American Funk

Ian Buruma


NEW YORK – The eccentric Bengali intellectual Nirad C. Chaudhuri once explained the end of the British Raj in India as a case of “funk,” or loss of nerve. The British had stopped believing in their own empire. They simply lost the will, in Rudyard Kipling’s famous words, to fight “the savage wars of peace.”

In fact, Kipling’s poem, “The White Man’s Burden,” which exhorted the white race to spread its values to the “new-caught sullen peoples, half devil and half child,” was not about the British Empire at all, but about the United States. Subtitled “The United States and the Philippine Islands,” it was published in 1899, just as the US was waging a “savage war of peace” of its own.

Chaudhuri had a point. It is difficult to sustain an empire without the will to use force when necessary. Much political rhetoric, and a spate of new books, would have us believe that the US is now in a dangerous state of funk.

For example, Republican presidential candidate Mitt Romney likes to castigate President Barack Obama for “apologizing for America’s international power,” for daring to suggest that the US is not “the greatest country on earth,” and for beingpessimistic.” By contrast, Romney promises to “restoreAmerica’s greatness and international power, which he proposes to do by boosting American military force.

Romney’s Kipling is the neo-conservative intellectual Robert Kagan, whose new book, The World America Made, argues against “the myth of American decline.” Yes, he admits, China is growing in strength, but US dominance is still overwhelming; American military might can stillmake right” against any challenger. The only real danger to US power is “declinism”: the loss of self-belief, the temptation to “escape from the moral and material burdens that have weighed on [Americans] since World War II.” In a word, funk.

Like Chaudhuri, Kagan is an engaging writer. His arguments sound reasonable. And his assessment of US firepower is no doubt correct. True, he has little time for domestic problems like antiquated infrastructure, failing public schools, an appalling health care system, and grotesque disparities in income and wealth. But he is surely right to observe that no other power is threatening to usurp America’s role as the world’s military policeman.

Less certain, however, is the premise that the world order would collapse without “American leadership.” France’s King Louis XV allegedly declared on his deathbed: “Après moi, le déluge” (After me, the flood). This is the conceit of all great powers.

Even as the British were dismantling their empire after World War II, the French and Dutch still believed that parting with their Asian possessions would result in chaos. And it is still common to hear autocratic leaders who inherited parts of the Western empires claim that democracy is all well and good, but the people are not yet ready for it. Those who monopolize power cannot imagine a world released from their grip as anything but a catastrophe.

In Europe after World War II, Pax Americana, guaranteed by US military power, was designed “to keep the Russians out and Germany down.” In Asia, it was meant to contain communism, while allowing allies, from Japan to Indonesia, to build up economic strength.

Spreading democracy was not the main concern; stopping communism – in Asia, Europe, Africa, the Middle East, and the Americaswas. In this respect, it succeeded, though at great human cost.

But, now that the specter of global communist domination has joined other fears real and imagined – in the dustbin of history, it is surely time for countries to start handling their own affairs. Japan, in alliance with other Asian democracies, should be able to counterbalance China’s growing power. Similarly, Europeans are rich enough to manage their own security.

But neither Japan nor the European Union seems ready to pull its own weight, owing in part to decades of dependency on US security. As long as Uncle Sam continues to police the world, his children won’t grow up.

In any case, as we have seen in Iraq and Afghanistan, “savage wars of peace” are not always the most effective way to conduct foreign policy. Old-fashioned military dominance is no longer adequate to promote American interests. The Chinese are steadily gaining influence in Africa, not with bombers, but with money. Meanwhile, propping up secular dictators in the Middle East with US arms has helped to create Islamist extremism, which cannot be defeated by simply sending more drones.

The notion promoted by Romney and his boosters that only US military power can preserve world order is deeply reactionary. It is a form of Cold War nostalgia – a dream of returning to a time when much of the globe was recovering from a ruinous world war and living in fear of communism.

