Walking around a used book store in Washington, D.C. I am reminded of another as yet unresolved dilemma left over form the Cold War: what to do with all the really narrowly focused specialty books on the Soviet Union for which all the retired Kremlinologists no longer have any use. You go to the Russia section in the store and it is like the PC book section: full of titles so arcane to the average used book store buying agent that they have no idea that they are the dupe to someone’s need to offload a bunch of obsolete books. Instead of, say, a few general histories of Russia in the Nineteenth Century or some modern books on Putin’s Russia, what you have are dozens of heavily thumbed tombs dating from the Sixties and Seventies on topics such as the persistence of the third five year plan in Soviet economic planning or the roll of the Politburo in ideology formation, 1954-1960. Just like many used book stores don’t buy PC books, D.C. used book stores should adopt a policy of no books on the Soviet Union by former CIA Directorate of Analysis employees.
Monthly Archives: August 2007
Ten More Years in Iraq
As the September date for the report on the effects of the surge in Iraq approaches, the right has been ginning up the rhetoric over what happens if the United States withdraws from the country. But almost no symmetrical consideration is given to the scenario of what happens if the United States stays. “The surge is working; we need to give it more time,” or “The United States is making progress in Iraq; our soldiers need to be given the opportunity to finish their mission there,” or some such thing is what one hears. But that’s more or less the extent of the scenario for staying. So we stay. But what then? The way the dialog around the issue is happening it’s as if deciding to continue in Iraq means the surge will get another four or five months and then … and then … and then thoughts trail off.
But war opponents should point out that the calculation isn’t withdraw, genocidal civil war ensues versus stay, no further conclusion. Some people are thinking about what staying in Iraq means and it’s not what anyone signed up for back in 2003.
For instance, the Washington Post reports on the findings that Representative Jan Schakowsky (Democrat-Illinois) brought back from her recent visit to Iraq (“ After Iraq Trip, Unshaken Resolve,” The Washington Post, 26 August 2007):
Rep. Jan Schakowsky made her first trip to Iraq this month, the outspoken antiwar liberal resolved to keep her opinions to herself. “I would listen and learn,” she decided.
At times that proved a challenge, as when Deputy Prime Minister Barham Salih told her congressional delegation, “There’s not going to be political reconciliation by this September; there’s not going to be political reconciliation by next September.” Schakowsky gulped — wasn’t that the whole idea of President Bush’s troop increase, to buy time for that political progress?
…
But the military presentations left her stunned. Schakowsky said she jotted down Petraeus’s words in a small white notebook she had brought along to record her impressions. Her neat, looping handwriting filled page after page, and she flipped through to find the Petraeus section. “‘We will be in Iraq in some way for nine to 10 years,’ ” Schakowsky read carefully. She had added her own translation: “Keep the train running for a few months, and then stretch it out. Just enough progress to justify more time.”
“I felt that was a stretch and really part of a PR strategy — just like the PR strategy that initially led up to the war in the first place,” Schakowsky said. Petraeus, she said, “acknowledged that if the policymakers decide that we need to withdraw, that, you know, that’s what he would have to do. But he felt that in order to win, we’d have to be there nine or 10 years.”
And Ted Koppel relates a private conversation in which Senator Clinton relates some of her thoughts about staying on in Iraq (“A Duty to Mislead: Politics and the Iraq War,” National Public Radio, 11 June 2007):
I ran into an old source the other day who held a senior position at the Pentagon until his retirement. He occasionally briefs Senator Clinton on the situation in the Gulf. She told him that if she were elected president and then re-elected four years later she would still expect U.S. troops to be in Iraq at the end of her second term.
Ten years. Is anyone prepared for another ten years in Iraq?
If the United states were to stay in Iraq for the next ten years, that would make it by far the longest war in U.S. history, nearly twice as long as the Vietnam war (168 versus 90 months). Say we simply project forward the current casualty rate. There are all sorts of problems with this, but also some reasons that this is probably a pretty good basis for such a calculation. Today the confirmed total U.S. killed is 3,724. So if the United States stays in Iraq for the next ten years the total by then will be 13,000 Americans killed. The cost of the war to date has been $450 billion. A simple linear projection puts the cost at the end of the next ten years at $1.5 trillion, which would be not bad considering some have been projecting $2 trillion.
