August 15, 2008
The Great Illusion
By PAUL KRUGMAN
So far, the international economic consequences of the war in the Caucasus have been fairly minor, despite Georgia’s role as a major corridor for oil shipments. But as I was reading the latest bad news, I found myself wondering whether this war is an omen — a sign that the second great age of globalization may share the fate of the first.
If you’re wondering what I’m talking about, here’s what you need to know: our grandfathers lived in a world of largely self-sufficient, inward-looking national economies — but our great-great grandfathers lived, as we do, in a world of large-scale international trade and investment, a world destroyed by nationalism.
Writing in 1919, the great British economist John Maynard Keynes described the world economy as it was on the eve of World War I. “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth ... he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world.”
And Keynes’s Londoner “regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement ... The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion ... appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.”
But then came three decades of war, revolution, political instability, depression and more war. By the end of World War II, the world was fragmented economically as well as politically. And it took a couple of generations to put it back together.
So, can things fall apart again? Yes, they can.
Consider how things have played out in the current food crisis. For years we were told that self-sufficiency was an outmoded concept, and that it was safe to rely on world markets for food supplies. But when the prices of wheat, rice and corn soared, Keynes’s “projects and politics” of “restrictions and exclusion” made a comeback: many governments rushed to protect domestic consumers by banning or limiting exports, leaving food-importing countries in dire straits.
And now comes “militarism and imperialism.” By itself, as I said, the war in Georgia isn’t that big a deal economically. But it does mark the end of the Pax Americana — the era in which the United States more or less maintained a monopoly on the use of military force. And that raises some real questions about the future of globalization.
Most obviously, Europe’s dependence on Russian energy, especially natural gas, now looks very dangerous — more dangerous, arguably, than its dependence on Middle Eastern oil. After all, Russia has already used gas as a weapon: in 2006, it cut off supplies to Ukraine amid a dispute over prices.
And if Russia is willing and able to use force to assert control over its self-declared sphere of influence, won’t others do the same? Just think about the global economic disruption that would follow if China — which is about to surpass the United States as the world’s largest manufacturing nation — were to forcibly assert its claim to Taiwan.
Some analysts tell us not to worry: global economic integration itself protects us against war, they argue, because successful trading economies won’t risk their prosperity by engaging in military adventurism. But this, too, raises unpleasant historical memories.
Shortly before World War I another British author, Norman Angell, published a famous book titled “The Great Illusion,” in which he argued that war had become obsolete, that in the modern industrial era even military victors lose far more than they gain. He was right — but wars kept happening anyway.
So are the foundations of the second global economy any more solid than those of the first? In some ways, yes. For example, war among the nations of Western Europe really does seem inconceivable now, not so much because of economic ties as because of shared democratic values.
Much of the world, however, including nations that play a key role in the global economy, doesn’t share those values. Most of us have proceeded on the belief that, at least as far as economics goes, this doesn’t matter — that we can count on world trade continuing to flow freely simply because it’s so profitable. But that’s not a safe assumption.
Angell was right to describe the belief that conquest pays as a great illusion. But the belief that economic rationality always prevents war is an equally great illusion. And today’s high degree of global economic interdependence, which can be sustained only if all major governments act sensibly, is more fragile than we imagine.
August 24, 2008
Melting Pot Meets Great Wall
By THOMAS L. FRIEDMAN
The Olympics may just be a sporting event, but it is hard not to read larger messages into the results, especially when you see how China and America have dominated the medals tally. Both countries can — and will — look at their Olympic successes as reaffirmations of their distinctly different political systems. But what strikes me is how much they could each learn from the other. This, as they say, is a teaching moment.
Call it: One Olympics — two systems.
How so? You can’t look at the U.S. Olympic team and not see the strength that comes from diversity, and you can’t look at the Chinese team and not see the strength that comes from intense focus and concentrated power.
Let’s start with us. Walking through the Olympic Village the other day, here’s what struck me most: the Russian team all looks Russian; the African team all looks African; the Chinese team all looks Chinese; and the American team looks like all of them.
This is especially true when you include the coaches. Liang Chow, the coach of the Iowa gymnast Shawn Johnson, was a popular co-caption of China’s national gymnastics team in the 1980s before he emigrated to West Des Moines. The U.S. women’s volleyball team was coached by a former Chinese player, Jenny Lang Ping, when it defeated China a few days ago. Lang, a national hero in China, led the Chinese team to a gold medal in the 1984 Los Angeles Olympics. It would be like Michael Jordan coaching China’s basketball team to a win over America.
The Associated Press reports that there are 33 foreign-born players on the U.S. Olympic team, including four Chinese-born table tennis players, a kayaker from Britain, seven members of the track-and-field team — as well as Lopez Lomong, one of the Lost Boys of Sudan’s civil war, who was resettled in the U.S. by Catholic Charities, and Leo Manzano, the son of an illegal immigrant Mexican laborer. He moved to the U.S. when he was 4 but didn’t gain citizenship until 2004.
It is amazing that with our Noah’s Ark of an Olympic team doing so well “that at the same time you have this rising call in America to restrict immigration,” said Robert Hormats, vice chairman of Goldman Sachs International. “Some people want to choke off the very thing that makes us strong and unique.”
China could learn something from our Olympic team as well: the power that comes from a strong society, woven together of many strands from the bottom up. For instance, it’s hard to drive around Beijing these days and not enjoy the thinned-out traffic and blue sky — which are largely the result of China ordering drivers off the roads and closing factories — and not wonder how these can be sustained after the Olympics. Many Chinese I have spoken to have asked: How can we keep this? Now that we have seen how blue the sky really can be, we don’t want to give it away.
The problem for China, though, is that environmentalism is a bottom-up movement in the rest of the world. While it requires a strong government to pass regulations from the top, it also can’t work without a strong, independent civil society acting as a watchdog, spotlighting polluters and suing businesses that do not comply. China can be green for the two weeks of the Olympics from the top down, but it can’t be green for the next 20 years without more bottom up.
That said, there are some things we could learn from China, namely the ability to focus on big, long-term, nation-building goals and see them through. A Chinese academic friend tells me that the success of the Olympics is already prompting some high officials to argue that only a strong, top-down, Communist Party-led China could have organized the stunning building projects around these Olympics and the focused performance of so many different Chinese athletes. For instance, the Chinese have no tradition of rowing teams, but at these Games, out of nowhere, Beijing fielded a women’s quadruple sculls crew that won China’s first Olympic gold medal in rowing.
The lesson for us is surely not that we need authoritarian government. The lesson is that we need to make our democracy work better. The American men’s basketball team did poorly in the last Olympics because it could not play as a team. So our stars were beaten by inferior players with better teamwork. Our basketball team learned its lesson.
Congress has gotten worse. Our democracy feels increasingly paralyzed because collaboration in Washington has become nearly impossible — whether because of money, gerrymandering, a 24-hour-news cycle or the permanent presidential campaign. And as a result, our ability to focus America’s incredible bottom-up energies — outside of sports — has diminished. You see it in our crumbling infrastructure and inability to shape a real energy program. China feels focused. We feel distracted.
So, yes, America and China should enjoy their medals — but we should each also reflect on how the other team got so many.
August 24, 2008
Slipping Over the Great Firewall of China
By NICHOLAS D. KRISTOF
What makes the news from China is usually the bad news: the arrests, the raided churches, the blocked Internet sites, the overzealous security goons. That’s the way journalism works — we cover planes that crash, not those that land.
Yet the underlying trend in recent years is the opposite. For all the continuing repression, Chinese live far freer lives now than when I lived in Beijing in the 1980s and ’90s. Ordinary citizens can now easily travel abroad, choose their own housing and jobs, and move to whatever Chinese city they want to.
Then there is the Internet.
It’s true that the government censors critical Web sites and closes down troublesome blogs. Yet there aren’t nearly enough censors to manage the job, and many Chinese are quite adept at technological ladders over the Great Firewall of China. Objectionable posts are deleted by censors, but then are quickly reposted on 50 different platforms.
This is a cat-and-mouse game in which the spotlight is usually on the mice when they get caught: China has more Internet commentators in prison than any other country. But the larger truth is that the mice are winning this game, not the cats.
Over the last five years, I’ve regularly tested the Chinese Internet censors, trying to map the boundaries of permissible comment. The first time I did this, in 2003, all posts in Chinese chat rooms had to go through a moderator. I would post critical comments (pretending to be Chinese) and they would go up only if they were very polite and roundabout.
Then over the years the system changed. I found that my posts went online automatically, but moderators kept watch on the forums and quickly deleted anything deemed subversive. So, unless the moderator was off on a coffee break, sharp criticisms would vanish within 10 minutes or so.
This year I found the openness continuing to expand. Direct denunciations of the Communist Party and its leaders are not allowed in chat rooms, but implicit criticisms of government policies are common.
I was able to post sharp criticisms and subversive statements even on The People’s Daily Web site. Some sites had automatic filtering that would catch troublesome terms like “Falun Gong,” or “Tiananmen” or “human rights,” and in those cases the post would go to a moderator who would delete it.
But it’s easy to defeat the filter software. On one site, for example, I got around the filter by inserting a comma between the characters for “human” and “rights.”
Frankly, my subversive posts in the chat rooms provoked yawns, because most netizens were less interested in politics than in finance. The chat rooms were sizzling with indignation at the plunge in the Chinese stock markets, and angry commentators were demanding bailouts.
