March 17, 2023
Welcome to Home & Away. I have been away for a week now, first in New Orleans speaking about The Bill of Obligations at the book festival there, now in Florida on a tour discussing the book at a number of venues. I assure you that the fact these venues are near golf courses is purely a coincidence.
Writing about home unsurprisingly leads me to the collapse of Silicon Valley Bank, or SVB. We should never have arrived at this point. Little is inevitable in life, and this bank crisis, which exposed a larger banking crisis, surely was not. It happened because of the move by the previous administration and Congress in 2018 to weaken regulation, the subsequent failure of multiple regulators to keep adequate tabs on banking institutions and what they were doing and failing to do, and boards of directors who did not ask the right questions of management or, if they did, did not insist on the right answers.
So the government has decided to bail out all depositors regardless of how much money they kept in the bank and not just up to the FDIC-guaranteed limit of $250,000. Some have argued this was the right thing to do, others that those with deposits above $250,000 should have taken something of a haircut. Either way, it underscores the need for tighter supervision of all banking institutions and not just those above $250 billion in assets, the arbitrary level at which a bank becomes “systematically important” and therefore worthy of serious regulation. As Martin Wolf pointed out about SVB, “It was conveniently non-significant in life, but became systematically significant in death.”
Going forward, we have to assume that the government will step in and make whole any depositor no matter how large the deposit or small the institution. One idea would be to get rid of the $250,000 cutoff and pledge to do this if the deposits are held in an institution that accepts robust regulation, including maintaining higher capital requirements and more realistic balance sheets. Those that refuse to meet such regulatory standards would be in a position to offer depositors higher returns but at greater risk and with no expectation of bailouts.
All this is a reminder that government and government-led regulation are necessary for the efficient operation of not just the economy but the society. Bad, inadequate government becomes costly, fuels populism, or both.
One last thought. What is going on with banks will make it more difficult for the Fed to act in a concerted way on inflation lest even higher rates lead to problems at additional banks. Few armies can fight two wars simultaneously, and Jay Powell will most likely choose to go slower on inflation in at least the near turn.
Away this week I will touch on three topics. The first is the recent agreement, brokered by China, between Saudi Arabia and Iran. It has generated considerable commentary, much of it overwrought.
The agreement itself is quite modest, both in what it covers and what it does not. It paves the way for the restoration within several months of diplomatic relations between Iran and the Kingdom but is largely silent beyond that. It is important to remember that these countries maintained diplomatic ties as recently as seven years ago, and diplomatic ties are no guarantee of cordial or positive relations. Indeed, there is no reason to believe the two countries have resolved their differences over Iran’s nuclear program, Yemen, Syria, Israel or much else.
That the United States was not central to this pact is no cause for alarm. If anything it was to be expected. The Biden administration, like the Obama and Trump administrations, has downgraded the strategic importance of the greater Middle East. This is not necessarily a bad thing as it allows greater emphasis on Europe and the Indo-Pacific. But as the United States pulls back, countries in the region will look to hedge, while outsiders such as China will look to increase their influence. That is just the reality.
In addition, there was no way the United States could have brokered this agreement given its absence of relations with Iran. What is more, the Saudi leadership was looking for an opportunity to poke the Biden administration, which is sees as unfriendly given its emphasis on democracy and human rights. The Crown Prince, MBS, was also likely attempting to put pressure on the Biden administration to agree to pay the high price he is asking to normalize relations with Israel.
I want to make one more point. We ought not to react negatively to something constructive done in the diplomatic realm just because it was carried out by China or someone else with whom we have a difficult relationship. To the contrary, we should welcome this development, both on its merits and as an indication that China is prepared to do helpful things at least on occasion. Chinese leader Xi Jinping will reportedly visit Moscow next week and speak with Ukrainian President Zelensky upon his return. Hopefully China decides to play a positive role in bringing the war in Ukraine to an end – although I have my doubts it will choose to do so.
The second issue I want to raise are the views of Florida Governor Ron DeSantis on Ukraine. What he said — including that becoming further entangled in the “territorial dispute” between Ukraine and Russia is not a vital US national interest, that we should not provide F-16s to Ukraine, and that involvement in this foreign war should not take priority over the defense of our homeland — is a reminder that there continue to be three tendencies when it comes to Republican thinking on foreign policy. The dominant tendency nowadays is Trumpism, which combines elements of isolationism and unilateralism and tends to be amoral. A second tendency (which often characterized the administration of George W. Bush) is a version of neoconservatism: internationalist and interventionist, but also unilateral and ambitious, often seeking democratic transformation and regime change. The third tendency is realism, with its belief in alliances and institutions, its focus on the foreign policy of others rather than their internal natures, the pursuit of limited ends, and an appreciation for the limits of American power. It was the foreign policy of George H.W. Bush.
I am of the third tendency. Alas, it is the weakest, in the witness protection program for all intents and purposes. No Republican candidate as yet embraces this approach to the world. Several of the actual or would-be candidates —Nikki Haley, Mike Pompeo — are close to the second, neoconservative tendency. This view tends to suffer from overreach.
Trump and now it seems DeSantis are of the first, neo-isolationist school. This is regrettable, as if this is the policy of the next occupant of the Oval Office, it would bring about a world of diminished order, freedom, and American influence.
The third issue concerns the Iraq War. This week marks its twentieth anniversary. I just published a longish (2000-word) piece for Project Syndicate assessing the war’s legacy with the advantage of some hindsight. Unlike a good bottle of wine, the decision to go to war and the decisions of how it was waged and followed up have not improved with age. To the contrary, I conclude the article as follows: “In 2009 I wrote that the 2003 Iraq War was an ill-advised war of choice. More than a decade later, and twenty years after the war began, I see no reason to amend the judgment. It was a bad decision, badly executed. The United States and the world are still living with the consequences.”
For those who want more, I refer you to a book I published just over a decade ago: War of Necessity War of Choice. The 1990-1991 Gulf War was an example of the former, the 2003 Iraq War the latter. Or more recently, Russia’s invasion of Ukraine was a war of choice; Ukraine’s defense one of necessity. The lesson to be learned is not to reject out of hand any war of choice, but to be rigorous and then some in advance of initiating one, both of which were lacking in the lead-up to the 2003 Iraq War.
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Monday, March 6, 2023: New York Civic Learning Week: A Conversation with American Diplomat and Author Richard Haass
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