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Wednesday, October 24, 2012

America's Strategic Insolvency

Michael Mazarr is a Professor of National Security Strategy at the National War College and author of an interesting article entitled The Risks of Ignoring Strategic Insolvency (see #1). The term strategic insolvency is possibly the most concise, on-target description of the risks to America's future, stemming from military, economic and political (foreign and domestic) strategies which are out of sync with current reality and also out of sync with each other. It is also the phrase that best describes the issue left completely unaddressed in the Presidential debates and the entire campaign.

Michael Mazarr appeared on Charlie Rose on October 23, 2012 (see #2) and discussed some of the points of his analysis and their implications with a panel of other commentators on military and foreign policy, including James Jones, David Ignatius and Zbigniew Brzezinksi. The original article is relatively short (18) pages and both the article and the discussion on Charlie Rose are highly recommended.

Strategic Insolvency in A Nutshell

The basic thesis of Mazarr's article starts with a comment Mazarr quotes from Barry Posen who said that any debate of post Cold War foreign policy strategy has focused on the FORM of American hegemony to pursue, not WHETHER to seek it. Mazarr's article lays out the case that any current formulation of global foreign policy strategy expressed by the Obama Administration or any alternative source fail to reflect reality in the following areas:

BUDGETS -- rising debt levels imposed by higher defense spending are crippling the larger economy that "lays the golden egg" to pay for military capabilities in the first place and that long term healthcare costs within the military (perhaps more so than the general economy) are likely to triple, drawing more dollars from traditional "tip of the spear" spending.

ALTERNATIVE CENTERS OF POWER -- Though many powers throughout the world still want America to stick it's neck out military and financially to support consensus reactions to threats, virtually all of those same powers want less influence from America in establishing that consensus. In other words, we'll let you do the lifting if you are willing be we want to choose what gets lifted and where it goes.

CHANGING MILITARY ABILITIES TO PROJECT POWER -- Many other players and non-state actors have some technologies such as missiles and drones which can negate some of America's traditional military capabilities. More importantly, many of the biggest risks to our economic and political stability are strictly speaking no longer constrained to pure military threats. Computer viruses, theft of critical intellectual property and globalized markets for commodities provide numerous opportunities for attacks on infrastructure, communication networks and markets both within American and worldwide.

LACK OF PROVEN NON-MILITARY TOOLS -- Like everyone else on the planet, America hasn't formulated any non-military strategies for addressing "root cause" issues in the areas of economic development, organized crime, resource constraints and ecological issues that spiral into second tier problems of radicalism, terrorism, etc. which increase global instability.

A SPLIT-BRAINED AMERICAN PUBLIC -- American voters and taxpayers are growing increasingly wary of the economic and social costs of our role as world policeman yet haven't leaned on their leaders to force discussion of our choices and force formulation of new choices that can materially change the game.

Mazarr then outlines some of the direct results of these unaddressed issues. Most importantly, failure to address these issues will further enhance the perception of America across the world as over-extended and ineffectual at best. America will also wind up wasting resources pursing losing strategies instead of focusing them on identifying better strategies for addressing world issues affecting American security and prosperity. As this perception of being "over-extended" grows in the minds of allies and adversaries, it becomes a spiraling problem as it weakens any legitimacy that comes from success and power when success and power become increasingly difficult to demonstrate in all of the situations in which we attempt to intervene.

It seems clear that many of these concerns have actually been understood and used to formulate SOME Pentagon planning dating back to Robert Gate's tenure as Secretary of Defense for both President Bush and President Obama. Early in his tenure, Gates addressed the need to reduce and restructure defense spending by shifting dollars from some traditional weapons systems to more special ops oriented capabilities (personnel and equipment). Most notably, Gates directly stated the problem while speaking to NATO members before his retirement:

-------------------------------
In the past, I’ve worried openly about NATO turning into a two-tiered alliance: Between members who specialize in ”soft” humanitarian, development, peacekeeping and talking tasks, and those conducting the ”hard” combat missions. Between those willing and able to pay the price and bear the burdens of alliance commitments, and those who enjoy the benefits of NATO membership—be they security guarantees or headquarters billets—but don’t want to share the risks and the costs. This is no longer a hypothetical worry. We are there today. And it is unacceptable. The blunt reality is that there will be dwindling appetite and patience in the U.S. Congress—and in the American body politic writ large—to expend increasingly precious funds on behalf of nations that are apparently unwilling to devote the necessary resources or make the necessary changes to be serious and capable partners in their own defense. (see #3)
-------------------------------

Unfortunately, the problems with the current outmoded, out-of-sync strategies are so dire, that internal discussions within the Pentagon during budget planning are not enough. This isn't just a military problem. It's a strategic problem that crosses all boundaries between military, economic and political strategies. It's also a problem that has gone completely unaddressed during the 2012 presidential campaign. Neither Barack Obama or Mitt Romney have clearly explained the true magnitude of the "guns versus butter" choices we need to make and how those choices require changes in our assumptions and default reactions about where we become involved in the world and how.

======================

One good specific example of the true cost of this "strategic insolvency" of American thinking was provided by a guest in a second segment on the same October 23 edition of Charlie Rose. (see #4) Dexter Filkins, a writer for The New Yorker and The New York Times, talked about a message he received recently on his Twitter account from a retired soldier living in San Diego. The soldier identified himself as one of the soldiers involved in a 2003 incident in which American troops operating a checkpoint in Iraq wound up shooting at an approaching vehicle, thinking they were insurgents. The shooting killed all of the males in a family and left one female survivor, age 20.

