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My Weekly Reader 25 October 2018.

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When the Second World War broke out, Americans—isolationists or not—expected a re-run of the First World War: a long pounding match.  Then the German army smashed into France in Spring and Summer 1940.  France surrendered and replaced the decrepit Third Republic with the collaborationist Vichy regime.  The French Empire in West Africa–nominally under the control of France, but vulnerable to German seizure–stretched westward into the Atlantic.  Brazil lay within flying distance of Dakar. Suddenly, Latin American affairs seemed of more than the usual importance in Washington.[1]

North Americans viewed South America as more than just a potential beach head for German invaders.  The continent held vast natural resources that might feed the Nazi war-machine.[2]  On its Caribbean shore, the continent abutted the shipping routes to the Panama Canal.  Moreover, the colonial heritage from Spain and Portugal–rather than American imperialism–made South America a politically tumultuous place.  Elites continually struggled with populists for control of the governments, and the armies of the continent did not always favor the “forces of order.”  To make matters worse, in the view of Washington, the region had received hordes of German and Italian emigres in the previous hundred years.  In the age of the “Fifth Column” suspicions ran hot.

As a result, South America became a battleground between the Axis and the Anglo-American Allies.  For their part, Germany and Italy hoped to restrict the flow of natural resources toward the United States and to enhance the influence of their emigrant brothers.  For their part, the Americans sought to build a Trans-Atlantic air ferry route to fly bombers and transports from Miami through Brazil to West Africa; they sought to monopolize purchases of raw materials, whose price spiked during the war and continued into the post-war reconstruction period; and they sought to squelch pro-Axis sentiment.[3]  Propaganda played a large role for both sides, although—like most propaganda—the effort availed them but little.

The Latin American countries were eager to profit from all this interest, yet they were not eager to be drawn into the war itself.[4]  Nevertheless, the turning of the tide led some Latin American countries to join the fight.  Brazil sent 25,000 soldiers to fight in Italy and Mexico allowed a small number of its air force pilots to serve against Japan.  In contrast, Juan Peron’s Argentina refused to engage in the war against the Axis until the very last moment.  Peron’s regime illustrates a number of the key themes.  He had served as military attache in Mussolini’s Italy; Argentina had received many German and Italian immigrants; and Argentina profited enormously from the spike in raw materials prices during and after the war.  Perhaps as a result, Argentina became the favored rat-hole for Nazi war criminals on the run, including Eichmann.

[1] Mary Jo McConahay, The Tango War: The Struggle for Hearts, Minds, and Riches In Latin America During World War II (2018).

[2] Henry Ford had established a rubber plantation in Brazil to insure the raw material for car tires.  He wanted to be free of dependence on the British Empire’s Malayan rubber during an era of bitter Anglo-American economic competition that was strategically forgotten during the Second World War.  On this fascinating episode, see Greg Grandin, Fordlandia: The Rise and Fall of Henry Ford’s Forgotten Jungle City (2009).

[3] This could go to what now look like shameful lengths.  Amends have scarcely been made to the Americans of Japanese ancestry who were evacuated from the West Coast, but who now remembers the Peruvian-Japanese?

[4] Rather like Sweden, Switzerland, Spain, and Turkey.

Amazing Grace.

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John Newton (1725-1807) grew up the son of an English merchant ship captain.  From 1736 to 1742 he learned the sailor’s trade on voyages with his father.  In 1743 he was “pressed” into the Royal Navy; when he tried to desert, he got eight dozen from the “cat.”  Later he joined the crew of a slave ship bound for Sierra Leone, but fell out with the captain and was left ashore as a slave for several years.  Finally rescued from slavery himself, he nevertheless returned to working in the slave trade until 1754.

However, he had begun to undergo a long conversion to evangelical Christianity.  In time, Newton became a Protestant minister and then an abolitionist.[1]  In 1779, he published a collection of hymns he had written.  Among them was one now called “Amazing Grace.”  It remains a widely popular hymn,[2] probably because it is a lamentation suitable for funerals.[3]

However, I wonder if we are listening without hearing.  “Amazing grace! How sweet the sound That saved a wretch like me.  I once was lost, but now am found, Was blind but now I see.”  It is, in its bare bones, a story of a deeply flawed human being “saved” by God’s grace.  In Christianity, God’s grace is “the love and mercy given to us by God because God desires us to have it, not necessarily because of anything we have done to earn it.”[4]

Until modern times, redemption stories like that of John Newton abounded.  They signified the liberation of the individual from the evil impulses that had held him or her in captivity.  Many stories celebrated the redemption of sinners.  They begin with Saint Paul, who described himself as having been the “chief of sinners” before his conversion experience.  John Bunyan’s A Pilgrim’s Progress (1666) testified to his own redemption in a 17th Century England torn by political strife.  The “Second Great Awakening” (a Protestant religious revival that came at a time when Americans were overwhelmingly Protestant, c. 1790-1850) called people to abandon their sinful past and to live better, more rigorous lives.

