the West begins in the Hindu Kush and Helmand. Would-be bombers must be kept off-balance. To believe otherwise is wishful thinking.

But of course the campaign has to be smart. Miliband identified several things that have to change, among them governance, outreach and military strategy.

Whatever Afghan government emerges has to be credible, where Hamid Karzai’s administration has not been, and provide a new offer to the Afghan people of security and economic development.

Miliband also called for serious outreach to the insurgency to divide it, estimating that 70 to 80 percent of the foot soldiers are recruitable. The choice they are being given now is fight or flight where it should be fight, flight or flip because an enduring settlement must be a political settlement in which conservative Pashtun nationalism has a place.

That’s critical. The Taliban are a Pashtun movement. Pashtunistan straddles the porous Afghan-Pakistani border. Afghanistan has always been ungovernable without a Pashtun buy-in. Pakistan’s strategic interest in that buy-in is non-negotiable. These are basic — but long ignored — building blocks of successful strategy.

Finally, Miliband argued for a different focus to military operations. Occupying land for the sake of occupying land is not what counts, he said. It’s population. You need to make sure the major cities are secured and Kandahar is vital.

These were the convictions behind Brown’s decision earlier this month to send 500 more British troops to Afghanistan, bringing the contingent to 9,500 — a decision the prime minister expected to be consistent with what the Americans will decide.

The reinforcement was about one quarter of what British generals had requested. In the U.S. case, Gen. Stanley McChrystal has asked for about 40,000 more troops. Doing the math on a consistent basis suggests a substantial American reinforcement short of McChrystal’s request will eventually be announced by the White House.

I asked Miliband if Obama’s protracted ponder worried the Brits. Miliband pondered in turn before saying, No, I think it’s a measure of the seriousness with which he takes the decision.

O.K., but I still worry. If counterinsurgency is counterterrorism, if this theater is the incubator of choice, if McChrystal is the most lucid product of America’s crash post-9/11 course in counterinsurgency, then Obama should step up.

Beyond Kabul I got these two nuggets from Miliband. Asked how worried he was about an Israeli military strike on Iran, he said: I don’t provide a running commentary on other countries’ concerns or policies, but we are one hundred percent committed to a diplomatic resolution.

Asked about a Mideast peace, he said, It’s very stalled and that’s very dangerous. He said Israeli settlements must stop, calling them illegal and an obstacle to peace. He said: I profoundly believe that Israel’s security depends on a two-state solution and I think that a Palestinian state on the 1967 borders plus or minus agreed land swaps, with Jerusalem as a shared capital, and a fair settlement of the refugee issue is the right basis for Israel’s future as well as the Palestinians’ future.

I have not heard President Obama be quite as candid. It would help.

(Zoon Politikon)

Fareed Zakaria: The Capitalist Manifesto

Greed is good (to a point). Fareed Zakaria in Newsweek:

A specter is haunting the world—the return of capitalism. Over the past six months, politicians, businessmen and pundits have been convinced that we are in the midst of a crisis of capitalism that will require a massive transformation and years of pain to fix. Nothing will ever be the same again. Another ideological god has failed, the dean of financial commentators, Martin Wolf, wrote in the Financial Times. Companies will fundamentally reset the way they work, said the CEO of General Electric, Jeffrey Immelt. Capitalism will be different, said Treasury Secretary Timothy Geithner.

No economic system ever remains unchanged, of course, and certainly not after a deep financial collapse and a broad global recession. But over the past few months, even though we've had an imperfect stimulus package, nationalized no banks and undergone no grand reinvention of capitalism, the sense of panic seems to be easing. Perhaps this is a mirage—or perhaps the measures taken by states around the world, chiefly the U.S. government, have restored normalcy. Every expert has a critique of specific policies, but over time we might see that faced with the decision to underreact or overreact, most governments chose the latter. That choice might produce new problems in due course—a topic for another essay—but it appears to have averted a systemic breakdown.

There is still a long road ahead. There will be many more bankruptcies. Banks will have to slowly earn their way out of their problems or die. Consumers will save more before they start spending again. Mountains of debt will have to be reduced. American capitalism is being rebalanced, reregulated and thus restored. In doing so it will have to face up to long-neglected problems, if this is to lead to a true recovery, not just a brief reprieve.

Many experts are convinced that the situation cannot improve yet because their own sweeping solutions to the problem have not been implemented. Most of us want to see more punishment inflicted, particularly on America's bankers. Deep down we all have a Puritan belief that unless they suffer a good dose of pain, they will not truly repent. In fact, there has been much pain, especially in the financial industry, where tens of thousands of jobs, at all levels, have been lost. But fundamentally, markets are not about morality. They are large, complex systems, and if things get stable enough, they move on.

Consider our track record over the past 20 years, starting with the stock-market crash of 1987, when on Oct. 19 the Dow Jones lost 23 percent, the largest one-day loss in its history. The legendary economist John Kenneth Galbraith. He wrote that he just hoped that the coming recession wouldn't prove as painful as the Great Depression. It turned out to be a blip on the way to an even bigger, longer boom. Then there was the 1997 East Asian crisis, during the depths of which Paul Krugman wrote in a Fortune cover essay, Never in the course of economic events—not even in the early years of the Depression—has so large a part of the world economy experienced so devastating a fall from grace. He went on to argue that if Asian countries did not adopt his radical strategy—currency controls—we could be looking at?.?.?.?the kind of slump that 60 years ago devastated societies, destabilized governments, and eventually led to war. Only one Asian country instituted currency controls, and partial ones at that. All rebounded within two years.

