http://historyunfolding.blogspot.com/ View Blog History Unfolding: October 2011

Saturday, October 29, 2011

What the Chancellor said

[N.B.: Those who visited yesterday may wish to scrol down and go through the Chancellor's speech again. I was extremely tired when I worked on the translation yesterday morning, and I did not realize how sloppy it was. I have now smoothed it out considerably.

Chancellor Merkel's speech, in my opinion, reflects great credit on her, but far greater credit on the political culture of Germany and Europe. I do not in fact agree with the thrust of some of the policies it lays out: they emphasize austerity in Greece and elsewhere, rather than economic growth (although, as she points out, her own country at this moment has a very impressive and enviable employment record of which to boast.) But the speech promises, directly and repeatedly, to make a sustained attack upon some deep-seated problems within the EU and the Eurozone in a continuing effort to preserve the achievements of her parents' generation. And in particular, at the end of the speech, she, like Lincoln and FDR in their time, puts the current crisis in the context of previous ones. While she does not name Bismarck or Adenauer or de Gaulle, she promises that her generation shall not fail the comparable test that it faces. It is symptomatic of the wretched mess in which the United States finds itself that neither President Obama nor any Republican ever wants to make such an appeal to the past. The Boom generation of historians seems successfully to have persuaded public opinion and our elites that history began in the late 1960s.

Europe does face critical, possibly insurmountable problems. In an effort to preserve the Euro the Greeks have made genuine sacrifices of their sovereignty. This may indeed crack the Eurozone, though not the EU itself, but if it does not, it will be a critical precedent that may move European political life into a new phase. The Europeans, in any case, are still engaged in an extraordinary attempt to widen and deepen their political order. The contrast with the United States could not be clearer: we are engaged, not in saving our grandparents' and parents' achievements, but in tearing them down. And it is no accident, clearly, that Republicans now cite Europe's regulated capitalism, complete with single-payer health care and truly modern infrastructure, as some sort of catastrophe that the United States has to avoid. Europe is still the continent of the Enlightenment. Paradoxically, the United States--the first political child of the Enlightenment--is now the advanced country where its spirit is under the heaviest attack.

The transcript of Merkl's speech shows that the applause came mainly, though not exclusively, from her own coalition. Yet she did not speak as a party leader several of her most important pronouncements drew unanimous applause. This has become unheard of when the President addresses the Congress. My old friend Stanley Hoffmann, in his review of Thomas Friedman and Michael Mandelbaum's new book This Used to Be Us, suggested that European parliamentary systems are simply more effective than our own separation of powers, but I think this was an oversimplification. Presidents such as Truman and Eisenhower have accomplished great things with the help of Congresses at least partially controlled by the opposition party. We are in trouble now not because of our constitution, but because of our almost complete lack of any common civic spirit. No European leader faces an opposition determined to ensure that anything he or she does fails, but that is the situation we have been living with for three years, and it will get worse before it gets better.

Having suffered the worst of modern western civilization during the last crisis, the Europeans remain committed to a relatively strong government and a welfare state. No major European nation has de-industrialized to the same extent as the United States, either. Chancellor Merkel's positions on the regulation of financial markets--including hedge funds!--were far in advance of President Obama's. The Europeans face big problems--but their governments are addressing them. If they can succeed, they seem very likely to regain the leadership of the western world which, half a century ago, they seemed to have lost forever. That would not disturb me. The Atlantic world is a family, and one one family member goes crazy, others must step forward. That was our role 70 years ago; now it seems once again to be theirs. We are all, in any event, in this together.

Leadership lives

From time to time over these last seven years I have written and posted speeches that I would like to hear an American President make. In composing them I drew upon speeches I have read from past eras. In 2006 I also posted a guest contribution, a mythical speech by John F. Kennedy showing how he might have addressed the state of our nation. Meanwhile I have become increasingly convinced that the United States is no longer capable of effective crisis leadership.

Last week it was widely but briefly reported that Chancellor Angela Merkel had given an important speech on the Eurozone crisis to the German Bundestag. Coincidentally, last weekend I had speculated once again that Europe, not the United States, would have to provide real leadership and keep the best of western values alive during the current crisis. I was thus sufficiently curious to find the complete text of Chancellor Merkel's speech. I found it in German, on the Bundestag's official web site. After a pass through the google translator program, I have worked all morning on providing the translation below, the first, it would appear, to be publicly available. (That in itself is an interesting fact that I will address tomorrow.) I am sure it is not perfectly clean but I think it will do.

I have not been a particular fan of Chancellor Merkel, and were I German, I suspect I would vote with the SPD. (I have known for 40 years, however, that the Christian Democratic party to which she belongs has consistently been to the left of our own Democratic Party, even though it represents the right there.) I am now inclined to revise my opinion. She has seized the moment in exactly the way that President Obama has failed to do. Below I reproduce the text of her speech in full, and I hope you will take the time to read it. Tomorrow I will provide my own commentary. My admiration for her has enormously increased because of something that happened since the speech: the news that she and Nicolas Sarkoczy forced the bankers to write off 50% of their Greek debt to help solve the crisis. Meanwhile I thank Chancellor Merkel for showing me that I have not been living in a completely delusional world.

Dr. Angela Merkel, Federal Chancellor
Mr. President! Ladies and gentlemen, Three years ago, the bankruptcy of investment bank Lehman Brothers triggered the biggest stock market crash of the postwar period. What began as an American real estate crisis quickly developed into a global financial crisis. Joint efforts by the Federal Government and the Bundestag had time to prevent Germany from falling into a deep recession. The crisis has demanded much of our citizenry: economic losses, but also patience and trust.

Today we can say that our joint efforts have paid off, because Germany has emerged stronger from the global financial crisis than it went into it. We can look forward to impressive economic growth. And above all, unemployment has reached a 20-year low.
It is also clear that Germany cannot do well in the long run if Europe does badly. Therefore, the main concern of the Federal Government is that Europe emerge stronger from the crisis stronger than it entered into it. The European Union must be a stabilizing union. What does that mean?

It means, firstly, that we must address the immediate crisis. We need to find viable solutions for the countries that have an excessive debt, and thus correct the mistakes of the past. At the same time we must prevent the crisis from spreading to other countries.