One person responded disdainfully to my post on human rights: “Who cares about that, when we’re all losing our shirts in the stock market. We shareholders love the country, but the country doesn’t love shareholders.”
It’s also worth noting that many Chinese seem less distressed by Internet censorship than Americans. One study found that four out of five Chinese believe the Internet should be controlled, partly because of concerns about pornography.
Aside from my chat room postings, I also started Chinese-language blogs on the popular Web portal Sohu.com and on the Chinese version of Yahoo — it takes just a few minutes and no proof of identity to start a Chinese blog — to see what would be blocked. I posted entries criticizing the Chinese leadership and calling for freedom for Falun Gong practitioners. Nothing happened, so I pushed the limit and asked what should be done to commemorate the “Tiananmen massacre” of 1989.
All my posts on the blogs went up instantaneously and have remained up for the last week; I find it impossible to be censored. The reason is simple: nobody reads my Chinese blogs. China has around 30 million active blogs, and as long as they don’t trigger political problems, the government doesn’t care. (State Security will presumably now find them and shut them down.)
I also saw firsthand how young Chinese are fearless on the Internet in a way that bodes trouble for the authorities. A young Chinese woman was helping me post my incendiary comments so that they didn’t have a strong American accent, and when I stepped away for a few minutes, she idly experimented on her own. When I returned, she gleefully nodded at the screen.
“Hey, look, this went up,” she said, pointing: “Let’s overthrow the Communist Party!”
Horrified, I asked her to delete the post immediately so that we wouldn’t both be arrested for counterrevolutionary offenses. She did so with a shrug, clearly thinking: What wimps these Americans are ...
August 30, 2008
Champagne and Tears
By BOB HERBERT
It was as though the Champagne had been on ice for half a century or more. On Thursday night, with Barack Obama formally accepting the Democratic presidential nomination at Mile High Stadium in Denver, African-Americans from coast to coast and beyond felt they might now dare to pop the corks.
As I talked to black residents in and around Detroit, a troubled city that has never fully recovered from the riots of 1967, the personal stories — some of them pent-up for decades — came in an emotional rush, often accompanied by tears.
The message I heard again and again was that the triumph of Senator Obama in securing the nomination helped to redeem some of the disappointment and grief of many years of racial humiliation and oppression.
“I was in Clarksville, Miss., when Emmett Till passed away,” said Willie Banks, a sales representative who watched Senator Obama’s speech at Bert’s Warehouse Theatre, a cavernous restaurant and bar that had to set up tables and a portable video screen in the street to accommodate the overflow crowd.
Till, in one of the most notorious lynchings of the 20th century, was a 14-year-old black boy who was kidnapped, mutilated and murdered in Mississippi in 1955 for whistling or saying something fresh to a white woman. Photographs of his bloated, partially decomposed body circulated widely.
Mr. Banks was 12 at the time. “Those pictures really stuck in my mind,” he said. “And the message I got was if I stepped out of my place, that could happen to me. You shouldn’t have to think that way, but that’s the way I thought.
“So, no, I never thought I would see a black man nominated for president. This is such a great day.”
I mentioned to an elderly woman making her way into Bert’s that the weather had cleared up. A light rain had fallen earlier in the day.
She reacted with surprise, as if the comment had been foolish. “God wouldn’t let it rain on a moment like this,” she said.
Jennifer West, a 47-year-old insurance executive told me: “We’re all sitting on feelings we don’t usually talk about. We’re starved for a collective sense of affirmation. Barack is the son, the brother, the uncle, the cousin who made good. Who overcame. God bless him for what he means to us.”
The suddenness of Mr. Obama’s rise added to the sense of amazement.
“It’s so very exciting,” said Pearl Reynolds, who is 92 and whose elegant bearing and dress belied her hardscrabble origins in tiny Oak Ridge, La., where she worked as a child in the cotton fields.
“I got married at 14 only because I wanted to get out of there,” she said. “I had to. At 14, I was just being promoted from the second grade to the third grade because we could only go to school when we weren’t working in the fields.”
She became quite emotional during Senator Obama’s speech. “Barack Obama is a measure of how far we’ve come as a country since I was a little girl,” she said.
P.T. Cochran would agree. Mr. Cochran, 88, a retired appraiser for the city of Detroit, recalled a day in 1944 when he and a fellow student at Wilberforce University, a black school in Ohio, went into the town of Xenia to see a movie. The ticket taker told them the theater was closed.
“We knew it wasn’t closed,” said Mr. Cochran. “They just didn’t want to let us in. So we stood there, watching to see if they would let anyone else in.”
The ticket taker refused to admit anyone as long as the two friends were standing outside. They stood there for six hours. Then they called the school and let other friends know what they were doing. The students at Wilberforce alerted white students at nearby Antioch College.
Students from both schools turned out in force — more than 100 of them — to support Mr. Cochran and his friend. “They all stood there with us, to back us up,” said Mr. Cochran. At that point, his voice broke, and he wept softly at the memory from 64 years ago.
“We stayed there until the theater closed that night,” said Mr. Cochran. “And then we came back the next day, which was Sunday, and stood there until 2 or 3 in the afternoon, when they finally decided to let us in.
“I’ll never forget what those kids did for us.”
Mr. Cochran said it would take an hour, “maybe more,” to describe how much Senator Obama’s candidacy meant to him. “I am elated,” he said. “I’m surprised, I—”
His voice broke once again. His tears, and those of so many others, were a measure of the enormity of what had come to pass.
August 31, 2008
Postcard From South China
By THOMAS L. FRIEDMAN
I had the pleasure the other day of visiting the delightfully named Zhuhai Guohua Wonderful Wind Power Exploitation Co. in Zhuhai, on the southern coast of China. It’s a good news/bad news story.
The good news was that the Chinese engineers showed me their control room, which has a giant glass window that looks out onto their 21 wind turbines that crown the peaks of a nearby mountain. “How nice,” I thought. “China’s really starting to go green.”
But as my eye drifted just to the left of that mountain, I saw Macau, with its rising skyline of casino skyscrapers. The Venetian Hotel in Macau alone has some 870 gaming tables and 3,400 slot machines. So, I did a quick calculation and figured that those 21 wind turbines together might power the Venetian’s army of one-armed bandits for a few hours of green gambling.
That dichotomy runs through a lot of what is going on here in Guangdong Province, where 30 years ago China began its economic opening. You’re starting to see the emergence of Chinese clean-tech companies — I also visited a solar panel start-up — and real environmental awareness among officials and students. But the momentum of this region’s growth, the sheer land-of-the-giants scale of the buildings, makes the renewable energy here literally a drop in the bucket.
As a result, there is a dawning awareness that if China is to break its own addiction to oil, it will take a much more fundamental shift from the growth model that powered its first 30 years. That model was based on two linked ideas: 1) energy was inexhaustible, inexpensive and benign; and 2) China could count on raising its living standards by forever being the world’s low-cost manufacturing workshop, based on cheap energy.
In recent years, though, fossil-fuel energy has become expensive, exhaustible and toxic, and rising wages — to some extent because of rising environmental considerations and social security requirements — have meant that the workshops of southern China are no longer the low-cost producers in Asia. Vietnam and Western China now beckon.
The only way forward, say officials, is for China to gradually develop a cleaner, knowledge-based, service/finance economy. It has to move from “made in China” to “designed in China” to “imagined in China.” In short, the economy here has to become greener and smarter. (Sound familiar?)
In 1992, China’s coastal economic powerhouses hit a similar wall when they found they could not grow further without the government loosening travel restrictions to attract workers from all over China. So, more personal freedom to move around China was unleashed then. Now, these same provinces need to allow more “mind movement” to get to the next level.
The problem for the ruling Communist Party is this: China can’t have a greener society without empowering citizens to become watchdogs and allowing them to sue local businesses and governments that pollute, and it can’t have a more knowledge-intensive innovation society without a freer flow of information and experimentation.
What surprised me is how much the party is thinking about all this. I actually came here at the invitation of Wang Yang, the Communist Party secretary, i.e. the boss of Guangdong Province. He had read one of my books on globalization in Chinese.
Wang is also a member of the Politburo in Beijing and is considered one of the most innovative thinkers in China’s leadership today. He has been given room to experiment and has begun advocating something he calls “mind liberation” — primarily an effort to change the culture of his bureaucracy and open it up to new ways of thinking. Right now he is focused on trying to shift dirty, low-wage manufacturing out of Guangzhou to the countryside, where jobs are still scarce. And he is trying to attract clean industries and services to the city. His goal, he said, was a more “low-carbon economy.”
“Please put it in your column that Party Secretary Wang Yang welcomes [Western] clean energy technology companies to come to Guangdong Province and use it as a laboratory to develop their products,” he told me. “We will be most willing to participate in the innovation and provide the services they need.”
So my postcard from Guangzhou would read like this: “Dear Mom and Dad, this place is so much more interesting than it looks from abroad. I met wind and solar companies eager for Western investment and Chinese college students who were organizing a boycott of an Indonesian paper company for despoiling their forest. An ‘Institute of Civil Society’ has quietly opened at the local Sun Yat-sen University. The Communist Party is trying to break the old mold without breaking its hold. It’s quite a drama. Can’t wait to come back next summer and see how they’re doing ...”
