How Not to Reform Finance

The potential for financial crises can only be mitigated, never eradicated. Few institutions are more vital in resolving a crisis than the lender of last resort. I thought reformers like Elizabeth Warren understood this necessity, but I may have been wrong.

Senators Elizabeth Warren and David Vitter have introduced The Bailout Prevention Act of 2015. The bill would restrict access to emergency lending by the Federal Reserve and pressure the central bank to lend at steeper rates in a crisis. According to former Fed Chairman Ben Bernanke, it would undermine the Federal Reserve’s role as lender of last resort. Bernanke’s argument is compelling:

Imagine a financial institution that is facing a run but has good assets usable as collateral for a central bank loan. If all goes well, it will borrow, replacing the funding lost to the run; when the panic subsides, it can repay. However, if the financial institution believes that its borrowing from the central bank will become publicly known, it will be concerned about the inferences that its private-sector counterparties will draw. It may worry, for example, that its providers of funding will conclude that the firm is in danger of failing, and, consequently, that they will pull their funding even more quickly. Then borrowing from the central bank will be self-defeating, and firms facing runs will do all they can to avoid it. This is the stigma problem, and it affects everyone, not just the potential borrower. If financial institutions and other market participants are unwilling to borrow from the central bank, then the central bank will be unable to put into the system the liquidity necessary to stop the panic. Instead of borrowing, financial firms will hoard cash, cut back credit, refuse to make markets, and dump assets for what they can get, forcing down asset prices and putting financial pressure on other firms. The whole economy will feel the effects, not just the financial sector.

The stigma problem is very real, with many historical illustrations. When the BBC announced in 2007 that the British lender Northern Rock had received a loan from the Bank of England, for example, a severe run on the lender began almost immediately. Ultimately, the government had to take the firm over.

The Warren-Vitter legislation would create an insuperable stigma problem. (It has other drawbacks as well, but my focus here is on stigma.) First, the requirement that solvency analyses be released immediately (or quickly) would publicly identify any potential borrowers. No borrower would allow itself to be so identified, for fear of the inferences that might be drawn about its financial health. Second, the five percentage point penalty rate requirement would remove any doubt that those borrowing from the central bank had no access to other sources of funding, further worsening the stigma problem. (A penalty rate was not a problem in [Walter] Bagehot’s era, because, unlike today, all lending by the central bank was strictly confidential.) Moreover, because borrowers would know that the program could be terminated in thirty days if Congress didn’t approve, the benefit of borrowing from the central bank would be limited. Because borrowers would not willingly participate, broad-based lending programs (which Dodd-Frank intended to preserve) would not work, and we would have lost a critical weapon against financial panics.

The approach of Senators Warren and Vitter, Bernanke said, is “roughly equivalent to shutting down the fire department to encourage fire safety.” It would be far better to improve the fire code, which has already changed since 2008:

The Fed intervened in the cases of Bear and AIG with great reluctance, doing so only because no legal mechanism existed to safely wind down a systemic firm on the brink of failure. A key element of the Dodd-Frank financial reform bill, passed in 2010, was to provide just such a mechanism—the so-called orderly liquidation authority, which gives the Federal Deposit Insurance Corporation and the Fed the necessary powers to put a failing firm into receivership without creating financial chaos. (By the way, a great deal of progress has been made in implementing this authority and preparing for the possible failure of a systemic firm; see these recent remarks by FDIC chairman Martin Gruenberg.) With the creation of the liquidation authority, the ability of the Fed to make loans to individual troubled firms like Bear and AIG was no longer needed and, appropriately, was eliminated.

If the liquidation authority is not yet adequate, reformers should demand its enhancement. But undermining the Fed’s role as lender of last resort is backasswards. It leaves me baffled as to what lessons were learned by Senator Warren from the financial crisis.

There are reasons to doubt the stability of the financial system, as Martin Wolf has argued. But when reformers get the diagnosis wrong, they are far more likely to screw up the remedy.

Blasphemy Is the New Bigotry

If a Muslim woman is spat on because she wears a niqab, that is bigotry. If a Muslim man is denied an apartment because of his faith, that is bigotry. If a mosque is firebombed by a Christian nativist, that is bigotry. Blasphemy, however, is not.

