Diatribes of Jay: April 2010

21 April 2010

The Case for Nuclear Proliferation

[For comment on Senator Graham’s threat to quit the bipartisan energy coalition, click here.]

The Case against Nuclear Weapons
The Three Conventional Approaches to Nuclear Weapons
Defects in the Three Approaches and a Possible Fourth
Arguments for Proliferation
A World of Proliferation
The Terrorist Threat
Rogue Regimes
Reasons to Avoid a Total Ban
Conclusion

Sometimes conventional wisdom turns out to be spectacularly wrong. An African-American could never become president of the United States, until he did. A nation united by language, history and ethnicity could never remain divided by ideology for over half a century, until Korea did. Two fearsome superpowers, engaged in a worldwide ideological struggle, each possessing thousands of nuclear weapons, would either destroy each other (and the world) or grind each other down in a perpetual and costly arms race, until the US and the Soviet Union didn’t.

Serious analysts must keep on constant guard against the insidious lure of conventional wisdom. It is in that spirit that I offer this essay.

The Case against Nuclear Weapons

The case for proliferation of nuclear weapons begins with the case against the weapons themselves. That case is as easy to perceive as a kick in the solar plexus.

Every serious analyst of nuclear weapons should visit the Peace Museum in Hiroshima. No one can leave it without a sense of despair and dread. It has pictures galore of cataclysmic devastation and radiation sickness’ revolting sores. It has lots of statistics.

But as Stalin said, a single death is a tragedy; a million is just a statistic. My own most searing memory from the Peace Museum is of stone steps from a bank near Ground Zero, which the Museum painstakingly transported and reassembled inside. On the steps is what looks like a shadow of a woman. You can vaguely perceive the outline of her kimono and seated posture. She may have been resting in the sun after withdrawing money to feed her family.

Yet the outline is no shadow. It is a thin film of carbon atoms from the woman’s vaporized body and clothing. Nothing else of her remains, not a fragment of clothing, bone or tooth.

To imagine yourself as that woman changes your view of humanity. All your life, fears, love, hopes and dreams have vanished in a microsecond. Not a recognizable trace remains. Next imagine the same fate for whole cities, nations, continents.

“Man [is] matter,” wrote Joseph Heller in Catch-22. “That was Snowden’s secret.” Nuclear weapons and the Peace Museum shout that secret as nothing has before. Is Man anything more?

Nuclear weapons can extinguish human lives in an instant, without a trace. They can erase human civilization, leaving victims suffering and dying in radioactive Hell, without homes, food or infrastructure. The aftermath of nuclear war—even a small one—would make Hieronymus Bosch’s darkest vision look pleasant by comparison. But nuclear weapons are not the product of a fertile medieval imagination. They are reality.

By making our human secret of vulnerability and fragility so painfully clear, nuclear weapons make us question our own value. They deprive life of humanity and meaning. And they make us wonder whether their awesome power, in the wrong hands, someday might make tyranny complete and irreversible.

The Three Conventional Approaches to Nuclear Weapons

Nuclear weapons’ uniquely terrible character has engendered three approaches to their possession. One faction, largely intellectuals and idealists, would like to eliminate them entirely. That appears to be the President’s ultimate goal, although as a realist and wise leader he knows how far away that goal must be. Let’s call this the “total ban” approach.

A second faction supports the conventional wisdom among policy makers in the West. They would like to limit nuclear weapons to the “good guys,” or at least to the good guys plus those who already have them. Let’s call this the “us-versus-them” approach.

The final conventional approach to nuclear proliferation is a variant of the “us versus them” approach. If “bad guys” are determined to develop nuclear weapons, there’s not much the rest of the world can do about it but start a war to avert one. No one yet has had the stomach to go that far. Hence North Korea and maybe soon Iran.

Recognizing the difficulty of keeping the genie in the bottle, adherents of a “realpolitik” approach just seek to keep the number of nations possessing nuclear weapons as small as possible. Although it sometimes degenerates into the “us-versus-them” approach, this approach most closely resembles the present Nuclear Nonproliferation Regime. Let’s call it the “nuclear club” approach.

Defects in the Three Approaches and a Possible Fourth

All three current approaches to nuclear proliferation have the same obvious defect. There is no practical―let alone foolproof―way to enforce them.

Nations that don’t have nuclear weapons may want them. Human beings seek security, power and dominance; that’s human nature. For nations that feel threatened, as every one (even ours!) often does, nuclear weapons and their awesome power seem to provide an answer.

The nuclear genie is out of the bottle, and no one can put it back. Although technical details are still secret, general guidelines for making weapons are all over the Internet. So is the general approach to making them. All you have to do is enrich uranium using centrifuges. Then you can assemble implosion weapons, using carefully shaped chunks of highly fissionable material bashed together by specially configured conventional explosives.

A nation that wants a nuclear weapon and is willing to invest the time, money and effort can make one, given enough time. North Korea proved that, and Iran may be about to.

All three current approaches―total ban, us-versus-them, and nuclear club―require some way to keep nations that don’t have nuclear weapons from building them, either openly or in secret, above or under ground. There doesn’t seem to be any reliable way to do that.

For about sixty years, the United Nations has tried to “keep the peace” in much more limited respects, suppressing conventional conflicts. Its success in doing so can best be described as modest. None of the current approaches can realistically be feasible unless and until the international community is prepared to raise and support ground armies for “regime change” in places like North Korea and Iran. The possibility of that happening is remote.

But there is a fourth possible approach. Why not let every nation that wants nuclear weapons have them and rely on mutual, multilateral deterrence to keep the peace? Let Iran, for example, have a few nukes, but remind its clerical leaders that Israel, Pakistan, Russia and the US have them, too. Having a few nukes might make Iran’s leaders, let alone its people, less fearful of a foreign invasion and more reasonable. It would certainly give the lie to Iranian leaders’ demagogic argument that Iran must devote its scare resources to arming against foreign invasion. Popular pressure might do the rest.

Arguments for Proliferation

The strongest argument for nuclear proliferation is not speculation, but history. Since the first and only use of nuclear weapons (against Japan in 1945), no one has invaded a country that had them, with the possible exception of Israel. Besides brief border skirmishes, all significant armed conflicts since 1945 but one have involved nuclear haves fighting in nuclear have-nots, or have-nots fighting among themselves. Here’s the list:

[Other colonial actions, which involved haves against colonized have-nots, are not listed. Nor are civil wars and conflicts in Africa, all of whose nations are nuclear have-nots.]

