Thinking Outside the Borders

For better or worse, Congress is getting a makeover. As for the president's economic team, why can't Obama look beyond the usual suspects -- way beyond?

The day after the U.S. midterm elections, the Federal Reserve is yet again buying securities (it has bought more than $2 trillion of them since 2008), to keep down interest rates. U.S. interest rates have now been at historic lows for two years, a huge gift to the financial industry -- but one that has done little to help the broader economy. Not coincidentally, investment banking bonuses are at record levels, while unemployment remains above 9 percent (officially, that is:  the real rate is probably 15 percent), home foreclosures are at record levels, and there has still not been a single criminal prosecution -- not one -- for the reckless behavior that caused the financial crisis. 

It is blindingly clear that America needs different and better economic leaders -- preferably leaders not compromised by past errors and conflicts of interest. Yet the overwhelming majority of the Obama team, not to mention Wall Street and academia, is composed of people who were part of the problem, or at best remained silent. Well, I have a suggestion as to where excellent replacements can be found:  outside the United States.

Others already recognize that talent and honesty know no borders. Recently, I spent a week in London while my new documentary about the disastrous decisions and systemic corruption that caused the global financial crisis, Inside Job, premiered at the London Film Festival. During my stay, I met with Ruby Films, which is run by a very witty, accomplished man who had previously managed the funding of independent films at the UK Film Council.  All well and good; but now comes the interesting part: He's not British; he's Dutch.  But the UK Film Council had concluded that he was the best person for the job. 

The United States needs to learn this lesson, and in areas far more important than movies. It might be difficult for us to swallow our pride, but for some of the most important policy decisions facing the United States, the right people for the job might be foreigners.

This idea will doubtless meet resistance among U.S. academic and policy elites, in part because it is contrary to their own financial and career interests. But over the last several years, in the course of making two heavily-researched documentaries about the effect of American behavior on the world (the first about the occupation of Iraq, the second about the global financial crisis), I have come to realize that there has been a deep shift in how the world views America's economic, financial, and foreign policy elites. Washington's days as unquestioned role model for the world are over. 

The rest of the world has a lot to teach America.  In some domains, such as the "lean production" system pioneered by Japanese manufacturers, this is of course old news. But in economics, finance, and regulation, American experts still portray themselves as the gold standard. This is highly debatable, for two reasons. First, American experts and their thinking are often dangerously parochial. And secondly, to be unpleasantly blunt, the United States now has a major systemic corruption problem not only in its financial industry but also among its regulators and economists, from which supposedly impartial policy experts are often drawn. All too frequently, America's top experts have been paid off, with varying degrees of subtlety, by the industries they are supposed to be evaluating. Nowhere is this clearer than in American debate about the financial crisis.

The overwhelming majority of America's most prominent economists and financiers were astonishingly silent during the bubble, and many of them were deeply complicit in it, either through their policy roles, their highly profitable financial-sector involvements, or both. Not surprisingly, they have since opposed fundamental reform and been remarkably gentle in their assessments of American banking and regulatory conduct. 

For example, Larry Summers was instrumental in crafting the late 1990s legislation that repealed the Glass-Steagall Act, which had kept a firewall between investment banks and lenders since the Great Depression, and banned the regulation of over-the-counter derivatives. Later, as president and economist at Harvard, he made $20 million from hedge funds and investment banks, while denouncing the first warnings against the coming crisis, issued in 2005 by the chief economist of the IMF, as Luddite. 

Other senior administration officials have similar conflicts of interest and/or have dismissed warnings about the crisis. Federal Reserve chairman Ben Bernanke said in 2005 that housing prices never declined nationwide (which was not true, even then). Jacob Lew, nominated to be head of the Office of Management and Budget, and Michael Froman, coordinator of economic policy at the National Security Council, both made serious money while their employer at the time, Citigroup Alternative Investments, lost billions when the bubble collapsed. Laura Tyson, a professor at Univerisity of California, Berkeley who was director of the National Economic Council in the Clinton administration and may well replace Summers, has been on the board of Morgan Stanley for over a decade, and likewise remained utterly silent during the bubble.  

