Tuesday, December 22, 2009

Careful What You Wish For

Today’s Wall Street Journal editorial urges the Obama Administration to catch up with events in Iran and make it American policy to support and encourage the so-called “Green Movement” (democracy movement) rather than continue to give legitimacy to the Ahmedinejad government.

The Obama Administration has deeply committed itself to a strategy of “engagement” with the Ahmedinejad regime, and has specifically and pointedly rejected the approach of the Bush Administration, which was to seek regime change, in part through encouragement of democratic and dissident elements in Iran. To make such a change of policy, the Administration would either have to (i) develop courage and a moral clarity which is fundamentally inconsistent with its previous appeasement policy (and the cowardice and moral relativism on which it is based) or (ii) conclude, through a political calculation, that the odds of the Green Movement’s success are so great that it is time to get on the bandwagon and try to claim credit for the result.

I leave to you, dear reader, to judge the likelihood of the former. That latter is a practical impossibility because, in the swirling fog of “intelligence” concerning fast moving events (which are inconsistent with previous “intelligence” assessments), it will never be possible to reach the level of confidence necessary for such political calculus, about the inevitability of the fall of the Iranian regime, until it is virtually a fact.

Of course, I can easily imagine the Administration “hedging its bets” by saying something vague about human rights or the importance of democracy, in order to be able to later claim that it was supportive, in the event the Green Movement prevails. But don’t look for the Administration to take any step that would jeopardize (God forbid halt) its “engagement” track.

If the Ahmedinejad government truly feels threatened, it may seek further legitimacy by offering the possibility of concessions in the nuclear talks. Supporting the Green Movement would mean choosing not to be lured by such offers into an unclear, unenforceable nuclear compromise with this Iranian government, but rather choosing this moment to stiffen our negotiating stance; becoming progressively more insistent that the only thing that would be acceptable would be a complete and verifiable end to all nuclear activity, a destruction of all existing nuclear facilities and a complete accounting of all past activities and uranium inventories and international control of all uranium stockpiles. Does that sound like something of which this Administration is capable? Don’t forget, with the widespread criticism of the Administration’s failure at Copenhagen, the Administration will be desperate for any foreign policy success. In this circumstance, it takes courage to refuse to eat the proffered fruit of an unholy bargain with the devil.

If the Administration did decide to “help” the Green Movement, the Movement would enter an even greater zone of peril (if that is possible). This is because such a policy move could never be kept covert, and the downside to the Movement (giving credence to the Iranian Government’s attempt to tar the opposition as traitors and unpatriotic) would outweigh the feeble, halting, on-again off-again, just-enough-rope-to hang-oneself, style of support that comes from policies created by “nuanced” political calculation.

The Iranians should remember the fate of the Iraqi Shiites who rose up, at the urging of the Bush 1 Administration, after the first Gulf War. That Administration “calculated” that the possible resulting break-up of Iraq was too problematic for our interests and concluded that Saddam was fatally weakened by the war anyway, and therefore doomed to fall very soon to a more pliable Sunni Iraqi leader (who could maintain Iraqi unity).

No administration can be expected to develop the focus and single-mindedness of purpose that is necessary for a reasonable chance of success of a foreign policy initiative which is predicated on fundamental principles that that administration does not embrace. This Administration does not cherish the idea that individual political and economic freedom from an intrusive and paternalistic state power is a transcendent good, without regard to whether that power is, for the time being, benevolent or malevolent. Accordingly, I believe that any Obama Administration initiatives in the direction urged by the WSJ will be incompetent flops and, almost certainly, more harmful than helpful to the Green Movement.

In short, anyone who truly cares for the interests of the democratic dissidents in Iran should not urge the Administration to “help” them. They should pray to God that the Obama Administration dithers.

Wednesday, December 16, 2009

The Paulson Dilemma - Part 2

In my piece entitled “The Paulson Dilemma”, posted, I am ashamed to say, on June 8, I promised a follow-up “in my next posting”. Since then, what I intended to say has become more obvious as the anti-Wall Street populist demagoguery has ratcheted up, and the banks who received (or were forced to take) TARP money and other Government help have been trying to move heaven and earth to pay back the TARP money and get out of the Government bear-hug.

In “The Paulson Dilemma” I suggested (and tried to show) that 1) free-market financial systems naturally create increasing “systemic risk” during long periods of “good times” and 2) politically, no government which has the executive authority to intervene in the financial markets, regardless of its political philosophy concerning economics (i.e.” laissez faire” or statist or anywhere in between), will stand by and do nothing in the face a financial crisis which seems to pose a “system risk”.