There is a lot more poverty in the world than previously thought. The World Bank reported in August that in 2005, there were 1.4 billion people living below the poverty line — that is, living on less than $1.25 a day.
That is more than a quarter of the developing world’s population and 430 million more people living in extreme poverty than previously estimated. The World Bank warned that the number is unlikely to drop below one billion before 2015.
The poverty estimate soared after a careful study of the prices people in developing countries pay for goods and services revealed that the World Bank had been grossly underestimating the cost of living in the poorest nations for decades. As a result, it was grossly overestimating the ability of people to buy things. And the new research doesn’t account for the soaring prices of energy and food in the past two years.
The poverty expressed in the World Bank’s measure is so abject that it is hard for citizens of the industrial world to comprehend. The new count underscores how much more the developed world needs to do to help the world’s most vulnerable people.
It should also serve as a jarring reminder to the leaders of the world’s much-touted new economic powers — India and China — about the inequities growing amid their growing wealth. Forty-two percent of India’s people live below the World Bank’s poverty line, as do 16 percent of China’s.
The new data confirm the primary role that economic growth must play in lifting millions out of poverty. Fast growth slashed the number of Chinese living in extreme poverty by three-fourths in less than 25 years. Achieving broad-based growth will not be easy.
India, which has more people in extreme poverty than it did 25 years ago, must reform its farm sector to increase dismal productivity and broaden its narrow economic expansion. Sub-Saharan Africa — where 50 percent of the people live below the poverty line — requires stability, above all, to encourage investment. All developing countries must invest more in education.
There’s still a big supporting role for rich countries. Last year, development aid from the Group of 8 industrialized nations amounted to $62 billion — far below the $92 billion that was promised to be delivered by 2010. We hope the World Bank’s new poverty count finally shames the Group of 8 into keeping that promise.
How many times have you heard something like this? "Look, you say we're all for diversity. Diversity is what Canada is about. So what's the problem with polygamy? Diversity is diversity, right? You're either for it or against it!" You squirm in your chair feeling awful. You know that accepting polygamy is not the same thing as, say, trying Ethiopian food. You think it's wonderful that people in Canada feel free to express cultural difference when it comes to the three Fs -- food, fashion and festivals -- but not so much when it comes to, for example, restricting the rights of women or gays.
But how to explain the difference? McGill sociologist Morton Weinfeld's distinction between "soft" and "hard" diversity might help. According to him, soft diversity is "food, music, art and other symbols. Soft diversity adds spice and excitement to our lives. . . . No matter what Canadians . . . think about Canada's handling of ethno-racial diversity, this is one issue the rest of the world seems to think Canada has got right. . . . And we just love our soft diversity." I agree: I love the fact there is an Ethiopian restaurant in our neighbourhood. But as my daughter says, who was recently proposed marriage by a Ghanaian tribal chief already husband to 15 women, "I'm not so keen on the multiple wives bit." How do you justify this rejection of some differences and not others? Weinfeld's notion of hard diversity is key. Hard diversity challenges deep commitments, such as the political integrity of the country. Think here of Quebec or western separatism.
And there are other types of hard diversity. These don't threaten our territorial integrity, but instead the social and political institutions which make Canada the good place that it is. Our world-class mixture of personal liberty, guided by the rule of law and enriched by the legal protection of human rights, including equality, should not be trifled with in the name of promoting ill-defined diversity.
So if you say to me, "you really must see the Afghan weaving exhibit, it is second to none," I should be ready to listen.
However, if you urge the adoption of sharia law, you are challenging some of the foundations of our political system, for example, separation of church from state and gender equality, which make Canada a good and fairer, place.
To this kind of diversity, we should say, "thanks, but no thanks." What we've got already by way of political institutions is better.
Between, on the one hand, food, fun, fashion and on the other sharia, it isn't hard to distinguish soft (welcome) from hard (unwelcome) diversity. But it isn't always so easy.
For example, how do we decide when the diversity suggested is the racial segregation of schools for educational reasons? Is creating an aboriginal school in Calgary or an Africentric school in Toronto like adding a new ethnic restaurant -- soft diversity because it is non-threatening? Or does segregating children along racial lines challenge a fundamental Canadian value -- public institutions should not discriminate on the basis of skin colour -- and thus constitute hard diversity, a danger we should not embrace? York education professor Carl James argues that soft or hard diversity is not the question here. He argues that black students in Toronto already experience segregated education and that an Africentric school -- that is, an actual segregated institution -- is necessary so that black students can heal. Not all need it, but for those whose confidence and capacity for learning has been especially damaged, segregation of that kind may be essential.
Is this hard diversity which reduces social cohesion and should be rejected, or good educational policy which helps disadvantaged students? It's complicated, but here are some issues to consider: 1) Will the concrete good which could be done by an all-black school for needy children outweigh the bad of officially sanctioned segregation? 2) Are there other less socially damaging ways that same good could be achieved? and 3) Can we minimize the harm done by the segregated school? I think the answers are 1) Quite possibly, 2) Maybe, but perhaps we need more than one strategy, and 3) Yes, for example, by treating it as an experiment of limited duration.
Sometimes, in some places, for some purposes, diversity which challenges cherished social goals may have to be sacrificed in the short-term for long-term benefits. But we are right to anguish over these sacrifices.
Education is one of many areas where diversity presents public policy challenges. What kind of diversity should we encourage? How much? And how should we respond when diversity threatens social cohesion? We need to engage thoughtfully with such questions.
Janet Keeping is president of the Sheldon Chumir Foundation for Ethics in Leadership, which will host a symposium on diversity, Identity and Polarization: Implications for our ability to live well together, Oct. 3 to 4 in Calgary. Professors Weinfeld and James are scheduled speakers.
September 7, 2008
Georgia on My Mind
By THOMAS L. FRIEDMAN
On Wednesday, The New York Times on the Web flashed a headline that caught my eye: “U.S. to Unveil $1 Billion Aid Package to Repair Georgia.” Wow, I thought. That’s great: $1 billion to fix Georgia’s roads and schools. But as I read on, I quickly realized that I had the wrong Georgia.
We’re going to spend $1 billion to fix the Georgia between Russia and Turkey, not the one between South Carolina and Florida.
Sorry, but the thought of us spending $1 billion to repair a country whose president, though a democrat, recklessly provoked a war with a brutish Russia, which was itching to bash its neighbor, makes no sense to me. Yes, we should diplomatically squeeze Russia until it withdraws its troops; no one should be invading neighbors.
But where are our priorities? How many wars can we fight at once without finishing even one? Iraq, Iran, Afghanistan, Pakistan and now Georgia. Which is the priority? Americans are struggling to meet their mortgages, and we’re sending $1 billion to a country whose president behaved irresponsibly, just to poke Vladimir Putin in the eye. Couldn’t we poke Putin with $100 million? And shouldn’t we be fostering a dialogue with Georgia and with Putin? Otherwise, where is this going? A new cold war? Over what?
And that brings me to our election.
What I found missing in both conventions was a sense of priorities. Both Barack Obama and John McCain offered a list of good things they plan to do as president, but, since you can’t do everything, where’s the focus going to be?
That focus needs to be on strengthening our capacity for innovation — our most important competitive advantage. If we can’t remain the most innovative country in the world, we are not going to have $1 billion to toss at either the country Georgia or the state of Georgia.
While we still have enormous innovative energy bubbling up from the American people, it is not being supported and nurtured as needed in today’s supercompetitive world. Right now, we feel like a country in a very slow decline — in infrastructure, basic research and education — just slow enough to lull us into thinking that we have all the time and money to play around in Tbilisi, Georgia, more than Atlanta, Georgia.
As Chuck Vest, the former president of M.I.T., said to me: “Both candidates have spoken a lot about ‘change,’ but in most areas of need, innovation is the only mechanism that can actually change things in substantive ways. Innovation is where creative thinking and practical know-how meet to do new things in new ways, and old things in new ways.
“The irony of ignoring innovation as a theme for our times is that the U.S. is still the most innovative nation on the planet,” Vest added. “But we can only maintain that lead if we invest in the people, the research that enable it and produce a policy environment in which it can thrive rather than being squelched. Our strong science and technology base built by past investments, our free market economy built on a base of democracy and a diverse population are unmatched to date; but we are taking it for granted.”
A developed country’s competitiveness now comes primarily from its capacity to innovate — the ability to create the new products and services that people want, adds Curtis Carlson, chief executive of SRI International, a Silicon Valley research company. As such, “innovation is now the only path to growth, prosperity, environmental sustainability and national security for America. But it is also an incredibly competitive world. Many information industries require that products be improved by 100 percent every 12 to 36 months, just for the company to stay in business.”
Our competitiveness, though, he added, is based on having a broadly educated work force, superb research universities, innovation-supportive taxes, immigration and regulatory policies, a productive physical and virtual infrastructure, and a culture that embraces hard work and the creation of new opportunities.
“America is still the best place for innovation,” said Carlson. However, we are falling behind in K-12 education, infrastructure and in tax, regulatory and immigration policies that no longer welcome the world’s most talented minds. “These issues must be at the top of the national agenda because they determine our ability to provide health care, clean energy and economic opportunity for our citizens.”
(For a good plan, read the new “Closing the Innovation Gap” by the technologist Judy Estrin.)
Alas, though, the Republicans just had a convention where abortion got vastly more attention than innovation, calls to buttress Tbilisi, Georgia, swamped any for Atlanta, Georgia, and “drill, baby, drill” was chanted instead of “innovate, baby, innovate.”
