Raid Syria? Actually, that's a terrible idea.

The implications of the US military strike into Syria are manifold. Counterinsurgency 101 tells you to eliminate all insurgent safe havens, but there will be serious negative consequences that might outweigh playing Al-Qaeda whac-a-mole in Syria.

But first, it is confusing as to who actually ordered the strike into Syria. It would appear that the White House has delegated the responsibility for ordering strikes into insurgent sanctuaries to the military commander of Central Command, David Petraeus.

Wow.

We take from Clausewitz that war is merely the continuation of politics by other means, but is it acceptable to give the Pentagon the ultimately political choice of when to potentially start a war? Clausewitz, and I say a definite no- even though Petraeus is a pretty good guy. And there could also be confusion as to who even ordered this particular attack. This is also a tad worrisome.

Syria is granting insurgents and terrorists safe haven in their countryside, as I discussed in the previous post, and this was getting on Iraq and the US’s nerves. But perhaps who ever thought it would be a good idea to conduct a US raid in Syria was banking on Syria’s response to be similar to Israel’s bombing of their suspected nuclear reactor last fall? (Which was rather muted at the time.) But Israel bombed a remote region that was closed off to the Syrian public, and the US sent ‘copters in the middle of the day near a pretty large town. It is hard to just write that off… It might be a little more expensive in the short run than a quick helicopter trip into Syria, but I would advocate that Iraqi and US forces man the border and we work towards getting the Syrian police to roll up the undesirables that might run amok along the Euphrates. Violations of sovereignty tend to upset people.

Most Syrians desperately would like to be free from Iran’s sphere of influence and rejoin the international community sans sanctions. Anyone who has taken an Iranian-made taxi in Damascus will sympathize. The Syrian government had recently been making overtures towards the west, but this raid is likely to set that back a quite a ways.

Finally, one must wonder what this will do to the SOFA (Status of Forces Agreement) negotiations back in Baghdad. Iraqis want the US military out of Iraq, and since it is a now a democracy (that’s a good thing, right?), the government needs to respond. The raid into Syria has thrown yet another wrench in the equation. And I’ll bet that it’s a pretty big wrench.

Raid Syria? Sure, why not?

This past summer I backpacked through much of Syria, and the guys at Zeitgeist have asked me to share a few thoughts on the recent raid by US forces into Syria.

First, a little back ground info:

On October 26th, the United States raided a village on the outskirts of the Syrian town of Abu Kamal, which is right on the Iraq border. Four American helicopters entered Syrian airspace in the middle of the afternoon (rather bold, I’d say) and the raid resulted in the death of Abu Ghadiyain, Al-Qaeda's senior coordinator who was operating in Syria. This is the first attack of this nature by US forces into Syria, and Syria’s government was none too pleased, labeling the raid “criminal” and “terrorist aggression.”

Russia, Venezuela, France, China, Iran, North Korea, and a host of other nations condemned the attack with varying degrees of strong language. Iraqi government officials also voiced extreme displeasure with the raid- the said they didn’t sign up to have Americans invading other countries’ sovereign territory while using Iraq as their base.

I took a whirlwind road trip of eastern Syria this summer, which included a visit to the town of Abu Kamal. After sugaring up my mukhabarat (secret police) escort that had been following me as I visited archeological sites on the Euphrates, I was able to visit the border crossing, pictured below, on the condition that I didn’t take any pictures.

The Syrian border guards were pleasant, and they said at most only five or six cars cross from Syria into Iraq each day. This, however, is not the impression you get from Abu Kamal, which was bustling with the types of commerce that you would expect in a remote town that Iraqi insurgents use as a safe haven. From the plethora of desert-going American SUVs, many with Iraqi license plates (and some with Texas DMV stickers still on their windows), it was clear that more than a half dozen vehicles were crossing from Syria into Iraq near Abu Kamal.