Each crisis convinced observers that it signaled the end of some new, dangerous feature of the economic landscape. But often that novelty accelerated in the years that followed. The 1987 crash was said to be the product of computer trading, which has, of course, expanded dramatically since then. The East Asian crisis was meant to end the happy talk about emerging markets, which are now at the center of world growth. The collapse of Long-Term Capital Management in 1998—which then–Treasury secretary Robert Rubin described as the worst financial crisis in 50 years — was meant to be the end of hedge funds, which then massively expanded. The technology bubble's bursting in 2000 was supposed to put an end to the dreams of oddball Internet startups. Goodbye, Pets.com; hello, Twitter. Now we hear that this crisis is the end of derivatives. Let's see. Robert Shiller, one of the few who predicted this crash almost exactly—and the dotcom bust as well—argues that in fact we need more derivatives to make markets more stable.

A few years from now, strange as it may sound, we might all find that we are hungry for more capitalism, not less. An economic crisis slows growth, and when countries need growth, they turn to markets. After the Mexican and East Asian currency crises—which were far more painful in those countries than the current downturn has been in America—we saw the pace of market-oriented reform speed up. If, in the years ahead, the American consumer remains reluctant to spend, if federal and state governments groan under their debt loads, if government-owned companies remain expensive burdens, then private-sector activity will become the only path to create jobs. The simple truth is that with all its flaws, capitalism remains the most productive economic engine we have yet invented. Like Churchill's line about democracy, it is the worst of all economic systems, except for the others. Its chief vindication today has come halfway across the world, in countries like China and India, which have been able to grow and pull hundreds of millions of people out of poverty by supporting markets and free trade. Last month India held elections during the worst of this crisis. Its powerful left-wing parties campaigned against liberalization and got their worst drubbing at the polls in 40 years.

Capitalism means growth, but also instability. The system is dynamic and inherently prone to crashes that cause great damage along the way. For about 90 years, we have been trying to regulate the system to stabilize it while still preserving its energy. We are at the start of another set of these efforts. In undertaking them, it is important to keep in mind what exactly went wrong. What we are experiencing is not a crisis of capitalism. It is a crisis of finance, of democracy, of globalization and ultimately of ethics.

Capitalism messed up, the British tycoon Martin Sorrell wrote recently, or, to be more precise, capitalists did. Actually, that's not true. Finance screwed up, or to be more precise, financiers did. In June 2007, when the financial crisis began, Coca-Cola, PepsiCo, IBM, Nike, Wal-Mart and Microsoft were all running their companies with strong balance sheets and sensible business models. Major American corporations were highly profitable, and they were spending prudently, holding on to cash to build a cushion for a downturn. For that reason, many of them have been able to weather the storm remarkably well. Finance and anything finance-related—like real estate—is another story.

Finance has a history of messing up, from the Dutch tulip bubble in 1637 to now. The proximate causes of these busts have been varied, but follow a strikingly similar path. In calm times, political stability, economic growth and technological innovation all encourage an atmosphere of easy money and new forms of credit. Cheap credit causes greed, miscalculation and eventually ruin. President Martin Van Buren described the economic crisis of 1837 in Britain and America thusly: Two nations, the most commercial in the world, enjoying but recently the highest degree of apparent prosperity and maintaining with each other the closest relations, are suddenly?.?.?.?plunged into a state of embarrassment and distress. In both countries we have witnessed the same [expansion] of paper money and other facilities of credit; the same spirit of speculation?.?.?.?the same overwhelming catastrophe. Obama could put that on his teleprompter today.

Many of the regulatory reforms that people in government are talking about now seem sensible and smart. Banks that are too large to fail should also be too large be leveraged at 30 to 1. The incentives for executives within banks are skewed toward reckless risk-taking with other people's money. (Heads they win, tails they break even, is how Barney Frank describes the current setup.) Derivatives need to be better controlled. To call banks casinos, as is often done, is actually unfair to casinos, which are required to hold certain levels of capital because they must be able to cash in a customer's chips. Banks have not been required to do that for their key derivatives contract, credit default swaps.

Yet at the same time, we should proceed cautiously on massive new regulations. Many rules put in place in the 1930s still look smart; the problem is that over the past 15 years they were dismantled, or conscious decisions were made not to update them. Keep in mind that the one advanced industrial country where the banking system has weathered the storm superbly is Canada, which just kept the old rules in place, requiring banks to hold higher amounts of capital to offset their liabilities and to maintain lower levels of leverage. A few simple safeguards, and the whole system survived a massive storm.

The simplest safeguard American regulators have had, of course, is the interest rate on credit. In responding to almost every crisis in the past 15 years, former Fed chairman Alan Greenspan always had the same solution: cut rates and ease up on money. In 1998, when Long-Term Capital Management collapsed, he suddenly and dramatically slashed rates, even though the economy was roaring along at 6 percent growth. In late 1999, buying into fears about Y2K, he swamped the markets with liquidity. (One effect: between November 1998 and February 2000, when rates finally rose, the NASDAQ jumped almost 250 percent, increasing in value by more than $3 trillion.) And finally, when the technology bubble burst and 9/11 hit, Greenspan again lowered rates and kept them low, this time inflating a massive housing bubble.

Greenspan behaved like most American political leaders over the past two decades—he chose the easy way out of a hard situation. William McChesney Martin, the great Fed chairman of the 1950s and 1960s, once said that his job was to take the punch bowl away just as the party had begun. No one wants to do that in America anymore—not the Fed chairman, not the regulators, not Congress and not the president.

