2008 recession is anything but ancient history

Posted on by j.giglio

If you think you have heard it all before about the 2008 financial meltdown, then you need to listen more closely. Enough is never enough when it comes to learning about what caused the crisis and the recession that followed.

This month marks the 10th anniversary of the financial crisis that devastated Wall Street and Main Street. While the autumn leaves were falling in September 2008, months of uncertainty crystallized to spark a financial panic.

The crisis, the worst financial downturn since the Great Depression, was triggered by the bursting of a housing price bubble that had been fueled by increased risk in mortgage lending. As a result, millions of Americans lost their jobs, homes, or both.

The crisis had many causes, including too much irresponsible borrowing, foolish investments, the credit bubble that resulted from loose monetary policy, the housing bubble, national housing policies and non-traditional mortgages, relaxed mortgage lending standards, credit ratings and securitization, financial institutions’ concentrated risk, leverage and liquidity risk, 30 years of deregulation, securities firms converting from partnerships to corporations and perverse compensation incentives.

Scratch the familiar refrain of greed as a cause. Greed has been a constant in human affairs for millennia. It was not a new attribute in the lead up to the crisis.

Today the economy is strong, according to official measures. The United States Bureau of Economic Analysis estimates that GDP growth reached 4.1 percent in the second quarter of 2018. Consumer confidence is high and financial markets are flirting with records. The housing market, the epicenter of the crisis, has recovered in many places. Add low unemployment and things are looking good.

Wall Street has profited every year since the recession ended in 2009. Average Wall Street compensation, consisting of salary and bonus, hit $422,000 in 2017, 13 percent higher than the previous year, according to the New York State Comptroller.

In contrast, the latest Census Bureau data shows that the median income for American employees was $59,039 in 2016. Last month the average hourly wage rose 10 cents, to $27.16, according to the Bureau of Labor Statistics. While that was the largest gain since 2009, the increase was roughly equal to inflation, which eats away at purchasing power.

The crisis strikes some people as ancient history. Others, who saw their net worth wiped out are still trying to recover. They want Old Testament justice for the financial institutions that got bailed out from their reckless behavior while ordinary people suffered and continue to tread water thanks to ongoing wage stagnation. The hope is that as it gets hard to fill jobs with the country approaching full employment, wages will go up and the average American will enjoy the recovery.

While many analysts hesitate to blame American families for contributing to the financial crisis, they did play a role, aided and abetted by bankers and mortgage brokers. To put their role in context, consider that highly risky mortgages were attractive, given that real wages in the United States had been stagnant since the early 1970s.

People came to understand the power of leverage, which had previously been available only to wealthy investors. No-down payment mortgages with adjustable rates reduced their initial costs, providing the opportunity to improve their standard of living and enjoy wealth appreciation.

The assumption was that housing prices always increase. The rising value of the house would allow them to refinance and upgrade to a fixed-rate mortgage. When the housing bubble burst, many families were ravaged.

An economy that is strong for some continues to have harmful effects on the physical and emotional health of ordinary Americans. The results are a permanent state of outraged class warfare, declining social mobility, a shrinking middle class, and widening income inequality.

There is much to be mad about and plenty of blame to go around. Wall Street was the ultimate beneficiary of the Great Recession, not Main Street.

Originally Published: September 23, 2018

Too big to jail

Posted on by j.giglio

Sept. 15 is the 10th anniversary of Lehman Brothers declaring bankruptcy. It was a day after the global money markets seized up, turning a worldwide daisy chain of financial institutions into a ticking bomb. In the wake of the bankruptcy, it seemed likely that the United States financial system as a whole would cease to operate, a financial blackout that would render paychecks, credit cards, and ATMs useless.

Lenders, including large companies, financial institutions, and money market funds, suddenly hoarded cash in the face of growing losses and threats to their own sources of credit. They no longer knew which borrower was a good risk, so they treated all of them as bad risks.

The world experienced the worst financial crisis since the Great Depression of the 1930s and the economy plunged into deep recession. The Federal Reserve and Treasury Department misjudged the scale of the fallout from Lehman’s bankruptcy.