So indeed, there are Iraqi insurgents in Syria. And some even have Osama Bin Laden bumper stickers. Abu Kamal, and the whole of eastern Syria, is a pretty wild place. In counter-insurgency lingo it could be classified as a “sanctuary.”

But what to do about it? And what are the implications from this raid? More to follow in a few minutes...

Democrazy

On similar lines to Nick's post below. During an election year, this is about the time when the blogosphere starts beating the old drum of democratic policy inefficiency. The argument, as made famous recently by Bryan Caplan, is that voters are biased against rational or efficient policies. Even Tom Friedman has been getting in on the act lately, lamenting the fact that the US cannot be China for “just one day” (i.e., an authoritarian government) to fix its ailing climate/energy policy. The implication, of course, is that democratic governments take too long to settle on the “right” policy when it’s controversial.

I must admit that when I first read Dr. Caplan’s book, I was seduced by the argument, if not his punitive policy prescriptions. But upon consideration, it seems like a moot point to me. No one is arguing that democracy is more efficient than authoritarianism, but that’s sort of the point. It’s inefficient by design. It’s an exercise in consensus building, in which you essentially let everyone air their opinions before you govern. Undoubtedly, this will sometimes produce bad policies, although there is convincing evidence that democracies actually produce better policy outcomes than would be expected. But crucially, democracy confers legitimacy upon government, which in turn confers long-term stability. We would do well to remember that for every enlightened despot, there are 100 brutal dictators. Both types can be enormously efficient.

Policy inefficiency is the hefty price we pay for living in a free society. So please, for democracy’s sake, go vote next Tuesday. Get your uneducated friends to vote, too. Take pleasure in the fact that the whole exercise is deliciously inefficient. Try to cut out of work early if you can.

(Sorry for the sporadic posting of late, folks. Explanations forthcoming.)

(Ir)rationality

Lifted completely out of context, but interesting nonetheless. Via the Undercover Economist:

Game theory is the economist's tool of choice to analyse what happens when two or more people have to negotiate, co-operate, compete or otherwise engage with each other. The essence of game theory is that each side would expect the other side to anticipate and respond to his likely actions.

Game theory shows that there are times when irrationality (real or feigned) is a highly effective strategy. Someone who seems impervious to logic is someone who also gets his own way a lot. Consider, for example, toddlers, terrorists, bosses, dogs and the late Charles de Gaulle...by demonstrating a willingness to punish [a person or group] for no immediate personal gain, [the instigator] will gain in the long term anyway. Irrational perhaps, but rationally irrational. 

I would love to see a modern Ken Arrow test this against our last eight years of foreign policy; or better yet predict the next administration's. Rationality may be the basis for most of our decisions, but when it increases a country's utility (whether it is real or its leaders think it will) to use something else to justify action (such as nationalist fervor or resource control), that course is sold to the public. If politicians don't embody rational irrationality, I don't know who does. Ah wait, yes I do.

  

Zeitlinks

This link collection cost your authors $150,000. Seriously though, is anyone else ready for this election to be over? I just want W. to rock the lame-duck harder than anyone...I'm talking boy-band lame duck.

Nick

1. Little l or big L: McArdle nails it. Any explanation of the crisis, and associated doctrinaire, that blames one aspect (whether regulation, markets, or something else) misunderstands that this is a systemic problem.

2. Dream Team(s): The Cabinet is just as important as the ring leader. FP lets the pundits pick 'em. Some interesting choices throughout.

3. The increasingly larger fall of the rest: So "decoupling" was a myth? Wolf lays out the case.

4. Bailout Video: If you want to find something in the financial crisis to laugh about, look no further. All I have to say is Bernanke + helicopter = great success. (HT: Mankiw)

Patrick

1. Can India claim any uranium deposits it finds on the moon? In a word, no.

2. World trade growth slows: Trade data tends to lag a few months behind other indicators, so this is actually very bad news.