People who had wallowed in bad behavior could alter their lives so dramatically that observers could scarcely credit that the same person had lived two so wildly different lives.  Thus, there used to be a way back for sinners.

Now there isn’t.  We live in a society that has become increasingly secularized.  The natural and social sciences have provided more satisfactory answers to many questions that the ones provided by religion.  Religious doctrines don’t have the same bite they once did.[5]  Apparently, that includes grace and redemption.  Then, Newton could offer “a confession, which … comes too late … It will always be a subject of humiliating reflection to me, that I was once an active instrument in a business at which my heart now shudders.”  Now, you are for all time your worst words or deeds.  Who would publicly confess and try to make amends for their failings under such circumstances?

[1] He appears in the film recounting the contributions of Evangelical Christians to ending Britain’s role in the slave trade.  See: “Amazing Grace” (dir. Michael Apted, 2006).

[2] Check out the sample of versions available on Youtube.  https://www.youtube.com/results?search_query=Amazing+Grace

[3] For an alternative approach, see https://www.youtube.com/watch?v=q6kNHWh_RwY

[4] See: https://en.wikipedia.org/wiki/Grace_in_Christianity

[5] This comes on top of, but is not caused by, the failings of some religious people.  See: https://www.youtube.com/watch?v=0Erg09oOpmo

Where did our love go?

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First, the Supreme Court’s decision in “Plessy versus Ferguson” was considered settled law from 1896 to 1954.  The Supreme Court’s decision in”Roe versus Wade” has been considered settled law since 1973.

Second, given the politicization of the judiciary since the Warren Court, should the Justices of the Supreme Court be elected officials serving for limited terms, as are the members of the Legislative and Executive branches of government?  The ideal of an impartial and disinterested group of experts regulating the passions of the people currently seems impossible to fulfill.  The spectacle of Court nominees appearing before the Seante’s Judiciary Committee only to evade questions and of potential presidential candidates buffing their profiles in courage could appear equally disgusting.

The Latest News.

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I’m a never-Trump Republican.  I didn’t vote for him the last time and I’m not going to vote for him the next time.  I think, to steal a line from P.J. O’Rourke, that when the Donald Trump Monument is unveiled in Washington, DC, it will consist of a large pit with a donkey at the bottom.  That said, here are my thoughts on “The Latest News.”(Name of an anti-Bolshevik Russian refugee newspaper published in Paris).

