The Russian Bear

My generation grew up thinking of Russian/Soviet behavior and motives as reflections of an ideological commitment to communism. With acceptance within Russia and most of the rest of the world that communism and economic central planning are deeply flawed and failed systems, we looked forward to better relations with a better behaved Russia that could finally take its proper place in the world commensurate with the highly respected cultural contributions of its people. Thus Russia’s behavior in recent years is a deep disappointment.

In reality, Russia’s international behavior has always tended to reflect admiration of “the West” and a strong desire to participate in and be respected by the West, despite the continuation of repressive feudal social structures within Russia. This contradiction aggravated an inferiority complex Russia seemed predisposed to anyway. These forces fed Russia’s century’s old impetus toward geographical expansion as the solution to its insecurities with regard to its “near abroad.”

Scott Thompson relates that “In 1980 just after Ronald Reagan’s election, a think tank in Philadelphia held a semi-official meeting with Moscow’s foreign policy elite, starting with Yuri Arbatov, the head of the USA Institute. Mr. Arbatov responded to our challenge—that Moscow was acquiring a vastly greater strategic military force than what America possessed—by saying that Moscow faced hostility along all its borders.  China bristled with might along that border, all the European states disliked it, and on its southern border there were hostile regimes. He contrasted this with the unarmed and peaceful boundaries the USA had with Canada on its north and Mexico on its south. One of us responded, ‘if you treated your neighbors the way we do, you wouldn’t be facing enemies on your borders.’”

With its outrageous attack on Georgia last month, Russia has reverted to earlier form. Tragically, it seems not to understand how respect in the West is earned, starting with the rule of law. One of the speakers at the Mont Pelerin Society meetings I am attending in Tokyo,[1] Andrei Illarionov, chronicled for us Russia’s multi-year preparations for this invasion. Andrei was the chief economic adviser of then Russian President Vladimir Putin from 2000 to December 2005. At lunch he told me that the U.S. invasion of Iraq provided Putin with the example of how great nations behave and he emulated it. Russia’s behavior cannot be easily explained he said. “Putin and his advisors are acting like confused teenagers wanting to be treated like adults. Who can understand it or make sense of it. It makes no sense either economically or politically.”

Andrie, and me,

When Russia sends its fleet into the Caribbean to visit Venezuela’s President Chavez, it will see itself as following the example of the United States Navy steaming into the Black Sea to the coast of Georgia. In many respects they are the same. A Russian visit to our near abroad is no more threatening to our security than our fleet’s visit to the Black Sea and the ports of Georgia is to Russia’s. Yet we are sensitive to such demonstrations, as are they. We should try to understand and respect Russia’s demand for greater influence in its own back yard, but we should insist that it behave in a civilized manner if it wishes to be apart of the civilized world. I would not support going to war to defend Georgia, but I do believe we need to strongly express our strong support of its democratically elected government and its right to its sovereignty and to raise the price to Russia or any other nation that violates broadly accepted international norms of behavior for such behavior. We also need to insure that we observe those norms ourselves.


[1] Other speakers included Vaclav Klaus, President of the Czech Republic, Edward Lazear, Chairman of the U.S. President’s Council of Economic Advisers, Myron Scholes, Nobel Prize in Economics recipient in 1997, Gary Becker, Nobel Prize in Economics recipient in 1992, Junichi Ujiie, Chairman of Nomura Holdings, and William Niskanen, Chairman of the Cato Institute.

How to measure the size of government

What is the right size of government? Obviously our answers vary depending on our understanding of the facts and the value we each place on different activities. It should be possible, however, to narrow the range of answers to differences in individual preferences (values). A good starting place is to agree on how to measure the size of government. My real interest in this note, however, is in how best to finance whatever government we wind up having.

The size of government should be measured by the resources it commands. This is obvious with regard to the government buying goods and services and employing people. These resources are taken from the private sector and employed for government purposes. If these purposes have greater value to us than their alternative value in private use (what economists call their “opportunity cost”), society as a whole is better off as a result. This is the economist’s famous cost benefit test.

People sometime confuse the size of government with the taxes leveled to finance it. Reducing taxes without reducing the government’s command over resources does not reduce the size of government. Rather it shifts how the resources commanded by government are paid for. But how the government gets and pays for these resources is important too because it can impose additional costs over and above the cost of just taking command of them. So what are the options? Here are the Good, the Bad and the Ugly choices. I have been indulging in a Clint Eastwood retrospective, if you haven’t noticed, and I am impressed by how many things can be conveniently partitioned this way.

When it comes to paying for government it is a bit of a stretch to talk of the Good. Almost all ways of paying for government distort private decisions and thus resource allocations to some extent, but some methods are clearly better than others. The goal should be to share the burden of government fairly and with the least disturbance and distortion to the private economy as possible. The view that the free market is generally the best allocator of resources is now so widely accepted that Democratic Presidential candidate Barak Obama said “The market is the best mechanism ever invented for efficiently allocating resources to maximize production. And I also think that there is a connection between the freedom of the marketplace and freedom more generally.”[1] I start at the top and descend to the ugly.

User fees

If the government is providing goods and services to specific individuals, they should generally be willing to pay for them especially since they value them. If the government provides a passport for an American or an entry visa for a visitor, it is both economically more efficient and fairer for those getting these services to pay for them rather than for someone else to. This mirrors the resource allocation efficiency of the private sector where prices reflect supply and demand. The same principle applies to highways, airports, schools and medical facilities. Why should those without cars pay to build highways for those who have them? And if drivers are willing to pay more than the cost of building a highway, it should be built. Taxes on gasoline are an attempt to charge user of roads for the cost of building them as are tolls on highways.

Institutions such as colleges and hospitals present a mixed case. They mix the provision of services for those who benefit individually from them and can pay for them with income transfers to those who can’t. But these two aspects can and should be separated by charging for these services and subsidizing the payments from those who can’t afford them. A different argument is generally made for primary and secondary education where the argument is that all of society benefits from this level of general education and thus everyone should help pay for it and thus a user charge is not appropriate. People without children sometimes object to this argument. Applying wage taxes on workers to pay for their social security is another example of mixing things up. Social Security is not a pension from saving while working. It is a pay-as-you go tax on the currently working to pay the pension of those already retired. My thoughts on Social Security are here: "Saving Social Security"

General taxation

Government command of resources for the general benefit of the whole country should be paid for with taxes on the whole country that are fair and that distort economic decisions of the public as little as possible. User fees are infeasible and inappropriate in these cases. A properly designed comprehensive income or consumption tax (no exemptions for favored activities) at a flat marginal rate fits these criteria. Views differ on the fairness of progressivity. For me, it is “fair” that someone with twice the income pays twice the tax, which is what a flat tax rate does. A flat tax is actually modestly progressive because the tax rate is actually zero up to the level of income from which the flat marginal rate applies. I prefer the consumption version (VAT) because it does not distort saving and consumption decisions by taxing saving but not consumption. Business income taxes found in most countries are very hard to justify (other than relative ease of collection for companies that do not operate across borders) as such income is taxed twice, once at the company level and again as income to this shareholders. For example, Moldova recently reduced its business income tax rate to zero. My slightly more developed thoughts can be found in: "The Ideal Tax System"

Debt finance

Here we descend to the “bad.” Governments can finance their activities by borrowing from the public. This has the “virtue” that those lending to the government (buying is bills and bonds) do so voluntarily because of attractive interest rates and low risk (I leave aside the now thoroughly discredited practice of some earlier governments of mandating purchases of government securities in one way or another). However, this financing tool falls almost fully on capital. The diversion of saving from financing capital to financing government “crowds out” and thus reduces private capital formation. While it is possible in principle that the resulting increase in interest rates increases saving and thus takes some of the government financing out of consumption, empirical evidence suggests that this effect is very small.

Cyclically balanced budgets are much more defensible. When the budget is balanced over the business cycle, governments save (spend less than their tax revenue) during the boom phase of the cycle and dis-save (or borrow) during the recession phase. Such behavior results from maintaining constant government spending over the cycle and has an automatic stabilizing effect on output.

Discriminatory taxes

Some taxes look a bit like user fees but are not actually linked to the provision or use of a government services to those paying these taxes. They simply fall on particular economic activities and thus increase the cost and reduce the supply of those activities. These clearly distort resource allocation. Examples are import duties and excise taxes.

If, however, an activity is taxed (or subsidized) that has social costs (or benefits) not paid for (or received) by those undertaking the activity, the tax (or subsidy) can actually improve resource allocation. In other words, to the extent a tax reduces any gap between private and social costs of an activity it will bring private decisions with regard to the activity more in line with the true cost to the economy, which will improve the efficiency of resource allocation. The classic example is a pollution tax. If, for example, activities that add carbon dioxide to the atmosphere contribute to global warming (a scientific assertion that is still under some debate), such as burning coal or gasoline (when driving a car), are taxed by the amount of that damage, the public’s decisions about whether and how much carbon fuels to use will better reflect the true cost to society of its use. This would improve the efficiency of resource allocation. Simply prohibiting the use of carbon fuels runs the strong risk of imposing a cost (in the form of the next best alternative energy sources) far greater than the benefit.

Lotteries

I am not sure whether to categorize lotteries as “ugly” or “merely “bad.” They are voluntary, which is a virtue. However, they might be said to exploit human weakness for gambling. Gambling can be an acceptable entertainment for those with the money to pay for it, but can become the desperate effort to get ahead by those who cannot. Most jurisdictions restrict or even forbid lotteries except when offered by the tax authority. This is morally odd indeed. The state grants itself a monopoly in an activity considered generally inappropriate and thus forbidden to private enterprise, on the grounds that the state puts the money to good us. Lotteries are generally regressive (raising money disproportionately from lower income families).

Mandates (outsourcing)

This is a seductive form of financing the government’s command of resources. Government regulations from banking supervision to product safety and much more reflect government command of resources a bit more indirectly. The costs of these regulations are as real as if the government bore them directly, but they are generally paid for by the regulated entities. They should be subjected to the same cost benefit assessment as any other government program. The danger of mandates is that because the costs do not appear in the government budget it is too easy and thus tempting for the government to undertake such regulations and mandates as if they had no cost at all.

Inflation

Inflation is clearing in the “ugly” category. First it is the easiest of all taxes to administer. The central bank just prints the extra money to lend to the government to cover the cost of its activities (not covered otherwise). The government spends the money thus taking the resources away from the private sector. The private sector reduces its own spending as a result of the fall in the real value (purchasing power) of the cash held by the public. Thus economists refer to inflation as a tax on the holding of central bank money (currency and bank deposits with the central bank). While seductively easy to administer, the inflation tax has two serious shortcomings. First, it is generally hard to anticipate accurately and unfolds unevenly and thus tends to distort relative prices. Distorted relative prices distort resource allocation and thus slow the pace and quality of economic growth. Second, the inflation tax is regressive and thus fails the fairness test. Cash is held disproportionately by lower income families and thus the loss of purchasing power is born regressively.

The pernicious effects of inflation and the tempting ease with which government can “borrow” from its central bank have led to a world wide movement to protect central banks and their monetary policy from government by making them “independent.” Most central bank laws now prohibit or tightly limit central bank lending to government.

The health and well being of society and the economy depend in part on getting the size and nature of government right. But it also depends on financing those activities in the fairest and least distorting ways.


[1] Quoted in David Leonhardt, "How Obama Reconciles Dueling Views on Economy," The New York Times Magazine, August 20, 2008

Sarah Palin

I asked my UC Berkeley ATO fraternity brother, Steve Paliwoda, who now lives in Alaska, for his thoughts on McCain’s choice for his running mate. Here is his reply:

Warren:

I think McCain’s selection of Sarah Palin as his Vice Presidential running mate could well prove to be the most savvy Vice Presidential choice in a very long time. Certainly the timing of the announcement of such an unexpected and interesting choice, coming as it did the morning after the end of the Democratic Convention did much to divert the public’s attention from Barak Obama. Thus, such well-known Friday evening news programs as "Washington Week" and "Bill Moyer’s Journal" spent a goodly amount of their air time discussing Sarah Palin, instead of talking about nothing else but Obama and Biden. Chalk one up for the Republican campaign.

Sarah Palin is arguably more of a political novice than Obama. Before being elected Governor of Alaska a year ago last November, she had served one — maybe two — terms as the Mayor of the town of Wasilla (pronounced just like it’s spelled: wah-SILL-ah — that is, I think it was Wasilla, which is a sizable strip-mall town about 40 miles north of Anchorage, and is the major town of that area, which is known as the Matanuska-Susitna (mat’n-NUS-ka soo-SIT-ka) Borough. Sarah is not new to the public eye, for I think that soon after she graduated from High School in the early 1980’s she won a local or regional beauty contest. She may have served on the MatSu Borough or Wasilla City Council for a term or two before being elected Mayor — I’m not sure about that.

I did not vote for Sarah in her run the Alaska Governorship; I voted instead for the Democratic candidate, Tony Knowles, who I felt was far more qualified. Tony is a Yale grad, originally from Oklahoma, and had served two 4-year terms at Mayor of Anchorage in the 1980’s, and two 4-year terms as Alaska’s Governor in the 1990’s. He then ran unsuccessfully for Senator, but was defeated by previous Senator Frank Murkowski’s daughter Lisa (that’s a long story). Tony then ran again for governor against an "unknown" Sarah Palin, who had defeated the corrupt incumbent Frank Murkowski in the Republican Primary, but it seemed that the Alaska voters were tired of the "old guard" of politicians, and welcomed someone new and fresh, like Sara (BTW, Tony served in all his offices with honor and distinction; however years before starting his political career, he worked for an oil company; and, however unjustly, that was what undid him in the last election).