Obama’s recognition of America’s limitations is not a sign of cowardly pessimism, but of realistic wisdom. His relative discretion in the Middle East has allowed people there to act for themselves. We do not yet know what the outcome there will be, but “the greatest country on earthcannot impose a solution. Nor should it.

Ian Buruma is Professor of Democracy and Human Rights at Bard College, and the author most recently of Taming the Gods: Religion and Democracy on Three Continents.

Copyright: Project Syndicate, 2012.

Price Instability

by Doug Noland

February 03, 2012

Chairman Bernanke was forthcoming yesterday when he stated that loose monetary policy distorts the economy and leads to inflationary pressures. I’ll contend that the world would today be a safer place ifeasy moneyin fact always led to inflationary pressures. In reality, some of history’s most notorious Bubbles developed in an atypical environment comprising loose monetary policy and well-anchored consumer price inflation. 

One can look to the seemingly sanguine pricing backdrops in the U.S. during the “Roaring Twenties” and Japan in the eighties as cases in point. In both circumstances, a misdiagnosis of the Credit and financial backdrop was instrumental in policymakers remaining too loose for too long - and unwittingly accommodating precarious Bubble dynamics.

The U.S. economic recovery has achieved some momentum, risk markets are quite strong, the liquidity backdrop is amazingly robust, the banking system stable – and the Fed has nonetheless committed to sticking with near-zero rates for at least several more years. To be sure, market participants are anything but oblivious to the fact that they enjoy both ultra-loose liquidity conditions and a Federal Reserve eager to implement additional quantitative easing in the event of renewed economic weakness or market stress. It makes the oldGreenspan put” rather child’s playish.

In such a speculative marketplace, bubbling risk markets provide a powerful incentive that forces believers and non-believers alike to hop aboard. Increasingly, it’s a marketplace where everyone is being forced to become a trader with a short-term performance and trend-following focus. Attention to risk is proving too excruciating. For this phase of a historic Bubble cycle, it has been more a case of the Federal Reserve inciting rather than just accommodating Bubble Dynamics.

The Fed and global policymakers have fashioned a decidedly unlevel playing field. A distorted market incentive structure has fomented yet another bout of self-reinforcing risk-taking and speculation. Not all that many weeks ago, the global financial system was being rocked by de-risking and de-leveraging dynamics. Leveraged long positions were being reversed, which – in global markets dominated by leveraged speculation – was quickly leading to serious market liquidity issues. At the same time, markets were inundated with derivative-related selling, as players across the globe implemented strategies to hedge against various risk scenarios. With increasingly illiquid markets unable to withstand such selling pressure, global policymakers responded with resolve.

There is no happy medium. Equilibrium is a myth. It’s risk on or risk offmelt-up or melt-down. Oddly, relatively risk-averse and hedged global markets create quite a tinderbox. And as we now watch global risk markets catch fire and demonstrate a captivating propensity for going into melt-up mode, we’re witnessing confirmation of the “bi-polar,” “bimodal” and “fat (left and right) tailthesis. There are reasons why speculative Bubbles tend to end with destabilizingblow-offtops.

It is understandable to be confused by such strong market performance in the face of major global structural issues and attendant risks. I would argue that markets have turned highly speculative specifically because of the deep structural issues confronting global policymakers. 

Last year, the efficacy of policy measures notably dissipated (in Europe and here with QE2), provoking only more aggressive policy interventions. The markets are now responding to the unprecedented liquidity backdrop – and the reality that global policymakers have become hostage to the markets. Risk concerns have evaporated, and ebullient traders are referring to “the sweet spot.”

