The End of Sound Money

Τhe Triumph of Crony Capitalism

by David Stockman

The triumph of crony capitalism occurred on October 3rd, 2008. The event was the enactment of TARP — the single greatest economic-policy abomination since the 1930s, or perhaps ever.

Like most other quantum leaps in statist intervention, the Wall Street bailout was justified as a last-resort exercise in breaking the rules to save the system. In the immortal words of George W. Bush, our most economically befuddled President since FDR, "I've abandoned free market principles in order to save the free market system."

Based on the panicked advice of Paulson and Bernanke, of course, the president had the misapprehension that without a bailout "this sucker is going down." Yet 30 months after the fact, evidence that the American economy had been on the edge of a nuclear-style meltdown is nowhere to be found.

In fact, the only real difference with Iraq is that in the campaign against Saddam we found no weapons of mass destruction; by contrast, in the campaign to save the economy we actually used them — or at least their economic equivalent.

Still, the urban legend persists that in September 2008 the payments system was on the cusp of crashing, and that absent the bailouts, companies would have missed payrolls, ATMs would have gone dark and general financial disintegration would have ensued.

But the only thing that even faintly hints of this fiction is the commercial-paper market dislocation. Upon examination, however, it is evident that what actually evaporated in this sector was not the cash needed for payrolls, but billions in phony book profits, which banks had previously obtained through yield-curve arbitrages that were now violently unwinding.

At that time, the commercial-paper market was about $2 trillion and was heavily owned by institutional money-market funds — including First Reserve, which was the granddaddy with about $60 billion in footings. Most of this was rock solid, but its portfolio also included a moderate batch of Lehman commercial paper — a performance enhancer designed to garner a few extra "bips" of yield.

As it happened, this foolish exposure to a de facto hedge fund, which had been leveraged 30-to-1, resulted in the humiliating disclosure that First Reserve "broke the buck," and that the somnolent institutional fund managers who were its clients would suffer a loss — — all of 3 percent!

This should have been a "so what" moment — except then all of the other lemming institutions who were actually paying fees to money-market funds for the privilege of getting return-free risk decided to panic and demand redemption of their deposits. This further step in the chain reaction basically meant that some maturing commercial paper could not be rolled over due to these money-market redemptions.

But this outcome, too, was a "so what": nowhere was it written that GE Capital or the Bank One credit-card conduit, to pick two heavy users of the space, had a Federal entitlement to cheap commercial paper — so that they could earn fat spreads on their loan books.

Regardless, the nation's number one crony capitalist — Jeff Immelt of GE — jumped on the phone to Secretary Paulsen and yelled "fire"! Soon the Fed and FDIC stopped the commercial-paper unwind dead in its tracks by essentially nationalizing the entire market. Even a cursory look at the data, however, shows that Immelt's SOS call was a self-serving crock.

First, about $1 trillion of the $2 trillion in outstanding commercial paper was of the so-called ABCP type — paper backed by packages of consumer loans such as credit cards, auto loans, and student loans. The ABCP issuers were off-balance sheet conduits of commercial banks and finance companies; the latter originated the primary loans, and then scalped profits up front by selling these loan packages into their own conduits.

In short, had every single ABCP conduit been liquidated for want of commercial-paper funding — and over the past three years most have been — not a single consumer would have been denied a credit-card authorization or car loan. His or her bank would have merely booked the loan as an on-balance sheet asset — rather than off-balance sheet asset.

Who's Simplicio now?

Did Galileo get in trouble for being right, or for being a jerk about it?

 

BY ESTHER INGLIS-ARKELL

Galileo was facing some stiff odds when he published his Dialogue Concerning the Two Chief Systems of the World. He'd already been officially warned against heliocentrism, and he had enemies. But it's possible, just possible, that he would have squeaked by if he hadn't been a jerk to the Pope.

The feud between Galileo and the Catholic Church - the one that resulted in Galileo spending the last years of his life under house arrest - is perhaps the most well-known part of his history. Galileo was tried, threatened with torture, and forced to recant his perfectly correct position about the solar system being centered around the sun, instead of around the earth. What isn't as well known is the fact that Galileo was greatly supported by the Church up until he published this book, and was a particular friend of the reigning Pope at the time of his trial. What hung Galileo out to dry might very well not have been his intellectual position, but his attitude.

During much of his life Galileo was not particularly interested in Copernicanism, the idea that the earth orbited around the sun instead of the other way around. Born in 1564, and hailed as a genius from an early age, it wasn't until he in his late forties that he got around to advocating the idea. Even then, he did so only in letters, and so when he went to Rome in 1615, he did so to voluntarily defend his unpublished ideas. He was warned privately not to pursue the matter, and the Inquisition sent out a special Injunction telling him not to hold or argue for Copernicanism, which the Inquisition declared contrary to Scripture. Galileo dropped the matter.

