Moral Hazard

And now, a glimpse at what ties together the mortgage crisis in the United States and Israeli foreign policy.

Moral hazard.  It’s an insurance term.  It’s also a fundamental concept in political philosophy. 
Moral hazard exists when people discount the future. People naturally tend to do this. Yet in the long run there seems nothing as certain in this world than that moral hazard, eventually, comes home to roost.
It means what happens when you let someone get off without paying in full for the risks he is exposed to, such as offering a cut rate on health insurance or a pension plan.  Insurance companies may be tempted to do this in order to get a contract now, and worry about the costs later.  Eventually, moral hazard ends in tears:  the insurance company goes bankrupt, or the pensioner winds up with too little or nothing for his retirement, or both.

Moral hazard exists when people discount the future.  People naturally tend to do this.  What happens in twenty years seems a long time away, especially when we’re talking about risk, the chance of something happening rather than the certainty.  Yet in the long run there seems nothing as certain in this world than that moral hazard, eventually, comes home to roost.

The world’s greatest producers of moral hazard are governments.  Governments consist of people who, in theory, control a big chunk of everybody else’s money, lives, welfare.  The people who make up governments are tempted to use those resources to achieve what they passionately desire today.

Democratic governments desire to be reelected.  They are tempted to promise the people things now, leaving the payment to the future, when they will no longer be in office or even alive.  Non-democratic governments aren’t immune.  The Soviet Union wanted, more than anything else, enough military power to bully the West into submission, and they sacrificed everything to that.  The result was the biggest political and economic implosion in history.
The world’s greatest producers of moral hazard are governments.

The headlines these days are about moral hazard.  Americans have made a mess of their economy through neglecting moral hazard.  Thirty years ago the American government promised everyone cradle-to-grave, government-guaranteed welfare.  It couldn’t keep the promise.  Taxes went up, growth went down, and there weren’t enough resources to keep the promises. 

Then things changed for a while.  The Reagan Revolution came in and government stopped trying to be all things to all people.  Instead of the failures of government, the free market was going to be given its head.  Businessmen are entrepreneurial and good at creating wealth, so went the story.  They’re hardheaded and don’t believe that something can be had for nothing.

For a while this worked quite well.  But then it turns out that businessmen are pretty good at smelling out a sweet, government-guaranteed deal, especially if that is the quickest way to make a profit.  Businessmen love it when the government guarantees that their deals can’t fail.  When government does that, businessmen are as good at anyone else at throwing caution to the winds and taking on dodgy deals for the sake of immediate income.  The result is this week’s headlines:  Millions of people have taken on risks they cannot sustain, millions are in trouble and, yep, Uncle Sam has stepped in to take off the pressure.  With just whose money?
The true defense against moral hazard is not regulation. It’s an attitude of mind and soul, once called “prudence” or “character.”

The fact is that American civilization as a whole has spent the last twenty years taking on a monumental bad bet.  Americans don’t save.  They spend.  They take out loans on their houses to fund spending beyond their income.  And now the rest of the world looks upon the once-almighty dollar the way Americans used to look upon Mexican pesos.   If and when America gets out of this, Americans are going to have to live a lot less well, spend a lot less and save a lot more.  That will affect everybody, from Shanghai to Syracuse, who wants an American to buy something.

Moral hazard is not just about money.  There was once a leader who was very careful about public money—so obsessed by it, in fact, that it blinded him to every other danger.  So careful was Neville Chamberlain with pennies and pounds that when he went to Munich he found himself facing the biggest air force and army then in the world, with none of his own.  His tunnel vision turned out to be a rather poor investment for the British people, and for many others besides.

Need I spell out the implications of moral hazard for Israeli policy?

After every episode of catastrophe arising from moral hazard, people are careful for a while.  Regulators get tough with private interests and prevent them from taking a free ride.  For a decade, for a generation.  Then special interests get to work again:  They make or buy friends in government, the regulations get watered down, and we all get set up again.  And of course, there are no “regulations” or regulative authorities in foreign policy.
At its highest, prudence means cultivating a sense of responsibility for the future, for the world around you—a sense that its welfare is in your care.

The true defense against moral hazard is not regulation (though regulation can help).  It’s an attitude of mind and soul, once called “prudence” or “character.”  It means a disposition of the soul to be suspicious of momentary pleasures, to guard against them.  At its highest, it means cultivating a sense of responsibility for the future, for the world around you—a sense that its welfare is in your care.  It is not the same thing as simply being conservative, since prudence requires being alive to changes in the world around you, taking advantage of emerging opportunities and precautions against emerging risks.

