End of the Bernanke Era

Early next year, Ben Bernanke will step down as Chairman of the Federal Reserve Bank and for the first time in its nearly 100-year history, a woman will take his place. Janet Yellen, Berkeley Professor, and former president and CEO of the Federal Reserve Bank of San Francisco, will be handed the reins of an economy in recovery. After clearing the Senate Banking Committee on semi-bipartisan lines, she will be in charge of a Fed that has seen increasing scrutiny and calls for transparency (and abolition - see Ron Paul).

Bernanke's tenure mostly involved facing down the worst recession since the Great Depression. His time was marked by both the unprecedented steps he took to avoid a bigger financial catastrophe and the tools he employed to foster a (albeit slow) recovery. Under his watch, the Fed became more well-known and transparent body, even if pronouncements about the economy remained purposefully vague. In other words, the power of his words moved markets.

Bernanke presided over:

• TARP (Troubled Asset Relief Program, AKA the "Bank Bailout") - Close to $450 billion paid to ailing banks to prop up their balance sheets after disastrous sub-prime mortgage market collapsed. To date, the return for taxpayers has been about 97%. 
• Freddie/Fannie - Fed took control of Freddie Mac and Fannie Mae after they nearly collapsed over their low capital reserves and high amount of liabilities related to defaulted home mortgages. 
• Federal Support of the Auto Industry (AKA, Auto Bailout, or Government Motors) - financial support for a failing auto industry. This program, which was approved by the Bush Admin, injected $25 billion into the ailing auto industry, mostly to the "big three" - GM, Chrysler and Ford. It was highly successful it making the companies profitable and all lines of credit extended have been paid back. 
• Quantitative Easing (AKA, QE or Operation Twist) - Traditional monetary policy (keeping interest rates near zero) was not enough to stimulate the economy or grow employment, so the Fed decided to buy up government bonds to lower market interest rates. At the moment, QE3 involves buying up $85 billion/month. 

The significance of the steps that Bernanke took are embodied in both their immediate impact and their legacy. The policies, while necessary in staving off the worst effects of the recession, have left the recovery on such a dependency that any hint of easing monetary reforms have led to isolated market shock. Politicians and financial professionals have long held that bailing out institutions has brought an issue of dependence - if a bank can depend on a bail out even after risky, isolated behavior that does not benefit the public, there is no incentive to curb such activity. It is the quintessential problem that has defined "too big to fail." 

It will be up to the new chairwoman and the Fed to guide new policies on the risky behavior of banks. But, more importantly, Janet Yellen will have to make measured judgment about how and when to taper QE in a way that does not throw the US and the world back into uncertainty and recession. 

Guns, Democracy and Rule of Law in CO and NY

Guns, and the right to own them, is an American tradition, enshrined in the Constitution and upheld by the Supreme Court. The National Rifle Association rivals the American Medical Association and the AARP in it's lobbying power and spending. Bombastic language around revolutions and the supposed surreptitious government takeover of arms have been the justification for a massive stock up of weapons during the Obama Administration. At the fringes of the gun culture, the Administration has been compared to Nazi Germany.

Gun culture in the purple state of Colorado and the staunchly blue state of New York has created anti-establishment heroes out of law enforcement agents and the recall of state legislators. In Colorado, the passage of gun control laws instituting universal background checks and limiting the size of high capacity magazines to 15-rounds (size of clips that CO police carry) have led to recall efforts against Senate President John Morse (D-CO Springs) and Senator Angela Giron (D-Pueblo). In NY, Sheriffs and gun owners in rural, conservative parts of the state are refusing to comply with the Safe Act, the country's strictest gun control law which bans the sale of assault rifles and banana clips.

