Banksters and Black Swans

"Ward, we all want to be optimistic, that is why we get up in the morning every day even though we know what the end will bring, more taxes." That was a comment to me by a friend. Pretty funny stuff.

The Big Short by Michael Lewis was a page-turner that I had difficulty putting down. About the guys who really foresaw the financial crisis coming (no, not Thom Hartman). Now I have started 13 Bankers by Simon Johnson and James Kwak, who argue that Wall Street is the newest oligarchy and that the big banks need to be broken up, much like Standard Oil was during T.R.'s time. So far, so good. They recognize that Hamilton was essentially right about finance and Jefferson was wrong.

A debate seems to be coalescing around this issue. Here, Paul Krugman thinks this position is wrong and that regulation is what is needed. I find his argument that because small bank failures in the 1930's led to a crisis, it is not "bigness" that counts, not very convincing, just as I find his arguments for taxing Chinese goods unconvincing. Here, here and here are three Johnson/Kwak posts arguing their position. The jury is still out for me, but I am hoping regulation can work.

The unintended consequences of an action or inaction are always difficult to ascertain. My uncle argues that we never should have based a retirement system on the contributions of current workers to previous generations. This may be fundamentally correct. But Social Security is here to stay. I wonder if the principle, though, of fixing the current by imposing upon future generations does not contain a general lesson that we should learn. He thinks people will wake up someday and not be so "greedy." I am more pessimistic about the human condition. People believe that it would be unjust to take away benefits that they have been promised (like Madoff investors?).

Here is another possibly surprising unintended consequence. What if we had not funded the muhjadeen in Afghanistan and Russia still ruled the country? No weapons for crazy Islamist terrorists. No place for Al Qaeda to train for 9-11. No need to be there now.

I am not a big supporter of Thomas Friedman, but I think that here he is on the mark. Why should we expect anything to change in Afganistan or Palestine? Same old stuff. I think Obama's mission is going to fail. I guess the question is what were the real options? There are those who say we should stay until it is fixed. After all, "the surge worked." It seems rational to give it a chance, but I am glad that it is supposedly time-limited.

The Cold War strategies in general have had huge unintended consequences. The U.S. and Russia ended up arming the rebels of the world in their "the enemy of my enemy is my friend" type of thinking.

We truly have great difficulties predicting the future. Maybe this calls for a couple of quotes from Nassim Taleb, who has added a new chapter for the paperback edition of The Black Swan, which is available on-line by going to his website or The Browser at the bottom of this page.

"Second, Mother Nature does not like anything too big. The largest land animal is the elephant, and there is a reason for that. If I went on a rampage and shot an elephant, I might be put in jail, and get yelled at by my mother, but I would hardly disturb the ecology of Mother Nature. On the other hand, my point about banks in Chapter 14—that if you shot a large bank, I would “shiver at the consequences” and that “if one falls, they all fall”—was subsequently illustrated by events: one bank failure, that of
Lehman Brothers, in September 2008, brought down the entire edifice. Mother Nature does not limit the interactions between entities; it just limits the size of its units. (Hence my idea is not to stop globalization and ban the Internet; as we will see, much more stability would be achieved by stopping governments from helping companies when they become large and by giving back advantages to the small guy.)...

I was once selected to be one of a group of a hundred who went to Washington to spend two days discussing how to solve the problems of the crisis that started in 2008. Almost all the biggies were included. After an hour of meeting, and during a speech by the prime minister of Australia, I walked out of the room because my pain became intolerable. My back would start hurting upon looking at the faces of these people. The center of the problem is that none of them knew the center of the problem.

This makes me convinced that there is a unique solution for the world, to be designed along very simple lines of robustness to Black Swans—it will explode otherwise."

More Af-Pak

The paragraph below is from the Sabrina Taverise article, which you can access here. And here is the Scott Shane article. She is interviewing a Pakistani psychiatrist.

I asked him to spell it out. “It’s coming from Americans, Jews and Indians,” he said. “It’s an axis of evil that’s being supervised by you people....” In recent months, Pakistan has begun challenging the Islamist extremists on its border and the extremists have directed bombings against Pakistani citizens and institutions. Even so, Pakistan’s powerful news media aggressively trumpet the conspiracy theories, which are consumed by anyone who picks up a paper or turns on a TV.

The Shane article also has a terrific map that one can click on and enlarge. Some other interesting facts. Karzai is a Pashtun whose father was murdered by the Taliban. He is part of a Pashtun group that supported a return of the King years ago after the exit of the Soviets. However, the CIA and the Saudis funneled their money through the Pakistani ISI, which gave most of it to jihadists like Hekmatyr. Later they supported the Taliban to counteract Indian support of the northern forces (who were also supported by Russia).

Before the Taliban took over, one could not drive through Afghanistan without periodically having to pay extortion (tolls) to bandits. Unless the current surge can make living conditions better, many people will favor the Taliban in spite of their fundamentalist excesses and harboring terrorists. Currently, the government is rated the second most corrupt in the world (Iraq is fourth). So part of what has to happen is for the corruption to lessen.

As long as terrorists and insurgents can merely cross the border into Pakistan and be safe, not much will be achieved. We need Pakistani cooperation.

Terrorists can organize anywhere. The anarchist movement in the era around 1900 is a good example of this. Given all these factors, should we really expect very much long term from this "surge?" Maybe not. Then why spend the money and American lives? On the other hand, what is the danger that if this region is taken over by Taliban-like forces, that terrorists will get nuclear weapons? There is no easy answer to these questions.