…And BTW, I don’t know whether I ever communicated this to you before, but in August and September of 1982, I served in then-Senator Frank Murkowki’s Washington D.C. office (in the Dirkson Building) as a temporary volunteer "intern". Believe it or not, they assigned me to perform initial research into the legislative background of what was then an unknown subject: "Wetlands". (That’s another long story.)
Getting back to Sarah: She has impressed people since taking office with practically everything she’s done. She knows how not to tread on people’s toes. She is not owned by anybody. The women lover her. She dresses and carries herself like many of the women voters who like her so much. She is a "natural" when it comes to public speaking, and yet does not come across as overblown or affected. She has a good public presence, without the political bombast. Now, it will be a challenge to her to be able to present herself well to reporters during the campaign on such subjects as international relations — but she is not easily fazed, has a quick mind, and is very "believable" when she speaks. She has a couple young kids, and recently gave birth to a Down-Syndrome son — which was expected early in her pregnancy, but which she chose to have anyway. ….The debate between her and Joe Biden could conceivably be more interesting to watch than the debate between McCain and Obama. Certainly, the audience for the vice-presidential debate (I presume there will be one) will draw an enormous audience, for the public has had such a steady diet of McCain and/or Obama over the past several months that they’ll dying to watch somebody new.

She has some conservative leanings when it comes to religion, and if memory serves, has made anti-abortion statements, and (I’m not sure about this next one) is tolerant toward the idea of teaching "Creationism" in public schools. Even so, she has enough brains to know such subjects are controversial, and is not one to go around trumpeting publicly such beliefs.

This summer, her office has been the center of attention regarding a couple mini-scandals, whereby (1) The guy she selected as head of Alaska’s State Troopers (a local police chief) had previously been chastised for supposedly being too "familiar" with one of his female subordinates. The letter that was put in his file was eventually expunged. His "slip-up"? — He failed to tell Sarah about that letter when she interviewed him for the job. Sarah didn’t appreciate the "surprise" when reporters dug that one up, so about a week later, the newly-hired Troopers Chief resigned. He’s now trying to get his old Police Chief job back. …and (2) One or two of her aides made pointed remarks to the previous Chief of State Troopers that he should consider firing a particular Trooper who had been chastised in the past for a variety of misconducts. The interesting point here is that the guy is currently involved with Palin’s sister in a nasty divorce-and-child-custody lawsuit. Sarah claims she never knew about the suggestion made to the Trooper Chief, and has temporarily "suspended" (i.e., put on leave with pay) the person who had the discussion(s) with the Chief.

Bottom Line: Sarah Palin is a very interesting choice for McCain’s Vice President, and will be the subject of much attention and discussion — which is just what the Republican want, I’ll bet. Her ability to be President of the U.S., Commander-in-Chief of the U.S. armed forces, and leader of the free world, in case McCain’s cancer snuffs him out — well, that’s another matter.

Steve Paliwoda

Saving Social Security?

Without changes, the Social Security payroll tax will stop raising enough money to meet the system’s pension payment obligations in 2018, just 13 years from now. This funding shortfall can be corrected with only modest adjustments, if action is taken now. Indexing retirement benefits on the consumer price index rather than the average wage increases would eliminate most of the shortfall and modestly and gradually increasing the retirement age a few years would reduce the rest. Other adjustments are also being discussed. The change in the benefit index would reduce the planned increase in benefits and leave the real value of current benefits unchanged. Choose which ever way of saying it that sounds best to you. Both are correct.

The issue of privatizing or otherwise reforming the nature of the system is another matter all together. Evaluating such reforms calls for a clear understanding of the purposes we wish Social Security to achieve. Before we can intelligently debate whether SS should be a fully funded insurance program (whether with a defined benefit or a defined contribution) or continue as a pay-as-you-go entitlement, we need to debate the role we want it to play in our overall system of retirement income.

Traditionally most Americans’ retirement incomes come from employer based pensions and individual savings (home ownership, whole life insurance, and other investments). Schools taught the need for proper preparations. On August 14, 1935, when the country was still struggling to overcome the Great Depression, President Franklin D Roosevelt added a mandatory government pension when he signed the Social Security Act. In addition to old age pensions, the Act established unemployment compensation, and aid to children and to the ill.

Roosevelt intended for the old age pension provided by Social Security to be a mandatory, defined benefit pension financed by the contributions of the pensioner and his employers over his working life. The system provided a guaranteed minimum pension for those who worked and paid into it. However, the relationship between what a person paid in and ultimately received was never close. Those at or near retirement when the system started were allowed benefits that were financed by young workers who would not draw their own benefits for many years. Pay-as –you-go financing is the cause of the upcoming financing problem as baby boomers swell the ranks of the retired. “As a result, the ratio of workers paying Social Security taxes to people collecting benefits will fall from 3.3 to 1 today to 2.1 to 1 by 2031.”[1] It was over 8 in 1955. The tax burden on those currently working is raising fast.

In its current form, Social Security’s old age pension is a complicated structure that is neither a sound insurance or pension scheme nor a well-designed and targeted safety net. The payroll taxes that finance it “account for more than 25% of all federal revenue; its payments represent more than 20% of all federal spending. For almost two-thirds of American’s pensioners, Social Security payments make up over half their income.”[2] As a social safety net, it does not target benefits or redistribute income in a clear and defensible way. As a compulsory, government administered pension, it is not financially sound and is considered by many to be an inappropriate and unnecessary government intrusion into private life.

How the system should be reformed, if at all (rather than merely fixing its demographic based financing problems), depends on how as a nation we answer the following questions: “Is Social Security a planning vehicle that an individual uses for his or her own retirement, or is it a pooling of resources so that all of society can meet the needs of its older members? Is it about each person saving for himself, or is it a matter of young helping old and rich helping poor?”[3] Should Social Security be part of the social safety net that Ronald Reagan spoke of for a society in which individuals and families are basically responsible for their own lives, or should it be an instrument of collective social responsibility for public welfare? The attitudes behind different answers to these questions reflect the great divide that has always separated (in varying degrees) Republicans and Democrats. But there may be a proper place for each view.

World Bank research found “that financial security for the old—and economic growth—would be better served if governments develop three instruments, or ”pillars,” of old age security: a publicly managed pillar with mandatory participation and the primary goal of reducing poverty among the old; a privately managed, mandatory saving system; and voluntary savings. The first covers redistribution, the second and third cover savings, and all three coinsure against the many risks of old age. By separating the redistributive function from the saving function, the amount of spending in the public pillar—and the tax rate needed to support it—can be kept relatively small. Spreading the insurance function across all three pillars offers greater income security to the old than reliance on any single system.”[4]

“A central recommendation of the [World Bank] report is that countries should separate the saving function from the redistributive function and place them under different financing and managerial arrangements in two different mandatory pillars—one publicly managed and tax-financed, the other privately managed and fully funded—supplemented by a voluntary pillar for those who want more.

“The public pillar would have the limited object of alleviating old age poverty and coinsuring against a multitude of risks. Backed by the government’s power of taxation, this pillar has the unique ability to pay benefits to people growing old shortly after the plan is introduced, to redistribute income toward the poor, and to coinsure against long spells of low investment returns, recession, inflation, and private market failures.”[5]

For the United States, the World Bank’s advice suggests a much smaller public pillar (the existing Social Security system), targeted on the poor (means tested) whether they had worked and contributed to retirement income or not. It would be financed from the government’s general revenues, not from wages if there were any. This social safety net would be supplemented by the second, mandatory savings pillar, which should sharply limit the need to resort to the first pillar. This mandatory, defined contribution, second pillar would be satisfied by qualifying (and regulated as now) company pension funds, 401K plans, or social security tax contributions to private mutual funds. Reasonable, but not excessive, restrictions and safeguards would be required. Recent experiences with pensioner losses with defined benefit pensions when their employer goes bankrupt indicate that further reforms of the private pension system are still needed as well.

The system would insure that those who could, i.e. those with jobs, would save enough for minimally acceptable levels of retirement income, but would still protect those who had not adequately protected themselves, whether from inability, short sightedness, or bad luck. Allowing workers to manage more of their retirement savings has several advantages. More would be invested in stocks and private bonds, which historically have yielded more on average than government bonds. Such savings would be part of the pensioner’s estate and any unused part would be passed on to his/her heirs. Both the reduction in wage taxes and the real savings of private pensions would tend to increase the supply of labor and national savings and investment, and thus economic growth. Fully funded benefits from saving would be free of the demographic problems now besetting our pay as you go system. Benefits from the second tier would be closely related to contributions, which would tend to increase saving (and economic growth) and to be seen as fair. Workers would become capitalists and thus potentially more sensitive to the health of the economy. Those who could not contribute enough, or experience poor returns on their investments would be protected by the first, public pillar.

President George W. Bush’s current proposals for Social Security combine both financial fixes for the existing system and substantive reform of the system by introducing “personal accounts.” His recent proposals may be seen as transitional steps to the above system. However, like the existing system, current proposals constitute a mixed and rather incoherent collection of ideas. The final result will be more satisfactory to everyone if the details now being debated contribute to a coherent overall three pillar plan for the provision of retirement income and medical care.


[1] “Fast Facts and Figures About Social Security, 2004,” U.S. Social Security Administration. http://www.ssa.gov/policy/docs/chartbooks/fast_facts/2004/ff2004.html#financing

[2] “How to mend Social Security,” The Economist, February 12 2005 p 10.

[3] Steven Mufson, “FDR’s Deal, In Bush’s Terms,” The Washington Post, February 20, 2005, page B3

[4] “Averting the age old crisis for the old,” World Bank Policy Research Bulletin, August – October 2004, Volume 5, Number 4. http://www.worldbank.org/html/dec/Publications/Bulletins/PRBvol5no4.html

[5] Ibid.

The Commanders Emergency Response Program in Iraq: Effective or Wasteful?

The Washington Post has published an outstanding report on the Commanders Emergency Response Program (CERP) in Iraq with the provocative title "Money as a Weapon" [1] CERP is an effort to be smarter about ‘winning hearts and minds” in Iraq by behaving more like a private charity. It has good and bad aspects and illustrates the inherent disadvantages of government employees spending tax payers’ money compared to spending their own money or private enterprise (or charity) employees spending the owners’ (donors’) money.

Any economic activity by groups larger than a family faces the challenges of coordination and monitoring the performance of the individuals within the group. If you are a parent, you know that this challenge exists even within the family. These challenges exist for private sector enterprises operating in free markets as well as for government bureaucracies. On several occasions I have noted that governments suffer serious disadvantages in these regards, but as there are some things only governments can do we need to put up with them while limiting government as much as possible to what only it can do.

Private enterprises have the advantages that they are risking their own money and are thus able to take greater risks (both in how they address the coordination and monitoring challenges and in what goods or services they choose to provide), and that they are forced by competition to make good decisions or parish. They are disciplined by their bottom line (profitability). Governments, on the other hand, must be accountable to the public for the use of tax money. Thus they require more rigid and intrusive performance monitoring procedures (more reporting than doing). In addition to adding an extra layer of cost, this tends to under value and thus stifle creativity. Civil service employees, for example, tend to be rewarded by length of service rather than performance evaluations to ensure that bosses do not show favoritism to friends and relatives. Public school teachers in many states in the U.S. suffer from the performance stifling impact of seniority systems with tragic results for the quality of public education. Even efforts to introduce merit pay for government employees are fraught with risks because of the absence of a bottom line and competition.[2]

In addition to being a smarter approach to overcoming terrorists and insurgents in Iraq, CERP also attempts to overcome the sluggish bureaucracy inherent in government programs. “Soldiers walk the streets carrying thousands of dollars to pay Iraqis for doorways battered in American raids and limbs lost during firefights. Sheiks appeal to commanders to use larger pools of money locked away in Humvees and safes at military bases for new schools, health clinics, water treatment plants and generators, knowing that the military can bypass Iraqi and U.S. bureaucratic hurdles.”[3]

CERP “has so far spent at least $2.8 billion in U.S. funds.”[4] That will pay for a lot of battered doors. All of it was handed out in U.S. dollar bank notes by American soldiers. “The program is intended for short-term, small-scale ‘urgent humanitarian relief and reconstruction.’ But as the broader $50 billion effort to rebuild Iraq with big infrastructure projects runs dry, CERP is by default taking on more importance as a reconstruction program, something it may not be equipped to do in a coordinated, nationwide way.”[5]

It is obvious that solders walking the streets can make quick and beneficial judgments about where a few bucks will get the best result in ways that more bureaucratically controlled procedures could never dream of. Most of the solders I met in Baghdad were fine people and could be counted on to serve their country’s interests first. I seriously believe that very little of this cash found its way into our solders’ pockets (but reread Catch 22 or M*A*S*H for a different perspective). Thus the broken door and missing limbs payments and candy and t-shirts for the kids are surely some of the best money we are spending in Iraq. However, it suffers at the end of the day what all government programs suffer from: the solders are giving out taxpayers’ money and thus are not guided by a bottom line of their own. This particular innovative, responsive, and flexible program also suffers a lack of coordination with broader efforts to pacify and rebuild Iraq.

