When Economics Meets Politics

When Economics Meets Politics
By THOMAS L. FRIEDMAN
Copyright by The New York Times
Published: February 2, 2010
http://www.nytimes.com/2010/02/03/opinion/03friedman.html?th&emc=th


Doha, Qatar

One of the few pleasant surprises of 2009 was that the world’s biggest economies were able to concentrate on healing themselves without any major wars or world-shaking political or geopolitical disruptions. What are the odds that 2010 will be so benign? I’d say quite low. No question, the world’s major economies badly need 2010 to be another quiet year politically and geopolitically, but that will require, at a minimum, that three major struggles — the banks vs. President Obama, China vs. Google & friends, and the world vs. Iran — can be defused with win-win compromises rather than win-lose confrontations.

Let’s look at all three. Banks are like the heart that pumps blood — credit — to our country’s corporate muscles. If that heart is malfunctioning, any recovery will be anemic. But heart surgery is a very complex thing. You wouldn’t want yours done by a plumber or a politician. After all, a year ago there was a great clamor to nationalize some major banks; that would not have been a good idea. Moreover, our financial crisis was the result of a broad national breakdown in ethics — from borrowers to lenders to rating agencies to lawmakers. Don’t think for a second that bank reform alone is a cure-all.

We need a new banking regulatory regime that reduces recklessness without reducing risk-taking, which is the key to capitalism. It’s complicated. If the leading banks had any brains, they would take the initiative and offer their own ideas. Surely, they can’t argue everything is just fine given the number of bank failures. Let the administration and other leading central banks also offer their ideas, and then let’s try to forge something smart.

What the public has seen instead, though, are clueless bankers giving themselves bonuses after being rescued by taxpayers, while instructing the lobbyists and lawmakers they own to resist any serious reforms. At the same time, we’ve had President Obama introducing his bank proposal, after his party’s Massachusetts defeat, in a way that seemed less intended to promote an intelligent discussion and more like an effort to use bank-bashing to boost sagging poll ratings. The administration didn’t even bother to prebrief other central bankers about its ideas.

A senior British Treasury official told me at a background briefing in Davos: “Even America isn’t big enough to solve this problem on its own. ... This is a global problem. ... Be sure you understand the problem before you fix it.”

Banking reform has to be done carefully so that we end up with stronger banks lending more money. If the bankers want to be pigheaded and turn this into a war with the president, or the president wants to use bank-bashing to get his mojo back, there are a few things I can absolutely guarantee: more uncertainty, less lending, a slower recovery and fewer new jobs.

While the struggle between China and Google appears, on the surface, to be about Internet freedom, beneath the surface is a much deeper problem. As this newspaper reported last week, 34 American corporations have recently been targets of hacking attacks traceable to China. The C.E.O. of one of the technology companies that was hit, who asked not to be identified because he is still debating whether to keep doing business in China, said that in his case the attacks involved attempts to vacuum up source codes, designs, business plans, and anything else they could get their hands on. This industrial espionage emanating from China, the C.E.O. told me, “was the worst we have seen in 25 years.” As one U.S. official described it: “The penetration was very extensive and deeply troubling.”

Memo to China: You are playing with fire. Sure, the U.S. also has its hackers, but industrial espionage on this scale is not coming out of the U.S. If this continues, China will see more than Google pull up stakes. And how many U.S. companies in the future will ever want to buy Chinese-made software or computer systems, which might only make it easier for Beijing to penetrate their businesses? This hacking story is huge and brewing. If it explodes, at a time of rising tensions over U.S. arms sales to Taiwan, fasten your seat belts.

Finally, the U.S. and its allies are about to ratchet up pressure on Iran by unveiling a new economic-sanctions resolution at the U.N. aimed at Iran’s Revolutionary Guards Corps and the vast network of financial institutions it controls inside Iran. If the U.N. will not act, the U.S. and key allies intend to impose the sanctions on their own. The Revolutionary Guards have become the regime’s primary tool for suppressing the popular uprising there and for protecting Iran’s nuclear program. If these sanctions prove incapable of getting Iran to halt its suspected nuclear weapons program, the chances for a U.S. or Israeli military strike against Iran will grow very high before the end of this year. Here in the Persian Gulf, apprehension is off the charts.

The economics of recovery were always hard, but in 2010 politics and geopolitics could make them even harder. Pray that cooler heads prevail.