In Box

Blame Game

Want to avert another global recession? Stop the finger-pointing.

The global economic blame game is reaching a crescendo as Americans go to the polls and Europeans approach critical decision points. And everyone -- from economists to central bankers, from TV analysts to the person on the street -- seems to have a favorite scapegoat for Europe's recession and debt crisis, for America's feeble recovery and its recurrent political fiscal dramas, for dangerously high youth unemployment in a surprising number of countries, and for China's sudden economic slowdown.

But four years into the global economic malaise that has followed the 2008 crash, the endless recriminations are more than just academic. They are actually preventing us from coming to a consensus not only on how to dig out of this mess, but also on how to prevent it from happening again. The unhappy result is that the risk of a global recession is rising, as is that of another financial crisis. So can we please get the finger-pointing out of our systems and move on?

Banks are at the top of most lists of bad guys. They lent way too much to credit-challenged entities, often using structured products like collateralized debt obligations and repackaged loans that few of them understood sufficiently, let alone knew how to manage responsibly. This lapse in the most fundamental element of banking -- failing to properly channel loanable funds to productive uses -- was consequential. Yet it was far from the only one.

Banks compounded the mistake by massively leveraging their balance sheets, making a whole set of expensive side bets, and moving activities to unregulated areas. Many did so while benefiting from the protection afforded to them by state-run deposit guarantees, emergency loans from central banks, and, most destructive of all, the notion that they were "too big to fail."

To add insult to injury, many banks (particularly in the United States) are seen as now overreacting. Having lent way too much and in a reckless manner, today they are withholding credit from legitimate borrowers, preferring just to add to the capital they've stockpiled at the Federal Reserve.

Even as I write this, I can hear the bankers shout, "Unfair!" Many of them argue that these crises are due to regulators falling asleep at the switch. They have a point.

Enamored with the textbook characterization of efficient, unfettered capitalism and well-functioning markets, regulators gave the banks an enormous amount of rope with which to hang themselves. In the process, they aided and abetted the illusion that banks could operate outside the constraints of the real economic activity that they finance. The laxity was intensified by competitive hubris -- among cities vying to be the world's financial center (London vs. New York) and among others that, in a quest for greater international respect, allowed their national banks to vastly outgrow domestic realities (Dublin, Reykjavik, and Zurich).

"Not so fast," respond the regulators, who invariably rebut the finger-pointing by arguing that the politicians pushed them to turn a blind eye or, even worse, deregulate beyond what prudence would have dictated. And the politicians wouldn't let up, believing that leverage could deliver sustainable economic growth to an impatient electorate.

After all, the West was (and is) increasingly losing out to emerging economies that benefit from lower wages, technology leapfrogging, or considerable natural resource endowments. Too many Western governments fell prey to the idea that advanced economies, in a bid to retain their global standing, could simply migrate up the value-added curve from producing things to financing them (and then trading over and over again a seemingly endless array of derivatives).

To which the politicians, of course, will say: "It's not our fault. Without a level economic playing field, we're forced to take risks to compete." In their version of reality, emerging economies gained competitive advantage by manipulating their currencies, weakening labor standards, degrading the environment, or engaging in various forms of implicit protectionism -- complaints that resurfaced in America's presidential campaign, pushing candidate Mitt Romney to threaten to label China a "currency manipulator."

These same politicians are also quick to point the finger at "do-nothing" multilateral institutions, claiming that the lapses leading to the crisis were a reflection of poor governance at global bodies like the International Monetary Fund (IMF), whose very purpose is to blow the whistle on unsustainable national policies, especially if they risk harming other countries. Remember, the raison d'être of the IMF and other multilateral institutions is to promote and facilitate global cooperation and shared policy responsibilities. Yet, when push came to shove, these institutions shied away from their duties, hindered by widespread representation and legitimacy deficits.