Colorado Recall

The Colorado recall effort is a waste of taxpayer money. But, more dangerously, it is a perversion of the Democratic process. The gun owners who started the campaign to recall the two Senators say that the legislation passed is a violation of their second amendment. Besides the fact that these people are highly unequipped to judge the merits of the law via-a-vis the right to bear arms, they are turning democracy in the state into an Egypt-style "boot the unpopular dictator" out because they did not get their way. One of the primary criticisms of the coup that ousted Mohammad Morsi in Egypt was that it delegitimized democracy. If you elect someone you don't like, just oust them by force or recall (in this case).

There is an appropriate time and place for recall efforts. Just because a legitimately elected official does not vote in congruence with a specific ideological orthodoxy does not mean they should be recalled. Recall should be reserved for nearly the same reasons as impeachment: high crimes and misdemeanors. In Democracy, the way to influence the policy direction of your state or country is purely through the ballot box during elections. In this case, the best way to ensure that gun rights are preserved is to challenge the law in court, not recall the people who wrote it.

New York - Safe Act

The New York Safe Act controversy is purely political grandstanding on the part of Sheriffs. Six sheriffs in northern counties of the state have flatly refused to enforce the law. Some, like the County Sheriff in Eerie County, call it an act of civil disobedience. Much like the Colorado gun owners, they believe it is violation of second amendment rights. Their constituents, who hate the law, voted them into office, so they must oppose the law too.

The simplistic calculus that the Sheriffs have applied leads to the worse violation of the oath to protect and serve - enforcement of the law. If a law is passed in the state, it is the duty of the Sheriff (and police) to enforce the law, no matter what their personal feeling are on the matter. Not only must they enforce the law, but they should be obligated to require that every sheriff and anyone responsible for law enforcement at every level enforce the law.

Let Experts Handle It

Those who oppose the new gun law restrictions, whether they are constituents of State Legislators or County Sheriffs, should allow the laws to be reviewed for their constitutionality. Once challenged in federal court, these laws will most likely be found unconstitutional. That duty is left to the courts and judges who have the expertise to apply judicial review to these laws. Assuming you have the authority to judge the law on its constitutional merits and acting on that judgement, especially if you are responsible for upholding the law, is a perversion of Democracy and the justice system.

Are They Ready for Democracy?

In 2009, the UCLA School of Public Policy held a panel on the politics and environment in the Middle East. The panel, made up of mostly academics from the school, was asked about the future of Middle East politics. One Adjunct professor made a remark about the rising tide of discontent among regular citizens. She said that we can speculate on a macro scale, but the environment on the ground, in the streets and in the mosques is much different. And, that is something we needed to pay attention to.

To say she had a crystal ball would be an understatement. In the last 4 years, the Arab world has experienced uprisings fueled by the desire to popularly elect leaders. The reaction of governments in the countries besieged by calls for democracy have ranged from immediate reforms (Morocco, Jordan, etc.) to civil war (Egypt, Libya, Syria, etc.). A 3-year civil war in Syria still rages on, with civilian and combatant casualties reaching over 100,000 and millions displaced.

While some of the countries have avoided long, drawn out conflict, the ones who have displaced their leaders by force (Tunisia, Egypt, Libya) still face an uphill battle towards full institution of a popularly elected government. And the ongoing civil war in Syria presents an age-old conundrum of choosing between the protection of civilians and democracy and the possible arming of future enemies.

Beyond the regional issues created by the Arab Spring, there remains a burning question about the Middle East: Are the countries of the Arab world ready for a Democracy?

Egypt

Egypt remains the most volatile of the Arab Spring countries, post-revolution. The Egyptian people popularly elected a government represented by the supposedly moderate Muslim Brotherhood, under the leadership of Muhamed Morsi. As the interim government rewrote the constitution and installed a Parliament, the Military moved aside and allowed for a peaceful transition of power. One year later, in response to another popular uprising, Morsi was deposed by the Military and the Parliament was dissolved. Morsi, who had promised a government that would represent the people who had struggled under the yoke of former president Mubarak, did the exact opposite. He installed Brotherhood members to cabinet positions and pushed aside secular opposition parties.

