NY Times Book Review: Looking Back@Crash of 2008

August 11, 2018


By Dr. Fareed Zakaria

How a Decade of Financial Crises Changed the World
By Adam Tooze
706 pp. Viking. $35.

Steve Bannon can date the start of the Trump “revolution.” When I interviewed him for CNN in May, in Rome, he explained that the origins of Trump’s victory could be found 10 years ago, in the financial crisis of 2008.

“The implosion of those world capital markets has never really been sorted out,” he told me. “The fuse that was lit then that eventually brought the Trump revolution is the same thing that’s happened here in Italy.” (Italy had just held elections in which populist forces had won 50 percent of the vote.)

Adam Tooze would likely agree. An economic historian at Columbia University, he has written a detailed account of the financial shocks and their aftereffects, which, his subtitle asserts, “changed the world.”

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If journalism is the first rough draft of history, Tooze’s book is the second draft. A distinguished scholar with a deep grasp of financial markets, Tooze knows that it is a challenge to gain perspective on events when they have not yet played out. He points out that a 10-year-old history of the crash of 1929 would have been written in 1939, when most of its consequences were ongoing and unresolved. But still he has persisted and produced an intelligent explanation of the mechanisms that produced the crisis and the response to it. We continue to live with the consequences of both today.

CreditTyler Comrie; Photograph courtesy of GSO/Getty Images

As is often the case with financial crashes, markets and experts alike turned out to have been focused on the wrong things, blind to the true problem that was metastasizing. By 2007, many were warning about a dangerous fragility in the system. But they worried about America’s gargantuan government deficits and debt — which had exploded as a result of the Bush administration’s tax cuts and increased spending after 9/11. It was an understandable focus. The previous decade had been littered with collapses when a country borrowed too much and its creditors finally lost faith in it — from Mexico in 1994 to Thailand, Malaysia and South Korea in 1997 to Russia in 1998. In particular, many fretted about the identity of America’s chief foreign creditor — the government of China.

Yet it was not a Chinese sell-off of American debt that triggered the crash, but rather, as Tooze writes, a problem “fully native to Western capitalism — a meltdown on Wall Street driven by toxic securitized subprime mortgages.”Tooze calls it a problem in “Western capitalism” intentionally. It was not just an American problem. When it began, many saw it as such and dumped the blame on Washington.

In September 2008, as Wall Street burned, the German Finance Minister Peer Steinbruck explained that the collapse was centered in the United States because of America’s “simplistic” and “dangerous” laissez-faire approach. Italy’s finance minister assured the world that its banking system was stable because “it did not speak English.”


In fact this was nonsense. One of the great strengths of Tooze’s book is to demonstrate the deeply intertwined nature of the European and American financial systems. In 2006, European banks generated a third of America’s riskiest privately issued mortgage-backed securities. By 2007, two-thirds of commercial paper issued was sponsored by a European financial entity.

The enormous expansion of the global financial system had largely been a trans-Atlantic project, with European banks jumping in as eagerly and greedily to find new sources of profit as American banks. European regulators were as blind to the mounting problems as their American counterparts, which led to problems on a similar scale. “Between 2001 and 2006,” Tooze writes, “Greece, Finland, Sweden, Belgium, Denmark, the U.K., France, Ireland and Spain all experienced real estate booms more severe than those that energized the United States.”


Credit Sonny Figueroa/The New York Times


But while the crisis may have been caused in both America and Europe, it was solved largely by Washington. Partly, this reflected the post-Cold War financial system, in which the dollar had become the hyper-dominant global currency and, as a result, the Federal Reserve had truly become the world’s central bank. But Tooze also convincingly shows that the European Central Bank mismanaged things from the start.

The Fed acted aggressively and also in highly ingenious ways, becoming a guarantor of last resort to the battered balance sheets of American but also European banks. About half the liquidity support the Fed provided during the crisis went to European banks, Tooze observes.

