Annals of the Great Recession XV.

The TARP and the stimulus bill were intended to recover from the financial crisis of 2008-2009.  What about preventing a re-run in the future?  The Dodd-Frank Act required banks to hold larger capital reserves and to submit to “stress tests” to evaluate how well they could deal with a future financial crisis on the scale of 2008.   Curiously, the law also limited the trade in “credit default swaps.”  Admittedly, the wholesale trade in these insurance policies against a collapse of the bubble seems to have been what sunk the AIG insurance group.  On the other hand, they were an investment by people who saw the bubble for what it was rather than blindly believing what they were told.

One effect of the new legislation appears to be that it has encouraged the consolidation of the banking system.  It has been argued that the costs of complying with the new regulations are more than smaller banks can bear, so they have sold out to already big banks that are better able to shoulder the burden.

It is said that generals are always preparing to fight the last war.  Banks and investors are on guard against sub-prime mortgages.  However, “bubbles” can develop in any asset.[1]  So, some kind of new crisis is always possible.  Can the government and the financial system respond effectively to a new crisis?  The answers are not encouraging.

First, a flight from Keynesian demand-management policies followed quickly on the financial crisis.  President Bush encountered considerable difficulty in getting Republicans to accept the TARP.  President Obama opted for a stimulus bill that Paul Krugman warned was half as big as it needed to be, spread over two years instead of front-loaded into one year, and contained a bunch of tax cuts that would be used to reduce debt instead of engaging in new spending.  Both Republicans and Democrats have proved critical of deficit spending plans.

Second, in the absence of a Keynesian policy on the part of the Congress and President, the Federal Reserve Bank launched a long program of “quantitative easing.”  It bought huge amounts of both MBSs and U.S. treasury debt as a way of pumping money into a slow-recovering economy.  It has only recently begun to unwind this position and to raise interest rates.  That means that it would be difficult to counter a new recession by cutting interest rates.

There may also be a deep hostility to government intervention on the part of many voters.  The policies that saved the American—and world—economy from a new Depression looked very much like a privatization of gains and a socialization of losses.[2]  Thus, in 2007, the top 10 percent of income-earners held 71 percent of the nation’s wealth; now the top 10 percent hold 77 percent.  That is about an 8 percent increase.  The Fed’s quantitative easing pushed up asset prices when ownership of stocks and bonds is concentrated in the upper income groups.

In 2007, the bottom 90 percent of earners held 29 percent of the nation’s wealth; today the bottom 90 percent hold 23 percent.  That is an average 20 percent drop in assets for the vast majority of Americans.  Even so, it is worse for some than for others.  Back in 2007, the median lower-income family had about $18,000 in assets.  Today they have about $11,000 in assets.  Doubtless that fall largely represents the loss of the houses they bought without being able to pay for them.  Would Congress tolerate a new TARP or a new stimulus bill?

Maybe.  The combination of the recent tax revisions and the huge spending bill that enjoyed bipartisan support seem likely to massively expand the deficit.  Maybe stimulus is back in style if you put in enough treats for everyone.  Locking up a bunch of bankers might have to be one of those treats.

[1] See: Alexandre Dumas, The Black Tulip (1850).

[2] President Obama may have contributed to this with his denunciation of the rich as “the people who tanked the economy.”  Bill Gates and Warren Buffett tanked the economy?

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Annals of the Great Recession XIV.

To review, the presidents from 1981 to 2017 were Ronald Reagan (1981-1989), George H.W. Bush (1989-1993), Bill Clinton (1993-2001), George W. Bush (2001-1009), and Barack Obama (2007-2017).  The chair-people of the Federal Reserve Bank were Alan Greenspan (1987-2006), Ben Bernanke (2006-2014), and Janet Yellin (2014-2018).  So, those are the people upon whose watch various things happened.[1]