Not for a minute have I ever believed that the proliferation of derivative trading would end well. When a meaningful part of the marketplace moves to implement hedging strategies (as was the case again last year), the market will immediately find itself both prone to illiquidity and vulnerable to trend-following selling pressure. And, as we’ve seen, when policymakers then aggressively intervene to stem deepening market stress, markets abruptly become susceptible to a destabilizing reversal of hedging-related exposures. The unwind of both hedges and bearish short positions creates a powerful burst of buying power and marketplace liquidity. In short order, dangerously illiquid markets can be transformed into abundantly – I would argue, overly liquid. And there is nothing like the specter of buying panic associated with a major short squeeze to really empower the markets’ animal spirits. Nervousness and risk aversion are so second-half 2011.

The NYSE Financial Index is already up 13.6% year-to-date. Bank of America has gained 41%, Citigroup 27%, and JPMorgan 15%. Morgan Stanley and Goldman Sachs have jumped 34% and 30%, respectively. The S&P500 Homebuilding index has a 2012 gain of 20.9%. The Morgan Stanley Cyclical index is up 16.0%. The small cap Russell 2000 has gained 12.2% and the S&P400 MidCap Index has jumped 10.5%. The Morgan Stanley High Tech index is already up 14.0%, and the Nasdaq100 closed today at the highest level since early-2001.

It’s a backdrop that had me this week recalling the 1990s. I certainly haven’t heard so much bullish technology chatter since the tech Bubble. The outperformance of heavily shorted stocks also brings back memories of the nineties’ squeezes and all the trading fun and games. In the nineties, liquidity and market distortions were being fueled by the explosion of Wall Street debt instruments and leveraged speculation. The GSEs (chiefly Fannie, Freddie and the FHLB) were there to covertly provide a powerful liquidity backstop in the event of heightened market stress. 

The market incentive structure was pro-Bubble, and especially toward the end of the decade the marketplace had become rather emboldened from repeated crises resolutions. Today, the distortions are fueled largely by an explosion of Treasury debt and speculative leveraging, with the Fed and global central banks acting conspicuously as market liquidity backstops. Players are again emboldened.

I’ve been at this for awhile, so you won’t hear me calling for the imminent demise of this Bubble. I will, however, continue to warn that when this one blows there will be hell to pay. And what a fascinating juncture for the marketplace to so emphatically embrace risk-taking. Especially with readily available derivative risk protection, it is indeed rational for players to aggressively play the (policy-induced) global risk market rally – with one eye on buying cheap risk insurance. And I will assume the sophisticated global speculators will play this for all its worth (multi-billions, literally) – with an eye on the exits in the event Europe begins to unravel. Policymaker efforts to avoid a system blowup have created a backdrop conducive to a destabilizing speculative blow-off. And the Fed can still somehow trumpetstable prices.”

Seizing Sustainable Development

Jacob Zuma and Tarja Halonen


HELSINKI/JOHANNESBURGThe world is on an unsustainable path, and must urgently chart a new course forward, one that brings equity and environmental concerns into the economic mainstream. To do so, we must put sustainable development into practice now, not in spite of the economic crisis, but because of it.

Our challenges today are many. Economies are teetering, ecosystems are under siege, and inequalitywithin and between countries – is soaring. Taken together, these are symptoms that share a root cause: speculative and often narrow interests have superseded common interests, common responsibilities, and common sense.

As Co-Chairs of the United Nations’ High-Level Panel on Global Sustainability, we have been asked by UN Secretary-General Ban Ki-moon to work with 20 of the world’s most eminent leaders in grappling with these issues. Our task is clear: propose how to provide greater opportunity for more people with less impact on our planet.

A quarter-century ago, the Brundtland report, named for former Norwegian Prime Minister Gro Brundtland, called for a new paradigm of sustainable development. It stated that durable economic growth, social equality, and environmental sustainability are mutually interdependent. Human well-being depends on their integration.

We are convinced not only that this concept is sound, but also that it remains more relevant than ever. Now we need to put theory into practice by moving sustainable development into mainstream economics and making clear the costs of action – and inactiontoday and in the future.

