Time Magazine - The Diagnosis

If you haven't yet read Andy Serwer's excellent article in Time Magazine, I recommend that you buy a copy & read it. It's a thought provoking piece for reflection upon.

Below I reproduce part of the article - which highlights our collective responsibility for the troubles that have arisen in this decade. The question I pose is - how should Congress and Parliament respond? With important elections coming in 2010 this question needs answering. I'd be happy to share your comments through this blog - either use the comments link or email to me.

"In large part, we have ourselves to blame. If you look at the underlying causes of some of the most troubling developments of the decade, you can see some striking common denominators. The raft of financial problems, our war with radical Islam, the collapse of GM and much of our domestic auto industry and even the devastation brought about by Katrina all came about at least in part or were greatly exacerbated by:

• Neglect. Our inward-looking culture didn't heed the warning signs from around the world — and from within our own country — that Islamic terrorism was heading for our shores.

• Greed. Our absolute faith in the markets, fed by Wall Street, combined with the declawing of our regulators to undermine our financial system.

• Self-interest. The auto industry disintegrated while management and labor tangoed from one bad contract to the next, ignoring their customers and their competition, aided and abetted by their respective politicians.

• Deferral of responsibility. Our power grid needs an upgrade and our bridges are falling down because we have not mustered the political and popular willpower to fix them. New Orleans drowned because authorities failed to act before Katrina busted the inadequate levees.

It was almost as if we as a nation said in previous decades, "Why do today what we can put off until the first decade of the 21st century?" But we didn't rise to those challenges. What we just lived through, then, was the chickens coming home to roost.

Take the vexing and costly war we are waging against al-Qaeda and its ilk. This is a conflict that was barely on the radar in the 1990s — which is exactly the problem. By most accounts, Osama bin Laden founded his organization sometime between 1988 and 1990. The U.S., in part, helped create this loathsome band itself by funding the mujahedin, who fought the Soviets in Afghanistan in the 1980s and provided much of the training for bin Laden's foot soldiers. But our friendly freedom fighters turned into foes. In 1992 al-Qaeda bombed a hotel in Yemen, hoping to kill American Marines bound for Somalia. Then came the first World Trade Center bombing, in 1993. Three years later, the Khobar Towers bombing in Saudi Arabia killed 19 U.S. Air Force personnel. In 1996 and 1998, bin Laden issued fatwas calling for Muslims to rise up and kill Americans. Making good on bin Laden's word, al-Qaeda blew up U.S. embassies in Kenya and Tanzania in synchronized attacks on Aug. 7, 1998, killing almost 300, including 12 Americans. In October 2000, terrorists struck again, bombing the destroyer U.S.S. Cole in Yemen and killing 17 service members.

After all that, should 9/11 have been a surprise? There were those who saw what was coming, most notably FBI agent John O'Neill, who perished during the attack on the World Trade Center and whose story is eloquently told in Lawrence Wright's masterly book The Looming Tower: Al-Qaeda and the Road to 9/11. Time and time again O'Neill warned his superiors that al-Qaeda was readying a big strike, only to be marginalized, causing him to leave the bureau. Another prescient voice was that of Harvard professor Samuel Huntington, whose book The Clash of Civilizations and the Remaking of World Order suggested that culture and religion would be the sources of conflict in the post–Cold War world. Huntington didn't limit this to war between the West and Islam, though he did single out "Islamic civilization" as potentially having significant friction points with the West because of its population explosion and the rise of religious fundamentalism.

Our economic narcissism was certainly the culprit in the devastation wrought by financial markets, which have subjected us to an increasingly frequent series of crashes, frauds and recessions. To a great degree, this was brought about by a lethal combination of irresponsible deregulation and accommodating monetary policies instituted by the Federal Reserve. Bankers and financial engineers had an unsupervised free-market free-for-all just as the increased complexity of financial products — e.g., derivatives — screamed out for greater regulation or at least supervision. Enron, for instance, was a bastard child of a deregulated utilities industry and a mind-bending financial alchemy.