Filkins wrote a story about the shooting back in 2003 (see #5) and hadn't thought to do any follow-up until the soldier contacted him from San Diego. The soldier hasn't slept through the night for nine years, grew dependent on painkillers, etc. Filkins subsequently found out that the survivor actually moved to America and was living in Glendale, CA roughly 200 miles from the soldier.

Filkins wrote a follow-up story in The New Yorker called Atonement (see #6) which describes the "reunion" of sorts between the soldier and the Iraqi woman and other information gleaned from discussions with other members of the company involved in the 2003 shooting. The soldiers he spoke with estimate that at least 75 of the roughly 150 in the company are "basically wrecked" through divorce, unemployment, drug addiction, etc. The story also mentions the term "moral injury" used by a psychiatrist to describe the damage done to soldiers who follow the directions provided assuming they are absolutely the correct thing to do at the time but later find out their actions have horrific (and sometimes unjust) consequences.

Even if many soldiers never experienced a case as wrenching as that in Filkin's original story, a LARGE number of soldiers were exposed to a great deal of death and violence over an extended period of time in our wars in Afghanistan and Iraq. According to a study by the RAND Corporation commissioned by the Army in 2008, (see #7, page x), over one million unique soldiers have served tours in Iraq in Afghanistan from 2001 to 2008.

* 121,000 troops in the Army had served their first year
* 173,000 troops had served two years
* 79,000 troops had served three years
* 9,000 troops had served four years

(And that's just the Army -- this study didn't address counts from other branches of the military).

The same report also found that the ratio of time spent as "Boots On Ground" to "Dwelling" at the home base was closer to 1:1 (meaning about a 50/50 split) versus a more desired 1:2 (meaning a split of about 33% in the field versus 66% on base). The report also notes that "Dwell" time also counts time travelling to the theatre. In the case of Iraq and Afghanistan, where roadside bombs were / are the preferred weapon of choice by the enemy, time spent traveling to the theatre was equally stressful and dangerous to troops as actual "BOG" time.

That's a lot of soldiers with high risk for life-altering post traumatic stress disorder related problems. Those PSTD problems don't just affect the soldiers but their extended families. That's certainly a different perspective of the true costs of America's strategic insolvency.

======================

#1) http://csis.org/files/publication/twq12FallMazarr.pdf

#2) http://www.charlierose.com/view/interview/12620

#3) http://www.defense.gov/speeches/speech.aspx?speechid=1581

#4) http://www.charlierose.com/view/interview/12622

#5) http://www.nytimes.com/2003/04/19/world/nation-war-casualties-for-family-iraq-3-deaths-moment-confusion.html?pagewanted=all&src=pm

#6) http://www.newyorker.com/reporting/2012/10/29/121029fa_fact_filkins

#7) http://www.rand.org/pubs/documented_briefings/2010/RAND_DB587.pdf

Thursday, October 18, 2012

American Whining About Gas Prices

It's Presidential election season time and, once again, as has been the case for nearly 30 years, it's the time when sophisticated, discerning undecided voters pose the tough questions to the Presidential candidates and the rest of us get to decide who knows less --- the undecideds or the candidates. Probably the top question posed during election season that shouldn't be involves how each candidate envisions "doing something" about the price of gas. It really helps to look at some graphs before explaining how naive the question really is.

Worldwide oil production from 1980-2012:

http://www.indexmundi.com/energy.aspx?product=oil&graph=production

Worldwide oil consumption from 1980-2012:

http://www.indexmundi.com/energy.aspx

North American oil consumption from 1980-2012:

http://www.indexmundi.com/energy.aspx?region=na&product=oil&graph=consumption

Oil prices from 1861 to 2012:

http://upload.wikimedia.org/wikipedia/commons/8/82/Crude_oil_prices_since_1861_%28log%29.png

These graphs suggest the following critical conclusions:

* oil demand worldwide grew from 59.9 million barrels/day in 1980 to 86.9 million barrels/day in 2010 in pretty much a straight line -- about 45 percent growth over 30 years
* oil demand in North America has grown since 1980 but only by 25% from 1980 to the peak in 2005
* oil demand in North America has actually dropped since 2007, partly because of the recession but also due to improved efficiency
* worldwide production has kept up with demand outside of coordinated embargoes
* oil prices have jumped ALL OVER from roughly $24/barrel in 1980 to over $100/barrel with eight different spikes or drops of 50% or more since 1980

Suppose you are a free market purist and believe prices are a reflection of supply and demand. If North American demand has only grown about 25 percent over 30 years and has actually dropped a bit for the last five, why would oil prices have gone up over 400 percent over the same period? If both supply and demand have been inching upward steadily over the entire period, what could possibly produce eight different spikes or drops in price of over 50 percent over that period?

The answer boils down to three factors:

1) America isn't the only one buying oil every day on the open market
2) Most oil contracts are denominated in US dollars, given the US dollar's role as the world's reserve currency
3) Oil has become yet another vehicle of speculators trying to score big profits from volatile prices

Since the early 1990s, the exponential growth of the Chinese economy has contributed most of the growth in worldwide demand for oil. When another player shows up wanting to buy nearly as much oil as the current players on the market, any slack in the market that would otherwise keep prices down during slight dips in demand never occurs, keeping upward pressure on prices.