Then again, the multilaterals will say, "Don't blame us. We're only as strong as our member nations let us be." Fair enough: For many years, a number of key countries acted to undermine responsible multilateralism. Western countries stubbornly held on (and still do) to their outmoded entitlements at the IMF and World Bank, from absurd voting overrepresentation to feudalistic strangleholds on key decision-making positions. For their part, emerging economies were too timid in forcing much-needed change.

"How could we?" ask these emerging economies. After all, the last thing they wished to do was alienate powerful politicians in Europe and the United States who were too timid to face reality, shying away from the responsibility of explaining to their citizens the reality and consequences of global economic realignments. These same politicians -- hostage to the tyranny of short election cycles -- instead wooed voters seeking instant gratification, the protection of unsustainable entitlements, and shortcuts to continued prosperity. All this brings us back to the banks, the beginning of this vicious circle of blame. I mean, who else could have enabled these voters to consume as they wanted, inflating their living standards based not on income but credit?

And so go the endless, useless recriminations. The blame game, however, is a lot more dangerous than it sounds. This never-ending cycle not only diverts responsibility, but distracts from coherent responses. That has two immediate consequences.

First, it is virtually impossible to generate the sense of shared responsibility that must underpin any sustainable, effective solution. And while we dither, the global malaise spreads: Unemployment remains too high, financial fragility grows, and healthy capital retreats to the sidelines. Meanwhile, a growing number of weak economies now risk being tipped into severe crises while the stronger ones see their vibrancy sapped by global instabilities. Just witness the sharp slowdown in Germany -- Europe's strongest economy -- and the related rise in unemployment. Or look at how growth is plummeting in once vibrant emerging markets such as Brazil, China, and India. The longer the blame game continues, the greater the scope and scale of the synchronized global slowdown.

Second, the temptation increases for each country to turn inward, significantly raising the risk of protectionism. In today's world, this risk is not limited just to trade and currency wars. If we're not careful, a cascade of capital controls -- gates that stop money from flowing around the global system -- could be on the horizon, severely undermining the functioning of the open markets our economies have come to rely on and risking a further deterioration in growth and job dynamics. That's something we can ill afford.

There is no time to waste. Instead of a blame game, we need a cooperative game. And whoever wins the U.S. election in November must make this priority No. 1.

The world is looking for bold economic leadership, and in the absence of it, dysfunction that will make 2008 merely a flesh wound risks becoming an ever more likely reality. And trust me -- no one will want to take the blame for that tragedy.

Illustration by Laurie Rosenwald

In Box

The Myth That Screwed Up 50 Years of U.S. Foreign Policy

It's time to set the record straight about John F. Kennedy's handling of the Cuban missile crisis.

U.S. President John F. Kennedy's skillful management of the Cuban missile crisis, 50 years ago this autumn, has been elevated into the central myth of the Cold War. At its core is the tale that, by virtue of U.S. military superiority and his steely will, Kennedy forced Soviet Premier Nikita Khrushchev to capitulate and remove the nuclear missiles he had secretly deployed to Cuba. As Secretary of State Dean Rusk rhapsodized, America went "eyeball to eyeball," and the Soviets "just blinked." Mythologically, Khrushchev gave everything, and Kennedy gave nothing. Thus the crisis blossomed as an unabashed American triumph and unmitigated Soviet defeat.

Kennedy's victory in the messy and inconclusive Cold War naturally came to dominate the politics of U.S. foreign policy. It deified military power and willpower and denigrated the give-and-take of diplomacy. It set a standard for toughness and risky dueling with bad guys that could not be matched -- because it never happened in the first place.

Of course, Americans had a long-standing mania against compromising with devils, but compromise they did. President Harry Truman even went so far as to offer communist Moscow a place in the Marshall Plan. His secretary of state, Dean Acheson, later argued that you could deal with communists only by creating "situations of strength." And there matters more or less rested until the Cuban missile crisis, when JFK demonstrated the strength proposition in spades, elevating pressures on his successors to resist compromise with those devils.

