You may recall back to last fall, when then Secretary of the Treasury Hank Paulsen got Congress to pass his $800 billion TARP (Troubled Asset Recovery Program) proposal, almost overnight.
The idea was this: Banks have huge volumes of mortgage-backed securities in their portfolios. These securities are CDOs (collateralized debt obligations), CDOs-squared (CDOs of CDOs), CDSs (credit default swaps), and numerous other highly leveraged structured securities designed by brilliant financial engineers just a few years ago.
These securities are now being called “toxic assets” or “toxic waste,” because they’re worth a lot less than thought.
There’s no market for these securities any more, and when forced to sell via a “fire sale,” banks are getting 20 or 30 cents on the dollar. If banks are forced by “mark to market” rules to mark down the values of these assets to 20-30 cents on the dollar, then many banks immediately become essentially bankrupt, for all practical purposes.
So the TARP program was supposed to purchase the toxic assets at something like 60-80 cents on the dollar, so that banks can get them off their balance sheets, and still survive. Paulsen got his $800 billion, but unfortunately he never got around to buying up all those toxic waste securities. For some strange reason, he just never got around to it. I guess he must have spending too much time working out at the gym, or something.
Anyway, early in February, President Obama gave a press conference at which he announced that the shiny, brand new Secretary of the Treasury, Timothy Geithner, would announce the details for how the banks would be saved. The next day came and and Geithner gave his own press conference but, for some strange reason, he provided absolutely no details whatsoever. I guess he must have spending too much time celebrating the inauguration, or something.
I’ve said repeatedly what the problem is. The problem is that there are many tens of trillions of dollars worth (nominal value) of this toxic waste, perhaps over a hundred trillion, and there isn’t enough money in the world the buy them all.
That’s the ice water reality that keeps striking these government officials.
People keep saying, “Why doesn’t the government just buy these things up?” Or, “Why doesn’t the government just nationalize the banks?” Or, “Why don’t we just let these banks fail, and the market will dispose of the toxic waste?”
The problems is that none of these “solutions” has any chance of working. When you’re talking about many tens of trillions of dollars of toxic waste, there’s literally no way to deal with it, without massive and widespread homelessness, bankruptcies, poverty, and starvation.
The dot-com, real estate, credit and stock market bubbles took almost 15 years to grow. By using leverage, and leverage on leverage, and leverage on leverage on leverage, there are now well over $1 quadrillion worth of structured securities in the world.
All those bubbles have to deflate before things can return to normal. And it can’t be done overnight. If it took almost 15 years for the bubbles to expand, then it will take a similar period of time for the bubbles to deflate. This crisis has barely begun.
So finally, Tim Geithner had to do SOMETHING. The investors were demanding it. The Congress was demanding it. The public was demanding it. The President was demanding it.
So he came up with a “public-private partnership” that tries to use allow the market to dissolve the toxic waste. The Treasury won’t buy the toxic waste from banks, as it would have with the TARP plan.
Instead, a bank can sell the toxic waste to certain third party investors, and the Treasury will put up 86% of the purchase price. The purchaser need put up only 14% of the purchase price, providing 6 to 1 leverage.
But by another arrangement, the FDIC will put up half of the remaining price. So the investors only puts up 93% of the purchase price, providing 13 to 1 leverage.
It wouldn’t be a straight sale. Instead, several of these investors would bid on the toxic waste at an auction. That way (it is hoped), a realistic market value for the toxic assets will be established.
If the value of the toxic waste assets goes up, then the investors will make money. If the value goes down, then the investors lose less than they would have otherwise.
This doesn’t solve the size problem in any way that I can see. There are still many tens of trillions of dollars worth of these things, and now the US government only has to pay 93% instead of 100%. That isn’t going to make any difference.
The deflationary spiral
As I’ve been saying for years, we’re in a deflationary spiral. People keep asking me why there won’t be hyperinflation instead of deflation, but that’s impossible. Here’s why.
According to the Bank of International Settlements, there are over $1 quadrillion ($1,000 trillion) worth (notional value) of credit derivatives and other structured finance securities in the portfolios of financial institutions around the world.
Now, if mortgage-backed securities are turning out to be worth only 20-40 cents on the dollar, how much will these other securities turn out to be worth?
Some people say that most of them are solid, and that they’ll be worth at least 90 cents on the dollar. I have my doubts, but let’s suppose it’s 90 cents on the dollar.
That means that the $1 quadrillion worth of securities will lose $100 trillion in value. There just isn’t enough money in the world to make up for that. And it might be even more than $100 trillion.
So we spent 15 years leveraging debt to create a massive credit bubble over $1 quadrillion in size. Now there’s a deleveraging process going on. That bubble is leaking, and all that money is disappearing.
So if there’s less money (fewer dollars) in the world, then dollars become more valuable, and that’s deflationary. Nothing can be done to stop that.
