Woodward once again

Although Bob Woodward's new book, The War Within, is selling briskly, the economic meltdown (which I absolutely expect to continue despite the bail-out passage) and the election have diverted attention from it and, more importantly, from the situation in Iraq, upon which John McCain had counted to ride into the White House. For me, however, it is a source of extraordinary interest for at least four reasons. First, even though I work for the Department of Defense myself (albeit about 400 miles form Washington), I had no idea that the senior leadership of the American military during 2005-6 was just as eager to get American troops out of Iraq as I was. Secondly,it seems that as a result, something close to a coup d'etat was required to end run the entire civilian and military bureaucracy and put in place a new strategy--the surge--that had been written at the 99.44% pure neonconservative American Enterprise Institute. And thirdly, I did not realize that while I was writing in 2005-6 that the Iraqi experiment in democracy was obviously fragmenting the country into three parts, well-placed Americans who had the opportunity to see for themselves--led by the Baker-Hamilton commission--were reaching exactly the same conclusion. And last but not hardly least, I have correctly identified the critical issue for American foreign policy in the next ten to twenty years: are we going to continue to hopeless effort to dominate the Middle East by force, or not? Even in the last year of his Presidency, George W. Bush has proudly done everything he can to try to ensure that the answer is yes.
By late 2005, when Woodward's book begins, the Iraq adventure was clearly not going as planned, but the military--led, ironically, by Donald Rumsfeld himself--was focused upon winding it up. They took comfort, apparently, from Presidential propaganda about the success of the Iraqi elections--elections which I immediately recognized as unmistakable signs that Iraq was breaking apart--and began planning a substantial withdrawal of American troops by the end of 2006. General George Casey, the commander in Baghdad, was outraged in October 2005 when Condoleezza Rice announced that our strategy was "clear, hold and build," because he knew the last two verbs were well beyond our capabilities. General Peter Pace, the Chairman of the Joint Chiefs (and thus by law the President's chief military adviser)apparently felt the same way. The assumption that the war would soon be winding down was a convenient excuse for avoiding any serious thought about the tactical problems American troops faced, much less the long-term future of Iraq, which, the conventional wisdom held, would be the business of the Iraqis themselves. That, combined with the President's compulsive aversion to self-doubt, stopped any serious re-evaluation of what we were doing for the next year and a half, as civil war and ethnic cleansing came to dominate Iraqi politics. When Stephen Hadley, the new National Security adviser, started a review in the second half of 2006, he had to keep it a complete secret. Knowledge that the Administration was questioning itself, many felt, would be devastating in the November elections. (An apparent failure to question itself, in the event, proved equally damaging.)
The Baker-Hamilton study group was, as I wrote at the time, an attempt by an aging establishment (composed entirely of members of the Silent generation) to restore sanity to American foreign policy. Traveling to Iraq and speaking to the Iraqi leaders, they found absolutely no real interest in national reconciliation, especially in Prime Minister Maliki's Shi'ite domianted government,which viewed Sunnis as the problem. They did not dare recommend encouraging the partition of the country, knowing that would not possibly accept it, but they did recommend a rapid wihdrawal.
They were not alone. Condi Rice and her senior aids at the State Department had reached a similar conclusion: that the Iraqi government was failing and the United States had to put more power in its hands. A team of highly regarded Army colonels, convened by the Joint Chiefs to review the situation, did not favor more troops, nor did the Joint Chiefs or General Casey. The man who did more than anyone else to make the surge happen, apparently, was a retired Army Lieutenant General, Jack Keane, who had been a favorite of Rumsfeld and a mentor to General Petraeus. Keane in 2006 was a member of the Defense Policy Board, whose functions are not entirely clear, and began pushing the case for more troops and a counterinsurgency strategy in Iraq in a private meeting with Rumsfeld in September 2006. Keane then suggested the colonels' review to Pace, but it did not produce the kind of reommendations he favored. By the end of 2006 senior Republicans and officials were asking President Bush to stop using words like "victory" and "win" about Iraq, but he refused. Instead, Hadley realized, as the situation steadily deteriorted in late 2006, that the President wanted more troops, and set about finding anyone who could draw up such a recommendation, starting with William Luti of his own staff. But in the midst of the deliberations that fall, General Keane discovered a new planning shop led by Fred Kagan, a political scientist and close friend of William Kristol, in the American Enterprise Institute.
Going outside the government for support, Hadley on December 11, 2006, brought in five outside experts--two of whom, academics Eliot Cohen and Stephen Biddle, who had once been students of mine. Cohen and Biddle (the latter of whom I have not spoken to for some years) both recommended more forces. Keane made the most sweeping presentation, essentially coming across as an alternate Chairman of the JCS. Calling specifically for five brigades in Baghdad to pursue a counterinsurgency strategy of living among the population. He also urged the President to ignore the argument that this would break the Army and the Marine Corps, even though it was going to require longer tours and shorter rest periods back at home. Two other retired Army generals disagreed, but Keane and Kagan also briefed Dick Cheney. Keane was also instrumental in securing Petraeus's command. With Bush clearly favoring a surge, everyone fell in line. Woodward also confirms my own long-held feeling that no one can work with George W. Bush who does not accept his world view and, more importantly, his own self-image as a determined, heroic leader. In Hadley's case this takes the form of hero-worship. Rice is more subtle but always finds a way to come around. In this case she was highly influenced by an Arab summit she attended in the fall of 2006, in which our Gulf allies lamented that we were about to withdraw, essentially hand Iraq to Iran, and even make peace with Iran over their heads.
The surge led initially, as I pointed out at the time, to heavier fighting and the heaviest American casualties of the war, but things have quieted down dramatically in the last year. Kurdistan is essentially independent; the Maliki government does seem to have established its authority more effectively in Shi'ite areas; and Sunnistan has become, essentially, an American protectorate. Sunni tribal leaders have been induced by the presence of American forces and a steady flow of American money to give up their own insurgency, at least for the time being. Yet there is still little evidence of actual reconciliation between Sunni and Shi'ite or Sunni and Kurd--and therefore, no indication that anything has been built up that will survive an American withdrawal. Army and Marine officers generally believe that one is inevitable no matter who wins the election. A glance at icasualties.org shows that Iraq remains very violent and very divided.
Woodward's book includes on appalling mistake. Referring to now-retired Admiral Fallon on p. 351, Woodward writes, "Fallon was haunted by the 1975 decision by Congress to cut off all funding for the Vietnam War. Like many others, including president Gerald Ford, he felt that the funding cut forced too early an American exit." Both Fallon and Woodward ought to know that Congress never cut off all funding for South Vietnam; it reduced the requested appropriation in 1974, a year and a half after the Paris peace agreement that was supposed to lead to political compromise in the South, and then refused an emergency request in the midst of South Vietnam's collapse in 1975. Conservatives have been blaming the Congress for the loss ever since, but it was the political and military failures of the South Vietnamese government that doomed it. Something similar may well happen in Iraq, but that will only be because Iraqis either could not or did not want to bring about the outcome we desired. That was the real problem in Vietnam.