I have an additional problem with the way this program is implemented, which is modest but not trivial, which is that U.S. dollar bills are being used rather than Iraq’s own currency. Doing so undercuts the development of Iraq’s monetary system, makes the monetary policy of the Central Bank of Iraq more difficult, and pours hundreds of millions U.S. dollar bank notes into the country in ways the make anti money laundering and combating the financing of terrorism measures impossible. When Iraqis exchange these dollars for dinars, where do the dollars wind up? Iraqi dinars could and should be used for this operation.[6]

“CERP is, in fact, a reconstruction program in addition to being a counterinsurgency weapon.”[7] The real problem with the program comes with the larger expenditures—the “schools, health clinics, water treatment plants and generators, etc.” These are all good things potentially but schools with no teachers, health clinics with no medicine, are a waste of money. “A $33 million hotel, office and retail complex at Baghdad International Airport” may be the best use of that money, but it is very unlikely that the mechanisms for allocating CERP cash resulted in valuing this project against all others being financed by the U.S. or Iraqi governments. That is exactly what government budgeting is all about (or should be)—setting priorities. Resources (money) are limited and thus projects must be prioritized in order to finance the most valuable ones to get the highest value per tax payer dollar (or dinar). Furthermore, the value of one project, a farm irrigation system say, may depend on other projects, such as the roads needed to transport farm output to market. Thus an overview of all projects and coordination among them may also be important, which CERP does not provide but USAID does (or at least tries to).[8]

“Outside Kirkuk, in northern Iraq, an $8.3 million water treatment project completed in February with CERP funds took more than two years and was $1.7 million over budget — and it is not far from another water treatment system that USAID paid $4.1 million to build two years ago.” In another more successful example, “In the violence-prone city of Ramadi, Army Capt. Nathan Strickland and his battalion used CERP money to hire day laborers to clear away trash and rubble. The military strategy: Get young men to pick up shovels instead of guns.”[9] I remember in the early months of American occupation of Iraq Peter McPherson, assigned to the Coalition Provisional Authority to oversee the reconstruction of Iraq, killed a similar idea as wasteful welfare.[10]

Over a trillion dollars or more later we have learned a lot, made many adjustments, and things are going better in Iraq. The Post article is full of fascinating examples of successes and failures and the difficulties of making the government function more like the private sector. Of course, it raises the question that should always be raised of whether this was really something our government should be doing in the first place.


[1] Dana Hedgpeth and Sarah Cohen, “Money as a Weapon”, The Washington Post, August 11, 2008, Page A01.

[2] “David Whitman, in his book "Sweating the Small Stuff: Inner-City Schools and the New Paternalism," reports that in Chicago from 2003 through 2006, just three of every 1,000 teachers received an "unsatisfactory" rating in annual evaluations; of 87 "failing schools" — with below-average and declining test scores — 67 had no teachers rated unsatisfactory; in all of Chicago, just nine teachers received more than one unsatisfactory rating, and none of them was dismissed.” Quoted by George F Will in "Where Paternalism Makes the Grade", The Washington Post, August 21, 2008, page A15.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] A modest problem with doing so currently is that the largest ID bill (25,000 ID) has a dollar value of only about $20.00.

[7] Ibid.

[8] In the interest of full disclosure, I am BearingPoint’s Senior Monetary Policy Advisor to the Central Bank of Iraq under a consulting contract financed by USAID. I am expressing my own views here only.

[9] Ibid.

[10] Warren Coats and Kenneth Weisbrode, "The Strange Tale of Financial Reconstruction in Iraq" October 25, 2003.

One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina

What follows is blatant self interested commercialism. Here is what my latest book (kind of makes it sound like I have a lot of them) is about and how to get it.

F O R  I M M E D I A T E   R E L E A S E

Book Launch:

Warren Coats’ One Currency for Bosnia:

Creating the Central Bank of Bosnia and Herzegovina.

349 pages

$42.50

Jameson Books

August 3, 2007

Washington, DC – Bosnia and Herzegovina has arisen from war-torn ruins to relative national stability in just ten years – in compelling contrast to the chaos of nation-building efforts elsewhere in the world. The story of rebuilding the monetary and banking systems from these ashes and their contribution the country’s healing and rebirth is a story of national triumph and world hope.

An architect of this historic feat, Dr. Warren Coats of the International Monetary Fund, now offers a chronicle starting before the fighting had stopped — and concluding with reflections about the on-going challenges of establishing stable monetary systems in post conflict countries.

For those who know of Coats’ reputation, the especially good news is that Coats provides insights into human and practical aspects monetary systems, and he offers lessons for those who would undertake similar quests.

What people are saying about One Currency for Bosnia:

  • Michael Lind, Author of The American Way of Strategy: “Now that the challenges of rebuilding failed states and shattered societies are central to U.S. foreign policy, his [Coats] lively and fascinating account of one effort at national reconstruction is as timely as it is informative.”
  • Mario I. Blejer, Director of the Centre for Central Banking Studies at the Bank of England: “His book not only clarifies potentially obscure economic concepts for the laymen but also illuminates the important interconnections between the economic and political aspects of post conflict reconstruction.”

About the author: Warren Coats is currently an advisor to the central banks of Afghanistan, Iraq, and Kazakhstan and is a director of the Cayman Islands Monetary Authority. During his twenty-six years at the International Monetary Fund he has provided IMF technical assistance to central banks around the globe including in Croatia, Bangladesh, China, Egypt, Nigeria, Turkey, the West Bank and Gaza Strip. He lives in Bethesda, Maryland.

  • Monetary stability is a necessary precondition to a healthy economy. The author demonstrates in plain language the means to achieving this goal.
  • Bosnia remains in the world’s headlines as a flashpoint of ethnic and religious conflict, especially the suffering of its Muslim inhabitants.
  • Beneath the political rhetoric of peace, democracy and nation-building are the hard realities of economics. Policy writers and academics will find this book an invaluable guide.
  • For all academic library collections dealing with history, foreign policy, economics, banking, and the Balkans.
  • The Berkeley, Chicago, New York, Boston, and Washington, DC top bookstores should have this on their history, foreign policy and economics shelves.
  • Milton Friedman’s more than 2,000 economics PhDs, like Coats, are a formidable market for serious works of economics and are likely avid reviewers.

Title

One Currency for Bosnia

Subtitle

Creating the Central Bank of Bosnia and Herzegovina

Author

Warren Coats, Ph.D. of Bethesda, Maryland

Author Bio

Warren Coats received his undergraduate degree at U.C. Berkeley and his Ph.D. at the University of Chicago. Currently advisor to central banks in four countries, he has led technical assistance missions to more than twenty countries, including China, Israel, Egypt, Iraq and the Czech Republic. For 26 years he held various positions at the International Monetary Fund.

This is both a fascinating personal narrative of the often colorful warriors rebuilding a part of war-torn Yugoslavia, and a detailed inside look at how experts can stabilize a nation’s currency and banking system. Written by an American who has led International Monetary Fund advisory missions to the central banks of more than twenty countries, this book, crafted in layman’s language — but of immense value to specialists in monetary and foreign policy initiatives — is an account of the behind-the-headlines work American and other economists do to bring peace and prosperity to former failed states.
Coats was involved in the creation of the Central Bank of Bosnia from before the Dayton Peace Accords. His “currency board” rules for monetary policy, and the creation of the bank, have resulted in the most successful state institution in the country.
Marking the tenth anniversary of the bank, the technical world of economics comes alive as the book unfolds like a mystery novel full of colorful and determined people determined to escape the disaster of a bloody civil war.

Order from Amazon:

Bosnia book endorsements

 

Front cover:

 

“Warren Coats’ well told account of the establishment of a currency board in war torn Bosnia and Herzegovina is fascinating and insightful reading.”

 

Robert Mundell, Nobel Prize in Economics in 1999

 

Inside before the title page

 

Robert Mundell,    Nobel Prize in Economics in 1999, Professor of Economics, Columbia University ram15@columbia.edu

 

“Currency board systems have become more popular since the collapse of the Soviet Union and with good reason: they provide a good option for monetary policy formation in countries where a suitable anchor currency is available. Warren Coats’ well told account of the establishment of a currency board in war torn Bosnia and Herzegovina is fascinating and insightful reading. His mastery of detail and intimate knowledge of that unusual environment, both political and economic, challenge and deepen our understanding of monetary systems and policies.”

 

Richard Rahn, Director of Cayman Islands Monetary Authority, former Chief Economist of the U.S. Chamber of Commerce, and syndicated columnist and author. rwrahn@noveconfinancial.com

 

“If you were going to build a monetary system that would heal the wounds of a civil war devastated country and help lay the foundation for economic recovery and development, what would you do? Warren Coats provides the answer given for Bosnia and Herzegovina in his well told story of the establishment of the Central Bank of Bosnia and Herzegovina. Readers of his book will follow the detective like uncovering of the workings of the unique Yugoslav banking and payment system and the challenges faced and overcome in replacing it with a modern, market based system.”

 

Mario I. Blejer,  Former Governor of the Central Bank of Argentina (2001 to 02) and Senior Advisor in the IMF (1980 to 2001). Currently Director of the Centre for Central Banking Studies at the Bank of England.

 

“Warren Coats describes and analyzes the very complicated and extremely relevant process of the establishment of Bosnia’s present monetary system in clear, highly readable prose. His book not only clarifies potentially obscure economic concepts for the laymen but also illuminates the important interconnections between the economic and political aspects of post conflict reconstruction.”

 

Back dusk jacket:

 

Carl Bildt, Former High Representative of the UN in Bosnia, Former Prime Minister of Sweden, Current Foreign Minister of Sweden carl.bildt@foreign.ministry.se

 

“The democratization process in Bosnia was one of the most exciting periods of my life. And in the lives of all the courageous people who were involved.  The history deserves to be told over and over again. I told parts of it in my own book. Now, Dr Coats has taken the trouble to recall his own fascinating experience with the establishment of the Central Bank of Bosnia and Herzegovina. His account is an invaluable contribution to the never ending story of the Balkans.”

 

Serge Robert, First Governor of the Central Bank of Bosnia and Herzegovina (Oct 1996 to October 1997)  sergejrobert@noos.fr

 

“This excellent book written by Warren Coats about the creation of the new Central Bank of Bosnia and Herzegovina is well worth reading. The author meticulously relates various aspects of history, monetary policy and human behavior in a clear, lively, humorous and enthralling style. The book reports how, after a grueling war, some men – still impregnated with rancor and distrust – bridled their own resentment, working together to build a monetary institution vital to their common future. Warren, with a great IMF team, played a major role in encouraging mutual understanding and co-operation. Today, on the eve of its 10th anniversary, the Central Bank has proved to be a real success. Warren Coats’ book will be an appropriate gift to mark such an event.”

 

Michael Lind,  Whitehead Senior Fellow, The New America Foundation and Author of The American Way of Strategy (Oxford, 2006) and other history and policy books and articles.  Lind@newamerica.net

 

“The mission of Warren Coats in Bosnia was as much diplomatic as economic.  Now that the challenges of rebuilding failed states and shattered societies are central to U.S. foreign policy, his lively and fascinating account of one effort at national reconstruction is as timely as it is informative.”

 

Steve Hanke, Professor of Applied Economics at Johns Hopkins U Baltimore MD and leading authority on currency boards.  hanke@jhu.edu

 

“The newly independent Bosnia and Herzegovina emerged in shambles from a bloody civil war in late 1995.  Warren Coats, a premier emerging market monetary expert, was central to the design and implementation of the currency board system that restored Bosnia and Herzegovina’s economy.  His book represents a scholarly and comprehensive, yet readable, realistic, and insightful account of one of the world’s most successful modern currency reforms.  One Currency for Bosnia should be required reading for all those who are serious about stable money.”

 

 

The Death of the Right?

Political sentiments go through cycles. I have been listening to a growing number of people declaring the end of the Republican Party dominance and the Reagan Revolution.[1] Following eight years of George W Bush, I am not sure that the defeat of the current crowd would be much of a loss to the Republican Party I joined in 1964, but whatever else the end of this era means, it means replacement of Republican leadership in government (certainly the congress, and probably the White House) by Democrats. But what does it mean for the “Reagan Revolution?”

I am a Barry Goldwater Republican. I believe that we and our families and friends are largely responsible for our own well being, that government should be kept small and focused on what only it can do well, that free markets are the most effective way to create and allocate wealth, that the individual freedoms, checks and balances on government, and separation of church and state in our constitution and its Bill of Rights provide the best environment for my personal moral and material development and in which I can live in harmony with my neighbors, and that if I work hard (which almost always means serving the needs of others) I have the best chance of doing well for myself and family. I believe in a strong national defense (but not empire building) and international collaboration and cooperation in today’s globalized world. In order to keep them relatively honest, governments operate under significant disadvantages relative to private enterprises with free trade, but there are some things that only government can do or do best and therefore they should be done well.

I think that these principles best serve the establishment of a just and prosperous society for all. Over the years considerable evidence has been developed and presented to support these views. Developing an economic and civil society that reasonably approximates these ideals has made us (and the increasing number of countries that have adopted similar principles) the enormously wealthy country that we are today. Even the poorest in our midst live better and healthier lives than the average person in the rest of the world. This is not because every one is “successful” and does well in free market capitalist economies, but because allowing the clever, energetic, and hard working among us to benefit from their efforts generates the enormous wealth from which the losers or handicapped can be compensated or looked after (charity—for which America is famous—and social safety nets.) Goldwater/Reagan republicans helped advance these principles and Clinton’s New Democrats largely embraced them as well. So what era is coming to an end and why is it happening?

While it seems pretty clear that American politics has started to swing to the “left,” I think that the next political cycle will take the form of corrections of some problems and excesses of the Reagan Revolution, not an abandonment of our general preference for market over government production and distribution. Bill Clinton’s New Democrats moved the center of the Democratic Party to the right of Richard Nixon. Even if the swing left overshoots that new center, it is likely to remain to the right of LBJ and Hubert Humphrey.

