Steve Simon Against Afghan Buildup

Steve Simon, with whom I worked in State's old Politico-Military Bureau, has an op-ed in yesterday's Financial Times, "Pull the Plug on the Afghan Surge." I agree with most of his reasons to oppose a surge, except the last one: that if we withdraw troops from Afghanistan's border with Pakistan, the bad guys in Pakistan will probably return to Afghanistan and ease the situation in Pakistan, which is more serious. I don't think that making Afghanistan more attractive to the bad guys, whether Taliban or al-Qaeda, is a good argument for a military strategy. We should not offer them an unfettered base of operations in either country. But I don't think we need huge forces in Afghanistan to interdict the bad guys, but we should attack them whenever we are able to, and we should maintain enough forces to make their life unpleasant, if not impossible.

Corruption on Wall Street

This article from the Wall Street Journal is an apology or explanation of the claims of insider trading at Galleon and other hedge funds, but I don't buy it. On top of the sub-prime, over-leveraging bank debacle, the Madoff ponzi scheme, and other misdeeds by Wall Street, the claims of insider trading ring true. The commentators all say that there is a "fine line" between legitimate information and illegal, insider information. Wall Streeters cross this line every day. They all get information that is not available to people who are not professional, insider stock traders. The editorial says that insider tips are no sure thing for long-term profits. That may be true, but if you can get rich in the short term, who cares about the long term? Nobody on Wall Street. The whole crisis was created by bankers and traders who just wanted to make a buck on their trade, get the asset off of their books, and move on to the next, short-term, insider deal. They're all crooked. They're smart like Al Capone was smart, like Adolph Hitler was smart. They may be masters of the universe, but it's not a universe that anybody else would choose to live in.

Letter on Too-Big-To-Fail Banks

While federal government retiree and Social Security payments will be frozen this year, Wall Street is granting huge bonuses to its workers, who drove the US to the brink of a second great depression. Secondly, there has been little progress on improving financial regulation to prevent what happened a year ago from happening again. In particular the federal government still puts the full faith and credit of the United States behind half a dozen banks that are “too big to fail,” as Fannie Mae, Freddie Mac, and AIG were, while the rest of the US is left to its fend for itself. That policy encourages the big banks to take too many risks, and it gives them an unfair competitive advantage over smaller, local banks.

Government retirement benefits are frozen this year primarily because Wall Street almost bankrupted the country, which meant that there was no economic growth. Wall Street was responsible for throwing millions of people out of work. I believe they are pleased with that. The financial elites -- the one percent who make 95% of America’s income, the CEOs who make 400 times the salary of average workers, or whatever huge statistic you accept -- want a new paradigm where most labor is done overseas by workers in China or Bangladesh who are paid a pittance compared to American workers. In the future 10% or 15% percent unemployment may be the new normal, if Congress does not act.

“Too big to fail” is the primary problem that financial regulation must address. I am a big fan of Elizabeth Warren, the chair of the Congressional bailout oversight program. In one of her recent interviews, she warned that local banks likely face a crisis as commercial mortgages come due and need to be rolled over. There may be huge defaults, and she said that unlike the half dozen banks that are too big to fail, the FDIC would probably shut down the local banks. This creates unfair competition, because the FDIC only insures deposits up to $250,000, chicken feed for the financial elite. Meanwhile the too-big-to-fail banks (Chase, CitiBank, Bank of America, Wells Fargo, etc.) will never need to depend on the FDIC, because the federal government will never let them fail. They will be bailed out by billions of taxpayer dollars, as they were last year, rather than by the insurance fees paid by member banks of the FDIC. It means that the elite billionaires will bank primarily with the big banks, where they don’t have to worry about FDIC limits for the millions they have on deposit. They would be more reluctant to put those millions in a smaller bank that depends on the FDIC, rather than on the full resources of the US Treasury and the Federal Reserve currently pledged to the big six.

It’s important to regulate derivatives, as Congress has proposed, but I believe that it is more important to deal with “too big to fail.” If some banks had not been too big to fail, they would have failed because of their flawed derivatives dealing. It looks like some banks, Goldman Sachs for example, were smart in their derivatives trading. Even there, however, when the US bailed out AIG, about $12 billion of the AIG bailout went to Goldman to pay off their derivative bets. Goldman should have had to absorb that $12 billion bad bet with AIG. There should be a “moral hazard” to bad management, but the government has eliminated the moral hazard penalty for the big banks by making them failure proof.

A particularly terrible thing was the elimination of the Glass-Steagall Act provision preventing bank holding companies from owning other types of financial institutions, a revision done under the Clinton administration. This is part of the too-big-to-fail problem.

The bottom line for me is that the American government is abandoning the middle class, of which I am (or used to be) a member. It’s not unusual. The problem for many failing, developing countries is that they have no middle class. I saw this first-hand in Latin America and Asia. One reason China is making such huge strides in overtaking the US financially is that it is creating a vibrant middle class. Throughout history, societies have deteriorated as corrupt elites have gained more and more power; the Roman Empire is just one big example.

Israel Needs To Man-Up

Israel is pressing back against the UN Goldstone report finding Israel probably guilty of war crimes in its attack on Gaza. According to the AP, the report is having a number of perhaps unanticipated effects, including undermining Fatah leader Abbas, delaying Israel's participation in US peace plans, and putting Israel on the hotseat in the UN. Israel is outraged, but Goldstone, a Jew, has said that he calls them like he sees them and only wants the best for Israel.

The bottom line is that Israel needs to face the fact that morally it is falling short. It needs to man-up and behave in a manner acceptable to the world community of nations.

One of the main criticisms is Israel's use of white phosphorous artillery against people, including civilians. White phosphorous should not be fired on the ground; it should be used in air bursts as a marking round to see where artillery going. If it hits you, it burns until the phosphorous is consumed, because you can't put it out. But it makes a visible puff of white smoke during the day and a fireworks-light bright flash at night. It used to be fun to watch other artillery batteries shoot in delta tangos (defensive targets) for our fire base at night, so that they would know where high explosive rounds would land if they had to be called for during the night. They weren't intended to be used against enemy personnel in a fire fight.