Glenn Hubbard, chief economic advisor to the Bush administration and now dean of Columbia Business School, has multiple advisory relationships with financial services firms, which bring him over a half a million dollars a year, and is a much sought-after commentator on economic policy. Yet in 2004, he co-authored an article with William C. Dudley, then the chief economist of Goldman Sachs, extolling the virtues of deregulation and financial derivatives.

These are not isolated examples. Over the last quarter-century, the academic and governmental elites of the United States have been progressively coopted and corrupted by powerful interest groups, particularly but not solely the financial services industry. In part, this is because the United States suffers from both the blessing and curse of its size, wealth, power, and parochialism.

Want proof of why we should look to foreign economic advisors? The five most prominent experts in the United States who warned about the dangers of financial deregulation and the impending financial crisis were Raghuram Rajan, Simon Johnson, Nouriel Roubini, George Soros, and Charles Morris.  Rajan, a professor at the University of Chicago, is from India, and is now an advisor to India's prime minister. Johnson is from Australia, Roubini is an Iranian raised in Italy, and Soros is a Hungarian refugee educated in England. Morris, the only one of the five born and raised in the United States, is an outsider too in his own way, not affiliated with any academic economics department.

And yet the United States continues to behave as if the only people who can run the government, or give it good advice, are Americans. This is an extraordinarily foolish, outdated, and dangerous illusion.  

Upon hearing this call for outside help, some might panic. So just for the record, no, we should not have an Iranian energy secretary or a North Korean defense secretary. But it might make excellent sense to have a European or Asian as treasury secretary, or chair of the Securities and Exchange Commission, the FDIC, or the Commodity Futures Trading Commission. At the very least, serving as a senior advisor to the president.

In mid-2009, I took a small film crew traveling for six weeks, filming interviews for Inside Job with senior government officials and economic experts around the world. I was struck by how much more accurate, direct, and honest many of the foreigners were. They also had a higher level of international training, experience, and awareness than the senior U.S. officials I interviewed.  They spoke foreign languages, had been educated internationally, and had lived and worked for extended periods in other countries (including the United States). And they certainly didn't feel any need to bow down before America's economists and financiers, who had, after all, just nearly destroyed their countries' economies. 

Take the prime minister of Singapore, for example. Lee Hsien Loong was educated in England and rotated through many ministerial positions before leading the country. He and his advisors studied American securitization and decided it wasn't for them; consequently Singapore, like most of Asia, avoided purchasing the toxic financial products that American banks peddled. Christine Lagarde, the French finance minister, speaks fluent English and lived for years in Chicago running an American insurance company. As she says in my film, she warned then-Treasury Secretary Henry Paulson in February 2008 of a coming "tsunami," only to have him tell her that she didn't need to worry. And Martin Wolf, the British writer and chief economic commentator of the Financial Times, described the housing bubble on camera, as a "gigantic national, in fact global, Ponzi scheme." When was the last time you heard Larry Summers, Ben Bernanke, or Treasury Secretary Tim Geithner, or  say that?

Or look to Andrew Sheng, chief advisor to China's banking regulator. In my two-hour interview with him in Beijing, Sheng was brilliant, perceptive, and extraordinarily direct. But the most striking thing about Andrew Sheng was that he is not Chinese; he is Malaysian. After growing up in Malaysia, he worked for the Malaysian Central Bank, the World Bank in Washington, then was deputy director of Hong Kong's central bank, and wrote a superb book on the Asian financial crisis of the 1990s -- all before taking his current job in Beijing. 

Of course, there are economic and financial experts in America who are untainted by these systemic problems. But there are surprisingly few who feel truly free to speak their mind and act on their principles, without fear of professional isolation or retribution. So I have a suggestion for Larry Summers' replacement:  Andrew Sheng. If he's not available, try Christine Lagarde.

Getty Images


Name Games

A Bush administration official recounts how, in the high stakes diplomacy over disputed territory, a tenuous peace can unravel because of a single typo.