Important and fundamental arguments between communism and capitalism or socialism were won by the champions of free markets long before the collapse of the Soviet Union (though that was the final nail in the coffin). As a student at UC Berkeley in the mid 60s, it was a rather uphill argument that prices (incentives) mattered and that therefore the market generally allocated resources efficiently and that public policy needed to build on and take seriously the incentives it created for people to behave this way or that. This is no longer questioned by any serious person. Consider Barack Obama’s recent statement that “the market is still the best way to allocate resources productively, that some of the [regulatory] excesses of the 60s and 70s may have hampered economic growth, [and] that we don’t want to return to marginal tax rates of 60 or 70 percent.”[2]

Nonetheless a significant number of people are uneasy or unhappy about the economy and not just because of the current housing crisis. Middle and lower level incomes have stagnated over the last decade (when excluding the large increase in benefits, where most of the increases in wage costs have gone) as salary increases have increasingly gone to those with higher educations.[3] These insecurities and rising health costs have turned many sour on immigration and trade, both of which have benefited us and the rest of the world enormously.[4] Public sentiment does not always favor Democrats. In the face of dramatically increased gasoline prices, “Americans want to lift the moratorium preventing drilling on the Outer Continental Shelf by an overwhelming margin of 2 to 1.[5] While a Post/Kaiser/Harvard survey of low-wage workers found that “Nearly half of low-wage workers said their personal financial situations have deteriorated under President Bush,” it also found that “More than half said that government programs aimed at helping working families ‘aren’t having much impact,’ while another 2 in 10 said they are actually making things worse.”[6]

As public sentiment swings back to the left what the public wants (domestically), I think, are largely free but better regulated markets and a better social safety net (health care and pensions). Those like me who think that too much regulation stifles beneficial market innovation and worry about the work incentive stiffing effects of excessive or poorly designed safety nets need to take note of these sentiments. The freedom for me to lead my life largely as I choose and to enjoy the fruits of my labor depends heavily on the willingness of my neighbors (fellow citizens and residents) to accept those rules of the game. Our society functions as it does because of a broad social consensus on the rules of public behavior. This consensus rests in part on each player’s confidence that if he fails there is a safety net that makes it worth his taking the risk of playing. We need to compromise what we consider first best for society (and Republicans and Democrats tend to differ on what this is) to the extent needed to preserve that broad consensus.

Republicans tend to emphasize opportunity and self reliance and keeping government small (it is hardly that), short shifting attention to effective safety nets and efficient government. This is coming back to bite us.

President George W Bush seems to have forgotten that once elected he governs for the whole country, not just those who voted for him. Presidents are elected, presumably, because the majority of voters supported the policies they advocated during the campaign. But once elected it is incumbent on the President to make those compromises with his preferred policies needed to gain broad public support. Instead Karl Rove and company set about turning the government into an adjunct of the Republican Party. Bush’s shoddy governance put inexperienced political hacks in positions needing professionals. The illegal hiring practices of Monica Goodling under Attorney General Gonzales, himself a disgrace to the office, “by letting politics influence the hiring of career prosecutors and immigration judges at the Justice Department,…”[7] is but one of many examples of the over politicization of the executive branch of government that is polarizing our country.

In addition, small government Republicans like me often fail to give enough attention to the public’s interest in good government. Small government still needs to be efficient and responsive to the public’s needs in the areas we have assigned to it. President Bush’s impulse to reorganize (e.g., the intelligence agencies, and what is now known by the un-American name of “Homeland Security) rather than improve accountability and transparency have made the government less efficient and no smaller.

Congressman Barney Frank, Chairman of the House Financial Services Committee, epitomizes the best of the new left wing reaction to the Reagan Revolution. Frank is fully aware of the virtues of the market and enterprise and the need to get the incentives right, but insists that market excesses and rough edges should be removed with limited and well focused regulation. His collaboration with Republican Treasury Secretary Henry Paulson to fashion a Housing Rescue and Foreclosure Prevention Law (now called the Housing and Economic Recovery Act of 2008 (HERA)) enjoyed sufficient bipartisan support to gain the President’s signature on July 30. The bill’s many provisions were generally sensitive to moral hazard problems and market incentives, for example by placing the decision to refinance “nonviable” mortgages fully in the hands of the lenders. In exchange for a certain but limited loss to lenders, borrowers would gain better and more manageable monthly payments rather than be foreclosed. There were things for both Republicans and Democrats to like and to dislike in this bill.[8]

Frank is a pragmatist who is willing to sacrifice his version of “the best” for “the good.” He sees a major victory for his preference for limited, market friendly regulations in the Federal Reserve’s new rules (Regulation Z – Truth in Lending) to prohibit “unfair, abusive or deceptive home mortgage lending practices.” For example, the new rules “Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.”[9]  “For years Greenspan refused to regulate mortgage lending, and now at last under Bernanke they have done so with common sense restrictions,” said Frank.[10] When you cut through all of the complex financial instruments by which wide spread investors provided money to home owners in mortgages, the subprime mortgage crisis resulted largely from mortgage defaults by borrowers who should never have received housing loans in the first place. The new Fed lending regulations, while adding some costs to acquiring a mortgage, probably would have prevented the crisis we are now in. According to Frank, “We forced some mortgages on people who should really be renters. Not everyone is suited to be a home owner.”[11] These are not the sentiments of a wild eyed socialist and this is not a return to the heavy handed economic (as apposed to prudential) regulations of the 50s and 60s when government regulated, e.g., capital flows and interest rates on bank deposits. When asked why congress refuses to pass the no brainer free trade treaty with Columbia, which Frank has visited several times, he replied that “it has nothing to do with Columbia, nor the failure to recognize the benefits of trade. No trade liberalization deal will be passed by this Congress until more attention is given to compensating the losers. And don’t forget that today when someone losses their job, they also loss their health insurance.”[12]

For the next few years, maybe even a decade, until the next swing back in the political center, we can expect more regulation and more extensive safety nets. If we collaborate with market friendly Democrats like Frank, we can not only fix some of the genuine deficiencies with existing arrangements, but we can probably prevent some of the worst excesses of the over extension of government, until it is our turn again. This would be a worthwhile contribution to the welfare of the Nation.


[1] Greg Anrig, “McCain’s Problem Isn’t His Tactics. Its GOP Ideas.”, The Washington Post, Aug 3, Page B01; Sidney Blumenthal, “Did American Shift Too Far to the Right?” New America Foundation, July 31, 2008; Grover Norquist, "The Next Republicanism" New America Foundation, May 15, 2008; Steven Pearlstein, "Wave Goodbye to the Invisible Hand", The Washington Post, August 1, 2008, Page D01.

[2] Ruth Marcus, "Pivoting to Populism", The Washington Post, August 7, 2008, Page A21.

[3] 52% of low income workers said they felt somewhat to very insecure. “Nearly half of low-wage workers said their personal financial situations have deteriorated under President Bush…” Michael A. Fletcher and Jon Cohen, "Hovering Above Poverty…" The Washington Post, August 3, 2008, Page A01. See also: The Economist, "Cheap and Cheerful:  The long-term rise in American inequality may have been smaller than it appeared”, July 24, 2008; Alan Reynolds, "Has U.S. Income Inequality Really Increased?" CATO Institute, Policy Analysis no. 586, January 8, 2007.

[4] In a recent poll only 16% of the respondents favored NAFTA (the North American Free Trade Agreement), Rasmussen Reports, "56% Want NAFTA Renegotiated", June 20, 2009.

[5] Charles Krauthammer, "No will to drill", The Washington Post, August 8, 2008, Page A17.

[6] Fletcher and Cohen, Op cit, Page A13.

[7] "Justice Dept: Hiring Scandal Violated Law" CBS News, July 28, 2008

[8] Secretary Paulson, who worked closely with Frank in developing the bill and urged the President to sign the resulting law stated that "There were parts of this legislation that just got passed that a number of us found objectionable, unnecessary, extraneous, too much government involvement," David Cho and Neil Irwin, "Credit Crisis Triggers Unprecedented U.S. Response", The Washington Post, August 9, 2008, Page A01.

[9] Board of Governors of the Federal Reserve System, Press Release, July 14, 2008.

[10] Barney Frank in private conversation August 1, 2008.

[11] Ibid.

[12] Ibid.

Fannie and Freddie, More Good, Bad and Ugly

By Warren Coats[1]

Should Uncle Sam have bailed out Fannie Mae and Freddie Mac and what should he do now?

Fannie and Freddie were created by the government to promote home ownership by lowering the cost of home mortgages. Whether it is good public policy to subsidizes home ownership in this and other ways is a separate issue. Fannie, and later Freddie, lowered the cost of mortgages by raising mortgage financing in the market at lower interest rates than previously possible. They reduced borrowing costs to home owners because they were able to borrow in the market in their own names at the risk free interest rates paid by the government and to pass the savings on to the mortgagees. After Fannie was privatized in 1968, it began to raise funds in the market with minimal risk by selling claims to pools of mortgages that met clearly stated minimum underwriting standards.[2] It guaranteed (insured) that private investors would receive the expected principle and interest payments on the underlying mortgages in each pool. Not only did the pooling and guarantee reduce the risk to market investors in such mortgage backed securities (MBSs), but the market fully trusted Fannie’s and later Freddie’s guarantees because of the widely held view that the government would not let them fail (implicit—now explicit—government guarantees).

These low funding costs could be passed on to ultimate mortgagees with lower spreads (the difference between Fannie and Freddie’s cost of funds and the rate they charged home owners) because of F&Fs high leverage. Fannie and Freddie were granted much lower capital requirements than other financial intermediaries. Investors didn’t worry about F&F’s small capital because of the implicit government guarantee of F&F obligations. These advantages over the competition allowed Fannie and Freddie to deliver very large amounts of relatively low cost funds to home buyers.

Why should we care if this arrangement channels more and cheaper financing to homeowners? The history of state owned banks almost every where they have existed in the world has been bad. For obvious political reasons, they are usually greatly overstaffed (with friends of the ruling party) and hold higher levels of non performing loans than privately owned banks as a result of politically motivated loans and poor management. It is too easy and tempting for politicians to push off the costs of government programs, such as loans to subprime borrowers with low or even zero down payments, to such institutions (off-budget expenditures).

Thus the privatization of Fannie Mae in 1968 should have been welcomed. Unfortunately, however, what was privatized was Fannie’s profits but not its risks. The same mistake was repeated with the later creation, then privatization, of Freddie Mac to provide more competition when the more sensible policy would have been to remove Fannie Mae’s special privileges (especially its very low capital requirement). As privately owned companies, F&F have taken a significant amount of their income to pay high dividends to their private owners,[3] very high salaries to their management,[4] and large payments for lobbying services.[5] These payments reduced the extent to which they were able to lower the cost of home ownership. According to The Economist “it has been an awful deal for the tax payer – a Fed economist calculated the implicit debt-guarantee was worth a one-off sum of between $122 billion and $182 billion. Because Fannie and Freddie barely lowered the cost of borrowing, little of this subsidy went toward busting home ownership. Instead, just over half—about $79 billion—went straight to their share holders.”[6]

Worse yet, the “The Department of Housing and Urban Development sets ‘affordable’ housing goals for Fannie Mae and Freddie Mac to dedicate a given amount of credit to poorer homeowners. One way Fannie and Freddie fulfilled these goals was to buy subprime mortgage securities — many of which have now gone bad.”[7] In other words, congress has pushed the cost of one of its programs off the government’s budget onto F&F, backs which is now coming back to the taxpayers.

Between them Fannie and Freddie guarantee two fifth of America’s 12 trillion dollars in mortgages by either owning them or packaging and reselling them to the market as mortgage backed securities of one sort or another. Stated differently three fifths of American mortgages have been financed without Fannie and Freddie’s help.

Basically F&F now provide investment banking services and guarantees to investors in mortgage back securities. But their guarantee, which should be backed by the capital provided by their private shareholders and their due diligence in vetting compliance with the stated underwriting standards, are actually backed by American tax payers. They do nothing that the private market cannot and is not doing already. They do it somewhat cheaper because the tax payer bears the ultimate risk of losses. For many many years a long list of economists and public servants have recommended breaking them up and or getting rid of them[8] and congress has delayed taking action until the latest Fannie and Freddie crisis of this last week.

Congress’s housing bill, signed by President Bush July 30, 2008, strengthened emergency arrangements by the Federal Reserve and the U.S. Treasury to open credit lines to F&F after their share prices collapsed on July 7, following an analysis by Lehman Brothers that potential accounting changes could leave their capital $75 billion short.[9] The new law confirms the Treasury’s pledge to provide liquidity against mortgage collateral and even capital if needed. In other words, the government’s implicit guarantee of F&F liabilities has been made explicit. F&F’s share prices immediate recovered following the earlier Treasury and Fed announcements. These steps were necessary because a loss of confidence in the market in F&F’s mortgage guarantees would freeze trading of, and/or cause very large losses in the value of, the $5.2 trillion mortgages guaranteed by F&F. This could do irreparable damage to the mortgage market and financial markets more broadly. It is impossible to know at this point whether F&F really needs any of this money, which depends on whether mortgage defaults over the next few years are more or less serious than now assumed.

The new law also provides much needed strengthened supervision of Fannie and Frieddie, but there are worrying signs that the underlying problems are just being postponed for yet another bailout rather than being fixed. F&F, along with Ginnie Mae,[10] will continue to have social responsibilities that potentially put tax payers at risk. At the same time that the new law authorizes tax payer money to cover F&F losses, it also taps future income (starting in 2010) to fund a new National Housing Trust Fund. Rather than liquidating F&F, congress has provided for the financing of the new NHTF with yet another off balance sheet scheme that builds a political constituency for the perpetuation of Fannie and Freddie. David Broder declared this an example of “lawmaking as it should be.” [11]

What should be done?

The government should stand ready to provide whatever capital Fannie and Freddie need to honor their existing obligations (and to provide adequately collateralized liquidity). However, such capital injections should come only after all shareholder capital has been used up. The condition for tax payer funded capital should be the surrender of current owners’ shares (a nationalization ala Northern Rock in the UK). Shareholders would lose everything in this case but all other obligations would be met. Once back in government hands these institutions should be gradually liquidated in an orderly way over a number of years.[12] Though investors in F&F guaranteed mortgage backed securities would be bailed out, shareholders would not. This compromise would retain considerable market discipline and is essentially the approach taken with failing banks, which are taken over by the FDIC and often resold over the same weekend. It is the approach advocated by Alan Meltzer for investment banks now that they have access to Federal Reserve credit.[13]

Refusing to bail out shareholders while protecting depositors (in the case of banks) and other creditors (mortgage backed securities in the case of Fannie and Freddie) is a compromise. Market discipline of investors in F&F guaranteed mortgage backed securities from potential loss in bankruptcy of F or F would be reduced, though it would be gradually transferred to privately guaranteed mortgages after the liquidation of F & F. However, full market discipline would be retained for shareholders who are in the best position to control the behavior of these institutions anyway. This is generally as much market discipline publics around the world are willing to accept, but we should insist on nothing less.


