Turdblossom to the Rescue?

When Karl Rove is your white knight in shining armor, your party has a serious problem.

There is little from medical literature or science to suggest that the best way to treat the deranged is to humor them and hope they go away. It is in that spirit that we must approach the Conservative Political Action Conference (CPAC) recently held here in Washington and grapple with what it says about the Republican Party's foreign policy stance.

Clearly, the GOP establishment is eager to have the party look slightly less crazy on everything from foreign policy to women's issues. Karl Rove has launched a controversial plan to try and weed out unelectable Tea Party candidates from the primary process. Party Chairman Reince Priebus just issued a tough report detailing the party's many failings in the last presidential election, saying, "There's no one reason we lost. Our message was weak; our ground game was insufficient; we weren't inclusive; we were behind in both data and digital; and our primary and debate process needed improvement."

But as the CPAC crowd's disdain for such ideas as "Republican in Name Only' made clear, the Washington Republican establishment has lost almost all connection to the party it is supposed to represent. Indeed, if moderation and responsibility are new watchwords for Republican elites, this message was entirely lost on the red-meat speakers at the CPAC podium.

Consider some of these gems from the weekend. Texas Rep. Louie Gohmert argued that "Vietnam was winnable, but people in Washington decided we would not win it." The congressman then went further, insisting that he had learned from the North Vietnamese that with only one more week of bombing, the Viet Cong would have unconditionally thrown in the towel. (One wonders why Henry Kissinger hadn't ever thought of more bombing as a solution in Vietnam. And surely the South probably would have prevailed in the Civil War by May of 1865 if Robert E. Lee hadn't blundered into surrendering at the Appomattox Court House.) To round out his presentation, Gohmert also suggested that the United States should be encouraging ethnic separatism in Pakistan, since that always seems to turn out well.

CPAC also continued the Republican obsession with the Sept. 11 attack on the U.S. mission in Benghazi, and the conference dedicated a full session to further exploring the hidden facts of what it proclaims to be a monumental scandal. Congresswoman Michelle Bachman accused President Obama of going AWOL during the assault, as Sen. Kelly Ayotte of New Hampshire vowed to "get to the bottom of this." To an outside observer, the fixation on Benghazi is looking more and more like the John Birch Society's old conviction that plans to put fluoride in the drinking water were a communist mind control plot.

One of the stars of CPAC was newly elected Sen. Ted Cruz, another Texan, who proudly proclaimed, "If standing for liberty and standing for the Constitution makes you a wacko bird, then count me a proud wacko bird," Before attacking the administration for insufficiently loving Israel and giving foreign aid to people who "hate us," Cruz also called for abolishing the Department of Education and auditing the Federal Reserve.

But for all the emphasis on traditional conservative targets like foreign aid and Benghazi, all wrapped in snide insinuation that President Obama is a closet Islamic extremist, it was equally notable what wasn't discussed. Issues like free trade, an effective NATO alliance, and even missile-defense plans, long a conservative hobby horse received nary a mention. There was no real effort to come to terms with the hard lessons learned from the Iraq and Afghanistan fiascos championed by President George W. Bush. There was no real embrace even of major Bush successes, such as his efforts to combat HIV/AIDS by creating PEPFAR or to make foreign aid more focused by creating the Millennium Challenge Corporation.

As much sport as we might find in poking fun at the fever swamp that is CPAC, with Sarah Palin slurping Big Gulps and Ann Coulter making fat jokes about Chris Christie, it is a real problem that one of America's two major parties has virtually imploded when it comes to laying out a positive foreign-policy vision that includes diplomacy, trade, defense, and development. As former Florida governor Jeb Bush argued at CPAC of his own party, "All too often we're associated with being 'anti' everything...Way too many people believe Republicans are anti-immigrant, anti-woman, anti-science, anti-gay, anti-worker, and the list goes on and on and on."

