(While many observers are still consumed by the economic complexities of the financial crisis, historians have been busy making predictions about the ominous geopolitical implications of a destabilized global economy, rising unemployment, falling incomes, and swelling ethnic tensions. Much like its individual citizens, countries in the aggregate tend to retrench in the face of uncertainty about the future, and that could lead to some dangerously myopic decision-making in the months and years ahead…)
The Axis of Upheaval
By Niall Ferguson in Foreign Policy
March/April 2009
Forget Iran, Iraq, and North Korea—Bush’s “Axis of Evil.” As economic calamity meets political and social turmoil, the world’s worst problems may come from countries like Somalia, Russia, and Mexico. And they’re just the beginning.
Seven years ago, in his State of the Union address on Jan. 29, 2002, U.S. President George W. Bush warned of an “axis of evil” that was engaged in assisting terrorists, acquiring weapons of mass destruction, and “arming to threaten the peace of the world.” In Bush’s telling, this exclusive new club had three members: Iran, Iraq, and North Korea. Bush’s policy prescription for dealing with the axis of evil was preemption, and just over a year later he put this doctrine into action by invading Iraq.
The bad news for Bush’s successor, Barack Obama, is that he now faces a much larger and potentially more troubling axis—an axis of upheaval. This axis has at least nine members, and quite possibly more. What unites them is not so much their wicked intentions as their instability, which the global financial crisis only makes worse every day. Unfortunately, that same crisis is making it far from easy for the United States to respond to this new “grave and growing danger.”
When Bush’s speechwriters coined the phrase “axis of evil” (originally “axis of hatred”), they were drawing a parallel with the World War II alliance between Germany, Italy, and Japan, formalized in the Tripartite Pact of September 1940. The axis of upheaval, by contrast, is more reminiscent of the decade before the outbreak of World War II, when the Great Depression unleashed a wave of global political crises.
(”In 1969, a 14-year-old Beatle fanatic named Jerry Levitan, armed with a reel-to-reel tape deck, snuck into John Lennon’s hotel room in Toronto and convinced John to do an interview about peace. 38 years later, Jerry has produced a film about it. Using the original interview recording as the soundtrack, director Josh Raskin has woven a visual narrative which tenderly romances Lennon’s every word in a cascading flood of multipronged animation. Raskin marries the terrifyingly genius pen work of James Braithwaite with masterful digital illustration by Alex Kurina, resulting in a spell-binding vessel for Lennon’s boundless wit, and timeless message...”)
(This TED talk by mathematician Steven Strogatz “shows how flocks of creatures (like birds, fireflies and fish) manage to synchronize and act as a unit — when no one’s giving orders”. The parallels to market behavior and financial panic are implicit but obvious. We often perceive of our decisions during a crisis as unique and self-preservational, but the tendency toward spontaneous order is a powerful impulse. The coordinated reaction to natural threats, be it a hungry seal or predator hawk, can often increase a group’s biological fitness and probility of survival, while a coordinated reaction to synthetic financial crises can actually amplify individual exposure – like Strogatz’s example of London’s Millenium Bridge – and actually make matters worse…)
(The existence of black markets in virtually every economy on the planet is a testament to human resourcefulness and natural entrepreneurship. For those that are building tunnels under Gaza’s border with Egypt, $100,000 and a few months work can generate up to $10,000 a day in fees, and help to provide critical supplies and less critical desires into the struggling Gaza strip. One economist has estimated that roughly 90% of the annexed economy is driven by these covert smuggling operations. Unfortunately, along with tea, cows, washing machines, and gas flow AK-47s, drugs, and anti-aircraft missiles as soaring Gazan demand meets profitable Egyptian supply…)
Photo Essay: Gaza’s (Literal) Underground Economy By Preeti Aroon in November 2008
Since Hamas gained control of Gaza in June 2007, Israel has blockaded the flow of goods into and out of the territory. But when trade is closed aboveground, the economy simply moves underground, in more ways than one.
The land down under: Except for basic humanitarian supplies, Israel has blockaded the flow of goods into Gaza since June 2007, when Hamas, a militant Islamist group committed to Israel’s destruction, ousted its more secular rival, Fatah. The blockade has led to a new economic structure—a literal underground economy—in which everything from food to gasoline to underwear is illicitly imported from Egypt via underground tunnels into Rafah, which sits on Egypt’s border at the Sinai Peninsula. Above, Palestinian men pull a bag of smuggled food, milk, and other supplies from an underground tunnel linking Rafah, in southern Gaza, to Egypt, on June 27.