By 2030, as the human population swells and appetites increase, the world will need at least 50% more food, 45% more energy, and 30% more water. Our planet is approaching, and even exceeding, scientific tipping points. This has serious implications for how we manage the global commons – and for reducing poverty: if developing countries are to realize their legitimate growth aspirations, they will need more time, as well as financial and technological support, to make the transition to sustainability.

Yet we remain optimistic. Representative democracy is now the world’s dominant form of government. Advances in science have given us a better understanding of climate and ecosystem risks.

Billions of people are connected by technologies that have shrunk the world and expanded the notion of a global neighborhood. We believe that we can summon the wit and the will to choose our future, rather than have it choose us.

The greatest risk lies in continuing down our current path. In 2030, a child born this year will come of age. We cannot mortgage her future to pay for an inherently unsustainable and inequitable way of life.

So, how do we begin to tackle the massive challenge of retooling our global economy, preserving the environment, and providing greater opportunity and equity, including gender equality, to all? The Panel’s report, Resilient People, Resilient Planet, offers suggestions.

First, we need to measure and price what matters. The marketplace needs to reflect the full ecological and human costs of economic decisions and establish price signals that make transparent the consequences of action – and inaction. Pollution – including carbon emissionsmust no longer be free. Price- and trade-distorting subsidies should be made transparent and phased out for fossil fuels by 2020. We also need to build new ways to measure development beyond GDP, and propose a new sustainable development index by 2014.

Second, we must put science at the center of sustainability. We live in an era of unprecedented human impact on the planet, coupled with unprecedented technological change. Science must point the way to more informed and integrated policy-making, including on climate change, biodiversity, ocean and coastal management, water and food scarcities, and planetaryboundaries” (the scientific thresholds that define a “safe operating space” for humanity). To see the big picture, we propose a regular Global Sustainability Outlook that integrates knowledge across sectors and institutions.

Third, we need to provide incentives to take the long view. The tyranny of the urgent is never more absolute than during tough times. We need to place long-term thinking above short-term demands, both in the marketplace and at the polling place.

Limited public funds should be used strategically to unlock greater private investment flows, share risks, and expand access to the building blocks of prosperity, including modern energy services. The UN’s Millennium Development Goalsaimed at, among other things, halving global poverty by 2015 – have served us well. Governments should develop a post-2015 set of universally applicable Sustainable Development Goals that can galvanize long-term action beyond electoral cycles.

Fourth, we should prepare for a rough ride ahead, because extreme weather, resource scarcity, and price volatility have become the “new normal.” We need to strengthen our resilience by promoting disaster risk reduction, adaptation, and sound safety nets for the most vulnerable. This is an investment in our common future.

Fifth, it is crucial to value equity as opportunity. Inequality and exclusion of women, young people, and the poor undermines global growth and threatens to unravel the compact between society and its institutions. Empowering women has the potential to reap tremendous benefits, not least for the global economy.

Ensuring that developing countries have the time – and the financial and technical support – to make the transition to sustainable development ultimately benefits all. Promoting fairness and inclusion is the right thing to do – and the smart thing to do for lasting prosperity and stability.

No expert panel, including ours, has all the answers. But if we work together, we can help to steer our world onto a safer, more equitable, and more prosperous course. We call on leaders across all sectors of society to join us. The need is urgent; the opportunity, enormous. Let us seize it.

Jacob Zuma is President of the Republic of South Africa. Tarja Halonen is President of the Republic of Finland. They serve as Co-Chairs of the UN Secretary-General’s High-level Panel on Global Sustainability.

Copyright: Project Syndicate, 2012.


FEBRUARY 9, 2012

Banks Near $25 Billion Pact on Foreclosure Probe


Government officials are on the verge of an agreement worth as much as $25 billion with five major banks, capping a yearlong push to settle federal and state probes of alleged foreclosure abuses by lenders.

The deal would represent the largest government-industry settlement since a mammoth, multistate deal with the tobacco industry in 1998.