The above is not a fanciful story. It’s really happening. Just a couple of weeks ago, the Bank of International Settlements said that Europe’s banks face a $2 trillion dollar shortage, and they’re going to have trouble rolling over their debts. That’s deflation.
Krugman feels despair
Pity poor Paul Krugman, the man who received the Nobel Prize for Economics because he hated George Bush. His view of any dilemma was to blame the problem on the evilness of George Bush’s ideology, and his solution was to do what anyone else suggested, as long it was different from what George Bush wanted.
On the day that Krugman won the Nobel Prize in October of last year, he was congratulating the UK and the Europeans for announcing a bailout and other steps that “exceed expectations,” steps that the US didn’t take. He indicated that the reason that the US didn’t take these steps earlier is because of “ideology,” and that finally there was a plan that WOULD work.
There have been several new bailouts and stimulus packages since then, and nothing has worked. And it can’t possibly be because of ideology, because George Bush is gone, and the new President doesn’t do ideology; he “makes decision based on facts, rather than ignoring them.”
So now Krugman has to deal with the fact that things keep going downhill, and it’s not because of some ideology. He’s learning a little more about the real world.
In a recent opinion column, he calls Geithner’s proposal “cash for trash,” and says that it fills him “with a sense of despair.”
In an interview on Bloomberg TV he expanded his thoughts on the subject, and said some very interesting things. Here are some excerpts (my transcription):
“This plan is — once you strip away the basically confusing details — it is the same plan proposed by Hank Paulsen back in September. It is right back to “We’re going to have the government buy up some of these toxic assets in the hope of driving up their price enough to make the banks whole again.” It’s disguised, it’s done through these loans, it’s a very sweet deal. Investors who participate in the plan are given a shiny new toaster, plus a gigantic put option as part of the deal, which makes it a very attractive thing, so they’re going to buy the stuff.The problem with the plan is that — first of all, it’s a pretty bad deal for the taxpayers. It’s not very well focused on the most troubled banks. And it’s very unlikely to produce enough gain in the prices of these things to make the most troubled banks viable again.
It’s a very diffuse, ill-defined instrument. …
There’s a reasonable case that [the toxic assets are] somewhat undervalued. So there are banks holding stuff at 60% of face value, and the market value, if they were to try to sell it, is 30 cents. And maybe it’s really worth 40 cents. That’s a possibility.
But what’s pushing that price from 30 to 40 — first of all wouldn’t be enough to make the banks want to sell it, because they don’t want to mark down stuff they’re holding on their books. They’re really afraid of what that would do to their [measure?] capital. Basically they can’t handle the truth.
And do we really think that’s enough to make the banks whole, even if they do so. It’s not enough to say that the stuff may be somewhat undervalued. There’s a good case that it is, though that’s not for sure. But it has to be grossly undervalued for this plan to be capable of doing more than just handing some extra money to people who are holding toxic waste. ..
[Question: As the economy improves, won't the values of some of these toxic assets increase?]
Well, yeah, but you have to believe that there’s really the possiblity of a self-fulfilling prophecy here — if only people feel better about this stuff that the economy will surge so much, and the value of these assets will surge so much that it will make everything fine.
To believe that, you really have to believe that most of the problems facing the banking system are the results of a more or less irrational panic, that there isn’t a fundamental huge loss facing the system. I don’t think that’s right. Essentially our banking system — some of the biggest banks — bet heavily that home prices in 2006 made sense.
The idea that consumer debt at unprecedented levels relative to consumer incomes — made sense. Those bets were wrong. It’s a tremendous loss that you can’t wish away. That even if you had full return to the normality of the markets would still be there.
And if you can’t make it go away, then the idea that we’re going to get this self-fulfilling thing with the economy improves, confidence improves, everything fixes itself is just not going to happen.
Because the other things are not in place. We have stimulus plan that is helpful but not nearly big enough to produce recovery. There is nothing out there suggesting that we’re going to have an economic recovery any time soon. We might see the pace of decline level off. But the idea that we’re going to bounce back to full employment any time in years is hard to credit at this point.
So you really don’t want the centerpiece of your financial strategy to be based up on hope that something isn’t true might be true.”
This is a very striking assessment from Krugman, much more gloomier than anything in the past.
Krugman gives specific reasons why Geithner’s new proposal won’t work, but that’s not the most surprising thing.
What’s surprising is that Krugman is just one step away from concluding that NOTHING will work.
I could hardly believe my ears when I heard him say, “To believe that, you really have to believe that most of the problems facing the banking system are the results of a more or less irrational panic, that there isn’t a fundamental huge loss facing the system.
Krugman is repudiating the common wisdom of the time, that fundamentals don’t matter, that only words matter.