The only exception known to me is Pakistan’s brief invasion of India (in 1999, over Kashmir, as usual). That invasion occurred when both nations had nuclear weapons. But India’s strong conventional response and enormous international pressure stopped it. Other possible but unproven exceptions involved foreign invasions of Israel in 1967 and 1973, when Israel may have had nuclear weapons but, if it did, didn’t reveal or use them.

The conclusion that follows from this list in inescapable. Since the development of nuclear weapons, major powers possessing them (except for India and Pakistan) were too prudent or too civilized to make war among themselves. The unbroken record of military carnage that had preoccupied and devastated Eurasia and most of the “civilized” world for the previous two centuries stopped in its tracks. But the record of carnage continued in smaller countries lacking nuclear weapons, either because they fought among themselves, or (more often) because they were invaded or fought over by nuclear powers.

Looking at these data, an unbiased observer has to conclude that nuclear weapons, with their unthinkable potential consequences, don’t cause wars. They prevent them.

The destructive power of nuclear weapons is war’s reductio ad absurdum. It demonstrates graphically how pointless, senseless and useless war is. That is a lesson that Europe and the rest of the world should have learned (but didn’t) from World War I, a serious attempt at mutual genocide that accomplished absolutely nothing. Better late than never.

A World of Proliferation

What would a world of proliferated nuclear weapons look like? It’s hard to predict precisely, but several effects are foreseeable.

First, there would be far less war. Nuclear weapons would deter conventional invasion or military meddling in smaller and poorer countries. Countries like Israel, Lebanon, the “Stans,” and the small states of Central America could breathe easy and go their own way, without having to devote substantial fractions of their meager resources on training armies and buying expensive conventional weapons from countries like the United States and Russia.

A world with nuclear weapons proliferated might well be a world without war.

Might there be mistakes and miscalculations? Sure. But the bigger, more populated and more prosperous a nation is, the more it would have to lose. Even Pakistan’s military rulers eventually understood that point. In 1999, shortly after testing their first nuclear weapons, they invaded India, hoping that their nuclear umbrella would immunize their quick (and initially successful) conventional incursion. Undeterred, India, which had nuclear weapons also, mounted a stiff conventional response.

The international community convinced Pakistan’s generals that a nuclear exchange would be mutual suicide. The result was a return to pre-incursion borders and a resumption of the stalemate. Wiser but maybe sadder, Pakistan’s leaders today appear to understand that nuclear weapons are a deterrent and guarantee of territorial integrity, not a carte blanche for aggression, at least not when the target has them, too.

If blunders occurred in a world of proliferation, they would be the folly of small, poor countries, like North Korea, with small nuclear arsenals. Those countries would be incapable of doing devastating damage to a major power, let alone destroying the Earth’s biosphere as a full-scale nuclear war between major powers might. Their small size would allow proportionate retaliation to literally wipe them out, thereby making any first strike on their part irrational. (North Korea, for example, has only a single city of note, the capital Pyongyang. An “eye for an eye” would erase that small country and the Kim dynasty forever.) Large, prosperous nations have far too much to lose to ignite any conflagration.

The second likely effect of nuclear proliferation would be a gradual but substantial global reduction in economic waste on war planning and production. Although building (or buying) and maintaining nuclear weapons and their delivery vehicles is expensive, they are nowhere near as expensive as maintaining standing armies, navies and air forces. As nations became accustomed to the “nuclear peace” of proliferation, they would wind down their conventional forces and their military-industrial complexes. Civilian research, development and production would grow correspondingly. A worldwide swords-to-plowshares conversion would not be too much to expect, with the ultimate sword (nukes) remaining sharp to keep the peace and deter misadventures.

North Korea might provide a credible test of this point. All but its most recent nuclear test appear to have been duds. But once the paranoid Kim accumulates enough workable weapons to convince himself that he has a credible deterrent, he might put some of his four-million-person starving army to useful work, such as growing rice. Maybe there’s method in his madness and that’s his plan. Stay tuned.

The third salubrious and predictable result of nuclear proliferation is already starting now. Those countries maintaining vast nuclear arsenals would “prune” them enormously, as the US and Russia are agreeing to do now. Long-time nuclear-club members would need only enough weapons and delivery vehicles to deter conventional invasion and nuclear first strikes. (As far as we know, China has taken precisely this approach, stockpiling enough nukes for a deterrent but refusing to invest in massive arsenals like ours and the Russians’.)

To deter small countries’ bullying, wealthy nations could rely in part on the small arsenals of other small countries with opposing interests. And the mass of weapons held by all nations collectively would deter any single nation from seeking to disturb the deterrent balance of terror by accumulating more weapons than needed for credible deterrence. So would the expense of accumulating a larger arsenal.

The number of weapons any nation would need for credible deterrence would be in the low hundreds, at most, rather than the thousands we and the Russians have now. As numbers shrank worldwide under gradually negotiated accords, the number (and expense!) deemed necessary for adequate deterrence would shrink, too.

The Terrorist Threat

What about terrorists and crazies? They are the strongest conventional argument for nonproliferation. What would happen, nonproliferation advocates ask rhetorically, if nukes fell into terrorists’ hands? Surely we can’t let that happen.

There are four answers to this concern. First, it hasn’t happened yet. Paradoxically, the actual possession of nuclear weapons, as distinguished from an unfulfilled yearning for them, seems to sober people up. The Pakistanis provide an example.

Second, the problem of “crazy” terrorists is not without solution. Bin Laden and his lieutenants know that a nuclear strike on an American city arguably traceable to them will result in thermonuclear immolation of the entire region where they are hiding, including their families and their “movement.”

Third, while some crazies may be ready for suicide, conventional leaders with the ability to supply nukes are usually not. The secret to keeping nukes out of crazies’ hands is credibly extending deterrence to anyone who might supply them. Iran’s leaders, for example, know that a nuclear attack on Tel Aviv or Jerusalem would make Tehran toast in about fifteen minutes, unless the Russians credibly confessed in the short interim that one of their nukes had gone missing and had fallen into terrorists’ hands.

