Category Archives: History

The Stock Market and the End of the Bernanke Put – Part I

Since the 1980s, speculation in U.S. financial markets has been supported by first the Greenspan “Put” and then the Bernanke “Put.”  These puts – informal promises by the Federal Reserve Bank to protect the value of stocks and bonds and prevent destructive crashes, will come to an end if the Fed stops buying housing bonds and allows interest rates to rise this fall.

The wealthiest 1% of Americans, who own about 33% of the total value of stocks and bonds on Wall Street, are upset about the amount of risk they face without the Fed pouring money into the economy.

PART I  To understand why the stock market jumps up and down depending on what Ben Bernanke says, you have to understand the Greenspan “Put.”  In the 1970s, the post-WWII golden age of American prosperity came to an end.  The combination of staggering oil price increases, fierce competition from foreign imports, and resistance to wage cutbacks by unionized workers led to “Stagflation” – an unhappy world of slow growth and high inflation.

Profits for non-financial corporations were squeezed by these trends; in the late 1970s the rate alternated between 2% and 4%, less than half the profit rate of the 1950s and one third of the profit rate of the mid-1960s. 

In response to intense competition from modern factories in Germany, France, and Japan, U.S. industrial firms began what Barry Bluestone and Bennett Harrison wrote about in their ground-breaking book The De-Industrialization of America.  In a process that now seems commonplace to us, many companies closed old, unionized factories in the northeast and mid-west, moving them first to the south and then overseas.

Other manufacturing firms were purchased, their assets sold for cash, and the shell of the company then allowed to go bankrupt.  The blockbuster movie Wall Street captures the ruthless scramble to turn factories into cash in the 1980s.

With investment in tangible production assets becoming more risky and less profitable, American banks and investors began turning to financial speculation as a way to maximize their returns.  The newly elected Reagan administration was eager to help, persuading Congress to loosen regulatory restrictions on the savings and loan industry and stocking the government with regulators who looked the other way when new financial instruments like “junk bonds” appeared on Wall Street.

The explosive growth in these new financial products was fueled by a rapid and costly defense build-up which led to federal deficits of 6.1% of GDP in 1983, 5.2% in 1985 and 5.1% in 1986 – the largest peace-time deficits in U.S. history.  These deficits led to wild speculative excesses on Wall Street, vividly captured in Tom Wolfe’s novel Bonfire of the Vanities.

Alan Greenspan, formerly Chairman of Gerald Ford’s Council of Economic Advisors, was appointed chairman of the Federal Reserve in August of 1987, at a time when the roaring stock market had soared 44% in just one year.  Then, on October 19, 1987, a day after the Hong Kong the stock market collapsed, Wall Street stumbled into full financial panic, losing 22.5% of its value in a single day.  Greenspan immediately stepped in, providing large loans to banks and lowering interest rates.  He announced that the Fed “affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”

Greenspan, over the course of five terms as Fed chairman, would demonstrate again and again that the Federal Reserve was ready to pump money into the economy any time the financial markets got into trouble.  This guarantee of support became known as the Greenspan “Put.”  In the world of finance, a “put” is a contract that gives its owner the right to sell a stock or bond at a certain price regardless of whether the market is falling – essentially a guarantee against severe losses.

With the Greenspan “Put,” banks and investment companies could take more risks.  In response, they began inventing the world of derivatives, hedge funds, sub-prime mortgages, and securitization of loans that proved so unstable in 2000 and 2008. 

Next week in Part II, I will look at two examples of the Greenspan “Put” and then show how Bernanke has done even more than Greenspan.

Postscript: Front page headline in the Wall Street Journal on Friday the 11th, the day after I put up this post: “Stocks Surge to Fresh Highs: Skittish Investors Gain Courage From Fed Chief’s Reassurance on Easy-Money Policy.”

The First Mistake in Afghanistan

Clausewitz studied the guerrilla war waged in Spain against Napoleon and decided that resistance by an aroused population could prove decisive in war, even if the national army was defeated. The Bush Administration failed to prepare for a long war in Afghanistan because it did not understand how the native population would react to an American occupation.