I remember how shocked I was in 2004 then Ben Bernanke congratulated himself and the Fed for using words — Fed statements that interest rates would be kept low — were all that was necessary to keep stock prices up. I couldn’t believe that the head of the Princeton economics department could possibly say anything so stupid. But in fact, Bernanke’s claim was just the common wisdom.
This common wisdom is shared by President Obama, Fed Chairman Ben Bernanke, CNBC, Bloomberg TV, the Wall Street Journal, and almost everyone else.
Krugman has now repudiated the common wisdom, and his own ideological beliefs. It will be interesting to see where the leads.
Krugman isn’t the only one who’s suddenly decided that the common wisdom must be wrong.
Here’s what Tom Brokaw said last Sunday on Meet the Press, in explaining why people are so angry:
“Well, I–my take, I think it’s understandable. One of the things that I’ve been saying is that for a year now, for a full year nothing that the American people have been told about the financial condition of this country has proved to be true. And very good people–Jamie Dimon from JPMorgan Chase said last June, after Bear Stearns collapsed, “Well, we think we’ve seen the worst for Wall Street now. We still have the housing crisis to go.” Well, we hadn’t seen the worst from Wall Street. And this AIG bonus thing exploded in everyone’s faces.”
Apparently the only people who still believe the common wisdom are President Barack Obama and Treasury Secretary Tim Geithner.
President Obama clearly believes that if he goes on the Leno show or ESPN and other media outlets, and he talks confidently, then he’ll “restore confidence.” He believes that because that’s the way he got elected President, and he believes that if he can win an election that way, then he can turn the economy around that way.
Most incredible of all, Obama continually claims that the way to save the economy is essentially to implement universal health care, as well as a large energy program that would defeat global warming. It’s possibly his repeated claims that the more you spend the more you’ll save that are the most bizarre to me.
From the point of view of Generational Dynamics, “restoring confidence” is impossible. There is a generational change in behaviors and attitudes going on, and it’s only begun.
Here are the attitudes that are changing:
- People will not “start spending again.” People are beginning to understand that if they save a dollar today, then that dollar may save their lives a year from now. Those of you who remember how parsimonious and penny-pinching your grandparents were should understand that you and everyone else are turning more and more into your grandparents. Your transformation will be complete before all this is over.
- It’s impossible to “restore trust” in the financial system. Bankers will be blamed for this catastrophe, and they’ll be distrusted and reviled for years. I wrote recently how spooky I’m finding it personally that I’m suddenly hearing exactly the same rhetoric about greedy bankers that I used to hear all the time when I was growing up in the 1950s.
- The “credit crunch” will not be reversed. After the 1930s, debt and credit were treated with extreme suspicion for decades, and that will happen again. People are learning that debt is the road to personal disaster.
- Banks will not “start lending again,” as they did before. There will always be some lending, of course, but it will grow very slowly, over many years, and it will never be as extravagant as it’s been, as long as current generations are alive.
- New regulations are almost useless. I explained all this in my “The outlook for 2009.” There were plenty of regulations passed in the 1930s to prevent the current catastrophe, but they were all ignored or repealed at exactly the time when they were needed. This was done over many years, but I believe that the crucial turn was taken in 1999, when the Glass-Steagall act was repealed, and Fannie Mae and Freddie Mac turned seriously into structured finance. New regulations aren’t needed today, because nobody would invest in a mortgage-backed CDO today. As soon as the regulations are needed, they’ll be repealed by later generations.
Politicians, journalists and analysts expect the opposite of all of these. They imply that with the right words and right incentives and right regulations, trust will be restored to the financial system, and people will start borrowing and spending again.
What they’re expecting is that people will return to the “bubble mentality” that’s existed for the past twenty years.
From the point of view of Generational Dynamics, that’s impossible. The current generations of Boomers and Gen-Xers are suffering from their own abuses, and the young people in the Millennial generation are watching all this are learning lessons about trust, spending, debt and credit that they will live by as long as they’re alive — just like your grandparents.
More important, all the bailouts and TARP programs, as well as Geithner’s new plan, depend heavily on the assumption that people will quickly return to this “bubble mentality.” If there were no other reason why Geithner’s plan has to fail, this reason would mean its failure anyway. No one alive today will return to the “bubble mentality” of the past years.
The culture of complicity
Last week, Jay Leno asked President Obama why people weren’t being sent to jail. Obama said, “Here’s the dirty little secret though: most of the stuff that was done was perfectly legal.”
I strongly disagree, and I’ll briefly repeat the reasons.
As I wrote a year ago in “Brilliant Nobel Prize winners in Economics blame credit bubble on ‘the news,’” experts who were complicit in originally creating the toxic assets, like Nobel Prize winner Joseph Stiglitz, are lying and making excuses, like blaming it on the news or on the Iraq war.
