3 from James Carroll
Every few weeks I catch up on Jame Carroll’s excellent editorials and feel compelled to share them. See 3 of his most recent just below.
6 February 2008
JFK’s torch for Obama
By James Carroll February 4, 2008 WHEN SENATOR Edward M. Kennedy and members of his family endorsed Barack Obama in Washington last week, the real meaning of that torch-passing was defined by where it occurred.
John F. Kennedy is remembered as having given an important speech at American University, and that was noted. JFK’s future orientation, his rhetorical flair, his knack for drawing out the young, his own youthfulness - these were the highlighted points of connection between John Kennedy and Barack Obama. But the content of the 1963 speech suggests what really is at stake when a 21st century presidential candidate steps into the aura of the slain president. At American University John Kennedy laid out an urgent vision for this country. He did not live to advance that vision, and it remains unrealized to this day.
The most telling fact about the commencement address Kennedy delivered on June 10, 1963, is that Kennedy wrote it in secret. A small circle of trusted aides contributed to the text, but Kennedy kept the national security establishment in the dark about his intentions, which is surprising, given his subject. He came “to this time and place,” he said, “to discuss a topic on which ignorance too often abounds and the truth is too rarely perceived - yet it is the most important topic on earth: world peace.”
In those days, the language of peace was used by idealists, not realists - but it was exactly that dichotomy that Kennedy targeted. “Too many think peace is impossible. Too many think it is unreal. But that is a dangerous, defeatist belief.” Indeed, Kennedy’s speech was an end-run around his national security experts, a direct appeal to the broad public, an attempt to break the iron grip of Cold War militarism that imprisoned the White House and the State Department, as much as the Pentagon. Kennedy had been preparing the speech ever since he had stared into the abyss of nuclear war the previous October, during the Cuban Missile Crisis. He knew that, but for his own lonely opposition to the nation’s most “realistic” defense leaders, the nuclear holocaust would have happened. “I speak of peace because of the new face of war.”
Awareness of the new face of war defined Kennedy’s wisdom. His speech, addressed as much to the Soviet people as to the American, was a breakthrough. Gone were demonizing paranoia and saber rattling. Instead, he honored the virtue of the Soviet people, and suggested that the Cold War standoff was as much his nation’s fault as theirs. “We are both caught up in a vicious cycle in which suspicion on one side breeds suspicion on the other, and new weapons beget counterweapons.” Beyond rhetoric, he offered concrete steps to improve the situation, from something as specific as a new “hot line” communication system to something as ambitious as new structures of international law. He pleaded, especially, for a time-out in the arms race.
Nikita Khrushchev ordered Kennedy’s speech rebroadcast throughout the Soviet Union, the first time an American president’s voice was heard by average people there. It worked. Six weeks later, Moscow and Washington agreed to the long-sought Partial Test Ban Treaty, the beginning of the arms control regime that, eventually, enabled the Cold War to end nonviolently.
But Kennedy’s vision, in fact, went unfulfilled. Arms control did not stop the arms race from 25 more years of irrational escalation. Washington’s national security establishment tightened its grip on politics, economy, and culture - so much so that when the Cold War ended, America maintained its Cold War stance, even through Bill Clinton’s administration. This happened because our leaders, together with the American people, grew complacent about the dangers of the nuclear arsenal on which US power still rests. We lost change-the-world urgency that so seized Kennedy only months before he died.
To rekindle the flame of the American University speech would be to restore a preference of negotiation over confrontation, to build self-criticism into policy making, and to affirm the utter realism of idealistic hope. Ted Kennedy sees the possibility in Barack Obama of the realization of his brother’s greatest vision.
That vision, conceived negatively, boils down to this: If humans do not change the way we resolve international conflicts, the planet is ultimately doomed to nuclear devastation. The abolition of all nuclear weapons, starting with our own, must be at the top of the new president’s agenda.
Conceived positively, the American University vision means that humans are poised, by necessity, for a great leap into a new and better world. Yes, we can.
James Carroll’s column appears regularly in the Globe.
© Copyright 2008 Globe Newspaper Company.
Our one-way trip to disaster
By James Carroll January 28, 2008
YOU AND everyone you love are riding on a large bus. The bus driver, unskilled and careless, drives too fast, ignores traffic signals, and barrels off the road occasionally. Because the bus is huge, other vehicles swerve to get out of its way, with cars crashing repeatedly. But your driver just keeps going, leaving carnage in his wake. Naturally, you are terrified - but your reactions are irrelevant.
Finally, the bus itself crashes, killing many. Miraculously, you and your loved ones climb out of the wreckage. A second bus is standing by, and you gratefully scramble aboard. The engine starts up, but then the bus lurches dangerously onto the road, going too fast. Only then do you see that this new bus has the same driver, and he has learned nothing. Welcome to the United States of America. And welcome to the annual State of the Union address.
Every year, the nation looks up from the wreckage, only to see that the same unskilled and careless driver is still at the wheel, bombing along. Each January, he explains himself. You already know what he will say. His one admirable quality is that, over the years, he has always said exactly what to expect. A review of the Bush speeches has an “I told you so” quality, going back to the start. That raises the question, Why have you repeatedly been surprised?