The book concludes with remarks pregnant with significance. General Petraeus had expected to leave Baghdad for the NATO command in Brussels. But when Admiral Fallon--who never accepted the absolute priority of Iraq, much less war with Iran--was let go last spring, Petraeus's mentor General Keane--surely the most influential general of the decade, if Woodward is to be believed--urged to him to take over CENTCOM instead, claiming that the international center of gravity was now in the Middle EAst. "We're going to be here for 50 years minimum, most of the time hopefully preventing wars, and on occasion having to fight one, dealing with radical Islam, our economic interests in the region, and trying to achieve stability. . .Where should we have bases? Where should we have prepositioned equipment? Where should we have forward industrial bases? Because it doesn't make any sense to keep sending that shift home?" Petraeus has now taken the job. Last April, Keane bluntly told Secretary of Defense Gates that with Petraeus at CENTCOM and his deputy Raymond Odierno in command in Iraq, and Democratic Administration would have to face a higher political price if it wanted to withdraw in 2009. Keane, in short, wanted to lock the strategy in regardless of the views of the American people.
In farewell interviews with Woodward, the Secretary of State and the President expressed similar views. Rice (who also disclaimed any responsibility for the initial failures in Iraq) began by repeating the classic neoconservative administration line about the Middle East--that the status quo in 2001 had been so dreadful that any measures to overturn it were justified. She reiterated that Iran must not secure nuclear weapons, arguing, bizarrely, that an analogy with the Soviet Union would help understand this: "The Soviet Union became nuclear before it became powerful," she said, ignoring the impact of the Second World War, which had brought Soviet troops to the heart of Europe where they would have remained for half a century with our without nuclear weapons. "Before we re-stabilize the Middle East," she said,"let's be careful that we don't just lock in bad deals. . .I don't want to make a grand bargain with the Ayatollah Khamenei and Ahmadinejad because that grand bargain is going to be a kind of least-common-denominator view of what the Middle East ought to look like. . . .Let's say we have to live with the Iranian revolutionary state for some time. Would Ir ather live with the Iranian revolutionary state with American forces in Iraq, Afghanistan, the Gulf and Central Asia? You bet." (Here is one historian who does not believe the people of the Middle East will ever accept long-term American presence, and that therefore, such strategies will continue to erode our position.) And echoing Keane, she said that the "epicenter" of American power has now shifted from Europe to the Middle East. "We didn't come here to maintain the status quo," she said. "And the status quo was cracking in the Middle East. It was coming undone. And it was oging to be ugly one way or another. And it just might as well have been ugly in a good cause. And now, with the emergence of Iraq as it is, it's going to be bumpy and it's going to be difficult but big. Historical change always is." President Bush, too, confirmed that there was "kind of a recentering of American power in the Middle East, and once again compared a troop presence there to those in Germany and Korea.