But times changed, and Popes changed with them. In 1623, Cardinal Maffeo Barberini became Pope Urban VIII. Barbarini had met Galileo at a dinner in 1611, where he delighted in the sharp arguments Galileo made to completely destroy those who debated his ideas. This was just after Galileo had come by a new telescope, which allowed him to pick out the universe in more detail than anyone had before, and before the Injunction, so he very well might have discussed his heliocentrist ideas with Barberini at the time. The two men maintained a friendship that endured for over ten years. When Barbarini became Pope, Galileo met with him personally to take up the matter of Copernicanism again.

The two discussed the idea, and how it affected scripture. Barbarini, in the position to appear magnanimous and fair-minded, formally granted Galileo to write about the theory. Mindful of the political climate, Galileo did not suggest a polemic. Instead of an argument, the idea would be presented as a dialog in which characters discussed the two ideas and compared their merits.

Dialogue Concerning the Two Chief Systems of the World came out a decade later, and became a huge success in intellectual circles. It was exactly what it was promised to be, a dialog about the two ideas. Then someone noticed something. The advocate for Copernicanism was smart and well-spoken, while the one that espoused the Aristotelian geocentric view of the solar system came off as stupid and pigheaded. Well, authors always find a way to show their intentions, and it might have ended there if people hadn't noticed that the feeble-minded geocentrist used some of the same arguments that the Pope had made during his discussions with Galileo. In some cases, he even used direct quotes of what the Pope had said. And just to underline his authorial intentions, Galileo named the geocentrist 'Simplicio' - the Simpleton.

The friendship that Galileo had enjoyed was broken, with a vengeance. He was hauled into Rome and brought before Inquisition, this time not of his own accord. The private warning, and the official Injunction that had been given to him in 1616, were brought forward, and things were looking bleak. Galileo defended himself with technicalities. Although the Injunction had been issued, it had not been signed or properly processed (even in the 1600s, all court systems had bureaucracy). While it was true, he said, that he did discuss Copernicanism, his book was an examination of both sides and so he was technically not 'arguing in favor of it.' While these arguments were technically true, the Church would have been more inclined to come down in favor of technicalities in the case of someone who had refrained from publicly calling the Pope a dummy.

It was not technicalities that saved Galileo, but whatever powerful friends he had left and his own celebrity status. Galileo clung to technicalities, and insisted that he did not remember the earlier informal warnings not to 'hold or argue' heliocentrism. The counsel before which he appeared debated the possible punishments, before deciding that he should be "condemned to imprisonment at the pleasure of the Holy Congregation." The Pope, still smarting, resisted all efforts to end Galileo's house arrest, even towards the end of the man's life. He also demanded a public renunciation, during which he probably smiled and muttered, "Who's Simplicio now?"

Don't let America go down the drain

A Debt I Can't Repay

by Judge Alex Ferrer

I am Cuban. I feel I have to say that right off the bat because so many people, when they first learn that I was born in Havana, are stunned. I guess a lot of people expect that Cubans all speak and act like Ricky Ricardo. But I came to America as a very young child, so assimilation has never been a problem. My family moved to the U.S. in the 60's when Americans, once again, generously opened their arms to yet another wave of immigrants, as they had done so many times before in our country's history. My parents, who were well off in Cuba, had to start over like so many other immigrants, working two jobs each for minimum wage. But through hard work and perseverance, they were able to claw their way up so that we once again had a comfortable lifestyle. Not rich. But comfortable.

Sure, it was difficult, and I remember signs in some of Miami's downtown restaurants that stated "No Cubans Allowed," but the opportunity was there. And so I learned early on from my parents that, through hard work, in America anything was possible. That's how a Cuban born child who fled communism and came here with his immigrant parents became an American citizen, a cop, a lawyer, a judge and now the host of a successful, nationally syndicated television court show--"Judge Alex."

I started working at 15 and became a police officer when I was just 19 years old, working as a cop to support myself and pay my way through college and law school. Full time student by day, full time cop by night. Easy? No. But it was do-able and I didn't have any other options so I did what I had to do. Along the way, I become the youngest cop and the youngest judge in Miami, the first Cuban born attorney elected to Miami's Circuit Court, and now a member of a very small fraternity of TV judges. I would say that no one handed me anything; that I had to work hard for everything I obtained--but that would not be true.