Government actions should be countercyclical—that is, they should work to slow down growth. So, in boom times, the Fed would raise rates and require banks to have higher capital and lower leverage. Fannie Mae and Freddie Mac would start worrying about too much easy credit, raise standards for loans and disqualify buyers unlikely to be able to afford houses. Banks would be urged to slow down the supply of credit cards and other credit instruments. In fact, this is exactly how the governments of China and India behaved in 2007, when their economies were booming. At the peak, consumption in India actually declined as a percentage of GDP.

In the United States, the opposite happened: consumption surged from 67 percent to 73 percent of GDP. Presidents and congressmen extolled the virtues of homeownership for everyone. Congress pushed Fannie Mae and Freddie Mac to extend more loans. Regulators eased up on banks, and the Fed kept rates low. And the public cheered this pandering at every step.

Since Ronald Reagan's presidency, Americans have consumed more than we produced and have made up the difference by borrowing. This is true of individuals but, far more dangerously, of governments at every level. Government debt in America, especially when entitlements and state pension commitments are included, is terrifying. And yet no one has tried seriously to close the gap, which can be done only by (1) raising taxes or (2) cutting expenditures. Any sensible proposal will have to feature both prominently.

This is the disease of modern democracy: the system cannot impose any short-term pain for long-term gain. For 20 years, most serious structural problems—Social Security, health care, immigration—have been kicked down the road. And while the problem is acute in America, Europe and Japan face many of the same difficulties. Right now, the U.S. government's boldness is laudable, but it is being bold in spending money. In a few years, when the bills come due, and Congress must enact major spending cuts as well as raise taxes (and not just on the rich), that's when we will see if things have changed.

In reality, the problem goes well beyond Washington. It also goes beyond bad bankers, lax regulators and pandering politicians. The global financial system has been crashing more frequently over the past 30 years than in any comparable period in history. On the face of it, this suggests that we're screwing up, when in fact what is happening is more complex. The problems that have developed over the past decades are not simply the products of failures. They could as easily be described as the products of success.

Here's why we got to where we are. Since the late 1980s, the world has been moving toward a extraordinary degree of political stability. The end of the Cold War has ushered in a period with no major military competition among the world's great powers—something virtually unprecedented in modern history. It has meant the winding down of most of the proxy and civil wars, insurgencies and guerrilla actions that dotted the Cold War landscape. Even given the bloodshed in places like Iraq, Afghanistan and Somalia, the number of people dying as a result of political violence of any kind has dropped steeply over the past three decades.

Then there is the end of inflation. In the 1970s, dozens of countries suffered hyperinflation, which destroyed the middle class, destabilized societies and led to political upheaval. Since then, central banks have become very good at taming the monster, and by 2007 the number of countries with high inflation had dwindled to a handful. Only one, Zimbabwe, had hyperinflation.

Add to this the information and Internet revolutions, and you have a series of historical changes that have produced a single global system, far more integrated and faster-moving than ever before. The results speak for themselves. Over the past quarter century, the global economy has doubled every 10 years, going from $31 trillion in 1999 to $62 trillion in 2008. Recessions have become tamer than ever before, averaging eight months rather than two years. More than 400 million people across Asia have been lifted out of poverty. Between 2003 and 2007, average income worldwide grew at a faster rate (3.1 percent) than in any previous period in recorded human history. In 2006 and 2007—the peak years of the boom—124 countries around the world grew at 4 percent a year or more, about four times as many as 25 years earlier.

Many of these countries had more cash than they knew what to do with. China sits on a war chest of more than $2 trillion, while eight other emerging-market nations have reserves of more than $100 billion. They've all looked to the safest investment they could imagine—U.S. government debt. In buying so much debt, they drove down the interest rate Washington had to offer, which in turn made credit in America cheap. So the effect of all this money sloshing around the world was to subsidize Americans in their favorite activity: shopping. But it affected other Western countries as well, from Spain to Ireland, where consumers and governments loaded themselves up with debt.

Good times always make people complacent. As the cost of capital sank over the past few years, people became increasingly foolish. The world economy had become the equivalent of a race car—faster and more complex than any vehicle anyone had ever seen. But it turned out that no one had driven a car like this before, and no one really knew how. So it crashed.

The real problem is that we're still driving this car. The global economy remains highly complex, interconnected and im-balanced. The Chinese still pile up surpluses and need to put them somewhere. Washington and Beijing will have to work hard to slowly stabilize their mutual dependence so that the system is not being set up for another crash.

More broadly, the fundamental crisis we face is of globalization itself. We have globalized the economies of nations. Trade, travel and tourism are bringing people together. Technology has created worldwide supply chains, companies and customers. But our politics remains resolutely national. This tension is at the heart of the many crashes of this era—a mismatch between interconnected economies that are producing global problems but no matching political process that can effect global solutions. Without better international coordination, there will be more crashes, and eventually there may be a retreat from globalization toward the safety—and slow growth—of protected national economies.

Throughout this essay, I have avoided treating this economic crisis as a grand morality play—a war between good and evil in which demon bankers destroyed all that is good and true about our socie-ties. Complex historical events can rarely be reduced to something so simple. But we are suffering from a moral crisis, too, one that may lie at the heart of our problems.