Secondly and equally importantly, we must take precautions for the future. We need to tackle the causes of this crisis to resolve it at its root. This is the excessive debt, but also the lack of competitiveness of some euro-member states. This means than that we need to strengthen the foundations of economic and monetary union .

Each of these two challenges is quite large in itself. But we must nonetheless find convincing answers to these challenges if the economic and currency union is to survive this test and emerge ever stronger from it.. I think we all agree: This is the greatest test of the Economic and Monetary Union that the world has ever seen.

(Voice from the Left: Probably not the last)

The deliberations of finance ministers and heads of government made a good deal of progress towards finding the answers this past weekend, and I declare this evening that we shall find workable answers. Some of the the problems that we must solve had their origins well before the onset of the current crisis. They were unfortunately ignored both by the markets and by political leaders for much too long.

The truth is this: For years it was possible to go into debt without incurring the market sanctions of increased interest or penalties which the Stability and Growth Pact called for. For years it was possible to avoid necessary reforms and fall behind in competitiveness. For the truth is also that the Structural Fund and the Cohesion fund provided by the EU to increase competitiveness led in part to unintended consequences and failed to achieve the desired result. After many years of stalled reforms, we now must struggle . It would be totally irresponsible to say that the problems could disappear overnight.

But there is also good news. Above all, Ireland is back on track, Portugal is firmly determined to implement its adjustment program, and the Greek government has begun much-need reforms in recent months. We must also note that much is demanded of the people of Greece. They deserve our respect, and they deserve above all a viable future in the euro-zone.

(Applause from the CDU / CSU, SPD, FDP and Alliance 90/The Greens)

Nevertheless, there is still much to be done to bring the problems in Greece under control. The so-called troika comprising representatives of the European Commission, the European Central Bank and the International Monetary Fund is monitoring and evaluating the implementation of the program, designed to allow Greece to carry its burden of debt. We must now draw the right conclusions from their latest report. The report draws on the experience of one and a half years a realistic picture of the situation in Greece. This is particularly thanks to the IMF and its new director, Christine Lagarde, to whom I would like to express my gratitude at this point.

(Applause from the CDU / CSU and FDP)

The Troika report shows that Greece is only at the beginning of a long and difficult journey. It also makes clear that the private sector must make a significant contribution to improve Greece's long term debt sustainability. This means that the measures that we decided upon on 21 July 2011 at the European Council are no longer viable. Our goal is that today's deliberations must design debt sustainability for Greece such that Greece in 2020 has a debt of 120 percent debt of gross domestic product. We cannot achieve this without the private sector assuming a much greater share of the burden than on 21 July 2011 was provided.

(Dr. Ilja Seifert [The Left]: That was already clear!)

Debt relief alone - let me be very clear here - no matter how it is configured, will not solve the problems of Greece. Painful and necessary structural reforms must be implemented effectively. Otherwise, in spite of debt relief we shall in a short time back to where we are today. This must always be clear.
(Applause from the CDU / CSU and FDP)

Thus, the principle which we applied from the beginning is right: there can only be help if the recipient accepts responsibility. Aid must always be tied to strict conditions.

Ladies and gentlemen, in this way we must provide Greece with security for quite some time. I believe - and we'll talk about it today - it's not enough that every three months a troika comes in and then leaves. Permanent supervision in Greece is desirable.
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(Voice from the Left: Just like us!)

Similarly, we are obliged to do everything possible to ensure that Greece will have the opportunity to grow again. This means investments under clearly improved conditions. For this reason there is an EU mission led by the German Horst Reichenbach. For this reason, there was the trip of the Federal Economics Minister to Greece – carrying with him a variety of potential investment by German companies.

(Juergen Trittin [Alliance 90/The Greens]: As if the Greeks are dependent!)

And for this reason there will be a meeting of representatives of German and Greek cities next week. They will discuss how they can help each other.
I stress - I think I say this on your behalf - We want Greece quickly on its feet. We will do everything we can, within the framework of a German-Greek partnership.

(Applause from the CDU / CSU and the FDP and SPD deputies)

A reduced debt for Greece, including the participation of private creditors, means that we must also find a solution that avoids systemic risk, that is, that other countries from being infected due to this process . Therefore we have to do two things.

We need to ensure , first, that the banks do not lose confidence in one another. Therefore, this past weekend the Finance Ministers have decided upon a stronger recapitalization of on the basis of proposals of the European Banking Supervisors. This is an absolutely necessary and very important element to prevent such infection. We must carry out this recapitalization of the banks in the following sequence. First, banks must attempt to recapitalize on their own, and only in the second place can nation-states help, and only if the stability of the Euro itself is in danger, because a nation state can not allow the EFSF to get used to its help. This is the sequence.
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A second important element to prevent the risk of infection is the so-called protective barrier over which we have been talking a lot. You can also call firewall if you have mastered English.

(Laughter from CDU / CSU and FDP)

I wanted to use only German, which I thought would help. (Applause from the CDU / CSU and FDP)

For this we need to - this is the second step - shield all the other countries from the risk of contagion that may emanate from Greece. To which I add: it is absolutely essential that before we erect such shields, any country that might be affected puts its house in order and takes additional measures to try to prove its own soundness. This must be the first subject of discussion.

Now we come to the form the shield will take; it has been much discussed. The EFSF now has an effective capacity of 440 billion euros, which we agreed to here. Germany takes on guarantees in the amount of 211 billion euros. Those will remain the total volume of the EFSF and the upper limit of the German guarantees.

In today's meeting we agreed that the EFSF must achieve with this capacity the maximum impact in the prevention of contagion. The effect of this shield must be large enough. There has been a full public debate on it. I say again - this is very important in this context: - All models that assume the participation of the European Central Bank are now off the table and not the subject of discussion.

(Applause from the CDU / CSU and FDP)

Such ideas contradict the European treaties. I have made clear that for the Federal German government such solutions do not come into question.

(Voice from the Left: The biggest nonsense!)

Now, two options without the participation of the European Central Bank are: firstly, the partial insurance of new government securities of the affected Eurostate and second, the possible participation of private and public investors in the financing steps taken by the EFSF. Both options can only be used within the agreed framework for EFSF action. This also ensures that existing clear EFSF principles are always applied. The Member State shall submit an application for assistance,a Memorandum of Understanding will be negotiated, and a strictly conditional aid agreed.

