The Pasty Little Putz and Krugman

In “The Devil We Know” The Pasty Little Putz has a question:  Has Hosni Mubarak’s rule made America safer, or less safe?  Prof. Krugman, in “A Cross of Rubber,” says the Fed and the European Central Bank are under a lot of pressure from bankers to do the wrong thing and raise interest rates.  Here’s the Putz:

As the world ponders the fate of Egypt after Hosni Mubarak, Americans should ponder this: It’s quite possible that if Mubarak had not ruled Egypt as a dictator for the last 30 years, the World Trade Center would still be standing.

This is true even though Mubarak’s regime has been a steadfast U.S. ally, a partner in our counterterrorism efforts and a foe of Islamic radicalism. Or, more aptly, it’s true because his regime has been all of these things.

In “The Looming Tower,” his history of Al Qaeda, Lawrence Wright raises the possibility that “America’s tragedy on September 11 was born in the prisons of Egypt.” By visiting imprisonment, torture and exile upon Egypt’s Muslim Brotherhood, Mubarak foreclosed any possibility of an Islamic revolution in his own country. But he also helped radicalize and internationalize his country’s Islamists, pushing men like Ayman Al-Zawahiri — Osama bin Laden’s chief lieutenant, and arguably the real brains behind Al Qaeda — out of Egyptian politics and into the global jihad.

At the same time, Mubarak’s relationship with Washington has offered constant vindication for the jihadi worldview. Under his rule, Egypt received more American dollars than any country besides Israel. For many young Egyptians, restless amid political and economic stagnation, it’s been a short leap from hating their dictator to hating his patrons in the United States. One of the men who made this leap was an architecture student named Mohamed Atta, who was at the cockpit when American Airlines Flight 11 hit the World Trade Center.

These sound like good reasons to welcome Mubarak’s potential overthrow, and the end to America’s decades-long entanglement with his drab, repressive regime. Unfortunately, Middle Eastern politics is never quite that easy. The United States supported Mubarak for so long because of two interrelated fears: the fear of another Khomeini and the fear of another Nasser. Both anxieties remain entirely legitimate today.

The first fear everyone understands, because we’re still living with the religious tyranny that Ayatollah Khomeini established in Iran in 1979, in the wake of a spontaneous revolution not unlike the one currently sweeping Cairo and Alexandria.

The second fear is less immediately resonant, because Gamal Abdel Nasser is now 40 years in the grave. But the last time a popular revolution in the land of the pharaohs overthrew a corrupt regime, the year was 1952, Nasser was the beneficiary — and Washington lived to rue the day he came to power.

Nasser was not an Islamist: he was a secular pan-Arabist socialist, which in the 1950s seemed to put him on history’s cutting edge. But under his influence, Egypt became an aggressively destabilizing force in Middle Eastern politics. His dream of a unified Arab world helped inspire convulsions and coups from Lebanon to Iraq. He fought two wars with Israel, and intervened disastrously in Yemen. His army was accused of using poison gas in that conflict, a grim foreshadowing of Saddam Hussein’s domestic tactics. And his pursuit of ballistic missiles was a kind of dress rehearsal for today’s Iranian nuclear brinkmanship — complete with a covert Israeli campaign to undermine his weapons programs.

The memory of Nasser is a reminder that even if post-Mubarak Egypt doesn’t descend into religious dictatorship, it’s still likely to lurch in a more anti-American direction. The long-term consequences of a more populist and nationalistic Egypt might be better for the United States than the stasis of the Mubarak era, and the terrorism that it helped inspire. But then again they might be worse. There are devils behind every door.

Americans don’t like to admit this. We take refuge in foreign policy systems: liberal internationalism or realpolitik, neoconservatism or noninterventionism. We have theories, and expect the facts to fall into line behind them. Support democracy, and stability will take care of itself. Don’t meddle, and nobody will meddle with you. International institutions will keep the peace. No, balance-of-power politics will do it.

But history makes fools of us all. We make deals with dictators, and reap the whirlwind of terrorism. We promote democracy, and watch Islamists gain power from Iraq to Palestine. We leap into humanitarian interventions, and get bloodied in Somalia. We stay out, and watch genocide engulf Rwanda. We intervene in Afghanistan and then depart, and watch the Taliban take over. We intervene in Afghanistan and stay, and end up trapped there, with no end in sight.