  1. Paul Manafort is convicted of stuff from 2014 and before in Ukraine and Trump is supposed to be worried about what he may say about Russian collusion in 2016?  What if there was no collusion, as Trump has insisted?  So far, but we’re waiting for Robert Mueller’s final report or charges before we know.  We’re also waiting for the Department of Justice Inspector General’s report on the origins of the Russia investigation.  The last one excoriated James Comey in exactly the terms used by Rod Rosenstein to fire him back before Trump admitted that it was about Russia.  The IG also came down hard on Andrew McCabe.  So, he doesn’t look too marshmallow-like to me.  Let’ wait on the reports.  In the meantime, the suspicion might arise that Manafort would fabricate stuff to please Mueller.  Or, if Manafort says “I don’t know anything about what you want to know,” does he get the book thrown at him?
  2. Michael Cohen pleaded to a bunch of stuff he did independently of Trump + he helped pay hush money to a couple of women with whom Trump had had sex.    Similarly, HRC refused to release the text of her secret speech to Wall Street bankers for exactly the same reason as Trump tried to hide the revelations of “Stormy Daniels” and that other one.  People might think less of them during the run-up to an elections.  Did the lawyers and political operatives–if any–for HRC who counseled her on refusing to release the text of the secret speech also violate campaign finance laws?  After all, they got paid money to keep the truth hidden.   For that matter, how many of the Democrats who want to get Trump also said “OK” when Bill Clinton said “Well, we’ll just have to win it”?
  3. Turning to matters of substance, rather than froth and scum (see: Andie Tucher https://www.amazon.com/Froth-Scum-Beauty-Goodness-Americas/dp/0807844721 ),  Mexico is willing to make concessions on NAFTA and Canada will soon join in.  China has resumed talks with the US on tariffs and may yet open its markets to American goods.  The NATO allies are finally starting to meet their long-standing commitments.  North Korea has begun talks with South Korea and the US on nuclear disarmament.  It seems that the North Koreans suddenly figured out how to make (or buy) ICBM rocket engines and the computer technology to prevent US cyber-attacks on missile tests.  Could the CIA offer some insight on how this happened?  Then, huge numbers of ordinary Iranians, according to the New York Times, want their government to talk to the US, given the collapse of the Iranian economy.  The corporate tax is down to international norms.  OK, spending is wayup above international norms.  The unpredictable regulatory environment of the Obama administration has been reined-in.
  4. Yes, Trump identifies with “strong leaders.”  What do people want?  A continuation of the “Empire” as it operated under Clinton, Bush, and Obama?  Bunch of weak elites of both parties are nostalgic for the era of the USA telling everyone else what they had otta do, while getting bent-over on trade and other stuff.  Times up.
  5. Minor social stuff.  A.) Wait, Asia Argento had sex with  a 17 year-old boy and he was “traumatized”?  As opposed to grateful?  You ever see her in “La Reine Margot”?  Was he fighting to keep his virginity?  You know any 17 year old boys who are/were saving it for marriage?  Me neither.  America never was “Up With People.”  Then, how did the stuff come to the NYT?  And why were they in such a hurry to publish it?  To bust on an immigrant woman who may or may not be a little kinky?  Think about that one.  B.)  One little picture in the paper of the activists who pulled down the statue of “Silent Sam” at Chapel Hill.  (S’OK by me.  My great-great grandfather was killed at Nashville commanding the 35th Iowa Volunteer Infantry Regiment.  Picture of him getting knocked backward off his horse by a minie-ball to the head appeared on the front page of Harpers.  Burn the whole place down.)  In that picture, all but one of the people is white.  In the story accompanying the picture, the black people who are interviewed are described as being at the back of the crowd.  Was the crowd truly multi-racial, diverse, and inclusive, or was it a bunch of white activists who appropriated the justifiable anger of African-Americans for their own purposes? I would really appreciate it if people could give me some information or advice here.

Spy Stories 1.

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During the Fifty Years War, the opponents spied on each other by every means possible.  The Soviet Union possessed marked advantages over its enemies in this arena.  On the one hand, it was a brutal police state that could tightly control its frontiers and limit the contacts between its own “citizens” and foreigners.  Soviets who went abroad were closely watched.  On the other hand, this reality did not penetrate the minds of many foreigners.  Foreign Communists and progressive-minded “fellow travelers” clung to an idealized view of the Soviet Union as rough-around-the-edges place where socialism and democracy were being constructed.  Actually going there did nothing to alter their opinions in most cases.[1]  During the “Devil’s Decade” of the Thirties, the Soviet intelligence services recruited many Western agents.[2]

The most effective (so far as we can tell) and attention-grabbing of these spies were the so-called “Cambridge Five”: Harold “Kim” Philby, Donald Maclean, Guy Burgess, Anthony (one is tempted to go the Full-Brideshead and call him “Antoine”) Blunt, and John Cairncross.  They were recruited while undergraduates, then allowed to develop over time.  During the Second World War they came to occupy important positions in British government.  The British intelligence community only caught on in the 1950s.  It chose to cover-up more than expose.[3]

The most satisfying book on Philby explores the dense network of friends and colleagues, British and American, he exploited.  Everything depends upon the barriers to entry and the acuity of the gatekeepers.  Once you are on the “inside” of a group, people tend to see your behavior as congruent with your supposed function.  If you seem to be good at what you do, then trust increases.  What if Jesus was actually the son of Satan?  What if Judas found him out?[4]