European Pressphoto Agency

HUD Secretary Shaun Donovan haggled with states over a deal.
The agreement covers five banks: Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co., and Wells Fargo & Co. Together, the five handle payments on 55% of all outstanding home loans, or around 27 million mortgages, according to Inside Mortgage Finance.

Federal officials were planning to announce the accord Thursday morning, but the timing could yet be pushed back as some details had yet to be ironed out. Among them: the precise size of the agreement and the number and identity of participating states.

Representatives of the banks declined to comment.

The planned pact would involve $5 billion in cash penalties, payable to troubled borrowers, states and the federal government. That includes $1.5 billion in cash payments to foreclosed borrowers. Individual borrowers are expected to receive around $1,500 each, with the actual amount paid depending on the number of borrowers filing a claim.

The agreement is expected to call on the banks to provide $20 billion in other aid—by cutting loan balances for tens of thousands of homeowners and by refinancing thousands of borrowers who are current on their loans but owe more than their homes are worth.

Officials say the deal will help provide immediate benefits to around one million homeowners, while raising accountability for banks that work with borrowers facing foreclosure. The foreclosure process has been snarled since late 2010, after allegations that banks had serially submitted bogus mortgage documents when attempting to repossess homes from delinquent borrowers.

The bank payments would unlock a large new source of housing funding at a time when Congress doesn't appear likely to approve new spending measures to tackle lingering problems facing housing markets, such as a refinance program that President Obama unveiled last week.


The Obama administration made a full-court press over the past four days to secure the support of key state attorneys general, including those from Florida, California and New York.

All three overcame misgivings about the plan in recent days, people familiar with the situation said. The inclusion of California is especially important: People familiar with the discussions say the banks would have been willing to pay just $19 billion without the participation of the nation's most-populous state.

The office of California Attorney General Kamala Harris declined to comment. A spokeswoman for Florida Attorney General Pam Bondi said that "while Attorney General Bondi has not yet joined the settlement, she is hopeful that a resolution will be reached soon."

Shaun Donovan, secretary of Housing and Urban Development, became heavily invested in recent months in bringing the long-running negotiations to a conclusion. Mr. Donovan, who spent much of this week haggling with state officials over the final terms of the deal, made principal reduction a central piece of the deal but needed the support of as many states as possible to secure a price tag large enough to be meaningful.

The agreement is the latest government effort to ease housing-market problems that have plagued the economy for the past five years. Nearly 1.9 million homes have gone through foreclosure in the past two years, but just as many loans are in some stage of foreclosure.

On its own, the deal won't be a cure-all for the housing market or to the majority of borrowers at risk of foreclosure. Home prices have fallen by nearly one-third over more than five years, slashing real-estate values by $7 trillion and leaving 11 million homeowners with mortgages that are exceed their property values by $750 billion. High unemployment has frustrated round after round of federal efforts to stem foreclosures.

"It is frankly a headline victory for both banks and attorneys general with little real impact on the housing market," said Joshua Rosner, managing director of investment firm Graham Fisher & Co.

The resolution is likely to remove one cloud of uncertainty that has depressed bank stocks, and analysts say it isn't likely to result to a significant hit to bank earnings. Many of the loans where banks may reduce balances have already been marked down on their balance sheets, requiring them to have already built a cushion against losses.

"It's not new money. It's all soft dollars to the banks," said Paul Miller, a bank analyst at FBR Capital Markets.

Nadine Bond, who lost her home to foreclosure in 2010, is among those who expect to benefit from the settlement. Ms. Bond says that Ally's GMAC Mortgage unit foreclosed on her the day prior to what she had been told was the due date for her first loan modification payment. Ms. Bond, a receptionist who lives in Middletown, Conn., expects to qualify for a cash payment of $1,500 or so.

Her attorney, Jeff Gentes, says he is pleased that the deal won't bar her from pursuing other ways to obtain relief, such as the review process set up by federal banking regulators.

But "I have mixed feelings" about the settlement, Ms. Bond says. "It will help, but it is not going to get my home back."

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