It was, after all, in his 2002 State of the Union address that President Bush defined the purpose to which he has been dedicated ever since. “Evil” was his constant point of reference, and he claimed the mantle of one who would end it. America’s enemies were an “axis of evil,” while America’s friend was God, who, Bush told us, was “near.”
In such a cosmic moral struggle, normal standards of restraint did not apply. That you could not imagine yet the wreckage of law and decency - torture, wiretapping, concentration camps, treaty betrayals - that would follow from this course does not detract from your obligation to acknowledge that it was openly set by Bush’s first statement of purpose. Your bus was being driven by St. George, the dragon slayer. And why should mere rules of the road apply to him?
In 2003, the State of the Union address was, in effect, a declaration of war against Saddam Hussein. Bush could not have been more direct in stating his intentions, asserting absolutely that Hussein’s weapons of mass destruction were a present danger.
Bush promised that Secretary of State Colin Powell would immediately go before the United Nations to prove it. (To Bush’s credit, the 2003 speech also unveiled the “Emergency Plan for AIDS Relief,” his administration’s one positive accomplishment.) When Bush drove the United States into full-blown Middle East war two months later, he was only following the plan he had already laid out.
In 2004, Afghanistan was a smoldering ruin, and Iraq was under the bus. Yet Bush declared victory right and left. “The boys and girls of Afghanistan are back in school,” he said. As for Iraq, we were only dealing with “a remnant of violent Saddam supporters.” He was still saying that Hussein had had weapons of mass destruction.
In the 2006 State of the Union address, Bush repeated that “we will never surrender to evil,” but now he was explicitly associating it with what he called “radical Islam.” This careless labeling took the bus into the mine field of religious war.
What is most notable about the 2006 speech, however, is that New Orleans, still reeling from Hurricane Katrina, barely appeared in it. That the United States of America has abandoned that great city and its people to this day - surely to rank as the Bush administration’s most notable act of domestic policy - should have been no surprise to anyone who heard him then.
Last year’s State of the Union address was historic. Because of the antiwar mandate of the November elections, and the cover offered him by the consensus around the Baker-Hamilton commission, Bush had a golden opportunity to change the disastrous war course he had set.
Instead, with the so-called surge, he gunned it.
“This is not the fight we entered in Iraq,” he said, “but it’s the fight we’re in.”
That’s like the driver saying, “This is not the road I thought it was,” as he leaps to safety just as the bus goes off the cliff. We are a nation in free fall. The final insult is that, one more time, the driver gets to lecture us.
James Carroll’s column appears regularly in the Globe.
© Copyright 2008 Globe Newspaper Company.
Islamofascism’s ill political wind
By James Carroll
January 21, 2008
THE UNFOLDING presidential elections are laying bare what the real dangers are in the new American condition. They come not from our political divisiveness, economic uncertainty or military insecurity - but from our religious character as a people, which, in this case, is not positive. Religious intolerance marks one candidate debate after another - a sweeping denigration of Islam. And it is going to backfire.
The code word “Islamofascism” has become a staple of rhetoric. It braces the talk not only of pundits, but of all the major Republican candidates - from the tough guy at one end, Rudy Giuliani, who lambastes Democrats for not using the word or its equivalent, to the “nice” candidate at the other end, Mike Huckabee, who defines Islamofascism as “the greatest threat this country [has] ever faced.”
The pairing of “Islam” and “fascism” has no parallel in characterizations of extremisms tied to other religions, although the defining movements of fascism were linked to Catholicism - indirectly under Benito Mussolini in Italy, explicitly under Francisco Franco in Spain. Protestant and Catholic terrorists in Northern Ireland, both deserving the label “fascist,” never had their religions prefixed to that word. Nor have Hindu extremists in India, nor Buddhist extremists in Sri Lanka.
In contrast to the way militant zealotries of other religions have been perceived, there is a broad conviction, especially among many conservative American Christians, that the inner logic of Islam and fascism go together. Political candidates appeal to those Christians by defining the ambition of Islamofascists in language that makes prior threats from, say, Hitler or Stalin seem benign. The point is that there is a deep religious prejudice at work, and when politicians adopt its code, they make it worse.
The Democrats gain little by shaping their rhetoric to appeal to the Republicans’ conservative religious base, but a readiness to denigrate Islam shows up on their side, too. In last week’s debate, moderator Brian Williams put to Barack Obama a question about Internet rumors that claim he is a Muslim. The tone of the question suggested that Obama was being accused of something heinous. He replied with a simple affirmation that he is a Christian. He did not then ask, “And what would be wrong if I were a Muslim?” Had he done so, it seems clear, he would have cost himself votes in the present climate.
The present climate is my subject. In recent years, the public realm has been invaded by a certain kind of narrow Christian enthusiasm, made up partly of triumphalistic self-aggrandizement (exclusive salvation), and partly of the impulse to denigrate other religions, especially Islam. This phenomenon has been centered in, but not limited to, evangelical fundamentalism. The United States cannot have a constructive foreign policy in religiously enflamed regions like the Middle East, northern Africa or South Asia if the American presence in such conflicts is itself religiously enflaming.
