The realist position is equally contradictory. It assumes that the national interest of a twenty-first-century empire is as obvious as that of a small eighteenth-century republic clinging to the eastern seaboard of North America. Small, weak nations have clear-cut definitions of the national interest—which is primarily to survive with as much safety and prosperity as possible. But for a country as safe and prosperous as the United States—and with an unprecedented imperial reach—the definition of the national interest is much more complicated. The realist theory assumes that there is less room for choice in the near term than there is, and that the danger is always equally great. The concept of realism cannot be argued with as an abstract proposition—who wants to be unrealistic? Coming up with a precise definition of what reality consists of is a much more complex matter. In the sixteenth century, Machiavelli wrote, “The main foundations of every state, new states as well as ancient or composite ones, are good laws and good arms. You cannot have good laws without good arms, and where there are good arms, good laws inevitably follow.” This is a better definition of realism than the realists have given us.
I believe that the debate between realists and idealists is in fact a naive reading of the world that has held too much sway in recent decades. Ideals and reality are different sides of the same thing: power. Power as an end in itself is a monstrosity that does not achieve anything lasting and will inevitably deform the American regime. Ideals without power are simply words—they can come alive only when reinforced by the capacity to act. Reality is understanding how to wield power, but by itself it doesn’t guide you toward the ends to which your power should be put. Realism devoid of an understanding of the ends of power is frequently another word for thugishness, which is ultimately unrealistic. Similarly, idealism is frequently another word for self-righteousness, a disease that can be corrected only by a profound understanding of power in its complete sense, while realism uncoupled from principle is frequently incompetence masquerading as tough-mindedness. Realism and idealism are not alternatives but necessary complements. Neither can serve as a principle for foreign policy by itself.
Idealism and realism resolve themselves into contests of power, and contests of power turn into war. To turn once again to Machiavelli: “War should be the only study of a prince. He should consider peace only as a breathing-time, which gives him leisure to contrive, and furnishes an ability to execute, military plans.”
In the twentieth century, the United States was engaged in war 17 percent of the time—and these were not minor interventions but major wars, involving hundreds of thousands of men. In the twenty-first century, we have been engaged in war almost 100 percent of the time. The founders made the president commander in chief for a reason: they had read Machiavelli carefully and they knew that, as he wrote, “there is no avoiding war; it can only be postponed to the advantage of others.”
The greatest virtue a president can have is to understand power. Presidents are not philosophers, and the exercise of power is an applied, not an abstract, art. Trying to be virtuous will bring not only the president to grief but the country as well. During war, understanding power means that crushing the enemy quickly and thoroughly is kinder than either extending the war through scruples or losing the war through sentimentality. This is why conventional virtue, the virtue of what we might call the good person, is unacceptable in a president. Again as Machiavelli put it, “The fact is that a man who wants to act virtuously in every way necessarily comes to grief among so many who are not virtuous.”
Machiavelli introduces a new definition of virtue, which instead of personal goodness consists of being cunning. For princes, virtue is the ability to overcome fortune. The world is what it is, and as such, it is unpredictable and fickle, and the prince must use his powers to overcome the surprises the world will present. His task is to protect the republic from a world full of people who are not virtuous in any conventional sense.
Presidents may run for office on ideological platforms and promised policies, but their presidency is actually defined by the encounter between fortune and virtue, between the improbable and the unexpected—the thing that neither their ideology nor their proposals prepared them for—and their response. The president’s job is to anticipate what will happen, minimize the unpredictability, then respond to the unexpected with cunning and power.
From Machiavelli’s point of view, ideology is trivial and character is everything. The president’s virtue, his insight, his quickness of mind, his cunning, his ruthlessness, and his understanding of the consequences are what matters. Ultimately, his legacy will be determined by his instincts, which in turn reflect his character.
The great presidents never forget the principles of the republic and seek to preserve and enhance them—in the long run—without undermining the needs of the moment. Bad presidents simply do what is expedient, heedless of principles. But the worst presidents are those who adhere to principles regardless of what the fortunes of the moment demand.
The United States cannot make its way in the world by shunning nations with different values and regimes that are brutal, all the while carrying out exclusively noble actions. The pursuit of moral ends requires a willingness to sup with the devil.
I began this chapter by speaking of the tension between the American republic and empire in the decade ahead. Whatever moral scruples we might have about being an empire, this is the role history has cast us in. If the danger in becoming an empire is that we lose the republic, certainly the realist view of foreign policy would take us there, if not intentionally, then simply through indifference to moral issues. At the same time, idealists would bring down the republic by endangering the nation, not through intent but through hostility or indifference to power. Of course, the fall of the republic won’t occur in the next decade. But the decisions made during the next decade will profoundly affect the long-term outcome.