Addendum: After posting this, I ran across this article which makes the argument so much better than I did.

Lessons from Ghost Wars

Steve Coll's book Ghost Wars was a marvelously written history of our involvement with Afghanistan from the late seventies to 9/11. His new edition contains facts that came out of the official U.S. investigation. The book reveals many points at which decisions were made that had far-reaching effects, such that things could have turned out differently. Such books cast doubt over histories that portray events along one overreaching narrative, whether it is Chomsky or Podhoretz.

We helped create the power of radical Islamism, initially by facilitating the rule of Ibn Saud's family over the area we now call Saudi Arabia (which was intimately bound with radical Wahhabi preaching), and more directly, through supporting the mujahedin in their war with the Soviets. Since we failed to have a CIA presence in Afghanistan, we relied almost entirely on Pakistan's intelligence agency, the ISI, and in the process made both the ISI and the mujahedin very powerful...with even more support from the now-rich Saudis. When the Soviets left, we completely disregarded the country. We cannot afford to do so again. So we cannot just pull out without there being a strong government. Otherwise, the Taliban will facilitate radical Islamic terrorism, as they did before.

But it has now been over 8 years since 9/11. What has Afghanistan become? What have the Taliban become? What has Pakistan become? We need to realize that Pakistan continually lied to us about their support for radical Islamists in order to fuel terrorist activity in Kashmir against India. India is always their biggest worry and they will do what they think they need to do. One has to wonder how stable their civilian government is. The main two actors are not much recommended. Will the military seize control again? However, one should be cheered that they are finally taking some action against rebels in the west of their country. And one should be cheered that the Obama administration is engaged with both countries and is attempting to force the Karzai government to reform.

The last third of the book concerns the activities of Al Qaeda and our various government entities, who knew he had big plans and were very worried. This history involves many more failures on our government's part. It easily could have turned out differently. 9/11 could have been prevented. You might also check out James Bamford's book The Shadow Factory, for more specific failures by the NSA in this regard.

All that said, we need to get beyond the surge mentality of the right. Afghanistan is a very different place than Iraq. There will never be a simple military solution. As Steve Coll reminds us in his blog at the New Yorker (which I have linked to on this page), we first need to consider what our goals are. I think that he is right that one of them has to be to prevent the Taliban from coming to power again. Unfortunately, that is going to involve negating their power in the south, the Pashtun land of Baluch.

Ghost Wars

I am reading Ghost Wars by Steve Coll, an account of Afghanistan from the Soviet invasion of 1979 through 9/11. It is page-turner, with the first quarter of the book setting the background, with some great chapters on the history of Saudi Arabia, bin Laden, William Casey and the years leading up to 1986. Covert funding for the Soviet opposition increased dramatically in the mid-80's due to Congressional appropriations to the CIA (led by Charlie Wilson), which were matched by official Saudi contributions by their intelligence agency, and by massive private Saudi contributions. The CIA did not even have an outpost in Afghanistan in 1979 and for years we funneled all our money through the Pakinstani intelligence agency, the ISI. Although there were many groups fighting the Soviets, most of this massive surge in funding went to the Islamist groups such as Hekmatyar's. The Pakistani border ended up being a huge enclave of ISI, Arab volunteers and Wahhabi madrasses. They trained 6000-7000 jihadists a year.

The U.S. promoted these jihadists and the recruitment of Arab volunteers. The focus of the Reagan administration and especially Casey, was the defeat of the Soviets at all costs. Casey saw links of revolutions to Russia everywhere, including the IRA, Basque nationalists, Palestinian terrorists, and others. He was also very religious and saw a natural coalition of Christians with the Islamists against the atheistic communists.

The Islamist movement had been becoming more radicalized over the years, initially from the Muslim Brotherhood in Egypt in the 1920's. Cairo was the intellectual center from which the radical views spread, eventually to the university bin Laden attended in Saudi Arabia, but also to Afghanistan. However, most Afghans were primarily influenced by Sufiism and little in common with the Wahhabi-led extremists. They were a diverse bunch and included Ahmed Shah Massoud, the most formidable Afghan military leader who headed a northern alliance. Robert Gates, then second in command at the CIA, remarked in his memoir in 1996, that "no one should have any illusions about these people coming together politically."

The Saudi budget for 1969-74 was $9.2 billion. For the next five years, it was $142 billion. A generation removed from nomadic poverty, they were now powerful players. From the beginning, Ibn Saud had linked his power with the Wahhabis. Sensing the threat from Islamic radicalism, he embraced it, hoping to control it. There seemed to them to be no plausible politics but strict official religiousity and many of the royal family were true believers. Their state was, after all, the only modern nation-state created by jihad. In Afghanistan, bin Laden was just one of a variety of actors. But he began to ask the question of whether the jihad should not be just against the communists, but also against the corrupt governments of the Middle East, the U.S. and Israel. He was well-connected, wealthy and moved freely in circles of Saudi intelligence.

The Soviet introduction of the elite Spetsnaz, along with their Mi-24D Hind attack helicopters, seemed to be winning the war in 1984. But along with the increased funding, Afghan rebels now got satellite reconnaissance and Stinger hand-held missiles. On September 26, 1986, they were first put into use, detroying three Soviet helicopters.