Finally, neither the risk of nuclear terrorism nor the risk of miscalculation in small countries is globe-threatening. If the US and the Soviet Union had hurled even a significant fraction of their massive nuclear arsenals at each other during the Cold War, the resulting “nuclear winter” would have extinguished all life on Earth, except perhaps for microbes and creatures of the deep sea. If terrorists destroy a city or two and their territory or sponsors succumb to nuclear retaliation, or if leaders of small countries with nukes are dumb enough to exchange a few, the rest of the world will survive, just at it did after the dozens of atmospheric tests by the US and Soviet Union in the late 50s and early 60s.

The awful devastation that resulted from any such use of nuclear weapons would be an additional object lesson for the rest of the world. It would teach those whose intelligence and imagination are insufficient to learn from Hiroshima and Nagasaki. The international community might promote that learning, before allowing or assisting nuclear proliferation, by requiring recipients of technological aid to visit Hiroshima’s Peace Museum.

Would that lesson be worth paying such an awful price? That question is not easy to answer. But the real question may be different. Would avoiding the mere risk of that awful lesson justify the much higher probability of a long, dark future for humankind: one of perpetual war in small countries, famine, poverty, disease, “conventional” genocide, pollution and climatic devastation, as humanity collectively continued to spend far more than it can afford on conventional war and its tools?

Rogue Regimes

After terrorists and crazies, rogue regimes are the next strongest argument against nuclear proliferation. What would happen, conventional wisdom screams, if a terrible tyrant got nuclear weapons?

Conventional wisdom acts as if this question highlights a mere hypothetical future peril. But it doesn’t. Terrible tyrants have had and have nuclear weapons, and nothing extraordinary has happened.

With the possible exception of Hitler, Stalin was the worst tyrant in human history. He was certainly the most paranoid. Yet he had nuclear weapons for four years before he died. He didn’t use them. Nor did his Soviet successors.

North Korea’s Kim Jong Il is every bit as paranoid as Stalin and far more prone to making idle external threats. Yet he has done nothing rash and is unlikely to do so. Why? Because he knows that a single 50-megaton thermonuclear bomb could erase Pyongyang and his regime forever, even if he and a few select leaders managed to survive in some deep bunker. He also knows that his four-million-strong starving army is no proof against the atom’s awesome power.

So Kim waits and occasionally blusters. Waits for what? If he or his minions have any semblance of wisdom, they will exploit the reduction in paranoia that their small nuclear arsenal permits and begin improving their civilian economy. If and as that happens, the long-suffering North Korean people will begin a gradual and painful climb toward a better life. It may take decades. It may take a century. But eventually cooler and wiser heads will prevail amidst the stalemate of multilateral nuclear deterrence.

Conventional wisdom acts as if there were some easy external “solution” to localized tyrannies, if only they didn’t have nuclear weapons. But history reveals that view as nonsense.

The Castro brothers, Kim, and Mugabe have been around for decades. They are all likely to die peacefully, of old age. No external force seriously challenged them during their (and Kim’s father’s) long reigns. No external force seriously challenges them now although only Kim has an arguable nuclear deterrent.

What would change if each of them had a small nuclear arsenal? Their countries are small enough to be easy subjects for others’ nuclear deterrence. A few missiles could literally annihilate their entire nations. The only real difference a small nuclear arsenal might make would be giving the lie to the paranoid fear of foreign invasion that they use to keep their own people’s aspirations in check.

The proof of the pudding is Iraq. Part of our justification for invading was removing the tyrant Saddam. That wasn’t the main reason; Israel and oil were. But never mind. It was a reason with which every supporter of the war—left or right—(including me, before the blunders started) could agree.

Soon we will have spent well over a trillion dollars in direct and indirect costs. We will have suffered over 4,000 dead and 30,000 wounded to remove a tyrant who we thought had weapons of mass destruction but didn’t. That expense and the enormous economic drain of two wars are among the principal reasons for our national decline.

With our sad example in mind, the rest of the world is unlikely to challenge local tyrants by conventional invasion for a century, if ever. Certainly the world’s most rapidly rising power (China) will not. And we have found it like pulling teeth to get our NATO allies to contribute to the supposedly agreeable mission of fighting the tyrannical Taliban in Afghanistan.

So the notion that rogue regimes would be more susceptible to external “regime change” without than with nuclear weapons is sheer fantasy. The notion that local tyrants would commit personal and national suicide by starting a nuclear war is equally absurd. The Castro brothers, Kim Jong Il, and Robert Mugabe will die peaceably of old age, and their successors will change their policies. Or their smarter underlings or people will remove them.

It is impossible to foresee, let alone predict, that their possession of nuclear weapons would make any difference at all. The only difference it might make is assuaging their paranoia enough to let them spend less on tools of war and more on their people, if only to improve the chances of their regimes’ survival against mutiny or popular revolt.

Reasons to Avoid a Total Ban

As much as it may seem desirable form a moral perspective, a total ban on nuclear weapons is impractical and may be inadvisable. There are three reasons for this conclusion.

First, human-induced climate change is far more likely to ruin the world as we know it than any foreseeable actual use of nuclear weapons, even by terrorists. No terrorist or rogue country has or is likely to have (let alone use) enough weapons to seriously damage the Earth’s biosphere, as an all-out nuclear war between the US and Soviet Union would have. But in the long run unchecked global warming at its current rate might.

Unfortunately, continuing to obsess about possible diversion of nuclear power technology to weapons, as we appear to be doing in Iran, will slow down the global advance of nuclear power―one of the chief and presently most promising means of curtailing climate change. (The others are solar and wind power.) The fact that small, poor countries rely almost entirely on coal for power exacerbates this problem.

The details of nuclear technology make the problem even worse. Uranium-based nuclear power plants are far less susceptible to diversion of fuel for weapons than plutonium-based ones. But the world has a limited supply of useful uranium, and enriching uranium requires massive amounts of electric power, usually generated with fossil fuels. In contrast, plutonium plants generate their own fuel by nuclear transmutation. (Uranium plants can, too; but the result is plutonium, which increases the diversion risk. Present non-diversion regimes contemplate making plutonium by-products of uranium power useless for both weapons and power.) Therefore fearful attempts to prevent fuel diversion to weapons insist on restricting power plants to uranium technology, which is more expensive, more inflexible, more susceptible to fuel shortages than plutonium technology, and more harmful to climate.

The only apparent way to resolve this dilemma is not to worry so much about nuclear weapons development but to seek to expose it and limit it through regulation and deterrence. Most small countries that develop nuclear weapons want to publicize that fact as a deterrent, just as North Korea has done and Iran seeks to do even today with its bluffs.