Neither Rice nor Bush would accept the word, but Keane (whom I have never met) sounds ready to admit that he wants an American empire in the Middle East for some time to come. I remain convinced that the absence of serious threats in more developed regions of the world, the salience of the Israeli-Palestinian issue in American politics, and the conservative obsession with confronting America's enemies have enormously distorted ou strategic priorities and given us a decade of military involvement that cannot possibly have a good result. That will be a subject for more commentary in the coming months and years. Meanwhile, I must thank Secretary Rice, whom I have never met, for confirming so much of what I have thought, and argued, about the unshakable self-confidence, the hubris, and the destructive impulses of the generation of Prophets to which she, I, and the current President of the United States all belong. Perhaps come next year a younger leader will be able to harness some of these qualities in a better cause.

Into the Wild

One era died today, but the shape of the new one remains completely unknown. The House's failure to pass the bail-out signals the utter bankruptcy of our political system--a drama in which two generations have certainly acted entirely in character. Boomer Henry Paulsen, a former Wall Street titan, took charge of the situation--as Donald Rumsfeld had taken charge of foreign policy for George W. Bush after 9/11--and announced he needed total powers. The Silent Democratic leadership of the House of Representatives, led by Nancy Pelosi and my old friend Barney Frank, felt it essential to try to keep some cooperative spirit alive and give the Administration some version of what it wanted to avoid an economic class. But the Republican Boomers who dominated the House of Representatives from 1994 until last year, riding roughshod over all opposition in pursuit of their agenda, would not be stampeded. Lurking behind them were the American people, who probably have no idea what is in store for them--any more than northerners and southerners in late 1860 knew what the Civil War would be like--but who see no reason to reward irresponsibility and greed on Wall Street with $700 billion of their money. The plan failed, the market fell 600 points, and no one has the slightest idea what might happen next.

We shall probably never know, but in the long run the plan's failure might not be a bad thing. I strongly suspect Wall Street would have used the money to try to hang on to as much of their gains over the last 16 years as they could, without addressing many underlying problems. We were certain to have a major recession in any event, and the problem now is to find another engine--something very unlike subprime mortgages or new derivatives--to fuel a recovery. Hundreds of billions may well be needed, but they should in my judgment go into a new institution that can lend directly to the businesses and regular banks who need liquidity--and, perhaps, buy up and renegotiate some subprimes. Meanwhile, the recession may lead to a New Deal type of public works program to rebuild infrastructure, while greener power may play the role of TVA. All that, however, is at least a year away, and probably more, and the country will suffer economically for some time..

The old order is, for the moment, played out. Market idolatry has failed catastrophically but no new ideas have emerged to take its place. While Democrats (including Barack Obama) understand that Wall Street's days of running wild must come to an end, I don't think any of them have many ideas about restructuring our economy. That is both frightening and challenging. Many new politicians, economists, writers, and even journalists will make their names over the next ten years--largely by focusing on real events, rather than spin. That is the beauty, in every sense, of the crisis, the Fourth Turning, that the late Bill Strauss and Neil Howe first predicted 15 years ago. Their ideas have never won mainstream acceptance, but it is becoming more and more difficult to pooh-pooh them now--even though some posters here continue to try. The crisis is both death and rebirth, and thus a time to look forward more than back.