The failure of Lehman Brothers started a chain reaction in financial markets, as it was the first true test of the “too big to fail” hypothesis. Whereas Bear Stearns was sold to JP Morgan in March 2008, Lehman failed to find a buyer in time. The federal government refused to provide financial assistance and the company was forced into bankruptcy. Lehman was the fourth largest investment bank, and its failure sent huge waves across global financial markets. Market volatility peaked, and for some time it seemed that no bank was safe.

Merrill Lynch, the third-largest investment bank, rushed to sell itself to Bank of America that same weekend. Even Goldman Sachs and Morgan Stanley felt the shock and quickly tried to raise capital. The Federal Reserve allowed those two banks to change their charters and become bank holding companies which facilitated their funding via the discount window at the Federal Reserve.

On September 16, the federal government rushed forward with an initial $85 billion in taxpayer cash to bail out AIG, the nation’s largest insurance company. The very next day the nation’s largest money market fund was forced to “break the buck”, that is, report a share value of less than a dollar. The firm’s stake in debt securities issued by Lehman Brothers, with a face value of $785, million was essentially worthless. As a result, the share value fell to 97 cents. (Gasp.)

In the biggest bank failure in United States history, federal regulators seized the assets of Washington Mutual, the sixth largest U.S. bank, on September 27. JP Morgan acquired Washington Mutual’s bank deposits, assets, and their troubled mortgage portfolio from the Federal Deposit Insurance Corporation for $1.9 billion, making it the largest U.S. depository institution.

The crash brought together many forces: stagnant wages, widening inequality, anger about immigration and, above all, a deep distrust of elites and government. The road to recovery has been long for ordinary workers since those white-knuckle days of September 2008, resulting in a wave of nationalism, protectionism, and populism.

The ordinary American scraped by in the aftermath of the crisis, while Wall Street bankers soon returned to wealth and profitability, continuing their well-upholstered lives. The bankers were able to avoid accountability for the financial institutions they ran crashing the economy by trading trillions in fraudulent securities tied to risky or even certain-to-fail mortgages. No senior executive ever had to plea to criminal charges.

Policymakers and prosecutors took the view that prosecuting senior bank executives would cause too much collateral damage to employees, customers, other banks, and the economy. In 2013, then-Attorney General Eric Holder told the Senate Judiciary Committee that he was “concerned that the size of some of these (financial institutions) becomes so large that it… become[s] difficult… to prosecute them when we are hit with indications that… if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”

In short, they were too big to jail.

Originally Published: September 8, 2018

Fiat’s Sergio Marchionne leaves a legacy worth remembering

Posted on by j.giglio

Many CEOs know how to soar, but few know how to land the plane. One exception was Sergio Marchionne. The Canadian-Italian leader was one of those dynamic, old school executives who was grounded and anchored in reality, a rarity in the contemporary world. He died on July 25 at the age of 66.

Marchionne first saved FIAT and then did the same thing five years later when FIAT took control of Chrysler from the United States government and turned the combination into a profit generator.

He took the driver’s seat at a battered and indebted FIAT in June 2004, an accountant and tax specialist who described himself as a corporate fixer. He had no previous automobile industry experience and was FIAT’s fifth CEO in less than two years.

Thus began his first remarkable turnaround. FIAT was near death when Marchionne became CEO. It was heavily indebted, had suffered huge losses, and was running out of cash. He took dramatic measures to get FIAT off its knees and return it to financial health, including shuttering factories, laying off thousands of employees, and cutting the time it took to bring new models to market from four years to just 18 months.

A key issue for FIAT was its relationship with General Motors. In 2001, the two had entered into a partnership that gave FIAT a put option to sell the 80 percent of the company it still owned to GM. Sergio Marchionne decided to play hardball, persuading GM to pay $2 billion to sever its ties and end its troubled alliance with FIAT. General Motors paid that huge sum not to buy FIAT.