Those are the costs to the United States of staying. Iraq Body Count puts total Iraqi deaths since the onset of the war at 70 to 77 thousand. In another ten years that would amount to between 245 and 270 thousand Iraqis killed. But Iraq Body Count only tallies directly reported deaths in the English language media and requires two independent sources before counting a death, so this is a very conservative number.
A quarter of a million Iraqis may be killed even if the United States stays in Iraq. War supporters talk of a bloodbath that will ensue if the U.S. withdraws. Do they think that it will be worse than a quarter of a million? And if they do think that it will be a worse number, can they really argue that by reducing the death toll from their hypothetical number to a hypothetical quarter-million, the U.S. will have prevented a tragedy?
But who knows what could happen. The insurgency might radically accelerate. The U.S. could be drawn into a war with Iran; that could spread to Afghanistan. Pakistan might be destabilized by all this. The Saudis could intervene in Iraq. Turkey could go to war with a Kurdistan hiding under the skirt of the United States. Or things might improve. Judgment about the future is difficult. But the debate should cease to be between the options of withdrawing and terrible consequences versus staying and don’t think any further about it.
Update: Kevin Drum (“Nine or Ten Years,” Political Animal, The Washington Monthly, 26 August 2007) has been reading Michael O’Hanlon and Kenneth Pollack ‘s Iraq visit report (“Iraq Trip Report,” Brookings, August 2007) and Messrs. O’Hanlon and Pollack’s prediction for the surge is,
Over the long term, the United States must be looking to draw down its force levels in Iraq overall — probably to 100,000 or fewer troops — by about 2010/2011.
That’s two and a half more years at current force levels. Then we can go back to what was, prior to the surge, merely a heightened troop presence for an indeterminate period of time. Mr. Drum points out, “that suggests he doesn’t think total withdrawal will happen until, say, 2016/17 or so. In other words, nine or ten years.” Mr. Drum also points out that historically prolonged counterinsurgency wars have had negative consequences for nations prosecuting them.
2008: Even the Worst Case Scenario is Rosy!
I’m going to post an electoral map and some bean counting because I know this is one of Kyle’s favorite subjects and I am hoping to tempt him out of his quietude with a delicious helping of red and blue.
Chris Bowers at Open Left has crawled the recent polling data and — all appropriate qualifiers about people not tuned in yet and a lot can happen between now and then — compiled the current outcome of what he thinks is a strong Republican-weak Democrat match-up. In Clinton vs. Giuliani, Hillary Clinton wins 335 to 203. In Clinton vs. Romney it is a Hillary Clinton electoral landslide at 430 to 108.
As Mr. Bowers puts it (“Two General Election Maps,” 23 August 2007),
… it is important to keep in mind that Mitt Romney and Rudy Giuliani are the two frontrunners for the Republican nomination right now, and that Hillary Clinton is supposedly the least electable Democrat of the four early state candidates in double digits. To put it another way, this is supposedly the worst-case scenario for Democrats right now. On top of this, what do you think will happen to either Giuliani or Romney’s numbers when, for nine consecutive months next year (February 6th through Election Day), they are on every media possible, every day, arguing that we don’t need to withdraw any troops from Iraq?
Call me permanently bearish on the Democrats, but it is not only the Republicans who are going to have to endure nine consecutive months of media coverage. What’s going to happen over those nine months is that, nomination in hand, the Republican will tack back towards the center and dissemble and equivocate on the Iraq issue while the Democratic candidate offers elaborate justifications of policy positions, long-winded explanations on the difficulty of carrying out a withdrawal, et cetera until the average voter cannot tell the difference between the two policy positions. Meanwhile, as the above depicted outcome becomes more clearly fixed in the mind of the right-wing machine, they will be driven to ever greater acts of desperation. For instance just yesterday we were reminded that Democrats were at fault for the Cambodian genocide.
A Broad View of What Constitutes a Bank
In today’s column Paul Krugman (“It’s a Miserable Life,” The New York Times, 20 August 2007) points out an interesting aspect of the current financial crisis:
The key to understanding what’s happening is taking a broad view of what constitutes a bank. From an economic perspective, a bank is any institution that offers people liquidity — the ability to convert their assets into cash on short notice — while still using their money to make long-term investments.