3. Stuffing our faces: It's worth reading this critique, but also the original article. It's bold thinking, whether you agree with it or not.

4. China, skewered by Neptune's Trident: The Baltic Dry Index is dropping, which is a discouraging sign.

Associative decline?

Via the TED blog today.

Economic troubles will trigger the decline of the free economy, collaboration, and open-source - including communities such as Wikipedia - and even, perhaps the blogosphere itself. People will be less likely to give away 'their intellectual labor on the Internet in the speculative hope that they might get some 'back end' revenue.

C'mon. Seriously? The idea that a burst bubble causes people to abandon collaborative efforts is pretty baseless. It is always in the best interest of efficient and curious people to work together and the internet has certainly revolutionized the amount of ways this is possible. Unless this crisis spells the death of homo rationalis, this will continue to be the case. The main point of 'intellectual labor' on the internet is not to get 'back end' revenue, it's to prove the viability of those who write psuedo-intellectual blogs (your authors included) and increase future utility.

Collaboration comes out best when times require sharing of information. At a time when everything else is falling apart, nothing should stop the openness of information on the internets.

Republican Redux?

Is the Republican party's "big tent" falling apart? Probably not, but worth considering given the very public departure of many realist conservatives from the McCain ticket. Goldenberg's list (via Dan Drezner) includes many besides Colin Powell, who made his very public endorsement this weekend.

Those running away from McCain probably have one of four motives: their advice was ignored by this administration and they want to make that clear to regain public trust; their advice was followed and they want to distance themselves from their failures; they are campaigning individuals who want to ride the "change" wave, and; they believe the Republican party (or at least in the manifestation of John McCain) no longer represents their beliefs.

These certainly aren't hard and fast categories, nor are they mutually exclusive. The first three are rather obvious, but not nearly as interesting as the possibility of the last. The Republican party has relied on a grand coalition of social and economic conservatives (much like the Democrat's labor bent). If those who ascribe to small government, limited spending, and pragmatic foreign policy no longer see their place in the Republican party then the ever more tenuous bargain will collapse. Culture wars have distracted McCain and Bush from their true base. Let's hope the next Republican candidate recognizes that.

New spin zone

My co-author, and the rest of the blogosphere, have rightfully given Krugman props on his Nobel. A little contrarian thinking for you all.

Paul Krugman

I am considerably late to the tea party on this one, but I'd like to extend my sincere congratulations to Dr. Paul Krugman, a true giant in the field of international trade theory, for winning the Nobel Prize in Economics. His work on strategic trade, economic geography, and the role of economies of scale have all been integral to my own understanding of how trade actually works. On top of everything else, he is a remarkably gifted communicator with a knack for explaining the extraordinarily complex in lucid terms. I don't want to voice an opinion on the politics of this decision. Others have already analyzed this angle quite well. But whatever the Committee's motivation regarding timing, Dr. Krugman clearly earned the Nobel Prize based on his own economic merits.

Credit markets seize... trade slows down?

As I noted the other day off-handedly, when we think of economic globalization, we tend to think of the two pillars of international finance and international trade. At LSE, we generally studied them as related, but distinct phenomena. Let’s put it this way: you know how you can get through English 101 by chanting “four legs good, two legs bad?” You can get through grad school by repeating ad nauseam the mantra “trade flows good, portfolio capital flows bad.”

I keed, I keed. But seriously, most academic economists acknowledge that trade is an all-around beneficial economic driver, whereas the record of finance (capital flows) is a bit more mixed.

Which is why I was so surprised to read about an unexpected knock-on effect of frozen global credit markets: the cost of financing international shipments has skyrocketed. In a nutshell: nobody wants to lend money to exporters to cover up-front shipping costs, even though the ships and cargo are put up as collateral (maybe lenders are afraid of pirates?) Unfortunately, in the real world, trade and finance are not quite the neat, separate spheres we study in the classroom.