Second, there is no practical way to enforce a total ban, any more than there is a reliable way to enforce the nonproliferation regime today. Relying on an unenforced “total ban” would allow rogue regimes to “get a jump” on honest compliers and cause no end of trouble. Better to rely on disclosure, multilateral deterrence and self-interest, rather than a regime of illusory control that inevitably raises questions of poor enforcement, incompetence, mistakes and corruption.

Finally, humanity may need nuclear weapons. The most probable necessary use is fending off asteroids or comets that threaten too close an approach to Earth. Movies on the subject have been seriously misleading. All we would have to do is ignite a nuclear device close enough to the threatening object (and far enough out from Earth) to blow the object off course and so avoid an impending collision with Earth. (But that wouldn’t give Bruce Willis the chance to die heroically after planting the device deep in the object, thereby turning it into a celestial shotgun blast that, in real life, would be far more dangerous.) Humanity needs nuclear weapons and missile technology against this remote but far-from-impossible and potentially catastrophic contingency.

A far more remote contingency is invasion by another intelligent species. While that event is extremely unlikely, it might have horrendous consequences. Every similar invasion of foreigners in human history resulted in the extermination, enslavement, ghettoization, or marginalization of native peoples with inferior weapons. As impressive as they may seem to us, our conventional weapons would undoubtedly be laughable to beings with the immense power needed to traverse interstellar distances. The contingency of their arriving and proving unfriendly, remote as it may be, makes it imprudent for humankind to forsake and forget nuclear weapons entirely.

Conclusion

At various times in human history, men wore deadly weapons on their persons. With these weapons they protected their lives, families, property, comrades and servants. They discouraged ambushes and highway robbery. In some cultures personal weapons maintained an atmosphere of morality, politesse, personal dignity and “honor.”

Customs of this sort prevailed among the Italian city-states that Shakespeare depicted in his plays. (Remember Mercutio?) They also prevailed in most of medieval Europe, in Japan’s “shogun” era, and in America’s brief but colorful “wild west.” The custom of dueling in our own early history served similar functions, allowing Aaron Burr to kill Alexander Hamilton in a duel without legal recourse.

Human society felt these expedients necessary because there were no neutral police forces. Organized police in cities (or anywhere else), paid for by government, are a relatively recent innovation.

In the absence of reliable protection provided by police or other robust societal institutions, personal weapons made sense. But they required men to spend countless hours learning to fence or use, maintain and “draw” pistols quickly. As police forces and reliable systems of justice developed, the custom of carrying weapons for personal protection fell into desuetude. (Texas seems not to have noticed.)

A similar societal evolution among nations is now occurring. Among nations the only reliable “personal” weapon is the nuke. Just as wealthy gentlemen who could afford good swords and training to use them were once relatively immune from robbery and personal assault, so the “nuclear club” of advanced nations (possibly excluding Israel) has been free from attack and invasion since 1945. Is it any wonder that poorer nations want the same swift swords that the rich ones have?

The alternative, of course, is an effective international police force for nations, able to impose order under generally accepted international norms. Many thought that the United Nations would serve that purpose. But the UN has been toothless and ineffectual, far too dependent on the resources of a single nation (the US), and perceived by many as biased against nations that are poor, non-Christian, or have unusual cultures and histories. Many also perceive it as serving the interests of wealthy nations―a perception that the United States’ rejection of the international criminal court only reinforced.

In the absence of a neutral, widely accepted, effective international police force, it is natural for nations to seek nukes as effective deterrents to attack, just as individuals sought portable weapons in the days before routine policing in cities.

Developing nuclear technology was devilishly hard when the U.S. did it for the first time, alone, in the midst of history’s greatest war. But now it is relatively easy. The world knows it can be done. Every schoolchild knows the general approach, and some details appear on the Web. Working out the remaining engineering details should take any nation with a substantial industrial base, decent science and engineering schools, and a firm national commitment no more than three years. (We did it from a standing start in four, in the midst of war.)

That’s why, while I admire the President’s idealism, I regard his quest for a nuclear-free world as hopelessly quixotic, perhaps even dangerous. Humanity needs nuclear power to maintain and improve its standard of living and retard global warming. Nuclear power technology is too close to nuclear weapons technology to curtail the latter effectively without hampering the former. And in any event, humanity may need nuclear weapons technology both for the reasons explained above and to bring smaller nations peace from conventional invasion.

The balance of terror among members of the “nuclear club” has kept the peace among them for over half a century. Proliferation is far more likely to extend that “pax atomica” than it is to foster a nuclear exchange. And even if a small and tragic nuclear exchange results, would it be worse than humanity, faced with climate change and global ignorance, hunger, disease and poverty, continuing to spend far more on conventional weapons and armed forces than it can afford?

Just as it took competent city police forces to phase out most personal weapons in cities, it will take a powerful, fair, and widely accepted international police force to quell the desire for nuclear weapons. We are a long way from having (or even conceiving) such a police force, and the United States has lost the credibility to lead the effort.

In the meantime, trying to keep nations that feel defenseless or threatened from doing what comes naturally is likely to produce a lot of unnecessary conflict, and perhaps unnecessary wars. Some of those wars may be nuclear, as adversaries underestimate what weapons emergent nuclear powers have or try to prevent them from adding to small stockpiles. Risking war (which may itself be nuclear) to punish or deter the development or possession of nuclear weapons seems a bad idea.

A better idea is providing swift, sure and devastating retaliation for any offensive use of nukes. That is a function that any nuclear power, including the US, Russia and Israel, can perform unilaterally.

Mr. Reid, Back Down!

I hate to upstage an essay on which I spent so much time and effort as the one posted above. But I can’t refrain from commenting on Senator Graham’s threat to quit the small bipartisan coalition that promises the first carbon tax in US history.

Graham’s beef is Harry Reid’s announced intention to schedule Senate debate on immigration before the energy bill. Reid’s motive is obvious. He wants to exploit the kerfluffle over Arizona’s draconian new anti-illegal-immigrant law to split Hispanics from the Republicans and divide the Republicans among themselves.

It’s a good political ploy, but it puts politics over policy. Republicans have done that for about a decade, and nearly all of them are still doing it. So Reid’s plan reflects a certain amount of payback, even poetic justice.