Between 1997 and 2006 the government eased regulations on lending and encouraged home-ownership among new groups.[2]  Mortgage originators—banks or mortgage companies—did what they were allowed and even encouraged to do: they issued mortgages (loans) to “sub-prime” borrowers.[3]  These amounted to hundreds of billions of dollars of risky loans.  Rather than hold these dangerous loans on their own books, the loan originators re-packaged the mortgages as collateralized debt obligations (CDOs) and mortgage-backed securities (MBS), then sold these packages to investors.[4]  With many previously-excluded buyers seeking a limited stock of housing, housing prices rose by a national average of 124 percent.  The value of the CDOs and MBSs also rose.  Prices for both exceeded their real value.[5]

Then, in 2007 and 2008, it became apparent why sub-prime borrowers had previously had trouble getting loans.  The number of defaults started to rise sharply.  The MBSs and CDOs dropped toward their real value.  Financial institutions that had purchased these “instruments” suddenly found immense sums wiped off the asset side of their ledgers without their liabilities (what they owed other people) being reduced.  Bankruptcy loomed for the banks unless they could get rid of these dogs in a hurry and replace them with more valuable assets.  First Bear, Sterns, and then Lehman Brothers failed.  Seeking to stop the bleeding, banks pulled in the reins on all lending, including for productive investment.  The whole economy rapidly slowed during 2008.  The Dow Jones Industrial Average fell by 50 percent.  This reduced the values of many assets held by the upper and middle-classes, causing them to cut spending in order to reduce their own debts.  With consumption spending and investment both falling, the unemployment rate jumped to 10 percent by late 2009.

Acting quickly, the George W. Bush administration pushed through a Troubled Asset Relief Program (TARP) that bought $700 billion worth of bad debt from the banks.  The Obama administration launched a mini-Keynes stimulus program of $757 billion.  The Federal Reserve Bank cut interest rates to near zero and held them there for a long time.

[1] “The long shadow of the financial crisis,” The Week, 13 April 2018, p. 11.

[2] In part, this seems to have had a worthy purpose.  Houses are a key middle-class asset, but “red-lining” by banks had long restricted access to home purchases by African-Americans and other groups.  See: https://en.wikipedia.org/wiki/Redlining

[3] Sub-prime borrowers are ones with poor credit-worthiness.  For an explanation of how credit-worthiness is determined, see: https://www.investopedia.com/terms/f/ficoscore.asp  Very often, these are referred to in public discourse as “sub-prime loans,” as if the problem existed only with “predatory” lenders.  This seems to me to resemble referring to illegal immigrants as “un-documented immigrants,” as if the only problem is a bureaucratic foul-up with issuing them some documents.

[4] Apparently, it was possible for the purchasers to discern that the CDOs and MBSs were very risky—and possibly worthless—investments.  Most people did not do so.  A few did.  See: Gregory Zuckerman, The Greatest Trade Ever (2009) and Michael Lewis, The Big Short (2010).  The bets against the housing buble were called credit default swaps.

[5] This is called a “bubble.”

The Missing and Ulzana’s Raid.

From “Broken Arrow” (1954) through “Little Big Man” (1970) to “Dances with Wolves” (1990), Hollywood Westerns fell into step with the spirit of the times.  They took an ever-more sympathetic view of the Indians and an ever-more negative view of the white Americans who conquered the West.  Occasionally, some people have taken a more “classical” view.  In particular, “Ulzana’s Raid” (dir. Robert Aldrich, 1972) and “The Missing” (dir. Ron Howard, 2003) focused their attention on Apaches out for blood.  In part, they are effective because they take Indian beliefs seriously as a motivation to action.