John McCain is in every sense quite an old face; Barack Obama is a new one. That alone has proven a big advantage this year, but Obama also has shown the kind of curious, flexible, clear-headed intelligence that we are going to need.

A colleague yesterday reminded me of another vote at another moment of national crisis, the extension (after only one year) of the draft in the late summer of 1941 that passed the House of Representatives by a single vote. I have suspected for a long time that that vote--like the Senate vote for war with Iraq in 1991--reflected political realities more than sincere opinions. A significant majority of the House knew the draft had to continue in 1941, but they also knew that it was unpopular, and the Democratic leadership (which predicted the outcome exactly) probably arranged things to allow the maximum possible number of popular "no" votes while doing what the country needed. That, for various reasons--including the weaknesses of the plan--was what the House leadership--and especially the Republican House leadership--could not do yesterday. That's an interesting sign of where we are.

I spent the weekend in New York, watching Act II of another drama in Shea Stadium with my son (a devoted Mets fan) on Saturday. On Sunday he returned and I had a few hours to kill. Scanning the movies, I discovered one dealing with the subject of one of my books: Virtual JFK: Vietnam if Kennedy had Lived. I had no idea what to expect, but as it turned out, the movie, narrated by political scientist James Blight, used archival footage and tapes to show JFK at his level-headed best, refusing again and again to lose his cool when reporters baited him with argumentative questions, and facing down the Joint Chiefs in October 1962 when they bluntly told him that war was his only alternative. The movie, which acknowledged no specific secondary sources, actually seemed to draw on American Tragedy while discussing the Laotian and Vietnamese crises of 1961, in which Kennedy twice rejected the near-unanimous recommendations of his advisers and refused to begin large-scale war in Southeast Asia then and there. I am very glad that it was made and I hope it gets some good television exposure. Few viewers, I think, could watch the film without being reminded of Barack Obama--and those of us over 60 can remember how Kennedy, too,was frequently criticized for being too cool, too unemotional, and too cautious during his Presidency. Those were in fact the qualities we needed then, and those we have now been lacking for so long. Obama looks like he can provide them.

p.s. From time to time those posting comments ask me questions. I don't think some people realize that comments do not reveal your email address and that I have no way to respond privately unless you give it. Please do.

No war with Iran?

In the midst of the worst economic crisis since 1929 and the worst political crisis since Watergate, an astonishing news story has come out in Britain (as usual), stating that President Bush, in May of this year while in Israel for the celebration of its independence—the same trip in which he gave the speech endorsing Bible-based Zionism which I commented on here—told Ehud Olmert that he would not approve an Israeli attack on Iran. This is quite extraordinary news, for at least three reasons. This has been reported in the Guardian.

To begin with, Sarah Palin, just yesterday, told Katie Couric that we should not “second-guess” anything Israel finds it necessary to do in its own defense. That is evidently what President Bush did, according to European diplomatic sources who have heard about it from Israeli sources, and it would interesting to ask her about this in the vice-presidential debate next week.

Secondly, it was only two months after this meeting that Benny Morris wrote his notorious op-ed in the New York Times, on which I commented at length, attempting in effect to blackmail the United States into joining an Israeli attack on Iran on the grounds that an attack that did not finish the job would lead to a nuclear war. One can reasonably infer that President Bush’s words to Olmert had something to do with Morris’s piece.

But most interestingly of all, this statement came a bare two months after Admiral Fox Fallon had to resign as CENTCOM commander, reportedly because he had expressed his opposition to war with Iran too forcefully. George F. Kennan, whose memoirs I was re-reading this week, commented that Secretary of State Dulles had to fire him from the State Department in 1953 because Dulles had no alternative but to follow the containment policy associated with Kennan’s name. In the same way, apparently, Fallon had to go because he was right, perhaps as a sop to neoconservative elements and to Vice President Cheney, who have favored war with Iran all along. (Bob Woodward's book, which I have now finished and will be discussing at length within a few days, suggests another explanation: that Fallon was let go because he did not agree with his subordinate Petraeus or his superiors about the absolute military priority of Iraq.)