The US dollar's status as the world's reserve currency also tends to exaggerate rather than smooth the effective price of oil. The US dollar itself is a commodity because many international contracts are denominated in dollars, especially oil contracts. That means two non-American countries wanting to buy oil must typically first buy US dollars with their local currency, then use the US dollars to buy the oil they need. That means foreign buyers of oil wind up speculating to some degree in TWO commodities and get exposed to two risks -- fluctuations in exchange rates into the dollar which can swing widely due to financial concerns within the US or abroad and fluctuations in the oil markets, which then get priced in fluctuating US dollars.

During a period when demand for oil seems relatively predictable and new production techniques seem to be keeping up with demand, what else could cause oil prices to fluctuate so wildly? Simply put, after investors chased bubbles in technology stocks in the late 1990s to a crash, then chased real estate assets in the 2000s until the crash in 2007, oil became the next haven of speculators and hedge funds trying to make up profits lost in other sectors. The US was at war in the mid-east, the economies of several large countries were nearing complete economic collapse so the possibility of a supply interruption seemed to make sense to many, helping to rationalize a spike up in prices. However, this took place at the time the larger worldwide economy was collapsing, something that itself would have normally dropped oil prices. Eventually, reality kicked in, triggered a panic, and dropped oil prices FAR below long term price points associated with a worldwide economy not contracting at 2-5 percent annually.

Stated more simply, if supply and demand were the primary drivers of oil price fluctuations, consistent upward growth in worldwide demand with matching upward growth in supply would never produce 50 percent DROPS in price. Those types of fluctuations can only be produced by other factors, none of which have anything to energy regulation or marginal tax rates and special credits for producers. Since oil itself is a fungible worldwide commodity, there's nothing any American President -- of either party -- can do or needs to do to alter regulations or tax policies to affect prices. As long as the portion of the world wanting to enjoy the hydro-carbon fueled good life as much as America does continues growing, America will have little control over oil prices. The only way to lessen the headaches from the up-and-down rollercoaster of oil prices is to get off the ride ASAP and adopt other energy sources more under our control and less subject to manipulation and speculation.

Monday, October 15, 2012

The Unraveling of American Foreign Policy

In the Vice Presidential debate conducted October 11, 2012, foreign policy occupied a significant portion of the discussion. Paul Ryan's flash cards for the debate preparation clearly must have included the word "unravel" because he managed to use it three different times in describing recent events in the Middle East and America's responses to those events by the Obama Administration.

Referring to the "unraveling of the Obama foreign policy," Ryan was clearly attempting to convert Americans' likely sense of confusion and uncertainty over the results of the so-called Arab Spring into an impression of confusion and uncertainty on the part of the Obama Administration. Ryan criticized the Obama Administration for failing to immediately and publicly throw America's unflinching support for protestors and militant rebels from Iran to Egypt to Libya and Syria. According to Ryan, America has missed a once in a lifetime chance to align itself with the "forces of democracy" emerging in those countries. In essence, Ryan was charging the Obama Administration with conducting a feckless strategy of foreign policy that has crippled America's leadership role in the world while exacerbating all of the problems in the world.

That's an important charge to make and really merits its own debate and analysis. A full debate on this single issue is never going to happen but it's still worth a review by American voters who might still be attempting to pick a lesser of two evils for President.

What's Currently "Raveled"?

If Ryan and the Romney campaign are going to claim America's foreign policy has become unraveled under the Obama Administration, it's first crucial to understand exactly what was "raveled" in American foreign policy prior to January 2009. Exactly what were America's key policies regarding democracy, individual rights and military intervention and how did those policies support America's long term security?

Any cursory review of American foreign policy since World War II would boil down to the following bullet points:

* containment of Communism supported by Russia and China and their proxies
* support of Israel's establishment and ongoing security in the Middle East
* support of regimes willing to support American energy interests
* support of regimes willing to support other American business interests

One can argue our policy of containment resulted in Russia spending itself into oblivion, backing the world up several minutes away from midnight on the doomsday clock. One can also argue our policies with China have led (tricked?) China into pursuing its long term goals using economic tactics very similar to our own (rather than a pure militaristic approach like the USSR). That has resulted in lots of cheap consumer goods for Americans (albeit with a much larger trade deficit) but also adds a unique risk to China's government as it tries to operate a modern market economy while still restricting political and personal freedoms, a task as challenging as surviving a walk through a TNT factory with a 4th of July sparkler.

The other bullets are all intricately knotted together with layers of inter-dependency few can explain and even fewer are willing to actually discuss. America has certainly helped a very determined Israeli people maintain a democracy amid a region that was a literal and figurative desert of democracy. Rightly or wrongly, American support of Israel has also generated continued hostility from countries throughout the Middle East who feel Israel's very existence and territory came at the expense of other peoples of other faiths / ethnicity already IN the region. At the same time, American administrations over the past sixty years have consistently supported regimes in the Middle East who either required assistance for oil production or were willing to act as American pawns in the proxy chess war with a Communist Russia. This support had zero strings attached to democratic principles and individual freedoms in those "client" countries. In fact, many of our friends were among the most repressive regimes in the world during this period.

Consequences of America's "Raveled" Foreign Policy

For a time, the core elements of America's foreign policy seemed to yield all of the intended goals -- virtually unlimited quantities of cheap oil and profits for American producers, an independent Israel that successfully thwarted multiple attempts by its neighbors to destroy it and relatively little turnover in the leadership of our clients in the region, giving American politicians and the American public a sense of stability.