The term “Islamophobia” conflates blasphemy with bigotry. This is no accident. In origin and purpose, this pejorative has always been illiberal. Pascal Bruckner explained:

To avoid incurring any blame, in the 1970s fundamentalism invented the term “Islamophobia,” which was supposed to parallel xenophobia: the semantic buckler was first used against the American feminist Kate Millet, who was said to be guilty of calling upon Iranian women to take off their chadors, and then in the 1990s against the Anglo-Indian writer Salman Rushdie when he published The Satanic Verses. This was a clever invention because it amounts to making Islam a subject that one cannot touch without being accused of racism.

The use of this “semantic buckler” is not confined to the Islamist movement. Garry Trudeau is no Islamist, but he has joined the campaign against those who dissent from political Islam. In the acceptance speech for his Polk Award, Trudeau said:

Traditionally, satire has comforted the afflicted while afflicting the comfortable. Satire punches up, against authority of all kinds, the little guy against the powerful. Great French satirists like Moliére and Daumier always punched up, holding up the self-satisfied and hypocritical to ridicule. Ridiculing the non-privileged is almost never funny—it’s just mean.

By punching downward, by attacking a powerless, disenfranchised minority with crude, vulgar drawings closer to graffiti than cartoons, Charlie [Hebdo] wandered into the realm of hate speech, which in France is only illegal if it directly incites violence. Well, voilá—the 7 million copies that were published following the killings did exactly that, triggering violent protests across the Muslim world, including one in Niger, in which ten people died.

Powerless is not an adjective I would apply to men with Kalashnikovs. But unlike Trudeau, who was punching the dead, I view Islamists as political actors.

Buried within Trudeau’s argument is a peculiar assumption about Islamist agency. David Frum teased it out:

Had the gunmen been “privileged,” then presumably the cartoons would have been commendable satire. The cartoonists would then have been martyrs to free speech. But since the gunmen were “non-privileged,” the responsibility for their actions shifts to the people they targeted, robbing them of agency. It’s almost as if he thinks of underdogs as literal dogs. If a dog bites a person who touches its dinner, we don’t blame the dog. The dog can’t help itself. The person should have known better.

An aggrieved dog also has no politics, which is convenient for Trudeau. It’s violence cannot induce cognitive dissonance. It presents no conflict between multiculturalism and liberal values.

UPDATE (April 30, 2015): Power, as Nick Cohen said, “is not fixed but fluid. It depends on where you stand.”

The unemployed terrorist with the gun is more powerful than the Parisian cartoonist cowering underneath his desk. The marginal cleric may well face racism and hatred—as my most liberal British Muslim friends do—but when he sits in a Sharia court imposing misogynist rules on Muslim women in the West, he is no longer a victim or potential victim but a man to be feared.

Fever Dreams of the Apocalypse

The allure of prophetic and messianic religion is not something many American pundits comprehend. Conservative Rod Dreher is a rare exception. Dreher views the Islamic State’s barbarism as something familiar and comprehensible, if you consider their “fever dream of the Islamic apocalypse.” In a post over at The American Conservative, he explained the intoxicating power of apocalyptic visions:

I was reading last night from a passage in the Russian philosopher Nikolai Berdyaev (1874-1948), who writes about the messianic urge within societies. Excerpts:

It is not only upon interpretation of the meaning of history, but also upon the formation of the very category of the historical, that messianism has its bearing. History is created by the expectation that in the future there will be a great manifestation, and that this manifestation will be a disclosure of Meaning in the life of the nations. It is the expectation of the appearance of the Messiah or of the messianic kingdom. The movement of history is also a movement towards that messianic appearance which will bring with it liberation from slavery and suffering, which will inaugurate for man a state of happiness. Messianic consciousness is born in suffering. When suffering does not crush man it is changed into a terrible power. The dynamic messianic myth is turned towards the future. It is in this respect a contrast to pagan myths, which were turned not towards the future but to the past It was characteristic of the Greeks to be concerned with the contemplation of the cosmos and its cyclic movement. This postulates that the world is eternal and has neither beginning nor end, a world, above all, in space and not a world in time. No philosophy of history is to be found either in Plato or in Aristotle. It is in ancient Israel that the philosophy of history begins, in the revelation of God in history, which found expression in the consciousness of the prophets, and in the Book of Daniel.