Equally important, he dismantled the bureaucracy and focused on developing leaders, promoting high-potential young managers to senior positions, creating a flat organizational structure, and linking and leveraging information and knowledge throughout the firm. He constantly reminded the organization that he could not make all the decisions and created an entrepreneurial environment. By 2005, FIAT had returned to profitability.

In 2008, the global automotive industry was in a deep crisis. The following year, Mr. Marchionne found himself in a familiar situation. FIAT struck a deal with the United States government to take on the ailing Chrysler group and save several hundred thousand jobs in exchange for providing small-car technology. There was much skepticism about his ability to turn the firm around and grow the combined FIAT Chrysler into a profitable global automaker.

Marchionne chose an office in the industrial engineering department on the fourth floor of Chrysler’s headquarters, sending a clear message that he was accessible and wanted to be where the action was. He understood that Fiat Chrysler Automobiles was too large and complicated for one person to lead, and that human capital is a scarce strategic resource.

Just as he had done at FIAT, Marchionne fired most of the top management at Chrysler in 2009 and installed a dozen newcomers. By the end of the year, almost no one from the previous senior leadership team remained.

As he explained, “It is not a matter of how good they are at their jobs; it is a matter of change. I can spend 12 months arguing with them about what and how to change, but this won’t work and will take a lot of time. I look for the youngster. They don’t have seniority, they don’t play the corporate habits; they’re pure.”

The chain-smoking, espresso drinking CEO was direct and demanding, requiring his senior managers to be available 24/7 to match his own commitment. Like other successful executives he focused on setting stretch goals, developing a clear strategy, constantly communicating it, and ensuring proper execution of the strategy – all while managing to stay cool.

The combined Fiat Chrysler Automobiles group’s stock price nearly quadrupled over the past four years of his stewardship. Last year, the firm posted $4.4 billion in pre-tax profits.

Grazie mille.

Originally Published: August 18, 2018

A safety net for the looming trade war

Posted on by j.giglio

Much has been written about the continuous maelstrom of trade and tariffs. Articles are legion and lengthy, and the onslaught of words is entirely shorn of humor. Is the difference between trade and “free trade” the same as the difference between love and “free love?” Many of these articles fail the memory test.

Unlike academic arguments, debates about trade and tariffs are waged at a pitch of high intensity because the stakes are so high. Often overlooked is Trade Adjustment Assistance, a program with avid supporters and fierce critics.

Trade Adjustment Assistance is the primary policy response to dislocations caused by trade and globalization. This federal program provides assistance to workers who have involuntarily lost their jobs to foreign competition, either because their jobs moved outside the United States or because of an increase in directly competitive imports. It also assists those whose hours and wages are reduced as a result of increased imports, whether or not that had anything to do with a trade deal. Congress created the program as part of the Trade Expansion Act of 1962, but it was little used until the Trade Act of 1974 eased eligibility requirements.

Trade Adjustment Assistance offers eligible recipients a variety of benefits and reemployment services. It provides expanded unemployment insurance benefits, two years of job training, job search and relocation allowances, tax credits for health insurance coverage, wage insurance for workers over 50 years of age and related subsidies.

The legislation was initiated by President John F. Kennedy as a way of building domestic support for multilateral trade negotiations. The program has undergone changes through the years. Since free trade policies are expected to bring overall economic gains, there is a rationale for providing assistance to workers whose jobs are sacrificed for the greater good. Put differently, benefits of free trade, which are diffused throughout the economy, exceed its costs, which are concentrated. The winners should compensate the losers and help train or retrain American workers to become more competitive.

The original legislation faced strong opposition, but, with labor’s backing, Trade Assistance Adjustment became law. Trade Adjustment Assistance has been the necessary political price for keeping free trade on track, the sop to displaced domestic workers.

Critics of the program are wont to complain that despite its generosity, the program has been ineffective. For example, one study of Trade Adjustment Assistance recipients shows that their incomes after returning to work were no better than those of returning workers not eligible for Trade Adjustment Assistance.

Fairness is also an issue. Why should someone get special assistance after losing a job because of trade, but not if they lose a job because of changes in technology and consumer preferences, domestic competition or simple business failure? After all, they still have bills to pay.

