Saturday, April 20, 2013

Our enemy.

When I sat down to write this morning, I did not want to write about the Boston bombing and the ensuing manhunt. What was there left to be said? And yet, we know next to nothing.

I badly want to hear Dzhokhar's story. He was a classmate and friend of a close family friend in my native Boston, and by all accounts, did not "come across as someone who would do anything like this."

But who does? In the recent debate over gun control, people spoke with ease about denying purchases to the mentally ill, but is that so easy to define? Growing up in a family of psychotherapists, I found that debate somewhere between ludicrous and horrifying, as the mentally ill were presumed to be a new category of the "others" that have long been the source of so many of our ills. The conflation of despicable acts with mental illness, and the ensuing belief that if we identify mental illness we can limit atrocities is somewhere between wishful thinking and utter denial of a much more threatening reality.

I do not want to hear Dzhokhar's story to understand it, or to feel empathy, or forgiveness. The events at the end of the Boston Marathon were horrific. In a way, the magnitude of the maiming--runners who came to run a race and left with no legs--outstripped even the death. Scores left with limbs lost and lives forever changed. There is nothing he can say to make us understand the wanton cruelty of his and his brother's act, no personal story nor political rationale that will make us sit up and say, "Yes, I get that."

In his essay Inventing the Enemy, Italian essayist Umberto Eco describes the need for defining the other as the enemy as an enduring part of what binds societies and peoples together. His is not a judgement, but an observation.

"Trying to understand other people means destroying the stereotype without denying or ignoring the otherness. But let us be realistic, these ways of understanding the enemy are the prerogative of poets, saints and traitors. Our innermost impulses are of quite another kind."

Growing up in Boston was to feel the constant animus between communities that together comprised what to the outside world was a great cultural and intellectual capital. To paraphrase Tom Lehrer, the great Harvard mathematician and humorist, the white folk hated the black folk, the Irish hated the Italians, the Catholics hated the Protestants, and everyone hated the Jews.

The hatreds in Boston were very real, and the rage lay just beneath the surface. And they boiled over in moments such as when Louise Day Hicks led her community of the white working class to protest the racial integration of public schools. It was the Other that bound us together. We all hated the Yankees, the Canadians (the team, not the people), and the Lakers.

Despite the years since 9/11, and despite the years of watching Palestinian bombs killing indiscriminately on buses and in cafes in Israel, the bombing in my hometown last week gave me a visceral understanding of British national anger at the Boston Irish community--led by the Kennedy family--lending financial and moral support to the IRA, whose bombs were as indiscriminate in their slaughter and maiming. It gave me an understanding of a Russian friend's anti-Chechen animus for years of similarly indiscriminate bombings in Moscow.

I want to hear Dzhokhar's story because of the rage that I grew up with, that I inherited from my father as literally as DNA is passed down from one generation to the next. My father's rage was more consuming of his life than mine. For me it comes only in moments, and it passes, but it is consuming in those moments. I have experienced it as a vestige of the immigrant experience. His parents came from Russia, 1,000 miles north and a bit west of Dzhokhar's family home. I have often commented that the dislocation of that migration took four generations to dissipate, as I imagine that my children finally and fully experience life without the rage I experience.

Eco's fundamental observation is that we define ourselves by who our enemies are, that civil society relies upon the presence of the other as a central organizing principle. A week ago, before Boston dislocated my thinking, it occurred to me how much easier it was to be President during wartime. Bill Clinton was the first President of my lifetime who governed without a significant war, and since the collapse of the Evil Empire, the need for a new enemy has been tangible in our politics. Eco talks about the millennial anticipation of the Anti-Christ as an animating force in Christendom and Europe's slow evolution to its modern form, and we watched over the past two decades the labeling of our adversaries as the Anti-christ, including Saddam Hussein and Mahmoud Ahmadinejad.

In the absence of definable enemies, as I learned in Boston, we turn on each other. Perhaps it is only with the waning of the wars of my youth that this has become so apparent in our national politics. Now, Democrats and Republicans have turned on each other in the absence of a common enemy, with new permutations of class warfare where it is the wealthy who resent the poor, and where our President is the Anti-christ. We have taken the art of cultivating resentments and channeling hatreds to new heights, across multiple new platforms.