This is a sobering development, one which has flown under the radar given the other enormous, paradigm-shifting developments that have occurred in these strange times. (Partial nationalization?!? Really??) But it is an indicator of just how bad things have gotten, and it gives a glimpse of how difficult it might become for the world economy to function, should these government-led rescue initiatives fail. A world where finance problems strangles trade is enough to send shivers down my spine.

(Photo by akpt)

Ideas and influence

Dan Drezner raised an interesting question that has crossed my mind several times during the most recent spat of financial turmoil: are governments responding to the opinions of academic economists? 

A small piece of anecdotal evidence for our readers. Last Thursday, Charles Calomiris posted on VoxEU that governments needed to directly buy up bank shares; Krugman (PROPS) had made the same argument. In case you hadn't heard, the Treasury announced today that they will do exactly that. Was Paulson responding to academic opinion?

Certainly the UK's (and other Europeans') decisions to buy direct stock in banks influenced the US decision but when the "innovators" of Wall Street land us in a sea of trouble, government officials have incentive to take the advice of more tempered minds from the halls of academia, even when the man implementing the plans is a Goldman alum. But whether this represents a permanent shift toward a more intellectually founded economic policy is a much different question. I'm leaning towards this being the case based on my opinion that the explosion of economics blog and popular writing on the dismal science has fundamentally shifted the way economics is viewed by laymen and policy wonks alike. Readers, what do you think?

The Second Great Depression

Right now, things are so bad that every time you turn on the TV, flip to the op-ed page, or fire up the internets, it’s almost impossible to avoid histrionic comparisons to the Great Depression. 6 in 10 Americans think the country is headed for a depression. Are we? Well, nothing is set in stone, and this is obviously an enormously complicated question. (Translation: I don’t know, but I doubt it.) In this post I want to look at one particular piece of the puzzle: the role of trade policy.

The Great Depression was in large part such a great depression because a recession was severely aggravated by poor government policy choices. On the one hand, an excessively tight monetary policy choked the economy. On the other, international commerce and trade were massively constrained by the infamous Smoot-Hawley Tariff, a very misguided attempt to protect American jobs and industry that ravaged the economy.

When looking for parallels to our own time, it’s reasonable to ask whether the backlash against financial globalization will spill over into the other pillar of globalization, international trade. Very smart people have recently fretted about this possibility. And that would be disastrous: whatever your thoughts on trade, it is an absolutely essential driver of economic growth.

The good news is, free trade is relatively safe. Unlike international finance, trade is regulated and enshrined in an international organization: the World Trade Organization, which is the successor organization to the General Agreement on Tariffs and Trade (GATT); the product of 60 years of multilateral trade negotiations that have successively lowered barriers to trade; and an organization with arguably the world’s strongest international adjudication body that protects the integrity of WTO trade rules. During the interwar period, when the Great Depression occurred and Smoot-Hawley was passed, you had nothing remotely comparable to the WTO. Any politicians who want to pass a new Smoot-Hawley (the Brown-Tancredo Tariff, perhaps?) must be willing to undo 60 years of foreign economic policy, infuriate all of our trade partners, and completely cede any credibility the US has in observing its treaty obligations. A tall order, indeed.

Plus, as I’ve noted before, integration is much deeper now than it was in the 1930s. Production is sourced all over the world, wherever it is most efficient. Trade in tasks. I guarantee you that if Congress were to threaten a new massive tariff, international firms would lobby very strongly behind the scenes to block it.

A more legitimate worry is whether transportation costs will strangle international trade (same link as above). But as I’ve also noted, this too is unlikely.

So take solace: perhaps trade isn’t moving forward, but it’s certainly in little danger of going backwards as well.

(Photo by teotwawki)

Someone old and something new

We all know the debate wasn't earth shattering; far from it. One original notion was voiced throughout the sea of talking points and it came up in the first response. From CNN's transcript, Sen. McCain:

As president of the United States, Alan, I would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes - at the diminished value of those homes and let people be able to make those payments and stay in their homes.