That sense of stability came unglued in 1978 when Iran erupted into chaos and was shattered completely a year later when the Shah fled the country, leading to the establishment of an Islamic theocracy that was militantly anti-American. The reaction of most Americans at the time could probably be characterized as "Wow, why do those people hate us? We like the Iranians, they help us thwart the Soviets and sell us lots of oil." Most Americans had no clue that America had assisted with the overthrow of a democratically elected Mohammed Mossadegh in 1953 and the re-institution of Shah Reza Pahlavi, who continued to operate Iran as a brutal, secret-police state until the 1979 revolution.

Feelings of stability were further whittled away in 1981 by the assassination of Anwar Sadat in Egypt. Again, the reaction of the typical American at the time might have been "Wow, what is WRONG with these people? Sadat was a good guy, signed a peace deal with Israel, was an increasingly trusted ally of America. What's going on over there?" Few knew he used brutal repression internally to stifle the objections of his own population to the deal struck with Israel.

Things got worse when Iraq launched the Iran-Iraq war in 1980. Initially framed as a border dispute, the war really reflected a battle between Iraq's fantasy of itself as a leader of some greater pan-Arabic union and Iran's fantasy of itself as a leader of some greater pan-Islamic force in the region. What was the reaction of most Americans at the time? "Hey, whaddaya know? Someone just declared war on those nasty, hostage-taking Iranian punks and wow, how lucky can we get, that country wants to swing from being a Soviet client to an American client, wants to buy weapons from us and has gobs of oil to replace the oil we used to buy from Iran. We lose one oil ally and immediately land another. We're Even Steven." We wound up arming Saddam Hussein, a man just as crazy and brutal as the new leadership of Iran, and supported a war that killed over a half million people because we thought the enemy of our enemy must be our friend.

America's support for Iraq exploded in our face in 1990 when Saddam Hussein, as a continuation of his fantasy of himself as the leader of a wider pan-Arab force of the world, decided he also had a dispute with Kuwait, partly based upon oil production quotas and partly based upon a claim that, in fact, Kuwait belonged to Iraq prior to British borders drawn after World War I. Tensions escalated through the year until July 25, when Saddam Hussein met personally with April Glaspie, America's ambassador to Iraq, who stated that America had no position on "internal" Arab / Arab conflicts. Saddam interpreted that as a green light and invaded Kuwait on August 2, 1990.

America led the assembly of a coalition that attacked Iraq in January of 1991 and drove Iraq out of Kuwait by February 27. By February 28, the Bush Administration declared a cease fire rather than pursue the ouster of Saddam, citing a lack of support among coalition members to exceed the original goals and the lives such an effort would cost. America not only failed to defang Saddam, it also failed to rationalize communication to opposition forces inside Iraq by broadcasting messages of support for rebels. Would-be rebels emerged from cover to fight Saddam, no support or even air cover was provided by America, and Saddam quickly slaughtered them in large numbers. Wow. It really pays to trust American statements of support.

Foreign Policy in the Obama Era

Paul Ryan's debate critique of foreign policy as practiced by the Obama Administration seems to boil down to the following points:

* America didn't IMMEDIATELY express support for "pro-democracy" forces in Iran in 2010
* America didn't IMMEDIATELY express support for "pro-democracy" forces in Egypt in 2011
* America didn't IMMEDIATELY express support for "pro-democracy" forces in Libya in 2011
* America didn't IMMEDIATELY express support for "pro-democracy" forces in Syria in 2012
* America didn't LEAD military support for rebel forces in Libya
* America has yet to provide any military support for rebel forces in Syria

These are all certainly factually accurate complaints on the surface. However, all of them are completely without merit given America's past 60 years of foreign policy, the consequences of that foreign policy, and the current economic and military demands crippling America.

Declaring support for an emerging opposition in Iran in 2010 would have made it too easy for Iranian leaders to point to another attempt by American imperialists to control the country in an effort to distract Iranians from the complete meltdown of their economy. Over the last 32 years, our isolation from Iran has made it almost as much of a mystery regarding its internal politics as North Korea. We know next to nothing about any "legitimate" budding opposition forces and their true goals. If the Iranians are going to topple their theocratic regime and have any chance of replacing it with something more amenable to basic human rights, the effort will have to come from within.

Declaring support for "pro-democracy" forces in Egypt at the onset of demonstrations in January of 2011 would have posed identical problems as those in Iran. Our support of Mubarak for thirty years helped him suppress opposition within the country while isolating America from any meaningful contact with any opposition forces. We knew (and still know) virtually nothing about the true aims and power structures of the various factions now struggling to operate their fledgling democracy. All we know now is that free elections have resulted in leaders dominated by the Muslim Brotherhood controlling the government who are still walking a tightrope between past goals of adopting Islamic law and adopting enough democratic reforms to take control back from the Egyptian military.

Declaring support for democratic forces in Libya was equally unviable. Libya was another "outlaw" nation operating without any direct American relations for over forty years, leaving American policymakers with ZERO insight into possible opposition groups and their capabilities and goals. America did use its unique air power capabilities to create no-fly zones that prevented Qaddafi from attacking civilians from the air, drastically reducing casualties and weakening Qaddafi's command and control facilities. Given the circumstances, that was probably the most effective military and political action America could have taken. Even now, we know little about any factions within the country and how some might be partnering with external forces such as al Qaeda to know who we can trust.

