Bobo and Krugman

Bobo is still addressing military matters.  In “The Winnable War” he opines that at the end of a trip to Afghanistan, despite personal skepticism, it was hard not to be infected by the optimism of the people who are working there.  Mr. Krugman, in “The Market Mystique,” says that the top officials in the Obama administration still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.  Here’s Bobo, writing from the storied Khyber Pass:

I came to Afghanistan skeptical of American efforts to transform this country. Afghanistan is one of the poorest, least-educated and most-corrupt nations on earth. It is an infinitely complex and fractured society. It has powerful enemies in Pakistan, Iran and the drug networks working hard to foment chaos. The ground is littered with the ruins of great powers that tried to change this place.

Moreover, we simply do not know how to modernize nations. Western aid workers seem to spend most of their time drawing up flow charts for each other. They’re so worried about their inspectors general that they can’t really immerse themselves in the messy world of local reality. They insist on making most of the spending decisions themselves so the “recipients” of their largess end up passive, dependent and resentful.

Every element of my skepticism was reinforced during a six-day tour of the country. Yet the people who work here make an overwhelming case that Afghanistan can become a functional, terror-fighting society and that it is worth sending our sons and daughters into danger to achieve this.

In the first place, the Afghan people want what we want. They are, as Lord Byron put it, one of the few people in the region without an inferiority complex. They think they did us a big favor by destroying the Soviet Union and we repaid them with abandonment. They think we owe them all this.

That makes relations between Afghans and foreigners relatively straightforward. Most military leaders here prefer working with the Afghans to the Iraqis. The Afghans are warm and welcoming. They detest the insurgents and root for American success. “The Afghans have treated you as friends, allies and liberators from the very beginning,” says Afghanistan’s defense minister, Abdul Rahim Wardak.

Second, we’re already well through the screwing-up phase of our operation. At first, the Western nations underestimated the insurgency. They tried to centralize power in Kabul. They tried to fight a hodgepodge, multilateral war.

Those and other errors have been exposed, and coalition forces are learning. When you interview impressive leaders here, like Brig. Gen. John Nicholson of Regional Command South, Col. John Agoglia of the Counterinsurgency Training Center and Chris Alexander of the U.N., you see how relentless they are at criticizing their own operations. Thanks to people like that, the coalition will stumble toward success, having tried the alternatives.

Third, we’ve got our priorities right. Armies love killing bad guys. Aid agencies love building schools. But the most important part of any aid effort is governance and law and order. It’s reforming the police, improving the courts, training local civil servants and building prisons.

In Afghanistan, every Western agency is finally focused on this issue, from a Canadian reconstruction camp in Kandahar to the top U.S. general, David McKiernan.

Fourth, the quality of Afghan leadership is improving. This is a relative thing. President Hamid Karzai is detested by much of the U.S. military. Some provincial governors are drug dealers on the side. But as the U.N.’s Kai Eide told the Security Council, “The Afghan government is today better and more competent than ever before.” Reformers now lead the most important ministries and competent governors run key provinces.

Fifth, the U.S. is finally taking this war seriously. Up until now, insurgents have had free rein in vast areas of southern Afghanistan. The infusion of 17,000 more U.S. troops will change that. The Obama administration also promises a civilian surge to balance the military push.

Sixth, Pakistan is finally on the agenda. For the past few years, the U.S. has let Pakistan get away with murder. The insurgents train, organize and get support from there. “It’s very hard to deal with a cross-border insurgency on only one side of the border,” says Mr. Alexander of the U.N. The Obama strategic review recognizes this.

Finally, it is simply wrong to say that Afghanistan is a hopeless 14th-century basket case. This country had decent institutions before the Communist takeover. It hasn’t fallen into chaos, the way Iraq did, because it has a culture of communal discussion and a respect for village elders. The Afghans have embraced the democratic process with enthusiasm.

I finish this trip still skeptical but also infected by the optimism of the truly impressive people who are working here. And one other thing:

After the trauma in Iraq, it would have been easy for the U.S. to withdraw into exhaustion and realism. Instead, President Obama is doubling down on the very principles that some dismiss as neocon fantasy: the idea that this nation has the capacity to use military and civilian power to promote democracy, nurture civil society and rebuild failed states.

Foreign policy experts can promote one doctrine or another, but this energetic and ambitious response — amid economic crisis and war weariness — says something profound about America’s DNA.

Here’s Prof. Krugman:

On Monday, Lawrence Summers, the head of the National Economic Council, responded to criticisms of the Obama administration’s plan to subsidize private purchases of toxic assets. “I don’t know of any economist,” he declared, “who doesn’t believe that better functioning capital markets in which assets can be traded are a good idea.”

Leave aside for a moment the question of whether a market in which buyers have to be bribed to participate can really be described as “better functioning.” Even so, Mr. Summers needs to get out more. Quite a few economists have reconsidered their favorable opinion of capital markets and asset trading in the light of the current crisis.

But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.

The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.

And the financial system wasn’t just boring. It was also, by today’s standards, small. Even during the “go-go years,” the bull market of the 1960s, finance and insurance together accounted for less than 4 percent of G.D.P. The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average, which until 1982 contained not a single financial company.

It all sounds primitive by today’s standards. Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.

After 1980, of course, a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. The new system was much bigger than the old regime: On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960s. By early last year, the Dow contained five financial companies — giants like A.I.G., Citigroup and Bank of America.

And finance became anything but boring. It attracted many of our sharpest minds and made a select few immensely rich.

Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.

But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.

Sooner or later, things were bound to go wrong, and eventually they did. Bear Stearns failed; Lehman failed; but most of all, securitization failed.

Which brings us back to the Obama administration’s approach to the financial crisis.

Much discussion of the toxic-asset plan has focused on the details and the arithmetic, and rightly so. Beyond that, however, what’s striking is the vision expressed both in the content of the financial plan and in statements by administration officials. In essence, the administration seems to believe that once investors calm down, securitization — and the business of finance — can resume where it left off a year or two ago.

To be fair, officials are calling for more regulation. Indeed, on Thursday Tim Geithner, the Treasury secretary, laid out plans for enhanced regulation that would have been considered radical not long ago.

But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.

As you can guess, I don’t share that vision. I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.

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