Sunday, July 27, 2008

When you work at the U.S. National Security Council (NSC), early-morning phone calls are almost never good news. This is especially true when the person on the other end of the line is a foreign embassy official.

When my home phone rang at 7:00 a.m. that Sunday in July 2008, a colleague from the South Korean Embassy was on the other end of the line. After a quick apology for disturbing me at such an early hour, he expressed his "deep concern" about Washington's "new stance" on South Korea's sovereignty over Dokdo, a disputed group of small islets in the Sea of Japan (or East Sea, to the Koreans). He wanted to know what was behind the apparent change in U.S. policy. I recall him mentioning a "BGN website," making reference to "undesignated sovereignty," and indicating that his government was seeking immediate clarification of the issue.

As a general rule, it is not a good idea to engage officers of foreign embassies on matters of U.S. foreign policy before you've had your coffee. That said, I do remember telling my caller that I was unaware of any change in our government's policy with respect to Dokdo. I promised to follow up with him as soon as I could get to the office.

After hanging up with the Korean official, my first step (after turning on the coffee pot) was to Google "BGN" in an attempt to understand what he had been talking about. I learned that BGN was an acronym for the U.S. Board on Geographic Names, a federal body administered by the Interior Department. Following that I went to the office to begin drafting the memo needed to brief my ultimate boss, National Security Advisor Stephen Hadley, and to prepare him for the flurry of meeting requests from the Korean and Japanese embassies that I expected would begin the following day.

At issue was the disputed sovereignty of a cluster of rocky islets in the sea between Korea and Japan referred to as "Dokdo" in South Korea, "Takeshima," in Japan and "Liancourt Rocks" in the United States. These islets had been on NSC's radar earlier that summer as tensions between Tokyo and Seoul rose due to reports that the Japanese government planned to issue an educational guideline stating that the islets were a part of Japan's national territory.

The Sunday morning phone call was apparently triggered by Korean press reports over the weekend highlighting that BGN changed the text in the "country" column of its online database from "South Korea" to "undesignated sovereignty." It also changed the name of the islets from "Dokdo" to "Liancourt Rocks." Although BGN's new designations were entirely consistent with longstanding U.S. policy to not take a position on the islets' sovereignty, the fact that these changes were apparently the only corrections BGN made at this time (even though its database reportedly contained several other errors) heightened suspicions in Seoul and provided an opportunity for the lively South Korean media to spin the changes as a shift in Washington's stance undertaken in response to Japanese pressure.

The incident came at an extremely awkward moment, as it occurred only days before President George W. Bush's scheduled Aug. 5 to 6 stop in Seoul on the first leg of an Asia trip that would also see him visiting Bangkok and the Beijing Olympics. The president had postponed a previously scheduled visit to Seoul because of widespread protests in South Korea over the government's plans to resume imports of U.S. beef. It was apparent that the current situation might serve as a rallying cry for renewed anti-American protests.

As I left the office on Sunday evening I sensed that the week ahead, already packed with preparations for the president's upcoming departure for Asia, would be busier than expected.

Monday, July 28, 2008

When I returned to work the next morning, on my desk was a stack of South Korean press reports blasting the "new U.S. stance on Dokdo" and Washington's "pro-Japan bias." A July 29 editorial in Hankyoreh argued, "Japan's provocations over Dokdo are in the same vein as its attempts to rationalize its history of imperialist aggression" and excoriated the United States for creating "unnecessary factors for discord."

Our job that morning was setting the record straight: BGN's designation change did not represent a policy shift on the part of the United States. Rather it was an innocent effort by a U.S. government entity to align its previously incorrect database listing with the longstanding U.S. position.

State Department acting deputy spokesman Gonzalo Gallegos had the first opportunity to publicly address the issue at the daily briefing. In response to a question on BGN's actions, he emphasized, "The U.S. position for decades has been to not take a position regarding the sovereignty of the islands in question. As we've said in the past, the question of the sovereignty of these islets is for Japan and Korea to resolve peacefully between themselves."