On the other hand, advocates argue that Trade Adjustment Assistance has provided badly needed assistance to more than 2.2 million workers who lost their jobs to globalization since the Trade Act of 1974 and is an essential complement to the broader trade agenda. They point to data showing that nearly 77 percent of program participants found employment within six months of completing their training. They are silent on the quality of the jobs and whether they have a positive effect on wages for program participants.

While the United States may gain from free trade policies at the macro level, the losses are concentrated and inflict real distress on affected workers. Free trade has cut consumer costs, reduced poverty around the world and helped multinational corporations prosper; the United States should take care of workers who have paid the price.

Regardless of the dimensions of the coming trade and tariff wars and chaos in the international trading system, some version of Trade Adjustment Assistance is essential to provide a safety net, not just a fig leaf, for those who inevitably bear the cost of trade and tariff policies.

Originally Published: July 28, 2018

 

 

No doubt about it, China doesn’t play fair on trade

Posted on by j.giglio

Trade issues are not everyone’s idea of a good time. With so many demands on their attention, ordinary Americans are wary of the truth quotient in commentary on the subject. They are cautious about separating the genuine from the meretricious comments from corporate America, which is concerned about maximizing shareholder wealth rather than doing the right thing for the majority of Americans.

General Motors has warned that President Trump’s threats to impose a 25 percent tariffs on imports of cars and car parts are projected to cost the auto industry billions of dollars, could raise some car prices by nearly $6,000 and result in fewer American jobs and a smaller GM. In contrast, a Ford Motor Company spokesperson said they believe they are somewhat insulated from the proposed tariffs because their most profitable vehicles are built here.

Currently, vehicles imported to the United States face a 2.5 percent tariff. Cars built in America face a 10 percent tariff when they are shipped to the European Union and a 25 percent tariff when they head to China.

During the financial crisis, the feds put $49.5 billion of taxpayer money into the GM bailout and the taxpayers ultimately lost an estimated at $10.5 billion. The firm has remained profitable since then. In retrospect, the bailout should have included provisions requiring that a portion of future profits go to fully repay taxpayers. Government Motors could also have been required to build automobiles and auto parts in the USA.

The automaker sold 4.04 million vehicles in China in 2017, a third more than the 3.02 million it sold in the United States. Last year represented the sixth consecutive year that China was General Motors’ largest market.

GM and other multinational companies headquartered in America view China’s emerging middle class as the world’s largest market for their products. The firm’s future growth relies as much on China as it does on how the automaker responds to emerging disruptive technologies such as electric and autonomous vehicles, and changing patterns of car ownership and use that will ultimately force the modification of its current business model.

Multinationals are concerned that the tariffs will cause the Chinese government to retaliate by imposing bureaucratic rules and regulations that could cause them to lose market share. China used this approach to roll back Japanese automakers’ market share during a dispute with Japan over contested islands in the East China Sea.

When China was violating the World Trade Organization rules on subsides for wind turbines, General Electric and other firms that were in the business were reluctant to bring a dispute to the WTO for fear of Chinese retaliation. It was the United Steel Workers who ultimately brought it to the WTO.

It is hard for multinational corporations to resist the temptation to placate the Chinese. China doesn’t have to send lobbyists to walk the halls of Congress, they just have the multinationals do what they want.

It is implausible to argue that China does not engaged in unfair trade practices. China is a one-party communist dictatorship. It is not bound by the political constraints of a democratic government with a constitution that imposes presidential term limits and secures the rights of free speech and association.

This political structure enables China to promote state subsidized industries such as steel, aluminum, and solar panels that have flooded global markets, depressed prices, and shut down hundreds of manufacturing plants, all in violation of World Trade Organization rules. Along with currency manipulation and stealing intellectual property, China’s actions amount to a thumb on the scale.

“Free” trade is a concept that works in classrooms insulated from the harsh realities of unfair practices and policies. They ignore predatory practices by foreign governments who view trade as a competition between nations and play dirty to grab a competitive advantage for their industries.