Intelligent, ordinary people surround spies.[5]  Often they see nothing unusual in the behavior of the spies.  Geoffrey Hoare[6], previously and subsequently the Middle East correspondent for the Times of London, lived near Donald and Melinda Maclean in Washington, D.C., then was in Cairo when Donald Maclean’s drinking got him sent back to London for “health reasons.”  He was on the same flight to London as Maclean, but saw no sign that Maclean was under immense psychological pressure.  “He had none of the external signs of someone suffering from a severe nervous breakdown.”  Later on, Hoare befriended Melinda Maclean, who had been left behind when Maclean and Guy Burgess disappeared in 1951 before they could be questioned by British security officers.  He was very surprised when she did a bunk herself in 1953.[7]  Tim Milne, a long-time friend of “Kim” Philby and himself a senior officer in MI-6, saw no hint of treason in him.[8]

On the other hand, there was Guy Burgess.  Burgess provided endless scandals: he was an outrageous drunk and an outrageous homosexual at a time when the former seems to have been common and the latter a felony.  The British security services turned a blind-eye in the worst version of Nelson.  “Surely he can’t mean goats” said one security officer briefed on the “peculiar tastes” of Guy Burgess.  Burgess managed to be recalled from Washington and this allowed him to tell Donald Maclean that they were buggered and had to bolt for the Soviet Union.[9]  The two, followed eventually by Melinda Maclean, simply disappeared for a bit.

Burgess and the Macleans reappeared in Moscow in 1956.  Then “Kim” Philby disappeared from Beirut in 1963.  Much gnashing of awful British teeth followed.[10]  Rebecca West had written one version of a book, The Meaning of Treason, in 1947.  It was all about the “quislings” and collaborators of the Second World War.  “A rum lot, what?”  Her second version, The New Meaning of Treason, in 1964, was all about the Soviet spies.  She lambasted the security service (MI-5) and the in-breeding of the upper classes who filled up the diplomatic service.[11]  While understandable and valid, her criticisms didn’t get at the heart of the matter.  Much later it was revealed that Anthony Blunt, a highly-esteemed art expert, had been among the “Cambridge Spies” who had been recruited by the Soviets in the 1930s.  His life revealed the essential puzzle.  How can someone hate a society so much that he would betray its secrets to another country, but still insist on enjoying all the fruits of that society?[12]

[1] Paul Hollander, Political Pilgrims: Western Intellectuals in Search of the Good Society (1997).

[2] Notably the members of the “Red Orchestra” in Germany and France, the Gold-Rosenberg group in the United States, and the “Cambridge Five” in Britain.

[3] At least three of the men—Maclean, Burgess, and Philby—were alcoholics.  Did this make them particularly adept at deception, rather than vulnerable to error and exposure?

[4] I’m not trying to get fired from my job at a Catholic college.  I’m just trying to illustrate a psychological tendency.  In any event, see Ben Macintyre, A Spy Among Friends: Kim Philby and the Great Betrayal (2015).

[5] “Roland Philipps on the Cambridge spies,” WSJ, date misplaced; “Jason Matthews on secret agents of the Cold War,” WSJ, ditto.

[6] Husband of the remarkable Clare Hollingsworth.  See: https://en.wikipedia.org/wiki/Clare_Hollingworth#Personal_life

[7] Geoffrey Hoare, The Missing Macleans (1955).

[8] Tim Milne, Kim Philby (2014).

[9] Andrew Lownie, Stalin’s Englishman (2014).

[10] See: https://www.youtube.com/watch?v=hOHiPvl2mWk  Unless you have British relatives from earlier generations.  Then you already know what I’m talking about.

[11] Rebecca West, The New Meaning of Treason (1964).

[12] John Banville, The Untouchable (1997).

The Fifty Years War 1.

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Nazi Germany, the Soviet Union, and the Peoples Republic of China threatened the survival of millennia of human progress.  They had to be fought to the death.  Otherwise darkness would spread over the Earth.  It would be easy to characterize this as the Children of Darkness versus the Children of Light.  Life isn’t like that.  Instead, squalid moral compromises imposed themselves in this titanic struggle.  So, from 1939 to 1989, we embraced the lesser tyrannies in order to defeat the greater tyrannies.  The United States allied itself with the British Empire and Stalinist Russia to defeat Hitler’s Germany.  Then the United States allied itself with Franco’s Spain, Salazar’s Portugal, Saudi Arabia, post-Nasserite Egypt, Asian dictatorships (Taiwan, South Korea, South Vietnam), Shavian Iran, then Saddam Hussein against the Islamic Republic of Iran, and a great many African dictatorships.

We got our hands dirty in the process.  Very dirty.  We tolerated the atrocities of inhumane regimes allied to our cause.  We ourselves–and not just the soldiers we sent to do our bidding–committed atrocities.  We advanced the interests of the private corporations that we used as instruments and proxies.  We slighted the humanitarian organizations that expressed an important strand of American idealism.