Seeking an easy victory in Afghanistan, Bush and Cheney did not consider the consequences of fighting an enemy who possessed the will to fight a protracted war.

Humiliated by Napoleon’s defeat of the Prussian army at Jena in 1806, Carl von Clausewitz watched with fascination as guerrilla soldiers in Spain harassed and frustrated thousands of French soldiers. His patriotic passions then boiled over in the spring of 1812, when Napoleon intimidated Prussian King Frederick Wilhelm into sending a corps of Prussian troops to participate in the Emperor’s invasion of Russia. Clausewitz resigned his commission in the Prussian army and became an officer in the Czar Alexander’s army.

Before leaving he wrote Bekenntnisdenkschrift, roughly meaning “statement of belief.” In it he declared that Napoleon meant to occupy the German nation and the King and his court were fools to cooperate with the country’s real enemy. He then laid out an alternative plan of resistance based on the Prussian army breaking up into small units combined with a general arming of the patriotic citizenry. Clausewitz and the State. In Russia, he had a front row view of Napoleon’s disastrous campaign. Russian generals avoided decisive battles, drew the Emperor deep into an armed, hostile countryside, and then successfully counter-attacked.

Later, Clausewitz wrote in his seminal work On War “As we shall show, defense is a stronger form of fighting than attack.” Clausewitz in the 21st Century. In the modern era, when whole nations are mobilized to go to war, no attacker can achieve a decisive victory with “a single, short blow…Even when great strength has been expended on the first decision and the balance has been badly upset, equilibrium can be restored… The defeated state often considers the outcome merely as a transitory evil, for which a remedy may still be found in political conditions at some later date.”

The Bush Administration made the mistake of viewing the Taliban as merely a government and believed that the loss of formal ruling powers would lead to a break-up after their military defeat in late 2001. However, the Taliban is really a movement, the principal representative of the Pashtun people.

A quick look at a map shows that their tribal area includes about one-third of Afghanistan, the southeastern region, and a similar size area in Pakistan’s southwestern region. It is estimated that there are about 50 million Pashtuns in all. The Afghan Pashtuns are the most populous ethnic group in their country while Pakistani Pashtuns are a distinct minority in theirs. The tribe has lived in this region since around 1,000 BCE; that is, long before Rome was founded or the golden age in Greece. To act as if this organization would simply disappear after a military defeat was the height of folly.

Politics and Unintended Consequences

Who knew that the German military theorist Carl von Clausewitz came up with a brilliant theory about politics that explains why it is shot through with unintended consequences and unusual twists and turns.

His “fascinating Trinity” offers a unique way to think about political life.

One of my good friends is always cautioning me about my bold statements about politics and what will happen next.  He is a devotee of the notion that life is extremely complex and all actions lead to unintended consequences.  It turns out that Clausewitz, who fought in the Prussian and Russian armies against Napoleon, felt the same way.

After Waterloo, he became the Director of the Prussian equivalent of West Point and wrote On War, one of those complex 19th century books that everyone talks about and nobody reads.  However, he still generates plenty of controversy amongst military theorists – the internet is crowded with debates about his ideas.

Clausewitz describes war as a “fascinating Trinity.”  In all wars, he says, both full tilt combat between major powers and guerrilla wars, there are three dimensions. First is the realm of passion and emotion, anger, loyalty, and violence because war is like a heavyweight wrestling match – direct and brutal.  Another realm is the element of chance, intuition, military genius, willpower, and “friction,” his term which is the genesis of the idea we know as the fog of war.  Finally, there is the realm of rational planning, policy making, and strategic decision making.

The course of every war veers around in a non-linear, chaotic fashion between these three elements. Clausewitz says it is like a metal object hanging on a string that is being attracted simultaneously by three magnets set up in a triangle arrangement.  I saw a demonstration of this situation on a video.  What happens is the metal object careens around wildly, being pulled almost randomly this way and that way between the three magnets.  It is a fascinating multi-dimensional demonstration that smashes the cramped linearity of lines and arrows and circles on a piece of paper.