In “Ulzana’s Raid,” an Apache warrior named “Ulzana” (Joaquin Martinez) jumps the San Carlos Reservation.  Basically, he’s fed up with the smell of women, children, dogs, and old people.  He wants to smell ponies running, burning, and blood.  In short, he chooses Life over Death.  He takes along his teen-age son and a few other young warriors.  He gets right to business, while the Army tries to track him down.  The Army patrol is “led” by a young lieutenant fresh from West Point (Bruce Davison).  The lieutenant’s father is a Protestant minister in favor of “humane” treatment of the Indians.  The real leader of the patrol is an old scout named “Mr. McIntosh” (Burt Lancaster).  The scout is assisted by an Apache from the San Carlos Indian Police, who happens to be Ulzana’s brother-in-law (Jorge Luke).  (This seems more credible once you’ve been married for a while.)  The patrol revolves around the education of the lieutenant.  Ki-Ne-Tay, the Apache policeman, explains that Apaches torture prisoners to obtain their power: “in this land, you must have power.”  He also learns to command, although his commands are not always for the best and are not always well-received by his troopers.  The movie ends badly for a number of those concerned, as was common in that time and place.

http://www.youtube.com/watch?v=ZCFiO3Kb1ms

 

The Missing.

In “The Missing,” Samuel Jones, a white man who “went Apache” years before (Tommy Lee Jones) appears at the ranch of his daughter, Maggie Gilkerson (Cate Blanchett).  She is a “grass widow” who also works as the local “healer.”  She hates her father and rejects his effort to make amends.  At that same moment, an Apache called “El Brujo” jumps the reservation and goes on a rampage.  He kills white settlers and other Apaches, and kidnaps young women of both races for sale as sex-slaves in Mexico.  One of the kidnapped girls is Maggie’s rebellious daughter, who wanted bright lights instead of the homestead.  Maggie’s ranch-hand/lover is among the slain.  The local sheriff can’t help because it’s outside his jurisdiction.  (Sound familiar?)  The Army can’t help because it is busy with other stuff.  (Plundering the homes of murdered settlers for example.)  Maggie tells her father that he can make amends by helping her get the kidnapped daughter back.  So Maggie, and her youngest daughter, and her father set off in pursuit of the Apaches.

One problem is that “Brujo” is the Spanish word for “witch.”  This “El Brujo” has mystical powers and can change into a wolf or an eagle.  Probably he found this a stressful experience as a child because he’s crazy and sadistic.  (There having been too few trained talk therapists in Arizona in the 1880s.  Sad, but true.)  Eventually, the dysfunctional little family teams up with a couple of Chiricahua Apaches who are hunting “El Brujo” for the same reason.  They get the girls back and kill “El Brujo” and his merry men, but at a cost.  On the other hand, there’s a certain amount of reconciliation between the generations, a la Mark Twain.

http://www.youtube.com/watch?v=UI3IKUa9HyA

Mickey Free.

Boundaries and identities could be murky in the West.  For example, between the end of the Mexican-American War (1848) and the Gadsden Purchase (1854) a little strip of what is today southern Arizona and New Mexico belonged to Mexico.  Mexicans and Apaches vastly outnumbered any American immigrants.  Jesusa Martinez (b. 1830) lived with a part-Irish Mexican named Santiago Telles.  They had a couple of red-haired kids, so the Irish ancestry may have been real.  Their son was called Felix (1848-1913 or 1915) and their daughter was called Teodora.  So, all of them were Mexicans who suddenly found themselves living in the United States.  In 1859, she either left Telles or he died.  In any event, she moved in with John Ward (1806-1867), another Irish immigrant who had come to the area to ranch.  They more or less got married and Ward more or less adopted the kids.  Felix Telles became Felix Ward.

No sooner did they get these matters sorted out than some White Mountain Apaches rustled a bunch of Ward’s cattle and kidnapped young Felix Ward in January 1861.  The U.S. Army sent a small detachment to try to get the kid back.  This effort misfired and led to Cochise’s decade-long war with the United States (1861-1872).  Felix Ward was adopted into the band, with whom he lived for about ten years.

You might have thought that the Indian tribes would all stick together against the Americans.  Not the case.  The Yavapai Indians continually fought with the Apaches.  In late 1871 war broke out between the Americans and the Yavapai.  In December 1872, Ward and his White Mountain foster-brother, came down out of the mountains to enlist as scouts for the US Army.  Whites had a hard time with Apache names, so Felix Ward became “Mickey Free” and his brother “John Rope.”  They scouted for George Crook in the Yavapai War.