But there are two things wrong with it. First, it continues business as usual in Washington. Reid is emulating Karl Rove, the college dropout, in putting payback above governance. Second, it subverts the sense of perspective that, up to now, has been the President’s trademark, a rainbow of hope amidst the dark clouds of corruption, incompetence and political backbiting.

Revenge is sweet, but the best revenge is living well. We, the people, will never live well again unless the Senate gets it act together and starts solving real problems. Now that health-insurance reform is law, there is no national priority more important than getting energy policy right.

As Graham pointed out, the chance of real immigration reform occurring in an election year are next to zero. But Graham―one of the few Republican members of Congress to show recent signs of human intelligence―apparently signed on to energy-policy reform because he believes it can pass this year, before the elections.

Republicans who still can think are beginning to recognize that they have a nation to help govern. Chuck Grassley (R., Iowa) has assisted financial reform. Bob Corker (R., Tenn.) has made noises about doing the same. Corker once recognized the improbability of “clean coal” and might support a new energy policy.

Others may be waiting in the wings. Richard Lugar (R., Ind.) once championed sensible energy policy. Now he may be too timid to be a leader but may be brave enough to follow Graham. Ditto Scott Brown (R., Mass.), who swore to be nonpartisan after his recent upset victory in blue Massachusetts.

To stomp upon these green shoots of bipartisanship is not like the President. Nor is it good politics in the long run. Apart from the Tea Partiers, the people finally seem sensitized to political games. The President should bring Reid to heel, as quickly as possible, and get credit for leadership and bipartisanship.

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17 April 2010

The SEC’s Suit against Goldman, Sachs: What it Means

Introduction
Why the Markets Dropped
Caveat Emptor and Regulation
Prosperity
Complexity
Conclusion

Introduction

Today the Securities and Exchange Commission sued the investment bank Goldman, Sachs for securities fraud. Apart from the bailouts, this was the first major governmental response to the malfeasance at our big banks that nearly created a second Great Depression. Borrowing Churchillian language from World War II, a guest writer for the New York Times called the suit, “the end of the beginning.”

What he had in mind was the end of the beginning of a long, hard war against greed, swindling and vastly overvalued paper pushers. The suit also may have marked the beginning of the end of our brightest youth falling into the maw of law and investment banking, where they dream of getting obscenely wealthy while still young, without doing or making anything of lasting value.

You might think that sort of event would make the markets go up. You might think it would provoke a vast sigh of relief and catharsis―a green shoot of hope that on some bright future day we might actually set our financial sector right. But the markets went down. Go figure.

Iceland’s volcano, whose ash decimated European air travel, undoubtedly was partly to blame. Unlike the derivatives that Goldman allegedly sold fraudulently, air travel and the international trade and business its supports are real things. No one knows how long the volcano will keep pumping out the high-altitude ash that hobbles them.

The volcano’s direct hit to airlines is about $200 million per day. The “collateral damage” to other business and trade is impossible to estimate but undoubtedly very high. Mother Nature and the Earth’s crust don’t always answer human prayers, so the uncertainty is daunting.

When you recall that Iceland was one of the first and principal victims of the derivatives debacle, it’s enough to make you believe in poetic justice. Maybe there is a God after all, and She has a sense of humor.

Why the Markets Dropped

But I digress. The nation’s major financial reporters all cited the Goldman suit as the reason for the markets’ drop. That view might be just another instance of New Yorkers’ myopia and financial gurus’ overestimating their own importance. But if New York’s financial reporters know anything, they know what investment advisers and the sheep they lead to slaughter are thinking. So we have to assume that the Goldman suit is the market drop’s primary cause.

The obvious question is why. Why would the markets tank at the mere thought that architects of our global financial catastrophe might at last get slapped on the wrist? If their gambling on derivatives becomes more cautious, they’ll have more money to capitalize real businesses, won’t they? Wouldn’t that be a good thing?

One answer is clear and simple. We are ending an era in which the cleverest propagandists since Goebbels managed to promulgate a myth that just isn’t so. According to that myth, the government that [search for “public sphere”] won World War II, helped create our global air travel system, beat polio and smallpox and contained AIDS, put men on the Moon, and created the Internet (among many other things) is incompetent and can’t do anything right. In contrast, private business, which gave us the savings-and-loan meltdown, the dot-com bubble, Enron, Countrywide, Bernie Madoff, our energy crisis, the housing bubble, and global economic meltdown, can do no wrong. To people nursed on that myth from birth, the thought that the wicked witch of government might regain the power to quell the exuberance of private swindling brings fear and uncertainty.

So the markets went down because businesses―in particular banks―will likely have to change their ways. They might even have to make money by capitalizing real businesses that make such things as the Dreamliner, the iPod and iPad, electric cars, and even electricity-generating windmills. What a catastrophe!

But to really understand why the markets went down, you have to understand long-term market psychology. From a psychological perspective, capitalism looks a lot like a manic-depressive patient. Boom times are the manic phase. Our latest ended in September 2008 with our financial system’s near-meltdown. It began (roughly speaking) when grade-B actor Ronald Reagan decided he knew more about economics than the “brain trust” that had saved us from the Great Depression and had build the longest and strongest surge of prosperity in human history.

With his world-class charm and temperament and his fourth-rate intellect, Reagan got a generation and a half of Americans to believe the myth. The Cold War’s end reinforced it [search for * * *] by convincing us of our national omnipotence and (by extrapolation) the omniscience of the cartoon ideology that we thought had triumphed. The result is our economic condition today.

Normally, bust times follow boom times as the night the day. The nineteenth century saw a series of regular financial booms, followed by busts. The Crash of October 1929 and the following Great Depression were the worst busts in our short history. Japan's “lost decade” of the 1990s was a pale echo.

But something funny happened in 2008 and 2009. That wicked witch―government―discovered an antidepressant. Heeding the Great Depression’s lessons, which Ben Bernancke spent most of his life studying, it gave the world a huge dose of Zoloft, paid for by American taxpayers. The result today? Global stock markets (all leading indicators) are up. Business profits are up. Consumer spending and construction are starting to rise. Employment and consumer confidence (lagging indicators) are showing signs of having hit bottom and are starting to rise. Every indicator suggests a rising economic tide, making the “bust” phase of our near-global meltdown one of the shortest in history, especially for a recession so deep.