[1] Warren Coats, Bethesda, MD, retired from the International Monetary Fund in 2003 as Assistant Director of the Monetary and Financial Systems Department, where he lead technical assistance missions to central banks in over twenty countries. Prior to that he served as visiting economist to the Board of Governors of the Federal Reserve System, and to the World Bank, and was Assistant Prof of Economics at UVa from 1970-75. He is currently a director of the Cayman Islands Monetary Authority, Senior Monetary Policy Advisor to the Central Bank of Iraq for BearingPoint, an IMF consultant to both the central bank of Afghanistan, and to the Palestine Monetary Authority, and an Asian Development Bank consultant to the National Bank of Kazakhstan on inflation targeting. In 1989 he coauthored the World Bank’s World Development Report on “Financial Systems and Development.” His most recent book, One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina, was published in November 2007. He has a BA from UC Berkeley and a PhD from the U. of Chicago in Economics.

[2] The Federal Home Loan Mortgage Corporation (Freddie Mac) was chartered by the government in 1970 and “privatized” in 1989.

[3] For the year ended December 31, 2005, before the beginning of the current housing and mortgage crisis, Fannie reported profits of almost $6 billion from $50 billion in revenues. According to the Economist (July 19-25, 2008) a Federal Reserve economist “calculated the implicit debt guarantee [of Fannie and Freddie by the government] was worth a one-off sum of between $122 billion and $182 billion.” With just over half going to shareholders rather than lower borrowing costs to home buyers.

[4] “CEO Daniel Mudd received $12.2 million in total compensation last year [2007], down 15 percent from 2006,” when he received $14.45 million. Reuters January 31, 2008. In 2004, 20 of Fannie Mae’s top executives “received more than $1 million each in total compensation in 2002. Twelve received more than $2 million. Nine received more than $3 million.” Washington Post October 11, 2004. Fannie’s chairman and chief executive at that time, Franklin D. Raines, was subsequently fired over accounting “irregularities” that bolstered his and other executives’ performance bonuses.

[5] Fannie and Freddie reported lobbying expenditures over the last ten years of $167 million. The power and effectiveness of their lobbying efforts are legend.

[6] The Economist, “Twin Twisters” July 19, 2008 p 15.

[7] Robert J. Samuelson, “The Homeownership Obsession”. The Washington Post, July 30, 2008 p A15

[8] Peter Wallison has been a particularly articulate and persistent critic of F&F. Also see the resent article by William Poole, "Too Big to Fail, or to Survive" , NY Times, July 27, 2008

[9] Catherine Clifford, “Fannie Mae and Freddie Mac Plunge,” CNNMoney.com, July 7, 2008: 6:36 PM EDT

[10] Government National Mortgage Association, guarantees with the full faith and credit of the Federal Government pools of mortgages collateralize with loans insured or guaranteed by the Federal Housing Administration (FHA) the Department of Veterans Affairs (VA) the Department of Agriculture’s Rural Housing Service (RHS) and the Department of Housing and Urban Development’s Office of Public and Indian Housing (PIH).

[11] David S. Broder, “When Congress Works,” The Washington Post, July 31, 2008, P A19

[12] An alternative would be the outright nationalization of F&F compensating the shareholders with the estimated value of their shares (which might be negative). If later recovers from liquidation are greater than expected, shareholder compensation could be increased at that time. The government would accept the risk that it was less.

[13] Allan H. Meltzer. “Keep the Fed Away From Investment Banks” The Wall Street Journal, July 16, 2008; Page A17

Should the U.S. adopt a Gold Standard?

The gold standard for the U.S. is not a serious issue in my view, but a few hundred people, including Ron Paul, think it is. FreedomFest staged a debate in Las Vegas July 10, 2008 on this subject. Gene Epstein, Economics Editor of Barron’s took the affirmative and I took the negative position.This is the paper I prepared for a debate.

July 10, 2008, FreedomFest, Las Vegas, Nevada

We live on here on earth with all of its marvels and challenges. Life on earth is full of opportunities and risks. All cultures and institutions are imperfect. Monetary arrangements are no different. There is no such thing as a perfect monetary system. The gold standard is one of the better ones with many virtues and many weaknesses. I will argue that it is not the best system for the United States today. I will begin by defining what a gold standard is then provide a quick review of its strengths and weaknesses.

The goal of the monetary regime or of the monetary policy of any country should be price stability with maximum economic growth and minimum fluctuations in output. In the long run, monetary policy can only determine the value of the central bank’s money (inflation). Economic growth (real GDP) is determined by real factors of technology, productivity, labor skills, and work effort. So monetary policy cannot increase real output in the long run other than through the benefits of providing money with stable value. However, it can affect output in the short run and this is where it tends to get into trouble. An important source of inflation results from central banks increasing the money supply to stimulate output in the short run. Historically, inflation of central bank money was generally the result of the central bank lending to government (printing money to finance government expenditures). All hyperinflations were of this sort.

What is a gold standard?

A gold standard is a monetary regime (policy) that fixes the price of currency to a physical quantity and purity of gold and supplies or redeems that currency at that price in response to market demand. Thus a gold standard is a monetary system or policy in which market demand determines the supply of money. The purchasing power of one dollar fixed to gold is determined by the purchasing power of gold, i.e. the price of things in general in gold.

Pros and Cons of a gold standard

Pros

  • A gold standard is transparent, simple to administer, and has produced very stable prices over long periods. It reflects a strong commitment of the government not to resort to monetary finance (printing money) and may help reinforce such a commitment.

Cons

  • It can produce more volatile prices in the short run.

“Between 1880 and 1914, the period when the United States was on the ‘classical gold standard,’ inflation averaged only 0.1 percent per year…. This compares with the post classical gold standard “period of 1946 to 1990 with an average of 4.2 percent.”[2] However, under the gold standard inflation has been quite volatile in the short run. “For the United States between 1879 and 1913, the coefficient [of variation of inflation] was 17.0, which is quite high. Between 1946 and 1990 it was only 0.8….[3]

  • It precludes a monetary policy to soften or counter economic shocks resulting in more volatile business cycles.

In the United State, “The coefficient of variation for real output was 3.5 between 1879 and 1913, and only 1.5 between 1946 and 1990. Not coincidentally, since the government could not have discretion over monetary policy, unemployment was higher during the gold standard. It averaged 6.8 percent in the United States between 1879 and 1913 versus 5.6 percent between 1946 and 1990.”[4]

  • The resource cost is very high (digging up and refining gold).

Milton Friedman estimated the cost for the U.S. at about 2.5% of GDP (or around $375 billion dollars per year today).

  • It precludes a lender of last result to prevent bank runs

(though J.P Morgan was able to provide some of this from the private sector before the establishment of the Federal Reserve Banks).

The example of the Great Depression:

What should have been a “normal” business cycle recession starting in 1929 turned into the worst depression in U.S. history when the Federal Reserve raised interest rates in 1931 as required by gold standard rules to stem the outflow of gold and failed to provide lender of last support to hundreds of banks in the face of wide spread bank runs. By 1933, almost half of the 25,000 banks in the U.S. had failed. With normal credit sources severely disrupted, production plummeted. The introduction of trade restrictions worsened the situation and along with the gold standard helped spread the depression world wide. By 1932, U.S. manufacturing output had fallen to 54 percent of its 1929 level, and unemployment had risen to over 25 percent of the work force.

Britain restored gold convertibility in 1925 after its suspension during WWI at the prewar price. This is widely seen as a mistake that forced wide spread deflation on the British empire to reverse the war time increase in the price of gold. Speculative pressure forced the U.K to abandon gold convertibility September 20, 1931. In response to the speculative pressure on gold prices, the Federal Reserve, which hung on to its $20 dollars per ounce price and convertibility until 1933, raised interest rates in 1931 in an effort to stem the outflow of gold. The results were disastrous.

“· Countries that were not on the gold standard in 1929–or that quickly abandoned the gold standard–by and large escaped the Great Depression

· Countries that abandoned the gold standard in 1930 and 1931 suffered from the Great Depression, but escaped its worst ravages.

· Countries that held to the gold standard through 1933 (like the United States) or 1936 (like France) suffered the worst from the Great Depression.”[5]

Federal Reserve Chairman Bernanke is well aware of the risks of monetary contraction and deflation on the banking system and the real economy. [6] “Bernanke and James’ data for the average growth rate of industrial production for the countries [that abandoned gold] was positive in every year from 1932 on. Countries that stayed on gold, by contrast, experienced an average output decline of 15% in 1932. The U.S. abandoned gold in 1933, after which its dramatic recovery immediately began. The same happened after Italy dropped the gold standard in 1934, and for Belgium when it went off in 1935. On the other hand, the three countries that stuck with gold through 1936 (France, Netherlands, and Poland) saw a 6% drop in industrial production in 1935, while the rest of the world was experiencing solid growth.”[7]

What are the alternatives?

Flexible gold standard, Dollarization or currency board

Monetary regimes that fix the price of their currency to gold, another commodity, a basket of commodities, another currency, or basket of currencies (e.g. the SDR) and passively buy or sell their currency at that price are gold standard like regimes. However, gold would not be the best thing to fix the price of the currency to. Larry White has argued for a flexible application of such regimes in order to permit lender of last resort help to solvent banks experiencing runs. This would require temporarily lending to banks and there by increasing the monetary base beyond its gold backing. This could have avoided the problems leading to the Great Depression[8]

Inflation targeting

The major advantage of a gold standard is the commitment to long run price stability that it reflects. Inflation targeting reflects the same or even stronger commitment to price stability without the negative rigidities of a commodity standard. Inflation targeting holds the central bank accountable for achieving an explicit inflation target (generally 2%) two to three years in the future while leaving the central bank with full discretion over its monetary tools and their use for achieving the inflation target. Experience to date has been very good, reducing the variance of inflation without increasing real output volatility.

Is the price of gold more stable than other things?

Alan Greenspan has put monetary policy in historical context: “Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. But, in the two decades following the abandonment of the gold standard in 1933, the consumer price index (CPI) in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy unleashed from the constraint of domestic gold convertibility, had allowed a persistent overissuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess.”[9]

If the Central Bank of Bosnia and Herzegovina, the currency board I helped establish, had fixed the exchange rate of its currency to an ounce of gold rather than to the Euro, what would have been the result for the purchasing power of its currency (the convertible markka–KM)? From 1999 to 2007 the inflation rate (CPI) in Bosnia averaged 2.7% compared with 2.0% in the EU and 2.5% in the U.S. On average over this period, as would be expected, the Bosnian inflation rate was similar to the European inflation rate. But what if it had been fixed to gold rather than the Euro?

The Euro price of gold rose from 8 Euro’s per gold gram in 1999 to 18.8 Euros at the end of 2007. If the KM had been fix to gold rather than the Euro, its value relative to the Euro would have more than doubled from 2 KM per Euro to 0.85 per Euro. Put the other way around, in 1999 one KM would buy one half Euro, while if its price had been fixed to gold in would have been able to buy almost 1.2 Euros at the end of last year, a 10% appreciation in value each year. Deducting the European inflation rate of 2.0% per year over that period, Bosnia would have had an 8% deflation in KM on average over this nine year period. On the other hand if the KM had been fixed to gold in 1997 (about 10 Euros per gram)[10] two years later it would have depreciated against the Euro (about 8 Euros per gram), implying over those two years about a 13% per year inflation rate (after adding the underlying 2.0% European inflation rate). In fact, gold prices of the USD and the EURO have varied dramatically and would have provided a very unstable and unsatisfactory anchor for the KM.

As an aside, real GDP growth over the 1999-2007 period averaged 5.7% in Bosnia and 1.8% in the EU. The money supply (M2) grew at the explosive seeming rate of 41% per year over that period in Bosnia and only 7.4% in the EU, indicating the difficulty of monetary targeting in transition economies or post conflict economies like Bosnia.

The enormous volatility of gold prices over the last 40 years makes it a very unstable anchor for most countries’ monetary policies. Its price rose from 35 dollars an ounce in 1971 to over $800 in 1981 to below $300 from 1998 to 2003 to $926 per ounce at noon yesterday. However, these swings reflect speculative shifts in demand that would surely be greatly moderated if the United States and the world as a whole adopted a gold standard.

gold prices

Conclusion

The United States should not adopt a gold standard. Such a regime would have prevented the Federal Reserve from supplying the additional liquidity the banking system suddenly demanded this past year as part of the subprime mortgage crisis.[11] Without the injection of the additional liquidity, there would probably have been a financial sector meltdown and recession of hug proportions. Had the U.S. had a gold standard, it would not have survived such a financial crisis.

The United States should adopt inflation targeting. The Federal Reserve act should be amended to establish price stability as the primary objective of monetary policy, freeing the Fed from its statutory requirement to “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”[12]


[1] Warren Coats retired from the International Monetary Fund in 2003, where he led technical assistance missions to central banks in over twenty countries. He is currently Senior Monetary Policy Advisor to the Central Banks of Iraq and Afghanistan and a Director of the Cayman Islands Monetary Authority. His most recent book, One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina, was published in November 2007.

[2] Michael D Bordo, “Gold Standard” The Concise Encyclopedia of Economics

[3] Ibid.

[4] Ibid

[5] Brad DeLong, “Why Not the Gold Standard” 8/10/1996

[6] Ben Bernanke and Harold James, “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison” NBER Working Paper No. 3488, Issued in October 1990.

[7] James D. Hamilton, Econbrowser blog December 12, 2005

[8] Lawrence H. White, “Is the Gold Standard Still the Gold Standard among Monetary Systems?” CATO Institute Briefing Papers, No.100, Feb 3, 2008

[9] Alan Greenspan, remarks before the Economic Club of New York, New York, December 19, 2002, p. 1.