Most of what happened over the past decade across the world was legal. Bankers did what they were allowed to do under the law. Politicians did what they thought the system asked of them. Bureaucrats were not exchanging cash for favors. But very few people acted responsibly, honorably or nobly (the very word sounds odd today). This might sound like a small point, but it is not. No system—capitalism, socialism, whatever—can work without a sense of ethics and values at its core. No matter what reforms we put in place, without common sense, judgment and an ethical standard, they will prove inadequate. We will never know where the next bubble will form, what the next innovations will look like and where excesses will build up. But we can ask that people steer themselves and their institutions with a greater reliance on a moral compass.

One of the great shifts taking place in American society has been away from the old guild system of self-regulation. Once upon a time, law, medicine and accounting viewed themselves as private-sector participants with public responsibilities. Lawyers are still called officers of the court. And historically they acted with that sense of stewardship in mind, thinking of what was appropriate for the whole system and not simply for their firm. That meant advising their clients against time-consuming litigation or mindless mergers. Elihu Root, a leader of the New York bar in the late 19th century, once said, About half the practice of a decent lawyer consists in telling would-be clients that they are damned fools and should stop.

It's not just the law that has changed; so have all the professions. Ever since the 1930s, accountants have been given a unique trust. Who audits you? asked Sen. Alben Barkley during a 1933 committee hearing. Our conscience, replied Arthur Carter, the head of a large accounting firm. But by 2002 The Wall Street Journal was describing a different world, in which accountants had gone from watchdogs to lapdogs, telling clients whatever they wanted to hear. Bankers similarly once saw themselves as being stewards of capital, responsible to their many constituents and embodying trust. But over the past few decades, they too became obsessed with profits and the short term, uncertain about their own future and that of their company. The most recent example of this phenomenon has been at the rating agencies, which were generating fees that were too lucrative to be exacting in their judgments about their clients' products.

None of this has happened because businesspeople have suddenly become more immoral. It is part of the opening up and growing competitiveness of the business world. Many of the old banks and law firms operated as monopolies or cartels. They could afford to take the long view. They were also run by a WASP elite secure in its privilege. The members of today's meritocratic elite are more anxious and insecure. They know that they are being judged quarter by quarter.

The failure of self-regulation over the past 20 years—in investment banking, accounting, rating agencies—has led inevitably to the rise of greater government regulation. This marks an important change in the Anglo-American world, away from informal rules often enforced by private actors toward the more formal bureaucratic system common in continental Europe. Perhaps the state should not set the pay of the private sector. But surely CEOs should exercise some judgment about their own compensation, and tie it far more closely to the long-term health of the company. It will still be possible to get very rich—Warren Buffett, after all, draws a salary of only $100,000.

There's a need for greater self-regulation not simply on Wall Street but also on Pennsylvania Avenue. We get exercised about the immorality of politicians when they're caught in sex scandals. Meanwhile they triple the national debt, enrich their lobbyist friends and write tax loopholes for specific corporations—all perfectly legal—and we regard this as normal. The revolving door between Washington government offices and lobbying firms is so lucrative and so established that anyone pointing out that it is—at base—institutionalized corruption is seen as baying at the moon. Not everything is written down, and not everything that is legally permissible is ethical. Who was the last ex-president to refuse to take a vast donation for his library from a foreign government that he had helped when in office?

We are in the midst of a vast crisis, and there is enough blame to go around and many fixes to make, from the international system to national governments to private firms. But at heart, there needs to be a deeper fix within all of us, a simple gut check. If it doesn't feel right, we shouldn't be doing it. That's not going to restore growth or mend globalization or save capitalism, but it might be a small start to sanity.

(Zoon Politikon)

The New World: China, India, Indonesia, Brazil

Fareed Zakaria in W. Post:

Increasingly, the story of the global economy is a tale of two worlds. In one, there is only gloom and doom; in the other, there is light and hope. In the traditional bastions of wealth and power -- America, Europe and Japan -- it is difficult to find much good news. But there is a new world -- China, India, Indonesia, Brazil -- in which economic growth continues to power ahead, governments are not buried under debt and citizens remain remarkably optimistic about their future. This divergence between the once rich and the once poor might mark a turn in history.

Over the past six months, much conventional economic wisdom has been discredited. The experts who spoke confidently about unending global growth -- the boomsters -- have been debunked. But the new pundits of pessimism -- the doomsters -- have demonstrated a similar hubris, ignoring evidence that might complicate their story. Six months ago, stock markets worldwide swooned in unison as the U.S. financial system seemed on the verge of collapse. This led many to conclude that the emerging economies of Asia and Latin America had been growing only because of their exports to the United States and Europe; that they had no independent strengths of their own and probably would collapse faster and more furiously than the sophisticated economies of the West. After all, these were Third World countries.

But a funny thing happened on the way to a global depression. Once the panic that seized global markets abated, there began a fascinating and disparate recovery. The S&P 500 is roughly where it started the year, as is the London FTSE. Japanese stocks have fared better, up nearly 7 percent.

Around the globe, though, markets are humming. China's Shanghai index is up 45 percent, India's Sensex is up 44 percent, Brazil's Bovespa is up 38 percent and the Indonesia index is up 32 percent. Stock markets don't tell the whole story, but many are rising because the underlying economies of most of these countries are still registering significant growth.

Consider: In April, India's car sales were up 4.2 percent from a year earlier. Retail sales in China rose 15 percent in the first quarter of 2009. China is likely to grow at 7 or 8 percent this year, India at 6 percent, and Indonesia at 4 percent. These numbers are not just robust but astonishing next to those of the developed world. The U.S. economy contracted at an annual rate of 6.1 percent last quarter, Europe by 9.6 percent and Japan by 15 percent, something that truly begins to rival the 1930s.

