History Doesn't Repeat Itself, But It Rhymes

This was Mark Twain's take on the lessons of history.

Ukraine's travails of the past three months and Russia's intervention remind me of nothing so much as the events leading up to Germany's occupation of Czechoslovakia in 1938.

After World War I, the Austro-Hungarian Empire was dismantled into a number of constituent successor states, among them Czechoslovakia. The Czech lands of Bohemia and Moravia were prosperous, modern, productive economies. But a substantial percentage of the population were German - speakers who had previously enjoyed a privileged position in the Austro-Hungarian Empire. They resented the new ascendancy of speakers of Czech and Slovak languages.

On top of this loss of prestige, Czechoslovakia was suffering, like the rest of Europe, from the worldwide depression, affecting the economic prospects of the formerly dominant group.

Resentment boiled up against what the German speakers viewed as Czech atrocities against them. These so-called atrocities were mostly invented, but founded on resentment. Reinvented as a new nationality, the "Sudeten" Germans invited Germany under Hitler to occupy first the "Sudetenland" and then all of Czechoslovakia.

British Prime Minister Neville Chamberlain negotiated a settlement with Germany. In a radio broadcast of 27 September 1938, he had this to say about it:

"How horrible, fantastic, incredible it is that we should be digging trenches and trying on gas-masks here because of a quarrel in a far away country between people of whom we know nothing. It seems still more impossible that a quarrel which has already been settled in principle should be the subject of war."

In the end, the agreement didn't work out well for any of the parties.

John Maynard Keynes foresaw the economic aspects of the disaster in his essays "The Economic Consequences of The Peace" and "The Economic Consequences of Mr. Churchill."

Diplomatic efforts collapsed with the collapse of the League of Nations.

Czechoslovakia was well prepared to defend itself so long as it retained the "Sudetenland." But it couldn't stand alone against the major powers. France couldn't come to the aid of Czechoslovakia because many of her leaders were more worried about the Communist "menace" than about Germany and the French military cowered behind the Maginot Line. Britain had a formidable navy, but not much of an army. The Soviet Union had no direct border with Czechoslovakia either.

Neither Ukraine nor any other power wants to see war break out. The risks of letting Russia get away with the partition of Ukraine are greater than most of the public seems to realize. Russia is violating agreements made to assure Ukrain's territorial integrity as a price of Ukraine agreeing to turn over nearly 2,000 nuclear weapons. Such agreements are generally necessary when nuclear proliferation is at issue.

Good luck getting other near-nuclear powers to give up their capability if existing nuclear powers don't make good on Ukrainian security.

For what it's worth, the stock market doesn't seem pleased with events.

Does History Repeat Itself Or Just Rhyme?

Mark Twain is said to have observed that history doesn't repeat itself - but it does rhyme.

Many of us read history not only for entertainment, but also in hopes of learning useful lessons about our own time and place. We seek to uncover history's lessons.

Those purported lessons are brought to our attention by journalists, political figures and academics on major anniversaries of important events.

One such event is the assassination of Archduke Franz Ferdinand, heir to the throne of the Austro-Hungarian Empire on June 28, 1914 by Gavrilo Princip, a Serbian nationalist in the town of Sarajevo. That was a shot not only heard round the world, but one that has reverberated now for an entire century.

Margaret MacMillan, professor of history at Oxford, University, has contributed an essay for the Brookings Institution examining the lessons of that event and the ensuing war.

I have read many of the diplomatic papers leading up to the war, tramped across the battlefields and pondered the issue of "war guilt" as it was called. After the 1918 armistice and collapse of the German government, the Western Allies insisted on assigning all of the guilt for the war on Germany.

I have concluded that no European power was without guilt. Nor was any power imbued with great resources of wisdom.

But the guilt at the outset plainly belongs to Serbia.

Professor MacMillan makes the case in her essay that the times in 1914 were much like our own.

We should read it as a cautionary tale.

But read it!