Now this certainly seems to me like a substantive proposal and, please correct me if I'm wrong, I haven't heard or read any pundit discussion on this shift. I've made my feelings known, and though I'm not a rabid fan, I don't understand why Sen. Obama is the "socialist" when Sen. McCain wants the government to buy every bad loan. Would you rather the government own your home loan or equity in a institution that holds your debt? Personally I wouldn't mind that extra buffer between Mr. Paulson and my home. I'm sure some of our readers disagree with me...let me know in the comments.

Why you should never forecast prices

We live in strange, rapidly changing times. Just trying to keep up with the latest news on the financial crisis is practically a full time job. Last week? Might as well be talking about last year. 3 months ago? It’s like the swinging 60s are back again!

In this spirit, I want to publicly admit that I was wrong. I’ve spent a lot of time writing about oil prices on this blog, and it’s plain to see that the prediction I made about a $100 price floor for oil was... quite misguided. I still think I have the supply and demand fundamentals right, but I realize now how remarkably little I understand about pricing in oil markets. A $100 floor, which seemed reasonable in July, now looks rather absurd.

I still intend to theorize on the fundamentals and whether they will shift prices, but I'm going to shy away from price predictions.

Zeitlinks

Here in Washington, we've finally entered the only six weeks of beautiful weather we get a year. It' seems it's been a tough week for almost everybody but hopefully a little good reading can cheer you up if you've been dismayed by stagnant debates and falling indices.

Nick

1. No Depression: In a week of drastic predictions and what seems to be the coming of a financial apocalypse, Clive Crook finds someone willing to take a contrarian view. I certainly hope they're right...most people are literally banking on it.

2. Does Ahmadinejad speak for Iran? Simply put, no. From my own studies and readings I can tell you I believe that this man will have no power by next fall's elections. The Ayatollah essentially selects the Iranian president. Khameini thought Mahmoud would be a weak puppet and when his marginal, firebrand Islam led him to start making absurd predictions the Ayatollah realized his mistake.

3. A whimsical take: The financial crisis as explained to the author's 14 year old sister. Can anyone tell me - what is a Charizard?

4. The other shoe drops: That "lesser fall" hasn't proved to be particularly applicable. But I stand by the contention that even as global markets mirror the US in their downward trends, the relations of global finance are much more equal and politically oriented.

5. Would a surge work in Afghanistan? Depends who you ask. I have made the argument that it won't for some time but there certainly doesn't seem to be any consensus. Both candidates want more troops. The commanding general needs more troops but not a surge and Petraeus says we need to talk to the Taliban. Who is in charge and do they have any type of coordinated plan for Afghanistan???

Patrick

(Geez, Nick, you don't know what a Charizard is? COME ON!)

1. The Bernson Plan: Yet another whimsical/metaphorical explanation of the financial crisis. But it made things remarkably clear for me, especially the newest arguments about recapitalization.

2. Let's call the whole thing off: Language is one of the oldest indicators of socio-economic status, and the Presidential Race is no exception. I will admit, the way Sarah Palin pronounces "Iraq", "Iran", and "nuclear" drives me up the wall. FWIW, I say "Eh-rahk" but not "Pah-kee-stahn".

3. The Burst Commodity Bubble: Very spot-on take of commodities prices.

4. Does the Free Market Corrode Moral Character? In a week when the Pope criticized the pursuit of wealth, I think this is a particularly timely rejoinder.

5. Stop Sending Mail You Later Regret. The newest libertarian paternalism craze: discouraging you from sending drunk emails. Seriously.

Who to believe?

Depending on who you believe, the Taliban and Afghan government are either in, or preparing for, negotiations sponsored by Saudi Arabia. President Karzai has admitted that negotiations are forthcoming, Taliban officials either set conditions or deny them, and rumors are circulating in policy circles that Pakistan has been speaking with the Saudis for at least a few months in an effort to secure their involvement.