Compare the two worlds. On the one side is the West (plus Japan), with banks that are overleveraged and thus dysfunctional, governments groaning under debt, and consumers who are rebuilding their broken balance sheets. The United States is having trouble selling its IOUs at attractive prices (the past three Treasury auctions have gone badly); its largest state, California, is veering toward fiscal collapse; and the U.S. budget deficit is going to surpass 13 percent of GDP -- a level last seen during World War II. With all these burdens, the United States might not return to fast-paced growth for a while. And its economy is probably more dynamic than Europe or Japan's.

Meanwhile, emerging-market banks are largely healthy and profitable. (All major Indian banks, government-owned and private, posted profits in the fourth quarter of 2008.) The governments are in good fiscal shape. China's strengths are well known -- $2trillion in reserves, a budget deficit below 3 percent of GDP. Brazil is posting a current account surplus. Indonesia has reduced its debt from 100 percent of GDP nine years ago to 30 percent today. Unlike in the West, where governments have run out of ammunition and are praying that their medicine will work, these countries have options. Only a year ago, their chief concern was an overheated economy and inflation. Brazil has cut its interest rate substantially -- but only to 10.25 percent, and it can drop it further if things deteriorate more.

The mood in many of these countries is upbeat. Their currencies are appreciating against the dollar because the markets see them as having more fiscal discipline and better long-term growth prospects than the United States. Their bonds are rising. This combination of positive indicators is unprecedented.

The United States remains the world's richest and most powerful country. Its military spans the globe. But since the Spanish empire of the 16th century, the fortunes of great global powers have begun to turn when they get overburdened with debt and stuck on a path of slow growth. These are early warnings. Unless the United States gets its act together fast, the ground will continue to shift beneath its feet.

(Zoon Politikon)

Fareed Zakaria: I'm Worried About Trade

Fareed Zakaria in Newsweek:

I'm certainly not going to defend those AIG bonuses. But the trouble with populist outrage is that it bubbles over, sweeping from one justifiable issue across to many others. Waves of populism are now working their way through the American government on several fronts. The area I'm most worried about is trade, where populism leads to protectionism. The scandal of the moment, the bailout bonuses, will pass; in a year or two (one hopes) the U.S. government will no longer own banks and insurance companies. But protectionism and trade wars, once started, are hard to reverse.

This might sound alarmist. Free traders like myself are often accused of overstating the dangers to free trade. But in a report released last week, the World Bank has gathered some disturbing facts. Since the financial crisis began, countries around the world have proposed or implemented 78 trade measures. Of these, 66 turn out to be new restrictions on trade. For example, Russia raised tariffs on used autos; China has banned outright various European goods (Irish pork, Italian brandy, British sauces and some Belgian chocolates, if you're wondering). India has banned Chinese toys.

Rich countries tend not to raise tariffs, because they do protectionism another way: by subsidizing domestic companies. We are in the midst of the greatest orgy of subsidization for inefficient corporations in decades. Take the auto industry. The U.S. government's direct subsidies to Detroit since the crisis began are $17.4 billion. Canada, France, Germany, Britain and Sweden have also announced transfers to their companies. In total, worldwide governments are providing $48 billion in direct subsidies to carmakers. And then there are agricultural subsidies, which are set to rise as the price of food falls. In America, this means an additional $1.8 billion for agrobusiness this year. The lion's share of money, of course, has gone to subsidize banks and financial companies. This may be a necessary emergency measure, but the reality is that Western governments are subsidizing their banks in what was meant to be a competitive global market. The fiscal-stimulus packages across the world are all, in large measure, what were once called non-tariff barriers to trade because they are—almost by definition—subsidies to inefficient companies.

Every action by one government is producing a countermove by another, in a classic and depressingly predictable spiral. The United States shuts down a pilot program allowing a few Mexican trucks into the United States to deliver their goods—so Mexico, justifiably and legally, imposes duties on a number of American goods. The House puts a buy American clause into the stimulus package, and the Association of Southeast Asian Nations explains that its own "buy local" provisions are a justified response to Washington's measures. Buy American sounds great, except if Germany puts in a buy German provision and France a buy French one. Then who will buy American exports—which are the only part of the U.S. economy that has been growing for the past year?

Take the steel industry. The Peterson Institute for International Economics estimates that the buy American provision will result in an increased domestic production of about 0.5 million metric tons of steel every year. Unfortunately, steel is a highly mechanized industry, as are most manufacturing industries in the United States. The boost in production will translate into 1,000 jobs, which in a labor force of 140 million is insignificant. America's steel industry exports 9 million metric tons of steel every year. Even if 1 percent of those exports were lost because of retaliation by other countries—a very conservative assumption—that would result in 6,500 jobs being lost in the same industry. In an extreme case that 10 percent of those exports are lost, the authors of the study write, as many as 65,000 jobs could vanish. So we save 1,000 jobs and lose 65,000.

We seem to have forgotten that we are in a new world. Many countries are empowered and will flex their muscles if we flex ours. And the collective effect of this muscle-flexing is the first real retreat from globalization in 25 years—a period in which global GDP doubled and trade increased by 7.5 times—and the first sustained contraction of the global economy since the Second World War.


(Zoon Politikon)

Zakaria and Samuelson about the crisis

Fareed Zakaria and Robert J. Samuelson, among others, express their opinion about the crisis in the most recent issue of Newsweek.