The key to developing this kind of attitude on a society-wide basis appears to be religious belief and values, the sense that one is subordinate to a Creator, and responsible to Him for the welfare of His world, His people, and His soul—that is, the one He gave to you to guard and improve.  This attitude of prudence and responsibility seems to be what modern (and postmodern) civilization is set up to destroy.  Watch out, or it’ll take you—us—with it.

Beneath the Facade

Behind the facade of peace rhetoric, Israel's rulers are losing faith in their policies.  Their will to power is sure to suffer

Once again, Haaretz’ veteran political reporter, Yossi Verter, scored a scoop.  For a few hours on Friday, the newspaper’s Hebrew website sported the information that Shimon Peres no longer believes that peace with the Palestinians is possible.  Foolish me—I didn’t think to save the article to my hard disk or look for an English translation, but I did print it out.  It’s there on my desk, in black and white.
Abu Mazen has no legitimacy in Judaea and Samaria, Peres said, and no agreement made with him can last for more than a day.

Verter was invited to a dinner at Ehud Barak’s house on Saturday night.  Among the guests were Peres, the Jordanian ambassador and a prominent left-wing lawyer whose identity Verter is carefully keeping secret.  The lawyer said he believed it impossible to make peace with the Palestinians.  When the Jordanian ambassador protested vociferously, Peres backed up the unnamed attorney.  Abu Mazen has no legitimacy in Judaea and Samaria, Peres said, and no agreement made with him can last for more than a day.

Interestingly, the article appeared on Friday.  The dinner at which this conversation took place happened the preceding Saturday night.  It took Verter six days to convince his editors to run this piece of news.  .

When you think about it, it’s really no surprise that Shimon Peres has finally lost faith in his blood-drenched Oslo project.  Peres is a politician with a politician’s instincts.  His opinions are merely catching up with where the majority of the population has been for almost two years.  And his current opinion is no guarantee that he won’t suffer a relapse in the future.  Nonetheless it is significant that he finally admits what most other Israelis take for granted, and equally significant that he did so only in what he presumed, mistakenly, was a private context.
It took Yossi Verter of Haaretz six days to convince his editors to run this piece of news.

There are other important people who may be presumed to hold similar views.  Up to the Annapolis conference Ehud Barak made a point of snubbing Abu Mazen.  Only when Condoleeza Rice held his feet to the fire did he agree to go through the motions of meeting and consulting with him.  Does Ehud Olmert really believe that peace with the Palestinian Authority is possible this year, or any year?  Well, the fact is that buildings have been creeping up not only in Jerusalem but in many communities in Judaea and Samaria.  It’s not supposed to happen but the will to prevent it is strangely lacking.  And the latest ceasefire with Hamas is not the act of a government that has made a strategic choice to conclude peace with the nominal head of the nominal Palestinian Authority.

No, what’s interesting is not Peres’, or Barak’s, or Olmert’s likely views about peace with the Palestinians.  What’s interesting is that they still can’t or won’t admit it.  After all, more than a foreign policy is at stake.  Peace Messianism is the official ideology of an entire ruling class.  Like Communism in Eastern Europe last century, it is both the logical conclusion of their world view and the justification for their regime.  If it is no longer believable, it draws both into question.  It both explains and exacerbates their precipitate loss of morale.  It means that an entire ruling class is living a lie, merely in order to hang on to power.
Peace Messianism is the official ideology of an entire ruling class. Like Communism in Eastern Europe last century, it is both the logical conclusion of their world view and the justification for their regime. If it is no longer believable, it draws both into question.

There is one other reason:  The undue influence of diehard peace fanatics who cannot change their minds, such as Attorney General Menahem Mazuz, who holds Olmert’s fate in his hands, or Amos Schocken and David Landau, respectively the owner and editor of Haaretz, who must even now be regretting the decision to let Verter run his piece.  To recur to the Eastern European example, these people fulfill the role in the Israeli political system of the Soviet Army.  They will move in to bash anyone who exhibits loss of faith in the one true system.  But the Soviet Army didn’t save Communism once even most Communists lost faith in it.  And it’s only a matter of time till the Israeli establishment’s façade crumbles as well.

I should leave my readers with that hopeful note but I won’t, because one has to think of what comes after the collapse.  One looming option is the rule of a populist autocrat, possibly with a heavy Russian accent, over a people that no longer hopes for the future or cares for its liberties and lets it happen because it’s merely the path of least resistance.  The other is a new dispensation for Israeli society, led by a leader motivated by faith and able to articulate, if not a belief that appeals to the majority of the people, a comprehensive new set of policies that they are willing to support.  To date, unfortunately, no likely candidate has come forth.

