Brooks and Cohen

Bob Herbert is off today.  Bobo’s babbling about “The Goldman Drama,” and he tells us all about how dumb but decent meets smart and sleazy in the Washington drama over how to prevent another financial meltdown.  (Oh, and just so you know, he tells us that “consumers, lenders and builders” created the housing bubble.  I generally put the most important thing at the top of a list, so that tells us how Bobo views things…)  Mr. Cohen is in Jerusalem and sends us “Beating the Mideast’s Black Hole.”  He says President Obama’s recalibration of U.S.-Middle East diplomacy is ground-shifting. He’ll stay the course because he’s a realist: Calculation, not conscience, is driving policy.  Here’s Bobo:

Between 1997 and 2006, consumers, lenders and builders created a housing bubble, and pretty much the entire establishment missed it. Fannie Mae and Freddie Mac and the people who regulate them missed it. The big commercial banks and the people who regulate them missed it. The Federal Reserve missed it, as did the ratings agencies, the Securities and Exchange Commission and the political class in general.

It’s easy to see why this happened. People who make it into the establishment work and play well with others. They are part of the same overlapping social networks, and inevitably begin to perceive the world in similar, conventional ways. They thrive in institutions where people are not rewarded for being cantankerous intellectual bomb-throwers.

Outside the establishment herd, on the other hand, there were contrarians who understood the bubble (which was the easy part) and who figured out how to take counteraction (which was hard). Michael Burry worked at a small hedge fund in Northern California. John Paulson ran an obscure fund in New York. Eventually, there were even a few traders at the big investment banks who also foresaw the imminent collapse. One of them was “Fabulous” Fabrice Tourre of Goldman Sachs.

If this were a Hollywood movie, the prescient outsiders would be good-looking, just and true, and we could all root for them as they outfoxed the smug establishment. But this is real life, so things are more complicated. According to Gregory Zuckerman’s book, “The Greatest Trade Ever,” Burry was a solitary small-time operator far away. Paulson was cold and diffident.

And as for Fabulous Fab, he seems to be the product of the current amoral Wall Street culture in which impersonal trading is more important than personal service to clients, and in which any product you can sell to some poor sucker is deemed to be admirable and O.K.

In this drama, in other words, the establishment was pleasant, respectable and stupid, while the contrarians were smart but hard to love, and sometimes sleazy.

This week the drama comes to Washington in two different ways. First, as is traditional in our culture, the elected leaders of the clueless establishment have summoned the leaders of Goldman Sachs to a hearing so they can have a post-hoc televised conniption fit on the amorality of Wall Street.

This spectacle presents Goldman with an interesting public relations choice. The firm can claim to be dumb but decent, like the rest of the establishment, and emphasize the times it lost money. Or it can present itself as smart and sleazy, and emphasize the times it made money at the expense of its clients. Goldman seems to have chosen dumb but decent, which is probably the smart narrative to get back in the establishment’s good graces, even if it is less accurate.

The second big event in Washington this week is the jostling over a financial reform bill. One might have thought that one of the lessons of this episode was that establishments are prone to groupthink, and that it would be smart to decentralize authority in order to head off future bubbles.

Both N. Gregory Mankiw of Harvard and Sebastian Mallaby of the Council on Foreign Relations have been promoting a way to do this: Force the big financial institutions to issue bonds that would be converted into equity when a regulator deems them to have insufficient capital. Thousands of traders would buy and sell these bonds as a way to measure and reinforce the stability of the firms.

But, alas, we are living in the great age of centralization. Some Democrats regard federal commissions with the same sort of awe and wonder that I feel while watching LeBron James and Alex Ovechkin.

The premise of the current financial regulatory reform is that the establishment missed the last bubble and, therefore, more power should be vested in the establishment to foresee and prevent the next one.

If you take this as your premise, the Democratic bill is fine and reasonable. It would force derivative trading out into the open. It would create a structure so the government could break down failing firms in an orderly manner. But the bill doesn’t solve the basic epistemic problem, which is that members of the establishment herd are always the last to know when something unexpected happens.

If this were a movie, everybody would learn the obvious lessons. The folks in the big investment banks would learn that it’s valuable to have an ethical culture, in which traders’ behavior is restricted by something other than the desire to find the next sucker. The folks in Washington would learn that centralized decision-making is often unimaginative decision-making, and that decentralized markets are often better at anticipating the future.

But, again, this is not a Hollywood movie. Those lessons are not being learned. I can’t wait for the sequel.