Yet the myths remain. If government is a bumbling fool, can a recovery that it underwrote survive? If markets are omniscient and omnipotent, can restraining their irrational exuberance do any good? When juxtaposed to the facts of the last two years, the myths we have taught ourselves for the last thirty create cognitive dissonance. The result is fear on the part of those who believe the myth as well as those who feel real pain: the unemployed, the underemployed, and the foreclosed.

Caveat Emptor and Regulation

The SEC’s suit against Goldman, Sachs reflects one aspect of the boom-bust cycle. During boom times, exuberant markets adopt a philosophy of “caveat emptor”―Latin for “let the buyer beware.” During those times everyone seems to be making money, and making money seems so easy. Protecting the uninformed, unsophisticated and the “little guy” seems a waste of time and resources. Allowing robust business to work on its own seems more “efficient.”

But laissez faire markets, when coupled with natural human greed and self-interest, inevitably produce swindling. If swindling goes on too much and too long, its begins to kill markets themselves, as traders hesitate to trade for fear of being swindled. So eventually―at least in a rational society―the pendulum swings back from caveat emptor toward regulation. Society recognizes that unregulated markets with lots of swindling lead to no markets or (at best) weak markets. The Goldman suit marks a society (ours) at precisely that point.

Caveat emptor might work well with simple transactions like the sale of a cow or a used car. A dairy farmer who buys a cow ought to know how to inspect it for disease. A consumer who buys a used car ought to be at least savvy enough to take it to a mechanic and have it inspected. When the myth of rugged individualism prevails, as it does today, we are all deemed to be at least smart enough to protect ourselves as buyers in simple situations. And if we want more, we can ask the seller to put his claims in writing, in a guarantee or warranty that courts will enforce with damages if breached.

But stock and other securities are a bit different. You can inspect a cow or have your mechanic inspect a used car. But it’s hard to inspect a whole company, its history, its divisions and subsidiaries, its products and services, and its management. And that’s not all. The law―including the law of corporations and trade secrets― gives corporations the power to withhold vital information from the public, including buyers of stock. Deny buyers this information, and they will get burned. Deny them in mass, and you have the makings of a Crash.

So Congress in its wisdom passed a number of laws during the Great Depression. Several try to correct the inherent imbalance in access to information between corporations and buyers of their securities. They require public sellers of securities to disclose all material (important) information, without omission, and to do it accurately. If they don’t, buyers can sue them for losses. In effect, these laws turn securities sellers’ advertising and disclosures into the guarantees and warranties that even a rule of caveat emptor allows. They make disclosures by securities sellers act like a form of guarantee, automatically.

The SEC’s suit against Goldman differs in detail, but not in principle. Goldman sold its derivatives to private parties in private sales, so the laws governing public sales of securities don’t apply. But the SEC says Goldman committed ordinary fraud by making a materially misleading misstatement.

As the SEC tells it, Goldman sold derivatives of subprime home mortgages to two different types of parties. One, a well-known hedge-fund manager, bet on the downside. He correctly predicted that the housing bubble would collapse and the value of the underlying subprime mortgages and their derivatives would fall. The other parties bet on the upside. They predicted (incorrectly) that the housing bubble would continue to inflate (or at least not pop) and the mortgages and their derivatives would pay out as promised. The crucial point, says the SEC, is that the hedge fund manager, who bet on the downside, selected the mortgage portfolio on which the derivatives were based. At the same time, Goldman told the other (upside) parties that an independent consultant had selected them.

Now if you were buying securities hoping they’d go up, wouldn’t you consider it “material,” i.e., important, to know that the securities had been designed by a person betting they’d go down? Wouldn’t you want to know? That’s the essence of the SEC’s case for fraud.

Goldman will have its day in court. But if the SEC can prove the charges, it’s hard to see how any lay jury would fail to find fault. Furthermore, as the facts emerge at trial (assuming the SEC has done its homework) what remains of Goldman’s reputation will tank.

So it’s easy to predict what will happen. After lots of hemming, hawing and preparing for trial (and lots of fees paid to Goldman’s gold-plated law firms), Goldman will settle.

Goldman’s goal in settling will not be minimizing its monetary penalties. The entire amount of derivatives at issue (a little north of $10 billion) is pocket change to Goldman. Goldman’s goal will be to get a bland disclaimer of wrongdoing as part of the settlement, which it can tout to public and the marketplace, saying “See? We did nothing wrong.”

Disclaimers of that sort are commonplace in settlements of securities litigation. But this time the government should not allow one. Why? Because the whole point of the suit is to show that what Goldman did was wrong and to put the financial sector on notice. Without a public declaration of fault on Goldman’s part, we will never turn the corner from bust to recovery and from caveat emptor to regulation. Without one there will be no accountability for the near-destruction of the world’s economy and the real destruction of millions of consumers’ lives.

Prosperity

Whatever happens in the lawsuit, Goldman will still be Goldman. Any damages it may pay won’t even dent its profits. Its principals will still be obscenely rich, far beyond their real contribution to the commonwealth. But a public declaration of wrongdoing is an important goal in itself.

Goldman insists that its actions were fair because it was dealing with “sophisticated” investors, including managers of hedge funds and institutional investors. It wants to treat buyers of complex, abstract financial documents that it designed like the buyer of that dairy cow. Caveat emptor: if you buy one of these weird financial instruments, you are ipso facto sophisticated, or you should be. That’s Goldman’s pitch.

But that argument is retrograde to America’s history and economic development. It contradicts the principles that made our nation strong and our free markets unmatched.

To see why, think of Henry Ford. During the nineteenth century, only rich people could afford complex mechanical devices like cars. The rich maintained their disparate wealth by denying their workers a living wage. As a result, the markets for their consumer products were small, and they couldn’t sell much. Masters of industry like Andrew Carnegie made their fortunes by making and selling things for industry alone, such as steel.

In the early twentieth century, Henry Ford changed everything. Not only did he invent the assembly line, which made workers more productive. He also paid them a living wage, which allowed them to buy the cars they made. That simple change exploded the consumer market. A century later it has created the consumer economy that we know today, with the highest standard of living in human history.

The securities industry followed much the same path. During the Guilded Age, sophisticated insiders dominated finance. One financial guru famously said that he knew to sell out before the 1929 Crash because his taxi driver recommended stocks. When the plebes enter the market, he thought, it’s time for the masters of industry to leave.