The conflict in Syria is a near re-run of that in Libya. Syria is a former-Soviet / now-Russian client state, it operates as a brutal, secret-police state, partners with Iran to support Hezbollah terrorists throughout the region and uses fear of the repressed Sunni Muslim majority population to stoke support among a small minority of Alawite sect Muslims who fill most positions of power within the regime. Like Libya, America knows NOTHING about any possible opposition groups within the country, foreign organizations they might be partnering with and how those partnerships will affect the long term outcome. We know al Qaeda allied forces are operating in the country, we just don't know where they are and which internal groups are partnering with them. This is not the intelligence, political or military environment for which the correct solution to the problem is "drop hundreds of millions of dollars worth of weapons into the country and watch who emerges when the gunfire stops."

In addition to all of the "soft" strategic concerns with political and military intervention outlined above, a single crucial "hard" practical concern also affects American options. America's military personnel and equipment have been worn out and stretched too thinly after ten years and two wars. America's economy is already at the breaking point due to underfunding of those two longstanding wars and a decade of financial corruption. We simply have nothing left in the tank to back more saber rattling in North Africa, the Persian Gulf and the Middle East. If it wasn't already apparent to our enemies in these regions, it might become very apparent if we begin more saber rattling then have to put the saber away after the American public screams "ENOUGH" and forces our politicians to stop defending their own manhood with another generation of American men and women and another trillion dollars in debt.

What's the Opposite of Feckless?

If Ryan wishes to imply current Obama Administration policies are somehow "feckless", one has to assume the Romney / Ryan ticket presents a choice of some "opposite" policy that isn't "feckless". What exactly would that be?

Maybe the Romney / Ryan Doctrine amounts to supporting any group claiming to be "pro-democracy" anytime and anywhere. Even in countries with no recent history of democracy or institutions remotely capable of supporting democratic principles. Maybe it amounts to deploying the American military first, then asking questions later after the dust settles, assuming it ever settles.

Didn't we already try that in Iraq? How many American lives have we lost with that strategy? How many more dollars in addition to the $807 billion already spent will be required before exiting Iraq? How many more dollars will proponents be willing to guarantee in future budgets to cover support costs for the tens of thousands of troops with brain injuries from IEDs and missing limbs? Or will those be viewed as "health care" costs like everything else subject to across-the-board budget cuts as politicians maintain their refusal to raise taxes to cover their spending?

If the Obama foreign policy is feckless and the Romney / Ryan ticket expects to do the exact opposite of "feckless", what would that approach be called?

Maybe "fecked?"

Yea.

That's perfect.

Wednesday, October 03, 2012

Tie Goes to the Runner-Up?

The first 2012 Presidential debate conducted October 3 will probably represent a source of frustration for supporters of either candidate. Mitt Romney did well enough to arguably tie or "win" the debate on preparation and focused answers but probably not well enough to move the needle in the swing states, some of which are already voting and casting his fate in stone. Barack Obama didn't "lose" in a manner likely to reverse the margins in the swing states but failed to connect on numerous pitches right down the middle that should have been knocked out of the park. Here are some of those pitches.

The Role of Government in Education

Both candidates were asked to summarize their view of the role of the federal government in education and in general. Romney cleverly quoted snippets from the Constitution used as the set background to itemize the government's role in protecting life, liberty and the pursuit of happiness and expanded upon the happiness theme to encompass the right to start your own business and pursue your own dreams. In the case of education, Romney used the question to reference his support to return more control of education from the Federal government to states via voucher programs to give parents in poorly performing districts a chance to send their child elsewhere.

Obama's answer stated that the responsibility is definitely split between states and the federal government and the federal government should ASSIST but not necessarily DRIVE education. He missed several key opportunities in this response.

Missing in his response was a historical reminder on exactly WHY the federal government currently has so much involvement in local education. The federal government is involved now because states were doing a HORRIBLE job at providing a uniform level of education even when they tried and that MANY states were overfunding rich / white districts while underfunding poor / black districts. If one assumes that the share of current federal education dollars for Texas or Mississippi is $X billion and the federal government decides to either just write a check for $X billion to those states with no strings attached or decides to let them tax themselves and spend it as they please, does anyone think $X billion will be spent on education in those states? Or will they spend it on other priorities or simply revert to past behavior and favor some districts while starving others? If that happens, should the rest of us in the United States stand by as one state purposely chooses to cripple the education and future earning power of a significant portion of its population?

In the case of school vouchers, how does a voucher program jibe with the Republican mantra of personal accountability? If every taxpaying parent has the choice of voting on their own local school taxes AND still getting a "voucher" (paid for by what? -- federal taxes or state taxes?) to send their kid to a better school, what will happen to school tax rates with those incentives? Everyone will vote to lower their own taxes while hoping to send their children via a voucher to "some other" school that's better. Where will those better schools be if every taxpayer votes the same way?

The States as Laboratories of Democracy, Innovation and Cost Saving

Questions involving the deficit and healthcare prompted Romney to state his support of shifting Medicare funding out of the Federal government back to the states who have been BEGGING to take on that responsibility because they have their own ideas on how to provide those services more effectively. This claim has many flaws, none of which were referenced in Obama's reply.

Can anyone name a state that has requested to run Medicare out of its budget?

Can anyone identify a single program in any state that operates with 2 percent administrative costs like Medicare? (CBO estimates, not those of a liberal or conservative think tank.)