For Fareed Zakaria the most critical aspect is the banking crisis. Says he, we haven't turned the corner on the banking crisis, we can't even see the corner... the American public believes that we have already spent far too much money on bailing out the banks; but the economic fact is that we have not spent enough; without several hundreds of billions of dollars, these organizations will remain zombies and the economy will remain paralyzed.

For Robert J. Samuelson, the most critical aspect is that the crisis is global. He sees three interwoven dimensions: the spending crisis, the lending crisis and the trade crisis. While the first two dimensions could be tackled in principle at national level (by stimulus and rescue politics), the third aspect needs concertation at global level. Says he, as Americans save more of their incomes, Asians should save less, and spend more, to generate growth as opposed to exports. And he concludes, this sort of transformation requires basic political changes in Asia to complement changes in U.S. policies; whether China and other Asian societies can make those changes is unclear; the implications are sobering. The success of Obama's policies lies, to a considerable extent, outside Obama's hands.

Here are the two articles:

1. Fareed Zakaria: There's More To Fear Than Fear


Franklin Delano Roosevelt's first inaugural address is now known for only one sentence: The only thing we have to fear is fear itself. But the audience at the time paid little attention to that line and the newspapers buried it in their reports the next day. As Jonathan Alter recounts in his book The Defining Moment, the words that got the greatest applause were something more specific. I shall ask Congress for the one remaining instrument to meet the crisis, FDR said, broad Executive power to wage war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe. The next day's headline in The New York Herald Tribune was FOR DICTATORSHIP IF NECESSARY.

We are not in 1933, and no one would advocate or encourage any such power grab today. But President Barack Obama will have to quickly start planning for a set of more extraordinary measures to pull the United States out of its current, unsustainable economic condition. The president has understandably focused his first few days on important campaign promises—ending torture, closing Guantánamo—but he will now have to tackle the biggest challenge facing the country.

The American economy is entering its sharpest economic contraction since 1974—a recession that is likely to be the longest since the Second World War. But that's not the worst of it. The American financial system is effectively broken. Major banks are moving toward insolvency, and credit activity remains extremely weak. As long as the financial sector remains moribund, American consumers and companies—who collectively make up 80 percent of GDP—will not have access to credit, and economic activity cannot really resume on any significant scale. We have not turned the corner. In fact, we can't even see the corner right now. In Washington and in the media, we have all stopped thinking about the rescue of the financial system—that was last year's story—and moved on to the automobile bailout and now the fiscal stimulus. Debates have begun as to whether programs represent pork or investment, whether tax cuts should be preferred to government spending. But despite the injection of hundreds of billions of dollars, and the promise of many billions more, banks are still not lending. Without a functioning financial system, even a massive stimulus will not restore the economy to a normal growth trajectory. Japan tried to jump-start its economy with the world's largest fiscal stimulus in the 1990s. It did nothing for long-term growth in that country.

What about the actions taken so far? The $700 billion TARP, the various federal guarantees, the Federal Reserve's extraordinary actions? The outgoing administration has plausibly claimed that these have worked—in the sense that the financial system has not imploded. Paul Krugman, no fan of the Bush administration's approach to the crisis, acknowledges, without the bank bailout, the whole system would have collapsed. But the bailout has not solved the problem; banks are still buried under mountains of bad assets. And while the Bush administration has made mistakes—most of them clearer in hindsight—the Obama economic team knows that there is no simple answer to this extraordinarily complex situation. Britain, which was widely lauded for its first set of bank bailouts, appears to have stumbled in a second set of policies last week. This might be the time to recall screenwriter William Goldman's cardinal rule about Hollywood: Nobody knows anything.

And yet the government has to do something. President Obama faces a terrible dilemma. He needs to act quickly and on a massive scale. Part of what has unnerved markets has been the incremental nature of the government's response. Will it bail out this bank or that one? On what terms? A broad systemic approach commits the government to one course—one solution—and does not allow for experimentation. It is also enormously expensive. And yet without large-scale action, the financial system will keep bleeding. The politics of this are even worse. The American public believes that we have already spent far too much money on bailing out the banks. But the economic fact is that we have not spent enough. Without several hundreds of billions of dollars, these organizations will remain zombies and the economy will remain paralyzed.

Speed is also crucial. In U.S. policy-making circles in the 1990s it was customary to deride the Japanese government for its weak response to the bursting of Japan's real-estate and stock-market bubble—which led to more than a decade of economic stagnation. In fact the Japanese took drastic action: they injected capital into their banks, lowered interest rates and undertook a massive fiscal stimulus. But they waited for a couple of years before confronting their problems and that made the measures far less effective. The Federal Reserve has learned its lesson and has moved much faster than did the Bank of Japan. But will the American political system move any faster than the Japanese political system?

There remains a spirited debate over what should be done now. But at its heart everyone seems to agree with former Treasury secretary Hank Paulson's original diagnosis—the problem is that banks have huge amounts of bad assets (related to mortgages) on their books. These assets are toxic because they infect the rest of the banks' balances, making it difficult for them to operate. These assets must be disclosed, written down and quarantined for the financial system to start functioning again.

Some now argue for a national aggregator bank that would buy up all the toxic assets, still others for a set of government guarantees and insurance, others still for outright nationalization of the worst-off institutions. Paulson's January rescue of Citicorp seemed to use TARP money in an effective way, getting a large bang for the buck. Each policy has its merits and drawbacks, and I am not expert enough to judge which is the right approach. But it does appear crucial that the government's response be systemic. Ideologies need to be suspended in this period of crisis—we don't hear much about moral hazard anymore. We might temporarily limit practices that are causing a downward spiral—such as marking assets to market, the practice of forcing banks to keep lowering the price of securities (even those that they do not intend to sell), which then forces them to raise more capital. Overall, the government must send markets a clear signal: it is futile to bet against us; we have unlimited tools at our disposal and will use them; and in the end we will win.

