Shadow Government

'Even some supporters fear the potential for hubris'

In its scene-setter for the president's State of the Union Address, the New York Times, long one of the most reliable supporters of the Obama Administration, went off script and described the mood inside the White House in unsettling terms: 

"Inside the White House and out, advisers and associates have noted subtle but palpable changes in Mr. Obama since his re-election. "He even carries himself a little bit differently," said one confidant who, like others, asked not to be identified discussing the president. He is relaxed, more voluble and even more confident than usual, these people say, freer to drop profanities or dismiss others' ideas -- enough that even some supporters fear the potential for hubris."

That striking text was in my mind as I studied the President's State of the Union Address. It was, as advertised, mostly about domestic policy. The sections that did touch on foreign policy were notable mostly for how disconnected they were from the urgency of the myriad crises confronting the administration:

  • The president promised "mission accomplished" in Afghanistan by next year, a remarkably rosy outlook for a conflict that many experts fear is headed toward a far more dismal outcome. On the positive side, however, Obama did not honor Biden's campaign pledge of cutting U.S. troops to zero, thus perhaps tacitly acknowledging that the fight in Afghanistan remains daunting.
  • The president boasted about helping allies take the fight to al Qaeda and its affiliates, but elided over the setbacks and reversals that have spread that fight to new regions.
  • The president asserted that he had "worked tirelessly" on a new legal framework for the war on terror, about which he had kept Congress "fully informed" -- his only nod to the groundswell of opposition and outcry to these very same initiatives.
  • The reference to North Korea's latest nuclear test could hardly have been more perfunctory and the mention of Iran was likewise ritualistic. Nowhere does he acknowledge that both policy lines are failing. Perhaps the biggest concession in this regard was what was not said -- contrary to predictions, the president did not announce a bold new round of nuclear cuts and instead promised only to "engage Russia to seek further reductions..."
  • The president's references to Syria were even more cursory, oddly out of synch with the dramatic revelations regarding internal debates over Syria policy and the even more dramatic and tragic descent into chaos in Syria itself.
  • On trade, the president renewed old promises to deliver on a Trans-Pacific Partnership and made new proposals to launch a similar round with our Atlantic partners -- but gave no explanation for why the trade agenda has languished on his watch.

Indeed, on the national security and foreign policy front, Obama's biggest State of the Union play involved announcing a new executive order to increase "information sharing" in the area of cyber defense. This is a sound and sensible measure in an area where the administration has made genuine contributions, but it is modest in light of the threat.

All told, the foreign policy section was troubling not because it proposed a range of dangerous policies, but because it seemed not to recognize how dangerous the world is becoming for U.S. policy. It seemed to be the speech of someone who felt he was in an unassailable position and did not think there was much to argue about and thus little on which he needed to persuade.

Relatedly, an earlier New York Times article addressed a theme well-familiar to the denizens of Shadow Government: the stark contrast between Obama's Bush-bashing rhetoric and Bush-embracing war on terror policies. I am quoted in the article, a syntax-mangling snippet from a longer conversation I had with the reporter, Peter Baker, who asked me to explain the disconnect.

I told him I could think of two possible explanations. One is mere hypocrisy -- that is, Obama knows that he has been the pot calling the kettle black and is happy to continue to do so until he pays some political price for it. I favored, however, a second explanation, one perhaps a wee bit more generous to the administration: the president and his backers sincerely believe that he was acting more responsibly than the Bush Administration because they sincerely believe in a cartoon caricature of the Bush policies. According to the caricature, Bush enacted certain policies for some combination of nefarious reasons -- he was power-hungry, he was seeking partisan advantage, he was beholden to certain oil and gas interests, he was lying to the public, he was exaggerating the threat, etc. -- and he did so without any regard to respecting civil liberties and other ethical values. By contrast, Obama enacted the same sort of policies, but only so as to protect Americans and only after due regard to balancing civil liberties and other ethical concerns.

Granted this second explanation is not all that more generous to the administration, and so I am not surprised that my friends on the other side of the aisle bristle at it. Their reactions fit neatly into two groups. About half have expressed great outrage that I would even suggest that Obama holds such a view. And the other half have expressed great outrage that I would call such a view a caricature since it is obvious to them that the view is correct!


Shadow Government

Will Mario Draghi's eurozone fix backfire?

The conquering of the euro crisis seems like something out of a fairy tale. Faced with a gut-wrenching peril, our hero closes his eyes and chants an incantation: "Whatever it takes!" Suddenly, once-insurmountable troubles melt away and everyone lives happily ever after.