The other major activity in NSC's Office of Asian Affairs that morning was receiving several démarches, first from the South Koreans and later the Japanese. By the end of the day, my desk was covered with glossy brochures from the South Korean and Japanese embassies, each explaining why Dokdo/Takeshima is "our sovereign territory."

In our meetings that day with colleagues from the South Korean Embassy, we echoed the points made in the State Department briefing. They seemed to accept our reiteration of U.S. policy but remained concerned that the listing change might have been a response to Japanese pressure. The general gist of their comments was: "Even if this is not a policy shift, what drove BGN to make this change at such a sensitive moment in Tokyo-Seoul relations?"

It was a reasonable question. Unfortunately, at the time we did not have an immediate answer. We knew for certain that the White House had not requested the change. Later calls to the Bureau of East Asian and Pacific Affairs (EAP) at the State Department and the Office of Asian and Pacific Security Affairs at the Defense Department -- the two departments' lead offices on East Asia policy -- confirmed that they had made no contact with BGN on this issue prior to the change.

As the day progressed, I was able to piece together a rendering of events that seemed plausible. According to what I learned, the U.S. Library of Congress received a call (from exactly whom no one was able to determine at that time) inquiring about U.S. policy on the islets. A library employee then looked up the classification on BGN's website, found that it was inconsistent with his or her understanding of our neutral position with respect to the islands' sovereignty, and notified BGN, which made the change. Boom: international incident.

Our initial investigation may not have revealed the complete story, nor all the relevant facts, but what was more important at that point was confirming that BGN acted independently of any policy guidance from within the U.S. government. It was also clear that BGN had no idea that its actions would create a diplomatic row that would ultimately be resolved by the U.S. president himself.

We communicated our finding to our colleagues at the South Korean Embassy. Unfortunately, this information did not appease the South Korean media, which continued in the coming days to suggest that BGN's new listing must have been an element of some grander scheme to favor Japan in this dispute.

Tuesday, July 29, 2008

Despite clear public statements from the State Department and our private assurances to our Korean colleagues, the South Korean government continued to be assaulted by the country's press. The embassy in Washington felt the greatest heat during that period. On Tuesday, reports from Seoul indicated that South Korean Ambassador to Washington Lee Tae-sik, who was accused of "negligence of duty" by various media outlets for not blocking BGN's designation change, might be fired over the incident. The Korean media also reported that Foreign Minister Yu Myung-hwan had ordered the South Korean Embassy to "deliver our concern" to the United States.

Korean concerns reached the highest level of the U.S. government on Tuesday when Lee, who was attending an unrelated White House event, took the opportunity to make the case for reversing the change directly to President Bush. Responding to Lee's request, the president immediately directed Secretary of State Condoleezza Rice to look into the designation change and determine exactly what took place.

By the time the president's order reached Foggy Bottom, intense efforts were already under way in the State Department to determine the events leading to the designation change and, equally important, to consider options to defuse the situation.

The president's personal involvement and his upcoming visit to Seoul gave us a sense of urgency. Rather than through the usual interagency meetings, which can be cumbersome, the work was carried out in a series of direct interactions between the NSC's Office of Asian Affairs (my office) and the State Department's EAP Bureau, particularly the Korea desk.

First, we compared notes on our conversations with BGN and other affected agencies of the U.S. government to come to a more complete understanding of the situation. We also developed and discussed three options to attempt to resolve the crisis:

1. We could eliminate access to (i.e., "take down") the BGN website. It would be "under construction" until all necessary corrections and changes could be made, at which time a "new and improved" website could be launched under more controlled circumstances.

2. We could leave the website as it was following the BGN corrections (i.e., with the "Dokdo/South Korea" entry changed to "Liancourt Rocks/undesignated sovereignty"). Under this option we would leave other unrelated errors uncorrected for the time being.

3. We could reverse the BGN changes (i.e., revert to the status quo ante) while continuing preparations for a complete website overhaul in the future.

As with many thorny diplomatic issues, this was not a matter of choosing between options that were clearly "good" or "bad," but rather of selecting among a number of sub optimal alternatives. The first option was eventually ruled out when we learned that other entities of the U.S. government rely on the information contained in the BGN database on a real-time basis. Taking down the website would have created a new thread of problems, and there was no speedy way to re-create its functionality elsewhere.