We don’t think that way today. Today consumers own about fifty percent of all common stock, either directly or through mutual or retirement funds. That’s a good thing because it recycles consumers’ savings into capital for industry. It’s a win-win situation: business has greater access to equity capital, and (except during crashes) consumer-investors can earn better returns than they could from banks. That’s one reason why the US is still the world’s easiest place not only to start a business, but to finance it.

If Goldman wins the argument that derivatives are only for the sophisticated, the derivatives market will remain small. But if they’re as useful to real business as Goldman and the hedge funds insist, then they should be made available to any business that can use them, in fair and regulated markets. Any other approach would deny medium-sized and smaller businesses the benefits of derivatives. In so doing, it would promote industrial concentration and centralization.

Goldman’s CEO Lloyd Blankfein wants to keep all the derivatives business in a small circle because he thinks like J.P. Morgan and would like to rule finance as Morgan did. But keeping wealth in a small circle today is un-American. If derivatives are good for business and therefore promote prosperity, they should be made part of our general market economy, available to any business, of any size, anywhere. If not, their use should be restricted to specific situations that demand them, such as hedging commodities whose prices are volatile.

Complexity

The final general policy issue at stake in the Goldman suit is complexity. Derivatives require sophisticated investors, Goldman insists, because they are inherently complex.

But in general complexity is not a good thing for business. Some real products are inherently complex. They include Boeing’s Dreamliner and the software for Apple’s new iPad. But even in real engineering complexity is undesirable. That’s why both Apple (in Snow Leopard) and Microsoft (in Windows 7) recently made great effort to simplify and streamline their operating systems.

Outside the realm of real engineering, where complexity may be unavoidable, complexity is undesirable because it opens the door to swindling and makes markets opaque.

Let’s take two examples. The first is the now-infamous AIG. At the height of its success as an insurance company, it had (if I recall correctly) over 250 distinct corporations in its organization chart. Its CEO Hank Greenberg was famous for creating that complex structure and reportedly carrying it around in his head.

There is a plausible reason for an insurance company to have so many separately incorporated divisions. The corporate form limits a business’ liability to the capital invested in it. By separately incorporating divisions in different countries and different markets, Greenberg insulated his business in each market from unanticipated losses in the others, including foreign nations.
Yet as I’ve explained at length in connection with health insurance, insurance generally works better the bigger the market (and therefore the larger the pool of insureds). Large pool size (and therefore lower average costs and risks) might not have mattered to AIG in markets where it was the first entrant or lacked competitors. But that awesome complexity always made we wonder whether Greenberg was up to no good, or whether he simply wanted to be the indispensable man―the only one who understood the whole structure. As a result, I refused ever to consider investing in AIG. My caution proved prescient when the same sort of gratuitous complexity (in derivatives) on which Greenberg build his empire (in insurance) undid it.

My second example of complexity gone awry is Goldman itself. Derivatives of mortgages are not rocket science. They need not be horrendously complex. You take certain aspects or risks from a portfolio of similar mortgages and define them as “derivatives.” Some complexity inheres in how you define those aspects or risks, but most inheres in what mortgages you call “similar,” i.e., those you choose for a particular derivative portfolio.

For simplicity’s sake, you might use categorization. For example, you might take all mortgages on homes in a give ZIP code, or all mortgages above or below a certain principal amount. Once you get away from simple, transparent rules, you open the door to fraud. That’s precisely what the SEC alleges Goldman did: letting a downside bettor select the mortgage portfolio for the upside buyer, without telling the buyer.

If Goldman had only used simple, neutral rules for collecting its portfolios of mortgages, which any buyer could understand, it would not only have created transparent markets. It would also have protected itself against claims of fraud. The fact that Goldman didn’t do so suggests that it was bent more on lucrative swindling that on creating vibrant and useful new markets.

Conclusion

The Goldman derivatives story―as the SEC tells it―is an old plot with a new twist. If you want to see what’s going on, look not at the financial instruments’ complexity, but at how the sales are made.

Honest business people generally avoid complexity and disclose fully. They want customers to know what they’re selling because they are proud of it. They keep things simple in order to promote understanding. When people make things too complex and fail to reveal “details” like obvious conflicts of interest, they are generally bent on swindling, not honest business.

Business in a complex, high-technology economy of 307 million people is not always a simple thing. But it’s a good idea, in general, to beware of complexity, especially in business and financial matters not dictated by complex technology. Caveat emptor is a bad rule for a modern economy based on consumer sovereignty and consumer participation. It makes customers fearful and markets smaller. But omnes caveant complexitorem may be a good rule: let everyone beware the mystifier, who is usually up to no good.

Besides a grasp of the essential policy issues, the SEC’s action has another benefit. It illustrates the Obama Administration’s multipronged approach to governance, about which I’ve written before.

Congress is now deliberating comprehensive financial reform. Goldman and the other big investment banks (and some of their clients) are vigorously resisting the notion of regulated, transparent markets for derivatives. But what Congress does may not matter. If the SEC wins the lawsuit, or if it extracts a settlement with an admission of fault, preparing and selling derivatives as Goldman is alleged to have done may entail too great a risk of liability to gain business traction.

There’s more than one way to skin a cat. Our President, who was trained at the nation’s leading law school, knows them all. So masters of our finance sector had better get used to a new regime: if Congress doesn’t reign them in, the SEC and the courts will.

Once big banks could mumble “free markets” and get free reign to enrich themselves with cockamamie experiments that imperil the national economy. That era is now over.

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04 April 2010

Fork ‘em, Mr. President!

Watching the President defeat his political rivals is getting to be fun. The pattern is now clear. First, the media declare his goals nigh to impossible. Then his rivals refuse to take him seriously. How can a “black” man, they impudently imply, do “impossible” things? Next, he cruises along, seemingly effortlessly. He stays polite, compromising, reasonable and low-key to a fault.

No-drama Obama projects an attractive, relaxed, honest persona with a good sense of humor. The media accuse him of not caring, not being “tough” enough, or both. Liberal and progressive commentators pile on with unsolicited advice: stand tall, act like a man, shout a little. They sound like would-be parents chiding “stand up straight!”

Late in the game, the President’s rivals begin to doubt themselves. They sense that their strategy of ridicule, obstructionism and neglect is not working. At a loss, they panic and take the lowest possible road. They insult him, his programs, his Harvard-Law-School reasoning, and voters’ intelligence all at once.