[10] The Euro had not yet been introduced at that time and the KM was actually fixed one to one to the German mark, which in mid 1997 was 18.5 DM per gram of gold.

[11] Warren Coats, “The U.S. Mortgage Market: The Good, The Bad, and The Ugly,” Association of Banks in Jordan, June 22, 2008

[12] Federal Reserve Act, Section 2a.

 

Dialog with Denis (a young Russian living in Europe)

For five or six years I have been exchanging emails with a young Russian now living in London. Denis is ambitious and fought hard to study in Europe and work in the West. He is also clearly a very patriotic Russian who loves his country deeply. He has often responded very favorably to my criticisms of my own country. I recently sent him an article in the Washington Post written by Oleg Kozlovsky, a young Russian now in a Russian jail for civil disobedience. Kozlovsky’s article criticized former President, now Prime Minister, Putin’s leadership of Russia. Following is Denis’s angry reply and my follow up note to him, which launched a longer series of exchanges than I had expected. This will be way too much for most of you but if you are interested you will gain some insight into how America’s recent behavior is seen by many abroad or at least by one quite sensitive Russian young man who remains very angry that his requested visa to visit the United States was denied.

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May 19, 2008

Dear Warren,

Thank you for your attention. But do all you Americans think like this???? My friend from NYC also sent me some black PR and lies from The New York Post which raised my hair up of what is written? Warren, in order to see, feel and understand modern Russia you must visit it and talk to as many people as you can, but not with some paid by Americans or Europeans persons like Garry Kasparov or Oleg Kozlovsky, some of them representing simply xenophobic moods of some Russians who are simply fed up of illegal immigrants (you know that Russia is number 2 country after the U.S. according illegal immigration), some people do not follow letter of law when arranging meetings and illegal demonstrations or marches in places where they can not do that according our internal laws and disturb other citizens with their behavior and anarchy, WHICH IS NOT FREEDOM OF SPEECH OR HUMAN RIGHTS! YOU MUST DISTINQUISH NOW LIBERTY, FREEDOM OF SPEECH, DEMOCRACY AND HUMAN RIGHTS FROM YOUR OWN DOUBLE STANDARDS AND INTERNAL FEARS. REAL VALUES OF KINDNESS AND GOOD ARE REPLACING YOUR WESTERN VALUES OF PSEUDO-LIBERTY AND ANARCHY AND ABUSE OF POWER ANYWHERE AND WHAT EVER YOU WANT! IT IS WRONG AND A MAJOR MISUNDERSTANDING IN DOHA ROUND AND SIMPLY BETWEEN RICH AND POOR NATIONS. WARREN, BELIEVE ME OR NOT BUT FROM MY ANALYSIS AND UNDERSTANDING OF CURRENT RUSSIAN ISSUES ALMOST 90% OF WHAT IS WRITTEN AND PAID FOR BY ANTI-RUSSIAN POLITICAL AND ECONOMIC FORCES AND PERSONS ARE LIES AND BULLSHIT IN WESTERN MASS MEDIA, READ MORE RUSSIA TODAY.COM, PRAVDA.RU, AL JAZEERA, CCTV, AND OTHER CHANNELS FROM CONTRIES FOR WHICH YOU DO NOT HAVE OBJECTIVE OPINION AND ONLY PREJUDICES, LACK OF UNDERSTANDING OF CULTURAL DIFFERENCES, FEAR OF THEIR GROWING MIGHT AND POWER AND POLITICAL + ECONOMIC INFLUENCE IN THE WORLD AND IT IS SAID THAT AMERICA AND EU ARE TRYING TO POINT TO SOME MYSTICAL EXTERNAL ENEMY IN THE 21ST CENTURY WHICH THEY’VE CREATED FROM NOTHING OR BY THEIR OWN PROUDNESS, GREEDINESS AND MONEY DESIRE, FEAR AND ENVY + OTHER SINS……….I THOUGHT YOU WERE DIFFERENT AND ESPEC IALLY WITH YOUR EXPERIENCE AND COMMUNICATION , THAT YOU SAW MANY DIFFERENT PEOPLE AND WORLD, BUT STILL YOU SEE THE WORLD THROUGH YOUR AMERICAN AND PERHAPS OWN (BUT STILL HIGHLY INFLUENCED) IDEOLOGICAL PRISM OF PREJUDICES, FALSE VISION AND MISCONCEPTIONS………… I DONT KNOW HOW MONEY AND YOUR WORK IN IMF DEALING CONSTALY WITH MONEY CAN REFLECT IT BUT I HONESTLY FEEL HOW IT SMELLS……..

DO NOT WNAT TO OFFEND YOU SOMEHOW AND IF YOU WILL FEEL IN THIS WAY, PLS FORGIVE MY WAY OF EXPRESSION MYSELF, WE ARE ALL HAVING OUR NEW DEMOCRACIES NOW AND FREEDOM OF SPEECH, BUT HOPE YOU CAN UNDERSTAND MY CONCERN, MY FRIEND….. HOW I WANNA MEET YOU PERSONALLY ONE DAY

TAKE CARE OF YOURSELF AND WELLCOME TO RUSSIA!

DENIS

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Dear Denis,

Thank you for your letter, but you disappoint me. You are clearly a patriotic Russian, a positive attribute in my opinion, and love Russia very much (more now that you no longer live there, it seems to me). But I fail to see the critical assessment of developments in your country that, in my view, true love requires. I am a very patriotic American and deeply love my country and its values and principles. It is precisely this love and respect that leads me to be so critical of actions and policies that violate those principles.

My impressions and understanding of the situation in Russia today comes from many sources. I know many Russians, though most now live here in the U.S. My own travels to Russia have been limited to Moscow and St Petersburg, but I have met many Russians during my many trips to Kazakhstan, Kyrgyzstan and Moldova. On May 8 I attended a lecture here in Washington about the Russian economy by Petr Aven, President of Alfa Bank and Mikhail Fridman, Chairman of the supervisory board of Alfa Group. Mr. Aven was Russia’s Minister of Foreign Economic Relations in the early 1990s. Alfa Bank is Russia’s largest private bank and Messieurs Aven and Fridman are hardly paid western lackeys (Aven). Their conclusions are that the Russian economy is hollow, resting on the flush of oil revenues that will not last for ever (output has actually been declining for the last few years). Mr. Aven’s said that one of the best things that could happen to Russia would be oil prices below $50 or $60 per barrel as it would force the restart of more serious economic reforms needed if Russia is to really build a strong economy.

Regrettably two American friends who provided many insights into the situation in today’s Russia are now band by the Russian government from returning to Russia because of their association with Mikhail Khodorkovsky, the Russian oil oligarch still in a Russian jail as an example to anyone else who would challenge Putin and Russia’s political leaders. In today’s Post Masha Lipman documents the systematic stiffening of public debate in Russia, including the murder and imprisonment of many journalists. Putin’s Puppet Press . As a friend, I warn you that this is the beginning of a disease that will not be healthy for Russia.

I understand that Russians have historically wanted stronger government control of economic and civil life and that your “democracy,” as you call it, will look different than the western democracies defined preeminently by the rule of law. However, if you do not apply the same critical scrutiny to the policies and actions of Russia’s (can we say Putin’s) government that you earlier applauded in my notes about America, I predict that Russia will fail to achieve the greatness you dream of. Such greatness cannot be achieved by manufacturing disputes with neighbors in an effort to gain attention and respect. Russia today reminds me increasingly of Iran, not the great Persian country and culture of the past but the inwardly insecure and pathetic (but potentially dangerous) Iran of Mr. Ahmadinejad. But he will pass and I have hope for the reestablishment of a great Persia in the future. The world would be a richer place for it. I have the same hopes for Russia, but not unless bright, energetic young men like you are critical of Russia’s mistakes and supportive of its proper strengths.

Best wishes,

Warren

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May 21, 2008

Thanks for your attention, but I do not see a big difference in you and other American society which is fed by such anti-Russian articles daily from all U.S. mass media. Just have a look on Carnegie Centre in Moscow and it’s financing organization participants list: http://www.carnegieendowment.org/about/index.cfm?fa=funding

and tell me if this is not a 4th power of media used by U.S. government like Voice of America in early 90s to promote and export it’s "democracy" and justify Guantanamo and Abu Greib murders, tortures, lies, and the worst values I despise!

I thought you can easily see the TRUTH and DIFFER WHAT IS GOOD AND TRUE FROM WHAT IS NOT and as far as I am concerned your knowledge and opinion about Russia or Russian-US relations are different from my perception and views. THE WORLD HAS CHANGED AND RUSSIA IS NOT WHAT YOU USED TO LAUGH AT DURING YELTSIN TIMES!

Warren, I hope is quite clear who pay for these articles and support them, just to mention U.K. Department for International Development U.S. Department of Defense U.S. Department of Energy U.S. Department of State and OIL MONSTERS of the U.S. and it will become clear what they pursue and why. Just talk with them if you will have a chance and ask about their real targets and motivations, then maybe your eyes will be open and you will wake up. "The Truth is Out There" – from X-Files.:-) and what about Masha-poor journalist who works hard to get paid from this foundation in order to feed her family and have a bread with butter on her breakfast table.

GOD BLESS RUSSIA!

Back to you.

Denis

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May 21, 2008

Denis,

We were not laughing at Yeltsin, we were cheering him. He was sending Russia on a path to be great again. When he bought his second election with the oligarchs, things began to go down hill and he began to become laughable. We (and I think most Russians — but how would I know?) had high hopes that Putin would clean up Yeltsin’s mess and resume Russia’s path toward rebuilding its productive strength. For a while it looked like he might. His chief economic advisor from 2000 – 2005, Andrei Illarionov, was helping direct policy in the right (more competitive market oriented) direction. Andrei is now here in Washington, having resigned because of the corruption and misdirection of the Putin government. I meet with him from time to time and find him very insightful about Russian economic policy. Because he criticizes his government does that make him a traitor or Western stooge to you? I find him much more believable about what is happening in Russia than the self serving propaganda coming from the Kremlin. Where is the critical debate in Russian press, pro and con, that we have so much of here in American debating every aspect of American policy (Abu Greib and all the rest)? Too much power corrupts, whether in Russia or America. One of our strengths is that we continually struggle to limit the power of our government in order to minimize that corruption and that has helped make us great. Russia would do well to finally learn that lesson.

It amazes me that you so unquestioningly accept the information coming from Kremlin controlled news outlets in Russia (one ultimate source) while doubting the many competing sources available in the West. Some have their own interests to promote, but the self interest of most free journalists is to get the news out and to be accurate. In any event we have many competing sources of information and you have one. I am afraid that you are the one with your eyes closed. In my opinion, such closed mindedness will not serve the best interests of Russia (or the rest of us).

Warren

***************

May 21, 2008

Warren,

You misunderstood, of course I am not happy about some economic slow developments and way of life ordinary people live in Russia, but all I wanted to say is that it is constantly improving (looking at my parents and friends) and is becoming a more affordable and wealthy society. But in western mass media they write only bad negative things and try to spoil all image of Russia devaluating it’s contribution in world’s politics, sports, arts and culture, they concentrate on political murders like Litvinenko in the UK and nobody knows what’s happened in reality or other mistakes/necessary changes maybe not appreciated now but which should be a necessary platform for the prosper future.

What Mr. Illarionov was trying to do during his time? To liberalize economy, i.e. to sell for free to westerners major strategic assets and competitive producers and swamp Russian market with cheap imports profitable for you only and not for local manufacturers and Russians. The time when people were stupid enough to believe this has gone in the past and nowadays Russia is becoming more and more self-sufficient (no credit crunch) and prosperous state.

Maybe there is not enough mass media liberty I would agree, but I am not an expert but what for instance was Anna Politkovsksya, a U.S. passport holder, murdered (criminal and not political to my mind) writing about Chechnya? Was it all truth or political propaganda paid for clearly by the U.S. affiliated interest groups and political people? You never know. But when I see how US mass media cover Putin’s or other Russian government official’s current work and speeches, negatively , aggressively, I feel sorry for people who make money in such a way. Instead they would better concentrate on Hillary’s lie on public about her achievements in Bosnia and Northern Ireland, rhetoric and threat for innocently accused Iran and they should better try to justify invasion of Iraq, public money spending and debt, credit crisis and repossessions, Indian population human rights and reservations, give freedom to Vermont (US Kosovo) state and keep cleaning it’s own house!

By the way, I observe many information sources and have direct free access not only to competitive Russia press , but western as well (EU and Arabic, Chinese and Korean) which I read and can see the difference when in Chinese press they mention Russian forces helping to excavate ruins after earthquake and their valuable contribution including medical supplements, mobile hospitals and so on , and in the U.S. I read articles written by an employee, as a last example, funded by US MOD, Congress and oil/gas companies including Chevron/Exxon, which had not followed Russian Ministry of Natural Resources and ecological standards, including delays of production, which is economically called complete waste of natural resources, and therefore experienced licensing problems in Russia and Kazakhstan. So, this is a difference. I see that US foreign policy became very unfriendly to Russia and Russians who believed you after collapse of the USSR and all came out as a lie and misleading. Take as an example Czech Republic and Poland anti-ballistic missile defence systems. Against "rogue" states of Iran and N. Korea? In the Northern Europe close to St. Petersburg and Murmansk? You might be kidding or Condy with Gates. To protect whom? EU? without even asking their permission and ignoring EU stability ? American must change it’s tone and behavior with Russia and China in particular and the rest of the world, then only ordinary Americans will benefit.

Latest news: American Airlines are cutting fleet by 13% and cutting jobs as there is no demand anymore from people like me who were rejected fucking tourist visa to visit their friends! Good luck!

