Feb 09

Destroying the Village

There’s a quote from an unattributed USAF Major at Ben Tre (detailed in personal detail here) describing the logic of destroying an entire village while attempting to rout a deeply embedded Vietcong:

“[It] became necessary to destroy the town to save it[.]“

I don’t disagree with the premise. There is always collateral damage in war. It is always brutal, regrettable, and unavoidable. Sometimes, it is necessary to destroy the old so that the new may prosper. Sherman practiced “scorched earth” on his March to the Sea, and Schumpter theorized about creative destruction. Death and rebirth is the natural order of the world.

So it should be with “The Village”.

For those unaccustomed to the phrase, “the Village” is a theme in lefty blog circles explaining the culture and customs of DC beltway types – be they socialites, politicians, fund raisers, but especially the media – print and TV personalities especially.

From the Seminal:

These phrases are shorthand for the idea that there exists a permanent class in Washington D.C. of people “who have a proprietary interest in Washington and identify with it”. This set overlaps with, but is slightly different than, the set of government employees; the latter ostensibly serve at the pleasure of the people who elected them (or elected the person who appointed them), while the former are unabashedly self-interested (“Certainly the Washington insiders have their own interests at heart. Whenever a new president comes to town, he [or she] will be courted assiduously by those whose livelihoods depend on access to power.”). The seminal article on the Village was written in the Washington Post by Villager Sally Quinn in 1998, during the Clinton impeachment. It’s where I got those quotes above, and it’s where the term ‘Village’ comes from, and it’s full of other descriptive lines. For example:

“This is our town,” says Sen. Joe Lieberman of Connecticut, the first Democrat to forcefully condemn the president’s behavior. “We spend our lives involved in talking about, dealing with, working in government.”

…Muffie Cabot, who as Muffie Brandon served as social secretary to President and Nancy Reagan, regards the scene with despair. “This is a demoralized little village”

…”We have our own set of village rules,” says David Gergen, editor at large at U.S. News & World Report.

…”[Bill Clinton] came in here and he trashed the place,” says Washington Post columnist David Broder, “and it’s not his place.”

…Presidential historian Michael Beschloss … “When everything is turned upside down it affects our psyche more than someone who might be farming in Wyoming.”

That’s one big aspect of the Establishment mentality – the idea of entitlement, that being part of this rarefied group gives their opinions and feelings more weight than “someone who might be farming in Wyoming”. The other, equally important, part is that the Establishment is out of touch with the rest of the country.

I could easily tally their list of failings – the Clinton Impeachment, WMDs, the Iraq War, and now the economy – and particularly how out of touch they are with what Americans really think. We’re beginning to see it again with all the talks of tax cuts, spending freezes, the size of the stimulus, and a host of other issues. But that’s not the purpose of this post.

No. It’s about the public scolding of Michael Phelps for doing something the majority of Americans have done, with many doing so regularly, and ruining a young man’s life. Continue reading →

Jan 08

Tickling the Dragon’s Tail

Disclaimer:  I am by no stretch of the imagination an economist.

In listening to Ben Bernake's statement on the state of the economy and in consideration of the fiscal interventions as well as the pending economic stimulus package, its relevant to revisit the academic specialty of Mr. Bernake – the Great Depression.  As I had written previously:

The Wall Street Journal (subscribers only) has come to the same conclusion I did about Ben Bernake, prospective replacement for Alan Greenspan – he’s been very influenced by his academic research into the Great Depression.

The title of this post – "tickling the dragon's tail" – refers to a Manhattan Project era criticality testing with fissionable material [via Wikipedia]:

On May 21, 1946, Slotin and seven other colleagues performed an experiment that involved the creation of one of the first steps of a fission reaction by placing two half-spheres of beryllium (a neutron reflector) around a plutonium core. The experiment used the same 6.2-kilogram (13.7 lb) plutonium core that had irradiated Daghlian. Slotin grasped the upper beryllium hemisphere with his left hand through a thumb hole at the top while he maintained the separation of the half-spheres using the blade of a screwdriver with his right hand, having removed the shims normally used.[1] Using a screwdriver was not a normal part of the experimental protocol.