Seventy Years Ago On The Eastern Front: The Holocaust Is Discovered

Soviet forces advancing against the German Army enter the region of Khazary, a Jewish region, and find all the inhabitants dead.

The eyewitness account here paints a vivid picture of just what that means.

The horror.

German Elections

Interesting article in Atlantic about German elections. It describes a very different form of democracy. I think it has great advantages over ours. Germany's system is one form of proportional representation, where the voters vote for the party whose candidates they wish to see in office. It isn't about individual candidates. Parties select their own candidate list. The number of candidates from each party who win office in parliament depends on how many votes each party receives. Those candidates higher on their party's list have a higher probability of gaining office.

I think there are many advantages to the proportional representation system. One advantage is that it almost inevitably creates more than two parties and to form a government requires forming a coalition. To some extent, parties have to make nice with each other.

Here is a link to the article.

There are differences from country to country in the details, but proportional representation systems have much in common. The political dynamics are very different from "first past the post" or "winner take all" systems like ours.

What About Syria?

The subject of Syria keeps coming up at The Bean. "What do I think?"

I shy away from the subject. The truth is, I know a lot about warfare (it's my profession), but I don't know much about Syria.

I also know a lot about diplomacy, international law and strategic planning. But what I know of these subjects leads me to be cautious. Especially when the action under review is to become involved in someone else's civil war. Danger!

I also don't think much of the idea that we can just bomb a country into submission without some form of "boots on the ground." Or at least the threat of "boots on the ground." * And be sceptical of "regime change" as a goal. We're still suffering the aftereffects of our ill-considered "successful" operation of sixty years ago, where we caused the overthrow of Mohammad Mossadegh, the democratically elected, progressive prime minister of Iran.

We saved Iranian oil for British Petroleum, but at what cost?

Worth thinking about.

 *The only case that comes to mind of a successful military campaign won almost entirely by bombing is that of Kosovo in 1999.

Seventy Years Ago: Mussolini Falls

July 28, 1943: Franklin Delano Roosevelt delivers a fireside chat on the fall of Mussolini. And what a chat it was!

No American who heard FDR speak on that day could fail to note that we were all in this together, and we were winning!

Not many leaders have ever had the skill of FDR at putting events into perspective.

Read the whole, inspiring fireside chat here.

And celebrate with a cup of unrationed coffee.

D-Day

Just a reminder that sixty-nine years ago today, Allied troops stormed ashore on the landing beaches of Normandy, establishing a beachhead in France. Less than a year later, Germany surrendered. The United States was at war with Germany about three and a half years from declaration of war to surrender.

Economists And Politics

Today's New York Times tells the story of the political travails of Russian economist Sergei Guriev. Guriev, a prominent Russian economist who frequently advised former President Medvedev, apparently incited suspicions of Russian authorities when he co-authored a report by experts critical of the prosecution of Russian oil tycoon Mikhail B. Khodorkovsky.

Khodorkovsky, who acquired great oil wealth after the breakup of the Soviet Union, has been imprisoned since 2005 and is being investigated for further charges. Khodorkovsky apparently made the mistake of directly challenging Putin. He has now joined a long line of Russians and Soviet citizens who ran afoul of authorities, back to the time of Ivan Grozny (Ivan the Terrible) and even earlier in Russian history.

In Soviet years, the capture and prosecution of Khodorkovsky would certainly have counted as one of the most significant "show" trials.

Economist Guriev, very well connected in Russian political circles, especially the entourage of Medvedev, may have made an error in judgement by criticizing any aspect of the trial.

The phenomenon of economists getting entangled too closely with politics is not only a problem in Russia. My economics professor in graduate school, George N. Halm, made the error of giving the Nazi regime advice they didn't want to hear right after Hitler came to power. Professor Halm deemed it advisable to flee to the United States, where he became a noted professor of economics.

Guriev has found refuge at the Institut d’Etudes Politiques, a university in Paris. As the French say, "plus ca change, plus c'est le meme chose."