If the cost of Medicare is shifted from the federal budget to the state level, how does that reduce the taxes on business so they can hire people? Instead of paying $2300 per employee to the Federal government, a business is now going to pay $2300 in higher state taxes for the same service. Cash is cash. If that $2300 dollars was the difference between hiring a new employee or not, it won't matter if the business is writing a check to the IRS or their state Department of Revenue.

Partisanship

Both candidates were asked how they would operate in the continued partisan gridlock to get anything done on their new agenda items. Romney cited his work as Governor in Massachusetts dealing with a legislature that was 87 percent Democratic. He met with them once a week, listened to their ideas, and still got stuff done. Well Mitt, did Massachusetts Democrats convene a private caucus meeting the day of your Inauguration as Governor and form a pact to block everything you did? Of course not, they didn't need to. With an 87 percent share, they could vote for what they wanted and win every veto override vote. You HAD to get along to get ANY of your ideas incorporated into law.

In Obama's case, he didn't have a veto-proof majority in either the House or Senate. He also faced Republicans who decided on January 20, 2009 to thwart ANY legislation of ANY type proposed by the Obama Administration for the sole purpose of making Democrats look bad, even at the expense of the economy. When Obama did attempt to work with the Republican House, he worked with their designated leader John Boehner who exhibited ZERO control over the ulta-conservatives and essentially could not act as leader of the Republican position on anything. The Republican leader in the Senate, Mitch McConnell was essentially a co-conspirator with the Do-Nothing gang in the House and provided zero opportunity for bipartisanship. All of these points should have been mentioned by Obama and were never brought up.

Death Panels

In the course of the questions regarding healthcare, Romney raised the spectre of a small, unelected panel of government experts who would vote on healthcare treatments you could receive. The premise behind this depiction of "death panels" is that this small group of unknown, faceless bureaucrats would be making specific decisions for your doctor on a case by case, test by test basis.

The counter arguments to this are numerous and easy to state but Obama only got a few of them.

First, this "panel" concept is equivalent to a concept used in EVERY big business to identify, document and implement "best practices." If you run large computer systems, a "best practice" is "make sure you have a backup generator for power" or "test software changes in a test environment before deploying them to production." In health care, "best practices" can be as simple as WASH YOUR HANDS BEFORE TOUCHING A PATIENT or may involve identifying choices for prosthetic knees that actually DON'T improve patient functionality or yield the desired minimum of post-op pain and thus shouldn't be used except in special circumstances.

Second, the functions of such a panel already exist today in the form of specialized administration firms which review every request for a test made by your doctor and approve it or deny it based upon internal company procedures as interpreted by teams of nurses and doctors. If your doctor fails to obtain permission BEFORE a test, guess what? You pay for it. These "administration" processes are no more transparent or accountable than a similar function operated at a national level with a single standard.

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In the game of rigged expectations and who's up and who's down, a tie at the rhetorical level and a slight win at the performance level would probably dictate assigning the win to Romney. However, obtaining a technical win with such a small margin won't materially change the race. However, it should serve as a wake-up call to Obama to back up, avoid getting mired in technical details and focus on the concept BEHIND the questions and the core of his opponent's answers to formulate a more concise but broad brush reply. Voters won't remember the numbers, but they WILL remember responses that cleanly map back to simpler, more generic principles of fairness, efficiency and historical reality.

Tuesday, October 02, 2012

BOOK REVIEW: Bull by The Horns

Bull by the Horns -- Sheila Bair, 365 pages (415 with notes and index)

Sheila Bair's book on her tenure as head of the FDIC before, during and after the financial meltdown of 2007 and 2008 will likely encounter immediate comparisons to other noted books published after the crisis as readers attempt to answer the questions: Haven't I already read enough? Is there anything new I'm likely to learn from another book? Are there any unique insights in Bair's book that haven't been covered ad nauseum in prior books? Is there anything new to learn that materially changes my beliefs in actions to take in the future to ensure our government and corporations do not repeat this fiasco?

The answers to these questions are:

Haven't I already read enough? Maybe more than you wanted but less than you need to read.
Is there anything new I'm likely to learn from another book? Yes.
Are there any unique insights in Bair's book not covered in other books? Absolutely.
Is there anything new to learn that materially changes my perception of desired policy or of investment risk? Yes.

To understand the answers to these questions, one first needs to review the perspective and content of some of the other "famous books" on the financial crisis, then review a summary of Bair's book.

A Recap of Reviews

Too Big To Fail, written by Andrew Ross Sorkin, spent most of its bulk conveying the sense of chaos between all of the participants during the financial crisis. If it had any particular perspective, it seemed to be that of the Treasury and the New York Fed, then led by Hank Paulson and Timothy Geithner. (see #1 for a review)

All the Devils are Here, written by Bethany McLean and Joe Nocera, examined much of the crisis from the perspective of the corporate participants, and is probably the single most effective book at dispelling any notion that the actions that produced the financial crisis were purely the result of a "free market" adopting new securitization strategies whose risks no one foresaw and could not be avoided. Instead, it makes the definitive case that all of the major players knew EXACTLY what they were doing, knew the risks, and couldn't stay away from the profits as long as their competitors were making money.