I want to hear Dzhokhar's story because his and his brother's assault was so deeply personal, in a way that was obscured in 9/11 by the large scale nature of that tragedy. He chose to place bombs in crowded places. His action was both personal and impersonal. His life story as written across the web and in the words of those who knew him lacks a sense of animating rage.

I want to know how he took the step that so few take, to turn on one's enemy and in a deeply personal act inflict horror upon them. Defining this as the action of the Other--one more Muslim Salafist driven by religious rage against modernity--is not enough. This was a personal act. I have to believe that there is something there that makes Dzhokhar different, because it is too threatening to think that there isn't.

Tuesday, April 09, 2013

Ben's choice.

When former Reagan OMB Director David Stockman charged Ben Bernanke with  “exploding the Fed balance sheet” in his recent New York Times op-ed piece and in various interviews on his book tour, he was tapping into a topic rife with controversy and skepticism. Few areas of our politics are as rich with conspiracy theory in the public imagination as the workings of the Federal Reserve Bank.

Ben Bernanke has been a stalwart of federal economic policy since the 2008 collapse. While most of the original crafters of TARP and the bailouts of the banks are off writing their memoirs, Bernanke has soldiered on. Someday, perhaps, history will credit him with guiding the U.S. economy—and in its wake the rest of the world—through a treacherous time, but that time has not yet come.

From a certain perspective, Bernanke has done an admirable job. After all, while the rest of the advanced industrialized world—notably Europe and Japan—continue to struggle to find a path to growth, the U.S. economy is growing—albeit at a slower rate than in prior recoveries. And for all the continuing anger at the financial sector, the U.S. banking system has returned to viability, while European banks in particular continue to navigate a precarious path forward. Every month we see new evidence of the long, slow implosion of the Eurozone, while Japan’s failure to escape its long-running recession is now the stuff of legend. Meanwhile, flight capital from the rest of the world’s continues to strengthen the dollar as the reserve currency of the global economy and push U.S. Treasury yields to historic lows.

There are two particularly crimes that Stockton and others lay at Bernanke’s feet. The first is the impact of keeping short-term interest rates near zero. Facing the disinclination of the Congress and the U.S. public to recapitalize the banking system directly, Bernanke has used monetary policy to achieve this outcome. It is now (somewhat) widely understood that one of the primary objectives in keeping interest rates low has been to allow a “carry trade” whereby banks borrow funds from the Fed at near zero cost and purchase higher yielding U.S. Treasury securities, and earn a spread that flows through their earnings to rebuild bank assets that were destroyed with the collapse of housing bond values.

The consequence of this, as Stockman and many others have pointed out, is that it has enriched the banks while impoverishing the elderly, worker retirement systems and other savers across the economy. Our parents and grandparents who live off their savings have seen interest earnings on certificates of deposit decline from the range of four or five percent to below one percent. Similarly, the now-critical underfunding of public pension systems—which were universally fully funded a decade ago—is in part a direct result of Federal Reserve interest rate policy.

Bernanke, as Fed chairman, had to make a choice, and he did. Keeping the Fed Funds rate at near zero has had little to do with stimulating bank lending—and indeed the lack of lending is a major criticism of the banking system—but rather it has been to rebuild bank balance sheets that were destroyed with the 2008 collapse.

This focus on rebuilding the balance sheets of our largest banks parallels the second charge leveled at Bernanke. The Federal Reserve Bank balance sheet has grown significantly since the 2008 collapse. At the end of August 2008, just before the ensuing September crash, the Fed balance sheet showed assets and liabilities (which are equal in the language of Fed accounting) of $909 billion. Four and one-half years later, as of March 27th, Fed assets and liabilities had more than tripled, to $3.2 trillion. During this time, bank deposits with the Fed (shown as liabilities on the Fed balance sheet, because the they are assets of the depositing banks) grew from a negligible $19 billion to over $1.8 trillion.