And we won.  Nazi Germany, Imperial Japan, the Soviet Union as created by Joseph Stalin, and Communist China as created by Mao Zedong have all been laid in the dust.  We won, but not we alone.  We had allies, notably Britain and its Commonwealth of Nations, and the Western European countries that created the European Union, and Japan.

Squalid moral compromises didn’t always have squalid outcomes.  One great story of the second half of the Twentieth Century has been the expansion of democracy.  Places where democracy failed in the Thirties and Forties (Italy, Austria, Germany, France) have become solidly democratic political systems.  One-time dictatorships (Poland, Hungary, the former Czechoslovakia, the former Yugoslavia, Spain, Portugal, Greece, the Baltic states, Japan) have become democratic societies.  Formal colonial empires have been dismantled, allowing many societies to make a mess of things on the own and for the advantage of their own elites, rather than by and for Western elites.  The idea of Democracy has expanded.  Women have the vote and a greater chance at participation in most Western societies.  “Democracy” has come to mean government action to promote material welfare and opportunity in many countries.

Still, the “Fifty Years’ War” had its costs.  Not all of them were numbered in economic terms or human lives.  The war cost us in social and psychological terms.  Chief among them seems to be the entrenching of a war mind-set.  This appears in the overblown hostility to Vladimir Putin’s Russia and the fear of radical Islam.  Loathsome as these are, neither poses an existential threat.

What have we done, what will we do with our victory?  That is, “What do we offer?”  NOT the “blood, toil, tears, and sweat” declared by Winston Churchill.  Rather we want to offer honest work at decent pay; family homes; the right to your opinion, even if it is nutty or you don’t care to say; equal treatment under the law; and a tolerance for diversity.

What we aspire to offer everyone isn’t what we do offer to everyone yet.  Still, it’s better than wearing a suicide vest into a steamy rural market or writing malware in a freezing tenement.

Default Setting.

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I’m not sure that History weighs on us, but Memory certainly does.[1]  For example, inflation and deflation are subjects of learning and memory for those who experience them.  Deflation (falling prices) plagued American borrowers and benefitted American lenders in the last quarter of the 19th Century.  People looked at inflation (rising prices) with longing or loathing.  If you were, say, 64 in 1934, then you were born in 1870.[2]  Growing up, you would probably have heard about reams of paper money printed without any fixed relationship to gold in order to finance your particular country’s search for victory in the Civil War.  As an adult, you would have read with exultation or dread, depending on your social class, William Jennings Bryan’s “Cross of Gold” speech and the Populist calls for the free coinage of silver at a ratio of 16:1.  That is, you would have been familiar with inflation as a good thing (for debtors) or a bad thing (for creditors), rather than as just a normal thing.  In the wake of the election of 1896, a conservative victory, Congress enacted American adhesion to the gold standard.  However, that was just Congress, a bunch of gutless poltroons (why else would you bribe them?) who might change their minds with the wind.  As a result, many lenders inserted “gold clauses” in contracts.  These obligated borrowers to repay in gold coins of “present weight and fineness” or in paper of equivalent value.  Basically, “gold clauses” were inflation-proofing insisted upon by lenders.  They applied to various contracts, but especially to bonds—government and corporate IOUs.

OK, skip ahead to the Great Depression of the 1930s.  Taking the leadership of a country sunk in the slough of despond, Franklin D. Roosevelt opted for inflation over deflation.  He severed the United States from the Gold Standard, which kept currencies fixed at specific rates of exchange, and then revalued the dollar.  This allowed Roosevelt to “raise” the price of gold held by the United States and print more dollars to accommodate its higher price.  The “price” of gold rose from about $21/ounce to $35/ounce.  So, by about two-thirds.  This inflated prices and devalued debts.  Great!  For anyone who had debts not inflation-proofed.

At this point, Roosevelt’s policy slammed into the “gold clauses” on many bonds.  Because of the two-thirds rise in the price of gold, debtors had to pay lenders about two-thirds more than they had borrowed.  One of those debtors was the United States government, which owed about $20 billion in gold-clause bonds.[3]  In 1935, the Supreme Court—in the “gold clause cases:–held that the government could abrogate public and private gold clauses.  That is, the U.S. government is not obligated to pay its debts and it did not pay them in this case.