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Consider the case of KKR Financial Holdings, an affiliate of Kohlberg Kravis Roberts, a powerhouse Wall Street operator. KKR Financial raises money by issuing asset-backed commercial paper — a claim that’s sort of like a short-term C.D., used by large investors to temporarily park funds — and invests most of this money in longer-term assets. So the company is acting as a kind of bank, one that offers a higher interest rate than ordinary banks pay their clients.
It sounds like a great deal — except that last week KKR Financial announced that it was seeking to delay $5 billion in repayments. That’s the equivalent of a bank closing its doors because it’s running out of cash.
The problems at KKR Financial are part of a broader picture in which many investors, spooked by the problems in the mortgage market, have been pulling their money out of institutions that use short-term borrowing to finance long-term investments. These institutions aren’t called banks, but in economic terms what’s been happening amounts to a burgeoning banking panic.
Mr. Krugman points out that while the banking industry narrowly defined is well regulated — that is, both brought under law and made more uniform and predictable — by a host of institutions — the FDIC, the Federal Reserve, various banking laws, the Basil accords, et cetera — these other bank-like institutions are not similarly covered. Hence, the Fed can modify its rates all it wants and the FDIC may offer insurance, but these don’t effect the pricing of asset backed securities or the willingness of investors to purchase commercial paper in anything like the way that they effect regular banking.
Just as the financial sector innovates, so regulation and governing institutions should innovate as well. Unfortunately the sort of consensus that produces institutions like the Federal Reserve or the FDIC come only out of major crises — not the sort at which we are currently looking. For that, the financial system will have to build up a lot more pressure.
State Resource Acquisition
As long as I am kicking Thomas Barnett, I should mention his article on the creation of AfriCom in the July issue of Esquire (“The Americans Have Landed,” Esquire, vol. 148, no. 1, July 2007, pp. 113-117, 134-137). It generated a bit of attention when it first came out (e.g. Plumer, Brad, “Surging Into Africa” and “More on Africa Command,” both 24 July 2007; Farley, Robert, “Africom,” TAPPED, The American Prospect, 24 July 2007; Yglesias, Matthew, “Africa Command,” The Atlantic.com, 24 July 2007).
Mr. Barnett pushes around a few theories about why AfriCom, but dismisses my own (“AfriCom: The New Scramble for Africa,” smarties, 1 May 2007) with some hand-waving:
There’s oil here, but the United States would get its share whether Africa burns or not, and it’s actually fairly quiet right now.
The Chinese are here en masse, typically embedded with regimes we can’t stand or can’t stand us, like Sudan and Zimbabwe. But the Chinese aren’t particularly liked in Africa and seem to have no designs for empire here. Beijing just wants its energy and minerals, and that penetration, such as it is, doesn’t warrant Africa Command, either.
The theory by which Mr. Barnett dismisses the idea that AfriCom is an economic-strategic countermove against China is that it’s unnecessary because we can all get access to the recourses we demand through the market. The problem with too facile a dismissal of this theory is that states have never wholly committed themselves to one theory of resource acquisition.
Throughout most of history governing institutions have been mercantilist and have lived by beggar-thy-neighbor. The way that a state and its clients acquired resources was by seizing them. It was only with the advent of modern liberalism that a firm division between the state and the economy emerged, but it was a slow process and up through the Second World War many a state pursued a policy of economic expansion through conquest. It was widely believed by many liberals that imperialist and economic competition was the cause of the First and Second World Wars. Hence at the end of the Second World War the United States decided to root out imperialism and replace it with a global system of open markets. Henceforth states would get out of the business of resource acquisition and it would be an entirely private activity conducted through the peaceful means of the market, not conquest. Roosevelt hated imperialism and sought to smash the European and Japanese colonial empires and made decolonization a central mission of the United Nations. Also GATT and the belated WTO were to be integral parts of this new liberal international system on par with the United Nations, the IMF and the World Bank, to prevent war and ensure smooth, open economic access — missions perceived as integral to one another by Roosevelt and his men.