If we were serious about weakening both Putin and Putinism, we would be investing $1 billion in Georgia Tech to invent alternatives to oil — the high price of which is the only reason the Kremlin is strong enough today to bully its neighbors and its own people.
September 9, 2008
Hold Your Heads Up
By BOB HERBERT
Ignorance must really be bliss. How else, over so many years, could the G.O.P. get away with ridiculing all things liberal?
Troglodytes on the right are no respecters of reality. They say the most absurd things and hardly anyone calls them on it. Evolution? Don’t you believe it. Global warming? A figment of the liberal imagination.
Liberals have been so cowed by the pummeling they’ve taken from the right that they’ve tried to shed their own identity, calling themselves everything but liberal and hoping to pass conservative muster by presenting themselves as hyper-religious and lifelong lovers of rifles, handguns, whatever.
So there was Hillary Clinton, of all people, sponsoring legislation to ban flag-burning; and Barack Obama, who once opposed the death penalty, morphing into someone who not only supports it, but supports it in cases that don’t even involve a homicide.
Anyway, the Republicans were back at it last week at their convention. Mitt Romney wasn’t content to insist that he personally knows that “liberals don’t have a clue.” He complained loudly that the federal government right now is too liberal.
“We need change, all right,” he said. “Change from a liberal Washington to a conservative Washington.”
Why liberals don’t stand up to this garbage, I don’t know. Without the extraordinary contribution of liberals — from the mightiest presidents to the most unheralded protesters and organizers — the United States would be a much, much worse place than it is today.
There would be absolutely no chance that a Barack Obama or Hillary Clinton or Sarah Palin could make a credible run for the highest offices in the land. Conservatives would never have allowed it.
Civil rights? Women’s rights? Liberals went to the mat for them time and again against ugly, vicious and sometimes murderous opposition. They should be forever proud.
The liberals who didn’t have a clue gave us Social Security and unemployment insurance, both of which were contained in the original Social Security Act. Most conservatives despised the very idea of this assistance to struggling Americans. Republicans hated Social Security, but most were afraid to give full throat to their opposition in public at the height of the Depression.
“In the procedural motions that preceded final passage,” wrote historian Jean Edward Smith in his biography, “FDR,” “House Republicans voted almost unanimously against Social Security. But when the final up-or-down vote came on April 19 , fewer than half were prepared to go on record against.”
Liberals who didn’t have a clue gave us Medicare and Medicaid. Quick, how many of you (or your loved ones) are benefiting mightily from these programs, even as we speak. The idea that Republicans are proud of Ronald Reagan, who saw Medicare as “the advance wave of socialism,” while Democrats are ashamed of Lyndon Johnson, whose legislative genius made this wonderful, life-saving concept real, is insane.
When Johnson signed the Medicare bill into law in the presence of Harry Truman in 1965, he said: “No longer will older Americans be denied the healing miracle of modern medicine.”
Reagan, on the other hand, according to Johnson biographer Robert Dallek, “predicted that Medicare would compel Americans to spend their ‘sunset years telling our children and our children’s children what it was like in America when men were free.’ ”
Without the many great and noble deeds of liberals over the past six or seven decades, America would hardly be recognizable to today’s young people. Liberals (including liberal Republicans, who have since been mostly drummed out of the party) ended legalized racial segregation and gender discrimination.
Humiliation imposed by custom and enforced by government had been the order of the day for blacks and women before men and women of good will and liberal persuasion stepped up their long (and not yet ended) campaign to change things. Liberals gave this country Head Start and legal services and the food stamp program. They fought for cleaner air (there was a time when you could barely see Los Angeles) and cleaner water (there were rivers in America that actually caught fire).
Liberals. Your food is safer because of them, and so are your children’s clothing and toys. Your workplace is safer. Your ability (or that of your children or grandchildren) to go to college is manifestly easier.
It would take volumes to adequately cover the enhancements to the quality of American lives and the greatness of American society that have been wrought by people whose politics were unabashedly liberal. It is a track record that deserves to be celebrated, not ridiculed or scorned.
Self-hatred is a terrible thing. Just ask that arch-conservative Clarence Thomas.
September 12, 2008
The Social Animal
By DAVID BROOKS
Near the start of his book, “The Conscience of a Conservative,” Barry Goldwater wrote: “Every man, for his individual good and for the good of his society, is responsible for his own development. The choices that govern his life are choices that he must make; they cannot be made by any other human being.” The political implications of this are clear, Goldwater continued: “Conservatism’s first concern will always be: Are we maximizing freedom?”
Goldwater’s vision was highly individualistic and celebrated a certain sort of person — the stout pioneer crossing the West, the risk-taking entrepreneur with a vision, the stalwart hero fighting the collectivist foe.
The problem is, this individualist description of human nature seems to be wrong. Over the past 30 years, there has been a tide of research in many fields, all underlining one old truth — that we are intensely social creatures, deeply interconnected with one another and the idea of the lone individual rationally and willfully steering his own life course is often an illusion.
Cognitive scientists have shown that our decision-making is powerfully influenced by social context — by the frames, biases and filters that are shared subconsciously by those around. Neuroscientists have shown that we have permeable minds. When we watch somebody do something, we recreate their mental processes in our own brains as if we were performing the action ourselves, and it is through this process of deep imitation that we learn, empathize and share culture.
Geneticists have shown that our behavior is influenced by our ancestors and the exigencies of the past. Behavioral economists have shown the limits of the classical economic model, which assumes that individuals are efficient, rational, utility-maximizing creatures.
Psychologists have shown that we are organized by our attachments. Sociologists have shown the power of social networks to affect individual behavior.
What emerges is not a picture of self-creating individuals gloriously free from one another, but of autonomous creatures deeply interconnected with one another. Recent Republican Party doctrine has emphasized the power of the individual, but underestimates the importance of connections, relationships, institutions and social filaments that organize personal choices and make individuals what they are.
This may seem like an airy-fairy thing. But it is the main impediment to Republican modernization. Over the past few weeks, Republicans have talked a lot about change, modernization and reform. Despite the talk, many of the old policy pillars are the same. We’re living in an age of fast-changing economic, information and social networks, but Republicans are still impeded by Goldwater’s mental guard-rails.
If there’s a thread running through the gravest current concerns, it is that people lack a secure environment in which they can lead their lives. Wild swings in global capital and energy markets buffet family budgets. Nobody is sure the health care system will be there when they need it. National productivity gains don’t seem to alleviate economic anxiety. Inequality strains national cohesion. In many communities, social norms do not encourage academic achievement, decent values or family stability. These problems straining the social fabric aren’t directly addressed by maximizing individual freedom.
And yet locked in the old framework, the Republican Party’s knee-jerk response to many problems is: “Throw a voucher at it.” Schools are bad. Throw a voucher. Health care system’s a mess. Replace it with federally funded individual choice. Economic anxiety? Lower some tax rate.
The latest example of the mismatch between ideology and reality is the housing crisis. The party’s individualist model cannot explain the social contagion that caused hundreds of thousands of individuals to make bad decisions in the same direction at the same time. A Republican administration intervened gigantically in the market to handle the Bear Stearns, Freddie and Fannie debacles. But it has no conservative rationale to explain its action, no language about the importance of social equilibrium it might use to justify itself.
The irony, of course, is that, in pre-Goldwater days, conservatives were incredibly sophisticated about the value of networks, institutions and invisible social bonds. You don’t have to go back to Edmund Burke and Adam Smith (though it helps) to find conservatives who understood that people are socially embedded creatures and that government has a role (though not a dominant one) in nurturing the institutions in which they are embedded.
That language of community, institutions and social fabric has been lost, and now we hear only distant echoes — when social conservatives talk about family bonds or when John McCain talks at a forum about national service.
If Republicans are going to fully modernize, they’re probably going to have to follow the route the British Conservatives have already trod and project a conservatism that emphasizes society as well as individuals, security as well as freedom, a social revival and not just an economic one and the community as opposed to the state.
September 16, 2008
Why Experience Matters
By DAVID BROOKS
Philosophical debates arise at the oddest times, and in the heat of this election season, one is now rising in Republican ranks. The narrow question is this: Is Sarah Palin qualified to be vice president? Most conservatives say yes, on the grounds that something that feels so good could not possibly be wrong. But a few commentators, like George Will, Charles Krauthammer, David Frum and Ross Douthat demur, suggesting in different ways that she is unready.
The issue starts with an evaluation of Palin, but does not end there. This argument also is over what qualities the country needs in a leader and what are the ultimate sources of wisdom.
There was a time when conservatives did not argue about this. Conservatism was once a frankly elitist movement. Conservatives stood against radical egalitarianism and the destruction of rigorous standards. They stood up for classical education, hard-earned knowledge, experience and prudence. Wisdom was acquired through immersion in the best that has been thought and said.
But, especially in America, there has always been a separate, populist, strain. For those in this school, book knowledge is suspect but practical knowledge is respected. The city is corrupting and the universities are kindergartens for overeducated fools.
The elitists favor sophistication, but the common-sense folk favor simplicity. The elitists favor deliberation, but the populists favor instinct.
This populist tendency produced the term-limits movement based on the belief that time in government destroys character but contact with grass-roots America gives one grounding in real life. And now it has produced Sarah Palin.