When the crunch comes, the President wins, leaving his clueless rivals scratching their heads and wondering why. Few of them suspect the real reasons: he is very, very smart, and few voters are dumb enough to confuse ridicule, lies, innuendo and obstructionism with honest policy. The President grins like the Cheshire Cat, takes his victory in stride, shows his nobility by refusing to gloat, and turns to his next “impossible” goal.

It happened first with Hillary. She couldn’t believe that a virtual political unknown could challenge the mighty Clinton dynasty. When the tide began to turn against her, she turned to not-so-crypto racism, destroying her reputation to no avail.

Next came John McCain. Obama outclassed him in every respect save heroism in a war that occurred when Obama was a child. Perhaps sensing that fact, McCain relegated his campaign to jackal consultants. He abandoned any attempt at responsive policy, promising to keep us on the path to global economic destruction and to send more troops everywhere, just to show how tough we are. As the polls showed him slipping behind, he let his jackals ride what remained of his reputation down into the sewer, shouting racist insults and rebel yells all the way. He forgot that the South―while it may hold one key to the Senate―has failed to lead in anything both positive and important since our Founding.

After the election, the Republican party’s real leaders vanished. Mitt Romney―the natural candidate of business―dropped underground. So did Mike Huckabee, the evangelicals’ darling. Who filled the vacuum? John Boehner and Mitch McConnell. They continued the jackals’ politics of ridicule, lies and obstructionism, refusing to take the President, their rivals in Congress, or the nation’s troubles seriously.

These new “leaders” did manage to take one thing seriously: their own propaganda. They endorsed a ginned-up American brown-shirt movement incongruously labeled “Tea Party.” Then they imagined that Scott Brown’s victory in Massachusetts signaled a dramatic national lurch to the right.

They failed to account for three things. First, Scott Brown’s rival was a particularly lackluster candidate. Like Hillary, she thought herself entitled to the office and campaigned accordingly, not taking her rival seriously. Second, Massachusetts already had a decent health-insurance system, introduced by that selfsame Romney-in-hiding. It didn’t want to pay again for others’ health care.

Finally, Americans already have experience with brown shirts. It was called the Second World War. There are still enough people alive who remember Hitler’s brown shirts, have taught that lesson to their children and grandchildren, and don’t want anything of the kind in America, even if it adopts a cutesy but misleading title from our nation’s Founding. They know the difference between the real Boston Tea Party and an invitation to Kristallnacht.

So it went with health care. As with the primaries and the general election―Barnum-and-Bailey politics (“There’s one [a sucker] born every minute!”) failed, though not by much. The people’s representatives voted for a minor adjustment to our private health-care system that will curb its worst abuses and get another 10% insured. They dimly perceived that voters want leaders who take serious issues seriously. Maybe Congress’ 17% approval rating got their attention.

And so it goes still. Progressive bloggers now decry Obama’s willingngess to open part of our shoreline to oil-and-gas drilling. How, they scream, could the President give away his bargaining chips even before securing agreement to a carbon tax or cap and trade? The media, too, don’t get it.

But the President is crazy like a fox. He knows that there never was and never will be any bargaining. Led by Boehner and McConnell, the lemmings have already jumped off the cliff. They never intended to bargain or compromise. They never wanted to give the President a “win,” even if it would serve the people.

Now gravity has taken over. The lemmings’ fall won’t stop until they hit rock bottom and smarter people pick up the Republican party’s pieces. Romney the Jerk (1, 2, and 3 [Point 3]) is quietly licking his lips.

Anyway, the President has them in what chess players and debaters call a “fork.” Either way they go, the President and we the people win. If they change their self-defeating and nation-defeating tactics and make genuine compromise, the President will get credit for being the extraordinary leader that he is. If (as seems more likely) they continue their obstructionism, the public will tire of their lies and nay-saying. It won’t take six more months for the American public to see that the spoiled brats our erstwhile ruling class has become would rather the nation tank than help anyone else govern it.

With energy, the “fork” is even stronger. Oil-and-gas exploration ordinarily takes a year or two. But Big Fossil is so bloated with cash it will probably have exploration rigs in the field the day after leases are signed. If a big strike comes, the President can take credit for it. If not, he gets credit for compromising while his rivals did nothing to solve our forty-year-old energy crisis.

It gets even better in Florida. That’s a big, Southern swing state, with a large population of Hispanics and African-Americans. Its demographics make it ripe for plucking in a “swing-the-solid-South” strategy. So Florida’s coast is a big part of the plan for drilling. If a big strike comes offshore, Florida’s independent voters will give the President some credit. If not, the rich folk who live along the shoreline will wonder why the Republicans pushed so hard for a policy that ruined their peace, quiet, sailing and pristine views for nothing. Either way, Obama and we win. That’s a fork.

What about the lies and brown shirts that putatively elected Scott Brown? Obama and his party have over six months to show them for what they are. Come November, voters will know that the main thrust of health-insurance reform was to restrain private health insurers’ cruelest practices and increase the number of people with access to health care from 85% to 95%. After their recent antics, the public will recognize Tea Partiers as a rabble of thugs and seniles, carefully incited by Rovian political “operatives,” not a broad grass-roots movement. And come November, the Republicans will have not one positive economic contribution to show since the passage of Dubya’s prescription-drugs-for-Medicare plan, which Obama’s health bills reform. Who would prefer to run on this record over the one the President and Democrats will have?

What’s most fun is watching so many people underestimate the President so often and seem so surprised when they fail. The list is long: Hillary, McCain, Boehner, McConnell, Netanyahu, and now Karzai. All thought the President a wimpy professor who, despite a racial handicap, somehow managed to rise from nothing and win the longest, toughest political campaign in human history by sheer luck. They can’t seem to see how he makes his own “luck.”

Stupid people have trouble recognizing those smarter than themselves. Smart ones don’t have that problem. Among them are China’s Wen and Hu, Russia’s Putin, and Germany’s Merkel. They take Obama seriously and cooperate when they can.

But the know-nothing, do-nothing, take-nothing-seriously “leaders” in our own country are different. It will be great fun to watch their “surprise”―feigned or real―when conventional wisdom fails and the President’s party holds its own or gains in November. The trend of midterm losses is hardly a rule; it’s only a statistical likelihood. Watch Florida, Georgia, and Virginia.

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Diatribes of Jay

21 April 2010

The Case for Nuclear Proliferation

17 April 2010

The SEC’s Suit against Goldman, Sachs: What it Means

04 April 2010

Fork ‘em, Mr. President!

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