Last night's debate was on the whole encouraging with respect to Obama's performance and prospects, I thought, but discouraging for anyone looking for a fundamental change in U.S. foreign policy. Obama agreed that Ukraine and Georgia should be in NATO as soon as possible and agreed on the need for missile defense (which remains useless against a real threat.) While he spoke in his closing statement about the decline of our prestige, he did not dare suggest that Russia was emboldened against Georgia by our own unilateral actions. I was shocked last week when a good friend suggested that Richard Holbrooke might be his Secretary of State, because I thought that we had dodged that bullet when Hillary Clinton lost. Clearly Obama is running as what passes for a centrist today on foreign policy and we will have to wait until when (and if) he is in office to find out whether he can restore some sanity in that realm.

Because of travel, this may be the last post this weekend, but I will make up for that Monday evening if necessary.

Sunday update

It is very difficult, obviously, to tell what the Administration's rescue plan actually means, but I was appalled by one quote in the lead story of the Sunday Times, from Alan Blinder, a Princeton economist and one-time member of the Board of Governors of the Federal Reserve. "If the plan works," the Times writes, "it will attack the central cause of American economic distress: the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.

“'It’s easy to forget amid all the fancy stuff — credit derivatives, swaps — that the root cause of all this is declining house prices,” Mr. Blinder said. “If you can reverse that, then people start coming out of their foxholes and start putting their money in places they have been too afraid to put it.'”

Prof. Blinder, let me suggest an alternative explanation. Subprime mortgages were the only way to create the housing boom, because the American economy has not distributed greater benefits to enough people (or built enough new houses) to allow people to pay for them legitimately. I don't see how what the federal government is doing can possibly re-invigorate the housing market, which needed a drastic correction anyway. I don't know how widely these views are held, but actually, the amazing rally on Wall Street late last week suggests that a lot of people think we'll be back doing business as usual within a couple of weeks. NOT.

On another front, I just discovered the following letter written by a physician. (Frank Rich confirms the story about the "release" of McCain's medical records today.)

Dear Colleagues and Friends,

John McCain is a 72 year old man with recurrent melanoma, hyperlipidemia, degenerative joint disease, and recurrent difficulty with certain efforts at recall. These are the limited facts the American people have had access to. Over 1000 pages of medical records were shown to selected journalists for 3 hours with less than 48 hours of notice. The only medically trained journalist was Sanjay Gupta, MD from CNN. This is the extent to which the American people have been informed.

While I am certainly sensitive to the confidential nature of medical records given the anxiety expressed by many of my patients regarding the risk of lost coverage or lost jobs in this current health economic climate, there are certain exceptions for disclosure regarding public safety. As John McCain knows, a pilot’s records are comprehensively available for review by a certifying agency (the FAA, I believe) to insure the fitness of the pilot and the safety of passengers and the public at-large. In the election of the President of the United States of America, that certifying body is the American electorate.

A recurrence of metastatic malignant melanoma would essentially destroy John McCain’s capacity as the Chief Executive and the American people have yet to receive a full accounting of the facts regarding his actuarial risk. If he has had regional metastasis, his risk could be 30% or greater for distant metastasis to the brain, bone, and lung. As you all know, melanoma is one of the most insidious, pernicious, and aggressive malignancies our patients must deal with and that we attempt somewhat pathetically to control with interferon, interleukins, and dismally active and terribly toxic chemotherapeutic regimens. In addition, we lack the simple data to sensibly evaluate his cardiovascular risk as we would any septuagenerian in our exam rooms.

John McCain should be held accountable by the American people and its agents, the free press, to release without restriction the entirety of his medical records. Any hesitation to do so would clearly imply that there are significant medical concerns about his ability to fulfill the duties of the President.

Sincerely,

Michael D. Fratkin, MD
Internal Medicine
Hospice and Palliative Medicine
Eureka, California

Don't miss the longer post, below.