Thus, war is unpredictable and all planned activities generate unforeseen, unintended consequences. Once a war starts, no one can predict its course.  Therefore, a nation must plan carefully for a war, trying to examine a wide array of possible outcomes to events. It must then be flexible and ready to re-evaluate frequently as the war continues.  He also says that politics is like war, except that there is no (or at least little) violence in the passion-emotion element.  That is why he pens the famous statement: “war is an extension of politics by other means.”

I hope to use this multi-dimensional trinity imagery to think more deeply about politics in the future.  For now, I will use Mr. Clausewitz in some future posts about Iraq and Afghanistan. I believe he can help us understand the disasters that occurred in those countries.

Retreat on Filibuster Reform Helps Fundraising

Majority Leader Harry Reid and conservative Democratic Senators decided not to change the Senate’s filibuster rules when the new Senate met in January – the result is a disaster.

Tired of deadlock in the Senate? Blame the Democrats.

Sure, it is the Neanderthals running the Republican Party in the Senate who filibuster every possible improvement in American life, but the Democrats designed the rules that let them do it. Harry Reid may bluster and complain when a Republican filibuster blocks a nomination or stymies a bill, but every other January since 2007 he and a handful of Democratic conservatives prevent Senate liberals from changing the rules to break the power of the filibuster.

Unlike Roberts Rules of Order, which are based upon the principal of majority rule, the procedures adopted by the Senate in the 18th Century allow Senators to frustrate majority rule by talking without interruption – thus blocking any vote. Senate rules say that only a super majority – it was 66 Senators until the 1970s, now it is 60 Senators – can cut off debate and force a vote.

The filibuster is obnoxious in and of itself because, until the 1990s, the filibuster or the threat of a filibuster was used primarily by southern Senators to block civil rights legislation. As a result, none of the many civil rights bills approved by the House of Representatives between 1869 and 1957 – including voting rights acts, anti-lynching laws, and fair employment laws – passed the U.S. Senate. Only under the pressure of the Civil Rights movement in the 1960s were laws finally passed to outlaw discrimination and restrictions on voting rights.

Now the Republican Party has used the filibuster 380 times since Democrats re-took control of the Senate after the 2006 Congressional elections. Here are examples of legislation passed by the House during the 111th Congress (2009 and 2010) that received more than 50 votes in the Senate, but were blocked by a Republican filibuster – The DREAM Act, which would have provided a path to citizenship for children of undocumented immigrants; the Employee Free Choice Act, which would allow employees to create a legal union by collecting signatures rather than participating in a company-dominated election; a Public Option provision in the ObamaCare Act; and the Buffet Rule, which would have created a 30% minimum tax for individuals with incomes over $1 million.

There was a strong movement among newer Democratic Senators to change the filibuster rule when the 113th Congress started, but in the end Harry Reid, Diane Feinstein, Carl Levin and other conservative Democrats, apparently without any complaint from the White House, settled for a few minor reforms. The impact has been painful. Under the threat of a filibuster, the Democratic leadership has dropped provisions banning assault weapons and large magazine clips from the Senate gun control bill. In March, the President had to withdraw his nomination of Caitlin Halligan, a liberal lawyer who pursued law suits against gun manufacturers, to the U.S. Court of Appeals for the District of Columbia Circuit – a training ground for future Supreme Court justices because of the prominence of the cases brought in Washington.

This frustrating state of affairs allows the Democratic Party leadership to have it both ways – trumpeting its progressive positions during elections – but collecting campaign cash from rich donors who understand that results are what count.  You have to think about how their main constituents are the people that donate millions of dollars for their campaigns – people who are not excited about economic change.

Atheists, Pagans, and Christians

Atheists are usually secular humanists – focused on the immediate world of human experience. Pagans are more like Christians because they both believe that there is a spiritual realm outside of human experience.