They may have been scouting for Crook later that month when the Army besieged a large band of Yavapai in a cave in Salt River Canyon.  Eventually the Yavapai were defeated and forced onto a reservation at Camp Verde, Arizona Territory.  Mickey Free went there as an interpreter.  So did Al Sieber, Chief of Scouts for Crook.[1]  Sieber appears to have thought well of him.  So he probably moved to the San Carlos Apache Reservation with Sieber.

Life on the reservation wasn’t very tranquil.  For example, in August 1878, September 1881, and May 1885, Geronimo “jumped the reservation” in raiding expeditions.  Free scouted for the Cavalry as they hunted these and other bands of “renegades.”  He and his brother John Rope stayed with the scouts until the final capture of Geronimo in 1886.

One of Free’s fellow scouts was the “Apache Kid” (sometime in the 1860s-1894 or perhaps not if you believe the legends).  Like Free and Rope, the Kid did good service in the hunt for Geronimo.  However, in 1887, the Kid and some of his friends were involved in a shooting affray with some other Apache scouts; the Army arrested the Kid; and he promptly escaped and took to the hills.   In May-June 1887, Free helped Sieber in the successful hunt for the Kid.  Since the Apache Kid again escaped and was hunted by various groups, Free may have been a bounty hunter for a while.

Free left the Scouts in 1893.  He took up farming at the Fort Apache Indian Reservation, where the White Mountain Apaches lived.

I suspect that he inspired the fictional character “John Russell” in Elmore Leonard’s novel Hombre (1961).  A Mexican-Irish-Apache in Arizona and Mexico.  Murky boundaries.

[1] Al Sieber (1843-1907) was a German-born immigrant.  In the Civil War he fought at Antietam, Fredericksburg, Chancellorsville, and Gettysburg.  After the war he went West to prospect and ended up ranching in Arizona.  He served as Chief of Scouts from 1871 to 1890.

Kellogg and Briand Frosted Flakes.

In the First World War (1914-1918), Germany fought France, Britain, Russia, and the United States.  Germany lost–barely.  The French sought to create a post-war peace system based on keeping Germany weak.  Break up Germany into smaller states; grant the French control of the Rhineland and the Ruhr (Germany’s industrial heartland).  The British and the Americans didn’t like this solution, which just promised future wars.  Britain and the United States came up with a different plan: they would guarantee French security with an alliance treaty.  If Germany (or Mars) attacked, Britain and France would come to the aid of France.  However, the United States Senate refused to approve the Versailles Treaty (and its obligations for the United States).[1]  The British took the view—not entirely reasonable in light of the subsequent German danger under Mr. Hitler—that this let them off the hook as well.  All of a sudden, the French had neither an American nor a British alliance, nor did they have a weakened Germany.  What to do?

They tried coercing the Germans by occupying the Ruhr (1923-1925).  Unfortunately, they owed American banks a ton of money from the war.  So the American could—and did—bend France over the couch.  This led to the Dawes Plan and, eventually, to the Locarno Agreements.

Aristide Briand (1862-1932) fell heir to this mess.  Briand was a leftist politician who had been prime minister on many occasions.  In 1925 he became foreign minister.  He needed a way to fend off a future war with Germany.  Partly, this meant sucking-up to Germany.  Partly this meant trying to snare the United States into promising to defend France.  Briand fished around, then proposed what amounted to a defensive alliance between the US and France.

Frank Kellogg (1856-1937) grew up in the Upper Mid-West, taught himself law under the old pre-law-school system, and eventually became a terrifying lawyer for the U.S. Government in the Theodore Roosevelt administration.  He prosecuted the Union Pacific Railroad and Standard Oil.[2]  What he didn’t know about the real meaning of legal agreements wasn’t worth knowing.  He became a Senator from Minnesota (1916-1922).  Unlike most Republicans, he voted for the Versailles Treaty, so he lost that job.  “Progressive” Republicans like Herbert Hoover didn’t hold it against him that he had stood up to the old men and idiots.  He spent a year as Ambassador to Britain (1924-1925), then became Secretary of State (1925-1929).