Still, it is a commonplace that the United States has never defaulted on its debts.  That reassuring belief keeps people buying Treasury bonds when the deficit and national debt keep growing to extraordinary levels.  Except, maybe Bill Gross when he was at PIMCO.[4]

[1] That’s probably why “we” never learn from the past, but individuals often do learn from the past.  There is no way to transmit the acquired knowledge.  They why study History at all?  Because smart people will be among the few who learn lessons and for everyone else, it’s pretty entertaining.

[2] Sebastian Edwards, American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold (2018).

[3] Worth about $380 billion in 2018 dollars.

[4] https://www.theatlantic.com/business/archive/2011/03/pimcos-gross-asks-who-will-buy-treasuries-when-the-fed-doesnt/72276/ ; https://www.theatlantic.com/business/archive/2011/05/bill-gross-on-deficits-and-the-fed/238682/

Pakiban II.

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Americans idealize a government based on a division of powers, in which different branches of government can check—or authorize—the claims to power of other branches.  In contrast, Pakistan is a country dominated by un-elected, but highly regarded elites.  The military and the courts occupy pride of place, while elected legislatures and governments receive little respect.  This reflects a deep distrust of the idea of elections as a source of authority.

Pakistan also is an unusually corrupt country.[1]  In 2015, the “Panama Papers” hit the internet.  Essentially, these were secret records of a Panamanian law firm that had facilitated the creation and management of secret “off-shore” bank accounts for people around the world who had a lot of money whose origins they didn’t want to have to explain.[2]

One chief culprit was a Pakistani politicians named Nawaz Sharif.[3]  Pakistan has experienced only one peaceful, election-based, transfer of power at the executive level.[4]  Sharif has been prime minister of Pakistan three times so far.  He opposed the powerful role of the military in domestic politics.  He favored working out a deal with India.  The first two times, the army gave him the heave.  In July 2017, Pakistan’s Supreme Court evicted Sharif from office yet again.  The evidence is that Sharif is a crook.  Still, voters have put Sharif in power when his kleptomaniacal tendencies were well-known.[5]  The bum’s-rush he gets every time suggests that powerful institutions within Pakistan claim the right to issue voters their acceptable leaders.[6]

Sharif’s dismissal opened a can of worms.  First, the fact that other politicians were incriminated by the “Panama Papers” leak, but were not prosecuted suggests that the courts singled out Sharif.  On what grounds?  At whose behest?  Second, the Transparency International corruption ratings (see fn. 1.) suggest that almost everyone in Pakistan’s public life is as crooked as dog’s hind leg.  Is compliance with the desires of the powerful the condition for survival—and continuing chances for graft—in Pakistan’s politics?  Terms like “hidden hands” and “string-pullers” are common in the language of troubled states.  In Pakistan, these terms often refer to the Inter-Services Intelligence agency (I.S.I.) or the great landlords who hold the fate of millions of peasants in their hands.

Western observers object that the Sharif case makes it appear that “justice is often a means to a political end.”  That is, if you play by “their” rules, you’ll be “rich as Nazis!”—as Mr. Burns put it on “The Simpsons.”  If not, you end up in a bug-infested cell wearing red burlap as your gallows apparel for the morrow.  Tens, hundreds, of millions of ordinary Pakistanis go “Well, duh.”   Then, there’s “Traffik.”   https://www.youtube.com/watch?v=WW8qcbGRZ4U

[1] Transparency International rated Pakistan 113 out of 176 countries on its corruption index.  Wait, there are 63 countries even more corrupt than Pakistan!

[2] For a useful introduction, see: https://en.wikipedia.org/wiki/Panama_Papers

[3] See: https://en.wikipedia.org/wiki/Panama_Papers_case

[4] Max Fisher and Amanda Taub, “Pakistan, Ousting Leader, Dashes Fair Democracy Hopes,” NYT, 29 July 2019.

[5] Imagine Donald Trump being re-elected president in spite of his many vulgarities and incessant rule-bending.  It would not be that American voters didn’t know what they were getting.  Should such an election be allowed to stand? Should, instead, the courts or the legislature, or—Heaven forfend—the military be allowed to over-ride the will of the People as mediated through the Electoral College?

[6] Benito Mussolini once claimed that Italian fascism was an improved form of democracy because it was a qualitative, not merely, quantitative, democracy.  That is, some people’s opinions counted for more than did those of other people.

Annals of the Great Recession XV.

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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?

Annals of the Great Recession XIV.

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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.”