Thus, how could the United States advance the Israeli-Palestinian peace process if its government upholds, however implicitly, the Christian Zionist dream of a God-sponsored Jewish state from the Jordan River to the Mediterranean? Where is the two-state solution then? How, for that matter, is the traditional American commitment to the Jewishness of Israel advanced if the Christian Zionist vision of ultimate Jewish conversion to Jesus is achieved?
The issue is larger. The intellectual and moral paralysis of all major candidates from both parties on the subject of the war in Iraq is mainly a result of their religion-sponsored imprisonment in the Islamofascism paradigm, whether they use the word or not. By emphasizing that the goal of Muslim terrorists is to wage what John McCain calls a “transcendent” war against “us,” candidates miss the most important fact about the conflicts in Iraq and throughout the Muslim world - that militant Muslim zealots are primarily at war with their own people, most of whom they regard as decadent apostates.
As Muslim scholar Reza Aslan observes, Osama bin Laden’s attack on the World Trade Center was more aimed at generating a war of purification within the house of Islam than a war of conquest against “the far enemy” in the West. That strategy worked, sparking exactly the belligerent reaction he wanted, because America’s uninformed, religious prejudice toward Islam was predictable. What Bin Laden could not have imagined was that he would find like-minded partners-in-conflict coming to power in Washington, advancing his religious war, every bit as sure of God’s sponsorship as he.
James Carroll’s column appears regularly in the Globe.
© Copyright 2008 Globe Newspaper Company.
2 January 2008
What’s Your Consumption Factor?
TO mathematicians, 32 is an interesting number: it’s 2 raised to the fifth power, 2 times 2 times 2 times 2 times 2. To economists, 32 is even more special, because it measures the difference in lifestyles between the first world and the developing world. The average rates at which people consume resources like oil and metals, and produce wastes like plastics and greenhouse gases, are about 32 times higher in North America, Western Europe, Japan and Australia than they are in the developing world. That factor of 32 has big consequences.
To understand them, consider our concern with world population. Today, there are more than 6.5 billion people, and that number may grow to around 9 billion within this half-century. Several decades ago, many people considered rising population to be the main challenge facing humanity. Now we realize that it matters only insofar as people consume and produce.
If most of the world’s 6.5 billion people were in cold storage and not metabolizing or consuming, they would create no resource problem. What really matters is total world consumption, the sum of all local consumptions, which is the product of local population times the local per capita consumption rate.
The estimated one billion people who live in developed countries have a relative per capita consumption rate of 32. Most of the world’s other 5.5 billion people constitute the developing world, with relative per capita consumption rates below 32, mostly down toward 1.
The population especially of the developing world is growing, and some people remain fixated on this. They note that populations of countries like Kenya are growing rapidly, and they say that’s a big problem. Yes, it is a problem for Kenya’s more than 30 million people, but it’s not a burden on the whole world, because Kenyans consume so little. (Their relative per capita rate is 1.) A real problem for the world is that each of us 300 million Americans consumes as much as 32 Kenyans. With 10 times the population, the United States consumes 320 times more resources than Kenya does.
People in the third world are aware of this difference in per capita consumption, although most of them couldn’t specify that it’s by a factor of 32. When they believe their chances of catching up to be hopeless, they sometimes get frustrated and angry, and some become terrorists, or tolerate or support terrorists. Since Sept. 11, 2001, it has become clear that the oceans that once protected the United States no longer do so. There will be more terrorist attacks against us and Europe, and perhaps against Japan and Australia, as long as that factorial difference of 32 in consumption rates persists.
People who consume little want to enjoy the high-consumption lifestyle. Governments of developing countries make an increase in living standards a primary goal of national policy. And tens of millions of people in the developing world seek the first-world lifestyle on their own, by emigrating, especially to the United States and Western Europe, Japan and Australia. Each such transfer of a person to a high-consumption country raises world consumption rates, even though most immigrants don’t succeed immediately in multiplying their consumption by 32.
Among the developing countries that are seeking to increase per capita consumption rates at home, China stands out. It has the world’s fastest growing economy, and there are 1.3 billion Chinese, four times the United States population. The world is already running out of resources, and it will do so even sooner if China achieves American-level consumption rates. Already, China is competing with us for oil and metals on world markets.
Per capita consumption rates in China are still about 11 times below ours, but let’s suppose they rise to our level. Let’s also make things easy by imagining that nothing else happens to increase world consumption — that is, no other country increases its consumption, all national populations (including China’s) remain unchanged and immigration ceases. China’s catching up alone would roughly double world consumption rates. Oil consumption would increase by 106 percent, for instance, and world metal consumption by 94 percent.
f India as well as China were to catch up, world consumption rates would triple. If the whole developing world were suddenly to catch up, world rates would increase elevenfold. It would be as if the world population ballooned to 72 billion people (retaining present consumption rates).