13 Bankers, written by Simon Johnson and James Kwak, is perhaps the most concise "famous" book written about the crisis so far and addresses it from an analytical perspective from the government and regulatory bodies looking out. (see #2 for a review)

So in reverse order, one has 13 Bankers available to understand the theory of what happened and why it wasn't inevitable, one has All The Devils are Here available to understand EXACTLY how banks and securities firms took the flawed or completely missing regulations and systemically abused them and the public for profit in ways the Mob could only dream of and one has Too Big To Fail to allow one to experience much of the smoke and dust blowing around during the actual meltdown.

So what's missing in the analysis?

How about a detailed understanding of the communication between the government agencies and regulatory bodies directly involved with trying to defuse the financial bombshell? How about a more concrete explanation of the policy battles between those agencies and regulators both before, during and after the implosion? How about a concrete summary of how those battles magnified the damages inflicted upon consumers and taxpayers and transferred the new risks generated away from the parties producing the damage?

Those are the areas of analysis covered in Sheila Bair's book, Bull By the Horns. Bair's role as head of the FDIC throughout the entire crisis and the policy and personality battles she encountered with her other government and regulatory peers provided her unique insights into decisions and their consequences. Those inside insights are explained primarily from a theoretical standpoint by 13 Bankers, weren't the focus of All the Devils Are Here and were completely lost in the poorly organized Too Big To Fail which relied upon selective insider quotes without real insider insight.

Geithner Versus the Taxpayer

Easily, one of the most influential players in the entire financial meltdown and its aftermath was Timothy Geithner. Geithner was President of the New York Federal Reserve Bank from 2003 until his appointment as Treasury Secretary in the Obama Administration in 2009 so he was not only directly involved with the regulation of many of the firms that got in trouble but directed many of the individual deals to stabilize failing institutions, either by tossing billions at them or arranging shot-gun weddings with other larger institutions to hide the stench a little while longer to avoid further spooking the market.

One thing becomes very clear very early in Bair's book. Bair and Geithner don't like each other and never got along well --- probably at a personal level but definitely in their professional capacities. Since Geithner still holds his cabinet position, it will likely be a while before he writes his book explaining his theories, strategies and motivations. However, after reading Bair's book, one is not struck by any sense Bair intended to single Geithner out for criticism or sole blame for some decision made during the crisis. What DOES emerge from Bair's narrative is a consistent pattern of behavior, supported by concrete details, in which Geithner ignored or excluded Bair and/or other regulatory bodies and in some cases ignored documented policy decisions set forth by President Obama and Rahm Emmanuel (his one-time chief of staff) in pursuit of his own strategies.

Bair's narrative also echoes a disturbing pattern of behavior that took place in the Clinton Administration in which the "Committee to Save the World" --- Alan Greenspan, Robert Rubin and Larry Summers -- consistently ignored crucial insight into fundamental problems in the derivatives markets as documented by Brooksley Born. Not only did they ignore her, they actively worked to isolate her from other policy makers in Congress and the Administration or withheld information from her until the very last minute, limiting her ability to formulate viable responses to refute a policy argument being made. In the case of the most recent meltdown, Hank Paulson (Treasury Secretary under Bush) and Geithner (then as NY Fed President) exhibited the same behavior towards Bair beginning as early as 2006. After the inauguration of Obama, new Treasury Secretary Geithner and new Economic Advisor Larry Summers continued the same modus operandi.

Here are some examples:

CitiGroup Versus Wells-Fargo -- In early October 2008, Wachovia became the next domino to near a very dangerous financial death. By the time Bair's FDIC was involved, the New York Fed and Treasury had already been working to arrange a deal by which CitiGroup would take over Wachovia. In exchange, the FDIC (not involved to that point...) would publicly guarantee a "ring fence" (Bair's term) around the more toxic assets on Wachovia's books. At the time Paulson and Geithner began meddling, Wells-Fargo had already been in direct discussions with Wachovia for a direct purchase that would NOT involve the FDIC or any additional "ring fence" of loss protections for Wachovia shareholders. Instead, the meddling of the New York Fed and Treasury telegraphed to Wells Fargo that it was in competition with another bank who was asking for extra FDIC help in acquiring the firm, immediately lowering Wells' "willingness to pay." Meddling from Paulson and Geithner continued and resulted in CitiGroup submitting a low-ball bid involving up to $42 billion dollars of FDIC protection against a pool of $362 billion dollars in suspect mortgages. Even at that point, CitiGroup futzed around for multiple DAYS and was never able to convince its board to approve the purchase. In the mean time, Wells Fargo was getting cold feet and feeling like it wasn't involved in a fair fight (it wasn't). Bair notes that despite the fact that dropping the ball on Wachovia very well COULD have been the trigger for a larger meltdown, communication from the Treasury and Fed to the FDIC whose guarantees were crucial under any scenario was astonishingly poor or missing entirely. The reader gets a mental picture from the narrative of the Treasury and Fed batting a $42 billion dollar armed nuclear weapon back and forth like a tennis ball while refusing to tell anyone else with an interest where the tennis ball was. (A short review cannot do the synopsis in the book justice. You have to read the chapter entitled The Wachovia Blindside to get the full picture.)

The Rules Behind TARP -- At the time TARP was being concocted by Treasury and the Fed, the original language limited FDIC protection of customer accounts to those in the regulated affiliates of bank holding companies. For an entity operating both retail bank operations and more speculative insurance and investing affiliates, losses associated with those speculative affiliates would not be explicitly or implicitly backed by taxpayers' explicit backing of the FDIC's deposit insurance. Geithner lobbied FOR covering losses associated with those speculative / unregulated affiliates which did not pay insurance fees to the FDIC.