So, Frank Kellogg had to deal with Aristide Briand’s proposal.  How to dodge a French trap?  He counter-proposed an agreement that would be open to every country and which rejected aggressive war as an instrument of national policy.  Who could be against a rejection of aggressive war?  In the public mind, the Kellogg-Briand Pact “outlawed war.”  Cheering followed.  Robert Ferrell told this story well in Peace in Their Time (1952)

Then Japan attacked China and Germany ran amok in Europe.  The Second World War followed.  The Holocaust followed.  The atom-bombing of Japan followed.  Filled with disgust over humankind, people came to misunderstand the Kellogg-Briand Pact.  First, “nouveau realists” saw it as a joke.  “Outlawing War” is joke, yes?  More recently, lawyers have seen it as the entering wedge for the rule of law, norms, and a rules-based system.[3]  Neither is true.  The Pact is best understood as a “realist” diplomatic maneuver in an age of popular idealism.

[1] This is a complex story.

[2] Yes, Republicans used to do this, just like the Democrats used to be an arm of the KKK.

[3] Oona Hathaway and Scott Shapiro, The Internationalists: How a Radical Plan to Outlaw War Remade the World (2017).  The reviews aren’t much more sensible, even when written by historians

North Korea 2.

Suddenly, by August 2017, North Korea had successfully tested several Inter-Continental Ballistic Missiles (ICBMs) and it seemed likely that it had miniaturized an atomic warhead to mount on such a missile.  Alarm bells started ringing much more loudly.  Unlike defenses against short- and medium-range missiles, the defense against ICBMs is non-existent.  All that exists is deterrence—the certainty that North Korea would be wiped off the map if North Korea attacked the United States with a nuclear weapon.

Several questions, great and small, arise from the North Korean ICBM tests.  First, how did the North Koreans suddenly develop an ICBM missile and miniaturize a war head?  One theory is that a bankrupt and bent missile engine factory in Ukraine sold a sample to the North Koreans.  How the North Koreans got a rocket engine as big as a house from the Ukraine to North Korea without anyone noticing is an interesting question.[1]  If the Russkies were helping, then it could go overland by rail (or maybe even by cargo plane) to Vladivostok, and then by sea.  Or it could go to the port of Sebastopol on the Black Sea and then by sea to North Korea.  Giving North Korea the technology to put an atomic weapon on an American city would be considerably more of a hostile act than just meddling in an American presidential election.

If the Russkies were not helping, then does that mean that a few greedy managers in a Ukrainian rocket engine factory free-lanced this without anyone in the government of Ukraine noticing?  In any case, the engine would have had to go out through the port of Odessa.  How do you move a rocket engine as big as a house across Ukraine?  In the end, it seems that, if the bent factory in Ukraine helped, then it would be by loading the plans on a flash-drive and selling that to the North Koreans through some intermediary.  North Korean machine-tools could do the rest.

Second, what do the North Koreans want?  That’s a little murky.  One authority argues that “what North Korea wants is for us to stop threatening them and to talk with them.”   What forms do these threats take?  North Korea attacked South Korea in 1950.  Since the end of that war the United States has conducted military exercises with the South Korean military forces.  Hard not to see these as a) defensive, and b) just a demonstration of our commitment to an ally.  OK, but the U.S. attacked Afghanistan, then never left; the U.S. attacked Iraq on a specious pretext in 2003; and the U.S. attacked Libya, then walked away while the place burned.  Still, none of these places bordered on/were backed by China.  An American attack on North Korea is a fantasy.  Then, North Korea has rejected following the Chinese path to economic transformation.  If South Korea could go from being a backwater to an important industrial nation then so could North Korea.  Why hasn’t North Korea changed course?