But it is within Christianity, Berdyaev says, that a philosophy of history first became possible because it “introduced disquietude about the future, a messianic and eschatological disquietude.” He means that Christianity accepted and extended Jewish messianic hopes, foretelling an End of History, culminating in the Second Coming of the Messiah. In this way, history has meaning. It’s not simply random or cyclical events; it is going somewhere. We can only understand the meaning of history if we have a vision for where it is going, he says. This is not something scientific; this is something “prophetic.”

Islam, which arose in the Middle East seven centuries after Christianity, is messianic in that it also sees history ending with an apocalypse. And Berdyaev observes that Hegel was also driven by a messianism, though of the post-Christian sort. So was Marx. And so are the Western democrats of today, who may or may not believe in God, but who do believe in liberal democracy as the End of History. The messianic impulse is part of what it means to be modern (as opposed to ancient). This is something that contemporary Westerners do not seem to understand. At all.

Berdyaev says that formal religion domesticates and stifles the messianic consciousness among the people. “The priest has more and more crowded out the prophet,” he writes. “Ritualism is dominant. But ritualism does not confer any understanding whatever of the meaning of history.”

What he’s saying is that people have a deep craving for the belief that what they’re going through means something. That their suffering is not in vain. That events are going somewhere, however random they may seem on the surface. This is an essentially religious impulse, but it was shared by orthodox Marxists as well as religious believers. This is at the heart of the meaning of Beckett’s Waiting for Godot. We cannot let go of our sense that existence has meaning, and that the meaning will be revealed if we wait patiently and expectantly. More Berdyaev:

The messianic consciousness and expectation creates history, proclaims a meaning for it and holds it together, and yet at the same time, so to speak, breaks down history and seeks to overleap it. This contradiction has to be accepted as a part of experience. In the same way as the first Coming of the Messiah was prepared among the Hebrew people, so now among all mankind the way must be prepared for the Second Coming; and it is in this that history has its justification. The goal is no less than the attainment of the creative fullness of life and the realization of the Spirit not only in human life but also in the life of the cosmos.

It is nothing less than re-union with God, and the advent of Utopia. The end of all suffering, and the fulfillment of time. If you cannot understand why this vision has immense power, especially for the wretched of the earth, you are not looking hard enough. If you cannot understand why this vision has immense power for the bored, clapped-out, shopped-till-they’ve-dropped bourgeois children of the West, you are not looking hard enough.

The most compelling book I ever read on eschatological fanatics was Norman Cohn’s The Pursuit of the Millennium: Revolutionary Millenarians and Mystical Anarchists of the Middle Ages. The book is a sweeping account of the radical religions that thrived during the upheavals of late medieval Europe. It taught me that the expressions of this monomania are manifold and prone to moral derangement.

Paradox of Tolerance

Burning a cross on someone else’s front lawn is not something many liberals would defend as civil disobedience. No matter how sincerely a Klansman holds his beliefs, they are no license to terrorize others.

We are often intolerant of intolerance—with good cause. Tolerance without limits would self-destruct. As Karl Popper explained:

The so-called paradox of freedom is the argument that freedom in the sense of absence of any constraining control must lead to very great restraint, since it makes the bully free to enslave the meek. The idea is, in a slightly different form, and with very different tendency, clearly expressed in Plato.

Less well known is the paradox of tolerance: Unlimited tolerance must lead to the disappearance of tolerance. If we extend unlimited tolerance even to those who are intolerant, if we are not prepared to defend a tolerant society against the onslaught of the intolerant, then the tolerant will be destroyed, and tolerance with them.

Reasonable liberals will debate what the limits are and how they should be imposed. However, there can be no question whether any limits should be imposed at all. Anyone who claims otherwise cannot be trusted to defend an open society.

Islamism and Liberal Regress

Any political movement that threatens the liberties and lives of disbelievers is a legitimate object of fear. Acknowledging a fear is neither cowardice nor prejudice. That depends on how one chooses to respond.

Islamism, the intensely political interpretation of Islam, is emphatically not the whole of a fourteen-hundred-year-old religion with more than one and half billion adherents. The works of Avicenna and Averroes alone are enough to demonstrate this. As a political philosophy, however, its tenets are more widely shared than some pundits admit. Denying this reality is no act of enlightened tolerance.