What people came to understand about the Cuban missile crisis -- that JFK succeeded without giving an inch -- implanted itself in policy deliberations and political debate, spoken or unspoken. It's there now, all these decades later, in worries over making any concessions to Iran over nuclear weapons or to the Taliban over their role in Afghanistan. American leaders don't like to compromise, and a lingering misunderstanding of those 13 days in October 1962 has a lot to do with it.

In fact, the crisis concluded not with Moscow's unconditional diplomatic whimper, but with mutual concessions. The Soviets withdrew their missiles from Cuba in return for U.S. pledges not to invade Fidel Castro's island and to remove Jupiter missiles from Turkey. For reasons that seem clear, the Kennedy clan kept the Jupiter part of the deal secret for nearly two decades and, even then, portrayed it as a trifle. For reasons that remain baffling, the Soviets also kept mum. Scholars like Harvard University's Graham Allison set forth the truth over the years, but their efforts rarely suffused either public debates or White House meetings on how to stare down America's foes.

FROM THE OUTSET, Kennedy's people went out of their way to conceal the Jupiter concession. It started when the president's brother, Attorney General Robert F. Kennedy, met Soviet Ambassador Anatoly Dobrynin on Oct. 27 to present the Jupiters-for-Soviet-missiles swap. He told Dobrynin: We'll take the Jupiters out, but it's not part of the deal, and you can never talk about it. The Soviets removed their missiles, the United States removed the Jupiters, and the secret held for 16 years, until a small paragraph in an Arthur Schlesinger book upon which few remarked.

Four years later, Kennedy's key advisors wrote a Time article on the 20th anniversary of the crisis in which they admitted including the Jupiters in the agreement. They did so, however, in such a way as to diminish its importance, presenting the Jupiters almost as an afterthought while saying that JFK had already decided to remove them from Turkey. Then, they totally contradicted themselves, acknowledging that secrecy surrounding the Jupiter part of the deal was so important that a leak "would have had explosive and destructive effects on the security of the U.S. and its allies."

These Kennedy aides were so devoted to their triumphal myth that most of them continued to propagate it long after they themselves had turned against its very precepts. Most ended up opposing a Vietnam war that JFK had still been fighting when he was assassinated. They all grew skeptical about the value of military might and big-power confrontations, and they became formidable advocates of diplomatic compromise.

It was not until 1988, however, that one among them clearly and openly acknowledged his decades-long hypocrisy and its costs. In his book Danger and Survival, McGeorge Bundy, Kennedy's national security advisor, lamented: "Secrecy of this sort has its costs. By keeping to ourselves the assurance on the Jupiters, we misled our colleagues, our countrymen, our successors, and our allies" into concluding "that it had been enough to stand firm on that Saturday." It took 26 years, but there it was.

STUNNINGLY, THE RUSSIANS didn't reveal the truth far earlier. A well-timed Soviet leak after the Jupiters were removed could have done two things for Moscow. First, the story of the swap would have sharply blunted accounts of their utter defeat. Never mind that JFK was planning to take out the Jupiters anyway and replace them with Polaris missile-firing subs.

Second, it would have caused great consternation in NATO, where the swap would have been portrayed as selling out Turkey. RFK even told Dobrynin that this fear was his major reason for keeping the deal secret. Dobrynin cabled Bobby's words back to Moscow: "If such a decision were announced now, it would seriously tear apart NATO." Once the Jupiters had been removed, Moscow could have pounced. One would think the Soviets would have welcomed the opportunity.

Dobrynin fully grasped how the myth chilled U.S. willingness to compromise, something he told me about in the late 1970s when I was ensconced at the State Department. He didn't say so publicly, however, until his memoirs came out in 1995. He wrote: "If Khrushchev had managed to arrange [a leak], the resolution of the crisis need not have been seen as such an inglorious retreat."

