reflectivepundit

Kudos for Arianna Huffington: Can Blogs Become the New Watchdog Press?

By Brigitte L. Nacos
There is hardly a day without another gloom and doom item about the dismal state of America’s newspapers. Just this morning, I read that the San Francisco Chronicle may not survive for long. The problem with the shrinking newspaper landscape is that we are losing rapidly journalists that provide most of the news that Americans receive. Alex Jones, the director of the Shorenstein Center on the Press, Politics, and Public Policy at Harvard University, has estimated that about 85 percent of today’s news is generated by newspaper personnel. Bloomberg’s Albert Hunt wrote the other day, “[M]aybe when the economy rebounds, newspapers will get a bounce, too, although the structural problems predated the financial crisis. And there be costly casualties in the interim. That may not matter much for a vibrant economy. It matters a lot for a vibrant democracy.”

Indeed, strong democracy depends on a robust print press—unless others take on the role of news-gatherers and investigative reporters. Josh Marshall’s TPM blog has taken on this role. And now Arianna Huffington, the founder and editor-in-chief of the Huffington Post deserves kudos for launching the Huffington Post Investigative Fund that will bankroll serious investigative reporting. While not fond of its tabloid type features, I read the Huffpost for the spectrum of opinion pieces it offers and will continue to do so with even more enthusiasm because of its announced commitment to investigative reporting.

Arianna Huffington explains the rationale for the new initiative well, when she writes:

“As the newspaper industry continues to contract, one of the most commonly voiced fears is that serious investigative journalism will be among the victims of the scaleback. And, indeed, many newspapers are drastically reducing their investigative teams. Yet, given the multiple crises we are living through, investigative journalism is all the more important. As a result, all who recognize the indispensable role good journalism plays in our democracy are looking for ways to preserve it during this transitional period for the media. For too long, whether it's coverage of the war in Iraq or the economic meltdown, we've had too many autopsies and not enough biopsies. The HuffFund is our attempt to change this.” 

The Obama Administration and "Moderate" Taliban Factions

By Brigitte L. Nacos

Last November I wrote against negotiations between the United States and/or the Afghan government on the one hand and Taliban leaders on the other. At the time, the Bush administration floated such a trial balloon in response to Saudi officials and Afghanistan’s President Hamid Karzai who promoted such talks. U.S. military leaders, most of all the top U.S. commander in Afghanistan, Gen. David McKiernan, and Gen. David H. Petraeus, in charge of the U.S. forces in the Middle East and South Asia, bought also into the idea. And now, the Obama administration seems to aim at negotiating with so-called moderate Taliban factions in order to curb violence and promote peace in Afghanistan. Whether the administration’s objectives are narrowly focused on capturing or neutralizing the Al Qaeda and Taliban leaders in hiding or broadly designed to prevent the resurrection of Taliban rule in Afghanistan as well, negotiations will not solve the Afghan problem but likely worsen it. 

In almost all conflicts it makes sense to negotiate and try to find some common ground. But in some cases talking with the other side is not a reasonable option. The Taliban in Afghanistan—and Pakistan, close allies, hosts, and enablers of Osama bin Laden and Al Qaeda Central, represent such a case. There are no moderates within the Taliban movement that is the most extreme manifestation of Salafism and thus committed to purify or destroy their own Muslim brethren and, of course, infidels who defend the right of those Afghans who do not follow their fanatic religopolitical extremism.

This point is driven home by Kristen L. Rouse, a first lieutenant in the Army National Guard, who served in the 10th Mountain Division in Afghanistan from 2006 to 2007 in an  op-ed article in today’s New York Times. After recalling deadly Taliban attacks on school children in Afghanistan and the Taliban’s recent success in closing down many schools in the Swat region of Pakistan, she writes

“It’s also made me get back in touch with many of the soldiers I deployed with, sharing stories and talking about Afghanistan’s future. We hold diverse views about the war and about what should happen next. But I can tell you this much: many of the veterans I know are outraged at the possibility of the United States negotiating with the Taliban as if they were just another Afghan political party and not a criminal gang that inflicts and enforces the most extreme ignorance, poverty and violence upon innocent people — upon schoolchildren.”