For most people in the world, the previous paragraph is largely incomprehensible, so a few comments on monetary economics is in order.

As the U.S. central bank, the primary role of the Federal Reserve Bank is to regulate the money supply. That is to say it literally manages the amount of money that is in circulation. At the upper edge of every U.S. dollar bill are the words “Federal Reserve Note,” indicating that the dollar is “fiat” (or paper) currency issued by the Fed. Historically, the primary objective of the Fed has been to control inflation, though in recent decades it has been charged as well with keeping unemployment at acceptable levels. An essential premise of monetary economics is that a rapid increase in the money supply will necessarily lead to an increase in inflation, based on the very simple notion that if there are more dollars floating around purchasing the same amount of stuff, the price of stuff will rise as people throw more dollars at it.

Traditionally, one of the primary ways that the Fed increases the money supply is to lend money to the banks that are members of the Fed system, which they would then lend out to private borrowers. This has the effect of putting that money into circulation in the economy, and by lowering the cost of money (the Fed Funds rate) the Fed can increase the amount of lending. But as an alternative, when there is little borrowing going on at any price--such as during the current period of massive private sector de-leveraging--the Fed can put new money into the economy is by purchasing securities from banks.

This practice, generally referred to as quantitative easing, allows the Fed to put new money into circulation even if there is little private lending going on. Here is how it works: If a bank owns a bond and sells that bond to the Fed, the Fed literally pays for that bond by creating currency that it gives to the bank in exchange for the bond. One day, the bank owns $1 million in bonds, the next day it has $1 billion in cash. After that transaction, the Fed has a new $1 million in assets (the bonds it purchased) while the bank has newly minted money. On the liability side of the Fed balance sheet, the Fed shows that $1 million as either bank deposits, if the bank is not planning on lending that money out in the near future, or bank notes, similar to those in your wallet. (Just to close the circle, should the Fed want to slow down economic activity and inflation, it would do the opposite, selling securities to banks, effectively taking cash out of circulation and reducing the liquid resources available to the banks for new lending.)

Based on the Fed balance sheet numbers noted above, in the post-2008 period, the Federal Reserve has “inflated” the money supply by around $2.3 trillion. According to Bernanke detractors, this growth in the money supply must necessarily portend disaster. The accusation is that Bernanke is pumping up the money supply in order to “monetize” or devalue, the debt of the government. The monetization of debt constitutes nothing less than the expropriation of savings from the virtuous, and Bernanke’s actions will ultimately result in the impoverishment of America, suggesting images of Weimar-era Germany.

But there is an alternate perspective.

Back in the spring of 2008, I happened to be in the offices of Bear Stearns the day that its sale to J.P. Morgan was announced. The collapse of Bear Stearns marked the beginning of public discussions of the magnitude of bank losses in bad housing bonds that would ultimately lead to the passage of the $700 billion Toxic Asset Relief Program, or TARP. A colleague of mine, a very bright guy named Andre, made the casual, yet prophetic, observation, that aggregate losses across the U.S. banking system in bad housing bonds was far greater than the hundreds of billions of dollars then being discussed, and would ultimately be in the range of $2 to 4 trillion dollars. (I remember the conversation well because it was the first time I heard the word “trillion” used in casual conversation).

Andre’s casual prediction that Spring day has turned out to be an accurate demarcation of the range of bank losses in the 2008 collapse. These were real losses in real dollars from the asset side of the U.S. banking system. In some cases, U.S. banks have recognized (an accounting term that loosely translates into “admitted to”) these losses, while to a great extent accounting rules have allowed banks to defer loss recognition, so these bonds remain on the books. The TARP program, incidentally, was a complete failure specifically because it would have required banks to recognize the magnitude of their losses.

Ultimately, Andre’s $2 to 4 trillion dollar estimation of losses mirrors the amount of value that Bernanke is seeking to restore to bank balance sheets. Bernanke has essentially broadened the role of the Fed from managing inflation to assuring the viability of the banking system. His primary tool for doing this has been “quantitative easing,” a practice widely viewed as a means of managing the money supply in a period of low loan demand, but which is being used by Bernanke as a means to recapitalize banks, increase their liquidity and restructure the risk profile of their balance sheets.