The Sky Falls, at Last

About 12 years ago, when I discovered Bill Strauss’s and Neil Howe’s book, I began a sustained campaign of evangelism among my friends, family, and students. Some of them (such as my son Tom, who was only 14 at the time) got the point immediately. Others have remained profoundly skeptical. As I have already mentioned, my review of The Fourth Turning in the Boston Globe in 1996 remains the only really favorable review that they got from any mainstream media outlet. I tried in the late 1990s to present their ideas to the American Historical Association in a panel, but that august body turned the proposal down. Several years later we did have such a panel at the Historical Society. I think that this week, even the most skeptical of my friends and family will have to admit that yes, they did have a point. The United States (and other nations) are destined to have a profound crisis every 80 years or so—and this is it. The subject of its nature, likely course, and possible results could, and will, fill many books over the next 30 years or more—that is, for the rest of my life—and will undoubtedly fill up a lot of posts in this space. As I have already suggested, the crisis—brought about, over several decades, by my own Boom generation—has resulted from fundamental aspects of our generational personality, including both an extreme feeling of entitlement and a contempt for our parents’ achievements. Its effects are visible in academia, industry, and government, as well as on Wall Street—and I personally know a lot more about their role in academia and government than in the financial world, where I lack real expertise. Still,.I remember a good deal of the economics I learned in college, and the news this week, combined with numerous revelations about contemporary financial practices over at least the last ten years, allows me to speculate, I think, about what has happened. I suspect that, as Joseph Nocera writes in today’s Times, things are actually quite a bit worse than they seem. I shall try to outline the story as I see it.

I have been reviewing four years of posts in preparation for publishing a collection, and I am astonished by how much of this I managed to anticipate at one time or another. First of all, in my review of Kevin Phillips’ book, American Theocracy, I stressed one of his main points—that the financial sector of the American economy had increased its share of our GDP to totally unprecedented proportions. In the 1920s Wall Street lived off of American industry, and the heads of giant manufacturing and transportation corporations rivaled, if they did not surpass, the financial titans of New York in influence and power. That has not been the case for many years. While Bear Stearns, Lehman Brothers, Goldman Sachs and the rest of them handed out multi-million dollar bonuses and hired a large proportion of the graduates of our best colleges every year, Ford, GM, US Steel, our textile sector, and even our transportation industries have been shrinking, cutting their work force, and fighting off bankruptcy. The new products that have fueled economic growth haven’t been automobiles or durable household goods (more and more of which are produced overseas), but derivatives and sub-prime mortgages. Phillips noted, too, that this trend has gone much, much further in the United States than in other major industrialized countries. All of this, of course, was celebrated as proof that we were on the cutting edge. It also enabled us to run huge trade deficits, because foreign countries were only too eager to take advantage of the supposed new financial bonanzas on Wall Street, too.

I strongly suspect that within twenty years the collapse of Enron will loom as the harbinger of the much larger disaster that is now overtaking us. The Enron managers were touted as geniuses because they created new assets to trade—various kinds of energy futures and derivatives. They succeeded brilliantly for years because they convinced financial managers with money to invest that they were worth buying. They turned out to be completely worthless. And that, I am sorry to say, seems to be the drama that is playing itself out now on Wall Street. Here, as far as I can tell, is what has happened.

With interest rates so low for the last four presidential terms, the country has apparently been awash in capital. (In the old days, of course, a country with balance of payments problems like ours would have had to raise its rates to attract foreign capital and reduce borrowing somewhat, but in the age of globalization, such restrictions have been held to be obsolete.) The problem for astute Wall Street investment bankers has been to find new assets in which people—and, more importantly, institutions—could invest. The great discovery of the last five years or so, of course, was subprime mortgages, which allowed Americans to borrow trillions of dollars that they could not afford to pay back, based upon the idea that the value of the houses they were financing would constantly increase. What I suspect—and I would welcome any information from those on the inside—is that, for investment bankers, the long-term prospects of such loans were much less important than the process of closing the initial deal, because that is where they make their money. They are essentially brokers on a large scale, whose income comes from transactions more than from profit and loss. And of course, the mortgage loans themselves were only the beginning of the story—those loans were then bundled and then sold as securities, generating more commissions, higher stock prices for their firms, and—critically I suspect—higher bonuses for the top people in the firm. (Earlier in this decade, I participated in a largely successful campaign to reduce the compensation of the men and women who managed the Harvard endowment, and who were receiving multi-million dollar bonuses every year based on the appreciation of the assets they managed. Such deals have become the norm among money managers—and without specifically accusing those at Harvard, I think they must inevitably lead to the overvaluation of assets. They are, in short, one reason why no one knows how much the assets of financial institutions are worth as I write this morning.)

