The financial crisis was just a rehearsal

A global Minsky moment

I’m not the only one to draw comparisons between last week’s Munich events and those that took place in the same city in 1938. Whether it was the British betrayal of Czechoslovakia, or the subsequent carving up of Poland, plenty of us think that history is at least rhyming, if not repeating.

Some historians also compare current Russia-US ‘peace negotiations’ with the 1945 great power conference at Yalta that divided up Eastern Europe and Germany. There are also similarities with the brutal way colonial rule was imposed on the Belgian Congo after 1908. Mineral and other natural resource exploitation in the Congo parallels the ‘offer’ America has made Ukraine for its rare earths and other commodities. The U.S. obviously thought it had made Zelensky an offer for his minerals that he couldn’t refuse and was infuriated when he had the temerity to decline.

Wars either end in surrender or negotiation. Sometimes both. Since the first day of Russia’s invasion, military types have said that Ukraine cannot inflict a comprehensive defeat on Putin. Hence, concessions - territorial ones - will have to be made if the war is to end. A long time ago even some Americans of this ‘realpolitik’ persuasion stressed that any decisions over territory - and other peace terms - are a matter for Ukrainians. Now, all of a sudden, Ukraine has no say.

Of course, the U.S. has every right to send as much or as little aid to Ukraine as it likes. Similarly, the security umbrella that it extends over Europe (and Japan and South Korea) is a matter of choice for Americans and their tax dollars.

Of course, the US has the right to pull out of any or all agreements it has made. It doesn’t have to speak the language of diplomacy and can be as rude as it likes.

Of course, the US has the right to pick any side it likes in a war. This week America chose Russia, blamed Ukraine for Russia’s invasion and called Zelensky a dictator. This from Hal Brands, distinguished professor at Johns Hopkins:

…make no mistake: The US is now wielding the prospect of coercive, even violent, expansion to extract concessions from lesser powers. That’s unlikely to lead anywhere good.

It took enormous, enduring efforts to pull the international community up from a place where the weak were regularly devoured by the strong. Old patterns of predation could reassert themselves if the world’s leading power rejects the world’s most vital norm.

Enough ink has been spilled on trying to figure out why the MAGA cult is moving so fast and breaking so many things. The salient fact is that they are doing precisely that. And there will be consequences - many of which are, for once, foreseeable.

From the great unsent resignation letter of the man in charge of the U.S. military (admittedly from a different era). It’s addressed to Trump, of course.

…it is my deeply held belief that you’re ruining the international order, and causing significant damage to our country overseas, that was fought for so hard by the Greatest Generation that they instituted in 1945. Between 1914 and 1945, 150 million people were slaughtered in the conduct of war. They were slaughtered because of tyrannies and dictatorships. That generation, like every generation, has fought against that, has fought against fascism, has fought against Nazism, has fought against extremism. It’s now obvious to me that you don’t understand that world order. You don’t understand what the war was all about. In fact, you subscribe to many of the principles that we fought against. And I cannot be a party to that. It is with deep regret that I hereby submit my letter of resignation.

One trap some analysts fall into is to examine a new policy (or tweet) and examine it on its own merits - without reference to everything else that has been said or done. Identify an obvious wrong and acknowledge that Trump is trying to put it right. But with no heed paid either to the method of correction or the bigger picture. And nobody asks whether the cure could be worse than the disease. Or whether there might be a better cure.

For example, telling Europe to spend more on defending itself looks, on its own, an eminently reasonable point of view. But if we start to think about everything else Musk-Trump-Vance say in relation to Europe, it begins to look like an irrational campaign being conducted by an enemy. Words really do matter: there is a reason why diplomacy has its own language.

MAGA contempt for all things European even prompts questions about American willingness to sell arms to erstwhile friends. This from veteran political analyst Philip Stevens of the FT:

The US has always wrestled with the rationale for its foreign engagements - be they aid programmes or wars. The original containment strategy devised to cope with the Russian threat was authored during the post-war period by George Kennan. He took an avowedly transactional approach - do only what is good for the US - but also had a nuanced view of doing good for its own sake. Fans and opponents of the US take each side of the debate: America is the shining city on the hill or the neo-imperialist bully of Vietnam, Iraq and Afghan infamy. Take your pick.

The debate is over. The US is no longer interested in agreements or alliances. Only bullying transactions: the attempt to grab Ukraine’s minerals, absorb Canada into the USA, take Panama’s canal and avail itself of Greenland’s strategic location. Hal Brands again:

The liberal order, it is often said, arose after World War II. That’s an oddly passive way of putting things. The US and its allies painstakingly built that order, with its central goal to stymie the sorts of conquest that had been so prevalent in the past.

It’s easy to see why this seemed necessary. The world had just experienced the two worst wars in history, caused by aggressive powers that had sought to steal large swaths of the globe. That aggression had involved ghastly atrocities, such as the Holocaust and the murder and enslavement of civilians in parts of Asia occupied by Japan.

Even as World War II ended, another totalitarian state, the Soviet Union, was poised to push deep into Europe, Asia and the Middle East. Having witnessed how successful aggression could snowball — and eventually endanger even faraway democracies — American officials resolved to prevent rampant conquest from causing another avalanche of chaos.

That word: chaos. If MAGA stands for anything, it is chaos. It is revealed to be one of their core beliefs. Snub the elected leader of Germany but meet a leading neo-Nazi. Interfere in German elections. Fire tens of thousands of civil servants at random. Become weirdly infatuated with Vladimir Putin. Attempt extortion of Ukraine’s mineral wealth. Chaos for the sake of chaos. Mao and Trotsky would chuckle.

Chaos is assumed to be good for America. Whether it is good or bad for anybody else is irrelevant. Or perhaps not. MAGA cultists have a limited world view that takes a zero-sum perspective. So anything bad for the world is probably a necessary condition for something to be good for America. Probably guarantees it. That something could be bad for the world and bad for the USA is ruled out by assumption. I suspect that this is the fatal flaw.

If there is a thread that helps tie all this together it is an overarching ignorance of history. A total lack of awareness of all those efforts by long dead leaders to prevent wars. A nodding acquaintance with any period, short or long, of world history would teach that the thing humanity does most often is go to war. Smashing up the post-war architecture might give you a thrill (where else could billionaires get their kicks?) but does have a downside.

One of the key drivers of the financial crisis was the disappearance of economic history from the university economics curriculum. Too few policymakers had any knowledge about previous crises and their causes. Pair that ignorance with a ‘Minsky moment’ and trouble is guaranteed.

Hyman Minsky warned us long ago that prolonged periods of financial stability sow the seeds of their own demise. Financial types start to believe that stability will last forever. They build structures upon that foundational belief. One such was the widespread view that house prices could never go down. Once they did fall, the entire financial world came crashing down.

The post-WW2 peace, so painfully constructed, has convinced many people that it will last forever. The MAGA cultists who blow everything up for the sake of chaos laugh at the idea that peace is fragile and we tamper with it at our peril. The world is heading for another kind of Minsky moment. The great financial crisis was just a rehearsal.