What is most disturbing about the plight of Egypt is that those who voted and elected Morsi will not see the Democracy as a legitimate means of governing. The consequences of electing an unpopular leader in a Democracy should always be resolved through the ballot box. In Egypt, that is not the case. The current environment bodes unfavorably for a country struggling towards a peaceful resolution. As Morsi supporters hold demonstrations (some peaceful, some not), members of the police and military fire live rounds into crowds, killing both the armed and the innocent.

Syria

Syria presents the Obama Administration with a conundrum: armed support of rebels against the Assad regime may lead to weapons falling into the hands of groups connected with terrorist organizations. A couple of the more effective rebel groups have already pledged allegiances to terrorist groups working in the Arabian Peninsula. This trade-off seems almost irrelevant when considering the amount of bloodletting and acts of barbaric savagery that have been perpetrated by both sides. But, taking the short view in a humanitarian crises only works in complement to the long-term perspective. And, the prospects for having a stable country following the end of the Civil War are low.

Democracy in Syria will never take hold because sectarian loyalties have crossed international borders and seeped their influence into the conflict. Iranian military units, Hezbollah militias and Russia have provided weaponry and support for the Assad regime and the Brotherhood, Qatar, Saudi Arabia, Jordan, Turkey and the Emirates have stepped up financial support for the Rebels. Syria has become less of a opportunity for Democracy and more of a laboratory for testing the extent of sectarian influence in the region.

Common Threads - Tyranny of the Majority

The Egyptian and Syrian conflicts represent a common threat in the region - uprisings, whether they supported by sectarian regimes or a result of popular protests, will not spawn a peaceful transition of power unless there is an assurance of complete representation. In the Federalist Papers, James Madison warned against the "Tyranny of the Majority" as an obstacle to the creation of a Democratic Republic. "Different interests necessarily exist in different classes of citizens. If a majority be united by by common interest, the rights of the minority will be insecure." Creating a will, or a central form of power, according to Madison, is the instrument of governments ruled by "hereditary or self-appointed authority" (Egypt pre and post-revolution).

It is only when you create a government that is represented by a variety of viewpoints, whether they be secular or religious, you foster the seeds of a representative democracy. In Egypt, secular and Coptic representatives were pushed aside for a largely Islamist government. Instead of voting that government out, protests led to a military overthrow. In Syria, a splintered Rebel group backed by Sunni-majority countries is fighting a regime backed by Shiite-majority countries. These conditions will only lead to either the installment of a self-appointed leader (Egypt) or the continuation of sectarian violence that has plagued the Middle East (Syria). In both cases, Democracy is far from certain.

Policing the World In a Nutshell

American foreign policy, when it comes to foreign intervention in conflict zones or war torn countries, is deeply rooted in a mentality established at the turn of the 20th century. In fact, one can argue that interventionism has its ultimate precedent not in American adventurism overseas, but the protection of our Manifest Destiny in our own, domestic sphere of influence.

If you don't like a history lesson, go to the bottom of the blog post...

President James Monroe penned the Monroe Doctrine in in 1823 as a veiled threat to colonizing European nations that they could not set up camp in United States' territory. While both sides claimed victory in the War of 1812, the United States emerged from this era (The Era of Good Feeling, as it has been called) with a sense of birthright to the entire continent, and no matter how powerful a colonial force was, we could muster the might to defeat them. We had beat back the British twice (debatable), stared down European impressment (kidnapping of US sailors) and even took out some Barbary pirates ("shores of Tripoli."). In summary, we had a big head about ourselves. 