But this liberal vision was a utopian fantasy of a sort in that states were never about to wholly abandon the economic foundation of their strength — and hence their survival — to the vagaries of the market. So states have wavered between theories of resource acquisition: open markets versus conquest.
The United States has been the most advanced liberal state and in the Twentieth Century became the guarantor of system of open markets. The majority of the military actions of the United States have been in support of this global system of markets. Nearly all of its interventions in Central America have been over worries that some critical resource was about to be removed from apolitical market access by a populist socialist. The U.S. intervened in Second World War Europe — among other reasons — to prevent Hitler from doing to the United States what Napoleon attempted to do to England with his continental system. The U.S. tempted Japan to war because it was unthinkable to the U.S. and other interested parties that Japan should monopolize the resources of half the Pacific rim and half of Asia. For nearly inverse reasons the United States went to war in Vietnam because it recognized — as demonstrated by Japan’s behavior leading up to the Second World War — that Japan’s economic interest in Southeast Asia was too significant for the resources of that region to fall behind the iron curtain (there were two contending world systems at that time). The First Gulf War was to prevent the emergence of too powerful an oil monopoly — sort of the Pentagon doing to greater Iraq what the FCC did to Ma Bell in 1982.
The United States is not about to trust its economic wellbeing to serendipity: it’s going to manage it — and that means a lot of things, but one thing that it means is the military. But the United States is acting — in part — on behalf of the liberal international order. That the U.S. is required to intervene as much as it does — or perceives that it has to — suggests that a lot of states the world over still want to lapse from the open market back to conquest as a means for laying hand on their necessities. On the other hand, perhaps the U.S. is a player, only posing as the referee the better to play (Calvinball?).
In Africa it may be the case that the liberal order can provide everyone what they want — or at least everyone doing the divvying up; whether the parceling of Africa’s resources will have any benefit for the Africans themselves remains to be seen. But no state — not even the primary advocate and guarantor of the liberal international order — is about to stake its future on the hope that unfettered market access is going to play out in a straightforward way (I’ve written about this before; see “China’s Strategy for Resource Competition,” smarties, 30 March 2005, bullet two). Even in this world of open markets — or especially in this world of open markets — sanctions and economic exclusion have always played a role. So states make nice and play the diplomatic game of tit-for-tat, preparing to clamp down should the time come. Favors are proffered and chits collected — for a rainy day. A few military bargains will be struck and maybe some men and hardware will be put in place so that everyone knows how things stand. No state is going to idle while a positive sum game plays out against its favor. In the event of a crisis, states are either the quick or the dead. In Africa what we are seeing is the laying out of the pieces on the board and the early maneuvers.
Public Financial Institutions
Thomas Barnett is conservative leaning and — ironically enough — is one of those intellectuals who is stupid in exactly the way that conservatives predict intellectuals to be: he tends to trip over his own intelligence. A perfect example is his completely incoherent take on the recent, sudden burst of the housing bubble (“Nice analysis of the sub-prime ‘crisis’,” 13 August 2007):
The only crisis I see coming out of the subprime shenanigans (such new tricks to fleece people will always be with us) would involve governments assuming they should bail out all those hedge funds that long dabbled in this stuff. O’Driscoll makes a great comparison to the S&L crisis of years ago: so long as financial institutions assumed the FDIC bailout was coming, they’d pawn off the risk to the government instead of effectively discounting it themselves.
Really? The only crisis he sees is moral hazard? So we’re courting moral hazard toward no specific end?
Government intervention isn’t bailing out “all those hedge funds”: it is protecting the rest of us — not necessary culpable in the “shenanigans,” but still subject to the consequences thereof — from spreading economic misery. To suggest that this same old moral hazard argument that economic conservatives have been making since 1913 is somehow penetrating analysis of our present day woes is completely retrograde. Moral hazard is real, but people with less pronounced agendas have a lot more interesting things to say about the subject than that in the face of it we should do nothing.
The FDIC, the Federal Reserve, the SEC, punitive, but stabilizing taxes, transparency laws, etc. were created specifically because “foolish” investors engaging in “shenanigans” could be found well before any of these public sector economic institutions ever existed; and further, to protect non-privileged investors who did everything by the book from said “shenanigans” — in other words, to prevent the spread of irrationality. Once a critical mass of people begin to act irrationally — e.g. in a financial panic — rationality flips and the irrational becomes the rational thing to do.