Before the rescue and even in its early stages, the global economy was falling into a bottomless abyss. In the first months after the panic on Wall Street, world trade and industrial production fell at least as fast as they did during the first months of the Great Depression. Global capital flows declined by a staggering 90 percent. The Federal Reserve, with some assistance from other central banks, arrested this decline. The Obama fiscal stimulus also helped to break the fall.


Tooze points out that almost all serious analyses of the stimulus conclude that it played a significant positive role. In fact, most experts believe it ended much too soon. He also points out that large parts of the so-called Obama stimulus were the result of automatic government spending, like unemployment insurance, that would have happened no matter who was president. And finally, he notes that China, with its own gigantic stimulus, created an oasis of growth in an otherwise stagnant global economy.

The rescue worked better than almost anyone imagined. It is worth recalling that none of the dangers confidently prophesied by legions of critics took place. There was no run on the dollar or American treasuries, no hyperinflation, no double-dip recession, no China crash.

American banks stabilized and in fact prospered, households began saving again, growth returned slowly but surely. The governing elite did not anticipate the crisis — as few elites have over hundreds of years of capitalism. But once it happened, many of them — particularly in America — acted quickly and intelligently, and as a result another Great Depression was averted. The system worked, as Daniel Drezner notes in his own book of that title.


A trader on the floor of the New York Stock Exchange in February 2009. CreditJames Estrin/The New York Times


But therein lies the unique feature of the crash of 2008. Unlike that of 1929, it was not followed by a Great Depression. It was not so much the crisis as the rescue and its economic, political and social consequences that mattered most. On the left, the entire episode discredited the market-friendly policies of Tony Blair, Bill Clinton and Gerhard Schroeder, disheartening the center-left and emboldening those who want more government intervention in the economy in all kinds of ways. On the right, it became a rallying cry against bailouts and the Fed, buoying an imaginary free-market alternative to government intervention.

Unlike in the 1930s, when the libertarian strategy was tried and only deepened the Depression, in the last 10 years it has been possible for the right to argue against the bailouts, secure in the knowledge that their proposed policies will never actually be implemented.

Bannon is right. The crash brought together many forces that were around anyway — stagnant wages, widening inequality, anger about immigration and, above all, a deep distrust of elites and government — and supercharged them. The result has been a wave of nationalism, protectionism and populism in the West today. A confirmation of this can be found in the one major Western country that did not have a financial crisis and has little populism in its wake — Canada.

The facts remain: No government handled the crisis better than that of the United States, which acted in a surprisingly bipartisan fashion in late 2008 and almost seamlessly coordinated policy between the outgoing Bush and incoming Obama administrations. And yet, the backlash to the bailouts has produced the most consequential result in the United States.

Tooze notes in his concluding chapter that experts are considering the new vulnerabilities of a global economy with many new participants, especially the behemoth in Beijing. But instead of a challenge from an emerging China that began its rise outside the economic and political system, we are confronting a quite different problem — an erratic, unpredictable United States led by a president who seems inclined to redo or even scrap the basic architecture of the system that America has painstakingly built since 1945.

How will the world handle this unexpected development? What will be its outcome? This is the current crisis that we will live through and that historians will soon analyze.

Dr. Fareed Zakaria is a CNN anchor, a Washington Post columnist and the author of “The Post American World.”

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A version of this article appears in print on , on Page 1 of the Sunday Book Review with the headline: The Aftershocks.

Get out of Afghan Nightmare–The Right Exit Strategy

August 5, 2018

Get out of Afghan Nightmare–Work hard at Diplomacy.

by Dr. Fareed Zakaria


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Read On: http://theweek.com/articles/716562/americas-failure-afghanistan-going-worse-than-vietnam

Donald Trump campaigned as someone who wanted to get America out of the Middle East. But he also cast himself as a tough guy, and his initial instincts in office were to show force — added troops, more aggressive rules of engagement, bigger bombs — in America’s war zones. “These killers need to know they have nowhere to hide,” he said when announcing a troop surge in Afghanistan.

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Read On: https://www.axios.com/trump-may-be-requesting-review-of-afghan-strategy-as-frustration-grows-a70f19f9-c0d1-4bf5-bcfa-71ed74af579a.html

Now we get reports that the Trump administration is searching for a negotiated settlement with the Taliban. However meandering the road, the administration is on the right path. But it is a very difficult one to navigate.

