A view on Syria from the US: Obama's enemies scent blood

How did Obama find himself in such a rococo mess, pinned between haters in the House and his KGB rival?

Barely a week ago, when Barack Obama asked Congress to approve the degradation of Bashar al-Assad’s poison gas stocks, he became the hostage of obstructionist Tea Party members hell-bent on his downfall and of his own pacifist base, incapable of voting for war. The vote in Congress was heading for certain defeat. In an effort to rescue his rash gambit, Obama toured the talk shows and was billed to address the nation on television. What could he possibly say to turn back the tidal wave against war?
 
Enter the least likely character to save the US president from embarrassment, Vladimir Putin. A stray or perhaps not so stray remark by Secretary of State John Kerry that Syria could avoid attack if it surrendered its poisongas arsenal triggered a hectic Russian initiative to oblige Assad to do just that. Obama’s broadcast, a forlorn last chance to persuade Americans to live up to their responsibilities, turned out a damp squib: another passionless plea for military action, a delay to the congressional vote, and the granting of time for the Russians to strong-arm Syria.
 
In terms of high drama, no complaints so far. But how did Obama find himself adrift in such a rococo mess, pinned between haters in the House and his KGB rival? When it comes to big gestures it is best to ask questions only if you know the answer. When Obama invited Congress to share in the decision to bomb Syria, he must have known the House would oppose him. Not since he appeared vacant and distracted during his first presidential election debate with Mitt Romney has his judgement caused such consternation and despair among Democrats. What could he have been thinking?
 
The appeal to Congress remains a gamble. Until the Russian deal has run its course and Congress has, or perhaps has not, been asked to endorse military action, the presidency remains in severe jeopardy. A defeat in Congress would amount to a personal vote of no confidence on perhaps the most important decision any president can make: when to act to defend the nation’s safety. In his 10 September address Obama repeated that failure to act in Syria would lead to a proliferation of poison-gas attacks that put US national security directly at risk. As commander-in-chief, he does not need congressional consent to act in such circumstances, so the wonder is he has not already fired the cruise missiles. Which is what most of his allies wish he had done at the beginning of this month.
 
Instead, Obama chose the stony path. Some of his reasoning appears to be constitutional: he believes that the executive has too often ignored the legislature when making decisions about war and he, a Harvard constitutional law scholar, felt obliged to go through the niceties, whatever the risk of failure. Part of the reason, too, was the pivotal stance he took against the Iraq war that set him apart from Hillary Clinton in the 2008 primary debates. He believes Congress should play a key role in going to war.
 
There was, however, a recklessness about throwing the vote to Congress, which, since he lost the House in the midterm elections of 2010, has hampered him at every turn. The president has long lectured recalcitrant members of the House on playing chicken with America’s financial prestige – in order to keep America solvent by lifting the debt ceiling and by passing taxes to fund public spending. The vote for war is a similar test. Would Republicans risk harming America’s international reputation to satisfy their visceral dislike of him? Obama must have concluded that they wouldn’t dare, which is a bet few others would make.
 
By inviting the vote, Obama placed his tormentors in a torment of their own. Lawmakers have not thanked Obama for asking them to share the Syria decision. Americans are suffering war fatigue and the thought of another attack, however surgical, is unpopular in red and blue states alike. Being forced out into the open when opinion is so strongly against war is uncomfortable for a congressman. Best for those hoping to avoid an awkward primary to dodge the issue rather than be seen defying the will of the people.
 
For a couple of days Congress wriggled on the hook. In the Republican Party, mutating from a conservative to a libertarian movement, fiscal hawks now outnumber defence hawks. The old-school neocons and centrists such as John McCain and Lindsey Graham, who have ruled the roost on defence matters for the past decade and are backing the president, have been reduced to a handful. Many Republicans who had happily backed the unnecessary Iraq war are scrambling to find reasons to deny Obama the sanction to bomb Syria. For the sake of their president, Obama Democrats who opposed Iraq from the start are struggling to smother their pacifism and back another war.
 
Obama’s gamble has thrown everything in the air, but at enormous risk to his future authority. When a president finds his fate lies in the hands of the Tea Party and of Putin, he is in trouble. He faces opposition from a majority in the House of Representatives, almost half the Senate, and four out of every five Americans. His broadcast on Tuesday will not have changed minds. Like members of Congress who grabbed the Russian deal to save face, Obama must now hope that Putin can force Assad to keep his word.
 
The alternative for Obama is horrible. A failed Russian deal would reinstate the vote in the House and the Senate. If Congress rejects the measure, Obama will be profoundly weakened at home and in the eyes of the world – unless he bombs Syria anyway. The president might justify such an action by saying that Congress was asked to be wise and was found wanting.
 
Congress may reply that for a president to contradict a clear message from Congress is an impeachable offence. 
Hack or hostage? By mistiming and misdirecting the decision on a response to use of chemical weapons, Obama has put himself at the mercy of Putin.

Nicholas Wapshott’s Keynes Hayek: the Clash That Defined Modern Economics is published by W W Norton (£12.99)

This article first appeared in the 16 September 2013 issue of the New Statesman, Syria: The deadly stalemate

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?