And as if this wasn’t disconnected enough, then there’s this parenthetical aside:
(since finance is–to a large part–a young man’s game, the bulk of the front-line players tends to age out every dozen years or so, which pretty much guarantees you new forms of shenanigans with the same regular frequency)
It’s all fine and good to use pejoratives such as “shenanigans” and “foolish” — as Mr. Barnett does — to describe less than perfectly rational market actors who continue to fall for plaid-out investment schemes such as the housing bubble long after their true nature has become more than apparent, but if less than perfectly rational behavior is in fact systematic, as Mr. Barnette suggests with this theory, then what’s the point of moralizing about it? Systematic problems should be dealt with through systematic solutions — and not systematic solutions that entail mass suffering for all of society.
The Federal Reserve and Mortgage Backed Securities II
So it turns out that what was unusual about the Friday open market operations of Federal Reserve was even more narrowly technical still. The Federal Reserve always accepts mortgage backed securities as collateral, but usually issues loans backed by this sort of collateral at a less favorable rate. What was unusual on Friday was that the Federal Reserve issues all loans at the most favorable rate, no matter the collateral.
Kevin Drum passes along an e-mail from Stephen Spear, a professor of economics at Carnegie Mellon University, in which the Professor relates a conversation with a Federal Reserve colleague about the operation (“Friday’s Liquidity Event,” Political Animal, The Washington Monthly, 12 August 2007):
Here’s what I’ve been told by a colleague at the Fed:
First a minor point: Most of the open market operations that the Fed does (including Friday’s) are short-term collateralized loans and not outright purchases of securities. Friday’s loans were all overnight (well, over the weekend, actually, maturing on Monday). So the Fed is technically not buying anything; it’s been making short-term loans of cash against collateral.
The Fed accepts three categories of collateral for these loans. One is Treasury securities, another is other government agency securities, and the third is mortgage-backed securities that are federally guaranteed. Because they are federally guaranteed, the mortgage-backed securities the Fed accepts are (obviously) the very best.
Typically the interest rate on these short-term loans varies slightly depending on the type of collateral offered by the borrower. Treasuries get the lowest rate; mortgage-backed securities the highest. (The details of the last 25 OMOs, including the rates for each type of security, are available here.)
What was unusual about Friday (other than the size of the operation) is that the Fed announced it would lend against all three types of collateral at the same rate.
To quote my Fed colleague on this: “I’m not sure why we did this. I think the idea was that given the size of the operation we did not want to risk disrupting the Treasuries markets, but there may have been other motivations. The expectation was that borrowers would primarily use mortgage-backed securities, since these have the lowest opportunity cost to the borrower.”
On the web page above, you will see that for Friday’s operations, under collateral type it just says “mortgage-backed.” What this means is that mortgage-backed securities or any better securities were allowed as collateral — in other words, all three types were acceptable. Apparently, the media misinterpreted this as saying that the Fed was only accepting mortgage-backed securities, which led to the headlines about the Fed buying these things up.
So, the bottom line is that the Fed’s actions on Friday were unusual, but not tremendously so. It did three OMOs instead of the usual one. The quantity of reserves lent out was larger than normal, and the way collateral was handled was slightly unusual. But the general operating procedure, including the type of collateral accepted, was completely standard. It would seem that the media is trying to make the story a lot more sensational than it truly is.
Given the extraordinary amounts of money here along with tweaks to the usual policy, obviously the Federal Reserve sees a problem requiring extra-ordinary measures, but obviously not the panic initially reported by the press.
The Federal Reserve Does Not Buy Mortgage-Backed Securities
When I saw the following story in the New York Times on Friday (Peters, Jeremy W. and Wayne Arnold, “Stocks Are Volatile After Global Sell-Off,” 10 August 2007) I fucking freaked:
The E.C.B. injected another 61 billion euros ($84 billion) into the banking system, after providing 95 billion euros the day before. The Federal Reserve today added $19 billion to the system through the purchase of mortgage-backed securities, then another $19 billion in three-day repurchase agreements. The Fed added $24 billion on Thursday.