The universal excuse is that when these toxic assets were designed in the early 2000s, no one knew that they would fail. But even if that were true in the beginning, that excuse falls apart later.
Maybe that excuse works for toxic assets sold in 2003, 2004, 2005, or even 2006. But by 2007, it was perfectly clear that the housing bubble had burst, and that interest rates were rising. So by 2007, the financial engineers should have stopped creating new toxic securities, the bank marketing departments should have stopped selling them, the ratings agencies should have stopped giving them AAA ratings, and the monoline insurance agencies should have stopped insuring them.
But that didn’t happen. By 2007, the volume of toxic assets actually increased substantially, and they were designed, sold, rated and insured as before. What happened was that everyone wanted to get their fat fees and commissions before the game was up.
This is overwhelming circumstantial evidence that massive fraud was committed in 2007, by people who knew exactly what was going on. There is no question in my mind that it could be proven that hugely illegal activities were going on, and that they could be proven in court by prosecutors who could subpoena the relevant paperwork.
The reason that isn’t happening is that, like Stiglitz, the prosecutors were complicit in the fraud. The government regulators and prosecutors had access to the data that these toxic assets were becoming worthless, but they did nothing about it, probably because they didn’t want to harm their own investments.
I frequently quote John Kenneth Galbraith on this web site, especially his 1954 book The Great Crash – 1929. His son, James K. Galbraith, is an economics professor at University of Texas.
In an a recent interview with Der Spiegel, James Galbraith described what’s been happening as a “culture of complicity” in response to a question about the German bank Hypo Real Estate:
“I sincerely hope the bank management conducted some due diligence with the products they bought. And if they relied on agency ratings, they should have asked whether the agencies were working on their behalf. But I am very sure that, again, the answer is ‘no’. The rating agencies made a mess by rating asset backed securities with AAA, so we’re seeing a failure of due diligence at every stage. And a deep fraudulence at every stage. When a rating agency certifies that a security is AAA, it is making a claim about the quality of that security. It cannot make this claim unless it has closely looked at this security. …The representation of such a quality of this security without examination is fraud. Perhaps Hypo Real Estate has legal recourse to these rating agencies for having relied on their fraudulent ratings.
Actually I doubt that, as there was some hidden understanding between such banks and rating agencies. The language they used reveals a different story than the one bank managers are selling to the public these days. “Liars’ loans,” “toxic waste,” or my favorite: “neutron loans” — loans that destroy the people but leave the buildings intact. These were the words to describe these loans and they were used by the people who were working in this industry. They reveal a culture of fraudulence on a massive scale. And of course governments now have to come to recognize that these are things they have to deal with. …
There was clearly a systemic failure. But that does not mean there was no criminal energy around. The language one uses to describe these things is very important. I tend to stay away from neutral terms like “systemic failure” or “bubble,” because these terms imply the innocence of the people involved — and I can’t see that. …
The reality of the financial crisis is that it was caused by a culture of complicity. That makes it so difficult for people to come to grips with it, especially for people who were involved, who were denying it themselves and who were partially aware of the extent of the damage. Probably many of them thought they would get away with it and now they realize that they have created an enormous slump.”
This is exactly the point that I’ve been making. When politicians and analysts make excuses for what happened, it’s to hide their own complicity.
So what did President Obama mean when he said that nothing illegal had occurred? Is he completely ignorant of what’s going on, or is he hiding his own complicity? You decide.
And let’s make it clear: The culture of complicity has not disappeared. The people in the same lethal combination of Boomers and Gen-Xers that caused the current catastrophe are still around, and they’re still making it worse. Geithner’s plan, as well as the various bailouts and stimulus plans, are part of the culture of complicity and are making the problem worse, prolonging it, and guaranteeing that the bankruptcies, homelessness and poverty will be even worse than they might have been.
Harry Markopolos, Bernie Madoff and the SEC
You’ll recall the Bernie Madoff is the man who defrauded thousands of investors out of $65 billion.
Madoff himself has been quoted as saying, “In today’s regulatory environment, it’s virtually impossible to violate rules. This is something that the public really doesn’t understand. But it’s impossible for a violation to go undetected, certainly not for a considerable period of time.” When Madoff said that, he had already been violating the rules and defrauding people for decades.
Two weeks ago, the CBS show 60 Minutes ran a news segment on Harry Markopolos, the man who repeatedly complained to the SEC that Bernie Madoff’s claimed returns were mathematically impossible. He made five separate submissions to the SEC, in May 2000. October 2001. October, November, and December of 2005, and then again June 2007, and finally April 2008.
“It took me five minutes to know that it was a fraud. It took me another almost four hours of mathematical modeling to prove that it was a fraud. As we know, markets go up and down, and his only went up. He had very few down months. Only four percent of the months were down months. And that would be equivalent to a baseball player in the major leagues batting .960 for a year. Clearly impossible. You would suspect cheating immediately.”