Islamism is a system of belief, not a race. No system of belief deserves immunity from criticism, which all religious authoritarians demand. Islamists do so by conflating political objections to their ideology with racial prejudice against individuals. They resort to double speak. When they say “Islamophobia,” they mean heresy.

There was nothing senseless about the mass execution by Islamic terrorists of twelve people in Paris. The logic behind the Charlie Hebdo massacre was traced in a sympathetic op-ed by Islamist Anjem Choudary. A real Muslim, according to Choudary, does “not believe in the concept of freedom of expression.” They consider “the honor of the Prophet Muhammad to be dearer to them than that of their parents or even themselves.”

To defend it is considered to be an obligation upon them. The strict punishment if found guilty of this crime under sharia (Islamic law) is capital punishment implementable by an Islamic State. This is because the Messenger Muhammad said, “Whoever insults a Prophet kill him.”

However, because the honor of the Prophet is something which all Muslims want to defend, many will take the law into their own hands, as we often see.

The satirists, in Choudary’s view, had only themselves to blame. After all, “the potential consequences of insulting the Messenger Muhammad are known to Muslims and non-Muslims alike.” This line of argument should be familiar to anyone who has confronted an apologist for rape. As Lachlan Markay said, it “is the theological equivalent of ‘she shouldn’t have worn such a short skirt.'”

Fashionable cant aside, terrorism can work. As John Schindler said, if mujahideen “keep killing journos, as they did in Algeria, they will get their way.” Capitulation to their demands is easily recoded as “respect for religion,” and capitulation is a live issue.

Far too many progressives defend the right to blasphemy in abstract theory but condemn its actual practice. They wince at the Islamist demands, but they call for the same results. But the right to blaspheme religion, as Jonathan Chait said, “is one of the most elemental exercises of political liberalism. One cannot defend the right without defending the practice.” Without the freedom to offend, there can be no freedom of expression.

Liberal abdication is something with which Salman Rushdie has had some experience. Eight years ago, Rushdie gave a candid speech on the moral and intellectual failures of the contemporary left. The speech remains timely, and it can heard (beginning at the 20:55 mark) here.

Some Activists Want Dead Cops

Liberal democracy requires a modus vivendi, which means a way of living together and arguing together without killing each other over political disagreements. Most Americans respect this foundation—most, but not all.


The demand: “No Cops No Prisons”

There is an insurrectionary left in this country. In recent weeks, they have incited riots and looting, assaulted police officers, and lead chants of “What do we want? Dead cops! When do we want it? Now!” A faction of the left has argued for years that threats and acts of violence are a legitimate means to their political ends. No one who engages in this pernicious bullshit should be mistaken for an ally.

It is not enough for liberals to deflect blame and deny associations. We have an obligation to confront and discredit these fanatics, as we have done for years with the so-called Patriot movement. Coercive threats and criminal actions by the militia right nullified whatever moral authority they may have once possessed. What happened at Ruby Ridge, Idaho and Waco, Texas was no justification for the mass murder of civil servants in Oklahoma City. The same standard should apply to all Timothy McVeigh wannabes, regardless of whether they form militias or Black Blocs.

Assaults, property destruction, and the execution of civil servants are a kind of improvised despotism. They are a decentralized means for stateless autocrats to coerce the rest of us. Anarchy means now what it has always meant: rule by a multitude of little tyrants.

Nonlinear Ideology

There is no linear spectrum of political beliefs. The neat binary of “left” and “right” is a fiction. It can be a useful in describing mundane and familiar factions, but it fails when applied to anything else. At the extremes, ideologies of the “left” and the “right” warp and fold back on themselves. North Korea’s familial tyranny is one such case. (The political philosophies of Max Stirner and Georges Sorel are two others.)

Brian Reynolds Myers is one of the few western experts to immerse himself in North Korea’s domestic propaganda. Back in 2010, Myers published a book called The Cleanest Race: How North Koreans See Themselves and Why it Matters. In a lengthy interview about the book, he said “the further you get to the extreme left, the closer you get to the extreme right.” He described North Korean ideology as a startlingly simple form of race-based nationalism, and he placed it at the point “where the extreme right and the extreme left meet.” The interview is the most enlightening thing I have ever read on the heinous Kim dynasty.