The reality is I was given the most critical key to my success: the opportunity that America provides. This truly is the Land of Opportunity. I sometimes wonder what would have become of my life if Americans had not welcomed us into their country. I would have lived under communist rule in Cuba, barely getting by, no freedom to express my opinions in private, let alone in public, without being beaten and arrested. The government would have made me work at the career they chose for me and, even if I was lucky enough to be selected to be a doctor rather than a ditch-digger, the pay in Cuban pesos would be so inadequate that some doctors in Cuba drive taxis on the side in order to have enough money to feed their families. No. I was given the invaluable opportunity to become successful and live a great life through the unparalleled generosity of the American people.

And, try as I might, that is a debt I can't repay. 

Obama and the Ottomanization of modern Turkey

Obama’s Middle East Is in Tatters

By Martin Peretz

It is not actually his region. Still, with the arrogance that is so characteristic of his behavior in matters he knows little about (which is a lot of matters), he entered the region as if in a triumphal march. But it wasn’t the power and sway of America that he was representing in Turkey and in Egypt. For the fact is that he has not much respect for these representations of the United States. In the mind of President Obama, in fact, these are what have wreaked havoc with our country’s standing in the world. So what—or, rather, who—does he exemplify in his contacts with foreign countries and their leaders? His exultancy gives the answer away. It is he himself, lui-mème. Alas, he is a president disconnected from his nation, without enthusiasts for his style, without loyalists to his policies, without a true friend unless that’s what you can call his top aide de camp,Valerie Jarrett, which probably you can. Obama is lucky, but it’s the only luck he has, that there are nutsy Republican enemies who aspire to his job. Maybe Rick Perry can save him from … well, yes, himself. I wouldn’t take bets on that, though.

Obama’s first personal excursions into the Middle East as president were to Turkey and Egypt. Recep Tayyip Erdogan welcomed his visit. Indeed, the president’s journey set the framework for the Ottomanization of modern Turkey’s foreign policy. The 1923 Treaty of Lausanne formally abrogated the empire’s previous rights in North Africa, these being the rights it had lost in the First World War. From then on, the country was content to make trouble only for the Kurds across its borders and for Greece. A member of NATO, with more than 600,000 troops under arms (omitting more than half a million reservists and paramilitary), it certainly played a role in deflecting Soviet ambitions in the Mediterranean. Now, with the Russian threat (temporarily?) deferred, the military still faces minor annoyance from Georgia, Armenia, Iraq. But since Obama communed with Erdogan—by all accounts, it was love at first sight—the prime minister has been taking on new projects. Only in the last days has he made what can reasonably be called a conqueror’s march through Egypt, Libya, and Tunisia, evoking the old empire’s rule in North Africa not so long ago.

After all, let’s face it: Egypt is simply spent. Erdogan can seduce it with a speech or two. Yet it does have up-to-date military equipment. But, if it were tempted by war with Israel, Jerusalem would not give it the respectful pity that it gave Cairo’s Third Army 38 years ago. The Egyptian military has lost control of the Sinai to the Bedouins, even though Israel has already permitted thousands of Egyptian regulars, contravening specific prohibitions of the bilateral 1979 peace treaty, to re-enter the peninsula with heavy military equipment. For far into the future, I would assume. So what about the construction of Egypt in political, judicial, and economic terms? I’d give you heavy odds that in a decade or even two the political system will still be as undemocratic and corrupt as it has been since the comic and corpulent King Farouk reigned. By the way, it was the CIA’s Middle East head spook who initiated the coup that dispatched the monarch and his family to Italy and then to Monaco where he joined other deposed royals in the sedentary life. After Farouk came the reign of the colonels, a model favored by Allen Dulles whose wisdom spooked the region ever since. The courts will be fair when hell freezes over which, given global warning, is not at all likely. And the economy? My, my: With the desertification of the land, the high birth rate, and the functional illiteracy of most of the population, do not believe that anything will change quickly or, for that matter, anything much will change at all.

Were it not for Libyan oil, no country would have been tempted to intervene on “the shores of Tripoli” again. Even with its oil and with NATO intervention, the outcome of the civil war will not be as clear as folks like me had hoped or as decisive as the huge claque of always optimistic Arabisants have already concluded. Tout va bien. (Speaking of other Arabisants—without Arabic, incidentally—I wonder what my sort-of Harvard colleagues Stephen Walt and Joseph Nye now have to say about their notable protege Saif al-Qaddafi. Indeed, Walt has written against targeted killing by the alliance in Libya, doubtless making a pitch to save Saif’s ass. Yet the Kennedy School professor doesn’t seem nearly as interested in the random killings of Jews by Palestinians and other Arabs.) Under Qaddafi, Libya set its sights southward, trying to become a major force in sub-Saharan Africa. African leaders took the country’s petrodollars and gave Qaddafi the preposterous titles he required for his self-respect. He did become a comrade of Robert Mugabe and other gangster politicians, and even Nelson Mandela, yes, the sainted Nelson Mandela, has stood by him through thick and thin. But this augurs nothing special for the future of Libya. On the other hand, Erdogan’s stage show in Tripoli does put Turkey at the top of the list to dominate the crazy tyrant’s family business in oil.