Markopolos said there were only two plausible explanations: either Madoff was using insider information to rack up the huge profits or he was running a giant Ponzi scheme. Both of those are illegal.
I identify very closely with Markopolos’ story. In 2002, I was eating lunch at the mall reading the Boston Globe, when I saw a graph of the Dow Industrials going back to the early 1900s. I took one look at it and said, “Ohmigod, the stock market is going to crash.” (Yes, it was that obvious, just from the graph.) Later, I did the detailed analysis.
I was really naïve at that time. I thought that once this problem was identified, people would want to know about it and take immediate action. Instead, I was simply blown off. That’s what happened to Markopolos.
There’s another similarity. Markopolos said, “I would say that hundreds of people suspected something was amiss with the Madoff operation. If you look at who the victims were not, you’ll notice that the major firms on Wall Street had no money with Mr. Madoff.”
In other words, Markopolos believes that hundreds of people knew that Madoff could be criminal, though he doesn’t know precisely who they were.
I set up this web site in 2002-2003 with the purpose of publishing analyses and predictions, so that people could judge for themselves whether the predictions were right or wrong. There are tens of thousands of people who now read this web site regularly. I don’t know who they are, but I assume that most of them know that we’re headed for a major financial crash, and they’re preparing for it.
Just as Markopolos said that it was mathematically impossible to doing what he’s doing legally, I’ve shown that it’s mathematically impossible to avoid a major stock market crash and a new 1930s style Great Depression. (See: “How to compute the ‘real value’ of the stock market.”)
But most people go to great lengths to main their state of denial.
I was talking to a friend, and I told him that I believe that one of the most important statements of the last decade was Alan Greenspan’s testimony to Congress in February 2005, when he completely repudiated his earlier views on the dot-com bubble.
My friend said, “You must be wrong, because if what you’re saying is right, then it would have been very big news, and all the news shows would have reported it.”
I said, “You can check Greenspan’s testimony for yourself,” but to no avail. This person did not want to know the truth, and nothing could change his mind.
There was another 60 Minutes segment that I want to comment on — the March 12 interview with Fed Chairman Ben Bernanke.
As I watched the interview, I realized that I have a great deal of respect for him as a man.
Now, no one has been a bitingly critical of him as I have. I’ve been relentless in mocking his policies, and pointing out that they couldn’t possibly succeed, as indeed they haven’t. And last year I wrote, “WSJ’s page one story on Bernanke’s Princeton ‘Bubble Laboratory’ is almost incoherent.”
But of the people that I criticize, I find most of them to be personally sleazy, taking ideological positions on the left or right designed to cover up their own personal failings, and their own complicity in the disasters of our time.
But what I see in Bernanke is a somber, modest man who talks openly and honestly about what’s going on, who really believes what he’s saying, who doesn’t put an ideological spin on it, and who feels personally devastated about the state of the economy, much of which he feels personally responsible for.
As much as I want to believe Bernanke, I just can’t understand what’s going through his mind. I don’t expect the average man on the street to understand the Law of Mean Reversion, but I do expect the head of the Princeton University Economics Department to understand it, and how it provides a mathematical proof that a new Great Depression is almost 100% certain. In the 60 Minutes interview he said that he expects the recession to level off this year, and growth to begin again next year. Does he really have so little understanding of the long-term damage caused by the dot-com, real estate, credit and stock market bubbles? Or is he saying what he’s saying because he doesn’t dare talk about what he knows to be the truth?
To infinity and beyond
Last year, I wrote the article, “One, Two, Three … Infinity,” in which I compared to the ever-increasing government spending plans to a book by George Gamow that I read in school in the 1950s.
I’ve really lost track of it all. It seems that ever week there’s a new stimulus plan or new budget or new bailout plan that adds a trillion dollars to the national debt. It’s a process that has no possibility of succeeding, and is mind-boggling in its stupidity.
One phrase I hear all the time from the journalists, politicians and analysts is, “When this thing is over ….”
Thus, you might hear this: “When this thing is over, the Fed will have to raise interest rates again.”
The assumption always seems to be that “this thing” will be over by the end of this year, or the beginning of next year. The assumption is that people will return to their “bubble mentality,” and the credit bubble will start growing again. Of course that’s impossible, as I explained earlier.
But there’s another insidious assumption being made. The assumption is that the reason for the budget deficit in the Bush administration is from the Iraq war, and that Obama is going to end the Iraq war, and end the deficit.
Here’s a chart that I posted a couple of years ago. It comes comes from the Calculated Risk blog from 2005:
Income vs Outlay as %-age of GDP for Federal Government, 1971-2005, not including Social Security (Source: Calculated Risk)
This graph shows that the huge deficit, which was supposedly caused by the Iraq war, actually began in 2000, the last year of the Clinton administration, with the dot-com crash. The outlays caused by the Iraq war were not particularly large by the standards of the preceding three decades. What mattered was the collapse of tax revenues.