So what happened? Was it all in our minds? Was the episode anything more than a panicked bunch of bond traders, stampeding toward a precipice but now safely pacified and redirected?

As last summer turned into fall, Italy and Spain were wobbling. The two countries -- the third and fourth largest economies in the eurozone -- saw their bonds shunned by global investors. For the heavily indebted pair, a bond sell-off meant that interest rates rose and disaster loomed. At some point, the high price of borrowing would become unbearable. The eurozone nations had gathered funds to try to avert a crisis, but the sum would not be enough to cover the needs of such large member economies.

Then Mario Draghi, head of the European Central Bank, stepped in to save the day. He announced that the ECB would do whatever it took to save the currency. If extra funds were needed, the ECB would provide them through a program it called Outright Monetary Transactions -- the unlimited purchase of troubled nation bonds once those countries asked for help.

The effect of his announcement was dramatic. Bond yields fell as buyers relaxed. While the previous bailout fund might have been limited, the ECB's ability to print money and buy bonds was not. The restoration of calm was so successful that the ECB did not have to actually do a thing -- the mere announcement that it was willing to act relieved the pressure on Spanish and Italian borrowing.

It is hardly a novel idea to think that a dangerous market panic could be settled by words alone, so long as those words were credible and uttered by the right person. So, do we mark this up as an instance of judicious intervention? A daring move by Mario Draghi that saved the European project and merited his selection as the Financial Times' Person of the Year?

Maybe. The problem is that the sovereign debt problems plaguing Spain and Italy were only one part of a multi-dimensional crisis. The other problems remain, two in particular. First, the untenable contradictions of the eurozone's approach to banking have not been resolved. Second, the beleaguered countries along the eurozone's periphery are being asked to endure potentially unbearable levels of unemployment and economic stagnation.

The banking problem can seem the most obscure part of the problem. Yet as the global financial crisis demonstrated, the provision of credit is the lifeblood of an economy. Cut off credit and economic asphyxiation sets in quickly. Europe's additional discovery was that, in a single currency zone, money could flow very rapidly from any bank perceived as risky to others perceived as safe. Any hint that a bank's host country might leave the euro or that the bank might have gorged itself on dubious sovereign debt would be enough to start the exodus of funds. No funds, no credit, no economic activity.

Eurozone leaders resolved to fix this with a banking union. And then they ran into politics. Banking regulation is sensitive. There was little appetite for ceding control. Last week, discussing a recent bilateral move by France and Germany to coordinate their banking policies, the Financial Times' Wolfgang Münchau wrote:

"My suspicion is that the ultimate intent of the Franco-German legislation is to secure the position of their national champion banks ... The most important signal sent by the unilateral legislation in France and Germany is the lack of political will to sort out the banking mess, which is at the heart of the eurozone crisis. Instead, governments are seeking refuge in symbolic gestures ... The renationalisation of banking means that the monetary union is as unsustainable today as it was in July last year -- and now the policies needed to fix this problem have been abandoned."

This was one danger of Draghi's move. By alleviating the sense of impending doom, he also may have undermined the impetus for overcoming entrenched opposition to reform.

The growth and unemployment situation is not much better. A story this week, contrasting positive Spanish sentiment with dismal performance, detailed the economic turmoil in the country:

" the last quarter of 2012 ... the number of companies declared bankrupt soared by almost 40 per cent to 2,584. It was the highest number since the crisis began, suggesting that the situation for credit-starved Spanish companies is not only getting worse -- but getting worse faster than before ... Nor has there been any sign of a turnround in Spain's dismal unemployment numbers, which continue to rise towards 6 million, or more than 26 per cent of the workforce ... The IMF expects a drop in GDP of 1.5 per cent this year -- a worse recession than in 2012."        

We also come upon another danger of Draghi's move: By restoring confidence in the euro, he paved the way for the currency to rise, which did no favors for eurozone exporters. That's hardly the cause of Spanish economic woes, but it is no help, either.

And then, as always, the democracies of Europe have politics. Spain's governing party is caught up in a political scandal. Italy is moving back to electoral politics after a technocratic interlude. It is not clear that difficult political choices will get much easier in either case.

The list of eurozone perils is alarmingly long. Yet a remarkable sense of calm prevails in the markets. Perhaps this will be a crowd-pleasing story book ending, the sort in which impossible obstacles are overcome and everyone goes home happy. Or perhaps it will be the kind of story one rarely sees out of Hollywood, in which our blissful hero opens his eyes, only to find that he had dreamt his salvation and the threats remained, more menacing than before.