(Assuming that our lot in life is simply a function of hard work, acquired skills, and a bit of good luck, the only real difference between liberals and conservatives is the degree to which we believe that those who fall on hard times – for whatever reason beyond their control – deserve a helping hand. The degree to which we publicly spend on that assistance is not only a question of socio-political philosophy, but also a matter of practical statecraft. Whether “leveling the playing field” or simply “setting the rules of the game”, pharohs, kings, and presidents have all made use of their regulatory oversight with varying degrees of success. This piece in the Boston Review by noted macroeconomist Dean Baker explores the limited imagination often used in the design of modern regulation, then asks us to consider not simply how much or how little the government ought to regulate, but more importantly how efficiently and effectively it can achieve a desired distribution of resources…)
Free Market Myth by Dean Baker
Regulation is everywhere. Let’s choose who benefits.
The extraordinary financial collapse of recent months has been commonly described as a testament to the failure of deregulation. The events are indeed testament to a failure—a failure of public policy. Blaming deregulation is misleading.
In general, political debates over regulation have been wrongly cast as disputes over the extent of regulation, with conservatives assumed to prefer less regulation, while liberals prefer more. In fact conservatives do not necessarily desire less regulation, nor do liberals necessarily desire more. Conservatives support regulatory structures that cause income to flow upward, while liberals support regulatory structures that promote equality. “Less” regulation does not imply greater inequality, nor is the reverse true.
Framing regulation debates in terms of more and less is not only inaccurate; it hugely biases the argument toward conservative positions by characterizing an extremely intrusive structure of, for example, patent and copyright rules, as the free market. In the realm of insurance and finance over the last two decades, calls for deregulation have been cover for rules tilted starkly toward corporate interests. And the recent change in bankruptcy law, hailed by conservatives, requires much greater government involvement in the economy.
False ideological claims have circumscribed the public debate over regulation and blinded us to the wide range of choices we can make. Without these claims, what would guide regulatory policy? What kinds of choices would we have?
(The latest in a long series of articles on the Rational Post sharing a common refrain: those who forget economic history are condemned to repeat it…)
Originative sin: the future of banking By John Plender at FT.com, January 4 2009
For the late John Kenneth Galbraith, an acute observer of market folly, finance and innovation were fundamentally incompatible. Every new financial instrument, he said, “is, without exception, a small variation on an established design, one that owes its distinctive character to the … brevity of financial memory”. The world of finance “hails the invention of the wheel over and over again, often in a slightly more unstable version”.
After the devastating collapse of a credit bubble that had seen explosive growth in new financial instruments, many politicians might feel Galbraith, if anything, understates the damage wrought by financial innovation.
So the post-bubble policy agenda is bound to address important questions. Is financial innovation a blessing or a curse? Given, at the very least, that it is double-edged, should innovation in finance be curbed, or kept far removed from the conventional commercial banking sector? And how possible is it anyway to control the inventiveness of banking’s rocket scientists on Wall Street and in London or the eagerness of their employers to make money from their ideas?
(A eulogy for 20th century finance by one of its greatest poets…)
The End of the Financial World as We Know It By MICHAEL LEWIS and DAVID EINHORN
AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.
This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?
Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?
(For those still convinced that the Federal Reserve is the lynchpin in some grander economic conspiracy, this brief history of central banking in America should put some of your doubts to rest…)
Myth #1: The Federal Reserve Act of 1913 was crafted by Wall Street bankers and a few senators in a secret meeting.