I know, at first blush, it seems logical that atheists would be the ones who are more like pagans.

Instead of juggling definitions, it is easier to understand these relationships from an historical perspective. As I explain in my book, Perils of Empire, like most pagans, the Romans did not understand why many things happened – people fell ill and died suddenly, some soldiers survived many battles while others died in their first skirmish, winter came and went – so they felt that gods or spirits must control these events and did so without seeming to care much about the fate of mere individuals. Through ceremonies, the many different pagan cults acknowledged the power of these gods, requested their assistance, and gave people a way to express uncertainty about their fate. This went on for thousands of years and was deeply embedded in all human cultures.

As the Christian religion developed and grew, many Christian holidays and traditions were borrowed from the pagan ceremonies already prevalent in the ancient world. Appropriating pagan-like traditions (for example the Christmas holiday occurs very close to the pagan solstice holiday) made it easier for pagans to convert to Christianity.

In addition, one of the attractions of the new religion was the idea that unlike pagan gods, the Christian God cared about you as an individual. Note that, in The Iliad, the gods openly meddle in the war between the Greeks and the Trojans, playing out their own feuds with no thought about the consequences for humans. A God who was eager to provide human believers with life after death was a very positive difference.

In contrast to this ancient contest, modern secular atheists don’t have a lot of ceremonies or teachings or traditions. Most atheists are “humanists” in some way – simple truths about the dignity and value of human life form the basis of their ethical beliefs and behavior.

Now, some atheists are “spiritualists” who consciously take up pagan rituals to create ties with old cultures and with nature. However, modern spiritualists don’t literally believe that pagan gods or spirits exist outside of the human realm. Remember, ancient pagans felt that nature really was populated with gods who were independent of humans and did their own thing. Modern spiritualists are more descendents of Jung’s ideas about a spiritual connection between humans and other living things – some sort of collective unconscious – so in that sense they are not truly pagan.

As a result, I think Christians, who believe in a God who exists outside of the human realm, are more like pagans than either atheists or spiritualists, who have a more human-based ethical system. Keep in mind that both monotheism and polytheism are religious perspectives; their differences are over the number of Gods and their relationship with humans.

 

Not Really a Progressive

I went to hear George Packer, of The New Yorker fame, speak this week and was struck by his references to the Progressives; the real ones in 1905, not the vague term that people use today.  Mr. Packer said President Obama is like the Progressives in his passion for clean, open government; he deeply values a political system where issues are discussed in a spirit of good faith, where leaders struggle to work out what actions are in the best interest of the country.  This progressive, good government impulse is deeply embedded in the president’s “come, let us reason together” personality and is the source of his persistent attempts at bi-partisanship.

Mr. Packer also said that Obama, like the Progressives, believes in expertise and group discussion in order to reach the right policy prescriptions.  Once he reached the White House, Obama moved away from his campaign “man of the people” persona and adopted a more deliberative, expert-oriented, decision-making process.  While this was most evident during the three month process that preceded his decision to drastically increase military activity in Afghanistan, the same process was also used for major issues like saving the financial system, pushing for health care reform, and addressing climate change.

Unfortunately, the mere listing of those last three issues, banks-health care-climate change, highlights the dramatic way in which President Obama is not at all like the Progressives of the early 20th century.  Those reformers were passionately opposed to the abuses of large corporations and banks.  The “Robber Barons” were not loved by most Americans and numerous movements rose up to challenge their ability to exploit workers and consumers.  In fact, by the 1912 presidential campaign between Teddy Roosevelt, Woodrow Wilson, and Howard Taft, there was a fierce debate over whether big companies should be dismantled through anti-trust court action (Taft), closely managed through a system of powerful federal regulatory agencies (TR), or some combination of the two (Wilson).

Needless to say, Mr. Obama has never considered any of those alternatives.  Instead, following the advice of his experts, he, and the Democratic leadership in Congress, have attempted to purchase good behavior through open-ended bail-outs of financial firms, concessions that preserve the profits of drug and insurance companies, and subsidies and exemptions for dirty energy providers and users in the cap-and-trade bill that passed the House last summer.