Palin is the ultimate small-town renegade rising from the frontier to do battle with the corrupt establishment. Her followers take pride in the way she has aroused fear, hatred and panic in the minds of the liberal elite. The feminists declare that she’s not a real woman because she doesn’t hew to their rigid categories. People who’ve never been in a Wal-Mart think she is parochial because she has never summered in Tuscany.
Look at the condescension and snobbery oozing from elite quarters, her backers say. Look at the endless string of vicious, one-sided attacks in the news media. This is what elites produce. This is why regular people need to take control.
And there’s a serious argument here. In the current Weekly Standard, Steven Hayward argues that the nation’s founders wanted uncertified citizens to hold the highest offices in the land. They did not believe in a separate class of professional executives. They wanted rough and rooted people like Palin.
I would have more sympathy for this view if I hadn’t just lived through the last eight years. For if the Bush administration was anything, it was the anti-establishment attitude put into executive practice.
And the problem with this attitude is that, especially in his first term, it made Bush inept at governance. It turns out that governance, the creation and execution of policy, is hard. It requires acquired skills. Most of all, it requires prudence.
What is prudence? It is the ability to grasp the unique pattern of a specific situation. It is the ability to absorb the vast flow of information and still discern the essential current of events — the things that go together and the things that will never go together. It is the ability to engage in complex deliberations and feel which arguments have the most weight.
How is prudence acquired? Through experience. The prudent leader possesses a repertoire of events, through personal involvement or the study of history, and can apply those models to current circumstances to judge what is important and what is not, who can be persuaded and who can’t, what has worked and what hasn’t.
Experienced leaders can certainly blunder if their minds have rigidified (see: Rumsfeld, Donald), but the records of leaders without long experience and prudence is not good. As George Will pointed out, the founders used the word “experience” 91 times in the Federalist Papers. Democracy is not average people selecting average leaders. It is average people with the wisdom to select the best prepared.
Sarah Palin has many virtues. If you wanted someone to destroy a corrupt establishment, she’d be your woman. But the constructive act of governance is another matter. She has not been engaged in national issues, does not have a repertoire of historic patterns and, like President Bush, she seems to compensate for her lack of experience with brashness and excessive decisiveness.
The idea that “the people” will take on and destroy “the establishment” is a utopian fantasy that corrupted the left before it corrupted the right. Surely the response to the current crisis of authority is not to throw away standards of experience and prudence, but to select leaders who have those qualities but not the smug condescension that has so marked the reaction to the Palin nomination in the first place.
September 17, 2008
Keep It in Vegas
By THOMAS L. FRIEDMAN
Watching some financial stocks just get wiped out in recent months, I often hear a voice in the back of my head, and it is the same voice as one of those dealers in Las Vegas who coolly tells you as he sweeps up your chips after you’ve busted in blackjack: “Thank you for playing, ladies and gentlemen.”
That’s what happens when bubbles burst. You feel wiped out, and the coolness with which the dealers — in this case the markets — sweep away all your chips is unnerving. It’s easy to over-react, and it is important that we don’t. Now is the time for coolly sorting out what markets can do best and what governments need to do better.
Let’s understand what happened here. Wall Street — the financial industry — became a bubble in recent years thanks to an excess of liquidity and the oldest bubble maker in history: greed. Some of the smartest people forgot one of the oldest rules of investing: There is no such thing as a risk-free return. When you reach too far for yield, sooner or later you get burned.
In the ’90s, the no-lose, risk-free, high-yield return was supposed to be dot-com stocks. This decade’s version are subprime mortgages and financial stocks. Just like the dot-comers in the 1990s, the financial stocks got inflated to ridiculous levels and salaries for Wall Street executives reached ridiculous heights. You are now watching live and in color that bubble burst: “Thank you for playing, Lehman Brothers.” That’s really sad for a 158-year-old company.
The market is now consolidating this industry, with the strong eating the weak, which will impose its own fiscal discipline. Good. Maybe then more of our next generation of math geniuses will think about going into engineering the next great global industry — energy technology — rather than engineering derivatives.
But we also need to understand the uniqueness of this bubble in order to identify where smart government needs to step in. One reason this financial bubble got so big is now well known: you and your neighbor went out and got subprime mortgages, which enabled many more people to become homeowners — a real blessing. Your local finance company or bank, which extended those mortgages, later resold them to an aggregator who put them into big packages with thousands of other subprime mortgages. Then those loan packages were chopped up and sold in small pieces as corporate bonds to all kinds of institutions, who were reaching for extra yield. Your subprime mortgage payments went to pay the interest on those bonds.
But as the housing market collapsed, and people couldn’t cover their mortgages or sell their houses, the bonds lost value and, therefore, the banks that held them lost capital, and the whole pyramid started to crumble. This infected the entire housing market, so banks no longer knew the value of their mortgage-backed assets. The result? They stopped lending. Hence, the current credit crunch. This credit crunch is what makes this crisis so lethal. We can’t tolerate a prolonged situation where banks won’t lend to good companies.
That’s why Congress needs to create another Resolution Trust Corporation like we used to get out of the savings-and-loan crisis of the 1980s. As then, so now, we need a government agency to buy the toxic mortgages off the banks’ balance sheets, hold them and sell them in an orderly way later. That would prevent a fire sale of homes and mortgages now and restore confidence to banks so they start lending again.
In the long run, though, regulators need to find ways to limit the amount of leverage investment banks or insurance companies can take on at any one time, because given how intertwined they all are in today’s global economy, one bank blowing up can now take down many.
“We are at the end of an era — the end of ‘leave it to the markets’ and of the great cop-out that less government is always better government,” argues David Rothkopf, a former Commerce Department official in the Clinton administration and author of a book about the world’s financial leaders who brought about this crisis: “Superclass: The Global Power Elite and the World They Are Making.” “I think, however, it is important to stress the difference between smart government and simply more government.
“We do not need a regulatory ‘surge’ on Wall Street,” he added. “We need a complete rethinking of how we make global financial markets more transparent and how we ensure that the risks within those markets — .many of which are new and many of which are not well understood even by the experts — are managed and monitored properly.”
In sum, government’s job is to police that fine line between the necessary risk-taking that drives an innovation economy and crazy gambling with other people’s savings in ways that threaten us all. We need to make sure that what happens in Vegas stays in Vegas — and doesn’t come to Main Street. We need to get back to investing in our future and not just betting on it.
September 18, 2008
Need a Job? $17,000 an Hour. No Success Required.
By NICHOLAS D. KRISTOF
Are you capable of taking a perfectly good 158-year-old company and turning it into dust? If so, then you may not be earning up to your full potential.
You should be raking it in like Richard Fuld, the longtime chief of Lehman Brothers. He took home nearly half-a-billion dollars in total compensation between 1993 and 2007.
Last year, Mr. Fuld earned about $45 million, according to the calculations of Equilar, an executive pay research company. That amounts to roughly $17,000 an hour to obliterate a firm. If you’re willing to drive a company into the ground for less, apply by calling Lehman Brothers at (212) 526-7000.
I’m delighted to announce that Mr. Fuld (who continues to lead Lehman since it entered bankruptcy proceedings this week) is the winner of my annual Michael Eisner Award for corporate rapacity and poor corporate governance. The award honors the pioneering achievements in this field of Mr. Eisner, the former Walt Disney chief.
This isn’t a plaque that will simply gather dust in a closet. It’s a shower curtain to commemorate the $6,000 one that the former C.E.O. of Tyco purchased and billed to his shareholders.
So, Mr. Fuld, you’ll be pleased to know that I’ve picked out a lovely green vinyl number for you. Only $14.99! Why, I saved you $5,985!
Perhaps it seems frivolous to be handing out shower curtains to chief executives when we’re caught in a deepening economic crisis. Well, it is.
But one of our broad national problems is rising inequality, and it is exacerbated by corporate executives helping themselves to shareholders’ cash. Three decades ago, C.E.O.’s typically earned 30 to 40 times the income of ordinary workers. Last year, C.E.O.’s of large public companies averaged 344 times the average pay of workers.
John McCain seems to think that the problem is that C.E.O.’s are greedy. Well, of course, they are. We’re all greedy. The real failure is one of corporate governance, which provides only the flimsiest oversight to curb the greed of executives like Mr. Fuld.
“Compare the massive destruction of wealth for shareholders to what he gets at the end of the day,” said Lucian Bebchuk, the director of the corporate governance program at Harvard Law School. A central flaw of governance is that boards of directors frequently are ornamental and provide negligible oversight.
As Warren Buffett has said, “in judging whether corporate America is serious about reforming itself, C.E.O. pay remains the acid test.” It’s a test that corporate America is failing.
These Brobdingnagian paychecks are partly the result of taxpayer subsidies. A study released a few weeks ago by the Institute for Policy Studies in Washington found five major elements in the tax code that encourage overpaying executives. These cost taxpayers more than $20 billion a year.
That’s enough money to deworm every child in the world, cut maternal mortality around the globe by two-thirds and also provide iodized salt to prevent tens of millions of children from suffering mild retardation or worse. Alternatively, it could pay for health care for most uninsured children in America.
Do we truly believe that C.E.O.’s like Mr. Fuld are more deserving of tax dollars than sick children?
Perhaps it’s understandable that C.E.O.’s are paid heroically when they succeed, but why pay prodigious sums when they fail? E. Stanley O’Neal, the former chief of Merrill Lynch, retired last year after driving the firm over a cliff, and he walked away with $161 million.