Politics, 17th-Century Style

"If one wishes to strike a blow at a prince, one must kill him" -- Niccolo Machiavelli, The Prince

The business begun with Olmert's manipulation of Haaretz, on which I commented in my last post, is far more serious than I thought.

If Jerusalem 2008 were Chicago in 1930, Ehud Barak would suddenly find himself friendless (as indeed he pretty much is today).  Nobody would want to be seen talking to him.  If he walked down the street, people would hurry across to the other side.  If he entered a restaurant or a speakeasy, the patrons would take one look at him and leap for the exits; the proprietor would say “we’re closed!” and push him out the door.
Ehud Barak is a marked man. He took a shot at Il Capo di tutti Capi, and failed to bring him down

For Ehud Barak is a marked man.  He took a shot at Il Capo di tutti Capi, and failed to bring him down.  If Jerusalem were Chicago in 1930, men in fedoras toting violin cases would be combing the streets for him.  If he were smart, he’d leave town.

Barak is bright, analytical, cold-blooded and calm.  He sometimes tells the truth with disarming naivete  He has one besetting flaw:  The inability to act decisively (which ought to disqualify him as Defense Minister or Prime Minister).  Twice he issued ultimatums, to Arafat and to Hamas, and failed to follow through.  Once he issued an ultimatum to Olmert.  This time he didn’t back off, didn’t swallow his words.  He merely temporized, postponed the day of reckoning, tried to be nice and to give Olmert and Kadima time.  This could turn out to be the mistake that ends his political career.

In politics, Olmert is a past master to Barak’s puerile amateurism.  By telling Olmert to go, Barak has marked himself as Olmert’s greatest foe.  Barak foolishly gave Olmert three months, and Olmert will use them to wipe Barak out, swiftly and efficiently.

The overall game plan is clear:  First and foremost, put Barak under investigation by the police.  On Tuesday, six days after Olmert and Barak signed the agreement that postponed elections, Shmuel Levi, a former Barak flunky who is now an Olmert flunky, cut a deal with the police to turn state’s witness and testify about Barak’s illegal campaign contributions in 1999 (on the radio his attorney said he was doing so as “a matter of conscience.”  I laughed so hard I nearly had to pull the car off to the side of the road). 
By skillfully putting all of Barak’s weaknesses into play, in a manner which Barak has neither the skills not the resources to prevent, Olmert plans to reduce Barak to a political cipher by September. By then Olmert should be able to cancel Kadima’s primaries with impunity.

Second, raise a revolt against Barak in the Labor party, where Olmert, giver of budgets and offices, has more clout than Barak himself.  On Monday Amir Peretz declared he would challenge Barak for leadership of the Labor party before the next elections.  Olmert got a freebie from MK Dani Yatom who, disgusted with Barak, announced he was leaving the Knesset.  Barak today heads the Labor party only nominally. His colleagues are divided into two camps:  Those who are openly screaming for his political head, and those who would be happy to sit back and see him lose it.

By skillfully putting all of Barak’s weaknesses into play, in a manner which Barak has neither the skills not the resources to prevent, Olmert plans to reduce Barak to a political cipher by September.  By then Olmert should be able to cancel Kadima’s primaries with impunity.  Labor will be too divided and Barak too discredited to do anything about it.

Maybe my knowledge of political history is too limited, but I cannot recall a similar spectacle of the country’s greatest political crook methodically  plotting the downfall of another political crook, using the country’s legal system as a his tool.  One would have to go to the dying days of the Roman Republic or the Weimar Republic to find a parallel.

The dying days of republics . . .

To me the most ominous aspect of the whole affair are Olmert’s chosen hatchetmen, his guys in grey fedoras and violin cases.  They are none other than the police and the State Prosecution.  It is Olmert who, with a crook of his finger, is producing evidence against Barak where there was none before.  With a history of lenience toward public figures and incompetence in investigating them, Israel’s law enforcement agencies cannot be portrayed as crusaders against official corruption. 
The most ominous aspect of the whole affair are Olmert’s chosen hatchetmen, his guys in grey fedoras and violin cases. They are none other than the police and the State Prosecution.
From Aharon Barak and Asa Kasher they have learned to let precious calculations of individual rights and solicitude for legal niceties dominate their real job of going after the corrupt, mastering them, and throwing them out of public life.  Of course, the precious calculations and legal niceties go out the window when political enemies are involved.  Like other parts of Israel’s unelected power elite, they themselves have been corrupted, first by the perversion of their power to political ends, and then by its perversion to personal ends of power and money.

They will not, of course, make themselves the agents of Olmert’s dirty political manipulations willingly or intentionally.  But they will serve those ends nonetheless.  The reality of Israel’s public arena today is that the crooks are on top, able to exploit the “forces of justice” as and when desired, for their desired ends.