Over the next decade, the president won’t have the luxury of ignoring either ideals or reality. Instead he must choose the uncomfortable synthesis of the two that Machiavelli recommended. The president must focus not only on the accumulation and use of power but on its limits. A good regime backed by power and leaders who understand the virtue both of the regime and of power is what is required. This is not a neat ideological package that explains and reduces everything to simplistic formulas. Rather, it is an existential stance toward politics that affirms moral truths in politics without becoming their simpleminded prisoner, and that uses power without worshipping it.
In preventing the unintended empire from destroying the republic, the critical factor will not be the balance of power among the branches of government, but rather a president who is committed to that constitutional balance, yet willing to wield power in his own right. In order to do this, the president must grasp the insufficiency of both the idealist and the realist positions. The idealists, whether of the neoconservative or the liberal flavor, don’t understand that it is necessary to master the nature of power in order to act according to moral principles. The realists don’t understand the futility of power without a moral core.
Machiavelli writes that “the one who adapts his policy to the times prospers, and likewise that the one whose policy clashes with the demands of the times does not.” Morality in foreign policy might be eternal, but it must also be applied to the times. Applying it to the next decade will be particularly difficult, as the next decade poses the challenge of the unintended empire.
CHAPTER 3
THE FINANCIAL CRISIS
AND THE RESURGENT STATE
Two global events frame the next decade: President Bush’s response to September 11 and the financial panic of 2008. Understanding what happened and why in both cases amplifies our sense of what it means to be an empire and what its price is, especially when we consider how these interrelated events, which began as domestic American concerns, came to engulf the entire world. Let’s begin with the financial crisis.
Every business cycle ends in a c
rash, and one sector usually leads the way. The Clinton boom ended in 2000, when the dot-coms crashed; the Reagan boom of the 1980s ended in spectacular fashion with the collapse of the savings-and-loans. From this perspective, there was nothing at all extraordinary about what happened in 2008.
The reason for such booms and busts is fairly simple. As the economy grows, it generates money, more than the economy can readily consume. When there is a surplus of money chasing assets such as homes, stocks, or bonds, prices rise and interest rates fall. Eventually prices reach irrational levels, and then they collapse. Money becomes scarce, and inefficient businesses are forced to shut down. Efficient businesses survive, and the cycle starts again. This has been repeated over and over since modern capitalism arose.
Sometimes the state interferes with this cycle by keeping money cheap in order to avoid the crash and the recession that inevitably follows. Money is, after all, an artifice invented by the state. The Federal Reserve Bank can print as much money as it wants, and it can purchase government debt with it. That’s what the Federal Reserve did in the aftermath of September 11. The Bush administration didn’t want to raise taxes to pay for the war on terror, and the Fed cooperated by financing the war by, essentially, lending money to the government. The result was that no one felt the war’s economic impact—at least, not right away.
Bush’s reasons were derived both from geopolitics and from partisan domestic politics. He was at war with the jihadists, and he did not want to raise taxes to pay for his military interventions. Instead, he wanted the total revenue from taxes to rise by way of a stimulated economy. The theory was that the combination of military spending, tax cuts, and low interest rates would allow the economy to surge, increasing tax revenues enough to pay for the war. If this supply-side gambit didn’t work, Bush reasoned, he would still have the benefit of not undermining political support through tax hikes before the 2004 elections. He also assumed that he could deal with the economic imbalances after the election, as the war wound down. His problem was that the war didn’t wind down, and he grossly underestimated how long and intense it would become. As a result, he and the Fed never got around to cooling off the economy, and the war and this economic policy continue to define his presidency.
Another element that led to the collapse of 2008 was the cheap money pouring into one particular segment of the economy, the residential housing market. In part this was an economic calculation. Housing prices tend to rise over time, which gives real estate the appearance of a conservative investment. Government programs also encouraged individuals to buy homes, and during this era that encouragement extended to a wider segment of the population than ever before. The perception of safety, combined with government policy, brought extraordinary amounts of money into the market, along with speculators and millions of low-income buyers who in ordinary times never would have qualified for the mortgages they took on.
U.S. Home Prices
The price of homes had risen for the past generation, but as this chart above shows, that story of steady growth is a bit deceptive. If you adjust home prices for inflation, they have fluctuated in a narrow band between 1970 and 2000. But mortgages don’t rise with inflation. So if you borrowed $20,000 to buy a $25,000 house in 1970, by 2000 that house would be worth around $125,000 and you’d have paid off your mortgage. But $125,000 was not much more than $25,000 in real terms. You felt richer because the numbers were higher and because you had paid off your debt, but the truth was that home ownership was not a great way to create actual gains. On the other hand, the record showed that you were not likely to lose money either, and that gave lenders confidence. If worse came to worst, they could always seize the house and sell it, thus getting their money back.
