Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

20 June 2012

“Old Europe”

Over the last decade or so, we Yanks have said some pretty stupid things. Dubya’s “Mission Accomplished” banner, unfurled in May 2003, preceded nearly a decade more war in Iraq, including a minor civil war. That war is still ongoing today, just not with our own combat troops.

For sheer arrogant stupidity, it’s hard to top that one. But That Idiot Rumsfeld came close, with his frat-boy taunt of “Old Europe.”

To see just how dumb Rumsfeld’s jibe was, let’s take a clear-eyed look at recent history.

Let’s take science first. Over the last two decades, we Yanks have virtually abandoned basic science outside of medicine. The trend began with our killing the Superconducting Super Collider in 1993. Now its counterpart, the Large Hadron Collider, sits in Geneva. So our scientists must go to “Old Europe” to explore the mysteries of the subatomic universe. Ernest O. Lawrence, who designed the world’s first cyclotron at Berkeley over ninety years ago, is probably rolling over in his grave.

Next let’s take law—international law. We were only one of the victors in World War II. But were were the only one whose territory and civilian population were intact. We could have stomped our enemies with heavy boots, as victors had done to vanquished since time immemorial. Instead, we followed Jesus’ advice and loved our erstwhile enemies [search for “Marshall Plan”]. We built up their economies with the Marshall Plan, creating the world’s first, third and forth most prosperous nations today (including our own).

That history is well known. What’s less well known now is how we changed international law with the Nuremberg Trials [search for “Old Europe”]. For the first time in human history, we imposed individual responsibility for aggression and atrocities on an errant society’s leaders, not collective responsibility on its hapless population. We did the same thing in Japan.

As I have noted elsewhere, that small step was a giant leap for mankind. If continued and strengthened, it has the potential to halt the endless parade of clever demagogues causing self-destructive tremors in the landscape of human history. There is nothing like putting tyrants and butchers on public trial to show that power entails responsibility, not just to one people or ethnic group, but to our entire species.

So far, so good. But where is that tradition continuing now? Not here. In “Old Europe.”

Europe has the International Criminal Court, which we Yanks have refused to join. In the past decade it or specialized offshoot tribunals have prosecuted such evil men as Slobodan Milošević, the Butcher of Kosovo, Ratko Mladic, the Butcher of Srebrenica, and Charles Taylor, now sentenced to 50 years imprisonment for, among other things, “terrorism, rape and murder of civilians, . . . [and] recruiting child soldiers and child sex slaves.” Omar al-Bashir, the Butcher of South Sudan and Darfur, is under indictment, and Bashar al-Assad, Syria’s Butcher, may be next.

Where is the US in all this highly public legal action against butchers and tyrants? Nowhere. The operational planner of the biggest butchery of innocent civilians in our own history—Khalid Sheikh Mohammed—still sits in a military prison awaiting trial before a military tribunal, part or all of which may be closed.

So who carries the ball of public and well-publicized trials of the worst criminals our species has produced? Who keeps the path-breaking precedent of Nuremberg alive? “Old Europe,” that’s who.

In finance the story is much the same. Our Yankee bankers created the biggest financial catastrophe after the Great Depression. Yet not one of this economic atrocity’s architects has yet come to justice. Most have not only escaped accountability; they have waxed ever richer.

Yet in “Old Europe,” the process of accounting already has begun. Under the leadership of Germany’s Chancellor Merkel, private holders of Greek bonds have been forced to take a 50% “haircut.” If Greece defaults, they may take more.

That’s called “capitalism.” It’s also called “free markets.” You want to bet on the sovereign bonds of a weak state? Fine. But if you lose, you pay. If you are a corporation, your shareholders pay, not innocent taxpayers. That’s personal responsibility—something today’s right wing talks about endlessly but somehow always manages to evade.

The game is not over yet. The bankers have tried to protect themselves with a huge store of derivatives, now reaching the astronomical height of $700 trillion globally. (No, that’s not a typo.) Their endless quest to keep gambling but never lose may yet cause another Great Depression, this time completely a completely global one.

But at least “Old Europe” has made a start at restraining financial villains with the same sort of personal responsibility that the Nuremberg trials imposed on Nazi war criminals. We have not. Europe also has has begun to adopt serious, stringent regulation, and its leaders have proposed a tiny tax on financial transactions to fund the next big bailout. Here, too, “Old Europe” leads.