On the Georgian resort hideaway of Jekyll Island (which has some excellent golf courses, by the way), there once met a coalition of Wall Street bankers and U.S. senators. This secret 1910 meeting had a sinister purpose, the conspiracy theorists say. The bankers wanted to establish a new central bank under the direct control of New York’s financial elite. Such a plan would give the Wall Street bankers near total control of the financial system and allow them to manipulate it for their personal gain.G. Edward Griffin lays out this conspiratorial version of history in his book The Creature from Jekyll Island. His amateurish take on history is highly suspect, however. Gerry Rough, in a series of well- researched essays on U.S. banking history, reveals many historical inaccuracies, inconsistencies, and even contradictions in Griffin’s book and others of its genre. Instead of reproducing Rough’s work here, I offer the reader a substantially more accurate view of the events leading up to the creation of the Federal Reserve System in 1913. To get a proper historical perspective, the story of begins just prior to the Civil War…
(This counter-factual analysis of China’s path toward capitalism reveals that the country’s biggest cities aren’t necessarily the engines of dynamic Asian progress that modern commentators have suggested, and that the country’s future may lie in rural areas where entrepreneurship and competition have thrived since Deng Xiaoping’s Four Modernizations…)
Private ownership: The real source of China’s economic miracle December 2008 • Yasheng Huang
The credibility of American-style capitalism was among the earliest victims of the global financial crisis. With Lehman Brothers barely in its grave, pundits the world over rushed to perform the last rites for US economic ideals, including limited government, minimal regulation, and the free-market allocation of credit. In contemplating alternatives to the fallen American model, some looked to China, where markets are tightly regulated and financial institutions controlled by the state. In the aftermath of Wall Street’s meltdown, fretted Francis Fukuyama in Newsweek, China’s brand of state-led capitalism is “looking more and more attractive.” Washington Post columnist David Ignatius hailed the global advent of a Confucian-inspired “new interventionism”; invoking Richard Nixon’s backhanded tribute to John Maynard Keynes, Ignatius declared, “We are all Chinese now.”
But before proclaiming the dawn of a new Chinese Century, leaders and executives around the world would do well to reconsider the origins of China’s dynamism. The received wisdom on the country’s economic miracle—it was a triumph of technocracy, in which the Communist Party engineered a gradual transition to the market by relying on state-controlled businesses—gets all the important details wrong. This standard account holds that entrepreneurship, private-property rights, financial liberalization, and political reform played only a small role. Yet my research, based on a detailed analysis of the Chinese government’s survey data and government documents at the central and local levels, indicates that property rights and private entrepreneurship provided the dominant stimulus for high growth and lower levels of poverty.
(This brief history of regal extortion draws some parallels to today’s “sinister” Federal Reserve, though the links are less tenuous than Dr. Hoye and others often suggest…)
With a degree in geophysics and a number of fascinating summers in mining exploration, one winter in “the bush” quickly led Bob into the financial markets. This included experience on the trading desk and in the research department of a large investment dealer, which led to institutional stock and bond sales.
Bob’s review of financial history provided the forecasting models designed to anticipate significant trend reversals in the sometimes alarming volatility typical of the transition from rampant speculation in tangible assets to fabulous speculation in financial assets.
One would have hoped that financial rip-offs committed by medieval princes would have been permanently shelved when liberal enlightenment ended the divine right of kings. Recent imperious announcements by Chairman Bernanke to use the “printing press” to inflate anything they can should be considered startling only in the resort to honesty. Euphemisms for currency depreciations started with the original promoters of the Fed and the tout was that a “flexible” currency would prevent serious financial contractions.
Although policymakers have been convinced that currency depreciation would keep every “recovery” going, the 95 percent depreciation of the dollar’s purchasing power has exaggerated the booms and busts. This is particularly ironical as government intervention did not prevent massive contractions such as with the commodities collapse of 1921 and with the collapse of virtually everything after 1929. Moreover, the timing and percent declines on this fall’s crash replicated those of 1929 with remarkable fidelity. That infamous crash had replicated the 1873 example.
(As the Annus Horribilis finally comes to an end, many forecasters in the policy and financial communities have been left licking their wounds. This effort from Moises Naim and his team at Foreign Policy tries to capture the best of the worst and is certainly worth a look…)
Prognostication is by far the riskiest form of punditry. The 10 commentators and leaders on this list learned that the hard way when their confident predictions about politics, war, the economy, and even the end of humanity itself completely missed the mark.
ONE. “If [Hillary Clinton] gets a race against John Edwards and Barack Obama, she’s going to be the nominee. Gore is the only threat to her, then. … Barack Obama is not going to beat Hillary Clinton in a single Democratic primary. I’ll predict that right now.” —William Kristol, Fox News Sunday, Dec. 17, 2006
Weekly Standard editor and New York Times columnist William Kristol was hardly alone in thinking that the Democratic primary was Clinton’s to lose, but it takes a special kind of self-confidence to make a declaration this sweeping more than a year before the first Iowa caucus was held. After Iowa, Kristol lurched to the other extreme, declaring that Clinton would lose New Hampshire and that “There will be no Clinton Restoration.” It’s also worth pointing out that this second wildly premature prediction was made in a Times column titled, “President Mike Huckabee?” The Times is currently rumored to be looking for his replacement.