To paraphrase a thought from Tolstoy, "Authoritarian regimes are all alike; each free country is free in its own way."

Germany Beginning To Accept Need For Economic Stimulus

News from Germany is that the German government has decided they have to do something to have an economic stimulus in the periphery of the Euro zone. Spiegel On Line has some details.

Nothing in the report suggests that the program will be big enough to do much good.

It still looks to me like the Euro has been a bad idea, poorly executed. There is not an adequate mechanism to move funds from prosperous to less prosperous areas. The distress in the periphery was not caused by government spending, but by banks. In many cases, German banks.

This is not going to work, but it may drag out for a long time as the European Central Bank tries a series of what will prove to be inadequate measures.

I could be wrong - but I don't think so.

Seventy Years Ago: May 24, 1942: Admiral Doenitz Removes Submarine Force And Concedes Battle Of The Atlantic

By 1943, expansion of Allied antisubmarine force, improvement of Air operations against submarines, including aircraft operating from small escort carriers, were making life difficult for German submarines. Admiral Doenitz, the German submarine commander, explained his withdrawal of the force by improvements in Allied ASW weapons and organization. Here is his report.

Doenitz' list is incomplete. How did the Allied ASW forces know where to look for German submarines? It's a big ocean out there.

The Allies knew where to look because of their great successes in communications intelligence. They intercepted and decrypted German orders to submarines, even orders encrypted by Germany's latest Enigma machines. When Germany began changing their communications keys several times a day, cryptanalysts kept up.

They tracked submarines using the extensive Allied High Frequency Direction Finding network ("Huff-Duff"), even when the submarines began compressing the messages and sending them in "burst" transmissions.

The war was fought and won not only on the high seas and in the air, but more significantly in the back rooms of headquarters, using the black arts of cryptanalysis.

Seventy Years Ago: May 17, 1943 In Europe

May 17, 1943, the B-17 Memphis Belle completed twenty-five missions over Europe. They were the first US bomber to complete that number of missions. It was unusual enough that the Army made a documentary featuring Memphis Belle.

Here is a very interesting summary on Brad DeLong's blog.

How Cyprus Affects Europe

Here's a pretty straight report on what's wrong with Europe's approach to Cyprus.

Bottom line: the European Central Bank and IMF are practically inviting a run on European banks.

It may take awhile to develop, but it will be hard to turn around. Then what will happen to the Europe project?

Bank Heist In Cyprus Threatens Eurozone

Over the weekend, IMF, ECB and Cyprus banking officials agreed to a plan to swipe depositor's funds to pay for a bailout. Small depositors rush to get their funds out of banks. The mattress looks safer. Will this trigger a run on banks in other European countries?

More evidence that the Eurozone is a flawed monetary union.

What can they be thinking.

Germany remains confident in austerity.

One view of the decision:

Ten Years Ago: Freedom Fries

I failed to note an anniversary last week. On March 11, 2003, Congressman Walter B. Jones and Congressman Bob Ney announced that henceforth menu items in the Congressional cafeteria would be renamed: "French Fries" would henceforth be listed as "Freedom Fries," and "French Toast" would be renamed "Freedom Toast."

This episode of international silliness started because France refused to join the United States in the invasion of Iraq.

Quickly forgotten by most Americans was that on September 12, 2001, NATO (including France) invoked Article 5 of the North Atlantic Treaty, declaring that if it was shown that the September 11 attack was coordinated from abroad, the Alliance viewed the attack on the United States as an attack on all members.

Early on in the effort to retaliate against Afghanistan, European members of NATO offered to contribute more military forces than the United States was willing to accept.

The Bush Administration sought special assistance from French Intelligence sources. France had by far the most complete intelligence in the Western world on Islamic extremism. They willingly shared this information with the United States. In fact, it is fair to say that French intelligence was essential to the early progress of the investigation.

When the United States turned its attention from Afghanistan to Iraq, France was not the only NATO member unwilling to support the invasion of Iraq. Turkey also refused to allow US forces to invade Iraq across the Turkish-Iraqi border.