The German Bundestag and the Federal government must consent to the grants of aid in individual cases and agree to the application of the two options, and do so in a way that allows for parliamentary action. Today the Bundestag will decide upon the two options in principle, we will discuss them this evening at the meeting of Heads of State or Government in principle and decide upon them. . Of course, any guidelines will go through the parliamentary process here in the German Bundestag.

(Applause from the CDU / CSU and FDP MPs)

Furthermore, Europe has a consensus to hold talks with the International Monetary Fund on how the IMF can contribute further to the stabilization of the Euro-zone, drawing both on its expertise and as appropriate on its financial instruments.

I want to repeat , because it is important for today’s decision: Whoever wants private creditors to contribute to the debt sustainability of Greece, must also take care that a shield, a protection against contagion is established. Anything else is grossly irresponsible.

(Applause from the CDU / CSU and FDP)

I have said: The federal government wants the Economic and Monetary Union to become a union of stability. Therefore we must both deal with the acute crisis and provide for the future, namely by having the European member states undertake greater common responsibilities. We have already taken the first steps, for example, with the euro-plus pact with the leaders of the Euro-zone voluntarily committing to implement structural reforms. This means that competitiveness is now a top priority in the European Union. With the newly effected procedures for preventing and correcting macroeconomic imbalances, competitive weaknesses can be detected earlier and corrected. Also, the Structural and Cohesion funds must be used more this in the future, that they truly improve competitiveness.

But I also say – looking at matters from another perspective-- economic imbalances are not bad in themselves. If a surplus arises because a country is more competitive than another, it should clearly not be called into question and leveled, just as different interest rates reflect different strengths. (Applause from the CDU / CSU and the FDP and the Abg. Zöllmer Manfred [SPD])

We have tightened the Stability and Growth Pact. Sanctions come into play earlier. They are more effective. The pact now hs a lot more bite. In this respect, we have initiated a new trend.

Moreover, the French president, and I proposed - and we'll pursue it further – that national parliaments will commit themselves, if the European Commission criticizes their budgets, voluntarily to take account of the criticism, and that all euro Member States undertake to include a debt brake in their constitution.

(Applause from the CDU / CSU and FDP)

These discussions are in full swing. I find it absolutely remarkable that a country like Spain has changed its constitution to include such a debt brake shortly before elections.

(Applause from the CDU / CSU and the FDP - Dr. Barbara Hendricks [SPD]: There are Social Democrats in power there!)

Thus we tighten and improve European procedures. We complement and reinforce them by obligating ourselves, as I have just said. We thus extend the framework of existing European treaties. The problems we face today must and can be solved within this framework. But I also say this: We need more. It is my firm conviction that we must go beyond this approach.

Moreover, it is also thus: If the international community looks at us in Europe, it also wants to know where the development of the European Union will go in the medium term, because it need assurances that the euro zone stands together, improves its competitiveness and strengthens its culture of stability.

Therefore, we will need to alter the European treaties.

(Voice from the Left: Aha)
The Foreign Minister on Saturday, and I on Sunday, have begun work on this, and we gave decided that we shall ask the President of the Council to make proposals in December proposals on how the culture of stability can be better anchored. This is not a comprehensive reform of the Treaty of Lisbon – that would be too much – not is it a pooling of larger parts of our economic and financial policies,

(Juergen Trittin [Alliance 90/The Greens]: Too bad!)

but in the next step is to, first of all with regard to countries that violate continuously and repeatedly the Stability and Growth Pact, to create an opportunity to have a real sanction for their violations of the Stability and Growth Pact.

(Applause from the CDU / CSU and the FDP -
Unrest in the LEFT)

Because - because as people are muttering again - it is this: We cannot allow, as has happened over 50 times , that agreed targets in the Stability and Growth Pact are not met. We now know that a failure in one of the 17 Member States - Greece is not the largest - may jeopardize the stability of the euro overall.

(Voice from the Left: Of course!)

Therefore, these violations of the culture of stability must be more sharply sanctioned, for example, by a complaint before the European Court of Justice, if a country does not permanently adhere to the guidelines.

(Applause from the CDU / CSU and FDP)

I am very sure that the citizens in Germany, rightly burdened with many concerns, understand one thing very well. They do not merely want more Europe, they want more security for the culture of stability in Europe.

I think only when we create more of a Europe in this sense, if we continue to develop Europe further, then, we will have understood the political dimension of this crisis. Then we will have also understood that we will eliminate the weaknesses and flaws in the design of economic and monetary union now or not at all. If we eliminate them now, then we use the opportunity of this crisis. Otherwise we would fail.

(Applause from the CDU / CSU and FDP)

I am well aware of: A treaty modification always involves risks. It is a painstaking process. All 27 member states must agree. Nevertheless, it is necessary and the best way to prevent a split between the European Union's euro and non-euro countries. If we do not succeed, the euro-zone countries will have to conclude binding contracts with each other. I do not want that. I would not find it reasonable, because many countries still want to join the euro. Therefore, we must be ready to go this route.

Since we are in such an existential crisis in Europe, I ask: Where is it actually written that a treaty amendment must always take a decade? Who in the world will think we are capable of action, if we stand up and way : "After the Lisbon Treaty, there must never again be a change"? The whole world changes, and Europe must also be willing to change.

(Applause from the CDU / CSU and the FDP - Thomas Oppermann [SPD]: One year too late!)

Just as we managed in the question of German unification to conclude a two-plus-Four Treaty in six months, so will it also be be possible - the Euro should be worth enough to us – to look at amendments to the treaty.

(Applause from the CDU / CSU and FDP)

Given the dimensions of the struggle against the crisis, we must not forget: It was created largely by too little regulation. Therefore, the regulation of financial markets remains a major task, which is still far from done.

(Applause from deputies of the CDU / CSU and Alliance 90/The Greens)

Therefore, the European Council on Sunday once again took up the matter and stressed that important proposals for the regulation of derivatives, deposit insurance and capital requirements for banks now have to be adopted quickly. In this context, I want to reiterate that the federal government is committed to the introduction of a financial transaction tax, and indeed
(Call from Mr. Alexander Ulrich [The Left])
in the next few days at the G-20 summit in Cannes. We are also grateful that the European Commission presented a proposal for it. The finance ministers will discuss this proposal in early November, and Germany will do everything to make this proposal by the European Commission a success.