Some optimists claim that we could support a world with nine billion people. But I haven’t met anyone crazy enough to claim that we could support 72 billion. Yet we often promise developing countries that if they will only adopt good policies — for example, institute honest government and a free-market economy — they, too, will be able to enjoy a first-world lifestyle. This promise is impossible, a cruel hoax: we are having difficulty supporting a first-world lifestyle even now for only one billion people.
We Americans may think of China’s growing consumption as a problem. But the Chinese are only reaching for the consumption rate we already have. To tell them not to try would be futile.
The only approach that China and other developing countries will accept is to aim to make consumption rates and living standards more equal around the world. But the world doesn’t have enough resources to allow for raising China’s consumption rates, let alone those of the rest of the world, to our levels. Does this mean we’re headed for disaster?
No, we could have a stable outcome in which all countries converge on consumption rates considerably below the current highest levels. Americans might object: there is no way we would sacrifice our living standards for the benefit of people in the rest of the world. Nevertheless, whether we get there willingly or not, we shall soon have lower consumption rates, because our present rates are unsustainable.
Real sacrifice wouldn’t be required, however, because living standards are not tightly coupled to consumption rates. Much American consumption is wasteful and contributes little or nothing to quality of life. For example, per capita oil consumption in Western Europe is about half of ours, yet Western Europe’s standard of living is higher by any reasonable criterion, including life expectancy, health, infant mortality, access to medical care, financial security after retirement, vacation time, quality of public schools and support for the arts. Ask yourself whether Americans’ wasteful use of gasoline contributes positively to any of those measures.
Other aspects of our consumption are wasteful, too. Most of the world’s fisheries are still operated non-sustainably, and many have already collapsed or fallen to low yields — even though we know how to manage them in such a way as to preserve the environment and the fish supply. If we were to operate all fisheries sustainably, we could extract fish from the oceans at maximum historical rates and carry on indefinitely.
The same is true of forests: we already know how to log them sustainably, and if we did so worldwide, we could extract enough timber to meet the world’s wood and paper needs. Yet most forests are managed non-sustainably, with decreasing yields.
Just as it is certain that within most of our lifetimes we’ll be consuming less than we do now, it is also certain that per capita consumption rates in many developing countries will one day be more nearly equal to ours. These are desirable trends, not horrible prospects. In fact, we already know how to encourage the trends; the main thing lacking has been political will.
Fortunately, in the last year there have been encouraging signs. Australia held a recent election in which a large majority of voters reversed the head-in-the-sand political course their government had followed for a decade; the new government immediately supported the Kyoto Protocol on cutting greenhouse gas emissions.
Also in the last year, concern about climate change has increased greatly in the United States. Even in China, vigorous arguments about environmental policy are taking place, and public protests recently halted construction of a huge chemical plant near the center of Xiamen. Hence I am cautiously optimistic. The world has serious consumption problems, but we can solve them if we choose to do so.
8 November 2007
Chickens Come Home to Roost
How’s this for ceding the moral high ground?
Ahmed Raza Kasuri, a senior legal advisor to Pakistani President Pervez Musharraf and a guy who helped write that country’s (now suspended) constitution, defends the suspension of rights in his country by saying - that’s right - they learned it from us.
In response to a question from Michelle Norris on All Things Considered Wednesday, Kasuri was kind enough to remind Norris that “you have in your country a long history of a democratic tradition of values.” (Remember, Pakistan is a democracy, too.)
So what does the longest-running democracy have to teach the rest of the world?
Well, according to the Pakistanis, that it’s OK to suspend the constitution and dismiss the pesky Supreme Court in the name of “stability.”
“After 9/11,” asked Kasuri, “what have you done? You also have introduced evidence you can pick up anybody (for) detentions. … These are some of the measures you have to adopt to maintain the stability of the country.”
Forget the quagmire we’ve found ourselves in in Iraq. Everybody makes mistakes and, besides, surely everyone believed it was the right thing to do at the time.
No, the real lesson from our spreading democracy to parts of the world that really don’t seem to be asking for it (and for other places where it’s holding on tenuously) is to be learned right here at home.
It’s that civil liberties are a good idea until there’s a boogie man out there with some vague idea of undermining your way of life.
To maintain our purity of essence, we’ve got to forgo little bedrock principles like getting warrants, we’ve got to hold people without charge, deny them counsel or habeas corpus.
And so we’re being lectured about democracy by a nominal dictator whom we’ve propped up despite the fact that his country is actually harboring the guy responsible for 9/11.
And the sad thing is he’s right.
Our account in the bank of moral leadership is dangerously low on funds, and that’s a really hard deficit to make up.
Who Will Stop Bush’s Doomsday?
It was just before Halloween that President Bush trotted out the specter of World War III. Somehow, his remark that “if you’re interested in avoiding World War III, it seems like you ought to be interested in preventing [Iran] from having the knowledge necessary to make a nuclear weapon” was more in the spirit of the holiday than he probably intended. It was certainly scarier than any costume or haunted house.
If he wants to play war games, let’s do it. Undoubtedly, there are dozens of people around Washington playing scenarios, so we might as well join in. Consider this one version of the Bush Doomsday Scenario.