Getting Out from Under TARP -- Under the stress test scheme concocted by Geithner's Treasury in the spring of 2009, Bank of America's "score" indicated it needed a $22.5 billion dollar capital infusion to reach a point of health that would allow it to return the $45 billion it had been given under TARP. Under the original rules of TARP, each firm would have to raise a matching amount in common equity via stock sales. The premise behind this was to ensure the general market had regained enough confidence in each firm's management before allowing the "safety blanket" of TARP dollars to leave the firm and reduce its liquidity. By late summer 2009, Bank of America was one of the biggest banks that had not been allowed to pay back its TARP funds and the Fed under Bernanke recommended relaxing the 1:1 capital raising rule to a 2:1 rule. For BoA, its $45 billion TARP infusion meant it would need to raise $22.5 billion from new shareholders. BoA was desperate to exit TARP, not because of the stigma of having needed the money but because as long as those TARP dollars were outstanding, BoA's executive compensation was severely limited. BoA submitted a series of plans that each fell short of the simple $22.5 billion dollar requirement yet each new proposal was backed by the Fed. Bair then discovered the Fed had been consulting as well with Lee Sachs, a trusted advisor under Geithner in the Treasury department. The final deal for BoA allowed it to only raise about $18.8 billion and, as Bair predicted in writing in an email to the vice chairman of the Fed and another senior Fed official, other TARP recipients including Wells Fargo, PNC and Citigroup all attempted to negotiate lower equity sales for their TARP exits. Wells Fargo and PNC wound up losing their efforts and raised the equity required under the standard terms. Citigroup, however, not only lobbied for only raising $15 billion instead of $20 billion as required but also asked that it be released from a secondary restriction involving $300 billion dollars of suspect mortgages backed by an implicit FDIC guarantee of about $42 billion (the "ring fence"). They got their requested "ring fence" restrictions removed but the FDIC succeeded in increasing their required equity sale from $15 billion to $17 billion dollars.

Common to all of these scenarios (and more covered in the book) are the following patterns of behavior on the part of Timothy Geithner:

* shifting risk AWAY from the biggest risk takers (and confirmed losers) TO the public
* adding insurance exposure risk TO the FDIC in particular while retaining authority within the Fed and Treasury that allowed for the declaration of additional bailouts
* a particular focus on shifting risks and costs AWAY from the worst "poster children of failure" including CitiGroup who were regulated by the Federal Reserve when he was in charge of the New York Fed

When one remembers that Geithner worked under Robert Rubin and Larry Summers as Under-Secretary and that Robert Rubin then went on to lead the board of CitiGroup while apparently doing nothing during his tenure there, it doesn't require much imagination to see GIGANTIC blind spots in Geithner's strategic view if not outright conflicts of interest between his professional duties and his personal allegiances.

One final shot over the bow of the good ship Giethner. On page 364 in the Epilogue, Bair writes:

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The president needs to appoint -- and the Senate needs to confirm -- strong, independent people to regulate financial institutions and markets, people who understand that their regulatory obligation is to protect the public, not the large financial institutions. When Tim Geithner testified before Congress shortly after becoming treasury secretary, a congressman asked him about the effectiveness of regulation and he proudly responded, "I have never been a regulator, for better or worse." He did not even understand that part of his job as president of the NY Fed was to regulate some of the nation's largest financial institutions. Indeed, he seem offended that the congressman asking the question thought he was a regulator.
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Milky Ways Versus Granola Bars

The other major conclusion one reaches from reading Bair's book has less to do with economic details and more to do with the financial media, with Andrew Ross Sorkin as the poster child. In my original review of Too Big to Fail, I cited the following complaints about Sorkin's writing style:

* page after page of "details" which lacked specific dates and times
* lots of content derived from anonymous quotes spoon-fed to you by players with axes to grind
* lots of made-up, "you're in their head" narrative about what people were thinking (or even sweating) at the time

I've started referring to this pattern as the Milky Way approach to writing. Identify a few key ingredients that people like (chocolate, caramel) then add a bunch of "nougat" made up of fluffed up hydrogenated fat and other mystery ingredients and sell it as a product. Using this approach doesn't mean people won't like the product and that you won't sell a lot of candy bars, but the nutritional value of the product is suspect and definitely not good for you in high doses. Andrew Ross Sorkin's Too Big To Fail is a good example of the Milky Way approach to "investigative journalism" (as is virtually any book written by Bob Woodward in the past 20 years).

The practical implications of this style are vitally important to people hoping to actually LEARN something from the material. These style patterns virtually assure the reader that the writer has done little synthesis of the raw information they were provided. If the author couldn't be bothered to document specific dates and times, did they actually HAVE specific dates and times for their inputs? Did they actually lay out the chronology of their "facts" to confirm those "facts" could have occurred as their sources who wished to remain anonymous claimed?

In contrast, Bair's book is more like a Granola bar. It has a lot fewer "filler ingredients" and no matter where you bite into the bar, lots of individual, discrete pieces of information are provided with names, dates and times to clarify the sources of the point being made at that time. You may not agree with all of Bair's analysis and you may suspect she is reflecting her own biases, but at least you can check her work for yourself.

Bull by the Horns is highly recommended reading, for its political, policy and investing insights.

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#1) http://watchingtheherd.blogspot.com/2010/04/book-review-too-big-to-fail.html

#2) http://watchingtheherd.blogspot.com/2010/04/book-review-13-bankers.html