(Applause from the CDU / CSU and the FDP and from members of the SPD and Alliance 90/The Greens - Alexander Ulrich [The Left]: Just like here!)

It is also true: Many questions require not only a national or European response but a global response. Thus the G 20 is the appropriate forum. The G-20 represents at least two-thirds of world population and 80 percent of world economic power. Therefore, the starting point of the G-20 discussions in the rest was a better global regulation of financial markets.

One can say: We did a lot. An important step will now betaken in Cannes: Megabanks will no longer be dealt with as they were in the crisis, forcing the taxpayer to play a role. . "Too big to fail" is no more, and we shall have an international agreement on the restructuring of megabanks such as we have already carried out in Germany with the proposed restructuring law for banks.
(Juergen Trittin [Alliance 90/The Greens]: Then do it finally! Switzerland is further along than we!)

It was a long time coming, but it is good that we can now decide in Cannes.

(Applause from the CDU / CSU and FDP)

At the same time we shall take on the task of making clear, that what applies to banks, including the "shadow banks" must apply, for example, to hedge funds, because they too present as much a systemic risk to financial markets. The so-called Financial Stability Board will be addressed next.

(Applause from the CDU / CSU and FDP MPs)

In Europe we have already regulated the hedge fund. But the world has not done so sufficiently. Therefore, the topic of tax havens is n the table again, because we had planned in the G 20 at the beginning, that every instrument, every place and every player would be subject to regulation. Since we cannot do enough nationally or in Europe, that must happen worldwide. However, I also say this: With Individual measures in Germany, for example the ban on short selling, we have had good experience, because now the whole subject is discussed at least in Europe. Now we have to bring it forward even worldwide.
(Applause from the CDU / CSU and FDP MPs)

What is very important: G-20 will only work, if new resolutions are not passed every year. We committed ourselves to halve our 2013 state deficit. Germany will do it, but not all industrial countries in the G 20. I do not believe we can decide every year exactly what fits the economic situation. Rather, I believe that the G-20 has the obligation to hold itself on a long-term path to remove the cause of many difficulties. There is debt not only in Europe but also in other parts of the world such as Japan or the United States of America. Therefore, I think: It's not enough, when we exhort one another only, it's especially important that we act together.

Who is on the road these days in various countries speaking with citizens, whoever follows the demonstrations in New York, Brussels, Frankfurt or Berlin, who knows how much the debt crisis moves the people. I say that I have great sympathy. The situation is very serious. To cope with the crisis, requires persistence. We all break new ground. I have laid out the causes of the crisis. They are complex. Simple solutions, the one magic bullet, will not emerge. The issues will occupy us for years.

The documents on maximizing the lending capacity of the EFSF, the best which knowledge and conscience can now produce, now lie before you. In the public debate on this maximization we hear much of a major failure and liability risk that Germany will assume. Whether that will be, no one can ultimately assess conclusively. But I say explicitly: we can not exclude it.
(Thomas Oppermann [SPD]: the last week still sounded different!)
Therefore it is right and good that we have this enshrined in our resolution .
(Applause from the SPD and Alliance 90/The Greens)
I want to talk about it because here we are at a point where all bear who political responsibility, have to answer a simple political question. It reads: As we go into a situation like this, how do we deal with risks? Put another way: What do we consider to be acceptable risks? Can we specifically regard risk that we take with the maximization of the EFSF acceptable or not? Today this is the specific question. When I consider the risk unacceptable, then I cannot run it. If after weighing all the pros and cons I consider it reasonable, then I have to take the risk. This is exactly what distinguishes political action from other kinds of action.
(Applause from the CDU / CSU and FDP)

Regarding the maximization of the EFSF we know:

First. The German share will remain at 211 billion euros.

Second. Contracts are not broken.

Third. We are the economically strongest nation. But - and I say it- we are not the center of the world. The world looks to Europe and Germany. She looks to see whether we are willing and able to take responsibility in the hour of Europe's worst crisis since the end of World War II.

Fourth. The potential loss and liability risk is offset by the economic profit that Germany like no other country has taken from the Euro.

Fifthly. My conclusion is therefore: the risk that is associated with the maximization of the EFSF now proposed is acceptable.

(Voice from the Left: for whom?)
I go even one step further: It would not be reasonable and not responsible, not to take the risk. A better alternative, a more sensible alternative is for me, considering all the options. not available.

Dear colleagues, thank you for your past support and critical support in our efforts to protect and strengthen the euro. It is my personal goal, in close cooperation with the German Bundestag - to find solutions for the benefit of our country - with government and opposition factions.

I am convinced that the comprehensive approach that I have laid out to address the acute crisis on the one hand and take wise precautions for the future on the other, will enable us to make the Economic and Monetary Union again a union of stability. To our citizens, I say: It remains true: What is good for Europe, is also good for Germany. This is what half a century of peace and prosperity in Germany and in Europe proves.

Allow me given the situation - not only the economic situation of the debt crisis, but also the political situation in individual European countries - to end with a personal word. No one should believe that another half century of peace and prosperity in Europe is inevitable. It is not. Therefore I say: If the euro fails, then Europe fails. This must not happen.

(Applause from the CDU / CSU and the FDP and from members of the SPD and Alliance 90/The Greens)

We have an historic commitment to defend and protect, with all available means, the unification of Europe, which our forefathers put under way 50 years ago after centuries of hatred and bloodshed. None of us can foresee the consequences if it does not succeed. It must not happen—that is my deep belief—that one day it shall be said, that the generation of political leaders who bore responsibility in Europe in the second decade of the 21st century failed before history.

I find all the more valuable the political message that the German Bundestag sends today a joint request by the CDU / CSU, the SPD, the FDP and Alliance 90/The Greens, by the people of Germany, to Europe and the world. It is sending a message that goes far beyond financial policy statements . It sends the message that Germany regardless of party lines protects the European project and stands together for this goal. For that I thank all those who contributed to it. You can be sure that I will take this message with me today for the complex negotiations in Brussels.