Third, is there an alternative to war?  Everyone hopes so.  An American pre-emptive strike against North Korea’s nuclear facilities doesn’t seem any more likely to succeed than would an attack on Iran’s facilities.  Then the North Koreans would respond.  Seoul, the capital city of South Korea, is in easy range of the massed artillery batteries of North Korea.  Then, the US would invade North Korea?  What might be the response of China?  Do American voters want another large war?

We are being driven by reality toward another version of President Obama’s Iran deal.  So be it.  For now.  Eventually, the United States may “meet with Don Barzini, Philip Tataglia, all the heads of the Five Families.”

 

[1] See: “The Peacemaker” (dir. Mimi Leder, 1997).

Memoirs of the Addams Administration 28.

President Donald Trump’s foreign policy doesn’t seem that far off the mark: beat up on ISIS, try to square petty quarrels among the Gulf States, nudge the European NATO members to increase their defense spending to the promised levels before they talk about coercing the Russkies, figure out what to do about North Korea without blowing up the world, and start renegotiating the North American Free Trade Agreement (NAFTA).  The Democrats had turned against the Trans-Pacific Partnership during the election season, so the election of Hilary Clinton wouldn’t have made any difference there.  The Trump administration bailed on the Paris Climate Agreement, but the effects will be felt only at the margins and for a time.  Eventually, the United States will come back to supporting it.

The big problems have been in domestic policy.  What if the Republicans had chosen to work on something other than health care as their first order of business after the November 2016 election?[1]  What if they had gone with a big infrastructure bill?  Lord knows the country needs one, the Democrats have been just as neglectful as the Republicans on this matter in recent decades, and there could have been some kind of bi-partisan agreement on action.  Failing that, what if they had gone with a major tax over-haul?  Lord knows the country needs one, and there would have been lots of chances for horse-trading.

But no, the Republicans had to lead-off with efforts to “repeal and replace” the Affordable Care Act (ACA).  They had made it their battle cry for years before Donald Trump became their president.  Senate majority leader Mitch McConnell failed to assemble the minimum number of votes for the latest iteration of “repeal and replace.”[2]  Now all the things that might have been done, but were not done, face a steep up-hill climb.[3]

Still, beyond all the chortling over Republicans’ self-inflicted wounds, lie two realities.  First, the health-care market places already had begun to contract for reasons rooted in the ACA.[4]  Second, during the Obama administration, a federal court had invalidated the subsidies that made health insurance marginally affordable.  So, Republicans may get one more chance to get it right.  They need to think anew and act anew.

In contrast, the domestic economy is a mess.  “Trumponomics” consists of cutting corporate taxes and federal regulation in order to stimulate business activity; reforming welfare to get more Americans back into the labor force; re-negotiating trade deals to achieve equity; and stimulating the energy sector by relieving the burdens upon coal.  This will result in a 3 percent economic growth rate, he says.[5]

Many economists believe that 3 percent growth is a fantasy.  The Congressional Budget Office (CBO) guesses that these changes will produce only 1.9 percent growth.  The American economy can grow only if it has an expanding labor force.  So, no border wall.

[1] In the same ways that the first Barack Obama administration might have sought an adequate stimulus bill, rather than shifting its efforts to the creation of a costly new entitlement program in the form of the Affordable Care Act while the country slogged through an inadequate recovery from the financial crisis.  Paul Krugman had argued that the Obama stimulus bill was half a s bog as it should be, spread over two years instead of front-loaded into one year, and included tax cuts that would be used to de-leverage rather than spent to stimulate the economy.  As best I recall, President Obama was reported (by Bob Woodward) to have remarked that “Look, I get the Keynesian argument, but the American people aren’t there.”

[2] “GOP’s “repeal and replace” bill dies,” The Week, 28 Jult 2017, p. 4.

[3] See: https://www.youtube.com/watch?v=tL1acYvpR_E

[4] The Democratic solution to this problem is ever-larger subsidies.  The budget effects do not concern them.

[5] “Issue of the week: Trump’s MAGAnomics” plan.” The Week, 28 July 2017, p. 34.