The second option was appealing in that it allowed the website to remain running and remain at least more accurate than it was before the change. But leaving the website up, as it was, provided a focal point for some in the South Korean media to whip up anti-American sentiment. With the president's visit less than a week away, there was a real downside to this option, though we briefly considered a variant of it -- leaving the website up while attaching a footnote to the Liancourt/Dokdo/Takeshima entry in the database that would clarify the U.S. policy of neutrality with respect to the islands' sovereignty. This proved impossible for technical reasons.

The third option made sense from the standpoint of tamping down Korean anger in the near term (albeit at the risk of possibly arousing Japanese anger), but it seemed conceptually strange to reverse a correction to what was obviously an error.

By the evening of July 29, we had concluded that there were no easy ways out.

Wednesday, July 30, 2008

On Wednesday, when Hadley briefed Bush on the progress of our deliberations, the president did as presidents do: He made a decision.

Following Ambassador Lee's intervention the day before, Bush had made clear his desire to defuse the crisis as quickly as possible. He did not want the BGN issue to distract from the key strategic issues on the table during his upcoming visit. These included the North Korea nuclear program, the South Korea-U.S. Free Trade Agreement, the realignment of U.S. forces in South Korea, and the overall strengthening and expansion of the U.S.-South Korea alliance. Clearly, a continuation of the Seoul media storm might complicate his upcoming visit, but it was also apparent that the situation was creating real difficulties for a friend and ally. Moreover, the immediate cause of the problem lay in Washington, not Seoul. Bush had developed a high regard for President Lee Myung-bak, and he did not wish to cause a good friend of the United States any undue political difficulty.

Thus, the president chose option three: He directed that the changes in BGN's database be reversed with the aim of deflating media criticisms of the South Korean government and the speculation regarding U.S. motives.

Hadley relayed the president's decision to my boss, senior director for East Asian Affairs Dennis Wilder, on July 30, who announced the decision later that day during a press conference on the president's upcoming trip to Asia.

It worked. Changing the sovereignty designation on BGN's website from "undesignated sovereignty" back to "South Korea" effectively removed the issue from the front pages of Korean newspapers and enabled Bush and Lee to conduct productive meetings in Seoul. As for the BGN website, the changes directed by Bush are still in place while the board works on functional upgrades to its database, but an all-important caveat has been added indicating that "the names, variants and associated data may not reflect the views of the United States Government on the sovereignty over geographic features."

Clearly, the affair demonstrated that at least some of our government processes needed improvement. BGN's database contained errors. An honest attempt to correct an error was, however unintentionally, done in such a way that it embarrassed a friendly government, allowed elements of a foreign media to question our government's motives, and stirred anti-American sentiment in an important allied country. The outcome of the episode was far from perfect: It effectively appeased one of our allies while not necessarily pleasing another. Fortunately, the Japanese government was almost as eager as we were to see tensions with South Korea eased, and so it chose not to make a big issue out of our decision. And we subsequently worked with BGN and the State Department on technical and nontechnical ways we could prevent such incidents in the future.

The key elements of this story -- an isolated cluster of rocks and a somewhat obscure government database -- may seem inconsequential to the casual observer. But add to that mix highly emotional East Asian history and the tendency for regional governments to use these issues to bolster their nationalist credentials, and you have a recipe for diplomatic crisis. The recent flare-up between China and Japan over the Diaoyu/Senkaku island chain (an uninhabited island chain west of Okinawa) provides another example of how seriously regional powers treat these maritime sovereignty issues, as well as their capacity to derail otherwise peaceful working relationships.

For the United States -- which tends to view history as "the past" -- becoming enmeshed in such disputes can be highly frustrating, as they have the tendency to bring work on more "current" issues to a screeching halt. But ignoring them is not an option. The rocks, and the intense emotions that swirl around them, are not going away anytime soon. In the meantime, Washington will try to keep its East Asian friends focused in a more hopeful direction: on the region's bright future.