In the not-too-distant future, there will be a large attack on U.S. forces in Iraq or Afghanistan. It will probably be a bomb, or multiple bombs. Casualties will be many, and it will be messy. Evidence will be discovered in the carnage that the weapons came from Iran. This isn’t new, as the Bush administration has made the allegation before. But now, with the increased damage, Bush, Vice President Cheney, and congressional Republicans step up the rhetoric.
“My duty is to protect Americans,” the president will say. “Iran is a danger to us all. They are endangering out troops. Their desire to have nuclear weapons endangers the world.” He will trot out Secretary of State Rice to warn the Iranian government to open their borders to permit inspectors or face the consequences. She earnestly wishes for “productive diplomacy.” Iranian President Mahmoud Ahmadinejad rejects the American requests.
The rest of the world starts to get nervous. Crude oil prices start to rise to $110, $125, $130, in anticipation of a U.S. strike. Gas at the pump reaches $5.50 per gallon. Layoffs ensue, the recession picks up.
The president will come on TV to announce that he has new evidence of Iranian involvement in Iraq and in Afghanistan, and that he believes the government is on the way to acquiring nuclear weapons. He orders a “surgical strike” at suspected development facilities as a warning to Iran.
Iran, a country four times the size of Iraq, with a population of about 69 million, retaliates. It has an army of about 345,000, or about twice the force size of what we have in Iraq. Iran conducts a massive counter-attack across the Iraqi border, coordinating with Shi’a militia inside Iraq. U.S. troops and the private security guards take heavy casualties as their undermanned positions are overrun. Even the Halliburton cooks are given rifles, although they are useless as soldiers. The butcher’s bill is steep.
The president will come on TV again, this time to report the grievous losses of our troops, to blame the tragedy on Iran and to say we must renew our commitment to fighting the global war on terror, and orders more strikes into Iran and more troops to the region.
There is no limit in sight to the rise in oil prices, our people are getting killed and the economy is plunged into free fall. The Middle East is aflame. Israel is on alert, Pakistan descends farther into chaos.
Freeze frame. It’s easy enough to continue developing the scenario, but here’s the key question, asked in all seriousness. What is to keep this from happening? You have a president with a messianic complex and a vice president who hungers for power and control. They get their way at every turn using their toxic, but effective, brew of patriotism and fear.
Would Congress do it? How many senators or representatives would be bold enough to step in and say that we escalated the war and it’s time to leave before the disaster is total? Maybe a bare majority of Senate Democrats, and even that’s in question. What is not in question is that Republicans won’t. They and Joe Lieberman will stick by their president and will speechify that “islamofascism,” whatever that is, must be stopped by any means and our troops must be avenged. Republican senators would block any efforts to cut off funds or otherwise withdraw our troops. Republican presidential candidates would chime in with the same tune.
Democrats can’t stop a war by themselves. They haven’t so far. In this admittedly pessimistic scenario, what would the Democrats, particularly the Bush Dogs who supported the Iraq war down the line, do as the country plunges into turmoil? What would the “moderates” do? Would they try to stop a war, or, more likely, would they be afraid of being seen as weak and not “supporting our troops,” — of abandoning the country in its hour of need? A Congress, which continually kneels before a president who has a 24 percent approval rating, deserves its own 11 percent approval rating.
Will any Democratic presidential candidates, particularly the leading ones, have the fortitude to say it’s time to take a strategic retreat, or will they defend the spending of more human lives? Or would most of them find justifications for the conflict as our country and the world economy deteriorate?
We all hope none of this comes to pass. But it’s worth taking a few minutes to think about.
The Wile E. Coyote Economy
When I was a child my favourite cartoon program was the Looney Tunes. Bugs was my favourite, but in constant play were the Roadrunner cartoons, in which the starving (and very clever) Wile. E. Coyote would set out to get himself supper by catching the roadrunner. Unlucky Wile never managed to succeed, but in trying he inevitably wound up blowing himself up, getting hit by large objects, or falling to his death.
The current economic and market situation reminds me of how Wile would die from falling. On occasion he’d race off a huge cliff (apparently he always chased the roadrunner right next to the Grand Canyon). He’d run off the cliff in a straight horizontal line, as if there was still ground under his feet, and then come to a stop in mid air. He’d look around, then he’d look down. Seeing the mile of dead air beneath him, he’d gulp and immediately plummet to the ground, where he’d wind up as a pancake.
In the world of cartoon physics, the law of gravity didn’t take effect until you realized you’d been breaking it. Once you did, whoosh!
The US economy and US markets, indeed the world economy and markets, have been operating like Wile. E. Coyote running off a cliff. By my estimate we’ve been off the cliff since at least 2004. Some would put the moment a couple years back from that, or maybe a year forward. But for years many of us have been looking at the US the way a spectator might look at a coyote who performed in the real world what Wile did in a cartoon, scratching our heads and wondering “What the heck is keeping him up there?”