Given the way information comes out of Afghanistan, it is likely that the Saudis are increasing their involvement in some way; but no clear picture has yet emerged on what these talks are meant to achieve. Supposedly "moderate" elements of the Taliban have split from Al-Qaeda and are interested in entering into the political arena. But without real consensus within the Taliban, can any agreement be trusted? Do we have any other choice with seemingly all our allies calling our efforts futile and useless?

I've said for a while that regional consensus and negotiation is necessary for any type of Afghan stability. Any form of coalition government is a bit scary given the Taliban's track record. The best scenario such a peace deal would yield involves peacekeepers, long-term border forces, and a weakened (and nonviolent form) of the Taliban as a minor opposition group to centrist political parties fashioned in Karzai's model. The likelihood of this is obviously slim so what we need before any more "talks" is a defined end goal and confirmation whether all actors would be willing to accept a less than ideal result in exchange for hopeful stability.

On Mandelson, money, and oil

I apologize for the light blogging as of late. I’m starting a new job next week and moving very soon thereafter, so I’m trying to get about a million things done before then.

Three thoughts. First, you’ve no doubt seen that Gordon Brown, in an attempt to shore up his eroding political position, has asked Peter Mandelson (his once arch-enemy) to join his cabinet. Mr. Mandelson was formerly the EU Commissioner for Trade (rough equivalent to the United States Trade Representative.) His departure is a serious blow to multilateral trade negotiations, and it makes it that much less likely that we’ll see a Doha deal in 2009. In my opinion, he understood how far he could successfully push the EU position to the inch, and he had no problems standing up to some of the more recalcitrant members. His departure also seriously diminishes the institutional memory of the major negotiators, which means quite a bit in trade talks.

Second, after tonight’s debate, we can probably start talking about the McCain campaign in the past tense. He looked worse than usual tonight: old, irritated and tired. Mr. Obama didn’t have a great night either, but you don’t need to shake things up when you’re in a commanding lead. Tonight was one of Mr. McCain’s last chances to do something, anything, to reverse that. Aside from proposing that the Treasury buy everyone’s mortgage (I’m pretty sure that was new) and simultaneously proposing a government-wide spending freeze, he didn’t do much. I think he’s toast, and I will argue, as I have done repeatedly in the past, that contracts for Mr. Obama winning the presidency are still undervalued on Intrade. Fivethirtyeight’s electoral projections give Mr. Obama a nearly 90% chance of victory, which strikes me as closer to the reality. His Intrade contract is trading for $7.20ish. Do the math. If you buy right now, and he wins on Nov 4th, you’re making a 39% return in less than a month. Did I mention that Intrade trades contracts worth Real Money?!? Now who said there weren’t good investment opportunities in today’s markets? It just depends on which markets you look in.

Finally, great post by my illustrious coauthor yesterday about the “black lining” (catchy!) of the current economic turmoil: oil prices closed below $90/barrel, although I think they went back above that mark today. Either way, they’re down nearly $60/barrel since July. The point is, commodities correlate well with economic growth: you need more oil, copper, and aluminum to make stuff when the economy is good and demand for ‘stuff’ is strong, so the prices of inputs (commodities) rise as well. Problem is, now that everyone thinks the economy is going to hell in a handbasket, commodities prices are tanking. Great if you want to buy into the market, not so great if you like strong economic growth. So while Nick is right that less oil revenue frustrates the plans of nasty petro-crats, I’d qualify this slightly by saying oil prices are low for the wrong reasons. We want prices to be low because a diversified energy portfolio means we’re demanding less oil, not because we simply can’t afford it. The foreign policy implications may actually be more, not less, dire than we imagined.

A black lining

Well the world is falling apart but there's a little bit of good news...Oil futures closed today below $90.