The war in Afghanistan, which began in 2001, is already the longest military operation in U.S. history. Our involvement there cannot be compared to the U.S. military presence in Germany, Japan or South Korea. The permanent bases in those countries were designed to deter external aggression (from North Korea, for example). In Afghanistan, the United States is engaged in a military effort to ensure that the Kabul government is not overthrown by an insurgency — more comparable to a neocolonial force supporting a friendly local ruler.

For this reason, both the Bush and Obama administrations sought a way out of Afghanistan. But they found it difficult to just leave and declare victory. First, the simple reality was that the Taliban inexorably advanced as U.S. troops withdrew, putting the democratically elected Kabul government — which is friendly to the United States — in mortal peril. Second, as America stepped back, it was clear that other countries — regional powers like India, China, Iran and Russia — would fill the vacuum. And finally, with all its factions, there was no single Taliban with which to negotiate.

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The Price of American Arrogance–Stalemate and Face Saving Withdrawal or Peace with Honour

And yet, the United States cannot stay in Afghanistan forever. Our presence distorts U.S. foreign policy, tying significant resources to an area of limited national interest. It also creates an inevitable dependency for the fragile Afghan government. The United States is spending $45 billion a year on security and economic aid for Afghanistan. That’s more than double Afghanistan’s entire gross domestic product.

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So what is the right exit strategy? In an essay in Foreign Affairs, preeminent scholar Barnett Rubin argues that any political settlement will be extremely difficult and will require negotiations with both the Taliban and regional powers.

The central reality that Washington must come to grips with is that it will have to allow the Taliban a more formal role in power-sharing. In a comprehensive 2014 report, a pair of Rand scholars showed that, historically, the key to ending protracted insurgencies has usually been to accommodate the insurgents within the new political order.

In a conversation with me, Rubin offered some guidelines for a possible pathway to a political settlement. Don’t let the U.S. military be the lead negotiators, he cautioned, because its stark message to the insurgents has been “reconcile or die,” as the top U.S. commander in Afghanistan, Gen. John W. Nicholson Jr., has made clear. “This is not the way to start a dialogue with people whose entire culture is organized around personal and collective honor, which, by the way, is a much bigger factor in this war than so-called extremist Islam,” Rubin said.

He added that it’s obvious this conflict has no purely military solution. If there were, the war wouldn’t be in its 17th year. He pointed out that even maintaining the current military involvement requires better political ties with Afghanistan’s neighbors. “Look at a map,” Rubin said. “Afghanistan is landlocked. America needs supply routes.” The three countries that could help with access are Pakistan, Russia and Iran — and we have bad relations with all three.

Rubin’s chief advice is to work hard at the diplomacy. Recognize that other countries have an interest in Afghanistan and engage them. A successful outcome is entirely dependent upon involvement from India, Pakistan, China, Russia and Iran. Rubin suggests appointing a special envoy, ideally conferred with broader legitimacy under the authority of the United Nations.

But whatever the process, crucially, Washington will have to decide whether it is willing to get serious about Afghanistan. It cannot, for example, keep fantasizing about overthrowing the Iranian regime while simply hoping for a settlement in Afghanistan. Iran and Pakistan have the means to ensure that Afghanistan stays unstable forever. The largest regional issue is for Washington to decide how much to involve India, which would shift the strategic landscape altogether.

This is the difficult, painstaking work of diplomacy that the Trump administration has tried to ignore, demean and defund. But if the president actually wants to extricate America from its unending wars, it’s the only way out.

(c) 2018, Washington Post Writers Group


Trump’s 4-Dimensional Chess in Space Time–Bluster and Flip Flops

August 1, 2018

Trump’s 4-Dimensional Chess in Space Time–Bluster and Flip Flops

by Dr.Fareed Zakaria


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Listen closely. That sound you heard at Wednesday’s joint news conference between the presidents of the European Commission and the United States was Donald Trump backtracking once again. This has become a familiar routine. It goes something like this: Begin by hurling insults at the other side, some of which have a basis in reality but are mostly wild exaggerations. Threaten extreme consequences. Then meet with the other side, backpedal and triumphantly announce that you have saved the world from a crisis that your rhetoric and actions caused in the first place. Call it the Trump two-step.