Like that of multinational corporations, China’s position on trade will be based on maximizing their own interest

Originally Published: July 14, 2018

Strategy defies description

Posted on by j.giglio

In a famous Hindu parable, three blind men encounter an elephant for the first time and try to describe it, each touching a different part. “An elephant is like a snake,” says one, grasping the trunk. “Nonsense; an elephant is a fan,” says another, who holds an ear. “A tree trunk,” insists a third, feeling his way around a leg.

Similar confusion surrounds the notion of strategy. The word is tossed around promiscuously. The fact that there are so many competing conceptions of strategy suggests that the concept is subjective and ambiguous enough to defy any singular definition.

Strategy is important but it is also wickedly hard to deal with complexity, ambiguity, and uncertain outcomes in a competitive landscape. Getting it right is an uphill struggle, whether in business, athletics, military affairs, politics or other human endeavors. Strategy is an art, not a science.

The confusion surrounding the subject of strategy presents a challenge, especially for students. It requires them to think in interdisciplinary terms, that invariably means finding connections, for as historian Edith Hamilton put it, “to see anything in relation to other things is to see it simplified”. For example, business students struggle to integrate and coordinate various functional areas. They get caught between warring disciplines such as finance, accounting, and marketing. This is especially difficult in an academic environment with the pressure to specialize.

Strategy: the word is beguiling and elusive, but do we really know what it means? Is it as former Supreme Court Justice Potter Stewart said about pornography: “I know it when I see it”?

To put it simply, strategy is the link that connects resources with a set of realistic and prioritized objectives. Some theorists suggest a practical way to think about strategy is that it is a bridge connecting means to ends and the present to the future. Scratch that. Because the metaphor is at odds with reality. Strategies are far from linear.

There are circles and waves and dead ends and the inevitable influence of chance. But they rarely form a straight line. Events seldom conform to expectations. To paraphrase Mike Tyson, everyone has a strategy until they get punched in the mouth.

The question that haunts every strategy is “how.” How do you get from means to ends? It’s always the how before the who and why. Strategy is the relationship that unfolds at the intersection of means and ends.

Although your objectives may be infinite, available resources are finite. One challenge in developing a successful strategy is to keep goals within resources and not to confuse means with ends. That requires lining up feasible objectives in a queue and making hard decisions about trade-offs.

Strategy is more like having a map. It helps you navigate the distance between means and ends. It transports you from one place to another. It illuminates the competitive landscape with alternative routes. It traverses distance and time. Maps give you greater control over your surroundings. They help you see into the future; what you seek to accomplish and how you should go about it.

Strategy is not fixed; it’s not a blueprint. It is an iterative, continuous process that involves seeking feedback, dealing with surprises, and correcting course when necessary, all while keeping the ultimate objective in view. It is not a three-act play, but more like a soap opera; one thing following another.

Life often goes in a direction not of your choosing. That is why you need to adapt. No strategy is built to last forever. It is wise to allow for considerations of changing circumstances.

Changes in the external environment frequently are a catalyst for strategy. If you are not growing and evolving, you’re standing still and the rest of the world is surging ahead. It is Darwinism at its most refined; you develop the resources that allow you to survive or you just hide. But even that will not last for long.

Originally Published: June 30, 2018

 

Lessons from the Great War still apply

Posted on by j.giglio

On June 18, 1914, the Austrian archduke Francis Ferdinand, nephew of Emperor Francis Joseph and heir to the throne of the Austria-Hungary empire, and his wife Sophie were assassinated by a Bosnian Serb in Sarajevo, the capital of Bosnia-Herzegovina. The assassination was the flash point that triggered a global conflict.

The Great War had a kaleidoscope of causes, including mutual defense alliances, imperialism, militarism, and nationalism. Its origins have eerie parallels to the present and hold important lessons for the future, especially for China and the United States. The emergence of China as a major power trying to assert itself has echoes of Germany’s rise in the late 19th and early 20th centuries, which was viewed as a threat by Britain, so the theory goes.