TWO. “Peter writes: ‘Should I be worried about Bear Stearns in terms of liquidity and get my money out of there?’ No! No! No! Bear Stearns is fine! Do not take your money out. … Bear Stearns is not in trouble. I mean, if anything they’re more likely to be taken over. Don’t move your money from Bear! That’s just being silly! Don’t be silly!” —Jim Cramer, responding to a viewer’s e-mail on CNBC’s Mad Money, March 11, 2008
Hopefully, Peter got a second opinion. Six days after the volatile CNBC host made his emphatic pronouncement, Bear Stearns faced the modern equivalent of an old-fashioned bank run. Amid widespread speculation on Wall Street about the bank’s massive exposure to subprime mortgages, Bear’s shares lost 90 percent of their value and the investment bank was sold for a pittance to JPMorgan Chase, with a last-minute assist from the U.S. Federal Reserve.
Pity the nation that wears a cloth it does not weave,
eats a bread it does not harvest,
and drinks a wine that flows not from its own wine-press.
Pity the nation that acclaims the bully as hero,
and that deems the glittering conqueror bountiful.
Pity the nation that despises a passion in its dream,
yet submits in its awakening.
Pity the nation that raises not its voice
save when it walks in a funeral,
boasts not except among its ruins,
and will rebel not save when its neck
is laid between the sword and the block.
Pity the nation whose statesman is a fox,
whose philosopher is a juggler, and whose art is the art of patching and mimicking.
Pity the nation that welcomes its new ruler with trumpetings, and farewells him with hootings,
only to welcome another with trumpetings again.
Pity the nation whose sages are dumb with years and whose strong men are yet in the cradle.
Pity the nation divided into fragments, each fragment deeming itself a nation.
(Over-the-counter gambling on the markets has been around much longer than modern derivatives pundits would have you believe. The New York Times was warning against “casino capitalism” as early as 1905, when side bets on market movements were both commonplace and unregulated, and won the attention of an American government still swaggering after its victory over the mega-trust companies of the late 19th century. The following 60 Minutes segment discusses both the nature of CDS instruments and how they’ve become just as dangerous today as they were in the “bucket rooms” or gambling houses of the 1920s…)
The Axis of Upheaval
The extraordinary financial collapse of recent months has been commonly described as a testament to the failure of deregulation. The events are indeed testament to a failure—a failure of public policy. Blaming deregulation is misleading.
For the late John Kenneth Galbraith, an acute observer of market folly, finance and innovation were fundamentally incompatible. Every new financial instrument, he said, “is, without exception, a small variation on an established design, one that owes its distinctive character to the … brevity of financial memory”. The world of finance “hails the invention of the wheel over and over again, often in a slightly more unstable version”.
AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.
On the Georgian resort hideaway of Jekyll Island (which has some excellent golf courses, by the way), there once met a coalition of Wall Street bankers and U.S. senators. This secret 1910 meeting had a sinister purpose, the conspiracy theorists say. The bankers wanted to establish a new central bank under the direct control of New York’s financial elite. Such a plan would give the Wall Street bankers near total control of the financial system and allow them to manipulate it for their personal gain.G. Edward Griffin lays out this conspiratorial version of history in his book 
The credibility of American-style capitalism was among the earliest victims of the global financial crisis. With Lehman Brothers barely in its grave, pundits the world over rushed to perform the last rites for US economic ideals, including limited government, minimal regulation, and the free-market allocation of credit. In contemplating alternatives to the fallen American model, some looked to China, where markets are tightly regulated and financial institutions controlled by the state. In the aftermath of Wall Street’s meltdown, fretted Francis Fukuyama in Newsweek, China’s brand of state-led capitalism is “looking more and more attractive.” Washington Post columnist David Ignatius hailed the global advent of a Confucian-inspired “new interventionism”; invoking Richard Nixon’s backhanded tribute to John Maynard Keynes, Ignatius declared, “We are all Chinese now.”
With a degree in geophysics and a number of fascinating summers in mining exploration, one winter in “the bush” quickly led Bob into the financial markets. This included experience on the trading desk and in the research department of a large investment dealer, which led to institutional stock and bond sales.
Pity the nation that wears a cloth it does not weave,