The greatest folly of the modern era

Why The New York Times and American liberals worship the EU superstate

By Nile Gardiner

Across Europe, faith in the European Project is eroding. Even in Germany, for decades the powerhouse of EU integration, more than 70 percent of the public have "little", "low" or "no confidence" in the single currency according to a recent Allensbach Institute poll. The European financial crisis has been a painful shattering of illusions for Eurofederalists from Paris and Berlin to Rome and Madrid, and across the continent Euroscepticism is on the rise.

But in the United States left-wing elites continue to cling to the idea of a European superstate and the holy grail of ever-closer union within the EU. In fact some of the most zealous support for European fiscal and political integration anywhere in the world can be found in Washington and New York. And nowhere is this misguided thinking stronger than on the pages of The New York Times, which last week published an editorial that frankly could have been penned by Jacques Delors. For the Times, the break up of the Eurozone, or even the EU itself, would be unthinkable, not least because it would allow individual nation states to reassert their national sovereignty after decades of being told what to do by unelected elites in Brussels.

In the view of the Times:

European leaders have at last begun edging, haltingly and reluctantly, toward the only realistic solution to the continent’s debt and banking crises: refinancing unpayable government debts and reinforcing weakened banks. If their monetary and political union is to survive, all members must start acting more like a union and less like a collection of jealous sovereign states… If things get bad enough, the euro zone could fracture, and that could lead to the fracturing of the entire European Union.

What explains the American Left’s foolhardy love affair with the European Project? As I’ve noted before, President Obama and his administration are firmly committed supporters of political and economic integration in Europe, as are the East Coast liberal elites that back them. There are three key reasons for this approach.

Firstly, Obama and his supporters are quintessentially European in outlook. They share the Big Government mentality of the Eurocrats who have been driving the EU project for decades. They are happy to see the United States adopt European-style policies that emphasise the central role of the state, while increasing regulation of the free market. As Daniel Hannan noted in his excellent pamphlet for Encounter’s Broadside Series, "Why America Must Not Follow Europe", “Obama would verbalize his ideology using the same vocabulary that Eurocrats do… In other words, President Obama wants to make the U.S. more like the EU.”

Secondly, American liberals admire the supranational nature of the European Union, the erosion of the power of the nation state, and the pooling of national sovereignty. They believe that unrestrained sovereignty is a dangerous concept, not only within Europe but for the United States too. They actively push for America’s freedom to manoeuvre to be harnessed by the United Nations and a host of international treaties, from the Treaty of Rome (International Criminal Court) to New START and the Law of the Sea. They admire the sacrifice of national sovereignty taking place across Europe, as well as Brussels’ emphasis on deferring to international institutions. For these gilded elites, the projection of American power must be firmly constrained by a liberal internationalism that elevates supranationalism over the national state.

Lastly, American liberals cling to the myth that a unified Europe will actually reduce  the burdens of global leadership on the United States, especially in the area of defence spending. The Obama administration has actively backed the evolution of a European defence identity, which in reality threatens the future of the NATO alliance and undercuts the independence of national militaries across Europe. This of course is a grand exercise in futility. While Europe marches down the path of defence integration, military spending among EU members of NATO has dramatically fallen, a point powerfully made by former US Defense Secretary Bill Gates in his farewell speech in Brussels. Which proves the point, that a federal EU is not just bad for Europe, but bad for the United States as well.

Lady Thatcher famously remarked in her book Statecraft “that such an unnecessary and irrational project as building a European superstate was ever embarked upon will seem in future years to be perhaps the greatest folly of the modern era”. She was absolutely right. Her words should be heeded by the White House as well as its fellow travellers at the New York Times.

The EU project is going down in flames as the worst excesses of European profligacy are being copied in the United States – out-of-control government spending, spiraling budget deficits, rising unemployment, anti-business regulations, and high taxation. There is something rather pathetic about American liberals desperately clinging to a distinctly top down anti-market approach that has spectacularly failed in Europe, and is now dragging America down too. On both sides of the Atlantic, the grandiose Big Government vision of the Left is collapsing in turmoil and disarray. The New York Times may still embrace the Europeanisation of the US economy, but as the polls increasingly show, the American people themselves are firmly rejecting it.