Obviously, President Obama has been confronted by over-the-top belligerence from the Republican Party, but the policy choices he has made in an attempt to moderate their opposition and get cooperation from our modern day Robber Barons have added up to a demoralizing failure to promote the national interest.  Millions of his strongest supporters have been reduced to stunned disbelief.  Perhaps what we are seeing is the exhaustion of modern liberalism; a philosophy that was once guided by the principle of using government resources to improve the well-being of the great majority of the population.  Now the party of liberalism seems to have no political strategy other than using tax money to bribe rogue corporations and banks in the vague hope of moderating their behavior.

Obama’s Afghan Promise

While we often complain about candidates not keeping their campaign promises, when it comes to difficult, complex issues, a campaign promise can become a ball and chain around a new President’s neck.  This happened to Bill Clinton when he promised to immediately ban persecution of gays in the military during his 1992 campaign.  Instead of working with the Joint Chiefs of Staff to introduce a suitable shift in military policy, Clinton issued an Executive Order on his first day in office, abolishing rules against gays serving in the military.  This placed him in a high-profile conflict with war hero and Chairman of the Joint Chiefs of Staff, Colin Powell.  Clinton took an enormous amount of flack from right-wing and Congressional critics, Powell refused to buckle under Presidential pressure, and the public perceived Clinton as imposing an extreme “liberal” position on the highly praised military that had just won Gulf War I.  The new President was forced to accept a humiliating defeat, agreeing to the ridiculous “Don’t ask, Don’t tell” policy that actually made things worse for gay individuals in the service.

I bring up this sorry episode as a warning when we consider Obama’s repeated promises during the fall debates to hunt down Osama bin Ladin and kill him, with or without the help of the Pakistani government.  It is unclear to me how he can carry out this promise without continuing the new American policy of unannounced cruise missle strikes in the mountainous areas of western Pakistan, a policy cooked up by the Bush administration this summer.  Not surprisingly, these attacks on a sovereign country are destabilizing our relationship with the new Pakistani President and the country’s largest political party.  To frost the cake, Obama also explicitly and repeatedly said he would send more U.S. combat troops to Afghanistan in order to defeat the Taliban.  He has created very high expectations and will have a difficult time backing out of these commitments – commitments that could lead to the collapse of civilian rule in Pakistan and the creation of a new quagmire in the remote hills of Afghanistan.

Leaving aside the folly of adopting any policy created by the Bush Administration, I believe these Osama-Afghanistan promises are a classic example of how the Democrats have historically been drawn into defending the American empire.  In the heat of an election campaign, Obama felt he had to show how tough he is, how he would be a vigorous Commander-in-Chief.  Just like Kennedy and Johnson had to show how tough they were by keeping the commies out of Vietnam.  These military promises are powerful because they fit right into the imperial job description that so many military, journalistic, academic, and political leaders attach to the Presidency.  It is a job description that many Democratic and Republican voters believe in as well.  As such, they are the policy equivalent of painting yourself into a corner and then claiming you are free to go anywhere you want.  The appropriate response is – Yes, within your little box.

Of course, Obama is not as trigger-happy as McCain, but the criticism from Hillary Clinton this spring and then McCain and the media about his “credentials” to be Commander-in-Chief (see my posting in September) have forced him to become much more militaristic than he was when he started the campaign.  We are actually watching, in real time, how the dynamics and pressures of empire shape individuals who become leaders.  No matter what their pre-presidential ideas about foreign policy, the pressures of the political system puts them in a position where, in order to advance to the presidency, they must commit to defending the empire.  In Perils of Empire, I explain in detail how the dynamics of the Roman political system consistently generated leaders who sought war and expansion of territory – and the American political system has been doing a similar thing since at least the end of WWII.  Without a powerful peace movement that opposes wars and treaties the promote the empire, Democrats get pushed into the imperial system, even those who begin with good intentions.