At the beginning of 1996, President Clinton declared that “the era of big government is over.” What nobody knew then was that tax revenues were going to increase substantially in 1996, and every year after that, thanks to the dot-com bubble.
In fact, tax revenues depend on the state of the economy, and have almost nothing to do with anything else. Tax revenues went up in 2006 because of the credit bubble, and this year they’re going to crash dramatically, because corporate earnings, and the economy in general, are crashing.
Just as President Clinton was pleasantly surprised in 1996 when tax revenues surged, President Obama is going to be very unpleasantly surprised this year, when the weakened economy delivers substantially lower tax revenues.
Perhaps that’s why the Congressional Budget Office (CBO) published a report last week saying that the deficits will be much larger than President Obama’s estimates.
So President Obama is making incorrect assumptions on multiple levels.
He’s assuming that “when this thing is over,” people will return to their old “bubble mentality,” and they certainly will not.
And he’s assuming that tax revenues will hold steady, even though reported corporate earnings have been crashing.
All of the Obama administration’s assumptions are completely wrong. Tim Geithner’s new toxic asset plan doesn’t have a prayer of working.
The Obama Administration is a full partner and leading advocate in the culture of complicity. That’s why Washington’s budget plans are going to be a frigging disaster.
(Comments: For reader comments, questions and discussion, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (26-Mar-2009)
Can reformist Mir-Hossein Musavi beat Ahmadinejad in the June 12 elections?
Most analysts expect hardline Mahmoud Ahmadinejad to be reelected for a second term as Iran’s president in the election scheduled for June 12.
Now that popular reform candidate former president Mohammad Khatami has dropped out of the race, Ahmedinejad’s principal opponent is lesser known Mir-Hossein Musavi. Musavi is more conservative than Khatami, but is still considered a reform candidate with a chance of beating Ahmadinejad.
Decorations around the grave of a martyr from the Iran/Iraq war (Source: merip.org)
On Friday, US President Barack Obama send an open letter to the Iranian people in the form of a letter and an online video:
“Today I want to extend my very best wishes to all who are celebrating Nowruz around the world.This holiday is both an ancient ritual and a moment of renewal, and I hope that you enjoy this special time of year with friends and family.
In particular, I would like to speak directly to the people and leaders of the Islamic Republic of Iran. Nowruz is just one part of your great and celebrated culture. Over many centuries your art, your music, literature and innovation have made the world a better and more beautiful place. …
For nearly three decades relations between our nations have been strained. But at this holiday we are reminded of the common humanity that binds us together. Indeed, you will be celebrating your New Year in much the same way that we Americans mark our holidays — by gathering with friends and family, exchanging gifts and stories, and looking to the future with a renewed sense of hope. …
So in this season of new beginnings I would like to speak clearly to Iran’s leaders. We have serious differences that have grown over time. My administration is now committed to diplomacy that addresses the full range of issues before us, and to pursuing constructive ties among the United States, Iran and the international community. This process will not be advanced by threats. We seek instead engagement that is honest and grounded in mutual respect.
You, too, have a choice. The United States wants the Islamic Republic of Iran to take its rightful place in the community of nations. You have that right — but it comes with real responsibilities, and that place cannot be reached through terror or arms, but rather through peaceful actions that demonstrate the true greatness of the Iranian people and civilization. And the measure of that greatness is not the capacity to destroy, it is your demonstrated ability to build and create.”
Supporters of President Obama has described this as a brilliant move, designed to change the dialog between Iran and the West, and reverse the damage done by the evil Bush administration. Opponents of President Obama have described it as sending a message that, in the Persian mind, will be interpreted as defeat and surrender of the United States to the realities of Iran’s strength.
In between these two extremes lies a more sober assessment that can be derived from the principles of generational analysis. From the point of view of Generational Dynamics, Obama’s actions appear to have provided support for Ahmadinejad’s reform opponents in the upcoming June 12 Iranian elections.
The fact is that Iran is entering an extremely tumultuous political period. It’s now 21 years since the end of Iran’s last crisis war, which began with the Islamic Revolution of 1979 and continued with the Iran/Iraq war, climaxing in 1988. Thus, we can roughly compare today’s generational mood in Iran to the generational mood in America in 1966, 21 years after the end of World War II. In 1966, college students were mobilizing for the nationwide protests that led to the Summer of Love, the violent riots that accompanied the Democratic convention in Chicago in 1968, the collapse of President Lyndon Johnson’s presidential campaign, and the bombings and violence perpetrated by the Weather Underground.