Fast forward eight decades later, President Theodore Roosevelt (TR) updated the Monroe Doctrine with the Roosevelt Corollary. Deeply rooted in a policy of International Progressivism (not the progressivism of this era, although there are some similarities) expanded the US "sphere of influence" to include South America. In TR's humble opinion, chaos caused due to recent interventions in South America by European colonials seeking payments from debt heavy countries lead to hemispheric disarray. If the US was the arbiter of regional disputes and protector of the Western Hemisphere from wandering Europeans, all things would remain calm. Like former president William McKinley, TR was a fan of Alfred T Mahan and his book The Influence of Sea Power on History. He mixed the need for naval bases and international trade (as the book instructs) with Progressivism to create a foreign policy that helped user the US onto the world stage militarily and economically. 

During McKinley's presidency, the US declared war on, and defeated Spain. In doing so, the US received temporary control over Cuba and the territories of Guam, Puerto Rico and the Philippines. TR, against his own aversion to chaos, agreed (early in the 20th Century) to foment a popular revolution in Panama to obtain the land to build the Panama Canal. TR also employed JP Morgan to intervene on Venezuela's debt problem with Germany (and other European nations) and negotiated the peace treaty between Russia and Japan (after the defeat of Russia in the Russo-Japanese War) in front of the US Navy in Portsmouth Harbor (he won a Nobel Peace Prize for that one). All of these events cemented the role of the US as both an expansionist power and a believer in interventionist foreign policy if there was a benefit or threat to the country. 

Subsequent presidents, from Taft to FDR would have to deal with the consequences of being involved in South America, Philippines and eventually Europe. President Taft used Dollar Diplomacy to exert US military might to protect trade routes (rooted in Roosevelt Corollary), Woodrow Wilson used his "14-points" to form the League of Nations (the US did not join), President Coolidge became the first president to visit Cuba, Allied powers passed the Kellogg-Briand Pact outlawing war (that went well), went through an era of isolationism and eventually intervened in Europe to stop Nazism and in the Pacific to stem Japanese Imperialism. 

During the Cold War, the US viewed the world as split between the powers of Freedom (The US and European Allies) and the evil, monolithic, socialist states led by the Soviet Union and China. Foreign policy during this era was represented by proxy wars of various sizes and clandestine operations under the guise of Gunboat Diplomacy. We intervened with military might or CIA operation to stymie the supposed spread of socialism and the "falling of the dominoes" in Europe. If socialism was able to get a foothold in Europe and South America, the rest of the world would fall like dominoes. This kind of foreign policy was challenged by two dilemmas: Was a socialist leader was a nationalist (Titoism) or were they part of the evil empire (Soviet Union, et al)? How can we harmonize our need to foster democracy when a democratizing state turns to socialism?   

After the fall of the Wall, interventionism was used again to protect national security and, in some cases, as a moral imperative. During the H.W. Bush administration, we intervened in Kuwait to stop Saddam Hussein. During the Clinton Administration we sent troops into Somalia to capture a dictator and intervened in Eastern Europe to stop ethnic cleansing. We did not intervene during the Rawandan Genocide, which is something that Clinton regrets to this day.  

After 9/11 and the beginning of the War on Terror, the Cold War foreign policy of containment and brinksmanship was replaced (and adapted) to fight against terrorists across the Middle East who had no country of origin. Because the United States was no longer fighting a single state, but groups who passed over borders and blended in with the population, security apparatus to ensure against further attacks translated into nearly unprecedented attacks on civil liberties. While we received international support in ousting the Taliban in Afghanistan (perpetrators of the 9/11 attacks), we did not have full international backing when we invaded Iraq to secure WMDs. 

Why is this important? 

The newest challenge the United States faces in the war torn Middle East is the Arab Spring. It combines all the challenges that past presidents of the 20th century faced when intervening in a conflict zone. Dictators, some who are family of US-backed regimes, are being overthrown by popular democratic movements. While we continue to support the spread of popularly elected governments, by the people for the people, we face a challenge of the rising tide of Islamic extremism. In Egypt, the Muslim Brotherhood, who are fervently opposed to the state of Israel, have taken up leadership positions after the ouster of Hosni Mubarak. In Libya, a NATO-backed removal of Muammar Gaddafi has left a power vacuum.

