The Need for Certainty

With most recessions there is some sort of market imbalance that needs correction before everyone goes back to business as usual.

Over a particular winter in the 1630s, everyone in Holland got into the tulip business. People made lots of money on tulips, prices grew exponentially, and at some point, everybody snapped out of it and realized that it was just a flower. Cue economic collapse.

But life went on. In the 1720s, everyone went gaga over getting a piece of the South Sea Company, a British joint stock company that had near-exclusive rights to all sorts of commerce in Spanish South America. Everyone bought South Sea stock, the price went up, and at some point everyone realized it was grossly overvalued, and everything fell in on itself. In response, parliament passed the "Bubble Act" coining a term we know all too well, mostly because passing a law didn't do much good.

During the recent Great Recession, the same thing happened, with houses this time. But houses aren't tulips, or shares. People live in them.
Of course, houses are only part of the problem. There's finance and corporate profit too.
So here we are. Why is this different? Why can't we get over it like the tulip people did, or the shareholders, or the dot-commers for that matter? For my money, the answer is in the little guy. People depended on their houses for money, so much so that they weren't even making more at their jobs, even in good times when they could shop around for wages. Now they have no house and no job.

In a perfectly just world, bankers would have gotten equally screwed in the deal, but letting nature take its course would have been disastrous. Banks were literally talking about shutting the ATMs down in a matter of hours without some sort of guarantee from the government. That's a taste of what was at stake. For better or for worse, the banking sector is fine now. We made them whole. They're back to making money trading abstract things like repackaged debt, just like before, but with a few new rules to stop it from happening again quite the same way.

Banks got a massive bailout and a new law that defines the rules of the games they play in less uncertain terms than before. They may not like being told what to do by regulators, but they have one thing you and I don't. Certainty. The rules are known. The full faith and credit of the Federal Reserve is guaranteed as before, and they can go back to playing, just with more capital padding their leveraged investments than before.

But things are still not well. When people don't have a job, or a home, they're not going to spend money. When people don't spend money, nobody else gets paid. When nobody is getting paid, that means that people don't have a job, or a home, etc., etc., etc...

We tried the classic solution to this problem, stimulus spending. The theory is straightforward. When demand for stuff is weak, the government can step in to give people jobs so they'll spend money, which will give other people jobs, etc., etc., etc... It's generally thought to be ok to go into debt if you have to in order to do this. It'll come back in economic growth, and if you don't spend the money, the whole economy will spiral down the toilet of deflation. That's the theory, and it sort of works. I even think it sort of worked this time.

So what's the problem? Speculation happened, a bubble grew and popped, the government stepped in and did what the textbooks say they should, but everything is still anemic. Money is out there. Banks and corporations are sitting on billions. But businesses are still finding new ways to do more with less, instead of investing in new people, new capital, or new products. The American workforce is 30 percent more productive than Europe's. The dollar is still the preferred currency because our long-term prospects for growth are still better than almost anywhere else in the industrialized world. But people with real skills are looking for work and not finding any. Creative entrepreneurs, people with ideas and a work ethic to match are still just trying to scrape by. Small firms are 99 percent of all corporations in America, employing half the American workforce. This matters.

The answer for the little guy is the same as it is for the banks. Certainty. Small business owners don't know what their new liabilities are going to be when health reform rolls out. Some aspects of the law will help, like tax credits and subsidies for plans. Small businesses will no longer be at a disadvantage to a large company when it comes to benefits. Some aspects of the law will cause new headaches, like reporting more and more information to the IRS. People ready to invest money in a business don't know what they'll owe in taxes next year. They fell like all bets are off under a Democratic administration. Even if the answers to these questions are out there, the people who need them haven't heard. At very least, this is a major failure of communication.

If there is one thing the Obama administration should do that they haven't, it's this: A covenant with the small business owner, writ large. A ten-point guarantee of what the government can offer in terms of certainty. A national TV oval office pledge to veto any legislation that would violate this trust. Here are 10 points I'd like to see:

1. A pledge to leave taxes where they are under a certain payroll threshold, say $1 million.
2. A pledge to leave taxes where they are under a certain income threshold, say $250 thousand.
3. Set a little money aside for small business loans with very generous terms.
4. Set a little money aside for small business grants, issued competitively with business plans.
5. An insurance arrangement that covers against losses for businesses in the program who meet certain terms.
6. An insurance arrangement to mitigate the risk for investors who are interested in bankrolling small businesses.
7. A privately operated program for business owners to go into group purchasing arrangements with other businesses to leverage their buying power for capital investments.
8. A clear, simple statement of small businesses' stake in health reform, both how it helps, and what's expected of them.
9. Assistance accessing foreign markets, and tariff reductions.
10. A domestic and international marketing blitz for American small business.