The problem isn’t precisely paychecks that are huge. Baseball stars, investment bankers and hedge fund managers all earn obscene sums, but honestly — through arm’s-length transactions. You and I may gasp, but that’s the free market at work.
In contrast, boards pay C.E.O.’s after negotiations that are often more like pillow talk. Relationships are incestuous, and compensation consultants provide only a thin veneer of respectability by finding some “peer group” of companies so moribund that anybody shines in comparison. The result is what critics call the Lake Wobegon effect, which miraculously leaves all C.E.O.’s above average. Indeed, one study of 1,500 companies found that two-thirds claimed to be outperforming their peer groups.
John Kenneth Galbraith, the great economist, once explained: “The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.”
There are widely discussed technical solutions to C.E.O.’s overpaying themselves that we should move toward. We can also learn from Britain and Australia, which offer shareholders more rights than in America, redrawing the balance between shareholders and management and curbing pay in the process.
As for Mr. Fuld, unfortunately, he had no comment for this column. At $17,000 an hour, it probably wasn’t worth his time.
September 18, 2008
For Wall Street, Greed Wasn’t Good Enough
By PAUL WILMOTT
I’M fairly risk-averse by nature and so have always ignored the offers from my bank to help me “manage my money more successfully.” Put the money in a savings account, earn a bit of interest, but mainly work hard, that’s been my philosophy. Like everyone else, though, I’ve been looking into the small print lately to see just how safe my safe-as-houses account really is.
In Britain, the government will guarantee roughly the first $62,000 in a bank account. If you have more than this saved up then an obvious solution is to spread the money around several accounts. Fine in theory, but this rapidly becomes tedious if you want to protect the savings of a lifetime. So finally I succumbed to the calls from my bank manager. As of the middle of last week I have a man who will give me advice day or night, and crucially can help someone as conservative as me to not suffer while all hell breaks loose.
At our first meeting, one of the questions I raised was how to deal with the money I owe the tax man. Could he recommend a safe yet interest-bearing haven where I could keep the money until Her Majesty’s Government asks for it? He proposed an insurance bond that will mature on the date I have to pay my taxes. Insurance bonds have the nice feature that 90 percent of your money is insured, with no cap, and so even in a disaster I would lose “only” 10 percent. This is how my first venture outside my comfort zone ended with me being invested in American International Group.
When I hear about the potential collapse of A.I.G. shortly thereafter, I contacted my manager. “We are in talks with A.I.G.,” he tells me.
“I want out!” I tell him.
Luckily for me, I’m within a cooling-off period in which I can get my money back, losing none of the principal. At least I think I am. I hope. I’ll know more in the next couple of days. Even though A.I.G. has now apparently been rescued by the Federal Reserve and downgraded relatively little — and even though I can theoretically lose only 10 percent, with the rest being insured — I want to play it safe.
That last sentence contains quite a few important concepts that are all worth thinking about. First of all, “the rest being insured ...” Insured by whom, exactly? The main problem with the current crisis is not just that all financial institutions are now intertwined, but rather the new manner of this interlacing through their complex derivatives transactions. In the Long-Term Capital Management hedge fund mess of 1998, the transactions were fairly transparent and with obvious counterparties. The cancer, if I may use that dramatic word, was contained and operable. (The long-term impact for me, as someone who researches and lectures on finance, is that I can tell some great tales about the fall to earth of Nobel laureates who tried to put their theories to work in the real world.)
The current crisis, however, is nowhere near as simple. The cancer has metastasized — it has spread through all the organs of the financial markets and a straightforward excision is probably not possible. That’s what makes the question of whether to rescue each institution such a difficult one. Sure, people have to learn a lesson. But, and this is my final surgical analogy, would that be cutting off one’s nose to spite one’s face?
Back to my money with A.I.G., I ask myself, “Who insures the insurers?” I want out.
I mentioned “downgrading.” Institutions and products are graded by various credit-rating firms so as to supposedly give an objective view of the risks and of the possibilities of default. Can anyone say, while keeping a straight face, that the current system of having the institutions themselves pay for this service is a good idea? The moral hazard is so obvious you can almost taste it.
I spend a great deal of time speaking to people in banks about their mathematical models. I know which are using good models (a very few banks) and which are using bad models (most banks). I know of the dangers present, from a quantitative-finance and risk-management perspective. And for many years I have explained these dangers to anyone who would listen, and I will continue to do so. So it is incredible to think that ratings agencies, which must also have detailed knowledge of the nature and, more important, size of the toxic transactions, will happily give out their multiple A grades without any feeling of shame.
And then the word “theoretically” becomes very important. I have attended many conferences on quantitative finance, at which professors and practitioners describe their latest models for derivative instruments and the like. All the time I’m sitting in the audience thinking that these models are far too simplistic and based on countless unrealistic assumptions. I tell people that these instruments are dangerous, that no one understands the risks. But no one cares.
As long as people are compensated hugely for taking risks with other people’s money, and do not suffer equally on the downside, then those risks will inevitably become outrageous. Whether markets are efficient or not I don’t know for sure, but I do know that if there’s a way for someone to make money at another’s expense, he will. In spades. I want out.
So where next? And, most important, what should be done?
I’ve taken to comparing the current situation to “Hamlet.” We’ve had the deaths of Polonius, Claudius and Laertes — that is, the falling house prices, the rising commodity prices and the collapse of banks. As of now there is no sign of Hamlet himself, a catastrophic fall in the markets. Yet it’s difficult to believe that markets are not going to undergo a climactic implosion some time soon. If the current situation doesn’t fill investors with fear, then what are they smoking?
I believe that to get to the root of the matter, we have to address the bad side of greed. We know from Ivan Boesky and Gordon Gecko that greed can be good. Greed makes the world go around; it makes people take risks that ultimately lead to economic or scientific advances. But the greedy must also face the consequences of taking those risks.
Thus the current system of compensation at financial companies does not lead to anything good at all. If you give $10 million to random people on the street and tell them that they’ll get 20 percent of any profit they make, without any consequences if they lose it, then many of them will go into the nearest casino and bet it all on red. (The really clever ones will find a way to leverage it up first — after all, a $2 million bonus is nothing; you can’t seriously expect people to live in New York or London on less than eight figures, can you?)
Many Lehman Brothers employees received some of their compensation in Lehman shares. They aren’t feeling too happy right now. But a system run on that principle could achieve exactly what is needed: a closer link between a person’s paycheck and the longer-term success of his trading. At the moment, a trader can sell a 10-year toxic contract, pocket a nice bonus after a few months based on some theoretical valuation, and then disappear to another bank or off into the sunset, leaving nine years in which that contract could blow up.
These companies need to tie compensation to long- rather than short-term performance. This won’t be popular on Wall Street, but if we want to turn investment banking back to performing something useful and positive rather than some sort of riverboat-gambling scheme on which we are all unwitting participants, then there’s not much choice.
Meanwhile, I will be in contact with my new best friend, the bank manager, day and night. I will be closely monitoring every twitch of A.I.G.’s share price, balance sheet and credit rating. And I’ll just hope that if all does not end well, Her Majesty’s Government is understanding of this loyal, faithful and increasingly risk-averse subject.
Paul Wilmott is the founder of Wilmott, a journal of quantitative finance.
September 19, 2008
The Post-Lehman World
By DAVID BROOKS
A few years ago, real estate was all the rage. Earlier this year, the business magazines were telling us to invest in Lehman Brothers and Merrill Lynch, because those stocks were bound to zoom. Now another herd is on the march.
We’re in a paradigm shift, its members say. The current financial turmoil marks the end of the era of wide-open global capitalism. Today’s gigantic government acquisitions signal a new political era, with more federal activism and tighter regulations.
This observation is then followed by a string of ethereal gottas and shoulds. We gotta have smart regulation that offers security but doesn’t stifle innovation. We gotta have rules that inhibit reckless gambling without squelching sensible risk-taking. We should limit excesses during booms and head off liquidations when things go bad.
It all sounds great (like buying a house with no money down), but do you mind if I do a little due diligence?
In the first place, the idea that our problems stem from light regulation and could be solved by more regulation doesn’t fit all the facts. The current financial crisis is centered around highly regulated investment banks, while lightly regulated hedge funds are not doing so badly. Two of the biggest miscreants were Fannie Mae and Freddie Mac, which, in theory, “were probably the world’s most heavily supervised financial institutions,” according to Jonathan Kay of The Financial Times.
Moreover, there is a lot of lamentation about Clinton era reforms that loosened restrictions on banks. But it’s hard, as Megan McArdle of The Atlantic notes, to see what these reforms had to do with rising house prices, the flood of foreign investment that fed the credit bubble and the global creation of complex new financial instruments for pricing and distributing risk.
In other words, maybe there is something more going on here than just a bunch of laissez-faire regulators asleep at the wheel. But even if it is true that we need more federal activism, I’m a little curious about what we’re going to need to make the system work.
Surely, we’re going to need lawmakers who understand what caused the current meltdown and who can design rules to make sure it doesn’t happen again. And yet there’s no consensus about what caused this bubble.
Some people blame the Fed’s monetary policies, but some say the Fed had only a marginal effect. Some argue a flood of foreign investment allowed us to live beyond our means, while others say bad accounting regulations after Enron created a chain reaction of losses.