Thank you.
(Prolonged applause from the CDU / CSU and the FDP - Applause from the SPD and Alliance 90/The Greens)

Thursday, October 20, 2011

Hedging

The world is awash in books on the economic crash, and I have read only a couple, which I have reviewed here. In the last week I tried another one: More Money Than God, by Sebastian Mallory, about the rise of hedge funds. Mallaby, a financial writer, has worked very hard to put together the story of hedge funds since the 1970s, relying, inevitably, on a few spectacular figures, including George Soros, Paul Tudor Jones, and the operators of Long Term Capital Management, which famously crashed and required a Fed rescue effort in the 1990s. For the first time, I have some understanding of what hedge funds do and how they do it--and why they now attract so much of the best brain power that our country has to offer. Unlike Mallaby, however, I was not convinced that they are performing a socially useful function. Indeed, I think they are a profound symptom of what is wrong with us, and represent a problem requiring a solution--one that might not be hard to apply, were any of the necessary will lacking.

A hedge fund, of course, is a private, unregulated entity that invests in all sorts of things, from common stocks to bonds, foreign currencies, and, more recently, commodities--a development that Mallaby does not discuss. The operators of hedge funds use their own and other peoples' money, charging 2% a year to customers who give them their money, as well as a substantial share of any profits. Some of them are now handling billions of dollars. And their appeal becomes rather simple as soon as one grasps a simple fact. Hedge funds might more properly be called edge funds. They do sometimes hedge, that is, bet in effect on both sides of a trade to insure against losses, but they spend most of their time looking, like other gamblers, for an edge. An edge consists of any information, or analysis, tending to show that a certain tradable instrument is valued too low or too high at a particular moment. Because they dispose of so much money and use so much leverage, hedge fund managers have been able to score hundreds of millions of dollars of gains based upon a relatively small anomaly. Some of their simplest strategies involved identifying pairs of stocks--say, two domestic US airlines--whose value tends to move in parallel, and buying or shorting whenever one of them seems to be out of whack. One extremely successful firm, Renaissance Technologies, relied on analysts who knew very little about how markets actually worked, much less about what firms actually provided, but who could treat market statistics the way some analysts treat baseball statistics: they simply looked for patterns that would allow them to predict market movements without any sense of the underlying factors involved. For some time, at least, these tactics worked.

What ordinary citizens need to understand, however, it seems to me, is that hedge funds to not simply make money out of market trends. At critical junctures they have exaggerated those trends, on several occasions with consequences affecting the lives of many millions of people. In 1992, pioneering hedger George Soros and his collaborator Stanley Druckenmiller made perhaps a billion dollars (and other fund managers made about three times that) by betting against the pound sterling. The British at that time, like all governments inside the European Union, had committed themselves to maintaining the value of sterling within certain limits, and Soros and Druckenmiller were convinced that they could not. They sold pounds short in extraordinary volume--but such was the size of their position--perhaps $10 billion worth--that this inevitably started a run on the pound and made their preferred result not only more likely, but far more costly to the Bank of England, which, sadly, wasted billions of pounds in a futile effort to stop it. Variations of this story pop up repeatedly in Mallaby's book: many hedge funds take such large positions that they critically move the market. In addition, when they become over-extended, as they often do, any sign that they might have to unload positions to raise money threatens the value of their holdings as well.

Do hedge funds, which are designed to identify prices that are too high or too low, help maintain equilibrium in markets? The answer, frequently, at least, is no, and I suspect that I, ignorant though I may be, know the answer. To begin with, when the financial world is really in a frenzy, falling all over itself to acquire tech stocks in the late 1990s or subprimes just a few years ago, nothing will stop it. Several funds were nearly wiped out shorting tech stocks because, to quote John Maynard Keynes, the market stayed irrational longer than they could stay solvent. That was not the fund managers' fault. And yet, it seems to me, there is another reason why we cannot expect fund managers to stop the worst anomalies: because they generate the largest profits. Fund manager John Paulson (not to be confused with former Secretary of the Treasury Henry Paulson) made several billion dollars shorting subprimes in 2007. Much of this money came from the credit-default swaps--that is, insurance on subprimes--that he had purchased. Mallaby does not explain to us where that money came from, but I would not be surprised if was part of the many billions of AIG assets which the federal government decided to make good. That was not a socially useful profit.

I use Oliver Stone's movie Wall Street (the original, not the lamentable sequel) to illustrate the influence of Boomers like Gordon Gecko on financial markets. The tragic hero of that movie--tragic for us, not for himself--is Lou Mannheim, played by Hal Holbrook, a GI nearing retirement in the mid-1980s who tries to teach Xer Bud Fox the virtues of staying in the market for the long haul and identifying stocks with real value. That kind of strategy, carefully executed and assisted by sound national fiscal policy, enabled brokers to make a handsome, but not spectacular, living over the course of their careers. Hedge fund managers are gamblers who simply aren't interested in that kind of outcome. They dream of gigantic scores. Their goals, and their lives, are addictive. They often have to get up early in the morning to react to what markets in Asia and Europe are doing. Many of them finally retire when they suddenly realize that they have no time or energy to enjoy their millions or spend any time with their families. In Politics and War, in a chapter on the French revolutionary and Napoleonic Wars, I pointed out how destructive such behavior was when it became normal for European political leaders who felt free to redraw the map. I do not think it is less destructive in the economic world. Soros himself apparently had an epiphany after his sterling coup, abandoned high-stakes gambling, and began turning to philanthropy and genuine efforts to create a better world. He wrote recently that we live in increasingly irrational world. Hedge funds, I think, reflect that.

Mallaby believes in hedge funds. He notes, correctly, that their behavior was neither so reckless nor remotely so expensive as that of the big banks in the last crisis. He also cites studies claiming that hedge funds, as a group, have turned impressive profits over the last few decades, although he has to admit that such data are slippery because many losers have gone out of business without a trace. Gambling is an inherently unstable activity, and the mathematical theory of gamblers' ruin holds that every gambler will inevitably go broke sooner or later, especially if he keeps playing for higher and higher stakes. John Paulsen, the big winner in the subprime sweepstakes, has lost about 40% of the value of his fund this year. His days, too, may be numbered. Amazingly, neither in this book, nor, as far as I can see by scanning the titles of his recent columns in the Financial Times, does Mallaby have much to say about the impact hedge funds are having on the world economy right now. I would speculate (if you will pardon the term) that they have a good deal to do with the new commodities boom that has sent prices skyrocketing again, and it is inconceivable that they are not trying to profit hugely from the Greek crisis and the pressure on the Euro. If past experience is any guide, this will not help the European or world economy.