The two bullets fired in Sarajevo precipitated an international crisis, as various military alliances were activated, dragging everybody into a devastating global war. At the time of the royal murders, nobody believed it to be the “shot heard round the world,” but Europe went from peace to war in five weeks. As British Foreign Affairs Minister Sir Edward Grey said, “The lamps are going out all over Europe; we shall not see them lit again in our lifetime.”

Germany backed Austria after it declared war on Serbia, which was supported by Russia. When Germany then declared war on Russia, France was committed to Russia, and Germany attacked France through Belgium, pulling Britain into the war. Later Japan and the United States entered on the side of Britain, France and Russia, along with Italy, which switched sides in 1915. As Henry Kissinger explained, “the Great Powers managed to construct a diplomatic doomsday machine …” The war to end all wars (until it didn’t), later known as World War I, broke out in the summer of 1914 and was expected to be over by Christmas. Kaiser Wilhelm told his troops, “You will be home before the leaves have fallen from the trees.”

But it lasted until Nov. 11, 1918. Like the 2003 invasion of Iraq, it was to be swift, easy and victorious. Those who plan on fighting short wars often end up losing long ones.

By the time World War I ended, nine million had been killed, including over 100,000 American soldiers. Eight million were prisoners or simply missing. Twenty-one million had been wounded and who knows how many were damaged psychologically.

When the guns went silent, the Ottoman, Hapsburg and Russian empires had collapsed, a new German empire was foiled and France and Great Britain were greatly weakened. The war sowed the seeds of the Great Depression, the rise of fascism and communism and World War II. The dismemberment of the Ottoman Empire created the modern Middle East and laid the foundation for the chaotic conflicts that continue to plague the region. The Great War was also the catalyst for the coming American century.

China is an economic superpower and is translating economic might into military capabilities roughly in the same league as the United States. It is making a run at dominating northeast Asia through various territorial disputes with Asian neighbors over claims in the contested East and South China seas. By themselves, these neighbors are not powerful enough to check China.

The historical lesson for leaders in both China and regional rivals like Japan is to recognize that growing political and military tensions are a potential flash point.

Given the network of bilateral and collective defense agreements the United States has in the region, supporting its allies could draw the U.S. into disputes with China.

A clash between China and the United States is hardly remote. As recently as 2014, President Obama reaffirmed America’s bilateral defense agreements with South Korea, Japan and the Philippines. A lesson from World War I that seems so relevant today is that local conflicts can escalate into a great war.

Originally Published: June 16, 2018

On D-Day, the eyes of the world were on the Allies

Posted on by j.giglio

In the first days of June 1944, BBC transmitters beamed to the forces of the French Resistance the prearranged signal that indicated the start of the long-awaited naval, air, and land invasion of France that would open a critical second front against Germany.

The 74th anniversary of the Normandy landings is a useful moment to pause, reflect and ensure that the memory of this historic event doesn’t slip away. June 6, 1944 became historical shorthand for a generation of Americans, a date that needs as little explanation as “September 11” does for their progeny.

As General Eisenhower wrote in his June 6 Order of the Day, “You are about to embark upon the Great Crusade towards which we have striven these many months. The eyes of the world are upon you.”

The Plan for Operation Overlord was codenamed D-Day. The “D” in D-Day is a general term for the start date of any military operation. The Allies selected Normandy as the landing site because it provided the best access to France’s interior.

Operation Overlord was the greatest technical feat of the war. The challenges of mounting a successful landing were daunting. Herculean preparations requiring remarkable coordination among the Allies for Operation Overload had been going on since 1942.

The forces assembled constituted the greatest amphibious force in history. An armada of more than 5,000 ships and landing craft were waiting to transport more than 150,000 British, Canadian, and American troops; 1500 tanks; and thousands of guns, vehicles, and supplies to five beach heads along a 50-mile strip of the heavily fortified Normandy coast. Leading the way were over 300 minesweepers that cleared a path through a minefield that stretched across the English Channel to the Normandy beaches.

The Americans landed to the west on Utah and Omaha beaches, while the British and Canadians landed on the east at Gold, Juno, and Sword beaches. Allied casualties on D-Day have been estimated at 10,000 killed, wounded, and missing in action, 60 percent of them American. The first 20 minutes of the movie “Saving Private Ryan” captures vividly the horrible realities of the landing and the price paid by the soldiers.

