Thursday, August 11, 2011

No Captain America to save the US economy

Business Times - 12 Aug 2011

No Captain America to save the US economy


ONE of this summer's film hits is the silly but entertaining Captain America: The First Avenger. Based on the comic book superhero, the movie tells of a short and frail young man who is transformed into a super soldier that leads US military forces to victory over Nazi Germans.

In the real world, the US did defeat Nazi Germany and Imperial Japan in World War II. But that military victory was achieved only after America's political and military leaders had formed a powerful international alliance and deployed the largest military force in human history.

Fast forward to today and Washington's response to the rising threats to the US and global economy seemed to be taking place in a make-believe world. Political paralysis makes it impossible for the White House and Congress to do anything more than establish a Super Committee that should - but probably won't - come up with a plan to put US fiscal house in order.

That may explain why there was so much wishful thinking in Washington and Wall Street in the aftermath of the bitter political fight over the debt ceiling and the ensuing Standard & Poor's downgrade of the US debt rating - and before the Federal Reserve's policymaking committee meeting on Tuesday.

The markets expected the low-key and soft-spoken former professor by the name of Ben Bernanke and his team of nerdy economists to save the day, substituting for the entire political leadership in Washington. They were expected to succeed where the White House and Congress have so miserably failed. The Fed would launch a new round of quantitative easing (QE3) or something along these lines that will help bring back to life a moribund economy.

But the Fed chairman did not turn superhero. Instead, he was, at best, the hero of the day in Washington and Wall Street. The Fed's policymaking committee announced on Tuesday that interest rates for banks that borrow from the Fed would remain near zero per cent for the next two years, a move that was described by some pundits as 'unprecedented' and 'bold' and a 'breakthrough'. For more than two years, the Fed has kept saying that it would keep interest rates low for 'an extended period' which is Fedspeak for 'a while'. By insisting that they would keep the rates low at least through the middle of 2013, the Fed was signalling a policy change of sorts.

Indeed, the Fed's announcement helped provide a certain level of clarity for the markets that abhor uncertainty. In a way, what Mr Bernanke and his colleagues have done was to counteract the fears ignited by the S&P downgrade - that interest rates would rise and slow the economy. The Fed was basically assuring the markets that that would not happen for the next two years. Global stock markets were excited - at least for while - after the Fed issued its statement.

But then, there was the big downside to the Fed's announcement in the form of an admission that the economy will be stuck in slow growth - and perhaps no growth at all or even slip into another recession - for at least another two years.

Which gets us back to square one: If the current sluggish economic recovery - and it certainly does not look at all like a recovery on Main Street - is just another example of an economy making very slow progress after a devastating financial meltdown, then the Fed's decision to keep interest rates low could help.

But if the American economy is facing deep structural problems, including an unqualified workforce, crumbling infrastructure, a failing education system - all of which is made worse by the mounting deficits - only the White House and Congress have the power to do something really big, a la Superhero, to fix that. But the politicians don't seem to have the will to do what is necessary. And the Fed cannot force them to cut spending and raise taxes and get the US economy moving again.

Some fans of the Fed note that, in its statement on Tuesday, the policymakers also stressed that they would continue to monitor and review and take any action necessary to the size and composition of their balance sheet, which could mean that the Fed was opening the door to additional quantitative easing in the future, and that Mr Bernanke may announce his intention to move in that direction at the Jackson Hole, Wyoming, meetings later this month.

But then Mr Bernanke may be facing strong opposition of some of the policymakers on the Fed's board who, very much like conservative Republicans on Capitol Hill, are worried that low interest rate policies could risk inflation and drive the US dollar down.

Indeed, the intense debate inside the central bank - not unlike the one taking place in the rest of Washington - could make it quite difficult for Mr Bernanke to even try playing the role of a superhero.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.

Published four years ago...

...timely as ever

and I', not even sure whether the San Diego Union Tribune is still around

Time for 'benign neglect' in Mideast?

By Leon Hadar
August 14, 2007

Muslims and non-Muslims have been fighting over this territory for years, resulting in thousands of casualties and hundreds of thousands of refugees, as negotiations mediated by foreign governments have failed to resolve the conflict.

But nobody is calling on Washington to launch a new peace initiative. Why? Because we're not talking about the Israeli-Palestinian conflict, we're talking about the Armenians and Azeris clashing over Nagorno-Karabakh.

Most Americans know what is happening in the West Bank, thanks to the prominent news coverage the Arab-Israeli conflict receives. For years, pundits have been warning that unless Washington does something to end the bloodshed – revive the “peace process,” send a new special envoy to the Middle East, convene a peace conference – the entire region could unravel, triggering another oil embargo or even World War III.

But Nagorno-Karabakh receives little attention. Yet, this territory has been the source of a bitter dispute between Armenia and Azerbaijan since the beginning of the 20th century. The two nations fought over the disputed territory in the final years of the Soviet Union. Since the war ended in 1994, most of Nagorno-Karabakh has remained under Armenia's control, while the parties continue to hold talks.

There is no doubt that the United States and the rest of the international community would welcome a resolution to the conflict. Indeed, many have been trying to help the Azeris and Armenians overcome their differences.

Washington also has been trying for some 30 years to resolve the dispute between Greece and Turkey over Cyprus – and to end the Turkish occupation of the northern part of the island.

In all likelihood, however, we are going to learn to live with such conflicts, ranging from the dispute between India and Pakistan over Kashmir and the civil war in Sri Lanka to the bloody disputes that continue to ravage sub-Saharan Africa.

The fact that Washington focuses so much of its energy and attention on the Arab-Israeli conflict, while turning a blind eye elsewhere, indicates that U.S. foreign policy has lost its focus.

In the past the test was simple: Are vital U.S. national security interests at stake? During the Cold War, any nation that served as a buffer or counterweight to the Soviet Union could legitimately be considered a vital ally. With the Soviet threat long gone, it's time to reevaluate.

The U.S.-led “peace process,” as even a casual observer realizes, has accomplished little. Yet, like the Energizer Bunny, it keeps going, and going, and going. Indeed, President Bush recently announced plans to convene an international conference to help restart Israeli-Palestinian talks.

Has anybody considered the possibility that America's preoccupation with the Arab-Israeli conflict – motivated by the commitment to Israel and the need to appease the Arab oil-producing states – may be doing more harm than good? By pursuing the illusion that the United States has the power and moral authority to broker a “peace” in the Middle East, Washington has created unrealistic expectations that cannot be fulfilled. Meanwhile, America's repeated failures as an “honest broker” ends up producing an anti-American backlash, which creates even more pressure on Washington to “do something” or else.

It may be time for Washington to consider a new policy of “benign neglect” toward the Palestinian-Israeli conflict, not different from the policy it employs in dealing with Nagorno-Karabakh and other conflicts.

The United States should be more than ready, if necessary, to work with other international players to facilitate a resolution to the conflict but only if and when both sides are ready to make peace, and deal seriously with core existential issues, such as Israel's right to exist securely and in peace, the fate of the remaining Jewish settlements, and the status of Arab refugees and the city of Jerusalem.

Even in that (unlikely) case, Washington should refrain from making long-term security and economic commitments. If the two sides want even a fragile peace to work, they will make it work – with or without U.S. involvement.

Such “constructive disengagement” from the Israeli-Palestinian conflict could actually create incentives for the two sides to achieve real peace. If they fail, they will – not unlike the Azeris and the Armenians – have no one to blame but themselves.

Hadar is a research fellow in foreign policy studies at the Oakland-based Independent Institute (