The United States, and to a lesser extent the rest of the western world, is in big trouble because of a crisis in values. The idea of a safe, steady income, so influential at almost every level of society in the middle of the last century, is now hopelessly passe. (I am here to tell you that such an income can still provide a very happy life.) Hedge funds and megabanks are still gobbling up an astonishing portion of the brain power coming out of American universities and professional schools every year--brain power that could plan better cities, improve American manufacturing, teach students who want to learn, perhaps even reform government. Clearly we will go through more financial catastrophes before we do any fundamental rethinking of where we are and how we got here. That is why I am increasingly inclined to believe that the men and women who really will put things on a new and much sounder footing may not yet have been born.

Europe, however, is still in certain respects a hold-out. In one of the more affecting passages of the book, Mallaby describes how certain funds became interested in the German economy in the 1980s and 1990s, both before and after reunification. Initially, looking at the balance sheets of German companies, they found their stocks to be drastically undervalued. But they discovered that German companies had different values: they were actually more interested in keeping more people at work than in maximizing the bottom line. Germany, of course, still focuses on such things because Germany, more than any other modern nation, experienced the consequences of catastrophic political and economic failure, whose memory survives even though the adults who lived through Nazism are now dead. The western world now depends on Europe to keep sanity alive during the current crisis, just as, 80 years ago, it depended on the United States.

Friday, October 14, 2011

Occupy Wall Street

Some hundreds of people, most of them young, have been occupying a park near Wall Street for several weeks now, skirmishing occasionally with the police. Similar groups of similar sizes have sprung up in cities around the country. The group has issued manifestos about the evils of our current society, certainly with more than a grain of truth; but they have not made any specific demands, and they are not asserting anything more than the right to be where they are. Both they, and many of those who find them appealing, are proud of being non-partisan and even non-political, and some already worry that they will be "co-opted" by the Democratic Party in the way that, some say, an authentic Tea Party was co-opted by the Republicans. Because these protesters are in their heart on the same side of the political fence that I am, I wish I could find something truly encouraging in what they are doing--but I can't. What has happened to our country is not their fault, but sadly, I'm afraid the nature of their protest is another sign of how far we have fallen.

The most prominent list of demands, I believe, from the OWS protesters can be read here. It is an impressive and largely accurate litany of corporate malfeasance. I quickly counted 20 specific complaints, agreed with 14, and found 6 of them over the top. Nor, I think, is it really accurate to blame the state of America on corporations: many of our politicians are equally to blame, and not simply because of the debts they owe to corporations. The list was evidently drawn up to resemble the Declaration of Independence--but there is one difference.

The difference is that there is no punch line--no demand for specific remedies or political action of any kind. As such, it inevitably reminds me of some of the worst of late 1960s thinking--a conviction that society is intrinsically evil (which it was not) and that we can make it better simply by wishing it so. The manifesto includes no recognition that human nature might be to blame for many of our ills, much less any sense of how to control it. It simply calls for more assemblies and protests.

Strauss and Howe in 1993 identified the Millennial generation (born 1982-2002?) as the new Hero generation, parallel to the GI or "greatest" generation. But the GIs only became the heroes we knew thanks to Franklin Roosevelt and his cabinet, as well as the Lost Generation military leaders like Eisenhower, Patton, Bradley and the rest who led them into battle. The Boom and Xer generations have provided nothing like that for the Millennials, and it seems increasingly unlikely that they are going to do so. The GIs did some great things (and some not so great things as well) when they assumed power on middle age, but they were building upon the achievements of the preceding generations. The Millennials, sadly, are not being given that chance, and with government still being cut back, it's hard to see how they will be.

Nor am I anything but depressed by the new movement's aversion to traditional politics or either political party. That too is reminiscent of 1968, when so many concluded that there was no difference between Hubert Humphrey and Richard Nixon. Yes, the Democrats are nearly as in thrall to corporate power as the Republicans, but they do not share the Republican zeal for doing away with all levels of government in the United States. They are in touch with reality, which the Republicans are not. (We can hope, of course, that Mitt Romney, if elected, would revert to the sensible views he showed as Governor of Massachusetts, but that surely is grasping at straws.)

In a press conference last week the President tentatively embraced the protesters' concerns. I hope that this will be the beginning of something--that if the protests grow--and they really are very small now--they can move him to the left, and in turn supply him with a new cadre of shock troops for next year's election. But that is the best we can hope for. The United States is no longer capable--though it might at some distant point be--of embarking upon a great crusade to make a better world here at home, much less abroad. Our task now is to prevent things from getting much worse. To help, the protesters, I think, need a more realistic attitude.

Saturday, October 08, 2011

The historical profession and me

I have stayed away from purely academic issues for the most part here, despite occasional references to the state of the historical profession. I went into history to explore certain kinds of questions, and I have enjoyed doing so more than anyone will ever know. I am still at it and I will be, I trust, for many years to come. But it has been a struggle because of the Boomer-led transformation of the historical profession over the last 40 years, which, among other things, left no permanent place open in American university life for me. Regular readers might think a moment about exactly what that means.

I know some War College students read these posts, and one once took me to task in a comment for complaining about being there. I do not want to be misunderstood. In certain ways the War College was the ideal intellectual environment for me. It's the only place I know of where you have to know a great deal about a great many different things, and the only place where you are paid to think big. Since, as you know those were always my natural tendencies, that was a good fit. It does have its own problems, however, of which repetition is the biggest, and after 21 years, I will be leaving at the end of this year.

For the last 17 years I have been a regular participant on an internet discussion group called H-Diplo. I am reproducing, below, the post I submitted yesterday morning, which has now appeared. It is self-explanatory. Regular commentaries will resume soon.