A large part, but not the only part, of what’s been keeping the economy up there, instead of down in a ditch, is the same thing that keeps Wile up. As long as no one believes the US economy is massively overextended, that collaterlized debt instruments were properly valued, that derivatives based profits and valuations weren’t illusionary, they were willing to keep lending the US and Wall Street money and buying their pieces of paper. And as long as the money kept flowing, consumers could keep spending, brokers could keep selling collateralized debt obligations of various kinds, and everything was great — especially if you were one of those getting multi-million dollar bonuses for profits on paper that are likely to turn out to have never existed.
It all started coming apart with the subprime mortgage crisis. It should be emphasized that problems extend far, far beyond subprime, but it’s there that they first showed up, where they first became undeniable. It’s then that Wile, scanning the horizon, though to himself, “Gee, I don’t see any ground. Maybe I should look down.” As people realized there was no “there,” there; that many of these mortgage backed securities were worth cents on the dollar, they stopped being willing to buy them. The defaults started occurring and as people kept looking more and more they began to be forced to actually consider “How much is this worth?” And they didn’t stop at subprime mortgages.
Now the reason this mattered is that most Wall Street firms (and many banks) have a ton of this paper, and they are also heavily leveraged with loans. Those loans are loaned against the value of their portfolios. So when other firms and various banks started realizing the paper was worthless they stopped wanting to continue to extend loans. When the loans came due (and most loans these days are short term, from days to months) they didn’t just roll them over.
Without the loans firms began to face the possibility that to meet their obligations, to pay back the non-rolled-over loans, they might have to actually come up with cash. Which means they might actually have to sell some of this paper. And if they sold it, they’d know what it was worth. And if they knew what it was worth, they’d have to mark down all of it in their portfolio And if it’s really worth cents on the dollar, well that could wipe out billions. In fact, it could wipe out the entire capital of firms.
Which is where we come to Level 2 and 3 Assets:
There’s a mystery on Wall Street. Merrill Lynch last week wrote off $8.4 billion in its subprime mortgage business, a figure revised up from $4.9 billion, yet Goldman Sachs reported an excellent quarter and didn’t feel the need for any write-offs. The real secret of the difference is likely to be in the details of their accounting, and in particular in the murky world, shortly to be revealed, of their “Level 3″ asset portfolios…….From November 15, we will have a new tool for figuring out how much toxic waste is in investment banks’ balance sheets. The new accounting rule SFAS157 requires banks to divide their tradeable assets into three “levels” according to how easy it is to get a market price for them. Level 1 assets have quoted prices in active markets. At the other extreme Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks’ own models.
Goldman Sachs has disclosed its Level 3 assets, two quarters before it would be compelled to do so in the period ending February 29, 2008. Their total was $72 billion, which at first sight looks reasonable because it is only 8% of total assets. However the problem becomes more serious when you realize that $72 billion is twice Goldman’s capital of $36 billion. In an extreme situation therefore, Goldman’s entire existence rests on the value of its Level 3 assets.
The same presumably applies to other major investment banks - since they employ traders and risk managers with similar educations, operating in a similar culture, they probably have Level 3 assets of around twice capital….
…There has been no rush to disclose Level 3 assets in advance of the first quarter in which it becomes compulsory, probably that ending in February or March 2008. Figures that have been disclosed show Lehman with $22 billion in Level 3 assets, 100% of capital, Bear Stearns with $20 billion, 155% of capital and J.P. Morgan Chase with about $60 billion, 50% of capital. However those figures are almost certainly low; the border between Level 2 and Level 3 is a fuzzy one and it is unquestionably in the interest of banks to classify as many of their assets as possible as Level 2, where analysts won’t worry about them, rather than Level 3, where analyst concern is likely.
The reason analysts should worry is that not only are Level 3 assets subject to eccentric valuation by the institution holding them, but the ability to write up their value in good times and get paid bonuses based on their capital uplift brings a temptation that few on Wall Street appear capable of resisting. Both Goldman Sachs and Merrill Lynch are reported to have made profits of more than $1 billion on their holdings of Level 3 assets in the first half of 2007, for example, profits on which bonuses will no doubt be paid at the end of their fiscal years…
…Defenders of Goldman Sachs and the rest of Wall Street will insist that less than 27% of their level 3 assets are represented by subprime mortgages yet that is hardly the point. Subprime mortgages, estimated to cause losses of $400-500 billion to the market as a whole, though only a fraction of that to Wall Street, have been only the first of the Level 3 asset disasters to surface. There is huge potential for further losses among assets whose value has never been solidly based.
The author, Martin Hutchinson, then goes on to detail a number of very risky, and likely overvalued asset classes. But let’s step back a bit and examine the levels of assets:
Level 1 means the values come from quoted prices in active markets. The balance-sheet changes then pass through the income statement each quarter as gains or losses. Call this mark-to-market.Level 2 values are measured using “observable inputs,” such as recent transaction prices for similar items, where market quotes aren’t available. Call this mark-to-model.
Then there’s Level 3. Under Statement 157, this means fair value is measured using “unobservable inputs.” While companies can’t actually see the changes in the fair values of their assets and liabilities, they’re allowed to book them through earnings anyway, based on their own subjective assumptions. Call this mark-to-make-believe.