Now here’s Mr. Cohen:

The U.S. Middle East envoy, George Mitchell, has come and gone, again, with peace talks still on hold and one Israeli commentator, Yossi Sarid, musing that “the Israeli-Palestinian conflict is a black hole that swallows up goodwill ambassadors through the ages.”

I can’t argue with that. Cold wars come and go, new technologies transform the world, but the clash of Zionism and Palestinian nationalism in the Holy Land defeats resolution.

Right now, Israeli Prime Minister Benjamin Netanyahu thinks Palestinians are “up a tree” (a eucalyptus tree, to be precise) and Palestinians think Netanyahu’s a deceitful bully (the lead Palestinian negotiator, Saeb Erekat, characterized his tone as, “Come here, boy, we know what’s best for you.”)

Feeling optimistic already? I confess I am — or rather, the complete despair about the “peace process” with which I arrived in Israel has eased. O.K., that’s not exactly optimism, but in the Middle East small mercies count.

Mitchell’s trip was not unproductive. My understanding is that proximity talks will start again next month, with Mitchell’s team shuttling between the sides. Israel will refrain from provocations of the Ramat Shlomo kind (those planned 1,600 housing units in East Jerusalem) and will promise to get substantive, on borders above all. Palestinians will promise to, well, show up.

But that’s not the reason for my improved mood: It’s hard to celebrate proximity talks when Palestinians and Israelis have often held direct talks. No, I detect three developments. The first is Obama. The second is Fayyad. The third is what Danny Ayalon, the deputy Israeli foreign minister, called “the sugar-coated poison pill” of the Israeli status quo. I’ll take them in order.

Last week, a letter from President Barack Obama was conveyed to Mahmoud Abbas, the Palestinian president. In it, I understand, Obama spoke of his very strong commitment — unprecedented commitment — to a two-state peace and said that if Israel seriously undermines trust between the two parties, the United States will not stand in the way of a United Nations resolution condemning that.

No American definition of what such trust-undermining acts might be was offered, which is why Erekat pressed Mitchell in their meeting last Friday on what would constitute “provocative actions” by Israel.

But it seems clear that any reprise of the Ramat Shlomo debacle, which infuriated Obama, would meet American criteria. The bottom line to Israel is: Hold the building, hold the tenders and hold any other provocations while Mitchell shuttles.

Obama’s recalibration of U.S. Middle East diplomacy is ground-shifting. He’s being pummeled from the usual quarters but he’ll stay the course because he’s a realist and because soldiers have told him that, with 200,000 plus American forces in Muslim countries, getting to Israel and Palestine living side-by-side in peace is a vital U.S. national security interest. Calculation, not conscience (although there’s a little of that), is driving policy.

There’s real change in nascent Palestine, too. Salam Fayyad, the Palestinian prime minister, is the most important phenomenon in the Middle East.

Fayyad is obsessed with security — an obsession reflected in the now ubiquitous Palestinian Authority police on the West Bank — and with building state institutions and the economy. He’s not interested in Palestinian “victimhood.” Narratives do not a family feed. He wants a future. He believes nonviolence is the way to get there. He’s receiving some help from Netanyahu on the economy (but needs more) and security cooperation is ongoing.

Over time, Fayyad can reassure Israelis that they’ll get a reliable state over the border, not some Iranian Trojan Horse. Palestinian institution-building is the best answer to Israel’s “no interlocutor” argument.

Within Israel, a booming economy and day-to-day tranquility would suggest peace is a low priority. But polls show a majority feel the country’s moving in the wrong direction; rampant corruption scandals alone cannot explain that. As Ayalon told me, “We do not have an eastern border.” Countries without defined borders have a hard time believing they’re moving in the right direction.

That tells me Netanyahu has potential interest, Hamas and its vile videos about the kidnapped Gilad Shalit notwithstanding, in getting from status quo to permanent status.

Mitchell believes that. He was asked about Netanyahu during his visit and, according to notes I saw, responded: “I believe Netanyahu is serious, capable and interested in reaching an agreement. What I cannot say is if he is willing to agree to what is needed to secure an agreement.”

That meeting concluded with Mitchell saying: “You asked if I think Netanyahu is serious. They ask the same question. You are an expert on Palestinian and Israeli politics. They are the same. But no one in the world knows American politics better than me, and this I will say. There has never been in the White House a president that is so committed on this issue, including Clinton who is a personal friend, and there will never be, at least not in the lifetime of anyone in this room.”

Don’t give up just yet even if history, and Hamas, say peace is a pipe dream and Mitchell next in line for that “black hole.”

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