They were supported by 12,000 planes, some of which had been systematically destroying bridges and access routes to seal off the invasion area from the interior while others—transports and gliders —prepared to drop paratroopers and demolition teams well behind the beaches to complete the job.

The invasion was a high-risk operation, the outcome of which was by no means certain. The defenders had been preparing their reception for four years, building a formidable Atlantic Wall of concrete, wire, machine guns, mines, and artillery. SS panzer divisions lurked in the wings. As General Rommel famously remarked: “the first 24 hours of the invasion will be decisive, the fate of Germany depends on the outcome … for the Allies as well as Germany it will be the longest day”.

Despite furious German resistance, the Allies carried the day on June 6 and established a precious beachhead. Once the Wehrmacht recovered from its surprise, resistance was fierce. The Americans could not take Cherbourg, the principal port of the invasion coast for three weeks. The British, who should have entered Caen on the evening of D-Day, fought their way in on D+34 (July 9).

Finally caught in the decisive Battle of the Falaise Pocket, the Germans had nothing to do but run. After that, the road was clear for the race to Paris and the drive for the Rhine. Rommel was right, 11 months later Nazi Germany crumbled onto the scrap heap of history.

D-Day, June 6, 1944, paved the way for the liberation of Europe with countless acts of sacrifice by the men and women of the armed services that still resonate today. Success on the “longest day” marked the beginning of the end of the war in Europe.

Originally Published:  Jun 2, 2018 

 

Iraq and the consequences of an ill-conceived war

Posted on by j.giglio

American troops are still in Iraq on the 15th anniversary of an invasion, the pretext for which was the entirely trumped-up claim that America’s iconic foe Saddam Hussein had weapons of mass destruction. The failure of the 2003 invasion and continuing presence of American troops illustrate the importance of aligning ends with means.

The stated objectives of the invasion were to end the Hussein regime; eliminate the weapons of mass destruction; drive out Islamist militants; secure Iraq’s petroleum infrastructure, which was to cover the cost of the war; and create a liberal, representative government that would spark a new age of freedom in the Middle East.

The invasion did change the region; it made things worse. It began on March 19, 2003 and the military campaign was quick and decisive. Baghdad fell on April 9.

But unlike in Las Vegas, what happened in Iraq did not stay in Iraq. The war opened a Pandora’s Box in the Middle East, releasing many demons.

The abrupt fall of Baghdad was accompanied by a full-scale collapse of public order and helped incubate and reinvigorate radical Islamist militants in the region. The invasion contributed to the civil war in Syria, helped create a vacuum that ISIS filled and caused massive refugee flows to Syria, Jordan, and Europe, other than that it was a complete success.

In retrospect, it is hard to overstate the damage the Iraq War did to America’s global prestige, badly damaging America’s Godzilla-like unipolar credentials, and offering the world a pitiless example of the limits to American power. The magnitude of this disaster can also be measured in lives and money.

From 2003 until the formal withdrawal of troops in 2011, the war took the lives of 4,500 Americans and over 150,000 Iraqi civilians. Its direct cost has been estimated to be almost $1.7 trillion, with an additional $490 billion in benefits owed to war veterans.

The Ronald Reagan question is appropriate here: Is the Middle East better off today than it was before the Iraq war? Is the United States in a better place than before the invasion? In short, unintended consequences resulted in a shattered Iraq, an emboldened Iran, and a Middle East where many regional and international powers are engaged in a number of deadly conflicts.

Then there is the question of opportunity cost – the extent to which the war distracted America from a slew of other challenges, such as emerging nuclear threats from Iran and North Korea, China flexing its muscles in East Asia, completing the Afghanistan operation and other global trouble spots.

Fundamentally, the cleavage between the invasion’s ambitious goals and its actual results boils down to the fact that President Bush and his hawkish advisors failed to establish a proper relationship between end and means in their prosecution of the war. The year before the invasion, Army Chief of Staff General Eric Shinseki made the point that American troops were already stretched too thin around the world. In February 2003, he told the Senate Armed Services Committee that it would take “several hundred thousand soldiers” to secure and pacify Iraq.