For years now, much, and in some cases most of the capital of most Wall Street firms and many banks has been in assets that are either “mark to model” or “mark to make-believe”. Which is to say that the assets were traded so thinly that there was no market price to check them against, or that such market prices as existed were either very rare, and/or were sales between firms with similar expectations of what such assets might be worth.
But then there’s this thing called the “real world” which dared to intervene. Housing sales slowed. Prices began to drop. Jumper mortgages where you start with a low rate then jump to a higher variable rate started to reset. Those unfortunate enough to take Greenspan’s advice and take variable rate mortgages also suffered from them.
In short, defaults and the prospect of defaults began to go through the roof. The collateralized debt obligations (CDOs) stopped performing, or people realized that there was a good chance that they soon would. Because at the end of the day a CDO is supposed to supply its owner with regular chunks of money. If it doesn’t, it’s not worth squat, and no one can pretend it is. It’s just a bad loan.
Now if the problem here was just “subprime mortgages,” Wall Street would take a lickin’ and keep on tickin’. But as Hutchinson points out there’s a ton of bad paper out there: securitized credit card loans, mortgages other than subprime, asset-backed commercial paper and more. The list goes on and on.
Wall Street and America’s banks made a ton of money because the people who decided how much their assets were worth were the same people who owned the assets. And since their bonuses were based on how much those assets were worth, let’s just say those assets were worth a lot. It takes a lot of “profit” to justify bonuses equal to the raises of 80 million Americans, after all.
Bernanke and the Fed are aware there’s a problem, and their easing of interest rates and other actions like forcing loans on the banks have been an attempt to deal with the problem by providing “liquidity”. But here’s the problem: you can give the banks money, or lend it to them, but you have a hard time making them buy huge steaming piles of crap. This isn’t the Long Term Capital fiasco where some trades went bad but there was good reason to believe that if you held onto the position and unwound it you might make money. The underlying instruments are probably crap and you will never make your money back if you buy them at face (or that’s the fear, and it’s well founded). Nor is it nearly as small as Long Term Capital fiasco was; the amounts of money involved today are magnitudes larger. So the banks, while making “good citizen” noises, are mostly not willing to take that money and bail out those of their colleagues and competitors who are holding onto reams of worthless paper (the membership of which includes some big banks as well, including Citigroup).
Because this issue extends beyond Wall Street and into banks, most of whom were eager to get in on the easy and big money they saw securities firms and hedge funds earning, the consequences are going to be very, very real for ordinary people. When the banks have to take large write-downs the amount of money they will have available to lend to businesses and possibly even to consumers will also decline. Bernanke may make interest rates low, but if this cascade continues, and there’s no reason to believe it won’t, there simply won’t be the money to lend. (As an aside, this is exactly the reason why Great Depression lawmakers forbade banks to get involved in securities businesses. Removing those laws set the stage for what is happening.)
Likewise, and worse, foreigners watching the debacle are becoming increasingly unwilling to lend the US more money. Since the US requires a huge inflow of money every day to continue operating and for its consumers to continue spending, this is a potentially destabilizing situation. It is, of course, possible for foreign banks to step in, and indeed, over the last seven years foreign currency markets have been dominated by the actions of central banks, especially those of Japan and China. But China, in particular, is experiencing large rises in wages. Inflation is already much higher than the official figure and with rising wages will become higher still. Every dollar the Chinese have bought had to be bought, in essence, by printing Yuan. Those Yuan, as people cash out of dollars, are coming back into China and pumping inflation even further.
Which is to say, the cost for China of continuing to lend the US money by propping up the US dollar may soon exceed the benefits to them of doing so. It is true that if China stops propping up the US dollar and the US consumer then US demand for Chinese good will collapse, but significant goods inflation in Chinese goods from domestic Chinese inflation, plus reduced US spending as the home-loan ATM comes to an end in the US because the housing bubble has ended and Americans just can’t borrow any more mean that the US consumer is about tapped out anyway. It’s been a long run, but it’s about to come to an end. Especially as US consumers are being squeezed by stagnant wages, double digit food and energy inflation, and now by consumer good inflation. And if doubts about collateralized credit card loans start to take effect, the apparently endless willingness of credit card companies to extend seemingly unlimited credit to consumers may come to an end as well. The new leg-breaking bankruptcy bill hasn’t repealed the basic reality that you can’t get blood for a stone, and if people are walking away from their houses anyway (and many more will be ) what are you going to seize in terms of assets?–Fight it out with whoever holds the mortgage after default. If you can figure out who that is.
And this contagion will not stay limited to the US. I’ve recently heard talk by fools about how the Canadian economy, for example, has decoupled from the US one. That’s stupid and crazy talk; just because Americans have to buy our oil and electricity doesn’t mean that if our number one trade partner goes into an awful recession or depression we’re going to somehow ride it out. This is true for everyone — China, India, Europe. Even if the US isn’t a particular country’s main trade partner, for the past 7 years the vast majority (over 80% by some counts) of all the world’s savings, have been pouring into the US. When the crap those savings bought gets downgraded into cents on the dollar it is going to cascade through the financial firms and banks the world around; is going to depress foreign consumer spending and is going to collapse worldwide demand. The end result will be a huge wave of unemployment. And as Numerian alludes it will probably start of as a stagflationary wave and turn into deflation.