But as Brad Setser points out, the Gulf monarchies will feel a pinch in the coming year and that may spell even more bad news for the US economy. Sovereign wealth funds have certainly taken a hit in the recent downturn and exporters the world over are feeling the pinch from these losses; coupled with the downturn in prices, they probably won't be inclined to keep pumping money into Wall Street institutions.

The lower costs of consumption will most certainly be happily accepted by Americans given the coming winter. But the secondary implications for international oil exporters may also shape the next administration's initial foreign policy. Venezuela recently had to cut spending for the next year; Iran will probably be next. Domestic regimes who can no longer lavishly spend on their constituents will probably not be accepted as readily. Rogue leaders - weather in Iran, Venezuela, or Russia - may have trouble holding onto power when they can't continue propping up ill-designed economic systems with booming oil revenues. This is great news for the next administration - whoever is in charge.

The Mavericks

This is a minor point, and a very pedantic one at that. But one of the things that annoys me most about Sarah Palin’s folksy, homespun, light-on-substance persona is her use of the word maverick. Quoting the definition here for your convenience:

Mav·er·ick [mav-er-ik, mav-rik], noun. A lone dissenter, as an intellectual, an artist, or a politician, who takes an independent stand
apart from his or her associates. (emphasis mine)

I'm sorry, Ms. Palin, but you cannot have a team of mavericks. I also feel compelled to note that a very similar line was used as a repeating gag in a subpar awesome 1990s comedy about three would-be rockers who use plastic guns to hold up a radio station and try to get a record contract. What was their band’s name? The Lone Rangers.

Zeitlinks

The Mets collapse, as does the Dow, in a week filled with less than glamorous exits. The bailout is back and Biden v. Palin '08 is primed for the center stage. All that and it's almost the weekend, what more could you want? Your weekly Zeitlinks.

Nick:
1. A summary statement: If you get all your news from TV, you need to read this. Tyler Cowen's bullet points on the financial crises. We call these truthbombs, let 'em fly at your next dinner party and then walk away from the stunned crowd.

2. How much is $700 billion: What the Fed's cash could contribute to development goals around the world. Presented by Duncan Green, head of Oxfam Research, at his wonderful new blog.

3. Harnessing windfall revenues in developing countries: I have decided my thesis will focus on the extraneous effects of extractive industries on developing countries. If you're into that type of thing check out these two Oxford men offer their economic policy advice.

4. Careful Tour Guides: When I tell people I want to work in Afghanistan I get enough confused looks...imagine explaining that your going there on holiday?!

5. Service: A striking photo essay on the men and women of our generation's two wars (HT: Chris Blatmann).

Patrick:

1. Free Traitors: Mark Thoma points to this TNR article, which prominently featurs Jagdish Bhagwati (my favorite trade economist). Nothing new, but great overview on the politics of trade.

2. Australia OKs BHP takeover of Rio: Huge news in the mining world as the Aussies give the green light on BHP's takeover bid of Rio. BHP and Rio are two of the most important mining conglomerates in the world. The last regulatory hurdle is the European Commission, due to rule by January 15th.

3. Traders are going long on duct tape and shot guns: The stock market is a poor indicator. The credit indicators are still terrible, and there is an unprecedented investor flight to gold. Not good.

4. Politics and Paulson: a rant: I've been meaning to direct readers to this for a couple days. Dave's reactions to the failed House vote earlier this week are spot on, with a strong historical tie-in.

5. Looking for leaders? Look to Washington: Wilbon has the Redskins ranked second in the league after dominating Dallas last weekend. Yes, THAT Wilbon.

The rise (and lesser fall) of the rest

I've recently finished reading Fareed Zakaria's latest book, the Post American World, and found myself pondering its' relevance given the upheaval and turmoil in the finance industry.