Jeb Bush may not have been popular for saying so at CPAC, but he is correct. U.S. foreign policy is not well served by either party simply defining itself by what it is not. We know the Tea Party hates the United Nations, foreign aid, Iran, Islamists, and Barack Hussein Obama. We have no idea what Tea Partiers thinks America should do in conjunction with its allies other than kill terrorists. They have come to define the world in terms of endless dystopian threats, while that most American of words, "opportunity," never seems to cross their lips.

The question now is whether the likes of Karl Rove, Jeb Bush, the RNC, and old-guard GOP think tanks like the Heritage Foundation and the American Enterprise Institute, who so pumped up the Tea Party for tactical purposes to win the 2010 midterm elections, are now going to cauterize the wounds that are destroying the Republican brand. The patient will not heal itself. If the party wants to get it right on foreign policy, and once again make the case that responsible internationalism has always been a core party value, they will have to aggressively take on the lunatic fringe within the party. It says a great deal about the current state of affairs that Karl Rove, a political consultant dubbed Turdblossom by President Bush and portrayed by a canned ham on the Colbert Report, is getting an audition as a white knight.

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The Best of All Possible Bailouts

Don’t listen to Paul Krugman (and definitely don’t listen to Vladimir Putin). The European plan is Cyprus’s best chance for recovery.

As a general rule, when both Russian President Vladimir Putin and New York Times columnist Paul Krugman say something's a bad idea, you should probably do it. This is the case with the eurozone governments' decision to bail out Cyprus, which will include steep taxes on large deposits in the struggling Mediterranean nation's banks. Putin officially told his economic aides: "Such a decision, if it is adopted, will be unfair, unprofessional and dangerous." Krugman, though he acknowledged that he "wasn't watching Cyprus," felt no compunction about weighing in, writing, "It's as if the Europeans are holding up a neon sign, written in Greek and Italian, saying ‘time to stage a run on your banks!'"

Given how many of the accounts being taxed in Cyprus's banks belong to Russian depositors, Putin's opposition isn't surprising. The main Russian stock index, RTS, fell by 2.8 percent on Monday, and most of all the prices of Russian state bank stocks fell. But Krugman and the other Western observers decrying the EU's shortsightedness and cruelty should probably take a closer look at how this situation developed.

Like Bermuda or the Cayman Islands, Cyprus essentially has two industries: beaches and banks. It is clean, safe, and well-run, with a British system of law. Like Iceland and Ireland, however, it has an oversized banking system, with banking assets eight times its GDP. During the final years of the Soviet Union, Cyprus concluded a uniquely favorable double-taxation agreement with Moscow that is still in force with the main successor states, Russia and Ukraine. Cyprus has been a member of the European Union since 2004 and adopted the euro in 2008. It has the lowest taxes within the EU, with a 10 percent corporate profit tax. The combination of all these advantages has made Cyprus a dominant financial intermediary for Russia. All kinds of payments heading to and from Russia pass through the island, and though there have been frequent accusations of money laundering, Cyprus has never been blacklisted. Cyprus is technically one of the largest foreign investors in Russia, thanks entirely to Russian-owned companies operating in the country.

Traditionally, Cyprus has been fiscally conservative. It typically had small budget deficits and its public debt was only 49 percent of GDP in 2008. But since then, its financial situation has deteriorated quickly. In 2009 the International Monetary Fund recommended stimulus spending to Cyprus: "With a slow recovery ahead, authorities and staff agreed that a supportive fiscal stance should continue into 2010...The staff cautioned against a premature withdrawal of stimulus," the IMF's report read. The government followed the recommendations and, as so easily happens, overdid them, turning the budget surpluses of 2007 and 2008 into budget deficits averaging 6 percent of GDP from 2009-2011. Because of its vital financial interest in Cyprus, the Russian government gave the island nation a large loan of €2.5 billion in December 2011. The bilateral loan was to be repaid over the next 4.5 years at 4.5 percent interest.