We don’t even have a clear explanation about the past, yet we’re also going to need regulators who understand the present and can diagnose the future.
We’re going to need regulators who can anticipate what the next Wall Street business model is going to look like, and how the next crisis will be different than the current one. We’re going to need squads of low-paid regulators who can stay ahead of the highly paid bankers, auditors and analysts who pace this industry (and who themselves failed to anticipate this turmoil).
We’re apparently going to need an all-powerful Super-Fed than can manage inflation, unemployment, bubbles and maybe hurricanes — all at the same time! We’re going to need regulators who write regulations that control risky behavior rather than just channeling it off into dark corners, and who understand what’s happening in bank trading rooms even if the C.E.O.’s themselves are oblivious.
We’re also going to need regulators who can overcome politics and human nature. As McArdle notes, cracking down on subprime loans just when they were getting frothy would have meant issuing an edict that effectively said: “Don’t lend money to poor people.” Good luck with that.
We’d need regulators who could spot a bubble and squelch a boom just when things seem to be going good, who can scare away foreign investment and who could over-rule popularity-mongering presidents. (The statements by the two candidates this week have been moronic.)
To sum it all up, this supposed new era of federal activism is going to confront some old problems: the lack of information available to government planners, the inability to keep up with or control complex economic systems, the fact that political considerations invariably distort the best laid plans.
This doesn’t mean there’s nothing to be done. Martin Wolf suggests countercyclical capital requirements. Everybody seems to be for some updated version of the Resolution Trust Corporation, though disposing of complex debt securities has got to be more difficult than disposing of commercial real estate.
It’s just that there’s a big difference between dreaming of some ideal regulatory regime and actually putting one into practice. Everybody says we’re about to enter a new political era, rich in global financial regulation. The herd might just be wrong once again.
September 19, 2008
Bankers and Their Salaries
With the nation’s financial system teetering on a cliff, the compensation arrangements for executives of the big banks and other financial firms are coming under new scrutiny.
Bankers’ excessive risk-taking is a significant cause of this financial crisis and has contributed to others in the past. In this case, it was fueled by low interest rates and kept going by a false sense of security created a debt-fueled bubble in the economy.
Mortgage lenders blithely lent enormous sums to those who could not afford to pay them back, dicing the loans and selling them off to the next financial institution along the chain, which took advantage of the same high-tech securitization to load on more risky mortgage-based assets.
Financial regulation will have to catch up with the most irresponsible practices that led banks down this road, in hopes of averting the next crisis, which is likely to involve different financial techniques and different sorts of assets. But it is worth examining the root problem of compensation schemes that are tied to short-term profits and revenue, and thus encourages bankers to take irresponsible levels of risk.
The banks recognize that pay is a problem. “Some firms” used “compensation incentives that exacerbated the weaknesses and contributed to the market turmoil,” admitted the Institute of International Finance, a lobby group for big banks.
One direct way to address this problem is for bankers to have more of their own money at risk in the bets they are making.
The regulator of Fannie Mae and Freddie Mac set an example when the government took over the mortgage finance companies last week — barring them from paying their former chief executives severance packages worth millions that were stipulated in their contracts. It is proper for the federal government to intervene in executive compensation or exit pay when it takes over a bank. When the federal government assumed a huge ownership stake in the American International Group, it fired the chief executive.
But that was a drastic measure. Banks’ boards of directors, encouraged by their shareholders, must look hard at reforming the pay of top bankers. The core problem is this: bankers get stellar rewards in the good times and don’t have to give money back when their strategy sinks the bank a few years down the road. They might miss a bonus, or even get fired — and float down to earth on the “golden parachute” negotiated in the flush years.
One way to change this would be for banks to hold a big chunk of bankers’ pay in escrow, to be doled out over several years. A bigger share of a bankers’ pay could be made in restricted stock that can only be sold over a fairly long period of time. Golden parachutes could depend on good performance through the executive’s tenure.
September 21, 2008
No Laughing Matter
By THOMAS L. FRIEDMAN
Of all the points raised by different analysts about the economy last week, surely the best was Representative Barney Frank’s reminder on “Charlie Rose” that Ronald Reagan’s favorite laugh line was telling audiences that: “The nine most terrifying words in the English language are: ‘I’m from the government, and I’m here to help.’ ”
Hah, hah, hah.
Are you still laughing? If it weren’t for the government bailing out Fannie Mae, Freddie Mac and A.I.G., and rescuing people from Hurricane Ike and pumping tons of liquidity into the banking system, our economy would be a shambles. How would you like to hear the line today: “I’m from the government, and I can’t do a darn thing for you.”
In this age of globalization, government matters more than ever. Smart, fiscally strong governments are the ones best able to empower their people to compete and win. I was just in Michigan to give a talk on energy. I can’t tell you how many business cards I collected from innovators who had either started renewable-energy companies or were working for big firms, like the Dow Chemical Company, on clean energy solutions.
It just reminded me how much innovative prowess and entrepreneurial energy is exploding from below in this country. If it were channeled and enhanced by better leadership in Washington, no one could touch us.
If I were to draw a picture of America today, it would be of the space shuttle taking off. There is all this thrust coming from below. But the booster rocket — Washington — is cracked and leaking energy, and the pilots in the cockpit are fighting over the flight plan. So we can’t achieve escape velocity to enter the next orbit — the next great industrial revolution, which is going to be E.T., energy technology.
In many ways, this election is about how we get our groove back as a country. We have been living on borrowed time and borrowed dimes. President Bush has nothing to offer anymore. So that leaves us with Barack Obama and John McCain. Neither has wowed me with his reaction to the market turmoil. In fairness, though, neither man has any levers of power to pull. But what could they say that would give you confidence that they could lead us out of this rut? My test is simple: Which guy can tell people what they don’t want to hear — especially his own base.
Think how much better off McCain would be today had he nominated Michael Bloomberg as his vice president rather than Sarah Palin. McCain could have said, “I’m not an expert on markets, but I’ve got one of the best on my team.” Instead of a V.P. to re-energize America, McCain went for a V.P. to re-energize the Republican base.
So what would get my attention from McCain? If he said the following: “My fellow Americans, I’ve decided for now not to continue the Bush tax cuts, because the most important thing for our country today is to get the government’s balance sheet in order. We can’t go on cutting taxes and not cutting spending. For too long my party has indulged that nonsense. Second, I intend to have most U.S. troops out of Iraq in 24 months. We have done all we can to midwife democracy there. Iraqis need to take it from here. We need every dollar now for nation-building in America. We will do everything we can to wind down our presence and facilitate the Iraqi elections, but we’re not going to baby-sit Iraqi politicians who don’t have the will or the courage to reconcile their differences — unless they want to pay us for that. In America, baby sitters get paid.”
What would impress me from Obama? How about this: “The Big Three automakers and the United Auto Workers union want a Washington bailout. The only way they will get a dime out of my administration is if the automakers and unions come up with a joint plan to retool their fleets to get an average of 40 miles per gallon by 2015 — instead of the 35 m.p.g. by 2020 that they’ve reluctantly accepted. I am not going to bail out Detroit with taxpayer money, but I will invest in Detroit’s transformation with taxpayer money, provided the management and unions agree to radical change. At the same time, while I will go along with the bailout of the banking system, it will only be on the condition that the institutions that got us into this mess accept sweeping reforms — in terms of transparency and limits on the leverage they can amass — so we don’t go through something like this again. To help me figure this out, I’m going to keep Treasury Secretary Hank Paulson on the job for a while. I am impressed with his handling of this crisis.”
Those are the kind of words that would get my attention. The last president who challenged his base was Bill Clinton, when he reformed welfare and created a budget surplus with a fair and equitable tax program. George W. Bush never once — not one time — challenged Americans to do anything hard, let alone great. The next president is not going to have that luxury. He will have to ask everyone to do something hard — and I want to know now who is up to that task.
September 21, 2008
The Push to ‘Otherize’ Obama
By NICHOLAS D. KRISTOF
Here’s a sad monument to the sleaziness of this presidential campaign: Almost one-third of voters “know” that Barack Obama is a Muslim or believe that he could be.
In short, the political campaign to transform Mr. Obama into a Muslim is succeeding. The real loser as that happens isn’t just Mr. Obama, but our entire political process.
A Pew Research Center survey released a few days ago found that only half of Americans correctly know that Mr. Obama is a Christian. Meanwhile, 13 percent of registered voters say that he is a Muslim, compared with 12 percent in June and 10 percent in March.
More ominously, a rising share — now 16 percent — say they aren’t sure about his religion because they’ve heard “different things” about it.
When I’ve traveled around the country, particularly to my childhood home in rural Oregon, I’ve been struck by the number of people who ask something like: That Obama — is he really a Christian? Isn’t he a Muslim or something? Didn’t he take his oath of office on the Koran?
In conservative Christian circles and on Christian radio stations, there are even widespread theories that Mr. Obama just may be the Antichrist. Seriously.
John Green, of the Pew Forum on Religion and Public Life, says that about 10 percent of Americans believe we may be in the Book of Revelation’s “end times” and are on the lookout for the Antichrist. A constant barrage of e-mail and broadcasts suggest that Mr. Obama just may be it.
The online Red State Shop sells T-shirts, mugs and stickers exploiting the idea. Some shirts and stickers portray a large “O” with horns, above a caption: “The Anti-Christ.”