In 1994 or 1995 I made my first post on H-Diplo, and I have certainly been one of the most active posters—perhaps, indeed, the most active—for the last 17 years. This was, at the outset, a rare and rewarding opportunity for personal expression within a very lively intellectual environment. It has also been a forum within which changes within the historical profession could be observed. Sadly, many vital aspects of the list have changed. Although the American historical profession was well into its great and disastrous transformation by the mid-1990s, it was still in a transitional phase. Many posters in those days had been born well before the Second World War. Nearly every university or liberal arts college still included in its history department at least one genuine specialist in American diplomacy, and very possibly, a scholar of European diplomacy as well. They had been trained to address, research, and study great questions of war and peace, and they had done so. They took their own and others’ opinions on those questions very seriously, and they enjoyed discussing these questions in a frank, if generally friendly spirit. I myself belonged, I can now see, to the dying days of that tradition, having earned my Ph.D. in 1976. By 1991 the vagaries of the historical profession had landed me here at the Naval War College. The internet in general, and H-Diplo in particular, arrived just in time for us to take advantage of it, and for some time, we did.

Those who take the time to go through the H-Diplo logs in the mid- and late 1990s will find, I think, a record of extraordinary intellectual vigor and curiosity. We had very long debates on major historical questions, including the decision to drop the atomic bomb, the origins of the Korean War, the reason that Pearl Harbor was such a surprise, and many more. In 2002-3 we had a long and heated discussion about the forthcoming war in Iraq. We were also joined, from time to time, by non-historians who brought something different to the discussions. The prominent neocon David Horowitz posted for an extended period. The convicted spy Morton Sobell appeared briefly at one point to proclaim his innocence—a position he has now recanted. Most importantly of all, perhaps, the historians and political scientists who posted regularly did not feel bound to confine their comments to their research specialties. We had been taught that historians have opinions on every major question, and we expressed them. Of the historians who made the list go in those days, only two seem to be left: Ed Moise and myself. And we appear much less frequently than we did then.

Later in the 1990s, if I am not mistaken, H-Diplo became the site of a series of very heated discussions about postmodernism, whose value I and some others sharply questioned. It was now clear that history was at a serious turning point indeed. I had been taught that historians used the fullest possible documentary record to make the best judgments they could about what actually happened. Now a new view was taking hold: that arguments about knowledge, as Joan Scott put it in a celebrated article, were about the interests of groups, not the opinions of individuals, and that everyone was free to reshape the past based in large part on identity politics. The arguments over this position raged for several years and I think they were intellectually productive. They have however now died down, as a younger generation that grew up with postmodernism has come to the fore.
Indeed, it seems that H-Diplo is no longer a discussion forum—it is an online journal. I do not in the least mean to slight the work of the moderators who have done a thankless job very well for all these years. The trouble is with the posters, not the moderators. A new view of history has triumphed, one which indeed denies the existence of any single truth. (I am not suggesting that truth is ever easy to find, but I do believe it exists and is well worth looking for.) Everyone, it seems, is entitled to his or her own small plot of intellectual land, within which he or she can develop a particular variety of history. A general non-aggression pact among the practitioners prevails. The idea that certain books are superior in research, argument, or scholarship to others has become most unfashionable. Dissent from these views has not in fact died out, but it has shrunk to the point that it can safely be ignored. I recall that sometime in the 1990s I tried to start a thread entitled, “What Makes a Great Historian?” I put forward some ideas of my own, but that post never drew a single reply of any kind. That question, however, has continued to interest me deeply, and that is probably the reason why I am now well into my seventh book, each of them on a very different topic from all the rest. It has occurred to me, by the way, that several of my favorite historians, including Henry Adams, W. E. B. Dubois, Charles A. Beard, and Luigi Albertini, had either a fleeting involvement in the academy or none at all. Perhaps there is a lesson there too.

The last time that I made a post questioning the conclusions of a book that had been the subject of a roundtable, I received six emails within 24 hours thanking me for what I had said. I asked each correspondent to think about posting their views on the list. Not one of them did. That is another feature of the current historical profession: historians (and political scientists) are afraid to take a stand. Having grown up with the idea that history is controversy, I am very sad about that. More recently, in a perfectly friendly spirit, I raised a serious question of fact arising from another roundtable. No one responded publicly or privately to that one. I am quite certain they would have 15 years ago.

I would like to close with two broader comments. First of all, it is a paradox that serious archival work involving exhaustive research has fallen out of fashion at a moment when the opportunities to do it are exploding. The digitization of history is a godsend to historians. The Proquest historical newspaper data base, for instance, could allow historians to write political history of a kind that would have been impossible in earlier ages. Other aspects of computer technology, particularly the excel spreadsheet, have enabled me, in my last project and in my current one, to collect, store, and organize data on a hitherto undreamed-of scale. I regret that I have had no opportunity to pass these new techniques on to younger generations of historians. On several occasions I asked friends in history departments if I might give a presentation about them, but that never happened.
My second point involves the relationship of the historical profession to politics. It is commonly asserted that left wing politics dominate the academy and the historical profession, and in a sense that is surely true. Yet I am convinced, as a lifelong student of American politics, that the changes in the academy have benefited the political right far more than the political left. Because the historical profession is no longer interested in the doings of the rich and powerful, but only in the lives of the marginalized, universities have turned out a generation of undergraduates lacking the intellectual tools to understand the world around them. One cannot understand the great crisis the United States and the world are now passing through without detailed knowledge of the American Civil War, or the Depression and the Second World War, but such knowledge is increasingly unavailable on college campuses. And because we do not understand those crises, we have been, to date, almost completely unable to cope with this one in a useful manner. The right has never lost interest in American politics and in how things actually work—and it shows.

H-Diplo probably made me better known within the historical profession than anything I have written. (My books made me better known outside it, of course.) I made more than a few friends here, and I know that many people found things I said useful and encouraging. (I would warn them against believing, however, that ideas like mine have any place in contemporary history departments.) I am continuing to write the kind of history I believe in and I am sure that I will do so for a long time to come. I also have an additional year of teaching at an excellent liberal arts college, where I know from recent experience that the students want what I have to offer, to look forward to. After that, however, my professional career—not my writing career-- will come to an end. I shall try to keep the best historical traditions alive, and I am very satisfied with what I will have left behind.

This will be my last post on H-Diplo.