Denis

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May 23, 2008

Denis,

Mr. Illarionov was indeed a champion of liberalizing the Russian economy, a process started by Gorbachev because the centralized control of production was slowly sinking the Russian economy. This does not mean selling cheaply to foreigners (though many Russian firms were worthless and no one would want to buy them), but getting productive resources into private hands where there is a profit incentive to use them well. When the very Russian Mr. Khordokovski bought up oil reserves (though under questionable circumstances) he took failing and unproductive oil fields and made them productive and profitable. Now that the Russian government has taken them back from him (stolen them, I would say), they are losing productivity again. Russia’s oil output is falling in recent years. Its oil revenue remains high only because oil prices are so high. The rest of the economy is doing better than under communism but not nearly what it could or should be doing. Russia’s current income rests almost totally on oil. We can debate what policies are good or bad for Russia and we can have different views, but I am quite amazed that because Mr. Illarionov now criticizes Putin’s economic policies you assume that he is somehow disloyal to Russia and a tool of the west. This is a bit crazy frankly.

I have also not heard the criticisms you mention of Russian “sports, arts and culture.” The whole world has always greatly admired Russian contributions in these areas. Whether America should be critical of some of its own failings, and I have certainly focused most of my attention on providing such criticisms, really has nothing to do with Russia’s failings. You make it sound like a competition and a highly emotional one at that. “Don’t you dare criticize my country, because yours has lots of problems too.” This sounds like grade school kids. For me the issue is what is good for people, all people, Americans and Russians and everyone else. It is not a zero sum game. What increases the pie can increase the slice for everyone. Let’s talk about how to make our countries better, not whether your country is better than mime or visa versa.

Warren

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May 24, 2008

Warren, good morning,

First of all I would like to underline that I am much younger then you and that’s where my youthful maximalism and slightly high tone comes from. I agree that we must do all for a better world, but nothing is impossible and the crucial milestone I see in American foreign policy and colonial attitudes towards the whole world. The U.S. must not and has no moral right to "govern" the world and spread its’ "democratic values" in places where it can not be applied: Iraq, Israel, Iran, Latin America, Russia, China and so on. I am deeply ashamed of Kosovo scenario and know that this Serbian province will never join any international organization and that resolution of the UN 1244 was neglected and ignored as well as invasion by the US in Iraq without resolution of the UN and lie to it’s nation by Britain, its closest for now ally.

If you are talking about making world better then can you explain to me how you/your government behave in such a way and ignore the whole structure of the international law and justice? When I hear speech of paranoiac McCain (who obviously has problems with his head after 6 yrs in Vietnamese prison) about creating League of Democracies to replace the UN where only G7 countries will decide and govern the world, or his announcements to eliminate Russia from G8 (without Russia I don’t think you will ever succeed in your "war against terror" or be able to mediate international conflicts worldwide). I feel sorry and doubt your words in their real meaning.

You say you want to make the world better, but America is doing the opposite. Take for instance a simple example of Hollywood cinema and propaganda, 4th estate, which is re-writing history, making fun and laughing at many nations and their values, history,etc. Thank God, I was advised by a friend of mine to have a look free, illegally if you want on the Internet, latest Indiana Jones film , and Thank God I watched the first 10 mins and did not pay a penny in the cinema for these anti-communist and anti-Soviet propaganda, what they wanted to show in it and how is clear and why? I do not respect such people like Spielberg, Harrison Ford, they are not my heroes and will never be if they continue the "thin line" of their power abuse using cinema in such an arrogant way. It is just a small example, but I hope you know what I mean and how mass media works in the US and worldwide. You always blame lack of freedom in Russian media, but I don’t believe that we, Russians, need your model of liberty of speech, such "free" liberate media where there are no borders controlled and where they can write whatever they want including obvious lies which is destabilizing factor for society and show only low moral values and fears of your society on such shows like Steve Wilkos, Jerry Springer,etc. They are disgusting honestly.

Let’s come back to economics. I know that the IMF came to Moscow a few days ago, so maybe you will manage to extract their latest report and send me a copy, so we can discuss issues. About Khodorkovsky: you know what does it mean and how considered in the U.S. the crime of tax evasion and money laundering, corruption and bribery which he and his people did, including his latest effort to sell 25% Yukos stake to an American oil company. I may suspect that he was a "beaten caught boy" and some other oligarchs should follow his way, but that is not the case now in new Russia and results of dishonest privatization past and voucher system which probably you consulted to Gorbachev post-people as well has gone in the past. It brought many people in poverty which they realized and will never forgive now. Russia could chose a better way, Chinese style model at least in economy, but what Gaidar and his team did "shock therapy" was a torture for Russian people and society. So, here I want again to underline that your model of capitalism and economy did not work in Russia and won’t work due to our national specifics, geography and national character.

About Russian sports, art and culture: I see only anti-dopping scandals are coming more and more, false accusations, double standards of judgement including last Salt Lake City Olympics and brilliant victory of Russian dancers who then were judged and had to divide golden medal with a Canadian couple which was a head below their level and French judge met highest pressure from Olympic Committee reps (mostly Americans) at that time to change her opinion and free evaluation of her choice who must be the leader. It is sad, but lots of misconceptions and double standards are carried and alternative false vision is supported by Americans. We can talk and talk, but what do you know about Russian culture at all when you don’t have yours?

I visited recently small place called Claire in Suffolk county of England where unique architecture of 12th century buildings was preserved. I visited the main museum and their was a story that Americans wanted to buy like they bought London bridge and many other historic valuables from Ireland, England and worldwide to bring them to America, but local Englishman refused them. I left a message in their book that thanks God you resisted and protected it from being taken and consumed by Americans and Englishman was so proud to hear it from Russian and fully supported it. I wonder from where it comes from the desire to take over, to consume , to destroy somebody’s culture, their heritage, their identity by Americans and the answer is simple from their own absence of self-identification and young history. You can’t buy the world and America should not be a single Enterprise, Corporation, Inc. and spread this culture around the Globe. Only when you will learn to respect what you don’t have and can not have, respect the culture, values of other nations then people will be more friendly to the U.S.. Nowadays you can obviously note that everybody hates America: middle east for wars, EU for strong euro, Britain for their hesitation of self-determination (To Be or Not to Be part of the Europe and European values or together as an American puppet?).

About criticism in general: Warren, I do criticize many issues in modern Russia, but believe me America does not have to dictate and tell us what to do when they don’t have any experience with what it means to govern the largest and the biggest country in the world with huge natural resources and unique human capital which gave to the world Gagarin, Tchaikovsky, Tolstoi, Mendeleev and many others. We are looking for our own way and do not need advice on how to establish and apply somebody’s patterns and templates. You simply do not understand what Russians want and are ready to sacrifice for. This lack of knowledge and basic understanding come from primitive test educational system in the US where 12% of population does not have basic secondary education even due to affordability and we don’t want this ever to happen in Russia and imply this capitalism "help yourself" model in our ancient stable society, or apply American style health system. Huh, what are we talking about and how can you give me the US as an example, country which still practicing death penalty – not the best example for democracy and show on TV assassination of Saddam Hussein – shame on this public show and clear demonstration of American double-standards democracy! About your economy, oil prices and consumer values and devouring behavior: yesterday Ugo Chavez said that high oil prices (135USD per barrel Brent light) are only manipulation of Americans, now we see that your government is trying to blame OPEC in lack of production and find a guilty idiot to point to, but we all understand how price of oil and demand in calculated and the reason is in overconsumption and huge demand from Americans and what the fuck are we talking about when I know and saw on TV that fat americans use their car to drive 50 meters to buy in the supermarket something, is it a reasonable deed? NO! All of them demand airconditioning in a car, lights and illuminations are everywhere, and why I wonder does the US not open its’ reserves in Alaska and other places, keeping for its’ future and sucking all out of the other world now? Rapid demand from India and China is part of the reason , but they have every right to develop themselves quicker then you with your 2.5% GDP growth annually, they suffered enough during centuries of poverty and western rule.

Maybe as an economist you can tell me your vision and forecast for oil price in the nearest future? Will it be 200 USD as predicted now? Will we have more regional conflicts and wars from poor third world nations swamped by hunger, lack of free water and rocketing commodity prices? How does US help? USAid and UNAid is a small drop in the ocean and that’s what Nigerians fight for in Niger delta, or in Sierra Leone, Kongo, Liberia for their blood diamonds of life. It is sad that the US took unilaterally right to be an executioner where they want and how they want, but as our great Alexander Nevsky, who defeated Sweds and Poles on Ladoga beautiful lake 1215 said "Who will come on our land with a sword , will die from it’s own sword" and that is part of our national character and patriotism, different from US Patriot Act allowing US government to spy on people , listening their phone conversation, reading post, having access to sensitive private data and making Americans more insecure in their newly born police-CCTV-state model.

You need a revolution in your own minds and lands and maybe new changed "WE BELIVE IN" will come (from Barak Obama with a hope for better American future).

Sincerely,

Denis

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May 24, 2008

Denis,

Thank you for your interesting comments. This is getting rather long and I want to be brief and thus will not comment on every thing you have said. I want to focus on two points that come up in your note.

I sense that an important difference in our views rests on a very different view of how we relate to or are identified with our countries and governments. You said; “If you are talking about making the world better then can you explain to me how you/your government behave in such a way….” You equate me with my government (“you/your government”). Perhaps you react so emotionally to criticisms of Russia because you equate yourself with Russia. This is a big difference between us. I love my country because of the principles of human dignity and liberty, self reliance and responsibility, limited government, checks and balances on which it is based and because of which it has become the wealthiest and strongest nation in history (if we want air conditioners in our cars, and can afford them, what’s the problem?). But I hate it when it violates those principles, which it often does. My first commitment is to those principals, because I believe they serve the betterment of man kind, not to my country. My country is full of many good hearted people and a few mean and nasty ones. As you have said, there are some in my government who have imperialist impulses and wish to push our values on others (rather then offer them for consideration). It does not bother me when you complain about such people. Why should it? They are not me, and I have sharply criticized them myself.

We also have very different views on the role of and importance of a free press and artistic expression (which is one aspect of a free press). I have not seen the new Indiana Jones film yet. It opens here today. Russians generally manage to see Hollywood films before we do (is it a general lack of respect for property rights, the foundation of capitalism? Just joking – sort of). I agree that films, books, the press have an important influence on how we see things and what we think. However, one of the great strengths of the West (to use that short hand – or of the civilized world as Russians generally call it to my face) is that we are not afraid of open discussion and believe it strengthens us as a people and helps limit the potentially dangerous power of our (or any) government. What Spielberg is free to say, others are free to dispute. Competition is the ultimately controlling force rather than who ever sits in the high seat of government. How would Olympic scandals like the very controversial Salt Lake City judgment about the Russian and Canadian dancers receive the public debate it had without a free press?

You complained that the Indiana Jones film was anti communist and anti Soviet. I thought Putin and all modern Russians were anti-communist, having seen first hand the huge failure of that economic system. Do you think Alexandr Solzhenitsyn’s damning descriptions of Soviet life were western propaganda or anti modern Russia? Is that the Russia you want to defend? I doubt it, so I am not sure what your point is.

A few quickies: 1. Europeans hate us because of the strong EURO (which allows them to buy our goods cheaply)?? A few years ago they (though no doubt a different group of them) hated us because of the weak EURO (which made our goods too expensive for them). 2. All IMF reports are on their website so you can get it as soon as I do. 3. I love Sergei Eisenstein’s great 1938 classic film Alexander Nevsky with its beautiful music score by Sergei Prokofiev and have seen it many times (once on the huge screen at Wolf Trap National Park for the Performing Arts with a live orchestra). The torch scene on the frozen lake after the battle with its haunting melody is magical. 4. I also find Jerry Springer disgusting, but I don’t fear him. I would fear a government with the power to decide who and what was good for me to see. 5. Russia can do things its own way as long as we can do things our way. However, as long as Russia’s century’s old culture of serfdom persists, the rest of us will be at the mercy of whoever takes and holds power in Russia rather than of the good hearts of the Russian people.

Best wishes,

Warren

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May 25, 2008

Warren,

I see that Russians and Americans are just different from each other and their vision of the world and perception of values and culture are just very different. Answering your questions and comments I will start with why I put you together with your government and officials in one row. To my mind you are as a part of IMF, mostly US funded organization with top seats covered by American nationals, I would presume that you are part of the system, am I wrong? The point is that of course I "equate" myself with Russia, as I am Russian, though born in USSR(Russia) and believe in Russia more then any other time else in my life as I believe in a stronger Europe together with Russia. America is not in my list of priorities or countries to visit after what happened to me and simply is out of my travel plans or connections.It has become irreversible in all senses and I turn my face in a opposite direction. I do help Russia a lot from here now involving Europeans in many good deeds and charity. You can join one of the the Naked Heart Foundation by Natalia Vodyanova – Russian Top Model, 7th top-earner in World’s rating and the wife of a very famous English aristocratic family (www.nakedheart.org).

Warren, I see and know that you love your country like all other people love places where they were born. But I dare to disagree with words about American " human dignity and liberty, limited government, responsibility" – I simply do not agree it applies to modern US where all these values were perverted and neglected. We can debate here for ages but I repeat I do not believe in these nice words when I see what America does internally and externally. About airconditioners, as a small example, I can say only that you think as a real capitalist and consumer, but go beyond that and think about scarce natural resources and short-term profit we gain from exploiting these resources without giving anything back (remark: US even did not sign Kyoto protocol and keeps producing 40% of all greenhouses gases on Earth. I can assure you as a member of Royal Society of Chemistry in London) or subsidies for American agriculture and farmers to produce biodiesel fuel rocketing commodity prices and hunger in the world with this overcosting barbaric initiative.

And I like your reply about "why should I bother? they (government) are not me….." and here you were talking and mentioning responsibility? I think this is clear example of American nationals irresponsibility and value of American dollar as a substitute to real values of dignity, responsibility and so on. In these cases Russians are deeply different from Americans in how they perceive responsibility to their country, but probably when you live in such meting pot of many races, people of different cultures and background where there is no unity on cultural grounds and ideology, beliefs, then the only thing remaining is to worship money and not bother about anything else or how to help anybody and make world better.