The extent of Bernanke’s success to date can be seen in the $1.8 trillion of bank deposits referenced above. According to this perspective, what detractors view as excess money supply creation can be seen from Bernanke’s view new money channeled onto bank balance sheets necessary to replace the assets that were lost in the 2008 collapse and thereby restore solvency to the national banking system. In this view, the $2.5 trillion growth in securities held by the Fed reflects its success in converting long-term assets on the books of private banks to cash, and thereby reducing the aggregate duration of bank assets and further increasing bank liquidity.

Bernanke detractors are unarguably correct on one score: Fed policy of keeping the Fed Funds rate near zero was a policy choice between the interests of the banks and the interests of savers across the economy. The destruction of the solvency of senior citizens and pension funds was deemed by Bernanke to be acceptable collateral damage of policies designed to save the nation's largest banks.

Bernanke faced a dilemma of the sort that few public officials are ever forced to confront. Neither the banks nor the political system were prepared to take the steps necessary to stabilize the banking and economic system. The banks that held the toxic assets that effectively made them insolvent steadfastly refused to sell those assets as envisioned by the creators of the TARP program, while our politics made the nationalization of those insolvent banks a non-starter. Bernanke was clearly of the view that a collapse of several major banks was for all involved the worse outcome than the destruction of the savings of millions of people across the economy, and he acted accordingly.

David Stockman blames Bernanke specifically for making a choice that destroyed the virtuous at the expense of the profligate, and so he did. But the predictions after the fact by Stockman and so many others about how much better off we would be today if instead the banks had been allowed to fail are easy to make but impossible to prove.

But the “exploding the Fed balance sheet” debate is one for which we ultimately will have an answer. If Bernanke’s strategy of recapitalizing the banking is ultimately successful, the $2 trillion or so of new currency created under his watch will ultimately come to replace bank assets lost in the 2008 collapse, restoring solvency to the banking system but resulting in little material net increase in the supply of money in circulation. If Bernanke’s detractors are correct, those trillions of dollars will instead become the source of new and uncontrollable inflation. This is an empirical question, and the answer will largely determine how history judges Ben Bernanke.

Thursday, April 04, 2013

Handmaidens of our sorrows.

The New York Times published op-eds last weekend by David Stockman and Jeffrey Sachs, each once luminaries on the national and international stage. Both wrote with a passion that befitted their once lofty status, and yet each seemed to demand our attention, beseeching us to heed his unique wisdom, perplexed that we pay him such little regard.

David Stockman wrote of the irreversible decline of America like a man possessed. In what surely must be a précis of his recently published book, Stockman goes on for 2,700 words about the collapse of America. It is a historical ramble, going back to the New Deal, cataloging the criminal failings of monetary policy and the bi-partisan destruction that our politicians have unleashed on everything that once made America great. Don't get me wrong, I have my moments of being a schoolmarmish debt scold and find in Stockman a soul mate of sorts in his understanding of the deep-seated corruption that has aided and abetted the financialization of our economy to the detriment of the common weal. But his is the writing of a man on the verge of a nervous breakdown.

Sitting at the opposite end of the political spectrum, Jeffrey Sachs makes observations that are very similar to those made by Stockman. He too sees an economy in decline, one that has failed the middle class and that is systemically unable to compete with the rising global economic powers. But unlike Stockman--who concludes that America has reached "end-stage metastasis" and with despondency concludes that there is nothing to be done because "the way out would be so radical it can’t happen"--Sachs mirrors Stockman in his litany of the ills that afflict us, but then offers up surprisingly small bore solutions. Where Stockman would undo the corrosive intertwining of politics and commerce that have characterized western civilization at least since Niccolò Machiavelli was the advisor the Medici family, Sachs proposes a prescription of increased investment in transportation infrastructure, solar and wind power, and job skills training. Where Stockman is unrelenting, Sachs is decidedly unconvincing.