Sincerely yours,

David Kaiser

Saturday, October 01, 2011

A Prophecy from 1970

To remain intellectually active and interested in essentially the same subjects for four or five decades opens up a broad field of rare pleasures. The books that moved you 40 years ago not only retain their original value, but add new dimensions in light of subsequent events. One such, which I finally picked up again a couple of weeks ago, was Gary Wills's Nixon Agonistes, which grew out of reporting Wills, then a recent convert from National Review conservatism to liberalism, had written for Esquire. Wills had a good Jesuit education,a doctorate in Classics, an eye for character and detail, and a flexible mind. I have been amused to note some slips that got by his editor--Woodrow Wilson died in 1924, not 1921, and Senator Millard Tydings lost the general election, not the primary, to a McCarthy-backed candidate in Maryland in 1950--but Wills has indeed filled the gap left by the modern historical profession since the death of Richard Hofstadter at about the time Nixon Agonistes was published. Despite his lack of formal historical training he became a history professor at Northwestern University in 1980, and has written long books of varying quality on Ronald Reagan, Thomas Jefferson, Henry Adams, and John Kennedy.

The theme of Nixon Agonistes, which I remembered well, was that Nixon was entering office just when the Awakening (Wills did not use the word, but much of the book is about the phenomenon) was destroying the values of his America once and for all--that Nixon's self-discipline, iron control of his negotiations, and belief in very man as master of his fate had become obsolete in the dawning Age of Aquarius. And I thought the point of this post would be how wrong Wills had turned out to be--that in fact, Nixon, following up on Goldwater's doomed campaign of 1964, had begun the revival of those values that has continued almost without let-up ever since, and that threatens today to return us to the late 19th century. I may develop that idea in a later post, but as it turned out, the first few chapters of the book, about the campaign of 1968 and Nixon's campaign in particular, gave me more than enough to talk about.

It is clear, reading Wills, that Nixon and those around him--who in 1968 included both William Safire and Pat Buchanan--were the founders of modern Republican campaigning. Drawing on Nixon's early campaigns and even on his own words in the first of Nixon's three autobiographies, Six Crises, Wills notes that Nixon always thrived upon the attack. He was elected to Congress in 1946 by tying incumbent Jerry Voorhis to Communism, and to the Senate in 1950 by doing the same to Helen Gahagan Douglas. He was the Republican attack dog in 1952, referring to Adlai Stevenson's Ph.d from Dean Acheson's "Cowardly College of Communist Containment," and he complained bitterly in Six Crises that he lost the election in 1960 because he had to defend, rather than attack, an Administration's record. "Every campaign had taught Nixon the same lesson: mobilize resentment against those in power," Wills wrote. Three subsequent generations of Republicans have taken that one to a new level, railing ceaselessly against "the government" even when they are running it.

More subtly, Nixon in 1968 actually articulated the strategy subsequently adopted by Karl Rove, who, let it be remembered, was already a leading Young Republican by 1972. (One of the keys to recent American political history, by the way, is that while the Young Republicans were spawning Rove, Abramoff, and later Grover Norquist, the Young Democrats had essentially ceased to exist, read out of existence by Lyndon Johnson because of their opposition to the Vietnam War.) In May 1968 Nixon gave a radio speech announcing his plan for "A New Alignment for American Unity"--an alignment, not a consensus. Nixon actually claimed that 1968 would be for the Republicans what 1932 was for the Democrats--and while the temporary allegiance of southern whites to George Wallace hid the magnitude of what had happened for another four years, he was right. Nixon explained that his new alignment would include five groups: 1) traditional Republicans, 2) younger liberals who wanted "participatory democracy," 3) the new South, "interpreting the old doctrine of states' rights in new ways," 4) black activists looking for opportunity rather than welfare, and 5) "the silent center, the millions of people in the middle of the American political spectrum who do not demonstrate, who do not picket or protest loudly"--in other words, older Americans disturbed by black militants, student protests, long hair, rock-and-roll, youthful premarital sex, and all the other manifestations of the Awakening.

What was critical, as Wills noted, was that these groups had nothing in common. The second and fourth, indeed, were included for show--Nixon never drew significant support from either--but the other three were united by different resentments against the establishment, now symbolized by the Democratic Party. Nixon nearly lost the election because the New Deal coalition was not yet dead and because Wallace took away so many votes in certain key northern states--but had Wallace won enough electoral votes to deny him victory, we know now that Wallace would have offered them to the candidate who promised concessions on school desegregation, and Nixon, not Humphrey, would surely have found a way to pass the test. Karl Rove later raised this strategy to a high art, looking for angry groups of undiscovered voters who could be won over by coded appeals about their favorite issue.

The book also opens with a description of a Wallace rally in Maryland. (I attended a Wallace rally myself later that year on Boston Common, where the protesters far outnumbered Wallace's supporters, moving him to suggest that Massachusetts needed a busing program to bring some balance to the political scene.) And Wallace, too, emerges a founder of key aspects of modern Republican politics. "The press says we're some kind of uncivilized racists," Wallace said, prompting his supporters to shake their fists at the press section. "Oh, not these boys," said Wallace. "They're hard-workin' reporters. I love these folks. It's their editors, back in offices, that write all that stuff." Wallace supporters came out because they thought they had no voice in the mainstream media, which in those days truly had power. This, too, was the start of something big.

Yet let us not rhetorical similarity blind us to the very real changes that have transformed the Republican Party and our politics since then. Nixon was always looking for effective political tactics. "Let's get a woman on the ticket," he said to William Safire just before his death in 1994. "It hurts the Democrats, but it would help us." That was Nixon the pro, who fought dirty campaigns in order to govern. In office he went with the flow on domestic policy, signing the bill that created the EPA, and his pursuit of detente resembled no other President so much as his great rival Kennedy. He neither attacked nor tried to undo the New Deal or the Great Society--indeed, he made social security benefits high enough to live on for the first time. For today's Boomer and Gen X Republicans attacks upon government are a religion, not a tactic, and they will not rest until they have either undone a century of American history or been marginalized by a change of opinion. They also lack all self-discipline--they will do anything to serve their cause and beliefs and pay no attention to the consequences.

Wills did not confine himself in his great work to Nixon and the right; he discussed the new left at great length as well. They would be equally influential in other spheres--but that's a topic for another week.

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