From these two propositions, (and the unstated but known tendency of all government bureaucracies, once in control of anything, to tend to continue in that control) I erected the straw-man question: are all free-market financial systems destined to be transformed into non-free market extensions of the central government (including, for this purpose, the central bank)? I suggested that I would take the contrary view in my next posting. Here goes.

With any government bail-out comes increased government control over the entity that received the benefit. This is natural and appropriate. A democratically installed government that does not gain or exercise this control will not long be in office when the natural populist storm of indignation (toward Wall Street plutocrats feeding at the public trough) comes whistling down main street toward the beltway. And, of course, democratic government is, and is intended to be, a mechanism for converting political influence into policy.

This control over formerly private enterprises will be wielded in favor of those political factions who form the coalition that elected the government. Again, this is meant to be a statement of the obvious, and not necessarily pejorative. This is true whether the “favor” is direct and remunerative, or is merely the adoption of policy that is consistent with the economic philosophy at the center of gravity of the coalition.

Because government is about politics, and politics can channel absolutely any initiative (for example wealth redistribution or the modern economic equivalent of a Bill of Attainder for specific companies or even whole industries), the control gained over financial institutions, inevitably, will be exercised in a manner which is partly or completely at odds with the interests of the non-governmental owners of those companies. For example, (i) limiting executive pay when the national and global marketplace for executive talent is not subject to uniform rules consistent with those limitations, or (ii) insisting, on the one hand, that banks shore up their balance sheets (which means building reserve capital at the expense of deploying that capital in loans) and, on the other hand, threatening political vengeance if banks don’t lend more and, on the third hand, implying that bankers will be severely punished for taking risks that turn out badly. These are not coherent guidelines under which a business can be run rationally, and certainly not in the best interest of the shareholders (in their capacity as profit-seeking owners). Instead, the business becomes a vehicle for achieving political objectives without regard to the impact on the commercial health of the business or the effect on its long-term viability. Businesses that are subject to this control are at a competitive disadvantage. The longer and more intrusively this control is exercised, the more significant will be the impact. Its competitors will “eat its lunch”.

In other words, absent going all the way to a state owned and controlled economy with rigid barriers to the flow of human and monetary capital out of the country (i.e. a state enforced monopoly in favor of the government controlled businesses), the application of government control to businesses will cause those businesses, over time, to become a smaller and smaller percentage of their particular market.

This phenomenon was demonstrated in reverse, so to speak, with the liberalizations in China starting with Deng. At Mao’s death, virtually every enterprise of every industry was a state owned and controlled entity. The liberalizations were implemented by allowing private enterprises to start up and operate in certain economic sectors. Gradually, the permitted range of activities of private enterprise was widened. With certain exceptions (usually involving favored officials or favored government sectors, such as the People’s Liberation Army), the state-owned enterprises were not converted to private businesses. However, in industries where private enterprise was permitted, the percentage of the market represented by the state enterprises declined from 100% to, often, very low percentages, by virtue of the explosive growth of the private businesses and the relatively static activity of the state businesses. The state businesses were at a competitive disadvantage because they continued to be required to satisfy all the non-business (i.e. political) objectives mandated to them under the strict communist period. These objectives included everything from revenue generation for the state (hampering the ability to retain and reinvest profits), employment without regard to business need or productivity, production quotas without regard to whether the enterprise was creating wealth (profitable) or destroying wealth (operating at a loss) and the requirement to use specified sources of material without regard to quality or suitability (in order to create a market for upstream enterprises), to provision of all manner of social services such as housing, food, schools and clinics. Against such competition, any private enterprise with even a little room (freedom) to be nimble and creative will prosper.

As applied to the big US banks, this means that the longer and more intrusive is the Government control, the less competitive the controlled businesses will become. Their relatively less fettered competition will prosper at their expense. This competition could be from the banking sector inside this country, unless the controls are made uniform (i.e. without regard to whether the financial institution was a recipient of bail-out help or not) through national regulation, or from other less regulated forms of financial activity "disintermediating" the banking business (as the securities business did in the last 30 years) or from outside the country.

Over time, banks that were “too big to fail” in the last crisis will become smaller and smaller percentages of the market. Capital will flow to less regulated institutions and, over time, the massive government presence in the industry will diminish as a result of the persistent differential growth rates of the less regulated versus the more regulated.