Both Turkey and France were quite certain that Iraq had nothing to do the 9/11 attack on the US, and were equally certain that Saddam Hussein had not collaborated with Al-Qaida.

When asked much later about the "Freedom Fries" episode, Congressman Jones admitted he "wished it had never happened."

Europe - Not Looking Good

Mario Draghi, president of the European Central Bank, has brought the Eurozone back from the brink. He accomplished this by measures not unlike quantitative easing. Countries with troubled economies are at least not under so much pressure right now over sovereign debt.

But levels of unemployment in Spain, Italy, Greece and Portugal are much too high (on the order of 25%) and the economies of other Eurozone countries, including the Netherlands aren't much better. The economic distress is leading to a rise of extremist political parties.

Brussels Eurocrats and German bankers seem oblivious to the consequences of their obsession with financial austerity. To date, the result of all this austerity is larger deficits. Which leads to predictable calls by the masters of the system for even more austerity. Which will lead to even larger deficits.

I fear we know where this story leads. It all depends on whether Europe makes good use of the time Draghi won for them. Right now, that doesn't appear likely.

Meanwhile, next door in Hungary, an authoritarian government is grabbing even more power.

Economic Changes - Existing And Prospective - Mostly Europe

Professor James K Galbraith made a really fine presentation December 6th at an IG Metall conference in Berlin. Conference theme: The Good Life. Thanks to Mark Thoma for the link. The title of professor Galbraith's presentation is "Change of Direction."

Professor Galbraith draws attention to the existence of one overarching worldwide crisis. "Yesterday," he says, "Professor Nouriel Roubini give a magisterial and very high speed tour of the world situation making it clear of course that the promised recovery has not occurred. But if Nouriel is Sir Isaiah Berlin’s fox, who knows many things, let me try this morning to be the hedgehog who knows one big thing, and that one big thing is that what we are experiencing is a single, unified, global crisis of the economy and of the financial system. It is not a cluster of distinct and separated events; a subprime crisis in the United States; a public debt crisis in Greece; a bank crisis in Iceland; a real estate bust in Ireland and Spain; nor are there distinct U.S. and European crises, nor can the financial be separated from the real, nor is Germany a country to which crisis has not yet come with the suggestion that there might be some separate way out. There is one crisis, only one crisis, a deeply interconnected crisis of the world system. This crisis has, I think, three deep sources going back not twenty years but forty years to the early 1970s and the end of what we sometimes call the “golden age,” the “glorious thirty” years in the immediate aftermath of the second World War."

This calls to mind Noah Smith's observation that "something big" happened  early in the 1970's. Smith doesn't know what.

Professor Galbraith has some ideas.

"The first of the three deep sources is, I think, the rising real cost of the resources that we use, of energy and of everything that we use energy for. This was a problem that emerged in the 1970s and was then submerged again; it was deferred by new discoveries, by the geopolitical situation, and by the financial power of the western countries, which because of the debt crisis in much of the rest of the world had the effect of suppressing demand for these core resources. But this is a problems that can no longer be avoided or deferred. The cost of energy is roughly twice of what it was a decade ago and the future is far more uncertain. Both of these factors, cost and uncertainty, place a squeeze on the surplus or profitability in regions, continents, and countries that are importers of these resources. And as we confront, as we must, the problem of climate change and as we begin, as we must, to pay the price of climate change this problem is going to become more difficult. That’s just an economic reality that we have to cope with as we face the imperative before us."

"The second great underlying issue ....is technical change, the particular character of which in our time is quite different from ... before. If you take the digital revolution together with globalization, the ease of transnational manufacturing and ... the outsourcing of services, we ... live in an era where technology ... supplants workers. ...[T]he computer and ... associated technologies ... are now doing to the office worker what a century ago the internal combustion engine did to the horse."