Then there’s the question of bailouts versus “austerity.” It should be obvious by now that we have both, in a global vicious cycle that is busy repeating itself in time and space.

Politicians in the world’s democracies promise their people things too good to be true. To get re-elected, they make them happen by borrowing money. Bankers lend the money readily but unwisely, often charging too little interest. They then pass the risk off to other bankers by buying credit-default swaps and other derivatives from the likes of Goldman Sachs. When the whole financial house of cards inevitably crashes, the pols and bankers conspire to force ordinary people, collectively, to pay up.

That’s called “austerity.” The name makes it sound like a good old Calvinist virtue. But it’s not. It should be called “we play, you pay.”

The individual architects of this vast Ponzi scheme bear no individual responsibility. Pols get re-elected, their parties continue, or they retire into comfortable and well-deserved obscurity. Bankers collect on their derivatives, take their bonuses, and prepare to do the same again.

No voters besides those of France and Greece seem to have noticed two glaringly obvious points. First, this state of affairs is utterly unsustainable. As in any Ponzi scheme, something eventually must break. The trick now is to make sure that “something” is not the global economy. Second, unless there is a solution soon, the people—ordinary taxpayers and workers—will be the ones left holding the bag of debt and financial destruction.

Merkel’s haircut of Greek bond holders has the potential to break this vicious cycle, but its near-term consequences are unpredictable. Just think of all those $700 trillion worth of derivatives as a delicately balanced house of cards about to fall.

The solution is now obvious, at least in rough outline. We need some variant of Keynesian economics, which brought us out of the last depression. We must borrow money one last time, but not to bail private bankers out yet again. We must borrow money to prime the pump of the global economy and make the debt seem smaller. Then we must raise taxes to pay it off quicker. Finally, we must clamp down hard on miscreant bankers, unwind the Everest of derivatives, and make sovereigns tighten their belts and bankers take real, personal risk again. In other words, we have get back to real capitalism and stringent regulation, keeping bankers and pols on a short leash.

This is not easy stuff. It’s easy to say, but not to do. We not only have to walk and chew gum at the same time. We have to do three things simultaneously and effectively: (1) stimulate the flagging global economy (the real one, not finance), (2) cut government debt (and constrain ebullient pols) by raising taxes, and (3) tighten regulation drastically to get the mess the bankers have made of global finance back under control and under some semblance of the personal responsibility that used to be capitalism.

We Yanks are doing none of these things—not one. Our system is structurally incapable of acting, and our population is confused by demagogues. In contrast, “Old Europe” has already taken the first steps toward doing (2) and (3).

Recent elections in France and Greece suggest it is also considering step (1)—exchanging mindless “austerity” for some stimulus to the real economy. The French socialists won a complete majority to push for less austerity and more growth. The Greeks stepped back from the brink and probably won’t repudiate the Merkel-bargained bailout that already made private bankers bear 50% of the loss. But, as any observer of Greece knows, the Greeks are not sanguine about mindless austerity.

Since the Crash of 2008, global leaders have done little to address its underlying causes. They staved off immediate catastrophe at astronomical expense. Then they kicked the can down the road. We Yanks are stuck in political paralysis. Only “Old Europe” offers a ray of hope.

As I wrote before, personal responsibility is the salvation of our species. We Yanks imposed it after World War II and then dropped the ball. “Old Europe” has picked that ball up, with prosecutions for tyrants, mass rapists and butchers, retirement for clueless politicians, and “haircuts” for improvident bankers.

So as you think of “Old Europe” and its present struggles, remember that it’s the historical source of all our good Enlightenment values, including racial equality. (The British abolished slavery long before we did and fought to contain it in Africa.) And understand that Europe has wisdom, born of two millennia of struggle, suffering and trying to perfect those values.

Anyway, it now should be clear even the to dumbest investor that we are all in this together. Europe sneezes and we shiver. We are our brothers’ keepers, worldwide. If others suffer, so do we, and vice versa. The Crash of 2008 proved the latter proposition.

“Old Europe’s” people and leaders seem to be catching on to these essential truths quicker than we Yanks. So don’t count “Old Europe” out.

We don’t need endless bailouts of private investors followed by “austerity” for the masses. We need a way to break the vicious cycle and return to rational, stable, dull finance. Europe is groping for a practical way to do that. We stand transfixed by ideology like a deer caught in the headlights, unable to move. We could do far worse than follow “Old Europe’s” lead.

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