What I have written above is well understood by the banks themselves, which is why, as of this writing, the last of the TARP banks are struggling to get free of the Government and repay their TARP money and give up their Government loss protection, even though their existing non-governmental shareholders will be massively diluted by the capital-raising required.

The fact that there may be processes at work which may cause it all to come out all right in the end is, however, no reason to be passive in the political debate concerning the role of government and the private sector. Massive wealth destruction, with concomitant lowering of living standards, can result from wrong-head government intervention in the private sector, even if there is a feedback mechanism which mitigates the effect over time. Hundreds of millions of Chinese lived hard, short and unhappy lives between 1949 and the unset of Deng’s reforms who would have lived longer and happier lives had those reformed been introduced earlier.

Thursday, December 10, 2009

Lets Hope God Works in Mysterious Ways

First, let me apologize to my 6 readers for being so lazy and inattentive to this blog. I also realize that my last two postings promised follow-ups which I have not provided. I will try to honor that promise soon. However, allow me to move to a new subject today.

I read this morning the thought-provoking Wall Street Journal Op-Ed piece by Amir Taheri about the Democratic Movement in Iran (p. A25). Mr. Taheri describes a process of increasing pressure on the government by an ever bolder opposition. The article implies that the overthrow of the regime is inevitable and imminent. I hope it is true. I am a little concerned that Taheri may be allowing his hopes to run ahead of the reality, but I certainly have no knowledge that enables me to gainsay his views. Clearly, Mr. Taheri loves his country, and as we know, love "hopes all things."

Let’s assume, for the moment, that he is correct that the regime is in its terminal phase and that the opposition, when it comes to power, will: 1) stop Iran's nuclear weapons program; 2) defund Hamas and Hezbollah; 3) establish a constitutional separation of church and state; and 4) establish a true democractic republic, among other things.

In some respects, this may be attributable to the Obama administration's foreign policy, which is no credit to the administration, but may be credit to God.

One of the common placards carried in the opposition rallies poses a question to Obama: "Are you with us, or with them?" To our shame, the administration has repeatedly and emphatically answered "We are with them" by virtue of the choices its makes. The American Government no longer makes encouraging or supportive statements about Iranians yearning for true democracy and an end to totalitarian government (as we used to do, and as we did for Eastern Europeans before the wall fell). We legitimize Ahmadinejad's government by, for example, 1) not making an issue of the Iranian election fraud and 2) negotiating with them about the nuclear issue as if everyone involved is dealing in good faith.

America's current foreign policy, of futilely attempting to make friends of those whose core political identity is built upon virulent Anti-Americanism (e.g. Chavez in Venezuela) while making life difficult for our friends (e.g. Colombia), is so catastrophically inimical to American interests and inept, that national leaders who seek to attribute all their internal problems to the workings of a vast and insidious American conspiracy, implemented by the CIA, are beginning to flunk the laugh test.

America obviously no longer supports its friends or resists its foes. It neither acts in its own national interest, in a "realpolitik" sense, nor does it support those abroad who espouse its core principles and resist those who seek to destroy those principles. (Indeed the domestic activities of this administration suggest that it does not consider broad economic and political freedom of the individual citizen to be a core principle for which we stand - it seems to be motivated by the idea that the best and most efficient generator of societal good is a central government run by an elite who know better than you what is good for you.)

Ahmedinajad has been successful in the past characterizing opposition to his government as treason, giving aid and comfort to the enemy, the Great Satan. This is no longer credible. Iranian's progress toward nuclear power status, for example, is now almost entirely a function of its resources and commitment, (and the decision that Isreal will make) and not a function of the strength of American (or western) resistance.

If the improbable does happen (and the Iranian regime falls), no doubt the Administration will claim credit. But one is not entitled to take credit for an unintended consequence of one’s actions. The Administration's approach to the current Iranian government is based on the premise that they are the legitimate government of that country and they are permanant so we have to deal with them.

I say improbable because I do not believe that history shows us an example of a totalitarian regime falling merely from the effects of internal opposition, even when it expresses the will of the majority, unless that opposition has 1) very strong material support from outside or 2) the regime itself, in the face of opposition, loses its nerve to be as brutal as necessary to stay in power (e.g. the Shah's government). So, if the opposition has the nerve to stay in the streets despite killings, beatings, jailings and torture, the final question will be decided in the hearts of the "guardians" of the republic, who say their primary loyalty is to the will of God.

Let’s hope (pray) that God does work in mysterious ways and speaks authoritatively to these men.