"And the third great source of our problem is ideological. It is the neo-liberal idea that has given us deregulation and de-supervision; that has given us the notion that markets can function on their own without breaking down or blowing up. It is this notion as applied especially to finance. This is the great illusion of the last generation, and it fostered a form of economic growth that was intrinsically unstable and unsustainable. Why? ... [I]t was based on declining standards for loans and ... lax accounting standards, it was based upon financial fraud, on the most massive wave of financial fraud that the world has ever seen.... It was known to be such to the lenders at the time. This was true of housing loans in the United States made by the tens of millions that were known to the lenders as “liar’s loans,” as “ninja loans,” no income, no job, no assets; as “neutron loans” destined to explode leaving the building intact but destroying the people. This was known at the time. These were loans that had to be refinanced or they would default.

"It was also true of loans to the public sector, for example Greece....The fact that Greece had a weak public sector and a weak tax system was not a state secret before the crisis...." 

"Rising inequality is often linked to these phenomena. But I think we should be clear about what the linkage is. It is not the case that inequality rose and people compensated for it by borrowing more so they could have a higher standard of consumption. This is not what happened. It certainly did not happen in the United States. What happened was, is that the lenders went out to find new markets often fostering fraudulent loans on low-information borrowers, poor borrowers, inner city home owners, for example, forcing those loans to be refinanced so that the recipient only saw a fraction of the debt with which they were ultimately saddled. And the inequality arose from the booking of fees on those loans. This is how bankers get rich. They make their money in this way. And you can see this in their tax statements and you can see it in the geographical distribution of income gains in the United States."

 Professor Galbraith goes into more detail. You will find it rewarding to read the entire presentation.

You may not find it reassuring.

Why Wasn't The Higgs Boson Discovered By America?

A serious/humorous take on the issue by New York Times columnist Gail Collins in today's on-line issue here. Worth reading.

Euro Zone Update

Sigh of relief in some quarters. Greek voters support New Democracy Party that supports staying in the Euro Zone.

But ND didn't win a majority of seats and will have to form a coalition. How will they do that? Germany remains unbending, insisting on austerity rather than economic expansion.

My headline: "Germany remains bent on destroying Euro."

In Extremis: Greece and Germany

In the ancient past (when I was learning the nautical rules of the road) we were taught that certain ships had the "right of way" when there was risk of collision while other ships were "burdened."

That terminology is no longer used, but the principal is much the same.

How do you know if there is risk of collision? If the other ship is CBDR - that is, on a constant bearing and decreasing range.

It was the duty of the ship having the right of way to maintain course and speed. It was the duty of the burdened vessel to maneuver to avoid collision.

What if both ships insist that they have the right of way and maintain course and speed? At some point, after sounding warning blasts on the ship's whistle, the ships become so close to each other that the only way to avoid collision is for both ships to act.

That situation was known as being "in extremis."

Greece and the European Central Bank have been on a collision course and now are in extremis. At least if the object is to keep Greece in the Eurozone, both vessels must put the helm over and take up a new course.

But no one is at the helm in Greece nor will anyone take the helm for at least a month. Nor is it apparent who is at the helm of the ECB, but it still looks like Germany has the conn.

Europe may be in for a humongous collision.

It's at least time to check out the life vests and life boats.

Time To Undo The Euro?

My wife and I were living in Europe a decade ago when the Euro was introduced. Travel within the Eurozone was much more convenient with a single currency instead of having to convert after crossing every border. But I wondered how the inevitable differences in rates of economic growth would be accommodated.

The answer is now clear: not.

From the outset, some economists warned that the system wouldn't work. Here is an account of how Europe's political leaders ignored the warnings and chose to listen to economists who were more optimistic about the Euro.

The fall of the Euro still seems likely to begin in Greece. Greece's May 6 elections resolved nothing. It has proven impossible to form a government, so new elections will be held next month in hopes a government can be formed this time.

Will Greece default on its debts? It seems likely. Will Greece then leave the Euro zone and return to the drachma? It's really hard to see another realistic possibility.

Will such an event force the European Central Bank and, especially Germany, to rethink its policies of austerity?

Stay tuned.