Providing certainty and support to this area of the economy is what has been missing this whole time. The costs of this package pale in comparison to any stimulus, any bailout, and combine the dynamism of the private market with the security that comes with a government guarantee. America's comparative advantages have always been in our inventiveness and optimism. Economic policy should do everything it can to maximize those advantages. Presidents should do everything they can to push us forward despite everything else.

Nothing happens while people are scared. No one can be optimistic about the prospects of taking a big risk in these times. This administration and our president have let us down in this regard. Policy isn't enough. Certainty is an emotional commodity, albeit one that happens with a good insurance policy, a good loan, some good rules and a good message. It's more than sentimentality. It lets people take risks. Help us feel good about America again. Give us what we need to help ourselves.

Gandhi Cage Match, Anyone?

It's no revelation that non-violent protest and civil disobedience would represent a fundamental change in the way the Middle East does business. But it sure is revelatory to see it happening. When Hamas talks about Gaza flotillas being worth 10,000 rockets, something basic is shifting.

The Israeli left would be wise to follow suit. If they don't, there will be no one on the Jewish side that will attest to our morality after peace is settled, and the narrative is written that the oppressed are the victors. That could do more damage to Israel's standing abroad than any invasion, wall or checkpoint.

This article is the second in a week that's pointing to a real, serious change that has little to do with diplomats or generals.

If there's any truth to the concept of a cult of personality, both sides will need a Gandhi... but what happens if two Gandhis were to meet? Any bets?

Moral Authority in the Holyland

The only way I'm able to make moral sense of the Israel-Palestine conflict is by looking at the shifts in momentum that occur between the two sides every few years.

Narrative 1: Israel elects some war hero who has seen the light, and decides that trading some land for some peace is the only way out of this mess. Then the Palestinian side rejects all offers, ends up fracturing into hardliners and reformers, and it becomes impossible to negotiate. Then some genius blows himself up in downtown Tel Aviv.

Narrative 2: Israel elects some war hero who believes in dealing with Palestinians in the most cynical, base manner. The hero makes it his mission to expand settlements, jail and assassinate Palestinian leaders, and impose blockades and sanctions everywhere possible. Palestine retaliates in kind with homemade rockets, and some luminary drives a bulldozer into a crowd in Jerusalem.

Real life is usually some mix of these narratives, but the point is that both sides all retain enough moral authority to scuttle a deal, cower to extremists, or take raw political advantage of the moment.

People embroiled in the conflict, Israelis, Palestinians and their surrogates, will come up with compelling arguments for why they have moral authority. And they're right in their own ways. But there is a larger morality in play-- world opinion, which is usually too distracted by people's own parochial interests until things become crystal clear. For someone to win, the morality needs to shift far to one side so that the world demands a settlement.

In comes the most promising change I've seen in years. Hamas and Hizballah have decided to take on non-violent tactics over blowing themselves up and launching rockets from the backs of camels. Witness the Gaza flotillas, or the heavy PR pressure they're laying on the world from all quarters. I've been waiting for this for years. Palestine has real, serious grievances, but they squandered all claims to them with endless petty, violent acts. This changes the game.

Narrative 3: The only modern, westernized nation in a vast region, the product of recent immigration, imposes strict conditions on its indigenous ethnic groups. The indigenous people, fractious as they are, jockeying for power in their own conflicts, respond with terrorism and self-pity. They end up jailed and oppressed. Until they change their approach, go non-violent, and win. Both sides end up coming away just fine. The powerful, western people retain power over their domain, and the natives win self-determination.

That's South Africa's story. The conflict and its resolution all happened within roughly the same time period as Israel and Palestine have been at it. The power dynamic is the same. The cycle of violence remained unbroken until the powerless changed their approach. It's really up to the powerless here.

Israel can make all the overtures to peace they want, but the peaceniks will always look like naive cowards to a plurality of their population. They will always risk a double-cross. At the same time, Israel's warmongers can make Palestinians miserable, but this only means they'll have less to lose.

Palestine can make Israel's life miserable with terrorism, but they won't win, and they'll suffer under more necessary restrictions to their movement. If they go for peace, Israel has little reason to go along with it. If the Palestinians do nothing, they'll be marginalized as their land slowly gives way to Jewish settlements, and their status as second-class citizens is secured.

The only way out of this dilemma is for those with little power to renounce violence and make a big stink about their situation to the rest of the world. That's exactly what's happening. I just hate to be on the side of the Afrikaners this time around.