Sooner or later, the theories always fail. The world is too complicated for them, and too tragic. History has its upward arcs, but most crises require weighing unknowns against unknowns, and choosing between competing evils.

The only comfort, as we watch Egyptians struggle for their country’s future, is that some choices aren’t America’s to make.

Now here’s Prof. Krugman:

Last Saturday, reported The Financial Times, some of the world’s most powerful financial executives were going to hold a private meeting with finance ministers in Davos, the site of the World Economic Forum. The principal demand of the executives, the newspaper suggested, would be that governments “stop banker-bashing.” Apparently bailing bankers out after they precipitated the worst slump since the Great Depression isn’t enough — politicians have to stop hurting their feelings, too.

But the bankers also had a more substantive demand: they want higher interest rates, despite the persistence of very high unemployment in the United States and Europe, because they say that low rates are feeding inflation. And what worries me is the possibility that policy makers might actually take their advice.

To understand the issues, you need to know that we’re in the midst of what the International Monetary Fund calls a “two speed” recovery, in which some countries are speeding ahead, but others — including the United States — have yet to get out of first gear.

The U.S. economy fell into recession at the end of 2007; the rest of the world followed a few months later. And advanced nations — the United States, Europe, Japan — have barely begun to recover. It’s true that these economies have been growing since the summer of 2009, but the growth has been too slow to produce large numbers of jobs. To raise interest rates under these conditions would be to undermine any chance of doing better; it would mean, in effect, accepting mass unemployment as a permanent fact of life.

What about inflation? High unemployment has kept a lid on the measures of inflation that usually guide policy. The Federal Reserve’s preferred measure, which excludes volatile energy and food prices, is now running below half a percent at an annual rate, far below the informal target of 2 percent.

But food and energy prices — and commodity prices in general — have, of course, been rising lately. Corn and wheat prices rose around 50 percent last year; copper, cotton and rubber prices have been setting new records. What’s that about?

The answer, mainly, is growth in emerging markets. While recovery in advanced nations has been sluggish, developing countries — China in particular — have come roaring back from the 2008 slump. This has created inflation pressures within many of these countries; it has also led to sharply rising global demand for raw materials. Bad weather — especially an unprecedented heat wave in the former Soviet Union, which led to a sharp fall in world wheat production — has also played a role in driving up food prices.

The question is, what bearing should all of this have on policy at the Federal Reserve and the European Central Bank?

First of all, inflation in China is China’s problem, not ours. It’s true that right now China’s currency is pegged to the dollar. But that’s China’s choice; if China doesn’t like U.S. monetary policy, it’s free to let its currency rise. Neither China nor anyone else has the right to demand that America strangle its nascent economic recovery just because Chinese exporters want to keep the renminbi undervalued.

What about commodity prices? The Fed normally focuses on “core” inflation, which excludes food and energy, rather than “headline” inflation, because experience shows that while some prices fluctuate widely from month to month, others have a lot of inertia — and it’s the ones with inertia you want to worry about, because once either inflation or deflation gets built into these prices, it’s hard to get rid of.

And this focus has served the Fed well in the past. In particular, the Fed was right not to raise rates in 2007-8, when commodity prices soared — briefly pushing headline inflation above 5 percent — only to plunge right back to earth. It’s hard to see why the Fed should behave differently this time, with inflation nowhere near as high as it was during the last commodity boom.

So why the demand for higher rates? Well, bankers have a long history of getting fixated on commodity prices. Traditionally, that meant insisting that any rise in the price of gold would mean the end of Western civilization. These days it means demanding that interest rates be raised because the prices of copper, rubber, cotton and tin have gone up, even though underlying inflation is on the decline.

Ben Bernanke clearly understands that raising rates now would be a huge mistake. But Jean-Claude Trichet, his European counterpart, is making hawkish noises — and both the Fed and the European Central Bank are under a lot of external pressure to do the wrong thing.

They need to resist this pressure. Yes, commodity prices are up — but that’s no reason to perpetuate mass unemployment. To paraphrase William Jennings Bryan, we must not crucify our economies upon a cross of rubber.

Interest rates will go up in 5, 4, 3, 2…

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