About Indiana Jones—it is rubbish, don;t waste your money and time on it, not only political color but just the content and acting. About Russians and Hollywood- that is our answer to new emerging threats and disrespect towards our culture, values and heroes. About free mass media: West is different from the rest of the world and where is the border in your liberty of speech and offence, neglect and discrimination? Do you think that ugly pictures on prophet Muhhamed in Danish and Dutch mass media is a freedom of expression or an offence on many centuries establish values and way of life and beliefs by Muslim people who showed their respond by boycotting Danish dairy products, and breaking western shops and embassies in the Middle East? Do you have—you western world—have the right to express yourself in a such offensive way without apologies and being able to understand that in other parts of the world people live and think differently from you and always will? When you are talking about free mass media I read it as a way of earning and making more money from stories which never existed and had a case, which show lie and describe in offensive way in order to attract Steve Wilkos and Gerry Springer audience to buy and pay for it. And here the leading positions are taken by News Corp, Times-Warner, CNBC, etc. And this usually causes regional and world conflicts set fire to by the US and other western colonial democracies as my newly elected President -Dmitry Anatolievich Medvedev- said in China during his recent visit strengthening relations with our great neighbor and cementing relations for balance in the world and multi-polar world stability. About scandalous figure skating: people do not need debate and disability of their life and results of obvious success-it is a fruit of your paid western media to earn more money on it and make people talk about it like about Tibet or Taiwan – integral parts of Chinese People’s Republic where people have more rights and freedom then Indians in the US or Latin population in southern states.

About modern Russians : you are wrong that modern Russians are anti-communist, moreover they are more nationalistic and proud of the greatest achievements and power of the USSR and Soviet leadership during Great Patriotic War and crucial battles of Moscow, Kursk, Stalingrad, siege of Leningrad and the best example is that none of democratic parties which were quite popular for their widely open mouse during early 90-s did not gain even 1% of votes from free legitimate democratic elections in Parliament last year in Russia. The difference is that Russians respect and give objective truthful analysis of their own and world’s history, which you don’t and I don’t think I can read in your history books about invasions in Caribbean, Guam, Philippines and bloody period of colonial rule by the US during the past 100 years, do I? Alexander Solzhenitsyn was writing ages ago about the system and people—victims of it and cult of personality of Stalin and nothing else. Now as you know he returned and welcomed in Russia and highly condemned and blamed US for Kosovo, Iraq, Iran, Palestine for their deeds and abuse of power. Read his latest interviews and messages. There were many good things on USSR we are proud of—victory against fascism, nazis, Soviet genetics, art, space endeavors and leadership in non-militarized space which US currently oppose with it’s global anti-missile system starting a new arms race involving China, Pakistan,Russia,etc instigating other countries into more regional conflicts, supporting Tiger rebels in Sri Lanka trying to apply Asian Kosovo style model and many other example of Israeli occupied Syrian and Palestine territories and US loss in mediation of Middle East conflict policy resolving.

About Europeans and EU: you might be kidding telling me as an economist that Europeans are happy for weak dollar and that their exports are under threats and whole economies are addicted to US cheap imports and therefore dependence on your goods and services and therefore monopoly and neo-slavery economic dependence. About Alexander Nevsky: here I admit I am proud of you as an American respecting and understanding, appreciating great art and history when millions of your compatriots have never heard of even Tolstoi, Dostoevsky, Chehov, Pushkin and never seen paintings of Aivazovsky, Bryullov, Shishkin, Kandinsky, Chagall, never listened the Nutcracker of Piotr Ilyich Tchaikovsky or "Ruslan and Lyudmila" by Prokofiev. I was really pleased to know that you have certain class of education and knowledge about it. About your government and what you can see and watch: do you have a reasonable choice and alternative? Have you ever watched Al Jazeera or Russia Today (www.russiatoday.ru) or Euronews or Chinese CCTV or Korean Arirang TV? Do you have an alternative ? What is a major content on American TV channels and what is put in your head from your childhood? Probably new US Patriot Act now how to spy, instigate, lie, be aggressive and rude, cheat on poor and innocent and go ahead to make more money bypassing any barriers of real values cultures and respect to people? The choice in yours………….

Have a lovely Sunday and hope you can agree with all truth i said to you and gave you more thoughts to think about. I hope you can use your status and influence to change the world and first of all America for a better future and change it’s attitude, helping other nations on your IMF level and building together happy dignitive future, prosperity and multi-polar world’s stability. Good luck to you and stay on touch, would love to hear your practical good deeds of you making world better!

Your Russian friend Denis

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June 29, 2008

Dear Denis,

My apologies for taking so long to reply.

I have already explained that my loyalty to the great principles upon which my country was founded comes ahead of my loyalty to my current or future governments and thus I will not comment further on that. However, I think you have a wrong understanding of my former job with the IMF. The U.S. voting strength in determining the policies of the IMF is about 18% of the total. The American professional staff is also about the same share of the total professional staff. Americans head only one or two departments. The advice I provide to the countries I visit as an IMF staff reflects both what I understand as a professional economist and the broader policy positions taken by the IMF management, which provide the guidelines (terms of reference) within which I work. These are not controlled by the U.S.

There is a difference in American views on a free press and the views in many other countries. We are more tolerant of bad taste in order to protect genuine artistic and political expression. This can and does create conflicts with many in other countries (such as the pictures of Mohammed). This will not be easy to resolve because other countries will not accept U.S. standards within their own territory and the U.S. will not accept being dictated to by others within U.S. territory. The problem, of course is that information, pictures, etc move very easily across borders. In fact, there has always been considerable debate within the U.S. about where the proper boundary should be about what can be said in the press. That boundary has changed from time to time, but free debate about government policies is always protected (as you can see from my many complaints about my government). Government can never be trusted to control what can be said about itself without great risk to the dissemination of honest information and genuine debate of policies.

You surprise me with your statement that modern Russians are not anti-communist. Your President disagrees with you. Russia has replaced central planning with a market economy and I have heard no one in Russia support returning to central planning (i.e. communism). Yes, Russia has many things to be proud of, but that does not imply that it should be proud of everything it has done. Until you are able to rise about such emotional reactions to criticisms you will have trouble being objective in evaluating issues. Your comments hardly support your claim of Russia’s (your) “objective truthful analysis of their own and world’s history.” But on a simple factual matter you are wrong about American history books. They do contain the facts of every American invasion we have undertaken. You called American colonial rule of the Philippines “bloody.” I dispute that. Filipinos generally consider the period of Japanese rule as repressive and the period of American rule as more enlightened during which education levels were broadened and raised. Even then, like all people (or most all people—I am still wondering about Russians) they eventually wanted to rule themselves and wanted the Americans to leave (which we have done).

Every American with a university education has read Tolstoi, Dostoevsky, Chehov, Pushkin (well, not so much Pushkin), even in high school. My high school orchestra (in which I played the French Horn—now called a freedom horn – just joking) played may Tchaikovsky pieces, even Prokoviev (but he was more difficult to play in high school). Tchaikovsky’s Nutcracker Suite is performed all over American at Christmas time every year and on television. We have always admired Russian culture.

You ask me about “what you can see and watch: do you have a reasonable choice and alternative? Have you ever watched Al Jazeera.” Our TV cable services have up to 500 channels. We can watch anything we want. I like watching Al Jazeera’s English channel for a different perspective. I think it is healthy, but I understand you to be saying that such choices are not healthy and not needed and not wanted in Russia. You confuse me sometimes, but I wish you great success and happiness.

Warren

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June 30, 2008

Dear Warren,

You have completely misinterpreted my words about Soviet past of Russia and Russian attitude and analysis of the past. I do not use such words Russians are anti-communist, all I wanted to say was that they were deeply disappointed with expectations and big slogans they were offered in 90-s and today people’s nationalism has grown up enormously especially after series of victories: World Hockey No.1 Champions, Euro-2008 bronze medal, Eurovision concert No.1,etc and people are highly concerned with western promises when they could not keep their word that they would not expand Nato towards east, conventional forces agreement ratification by new EU-states and it’s delay, etc, the trust simply has gone away and people realized who are their real friends and allies. About communist past: believe me many Russians are still proud about glorious Soviet victory against Nazi and terror, proud of space endeavors and discoveries, Soviet genetics and Soviet sport, Soviet global political might and power and image abroad and want it back and have already received with Putin presidency.Also the quality of life has gone up and social expenditures, thanks God to our vast natural reserves and political leadership which lead day by day to prosperity and growth in Russia which I observe now on my parents, friends and classmates and hopefully return back shortly.

If you want to compare Americans and Russians you should always take into account cultural differences and diversity, history and way of life and habits, which differs deeply from American diverse but not unified melting pot of people gathered under common value of $$$USD$$$ and making money obsession which is not our main national character feature. In Russia these kind of "liberties", "freedom of speech or lie?", ongoing depressive critics of political establishment and their enormous effort to develop the biggest country on Earth and manage 1/4 of the planet’s landmass and natural resources as you correctly pointed with unclear borders are considered as a destabilizing factor for our sovereign integrity and national unity and not as a locomotive or driving force of progress via lies, sufferings, giving up, or simply lacerating our national ideology and country’s sustainable progress and development for interests of certain powers/multinational corporations interested only in one thing. So, that’s not what Russian people used to live and grow up and will tolerate in our mentality and values, that’s not what we consider right or simply the best way to achieve certain goals and nobody should dictate or advise us what we should and what we should not, simple as that! Our self-sufficient nation does not need external control over our own resources and human capital and moreover to be leaded from outsiders who do not know even what Siberia is talking about some mass of land in the north of Russia and minus 50 degrees , that’s all. Mysterious Russian soul will be always mysterious for westerners and as our famous Silver Century poet -Fyodor Tyutchev – wrote at the beginning of the 20th century:

(rough translation into English):

"You can not understand Russia with your brain, You can not measure Russia with your measures, Russia has it’s own unique status: You can only believe in Russia!"

and in these words I see a very deep philosophy and understanding myself and our nation.

About modern US foreign policy and "democracy": everyone in the world sees and analyses daily high level authorities abuse of power and manipulation of public opinion, lies and tortures and stringent concentration of controlled democracy, civil liberties and rights in hands of your politicians in this globalised century and pseudo- efforts to concentrate on fighting a new external enemy ( no more USSR) – terrorism, in the UK- is climate change and there are many other examples in the world where this "enemy" takes the form of exaggerated fear that can justify uncontrolled ruling and making wrong decisions. Instead of this US and EU must concentrate on poverty reduction , though not making money off it like the US (Monsanto, Cargill, etc, lobbing GM-seeds and products to resolve world food crisis and maybe bulling commodity prices in NYmex and ICE-Liffe. I think now humanity face a real challenge or unify together and find a balance (which we are still trying in Doha but some rich nations can not get it and give up their consumption lifestyle and destructive behaviour and barbaric subsidies of agricultural policies and their greedy farmers. Or the world will be destabilized and more wars, global threats will come up as a result of it.

About Russian literature: it is not the case in modern US and EU educational policies, maybe it was during your time, but as I see now they are not taught of real values anymore. I saw for instance UK test system which government lobbing for increase in A-level diplomas and degrees in order to be recognized abroad and therefore be more paid then others which Russia will never recognize this level and this knowledge. So, I just passed my GSCE of French which I am actively learning , I passed it in 30 mins with my 9 months studies on my own and a 2 hours class, when pupils in college have to study 5 years to achieve my level and questions were so simplified like what is "tongue" in french —"la langue" from " language" and very easy to guess answers. So, educational standards have dropped enormously, you can track it in the US too even asking some universities how many foreign nationals came in the past years to study (excl EU-nationals or visa-free waiver entrants) and you will see that this institution also suffers a lot due to plummeting student application and rising tuition fees and cost of living in the US. I think a year ago Condy Rice could not make a difference between Slovakia and Slovenia seriously in one summit and it was not an occasional mistake or just a confusion.

About TV: I watch all sorts of TV channels, mostly emerging markets and EU, UK, not American that much at all, because every time I switched to it, there is only one propaganda and anti-Russian foreign policy line and aggression, so basically the only channel I can watch is Bloomberg TV for business news and market situation though it differs from Reuters and other EU market news and facts. Al-Jazeera is interesting channel , at least where you can hear the voice of League of Arab Nation and their perception and view on Palestine genocide and bombings by Israel supported and militarized by the US.

I wish you also all the best and be more objective and make a small contribution as an American national with certain American values for world’s peace and stability and objective public opinion influence and in "CHANGE WE BELIEVE!" (from B. Obama who at least can understand Muslims better then schizophrenic pseudo-hero McCain).

Have a lovely day!

Denis

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July 1, 2008

Dear Denis,

Thank you for clarifying your earlier statement about communism. What you are saying now is more understandable. I also see more clearly that I had not appreciated how humiliating to Russia’s national pride the collapse of the Soviet Union was. For us in the west it was a wonderful event that opened the doors to our friends in Russia to a much brighter future. The replacement of communism (central planning and state ownership of most of the means of production) with a market economy opens the potential for Russia to be much stronger and closer to the rest of the world.

In our view, the great accomplishments of Russia (space, sports, the Great Patriotic War defeat of Germany, etc) were not because of communism, but despite it. These were accomplishments of the Russian people not of a discredited economic and political regime they were forced to live under. Let me suggest to you (reflecting, of course, my American, Western liberal, views), that if you and other Russians become confident and secure enough to criticize shortcomings and weaknesses in your regime and in your government along with praising what is good, Russia may be able to become the great country that matches the greatness of its people.

A Belarusian who lives in my house and a good Russian friend from Novosibirsk have read your comments and do not share them. So at least there is diversity of thought among Russians about whether Putin and his friends are going in the right direction. There is a bit of encouragement in that.

My genuine good wishes to you,

Warren