Remember what happened during the 1960s, America’s last generational Awakening era. It began in August 1963, when Martin Luther King led a march on Washington in which over 200,000 people participated. Later, President Kennedy was assassinated, and so was King. There were numerous demonstrations and riots throughout the country. There were “long, hot summers,” led by the Black Panthers, and there were bombings and declarations of war against the government, led by the Weather Underground.
That’s precisely the kind of tumultuous period that Iran is entering right now.
On the one hand you have the older generations that survived the Iran/Iraq war, and who revere those who were killed in the war as martyrs. For these people, the spirit of the Islamic Revolution is as strong today as it was in 1979, and Islamic morality is essential to keeping any such disaster as the Iran/Iraq war from happening again.
On the other hand, you have the generations born after 1984 or so, with no personal memory of either the Islamic Revolution or the Iran/Iraq war, who see the imposition of austere Islamic morality as the ideological demands of doddering old fools.
An obvious criminal at large on the streets of Tehran (from April 2007) (Source: france24.com)
The most obvious symbol of this generational conflict has been the requirement that Iranian women must wear headscarves that entirely cover their hair, and I’ve enjoyed making fun, from time to time, of Ahmadinejad’s campaign to arrest young women in Tehran who don’t follow the strict dress code. (See “Iranian police swoop down on women with loose headscarves.”)
Iraq Today vs 1960s America (Revised): They have much in common: Bombings, assassinations, student demonstrations, violent riots, calls for insurrection and civil war and harsh rhetoric. That’s much more than a coincidence. (8-May-2004)
Riots in Iran: Will there be a violent overthrow of the Iranian Mullahs? Generational Dynamics says ‘No.’ (25-Jun-03)
However, the morality drive did not begin with headscarves in 2005. For Ayatollah Ruhollah Khomeini, the leader of the Islamic Revolution of 1979, the revival of Islamic morality was an integral part of the Revolution. Khomeini himself created the Islamic “morality bureau” in 1979, to uproot corrupt pre-revolutionary cultural habits.
By the late 1990s, as the first of the young post-Revolution generation began to reach manhood, Tehran’s culture was changing. Kids were willing to accept Islam as their religion, but saw no contradiction in also adopting European and American styles and behaviors. The morality police were beginning to arrest young people who violated Islamic dress and behavior rules.
That gave rise to the “reformist” movement and the election of Mohammad Khatami (whom we mentioned at the beginning of this article) in the 1997 presidential elections. He was reelected in 2001.
In November 2002, and again in May 2003, violent student protests raged in Tehran over the death sentence imposed by the Islamic courts on Hashem Aghajari, a history professor at a Tehran university.
Aghajari was a Iran war hero — have lost his leg while serving in the Iran/Iraq war.
However, he enraged conservatives in Iran in 2002 when he questioned the rule of clerics, and said that Muslims should not follow Islamic clerics “like monkeys”. The student protests were triggered when he was sentenced to death for blasphemy in November 2002, and again when the sentence was confirmed in 2003. Finally, he was released in 2004 in reaction to increased political pressure from students and intellectuals.
By 2003, the student movement was growing, and so was anger at “reformist” Mohammad Khatami, according to student leader Saeed Razavi-Faqih, in a 2003 interview:
“What we have realized is that the majority of students no longer want to maintain any dialogue with the regime. Previously, the students distinguished between the reformers in government, whom the students helped to elect to office and with whom they shared many concerns, and the hardliners, whom they had not elected and who were intent on maintaining their authoritarian grip on power. But the events of the past months, and especially these past few weeks [as supra-parliamentary conservative bodies have blocked legislation enhancing Khatami’s powers], have deeply changed this attitude. Students believe that some of the government reformers are sincere in their commitment to change, but are simply powerless to deliver on their promises. Their presence in the government only prolongs the life of a system that is incapable of reform. Following the recent attacks on students by vigilantes and thugs, the students wrote a frankly worded letter to Khatami, challenging him either to stop these violations and punish the culprits, or to resign and avoid legitimizing this regime.”
Old fogies in America’s Boomer generation may feel a certain familiarity with the above rhetoric — it’s very similar to the rhetoric used by students in America’s Awakening era in the 1960s. If you have a moment, go back and read the letter from Mark Rudd of Columbia University that I quoted several years ago. The more you read about this kind of rhetoric from students during Awakening eras for students in different countries, you realize that it’s all bluster and that it all sounds the same.
Razavi-Faqih continued as follows, when asked what the students will do next:
“It is not clear yet. Civil disobedience, strikes and peaceful protests in various locations…all these measures are being considered. The student movement is not prone to violence, although anger and frustration may lead to isolated incidents of violent reaction by students. We realize that violence will destroy our hard-won gains of the past few years. That is why we are moving toward connecting our movement to the demands of other social groups, like workers and even families. What is clear, though, is that we no longer feel there is any use in continuing a dialogue with the regime, even with the elected reformers. In realizing this, the student movement has shown itself one more time to be a step ahead of the rest of society.”