Why, then, didn't the Soviets leak it? It's quite possible, even likely, that Khrushchev and his Politburo never considered leaking because they had no idea how the crisis would be portrayed -- how weak they would look. On the day the crisis was reaching a crescendo, before he knew that Kennedy would offer up the Jupiters, Khrushchev was ready to back down. He told his colleagues that the Soviet Union was "face to face with the danger of war and of nuclear catastrophe, with the possible result of destroying the human race." He wasn't thinking about the Jupiters; he just wanted out and was determined to convince his colleagues that a U.S. pledge not to invade would be enough to protect Soviet power and pride.

To check this view, I contacted the three living people most likely to know: Sergei Khrushchev (son of Nikita), Anatoly Gromyko (son of Andrei, the Soviet foreign minister during the missile crisis), and Alexander "Sasha" Bessmertnykh (a Foreign Ministry official at the time of the crisis and later foreign minister). All backed this theory, though they acknowledged not knowing the details of Khrushchev's thinking. Soviet leaders, they said, genuinely feared a U.S. invasion of Cuba. None was moved by my argument that by the time of the crisis, there was no likelihood of such an invasion. After the Bay of Pigs fiasco, this idea was laughable in U.S. policy circles. None would grant that Moscow's leaking of the swap was necessary to preserve Soviet honor. Yet as we spoke further, all eventually conceded that the image of Soviet power indeed would have fared far better had the swap become known.

In Moscow at a retrospective on the crisis in 1989, JFK speechwriter and confidant Ted Sorensen touted Bobby Kennedy's Thirteen Days as the definitive account. Dobrynin interrupted to say that the book omitted the Jupiters, to which Sorensen replied that Dobrynin was correct, but at the time, the deal was still "secret." "So I took it upon myself to edit that out," he said.

Reporters covering the meeting took it upon themselves not to chronicle this exchange. Nor has foreign-policy chatter over the years made much reference to the Jupiters. Indeed, the compromise is mentioned so infrequently that journalist Fred Kaplan had to nail it to the wall at considerable length in a recent Slate review of Robert Caro's latest volume on President Lyndon B. Johnson. Careful as he is, Caro relied on sources that extolled Kennedy's resolve, and he ignored the Jupiters.

COMPROMISE IS NOT a word that generally makes political hearts flutter, and it is even less loved when it comes to the politics of U.S. foreign policy. The myth of the missile crisis strengthened the scorn. The myth, not the reality, became the measure for how to bargain with adversaries. Everyone feared becoming the next Adlai Stevenson, whom the Kennedys, their aides, and their foes discredited for proposing the Jupiter deal publicly.

It's not that Washingtonians scurried about proclaiming their desire to emulate the missile-crisis myth, but it was very much a part of the city's ether in columns and conversations with friends from the early 1960s to the 1990s. Few wanted to expose themselves by proposing even mild compromises with enemies. In the famous "A to Z" review of U.S. policy toward Vietnam, ordered by LBJ after the 1968 Tet Offensive, we (I was in the Pentagon at that time) weren't even permitted to study possible compromises with Hanoi. And there's no doubt that only a dyed-in-the-wool Cold Warrior like Richard Nixon finally could have withdrawn from Vietnam.

It took extraordinary courage to propose compromises in arms control talks with Moscow. Even treaties for trivial reductions in nuclear forces on both sides faced furious battles in Congress. Today, it is near political suicide to publicly suggest letting Iran enrich uranium up to an inconsequential 5 percent with strong inspections, though the Nuclear Non-Proliferation Treaty permits it. And while Barack Obama's team is talking to the Taliban, its demands are so absolute -- the Taliban must lay down their arms and accept the Kabul constitution -- that any serious give-and-take is impossible. Were it at all serious, the White House would have to at least dangle the possibility of a power-sharing arrangement with the Taliban.

For too long, U.S. foreign-policy debates have lionized threats and confrontation and minimized realistic compromise. And yes, to be sure, compromise is not always the answer, and sometimes it's precisely the wrong answer. But policymakers and politicians have to be able to examine it openly and without fear, and measure it against alternatives. Compromises do fail, and presidents can then ratchet up threats or even use force. But they need to remember that the ever steely-eyed JFK found a compromise solution to the Cuban missile crisis -- and the compromise worked.

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