The real crisis hit Cyprus with the writing down of public debt in nearby Greece in March 2012. The two largest Cypriot banks, Bank of Cyprus and Popular Bank, held an inordinate amount of Greek state bonds. When I visited the Central Bank of Cyprus last May, officials there estimated the losses at €4.4 billion, but said they had been hoping for a private bailout or a big Russian loan. The main reason for the failure to reach any agreement with the EU earlier was that President Demetris Christofias -- educated in Moscow and the EU's only Communist leader -- simply refused to do so, not wanting to accept any austerity measures. Meanwhile, the crisis grew worse.

On Feb. 24, veteran center-right politician Nicos Anastasiades won the presidential election resoundingly with 57.5 percent of the votes. He knew that a debt settlement was his first task to quickly get his country's economy on the right keel. The IMF and the EU assessed the required financing at €16 billion -- almost equal to Cyprus's entire GDP -- most of it for bank recapitalization. If the country had received such a large loan, it would have ended up with a public debt of 145 percent of GDP, which would not have been sustainable. To tax the population of only 800,000 because of the failure of the banks would have been both unjust and impractical, since the taxes might not be very easy to collect.

Therefore, the natural solution was to tax bank deposits, or "to bail them in," as the jargon runs. The question boiled down to how. One idea would be to tax the non-euro holdings, which correspond to one third of the deposits, but since big Russian and Ukrainian businessmen operate through Cypriot companies, being registered as locals, this would have made little sense. Therefore, the obvious target was large deposits.

On March 16, the eurozone finance ministers came to an agreement with the new Cypriot government. The EU/IMF credit will amount to only €10 billion. The Cypriot government committed itself to collect a once-for-all bank tax of €5.8 billion through a tax of 9.9 percent on deposits over €100,000, which is the ceiling for deposit insurance, and 6.75 percent on all smaller bank deposits. In addition, the government committed itself to a fiscal adjustment of 4.5 percent of GDP; in other words, to cut public expenditures and raise taxes on such a scale. 

This stabilization program makes a lot of sense, fulfilling three requirements. First, it is one quick fully-financed overall package, as opposed to the piecemeal steps taken to stabilize Greece showing that the EU has learned quite a lot about how to compose stabilization programs from those experiences. Second, it looks sustainable -- that is, public debt will not be insurmountable. Given that Cyprus is likely to receive a huge windfall gain from its natural gas deposits in five years or so, the debt burden is much less worrisome than elsewhere. (It's not exactly shocking but hardly serious that Russia's state energy monopoly Gazprom has offered its own competing bailout deal.) Third, if a big cut of public debt or potential public debt had to be made, an immediate, single payment by the depositors makes by far the most sense. It should restore confidence to the banking system soon afterwards.

Even some members of Putin's government see this. Shortly before Putin's statement, the experienced deputy minister of finance, Sergei Shatalov, stated that the tax on bank deposits was necessary and that the Cypriot government did not have any other choice. He praised the government's decisiveness and noted that "they are choosing the most sensible solution." The deposit tax was "not at all terrible and even just."

The biggest concern over the deal is that the deposit tax also applies to small deposits that are subject to deposit insurance. The Cypriot government can in all likelihood avoid a bank run, but the question is whether it can mobilize a parliamentary majority for this step. The government could revise this tax so that it does not apply to small depositors and raise the tax on large depositors to persuade the parliament to pass it as a law.

If the package is settled in a professional fashion, bank runs are unlikely. But this also raises the question of whether it will lead to future bank runs in other countries, if fear develops that they might impose similar depositor taxes. Krugman has a point here, but it doesn't change the fact that this was the least bad option available.

Putin's statement, by contrast, appears outright strange. He has persistently campaigned for "de-offshore-ization," since December, and the Cypriot package is arguably the most forceful measure to tax Russian offshore funds ever. Putin didn't explain his remark, but apparently his interest in discouraging Russian fat cats from depositing their funds abroad has its limits.