Tackling the banks will not be the end of these problems. As President Obama has often pointed out, until the housing market stabilizes, the crisis will continue. Housing is what underpins many of these toxic assets. If prices continue to fall, the assets will only become more toxic. A veteran investment banker, Thomas Patrick, has circulated an innovative proposal that would have Fannie Mae and Freddie Mac close out the securitizations and then refinance all the underlying mortgages, thus dispensing with the toxic paper and stabilizing the mortgages in one swoop. No matter what course is taken, the United States will run trillion-dollar deficits for years, the Federal Reserve will accumulate trillions on its balance sheet, and the American financial and mortgage system will have been semi-nationalized, whatever the euphemisms used to disguise that fact.

This current crisis has resulted in a deep erosion of American power that we have not fully understood. Even in the depths of the Iraq War, when much of the globe was enraged by George W. Bush's unilateralism, people everywhere believed that the United States had the world's most advanced economy and that its capital markets in particular were the most sophisticated and developed. American officials, businessmen and economists lectured far and wide on the need to copy the American system. That system is now seen across the world as a sham, a casino game in which highly paid participants mismanaged risk and highly respected regulators cheered them on. I have traveled to Europe, Asia and the Middle East in the past three months and am writing this from Canada. The attitudes of officials and businessmen range from shock to rage at what they see in the United States.

When he began his run for the White House, Barack Obama thought he could restore American power and leadership by righting our foreign policy, winding down the Iraq War, closing Guantánamo, ending torture. These are all important policies, and I am glad that he is pursuing them. But right now, the most important way for him to restore America's credibility and influence in the world is to rescue the American model.

Obama's rhetoric suggests that he understands this issue. But does Congress? Can the American political system rise to the challenge? The United States will have to enact extraordinary measures, many of them unpopular, run up huge deficits, then just as quickly start to unwind these guarantees and commitments, get onto a path of strict fiscal prudence, reform entitlements and bring our financial house in order. If we don't, the world will talk not of American power but weakness. America will be a model, all right, but of pride and its fall.



2. Robert J. Samuelson: It's Really a Global Crisis

We should all want President Obama to succeed in reviving the economy, but that shouldn't obscure the long odds he faces. We need to recognize that we're not grappling with a single economic crisis. We face three separate crises, which are interwoven but which are also distinct and different. The solution to any one of them won't automatically resuscitate the larger economy if the others remain untreated and unchanged.

Here are the three.

FIRST: the collapse of consumer spending. American consumers represent 70 percent of the economy. Traumatized by plunging home values and stock prices—which have shaved at least $7 trillion from personal wealth—they've curbed spending and increased saving. That's led directly to layoffs and higher unemployment. In December, auto and light-truck sales were down 36 percent from a year earlier.

SECOND: the financial crisis. Lending has atrophied, depriving the economy of the credit to finance new factories, homes and costly consumer purchases (cars, appliances). The deepest cuts involve securitization—the sale of bonds. Investors have gone on strike. In 2008, the issuance of investment-grade corporate bonds dropped 35 percent, reports Thomson Financial. Bonds backing credit-card loans fell 41 percent, and those backing car loans, 51 percent.

THIRD: the trade crisis. There's a mismatch between national spending and saving patterns. High-saving Asian countries relied on export-led growth that, in turn, required American consumers to spend ever-larger shares of their income. Huge trade imbalances resulted: U.S. deficits, Asian surpluses. But as Americans shift from spending to saving, this pattern is no longer sustainable. Asia is tumbling into recession. China may grow 6 percent or less in 2009, half its 2007 rate.

Overcoming any of these crises alone would be daunting. Together, they're the economic equivalent of a combined triathlon and Tour de France.

Consider consumer spending. The proposed remedy is the economic stimulus plan. On paper, this seems sensible. If government doesn't offset declines in consumer spending, housing and business investment, might not the economy spiral downward for several years? Last week, House committees considered an $825 billion package, split between $550 billion in additional spending and $275 billion in tax cuts.

The trouble is that, in practice, the program could disappoint. Parts of the House package look like a giant political slush fund, with money sprinkled to dozens of programs. There's $50 million for the National Endowment for the Arts, $200 million for the Teacher Incentive Fund and $15.6 billion for increased Pell Grants to college students. Some of these proposals, whatever their other merits, won't produce many new jobs.

Another problem: construction spending—for schools, clinics, roads—may start so slowly that there's little immediate boost for the $14 trillion economy. The Congressional Budget Office examined $356 billion in spending proposals and concluded that only 7 percent would be spent in 2009 and 31 percent in 2010.

But suppose the stimulus is a smashing success. It cushions the recession. Unemployment (now 7.2 percent) stops rising at, say, 8 percent instead of 10 percent. Still, a temporary stimulus can't fuel a permanent recovery. That requires, among other things, a strong financial system to supply the credit needs of an expanding economy. How we get that isn't clear.

The pillars of a successful financial system have crumbled: the ability to assess risk, adequate capital to absorb losses and trust among the players—banks, investors, traders. A common denominator in these ills has been the consistent underestimation of losses. Economists at Goldman Sachs now believe that worldwide losses on mortgages, bonds and consumer and business loans total $2.1 trillion, with $962 billion belonging to U.S. banks. In March, the Goldman estimate was about half that. Economist Nouriel Roubini's estimate of losses is higher than Goldman's.