Historian H.W. Brands of the University of Texas points to the demise of the Glass-Steagall Act in 1999 as an unfortunate tipping point of deregulation. Glass-Steagall, passed in 1933, separated investment banking and plain-vanilla banking, which some experts argued made markets safer. (Certain restrictions of Glass-Steagall were repealed to allow the merger of Citicorp and Travelers. Let's just say that didn't end well.) "That was the single moment when the seeds for the bad stuff were planted," says Brands. "There was a belief that technology, the Internet and financial instruments had changed things, and the ones selling this idea and these instruments were making a lot of money."

Another proximate cause were new loosey-goosey borrowing rules (if they can be called that) that allowed the likes of Bear Stearns and Lehman to pile $30 of debt onto each $1 of capital. The chief executives of these firms argued vociferously for the right to greater leverage and vociferously against regulating derivatives because, they claimed, unfettered markets were more efficient. Yes, it was the unfettered use of leverage and derivatives that destroyed their companies and wreaked havoc on the rest of us.

Companies go belly-up all the time, but in this decade there were an inordinate number of bankruptcies. The creative destruction of the Internet had a part in this. While the Web opened up new worlds and created thousands of jobs at Amazon, Google and the like, it displaced workers at travel and government agencies, at newspapers and magazines and at stores like Circuit City and Tower Records — traditional distribution points for services, information and goods. Economists call that disintermediation.

But when we're talking about auto giants GM and Chrysler, both of which imploded after years of complicity and ineptitude by GM management and the United Auto Workers (UAW), it's more like disintegration. The UAW organized both GM and Chrysler in early 1937 — Henry Ford famously held out four more years. For decades, particularly under the leadership of Walter Reuther, who headed the union from 1946 until his death in 1970, it was able to win concessions from the automakers, bringing its members into the middle class. As long as demand for autos grew in the post–WW II halcyon days, relations between the unions and the automakers were basically quiescent.

And therein lies the problem. For years the UAW and the Big Three — now dwindled to the Detroit Three — operated an unholy alliance. Management would pile on wage hikes and perks, and in return (wink, wink) the union would keep the peace, i.e., rule out strikes, even though both sides must have realized that the amount being paid to workers was unsustainable, particularly if the industry hit any downdrafts — which happened with increasing frequency starting with the 1973 OPEC oil embargo.

Just as embarrassing was the colossal ineptitude of the big car companies: Ugly, low-quality cars with shameful gas mileage. Layers of redundant management that relied on amateurish financial controls. Insular thinking reinforced by decades of outsize market share. It was as if Detroit had drawn a road map for Toyota and Honda. And the Japanese drove right in, decimating the U.S. companies. In 1979, GM's U.S. employment peaked at 618,365. Today it's at 75,000 and falling fast. GM's U.S. market share, once about 50%, has fallen to about 20%. True, the quality and efficiency of American cars have improved dramatically, but it may be too late.

And what about the Hurricane Katrina debacle? An act of God, right? Not really. When the storm raced toward New Orleans in late August 2005, scientists at the National Oceanic and Atmospheric Administration feared the worst. For years they had been warning the Army Corps of Engineers, which oversaw the city's 350 miles of levees, that its system was inadequate. The scientists wanted the Corps to revise the Standard Project Hurricane, a model that determines how extensive the levees should be. For instance, the Corps did not consider the tendency of soil to sink over time, and it excluded the possibility of a highly powerful storm hitting the city because that was unlikely, which violates sophisticated principles of statistics and just plain common sense. On Nov. 18, a federal judge ruled that the Corps was directly responsible for flooding in St. Bernard Parish and the Lower Ninth Ward. "The Corps' lassitude and failure to fulfill its duties resulted in a catastrophic loss of human life and property in unprecedented proportions," the judge said. The government is expected to appeal.

Besides the Army Corps, mismanagement by the local levee boards contributed to substandard levees. Katrina wasn't even as bad a storm as had been feared, but the levees weren't as good as had been hoped. Some fact-based decision-making could have saved hundreds of lives and billions of dollars. Here, too, years of complacency were the rule, not the exception. The price was paid this decade."