It’s not the amounts of money that are unusual. Yes, this indicates a fairly aggressive attempt to preserve liquidity in financial markets and it is definitely earning the headlines it is getting in The Financial Times and The Wall Street Journal. But that the Federal Reserve might engage in the direct purchase of $19 billion worth of mortgage-backed securities would indicate a real problem and the adoption of extraordinary, panic measures on the part of the Federal Reserve. On Friday I was thinking how I might reinvest my 401k into gold doubloons.
Thankfully, on Saturday Dean Baker pointed out (“The Fed Does Not Buy Mortgage-Backed Securities!!!!!!,” Beat the Press, 11 August 2007) that this was just incompetence on the part of the economic reporting at The New York Times and The Washington Post (who also reported the story). That what really happed was that the Federal Reserve made a more routine loan through the discount window and accepted the $19 billion in mortgage-backed securities as collateral for the loan.
While you’re there, his post (“Tell The Post: The Problem Isn’t Subprime,” Press, 11 August 2007) pointing out that the cause of our current financial woes is not the subrime market (dirty, irresponsible poor people) is a useful reminder. The real problem is the bursting of the housing bubble more generally. The subprime market is just the first place it’s really being felt.
Friday Cat Blogging: Too Hot for Kitty
The weather has been unbearably hot here in D.C. — though not yet topping out the thermostat for the region in August. I’ve often wondered how an animal with a fur coat permanently affixed to his back copes with this heat. It’s never seemed to pose a problem for kitty. I guess that he has a much smaller mass-surface area ratio than me. But this year even he seems to be feeling it. He has been doing a lot of flopping, laying around and generally looking miserable.
Where Your Boots Go, There Your Mind Will Be As Well
I think the proper way to think about our situation in Iraq is this. It may be true that many vile consequences may ensue in Iraq should the United States withdraw. But the options aren’t that the U.S. armed forces save Iraq from itself versus U.S. soldiers go back to sipping cool lemonade in the backyard. It’s entirely possible that the choice is between staying in Iraq or preventing the next September 11th.
Al Qaeda and their ilk have a grand strategy. They are not going to match their weakness against our strength. This is not the Fedayeen Saddam. They are not about to try to engage the Fourth Mechanized Infantry in Toyota pickup trucks. The Liliputian terrorists will bind Gulliver, overwhelm us with distractions, mire us in a series of diversions. Having no commitments, no obligations of their own, they will then match the nimbleness of al Qaeda against the encumberment of the United States. As Osama bin Laden himself has said, “All that we have to do is to send two Mujahideen to the furthest point East to raise a piece of cloth on which is written al-Qaida, in order to make the generals race there to cause America to suffer human, economic, and political losses without their achieving for it anything of note …”
My ever so slight sampling of the zeitgeist says that we are working our way toward a condition — material and of mind — not unlike that in the late 1990s and early 2000s as the country slouched toward September 11th. Dangerous and anarchic regions of the world are spreading, extremists are gathering strength, plots — one can imagine — are unfolding. Nothing less than the most recent NIE has suggested that the terrorist threat is growing, not waning, and that al Qaeda is gaining strength. Just as after the Cold War the United States was unable to heed the warning of both events and the prognostications of certain elites, so George Bush has the put the country into a trance of Iraq focus. Despite a changing threat profile, we can’t think about anything else. Already al Qaeda and Co. have pivoted. New threats are in the making, but mired in the thought of post-September 11th and Iraq — the irony here is too much — we are incapable of conceptualizing or doing anything to prevent the next September 11th.
The right has argued that in the post September 11th world, the old Cold War system of long-term alliances like NATO is obsolete, that the United States needs to remain nimble, to rely on ad hoc coalitions of the willing. And yet in Iraq the United States has permanently bound itself in a coalition of the compulsory. That broken statue of Hussein was the signing ceremony and there is no nullification clause in the treaty. In Iraq the United States stepped into a bear trap and it closed on our foot. It’s going to hurt and it’s going to be bloody, but its time to gnaw that foot off and hobble free — before the trapper comes to claim our pelt.
Marching Under Banners 