Stockman and Sachs are not strangers to charting the course of radical economic change. Stockman was a leading figure in the Reagan Revolution--where he served as Reagan's Director of the Office of Management and Budget--implementing the supply-side economics and "deficits don't matter" policies that are now the target of his critique. Indeed, in the midst of a rant that casts the net of blame widely, Stockman excuses only himself, offering his version of Captain Louis Renault's apologia--I am shocked, shocked to find that gambling is going on in here--telling us that he resigned as OMB Director when he perceived the "destruction of fiscal rectitude under Ronald Reagan." But he offers this with no sense of irony that the policies that he eagerly embraced in his 30s are the very ones that three decades later he now sees as central to our national decline.

Jeffrey Sachs’ revolutionary moment came almost a decade after Stockman. Like Stockman, Sachs was in his mid-30s when, as a Harvard economist, he served as an advisor to Mikhail Gorbachev and then Boris Yeltsin during the end stage of the collapse of the Soviet Union. While Sachs has denied his complicity in the massive theft of Russian natural resource wealth that ensued, the privatization of Russian industry that was central to the Yeltsin-era economic program became the engendered the rise of the Russian oligarchs.

The death of Boris Berezovsky last month in the wake of legal battles with Roman Abramovich was a stark reminder of the enduring fortunes that were created in the chaotic end of the Soviet Union. While Bloomberg News describes Berezovsky as a self-made billionaire, this is a charitable description. Berezovsky and Abramovich together acquired Russian state-owned oil assets that then comprised one of the world's largest oil companies for literally pennies on the dollar, an opportunity made possible only by the tragic mix of the deep corruption of the Russian state and the intellectual firepower of the Boris Yeltsin's advisory team, of which Jeffrey Sachs was a prominent member.  Using words that evoke Stockman’s, Sachs resigned from Russia after a few years, having "found corruption to be growing and out of control."

In a way, Stockman and Sachs were each naifs whose intellectual capabilities fell prey to the political will to power. Jeffrey Sachs engaged in the world of international economics at a unique moment and crafted strategies for the complex restructuring of failed socialist economies. But where Sachs saw a theoretical path to recapitalizing a bankrupt economy, the Boris Yeltsin’s coterie of kleptocrats found a means to amass unimaginable personal wealth. No doubt Sachs was shaken to see how well intended advice on how to bring new capital into the failing Russian economy could be turned to personal and political avarice.

For his part, when David Stockman was at the height of his power, he was wont to say that he understood how the world worked. It was a notion that was central to his youthful arrogance. But like Sachs, Stockman did not understand the world he was in as much as he thought, and in large measure, the destruction of fiscal rectitude that he so decries came on his watch. Stockman failed to see how legitimizing unbalanced budgets would completely transform our politics, how it relieved Congress of the singular duty for which they are elected: the duty to make choices. Henceforth, they would not have to choose between cutting services or raising taxes, they could have it all, and increase services and entitlements even as they cut taxes.

As a young man in his 30s, David Stockman offered the intellectual rationale for the fiscal profligacy that he now decries as the source of our demise. As a young man in his 30s, Sachs became an intellectual superstar on an international stage, only to be humiliated as the co-creator of the greatest theft in world history. They each write with a passion about the problems facing our country today, yet each seems to wonder why no one seems to be listening. Perhaps it is because neither talks honestly about the role he played in what each clearly sees as a tragic moment in our history.

Stockman and Sachs each helped to set in motion historical forces that plague the United States and Russia to this day, and in each case it was because of the unintended consequences of making large scale changes in highly complex economic and social systems. Our economy today has been beset by the consequences of a number of deliberate public policy initiatives, including free trade, financial services deregulation, and education reform, that each have had and continue to have dramatic and adverse impacts on our society and our economy that were not intended by those who supported those changes.

The deep pain and tragedy of unintended consequences are experiences that Stockman and Sachs share, and that they each carry with them to this day. We need them to write about that, because that is where they have the greatest insight to offer, and the side of their stories that people most need to understand.