At 3:20 p.m., the screwdriver slipped and the upper beryllium hemisphere fell, causing a "prompt critical" reaction and a burst of hard radiation.[8] At the time, the scientists in the room observed the "blue glow" of air ionization and felt a "heat wave". In addition, Slotin experienced a sour taste in his mouth and an intense burning sensation in his left hand.[1] Slotin instinctively jerked his left hand upward, lifting the upper beryllium hemisphere and dropping it to the floor. He exposed himself to a lethal dose (around 2100 rems, or 21 Sv) of neutron and gamma radiation.[13] (Slotin's radiation dose was identical to the amount he would have received had he been 4800 feet (1463 m) away from the detonation of an atomic bomb.[14])

As soon as Slotin left the building, he vomited, a common reaction from exposure to extremely intense ionizing radiation.[1] Slotin's colleagues rushed him to the hospital, but irreversible damage had already been done. His parents were informed of their son's inevitable death and a number of volunteers donated blood for transfusions, but the efforts proved futile.[1] The accident ended all hands-on assembly work at Los Alamos. At first, the incident was classified and not made known even within the laboratory; Robert Oppenheimer and other colleagues later reported severe emotional distress at having to carry on with normal work and social activities while they secretly knew that their colleague lay dying.

Louis Slotin died nine days later on May 30,[15] in the presence of his parents.

It's with this in mind that I contemplate Bernake's domain of expertise and how it informs both his fiscal ideology and likely interventions.  Indeed, the current intervention's taken by the Fed neatly straddle what Bernake theorizes exacerbated and extended the Great Depression:

  • The Fed began raising the Fed Funds rate in the spring of 1928, and kept raising them through a recession that began in August 1929. This led to the stock market crash in October 1929.
  • When the stock market crashed, investors turned to the currency markets. At that time, dollars were backed by gold held by the U.S. Government. Speculators began selling dollars for gold in September 1931, which caused a run on the dollar.
  • The Fed raised interest rates again to try and preserve the value of the dollar. This further restricted the availability of money for businesses, causing more bankruptcies.
  • The Fed did not increase the supply of money to combat deflation.
  • As investors withdrew all their dollars from banks, the banks failed, causing more panic. The Fed ignored the banks' plight, thus destroying any remaining consumers’ confidence in banks. Most people withdrew their cash and put it under the mattress, which further decreased the money supply.
My interpretaion of the above, chronologically, is the the Federal Reserve attempted to manage inflation by raising the funds rate, to the detriment of the stock market (witness that each rate cut results in a 200-point jump in the Dow, with Wall Street constantly  clamoring for more).  With the stock market crashed, investors turned to currency and then commodities, with dollars being used to purchase gold (any analogy here with petrodollars?), setting of a dollar panic and a run on banks.  The Feds reaction was to raise rates to protect the dollar, causing a lending crisis (which the Fed seems to have currently remediated via their liquidity interventions).  The Fed also failed to print more money (make it a point to research why Bernake is called Helicopter Ben ), and as savers went to retrieve their funds from the banks, there was insufficient money to keep the economy moving, destroying consumers confidence in their meny and the banks.  The avoidance of the circumstances Bernake believes attributed to the Great Depression are central to his governing philosophy.
It is also with that the I call upon the dragon's tail metaphor – as more money is interjected into the financial system, via funds rate cuts, we experience greater infaltion, particularly as oil will continue to get more and more expensive.  But, if rates are not cut, the stock market will continue to gave lagging performance.  The most confounding circumstance is that the higher rate of inflation is dampening consumer confidence and causing them to pull back on their spending, which will cause pressure on companies on the stock market.  Where will Bernake's focus (and the Governments relief package) be in 2008 – on the US consumer of the stock market, and what are the possible outcomes?  Furthermore, how likely is it that politics will not be inserted into the fiscal debate, despite Bernake's assertions to the contrary?