This, ladies and gentlemen, is going to be a big one. Best case scenario is something like the late seventies and early eighties, which as those old enough to have live through them, were truly awful. Worst case scenario is we’re walking into the next Great Depression.
And if somehow we manage to put it off for a bit longer (we won’t put it off forever) it will because we do two things. We look resolutely up and refuse to look down, which is to say we pretend the paper is worth more than it is. And because we do a massive inflationary bailout of banks and firms by essentially printing huge amounts of money.
But as with Wile. E. Coyote, we can’t keep walking on air forever.. Once you’ve looked down and seen the abyss below your feet, gravity takes over. Too many people have to pretend now that they haven’t seen that the paper is worth almost nothing and fear is taking over. No one wants to be caught with the steaming pile in their laps when the music stops.
It hasn’t stopped yet, but one needs to remember that in early 1930 no one knew the Great Depression was underway either. We’re still looking down, and thinking “oh no” and looking to see if with a jump we can grab on to the cliff edge.
I don’t think we’re going to make it. And if we don’t the consequences will go far beyond the economic and into the political. In the early 30’s Americans were willing to do almost anything to fix things. They got FDR, and if he didn’t entirely fix things, he certainly made them a lot better. But they didn’t have to get FDR and a lot of other countries weren’t so lucky.
We’ve made our bad luck, with our fecklessness and our greed.
Can we make our own good luck?
29 October 2007
Forgotten faces of war
By James Carroll | October 22, 2007
ONE NEWS story from Afghanistan last week told of two tragedies. In Paktika Province a young man, whose chest was wrapped with an explosive vest, was en route to the place where he would detonate himself. But then, he saw people at prayer in a mosque, and he changed his mind. He went to the police. He began removing his explosive vest, but it went off. He alone was killed.
In Uruzgan Province, a young man, recently home from Pakistan where he had attended a religious school, announced a similar intention to his family. He was going to kill the enemy by killing himself. The article said that he handed over $3,600, presumably a reward for what he was about to do. In front of his mother, brother, and two sisters, he displayed his explosive vest. The young man’s mother was horrified, and she immediately tried to remove the vest from his body. The bomb detonated. The young man, his mother, and his three siblings were killed instantly.
Reports from Afghanistan and Iraq have been numbingly discouraging, in part because, in the United States, they come as a steady stream of abstraction. We see the faces of American casualties on the evening news, and the fate of wounded GIs draws sympathy, but otherwise the human cost of the war is kept vague.
We know to the single digit how many coalition fighters have died, but estimates of Iraqi deaths span a range from tens to hundreds of thousands. A single death - a tragedy; a million - a mere statistic. Meanwhile, as the suicide bombers treat their bodies as weapons, so do we, as if those faceless killers are indeed the automatons their masters want them to be. Yet this tale of two bombers suggests that every such deed, no matter how prompted by indoctrination or despair, must involve human responses.
During World War I, when the British Parliament was enacting a conscription law, so that draftees could replace the depleted ranks in the trenches, a politician declared, “The necessary supply of heroes must be maintained at all cost.”
A seemingly endless supply of suicide bombers is what makes the American war the horror that it is. Villains to one side, heroes to the other - but who are those bombers? Who are their mothers, brothers, and sisters? The two incidents from Afghanistan offer rare glimpses into the human depth of this otherwise inhuman act. Ambivalence and fear surely accompany each bomber on the way to destruction; anguish and dread must fill the hearts of their family members, if they know ahead of time. After the fact, grief must anchor every feeling.
I think of that mother. What was the meaning of her life if not the well-being of her children? What could be worse than the death of one’s children by one’s child? As the mother saw the suicide vest on her son, and as she then tried to wrestle it off, how could she not have been screaming inside, “Who did this to my child?”
I think of the siblings, witnessing the horror unfolding before them. How helpless they must have felt, with their last glance fixed on a violation of all they had been taught to love and value. I think of that first bomber, who, en route to killing, accidentally caught a glimpse of worship, which is nothing but the wish to affirm life, which is another name for God. I think of the bomb masters, who recruited those boys, manipulated them, tricked them into imagining that death could be an affirmation. And I think of those who created the situation within which all of this unfolds.
What is that situation but an explosive vest? It does no disrespect to these dead people to recognize this image as a metaphor of what we Americans have created. We are the bomb masters who have wrapped the body of Iraq in wires and plastic explosives. How can we remove the vest without blowing it up?
Iraqi civil war, conflict with Iran, Turkish-Kurdish violence, chaos throughout the Middle East - and now President Bush tells us that, if we don’t defuse the regional body vest carefully, World War III will start. There it is. Bush himself acknowledging at last what, under his leadership, the United States has done. We have put an explosive vest on Earth itself.
And now our job is to get it off. The revelation here is that, in the new age, every bomber is a suicide bomber.