Think about Trump’s actions with regard to North Korea. He began by calling Kim Jong Un “a madman who doesn’t mind starving or killing his people” and threatening “fire and fury . . . the likes of which this world has never seen before.” He solved his own crisis by making unilateral concessions to Kim and gushing about how the North Korean people “love” their absolute dictator and how he, Trump, trusts him. The same pattern applies with the European Union, which he only recently described as “worse than our enemies.” Now, he tells us, after meeting with European Commission President Jean-Claude Juncker, that the E.U. and America truly “love each other.” Expect to hear a similar climb-down on China one of these days.

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For Trump, there is no cost to this strategy, because his words are weightless. He starts with what he described in “The Art of the Deal” as “truthful hyperbole” (as opposed to the many outright falsehoods that he also tells) and then, when confronted, adjusts to something closer to reality.

There are those who assert that Trump’s seemingly bizarre and unpredictable behavior is actually all part of a canny and wise strategy, that he is playing a kind of four-dimensional chess, operating in space-time. Well, if so, he is getting beaten badly here on Earth. In none of these situations has he actually been able to extract real concessions. His usual approach is to announce something vague, as with North Korea and the trade talks with Europe, or something already in place, such as NATO members’ promise to spend 2 percent of their gross domestic product on defense by 2024, and claim it as a victory.

But there is a cost to this bluster and flip-flopping. Trump is creating a reputation for the United States as erratic, unpredictable, unreliable and fundamentally hostile to the global order. Leader after leader in Europe has made this clear. George Osborne told me that when he was Britain’s finance minister, you knew “the United States president had your back.” Neither Britain nor any other country can be sure of this anymore. As Donald Tusk, president of the European Council, put it, “With friends like that who needs enemies[?] . . . We [realize] that if you need a helping hand, you will find one at the end of your arm.”

Economist Adam S. Posen argues that countries are now bypassing the United States and constructing a “post-American world economy.” You can see this in the flurry of trade agreements that don’t include the United States, from the Trans-Pacific Partnership, which was signed minus America, to the trade deal the E.U. just struck with Japan. Many others are in the works.

The most dramatic indication of the world sidestepping the United States, Posen says, is the decline in foreign investment. “It’s fallen off a cliff,” he told me. On average, net foreign investment into the United States has dropped by half since 2016. “The decline is all the more worrying,” Posen writes in Foreign Affairs, “since many factors should have been pushing direct investment in the United States up this year. The massive fiscal stimulus passed by Congress should have increased [foreign investment] in three ways: by boosting spending, which increases U.S. growth prospects; by making the tax code more favorable to production in the United States; and by cutting the corporate tax rate.”

Perhaps some of the decline in investment is part of a longer-term trend — other countries are growing faster than the United States. But for decades, that reality has been countered by another reality — that among the world’s rich nations, the United States was unique in having good growth prospects coupled with stable, predictable, pro-market policies. Trump’s attacks on trade and allies, his willingness to punish and reward individual companies, and his general unreliability all add up to a picture of policymaking that looks more like that of an erratic developing country run by a strongman. The difference is, America’s strongman has the power to disrupt the entire global economy.

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(c) 2018, Washington Post Writers Group


Foreign Policy: Russia might have been lost

July 23, 2018

Foreign Policy: Russia might have been lost

by Dr. Fareed Zakaria


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“So yes, the West might have missed an opportunity to transform Russia in the early ’90s. We will never know whether it would have been successful. But what we do know is that there were darker forces growing in Russia from the beginning, that those forces took over the country almost two decades ago and that Russia has chosen to become the principal foe of America and the American-created world order.”–Fareed Zakaria

President Trump’s news conference Monday in Helsinki was the most embarrassing performance by an American President I can think of. And his preposterous efforts to talk his way out of his troubles made him seem even more absurd. But what has been obscured by this disastrous and humiliating display is the other strain in Trump’s Russia narrative. As he recently tweeted, “Our relationship with Russia has NEVER been worse thanks to many years of U.S. foolishness and stupidity.” This notion is now firmly lodged in Trump’s mind and informs his view of Russia and Putin. And it is an issue worth taking seriously.