To his credit, Mr. McCain himself has never raised doubts about Mr. Obama’s religion. But a McCain commercial last month mimicked the words and imagery of the best-selling Christian “Left Behind” book series in ways that would have set off alarm bells among evangelicals nervous about the Antichrist.
Mr. McCain himself is not popular with evangelicals. But they will vote for him if they think the other guy may be on Satan’s side.
In fact, of course, Mr. Obama took his oath on the Bible, not — as the rumors have it — on the Koran. He is far more active in church than John McCain is.
(Just imagine for a moment if it were the black candidate in this election, rather than the white candidate, who was born in Central America, was an indifferent churchgoer, had graduated near the bottom of his university class, had dumped his first wife, had regularly displayed an explosive and profane temper, and had referred to the Pakistani-Iraqi border ...)
What is happening, I think, is this: religious prejudice is becoming a proxy for racial prejudice. In public at least, it’s not acceptable to express reservations about a candidate’s skin color, so discomfort about race is sublimated into concerns about whether Mr. Obama is sufficiently Christian.
The result is this campaign to “otherize” Mr. Obama. Nobody needs to point out that he is black, but there’s a persistent effort to exaggerate other differences, to de-Americanize him.
Raising doubts about a candidate based on the religion of his grandfather is toxic and profoundly un-American, cracking the melting pot we emerged from. Someday people will look back at the innuendoes about Mr. Obama with the same disgust with which we regard the smears of Al Smith as a Catholic candidate in 1928.
I’m writing in part out of a sense of personal responsibility. Those who suggest that Mr. Obama is a Muslim — as if that in itself were wrong — regularly cite my own columns, especially an interview last year in which I asked him about Islam and his boyhood in Indonesia. In that interview, Mr. Obama praised the Arabic call to prayer as “one of the prettiest sounds on earth at sunset,” and he repeated the opening of it.
This should surprise no one: the call to prayer blasts from mosque loudspeakers five times a day, and Mr. Obama would have had to have been deaf not to learn the words as a child. But critics, like Jerome Corsi, whose book denouncing Mr. Obama, “The Obama Nation,” is No. 2 on the New York Times best-seller list, quote from that column to argue that Mr. Obama has mysterious ties to Islam. I feel a particular obligation not to let my own writing be twisted so as to inflame bigotry and xenophobia.
Journalists need to do more than call the play-by-play this election cycle. We also need to blow the whistle on such egregious fouls calculated to undermine the political process and magnify the ugliest prejudices that our nation has done so much to overcome.
September 22, 2008
A Measure of Hope
By PAUL COLLIER
THANKS to the copper boom, Zambia’s economy at last is growing. Last year, per capita gross domestic product rose by around 4 percent. The capital is busy with new construction, and traffic between here and the copper belt is so heavy, travel time has doubled to eight hours.
Still, Zambia is diverging from the rest of mankind. Its tax system has until last month been so lenient that most of the new copper profits have gone to the foreign companies that now own the mines. And the political and economic collapse of neighboring Zimbabwe has meant a loss of trade.
Zambians remain in the “bottom billion” of the earth’s poorest people — those whom Ban Ki-moon, the secretary general of the United Nations, declared would be the focus of development efforts for 2008. If the U.N., whose General Assembly convenes today, really rises to this challenge, how can it help the countries in the bottom billion? Presumably by more vigorous pursuit of its Millennium Development Goals, whose shaky progress toward ending poverty by 2015 is now subject to mid-term review.
The Millennium Development Goals have been a major improvement on the unfocused agenda for poverty that preceded them, but the world has changed radically since they were announced in 2000. And the assumptions on which they are based need to be rethought.
The World Bank has just raised the bean count of global poverty to 1.4 billion people, from just under a billion. It had previously overestimated the level of Chinese and Indian per capita incomes, so the count now shows that the number of poor Chinese and Indians far exceeds the number of poor Africans. But this is misleading because Chinese and Indian incomes are rising far faster and more surely than African incomes. The big difference between a poor Asian household and an equally poor African one is hope, not necessarily for the present generation of adults but for their children.
Hope makes a difference in people’s ability to tolerate poverty; parents are willing to sacrifice as long as their children have a future. Our top priority should be to provide credible hope where it has been lacking. The African countries in the bottom billion have missed out on the prolonged period of global growth that the rest of the world has experienced. The United Nations’ goal should not be to help the poor in fast-growing and middle-income countries; it should do its utmost to help the bottom billion to catch up. Anti-poverty efforts should be focused on the 60 or so countries — most of them in Africa — that are both poor and persistently slow-growing.
A further weakness with the Millennium Development Goals is that they are devoid of strategy; their only remedy is more aid. I am not hostile to aid. I think we should increase it, though given the looming recession in Europe and North America, I doubt we will. But other policies on governance, agriculture, security and trade could be used to potent effect.
What do I mean?
Well, take, for instance, the American biofuel scam (the ethanol subsidies that have diverted 30 percent of American corn away from the food supply) and the European ban on genetically modified seeds, imitated by Africa, have both contributed to Africa’s worsening food shortage. Where is the United Nations pressure for an end to these follies?
Why, also, did the United Nations not intervene militarily when the democratic government of Mauritania, another country in the bottom billion, was overthrown by a coup last month? Where is an alternative initiative to open international trade to poor countries now that the Doha round talks have collapsed? Above all, with a five-year-old commodities boom transferring wealth to some of the countries of the bottom billion, where are the international guidelines on taxation and investment that might help these countries convert earnings from exports of depleting minerals into productive assets like roads and schools?
I applaud Ban Ki-moon. Like Robert Zoellick, the World Bank president, Mr. Ban is offering more thoughtful leadership on development strategy than has been provided for decades. But he has been stymied by the powerful countries’ failure to rally to his call to focus on the poorest countries. No nation, not even the United States, is now sufficiently dominant for its actions to be decisive. International coordination is needed more than ever. For all its manifest limitations, the United Nations must work.
International coordination has been, indeed, the great achievement of the Millennium Development Goals; all the major donor countries have bought into them. But they should now be revised so as to focus on the challenge of helping the bottom billion to converge with the rest of mankind — and on a more realistic timescale. We need not just a “Year of the Bottom Billion,” but several decades. This session of the United Nations is an appropriate moment to get started.
Paul Collier, a professor at Oxford, is the author of “The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It.”
September 22, 2008
Barack Obama, John McCain and the Language of Race
By BRENT STAPLES
It was not that long ago that black people in the Deep South could be beaten or killed for seeking the right to vote, talking back to the wrong white man or failing to give way on the sidewalk. People of color who violated these and other proscriptions could be designated “uppity niggers” and subjected to acts of violence and intimidation that were meant to dissuade others from following their examples.
The term “uppity” was applied to affluent black people, who sometimes paid a horrific price for owning nicer homes, cars or more successful businesses than whites. Race-based wealth envy was a common trigger for burnings, lynchings and cataclysmic episodes of violence like the Tulsa race riot of 1921, in which a white mob nearly eradicated the prosperous black community of Greenwood.
Forms of eloquence and assertiveness that were viewed as laudable among whites were seen as positively mutinous when practiced by people of color. As such, black men and women who looked white people squarely in the eye — and argued with them about things that mattered — were declared a threat to the racial order and persecuted whenever possible.
This obsession with black subservience was based in nostalgia for slavery. No sane person would openly express such a sentiment today. But the discomfort with certain forms of black assertiveness is too deeply rooted in the national psyche — and the national language — to just disappear. It has been a persistent theme in the public discourse since Barack Obama became a plausible candidate for the presidency.
A blatant example surfaced earlier this month, when a Georgia Republican, Representative Lynn Westmoreland, described the Obamas as “uppity” in response to a reporter’s question. Mr. Westmoreland, who actually stood by the term when given a chance to retreat, later tried to excuse himself by saying that the dictionary definition carried no racial meaning. That seems implausible. Mr. Westmoreland is from the South, where the vernacular meaning of the word has always been clear.
The Jim Crow South institutionalized racial paternalism in its newspapers, which typically denied black adults the courtesy titles of Mr. and Mrs. — and reduced them to children by calling them by first names only. Representative Geoff Davis, Republican of Kentucky, succumbed to the old language earlier this year when describing what he viewed as Mr. Obama’s lack of preparedness to handle nuclear policy. “That boy’s finger does not need to be on the button,” he said.
In the Old South, black men and women who were competent, confident speakers on matters of importance were termed “disrespectful,” the implication being that all good Negroes bowed, scraped, grinned and deferred to their white betters.
In what is probably a harbinger of things to come, the McCain campaign has already run a commercial that carries a similar intimation, accusing Mr. Obama of being “disrespectful” to Sarah Palin. The argument is muted, but its racial antecedents are very clear.
The throwback references that have surfaced in the campaign suggest that Republicans are fighting on racial grounds, even when express references to race are not evident. In a replay of elections past, the G.O.P. will try to leverage racial ghosts and fears without getting its hands visibly dirty. The Democrats try to parry in customary ways.
Mr. Obama seems to understand that he is always an utterance away from a statement — or a phrase — that could transform him in a campaign ad from the affable, rational and racially ambiguous candidate into the archetypical angry black man who scares off the white vote. His caution is evident from the way he sifts and searches the language as he speaks, stepping around words that might push him into the danger zone.
These maneuvers are often painful to watch. The troubling part is that they are necessary.
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