With cheap money enabling more people to buy houses, demand rose, which meant that housing prices took off like a rocket in 2001, then accelerated further after 2004. Lenders kept looking for more and more borrowers for their cheap money, which meant lending to people who were less and less likely to repay these now “subprime” loans. The climax came with the invention of the five-year variable-rate mortgage, which enabled people to buy houses for monthly payments that were frequently lower than rent on an apartment. These rates exploded after five years, but if a buyer could not meet the new payments and lost the house, at least he would have enjoyed some good years and was simply back where he started. If housing prices stayed steady, he could refinance, so all in all, he didn’t seem to be taking much of a risk.
Nor did the lenders appear to be risking much, especially given that they made their money on closing costs and other transaction fees, then sold the mortgages (and passed along the risk) to secondary investors in what became known as bundles. In packaging these loans for the secondary market, lenders emphasized the lifetime income stream, which made the subprime loans appear to be the perfect conservative investment.
Everyone was making money and no one could get hurt—it was the oldest story in the book. And most people didn’t care or didn’t want to believe that the bubble could burst.
However, reality began to intrude. New homeowners who never would have qualified for an ordinary loan in ordinary times began to default, and as properties came on the market from forced sale or foreclosure, prices that had been counted on to keep going up began to fall. During the run-up, small investors had bought multiple houses, fixed them up a bit, and resold them for a quick profit. But as boom turned to bust and speculators were unable to “flip” the houses at profit, they rushed to unload them at whatever price they could, which drove prices further down. By 2007, the mild decline that had begun in 2005 became a rout. In truth, all that happened was that prices returned to the highest level within their prior historic range; the froth was disappearing, but the basic value was still there. Nonetheless, many of the people who had put money into these houses were devastated.
With the collapse of the housing market, the mortgages that had been bundled and sold to investors no longer had a clear value. Because these investors had believed that prices would never fall, they had never looked at what was actually inside their bundles. The more aggressive investors in bundled mortgages, investment banks such as Bear Stearns and Lehman Brothers, had leveraged their positions many times over, and by the time the loan payments were due, the value of the underlying assets was so murky that no one would buy them, or even refinance the loans. Unable to cover their bets, these big players went bankrupt. And since many of the people who had bought these supposedly conservative investments, including the commercial paper issued by the banks, were in other countries, the entire global system went down.
The story of the collapse often focuses on the United States, but the damage was truly worldwide. Residents of eastern Europe—Poland, Hungary, Romania, and other countries—who in normal times had never been able to afford a house had bought in. Austrian and Italian banks in particular, backed with European and Arab money, had wanted to provide mortgages, but interest rates in eastern Europe were high. So the banks offered these new, eager, and unsophisticated buyers loans at much lower rates, only denominated in euros, Swiss francs, and even yen.
The problem was that these homeowners weren’t paid in these currencies but in zlotys or forints. A Polish homeowner essentially paid for his mortgage by first buying yen, then paying the bank. The fewer yen a zloty bought, the more zlotys the homeowner had to spend and the more expensive his monthly payment became. If these zlotys rose against the yen or the Swiss franc, there were no problems. But if the zlotys fell against the yen or the Swiss franc, there were huge problems. Every month, more and more eastern Europeans were buying Euros and other currencies. As the financial crisis deepened, there was a flight to safety; and eastern European currencies plunged. Homeowners were squeezed and broken.
Major expansions always end in financial irrationality, and this irrationality was global. If the Americans went to the limit with subprime mortgages, the Europeans went a step further by enticing homeowners to gamble on global curre
ncy markets.
There is a constant refrain that we have not seen such a catastrophic economic event since the Great Depression. That is triply untrue, because similar collapses have happened three other times since World War II. This is a crucial fact in understanding the next decade, because if the financial crisis could be compared only to the Great Depression, then my argument about American power might be difficult to make. But if this kind of crisis has been relatively common since World War II, then its significance declines, and it is more difficult to argue that the 2008 panic represents a huge blow to the United States.
The fact is that such events are common. In the 1970s, for instance, there was a significant threat to the municipal bond market. Bonds issued by states and local governments are especially attractive because they are not subject to federal tax. Such bonds are also considered all but risk-free, the assumption being that government entities will never default on their debts so long as they have the power to tax. In the 1970s, however, New York City couldn’t meet debt payments and couldn’t or wouldn’t raise taxes. If New York defaulted, the entire financing system for state and local government would devolve into chaos, so the federal government bailed out New York, making it clear that Washington was prepared to guarantee the market.
The Next Decade Page 5