The idea that Washington “lost” Russia has been around since the mid-1990s. I know because I was one of the people who made that case. In a New York Times Magazine article in 1998, I argued that “central to any transformation of the post-Cold-War world was the transformation of Russia. As with Germany and Japan in 1945, an enduring peace required that Moscow be integrated into the Western world. Otherwise a politically and economically troubled great power . . . would remain bitter and resentful about the post-Cold-War order.”

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The Trump-Putin summit in Helsinki on July 16 boosted the Russian president’s international standing – mainly because he managed to pull Donald Trump and Binyamin Netanyahu over to his court. While Putin basks in the afterglow of the summit and the successful World Cup, both Trump and Netanyahu must face the music at home.–https://www.debka.com

This never happened, I argued, because Washington was not ambitious enough in the aid it offered. Nor was it understanding enough of Russia’s security concerns — in the Balkans, for example, where the United States launched military interventions that ran roughshod over Russian sensibilities.

I continue to believe Presidents George H.W. Bush and Bill Clinton missed an opportunity to attempt a fundamental reset with Russia. But it has also become clear that there were many powerful reasons U.S.-Russian relations might have been destined to deteriorate.

Russia in the early 1990s was in a period of unusual weakness. It had lost not just its Soviet-era sphere of influence but also its 300-year-old czarist empire. Its economy was in free fall; its society was collapsing. In this context, it watched as the United States expanded NATO, intervened against Russia’s allies in the Balkans and criticized its efforts to stop Chechnya from seceding.

From America’s vantage point, locking in the security of the newly liberated countries of Eastern Europe was an urgent matter. Washington worried that war in Yugoslavia was destabilizing Europe and producing a humanitarian nightmare. And the United States could not condone Russia’s brutal wars in Chechnya, in which tens of thousands of civilians were killed and much of the region was destroyed. The United States and Russia were simply on opposite sides of these issues.

In addition, by the late 1990s, Russia was moving away from a democratic path. Even under President Boris Yeltsin, the bypassing of democratic institutions and rule by presidential decree became common. Democratic forces in the country were always weak. Scholar Daniel Treisman has shown that by the mid-’90s, the combined tally for all liberal democratic reformers in Russia’s Duma elections never went above 20 percent. The “extreme opposition” forces, by contrast — communist, hypernationalist — received on average about 35 percent. And once Putin came to power, the move toward illiberal democracy and then outright authoritarianism became unstoppable. Putin has never faced a serious liberal opposition.

An authoritarian Russia had even more areas of contention with the United States. It panicked over the “color revolutions,” in which countries such as Georgia and Ukraine became more democratic. It looked with consternation at the establishment of democracy in Iraq. These forces, by contrast, were being cheered on by the United States. And to Putin, President George W. Bush’s “freedom agenda” might have seemed designed to dislodge his regime.

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The New Russian Tsar–Vladimir Putin

Perhaps most crucially, by the mid-2000s, steadily rising oil prices had resulted in a doubling of Russia’s per capita gross domestic product, and cash was flowing into the Kremlin’s coffers. A newly enriched Russia looked at its region with a much more assertive and ambitious gaze. And Putin, sitting atop the “vertical of power” he had created, began a serious effort to restore Russian influence and undermine the West and its democratic values. What has followed — the interventions in Georgia and Ukraine, the alliance with President Bashar al-Assad in Syria, the cyber attacks against Western countries — has all been in service of that strategy.

So yes, the West might have missed an opportunity to transform Russia in the early ’90s. We will never know whether it would have been successful. But what we do know is that there were darker forces growing in Russia from the beginning, that those forces took over the country almost two decades ago and that Russia has chosen to become the principal foe of America and the American-created world order.