All the new credit programs—the Treasury's Troubled Asset Relief Program and various Federal Reserve lending facilities—aim at counteracting these problems by providing government money and government guarantees. Probably Obama will expand these efforts, despite some obvious problems: if government oversight becomes too intrusive or punitive, it might deter much-needed infusions of private capital into banks. Again, let's assume Obama's policies surmount the obstacles. Credit flows and confidence rises.

Even then, we have no assurance of a vigorous recovery, because—at bottom—the economic crisis is global in scope. The old trading patterns simply won't work anymore. If China and other Asian nations try to export their way out of trouble, they're likely to be disappointed. Any import surge into the United States would weaken an incipient American recovery and possibly trigger a protectionist reaction. Down that path lies tit-for-tat economic nationalism that might harm everyone. Growing trade and investment barriers would shrink markets.

Indeed, if the rest of the world doesn't buy more from America, any U.S. recovery may be feeble. What's needed are policies that correct the underlying imbalances in spending and saving. As Americans save more of their incomes, Asians should save less and spend more, so that they rely more on satisfying their own wants to generate jobs and economic growth as opposed to exports. The great trade discrepancies would shrink. Americans would export more, import less; Asians would do the opposite.

But this sort of transformation requires basic political changes in Asia to complement changes in U.S. policies. Whether China and other Asian societies can make those changes is unclear. The implications are sobering. The success of Obama's policies lies, to a considerable extent, outside Obama's hands.


(Zoon Politikon)

Fareed Zakaria about US and China

We need China to see that its interests are aligned with America's. If not, things could get very, very ugly (Fareed Zakaria in Newsweek). Here's the whole article:

For weeks the world has eagerly awaited word from the Obama transition team about the people who will head up the next American administration—the new secretaries of state and Treasury, the attorney general. But one of the more crucial positions in the Obama administration probably isn't going to be filled for months and will likely get little attention when it is—the post of U.S. ambassador to China.

Everyone knows that China is a major power and our representation there is important. But right now, we need Beijing like never before. China is the key to America getting through the worsening economic crisis. The American ambassador in Beijing (OK, this is a metaphor for all those officials who will be managing this relationship) will need to make sure that China sees its interests as aligned with America's. Or else things could get very, very ugly.

There is a consensus forming that Washington needs to spend its way out of this recession, to ensure that it doesn't turn into a depression. Economists of both the left and right agree that a massive fiscal stimulus is needed and that for now, we shouldn't be worrying about deficits. But in order to run up these deficits—which could total somewhere between $1 trillion and $1.5 trillion, or between 7 and 11 percent of GDP—someone has to buy American debt. And the only country that has the cash to do so is China.

In September, Beijing became America's largest foreign creditor, surpassing Japan, which no longer buys large amounts of American Treasury notes. In fact, though the Treasury Department does not keep records of American bondholders, it is virtually certain that, holding 10 percent of all U.S. public debt, the government of the People's Republic of China has become Washington's largest creditor, foreign or domestic. It is America's banker.

But will the Chinese continue to play this role? They certainly have the means to do so. China's foreign-exchange reserves stand at about $2 trillion (compared with America's at a relatively puny $73 billion). But the Chinese government is worried that its own economy is slowing down sharply, as Americans and Europeans stop buying Chinese exports. They hope to revive growth in China (to levels around 6 or 7 percent rather than last year's 12 percent) with a massive stimulus program of their own.

The spending initiatives that Beijing announced a few weeks ago would total almost $600 billion (some of which include existing projects), a staggering 15 percent of China's GDP. Given their focus on keeping people employed and minimizing strikes and protests, Beijing will not hesitate to add tens of billions more to that package if need be.

At the same time, Washington desperately needs Beijing to keep buying American bonds, so that the U.S. government can run up a deficit and launch its own fiscal stimulus. In effect, we're asking China to finance simultaneously the two largest fiscal expansions in human history—theirs and ours. They will probably try to accommodate us, because it's in their interest to jump-start the American economy. But naturally their priority is likely to be their own growth.

People often say that China and America are equally dependent on each other, says Joseph Stiglitz, winner of the 2001 Nobel Prize in Economics. But that's no longer true. China has two ways to keep its economy growing. One way is to finance the American consumer. But another way is to finance its own citizens, who are increasingly able to consume in large enough quantities to stimulate economic growth in China. They have options, we don't. There isn't really any other country that could finance the American deficit.

In his fascinating new book, The Ascent of Money, Niall Ferguson describes the birth of a new nation after the cold war. He calls it Chimerica—and it accounts for a tenth of the world's land surface, a quarter of its population and half of global economic growth in the past eight years. For a time it seemed like a marriage made in heaven, he writes. The East Chimericans did the saving, the West Chimericans did the spending. The Easterners got growth, the Westerners low inflation and low interest rates.

Like Stiglitz, Ferguson believes that China has options. They will certainly try to keep American consumption going, but if it becomes clear that it isn't working, they do have a plan B, he said to me last week. Plan B would be to focus on boosting China's own consumption through government spending and easing credit to their own people.

The big question today, Ferguson said, is whether Chimerica stays together or comes apart because of this crisis. If it stays together, you can see a path out of the woods. If it splits up, say goodbye to globalization.

In recent years the most important and difficult ambassadorial posting has unquestionably been the one to Baghdad. Over the next decade, the toughest and most crucial assignment may well be in Beijing.

See also the article of Fergusson on this subject.


(Zoon Politikon)