The Tragedy of the Financial Commons

by David Epstein & Sharyn O'Halloran

Does our financial system need a systemic risk regulator?  Common wisdom is turning toward an affirmative answer to this question, but many doubt the wisdom of adding a new layer of bureaucracy to our already-Byzantine system of financial regulation.  Plus, they say, markets already offer many ways to hedge risks, and traders should be smart enough to avoid these kinds of problems in the future. 

But a risk regulator is the right way to go, and critics should take a lesson from post-Medieval British farmers.

Well into the 19^th Century, English cows, sheep, pigs, and other livestock grazed on the “commons:” shared pastures which anyone could use.  But the commons were always depleted, with barely enough grass to support the herds that used them, to everyone’s detriment. 

Why couldn’t the owners conserve resources more rationally?  In a 1968 essay, Garrett Hardin labeled this phenomenon the “tragedy of the commons” and outlined its basic logic.  True, everyone is better off if fewer animals graze on the commons, but each individual user has incentives to increase the size of his herd past the socially efficient point.  After all, the gains from these additions accrue solely to the one who adds a cow, while the costs are spread across all users.  As a result, voluntary deals to restrain herd size fall apart, and all suffer as a consequence.

How does this relate to the regulation of financial systems?  Well, from time to time markets are subject to panics, bank runs, and other system-wide failures.  When these happen, the costs are borne by all members of the financial community, not to mention ordinary people who look to the banks for loans and financing for their projects.  And these panics are more likely to happen when there are lots of risky assets in circulation.  So all would agree that everyone is better off when banks restrain their use of risky assets.

But just like the English farmers, investment bankers know that if they add just one more risky bet to their portfolio, they will retain all the profits that result if it goes well, while the costs of systemic failure are spread out to everyone else.  So they have incentives to add to their portfolio, as does everyone else in the system until – well, until what’s happening now happens.

Notice that the problem is not that the bankers aren’t smart enough to avoid trouble.  Quite the reverse: trouble comes precisely because the bankers, like the herdsmen before them, are able to accurately calculate their own costs and benefits from alternative actions.  And the problem isn’t the lack of risk management tools either: each bank can be individually safe and sound, hedging its own bets, while the system as a whole teeters on the verge of collapse. 

How to escape the dilemma?  We can’t do what the herdsmen did, which is fence in the commons and assign private rights to grazing land – no regulatory barrier could be high enough to prevent problems Wall Street from spilling over into Main Street.

How about the other extreme: regulate which assets can be bought and sold, to make sure that the system doesn’t have to take on unacceptable levels of risk?  This puts the heavy hand of government right in the middle of the financial marketplace, which is surely a recipe for disaster.  Since when are government officials better at measuring expected returns than bankers?  And do we really want to force traders to get government approval before pressing the button on every deal?  Business would fly away to foreign exchanges faster than you could say “Long Term Capital Management.” 

But there is a middle ground: use market mechanisms to align the incentives of traders, making them face the true social costs of their actions.  Buyers of assets with undiversifiable risk over a certain level would pay a fee into a central insurance fund, with the payment proportional to the size of the deal and its riskiness.  Just like FEMA requires homeowners who build their houses on floodplains to buy insurance in the case of storms, financial firms would contribute to a rainy-day fund, to be used to stabilize asset values in the case of market meltdown. 

This scheme would accomplish a number of purposes simultaneously.  First, it would help ensure that banks don’t engage in transactions whose individual benefits to the investors are outweighed by the risk they impose on the rest of society.  Second, it would create a stockpile of reserves, so that when the banking system does go into a tailspin, the money to bail them out (or at least the first installment) would come from the banks themselves, rather than the taxpayers.  And third, it could get our financial system back in order using market incentives, rather than heavy-handed government interference, to do the hard work.

Moving in this direction will take resolve and cooperation from Congress, the administration, regulatory agencies, and most importantly the firms themselves.  And there are still many details that will need to be worked out so that the system runs efficiently, without huge costs of oversight.  But the rewards are great as well: a financial system that is well-regulated is a boon not only to borrowers and taxpayers, but, as is now abundantly clear, to the players in the financial system as well.