Two days later, Defense Secretary Donald Rumsfeld said the post-war troop commitment would be less than the number of troops required to win the war, and the “idea that it would take several hundred thousand U.S. forces is far off the mark.” The Bush administration sent 150,000 American troops into Iraq.

Successful strategy in military affairs and business requires the proper alignment between potentially goals and resources. The Bush team aroused sky-high expectations without sufficient resources to meet them.

President Bush and his advisors failed to understand the words of Prussian military theorist Carl Von Clausewitz, who wrote, “Everything in war is very simple. But the simplest thing is difficult.” Even great powers operate in a world in which resources are not always sufficient to exploit all opportunities and neutralize all threats. There is never enough of anything to go around.

Originally Published: May 5, 2018

 

 

China flexes its muscle in the Pacific

Posted on by j.giglio

Just as Imperial Japan did in the 1930s, China is developing and asserting its own version of the Monroe Doctrine in Asia, so it may enjoy the same continental hegemony America does. The new reality is reflected in the South China Sea. China maintains that it has sovereignty over almost all of the South China Sea. The United States should respond by fostering closer ties with its allies in the region.

Beijing continues to militarize artificial islands in the South China Sea. It was reported earlier this month that China had installed antiship cruise missiles and surfaceto- air missile systems for purely defensive reasons on fortified outposts in the hotly contested waters of the South China Sea. Taiwan, the Philippines, Vietnam, Malaysia and Brunei are also contesting at least part of the chain of islands, reefs and their surrounding waters in the South China Sea.

Each year, a third of the world’s shipping passes through the South China Sea, carrying around $3.4 trillion in trade. In 2016, 21 percent of all global trade passed through it. Any conflict in the South China Sea would likely have serious consequences for global commerce.

Following the logic of the Monroe Doctrine, which opposed European colonialism in the Americas, Communist Party leadership believes China’s security would be better served by muscling the American military out of the Asia-Pacific region.

After all, the Chinese remember what happened in the century between the First Opium War (1839-1842) and the end of World War II, when the United States and European powers took advantage of a weak China. The current generation of Chinese Communist Party leaders are so bitter about the 100 years of humiliation that they can taste it.

In 1823, President James Monroe, on the occasion of his annual message to Congress, wrote “the American continents, by the free and independent condition which they have assumed and maintain, are henceforth not to be considered as subjects for future colonization by any European powers.”

The United States put European nations on notice that it would consider any foreign challenge to the sovereignty of existing American nations an unfriendly act.

The Monroe Doctrine, sweeping in scope, proclaiming hegemony over an entire hemisphere, was an expression of a growing spirit of nationalism in the United States in the 1820s. In short, it warned everybody to stay out of the Americas; this is a United States preserve.

China’s assertiveness in the South China Sea echoes the Monroe Doctrine. It wants to dominate Asia the way the United States dominates the Western Hemisphere. Why should anyone expect China to act differently than the United States?

China’s actions are not catching the United States at its best. The U. S. has been busy chasing bad guys in the Greater Middle East. Is it too late to contain and deter China as it did with the Soviet Union in the Cold War? Or is China just too big and powerful? It should be remembered that the United States did not have deep economic relationships with the Soviet Union, so Cold War-era policymakers did not have to contend with powerful American multinational corporations’ economic interests as they managed foreign relations. Lawmakers in Washington, special interest groups, and the business elite eat at the same table.

China’s moves in the South China Sea can be regarded as a threat. But it is also represents an opportunity to deepen relationships with American allies in Asia and leverage their resources to serve as an effective counterweight to China’s moves before China absorbs these countries into its economic orbit. The President may want to reconsider his decision to withdraw the United States from leadership of the Trans-Pacific Partnership. Keeping America secure means having partners and allies to magnify US power and extend US influence.

This approach merits consideration as long as the United States can avoid its usual perfection of getting things wrong when it comes to foreign affairs.

Originally Published: April 19, 2018