(c) 2018, Washington Post Writers Group

Ronald’s Out, Donald’s in

July 18, 2018

Ronald’s Out, Donald’s in

by Dr. Fareed Zakaria


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President Trump’s trip to Europe is being portrayed by both him and his critics as revolutionary. He tells us that he single-handedly and miraculously got members of NATO to increase their defense spending sharply. His critics claim that he single-handedly wrecked the Western alliance by sowing doubt and discord among America’s closest partners.

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Neither assertion is really true. Trump’s demands are, in fact, familiar American demands. President Barack Obama routinely asked the same of NATO allies. His first defense secretary, Robert M. Gates, chose to deliver his “farewell” speech in Europe — weeks before leaving office — on precisely this subject. He predicted a “dwindling appetite . . . in the American body politic . . . to expend increasingly precious funds on behalf of nations that are apparently unwilling . . . to be serious and capable partners in their own defense.” And he warned that “future U.S. political leaders, those for whom the Cold War was not the formative experience that it was for me, may not consider the return on America’s investment in NATO worth the cost.”

Trump’s loud charge against Germany this week — that it has become too dependent on Russian natural gas — does have considerable merit. The Germans have eagerly signed up for an energy relationship with Russia that is strategically dangerous. Trump gets some of the dynamics wrong. It is not so much that by importing large amounts of natural gas from Russia, Berlin can be blackmailed. The Russians are equally dependent on German cash. But the new pipelines being built could allow Russia to threaten Eastern European countries by withholding energy supplies or jacking up prices, and Moscow has used and abused this energy card in the past.

Again, however, Trump’s complaint was often voiced by the Obama administration. And in neither of these cases is there any indication that Trump’s crude and aggressive approach has produced any results. If anything, it has made some Europeans feel that they have to push back. German Foreign Minister Heiko Maas reminded Trump that Germany is a vassal neither of Russia nor of the United States.

The real revolution, however, is in what Trump is doing with his foreign policy at home. He is continuing with his project, by intent or instinct, to remake the Republican Party. His approach abroad appears to be designed to create a new Republican foreign policy that is much closer to the party’s historical roots — distrustful of foreigners, alliances and treaties — and, in many senses, flatly isolationist. In his rallies, Trump describes America’s closest allies as “our worst enemies” and says they “kill us” on both security and trade. “We’re the schmucks,” he bemoans about America in its dealings with NATO and the European Union.

Jonathan Chait writes in New York magazine that “Trump is training his base to hate NATO and like Putin.” Indeed, Trump has been remarkably successful: Fifty-one percent of Republicans now believe the United States shouldn’t defend NATO allies unless they increase defense spending. Even more astonishingly, Trump seems to have reversed Republican attitudes toward Russia and its dictator, Vladimir Putin. At a recent rally, Trump said, “You know what? Putin’s fine. He’s fine. We’re all fine. We’re people.” Republicans are now twice as likely as Democrats to express a favorable opinion of Putin, and 56 percent of Republicans want to cooperate and engage more with Russia.

The Republican Party has proved remarkably malleable ideologically. The party of law and order now has deep distrust of the FBI. The party of free trade is now far more solidly behind protectionism than the Democrats. The party that celebrated President Ronald Reagan’s optimism about immigrants now contains a majority that supports separating families at the border and criminally prosecuting undocumented immigrants.

Trump’s political genius continues to be that he recognizes that the base of the party is ripe for this ideological revolution — that while the old Reaganite formula may still be subscribed to by Republican elites in Washington and New York, it’s not embraced out there in the grass roots.

Five years ago, one establishment Republican wrote that “the specter of isolationism is stalking the Republican Party. . . . It is hardly certain that isolationist sentiment will prevail. But it is critical . . . that national-security Republicans can answer the questions being raised, restore a coherent party platform and thereby thwart the new isolationism.”

Those words were written by John Bolton, now Trump’s national security adviser. It seems even the most stalwart national-security Republicans have accommodated themselves to the Trump revolution.

(c) 2018, Washington Post Writers Group