As of last week, the Obama Administration has decided to arm rebels fighting a 17 month war against President Assad in Syria. As of late, the death toll has been over 100,000 with a confirmation that Assad used deadly Serin gas on his own people. Assad is the son of a military dictator in a country created by colonial powers. The rebels are a mix of moderate and extremist Islamic fighters who are fighting for control of their country. But, if control of the country means the installation of an Islamist state with strict application of Sharia Law, the Administration would be held accountable for another regime that is violently opposed to the US and the existence of Israel. Worse yet, the US might lose control of Syria's deadly chemical weapon stockpiles. 

Obama faces a familiar extension of US foreign policy. It is the age-old trade-off between the support of a populist fight against a anti-democratic regime and the consequences of that support. The Administration must prove to the American people that intervention, even if by indirect military action, both maintains our security and is a moral imperative.

Collective Amnesia About Housing Crisis

The Republican response to the State of the Union was peppered with stale Paul Ryan-esque ideas and uncompromising right wing rhetoric. What struck me most about Sen Marco Rubio's (R-FL) statement was his insistence that the housing crisis was caused by bad government policies. After belching out this gem, he goes on to encourage using a non-discriminating chainsaw to the federal budget.

Congressional Republicans seem to have a collective amnesia about what caused the housing crises. Sen Rubio wasn't even in Congress when the Financial Crises Inquiry Commission released a report detailing the causes of the financial collapse. In short, the housing crisis was caused by a mix of high risk investments, a shadow banking system, the proliferation of complex financial instruments and lax oversight on part of government watchdogs in the financial and housing sector. 

High risk investments were concentrated around the obsession by lenders to package risky, sub-prime mortgages into securities, paying rating agencies to slap a favorable rating on them and selling them to investors, both government backed (Freddie and Fannie) and private (WaMu, BofA, Citigroup, etc.). The shadow banking system refers to a proliferation of complex and unregulated financial instruments, like over-the-counter derivatives and credit default swaps. 

Even after a series of economic crises that led to unprecedented government intervention (Savings and Loan crisis, high level defaults, etc), the government had little appetite for continued oversight. Under the leadership of chairman Alan Greenspan, the housing and financial markets were essentially deregulated. Under these conditions, the derivatives market ballooned to a value of over $600 trillion and companies like Freddie and Fannie had trillions in securities investments with little capital to insure against default. 

The securities that some of the entities held were diverse and numerous in nature. Analysts justified their positive review of these assets by relying on the relatively harmless nature of a few thousand defaults in a diversified portfolio coupled with the assurance from the Fed that the economy was on sound financial footing and could absorb a massive default. Greenspan also instructed the fed to inject liquidity into the housing market through interest rates to further grow a bubble that would inevitably burst. 

In short, this was a failure of both the government through their insistence on not regulating complex financial markets and propping up a bubble. But, it was also a failure of the public financial sector by approving mortgages that were below standard, packaging these loans as securities, giving them positive ratings and not ensuring that some of the investor houses had enough capital. 

But all of this information is trumped by emotion. Sen Rubio knows that government failure under both a Democratic and Republican administration contributed to the housing crises. But, by employing the evil "G" word, people will connect the economic crisis and all of its ills to the current president. 

Politicians from both sides of the aisle have not (or do not want to) connect the dots between slashing spending indiscriminately and its effects on the ability of the government to stave off and discourage the type of disastrous and risky speculation that led to the housing downtown. 

By using government policy as a scapegoat for a event that had so polarized the nation, Republicans are assuring a emotional response to the task of deficit reduction. An emotional response leads to what many on the right like to call "starving the beast." The supposed failure of the government will be used as a means to cut the budget of some essential oversight agencies. This creates a self-defeating cycle that will only foster an environment of further reckless risk taking, negligence and crisis.