Zakaria's implicit thesis revolves around the "rise of the rest". Undoubtedly a broad topic, the book forces the reader to accept succinct and sometimes cursory treatments of different countries facing different problems, but the central tenet holds: that the future of the world, herein represented mainly as BRIC countries, does not pose a threat to America despite their growing wealth and influence. That is because the upcoming power shift is caused more by the rise of these developing nations rather than a collapse of the US.

If the developing world is only tied to, but not buoyed by, the American economy then we would expect to see the top developing countries feeling some economic pain but not the complete stagnation previous bank failures have caused. The facts seem to support this. China and India's economies will certainly slow in the coming years (heck, even the Party admits it) but they also own a more than significant portion of our debt, as do the petro-powers of the Middle East.

In fact, the main reason the Fed can even afford to buy up these toxic Wall Street assets is because the Chinese seem to have an unending appetite for dollar-denominated assets. Is this because they see the American economy as something risk-free? Well they certainly did at one point and even with the recent crisis they are still confident that their investments are safe. As Tyler Cowen puts it:

Bush, Bernanke, Paulson -- we call them leaders. The Chinese think of them as the customer service department. I suspect the Chinese get straighter answers from them than we ever do.

The point is not that foreign countries are on the path to "owning the US". This protectionist scare raised its head during the last oil boom and the Japanese rise of the '80s only to prove unfounded. What is relevant is that as "the rest" rise they are still tied to the dominance of the American economy. In fact they continue to grow both because of, and in spite of, the US. Every country that has grown mainly from FDI or an export-led model relies on the US market but will also continue to grow during our downtick. With diversified portfolios, good savings ratios, and prudent spending, many countries will continue to grow as the US falters (China, as usual, being the best example).

This is not to say that the rest of the world is immune from our economic and political fate. Rather, despite their increasing independence, countries are still entangled with US finance and capital in an increasingly murky, and politically oriented, dance. Interesting pieces in the past few days delineate just how much Europe and China both rely on and distance themselves from the US. Whether this represents the continuing dominance of the US economy or the new integrated nature of global finance is a tangled and complicated question. One thing is certain, we cannot let the model collapse. Thankfully, the US Senate took note.

More thoughts: bailout fallout

The Senate is set to vote on the bailout presently, so I thought I’d add some more thoughts before that. Quick civics lesson: the gravitas of the upper chamber in the American legislature, combined with the relatively greater insulation from public opinion that a six year term affords, have traditionally resulted in greater bipartisanship. I imagine the bill will pass. Of course, I thought it would pass in the House as well.

First, in the comments section of yesterday’s post, Bradley has weighed in with an excellent, substantive overview of the issues at stake from a financial perspective. I strongly encourage you to read it.

Second, I forgot to add yesterday that perhaps another reason to support the bailout is that there is less choice about government intervention than it seems. Both the Fed and the Treasury have made it clear that, absent any new authorization, they will continue to intervene in the markets as necessary (provided they have the legal and monetary capacity to do so).

Turning to political ramifications, our friend Rory over at IPE-J noted today that the US presidential race is starting to break for Mr. Obama. Indeed, all the major poll-aggregators (which are more accurate than individual polls: I like Pollster and FiveThirtyEight) have noted significant swings following the first debate, both at the national level and in the major swing states. This bodes well for the prediction I made back in July. No matter how much you claim to be a maverick, people need someone to blame when the economy is doing poorly. Right or wrong, the incumbent party invariably takes the brunt of voters’ anger. Also, the fact that Sarah Palin is one of the most unqualified candidates to run for high office in the history of the United States doesn’t help. Her favorability ratings have plummeted from 47% favorable/23% unfavorable on Sept 11th, to 36% favorable/ 39% unfavorable today. She's done an admirable job of shoring up Mr. McCain's right flank, but she's making him less appealing to indpendent voters in the center of the political spectrum. Perhaps things will change if Putin rears his head in the near future.

As Rory presciently notes, Mr. McCain really needs Mr. Obama to forget to wear clothes to the next debate.