The other massive problem—an echo of 1929—is leverage, or, as it used to be called on the stock market, margin. In 1929 one could buy $100 worth of stock for $10, borrowing the rest and listing the stock (which, of course, everyone knew would rise) as collateral. When stocks crashed the collateral vanished, and bankruptcies and suicides resulted. I well remember my Economics 1 section man in 1965-6 explaining that margin was now at 50%. But the new financial sector represented by the investment banks (not to mention totally unregulated hedge funds) has not had to face such tough restrictions, and in the last four years—for reasons that will eventually come out—they have been allowed to leverage on an unprecedented scale. Nocera writes today that in that period the allowable debt ratio has risen from 12 to 1 to 30 to 1. Using my historical analogy, that means that the situation was about as unstable in 2004 as it was in 1929, and that it is three times more unstable now. The results of a crash may be correspondingly worse.

This morning Joseph Nocera identifies the heart of the problem as the billions or trillions of dollars in mortgage-backed securities held by our major financial institutions—the assets whose value is now in question, and which the new Bush Administration rescue plan intends to buy. (I need clarification on this point. A lawyer involved in finance told me yesterday that the rescue money actually will go to buy up the bonds issued by the financial institutions to borrow the money they needed for 30 to 1 leverage—a plan that would not reward the firms. But that isn’t what Nocera thinks—he thinks the government is going to buy the assets from the investment banks. In fact, it may well be that no one knows the true answer yet.)

Nocera gets to the bottom line late in his piece. Everyone knows that the mortgage-backed bonds held by financial institutions here and elsewhere are overvalued—but by how much? He suggests, in effect, that they are overvalued by at least 50%, and maybe by 80%. If the government decides upon the latter figure, firms may go bankrupt even if the government buys them. But he is shying away from the worst case—what if, like shares on Enron, they are actually worth nothing? That is a possibility that I don’t think we can exclude—and if it is true, I don’t see how we are going to avoid a real financial collapse. (Nocera himself, without going as far as I just did, is skeptical that the current plan can work.)

And then, as if this were not enough, we have further hundreds of billions of credit default swaps lying around in financial institutions—perhaps the most mindless evidence of eternal optimism at all. No one will admit to understanding exactly what these are, but they seem to be insurance against the failure of investments. Now insurance works, I believe, when it pays off on catastrophic outcomes which, in the nature of things, only happen to a small number of policy-holders every year. The credit-default swaps, on the other hand, seem essentially to have been insurance against a financial downturn—something which by its very nature affects everyone at the same time, and which is bound to happen sooner or later. It’s rather like starting a life insurance agency for people who smoke, weigh too much, and practice extreme sports. This was one brilliant financial instrument no one in 1929 even dreamed of.

Globalization may be another casualty of the crisis—as it was in 1929-32. Preliminary reports this morning suggest that the Treasury Department has no plans to buy up worthless assets in foreign hands—and they must be at least as numerous as those here in the US. If we stick to that plan we are very likely to face some form of economic retaliation. And, in contrast to every economic crisis of the second half of the twentieth century, the leading powers of the world are not going to feel it necessary to give the U.S. a break because we defend and promote world stability. We have become the main threat to world stability in the last seven years.

All this feels so much like the great depression that I wish I could talk to someone who lived through it, at least as a young adult. But I can’t—that generation has passed away. That, of course, is part of the generational dynamic that makes these catastrophes take place. Those who had lived through one depression were determined to prevent another—and they did. Their children, like front line soldiers going into battle for the first time, assume it can’t happen to them—so it does.

The illusion that financial manipulation can actually create new wealth will eventually emerge, I think, as the great failing of the late twentieth century. We will have to relearn that real wealth comes from actual production of goods and services, and redesign our economy and our educational system so as to draw more of our best and brightest into endeavors that involve real products. That will be the great task of today’s younger generation, and they will enjoy it. Meanwhile, hard times are ahead—but so is, perhaps, our eventual rebirth. Having squandered our inheritance, the Boom now has to do what we can to bequeath to our sons, daughters and grandchildren a world with some of the safety, stability, and common sense of the one in which we grew up—so that the whole cycle can begin over again.