Thus, the election of hardline Mahmoud Ahmadinejad to the presidency in 2005 was a major blow to the student movement.
I’ve written about student unrest in Iran a number of times on this web site. (See for example “Iran: Tehran University student unrest is building against the government” for unrest targeting President Khatami in 2004, and “Students at Tehran University risk protest against Ahmadinejad” from 2007.)
I’ve written about it because it’s the hallmark of a generational Awakening era, one that begins a generation past the end of a crisis war.
(For information about generational Awakening eras, see “Basics of Generational Dynamics.” For information about America’s Awakening era in the 1960s-70s, see “Iraq Today vs 1960s America.” For information about the Summer of Love, see “Boomers commemorate the 40th anniversary of the Summer of Love.”)
The axis of evil
One thing that I’ve always found pleasing — going back as far as 2000 — was that I’d occasionally read news stories about pro-American student demonstrations in Tehran. It was such a pleasant contrast to the anti-Americanism that seemed to exist everywhere else, including even the American press. And when Palestinians were dancing in the streets after the 9/11 attacks, Iranians were expressing genuine sympathy.
I’ve written several times about the schizophrenic national strategy that Iran has been exhibiting. From the point of view of Generational Dynamics, what’s important is the behavior and attitudes of large masses of people, entire generations of people. The attitudes and behaviors of the politicians are irrelevant, except insofar as they reflect the attitudes of the people.
Thus, when I’ve analyzed Iran’s strategy, I’ve had to emphasize the effects and potential outcomes of the drastically different attitudes of the older generation politicians and people — the “kids.” I have absolutely no doubt that the kids are going to win this political battle. The only question is — when?
And when we discuss politics, we have to go back to 2002. Possibly no single sentence has roiled Iranian politics in the last decade more than President Bush’s statement, in 2002, naming Iran, Iraq and North Korea as the new “axis of evil.”
Here’s what NY Times columnist Thomas Friedman wrote in 2002:
“[If you come to Iran,] you’ll discover not only a Muslim country where many people were sincerely sympathetic to America after Sept. 11, but a country where so many people on the street are now talking about — and hoping for — a reopening of relations with America that the ruling hard-liners had to take the unprecedented step two weeks ago of making it illegal for anyone to speak about it in public. …But what is striking is how much President Bush’s branding of Iran as part of an “axis of evil” (along with Iraq and North Korea) intensified this discussion. At first, reformers in Parliament and the media were embarrassed by Mr. Bush’s statement, which hard-liners used against them as “proof” that America would never have ties with the Islamic Republic. But since then, reformers have retaliated by pointing to the “axis of evil” accusation and saying to the hard-liners: “Look where your policies have led us.”
Add to this the reduction in U.S. visas for Iranians since Sept. 11, which has dispirited many Iranian college students, and the shock the Iranians had two weeks ago when Russia, their longtime backer, effectively joined NATO, and you can understand why a lot of people here are rethinking ties with Washington. …
I don’t know what the final outcome will be, but I do know this: If Secretary of State Colin Powell were to announce tomorrow that he was ready to fly to Tehran and put everything on the table — an end to sanctions, Iran’s nuclear program, its support for Palestinian terrorists, diplomatic relations — he would light this place on fire.”
That column appeared on June 12, 2002. And now we’re headed for an election on June 12, 2009, and President Obama has done — sort of — what Thomas Friedman has suggested. When we say “sort of,” we mean that no real policies have yet changed. The Iranians are still enriching uranium and producing plutonium (ingredients in both reactor fuel and nuclear weapons). And last week, Obama signed a renewal of the US economic and trading sanctions against Iran.
Still, for those who believe that words can change the world, will Obama’s remarks “light [Tehran] on fire?”
Since the kids are going to win the generational political battle eventually, the kids may get a victory on June 12, and that’s the possible scenario that has to be considered.
Analysts that I’ve heard on BBC say that Ahmadinejad is heavily favored to win. They point to his popularity in parts of Tehran, and especially in the rural villages scattered around Iran’s countryside.
However, Ahmadinejad may not be as popular in rural areas as he used to be, according to one recent news story:
“On March 4, Ahmadinejad decided to make one of his frequent provincial stops on the city of Orumieh in west Azerbijan. This was supposed to be a great publicity tour with thousands of appreciative townspeople cheering and applauding their beloved president. It was after all in west Azerbaijan that Ahamdinejad’s career– as the governor of the province—had been launched before he came to national prominence as Tehran mayor. Instead, he was treated to a rare display of public anger not seen in Iran in recent memory. Right in the middle of the public spectacle, Ahmadinejad’s motorcade came under attack by more than one shoe-thrower who were apparently not enthused with this visit.According to the March 6 Guardian report on the incident, after the repeated shoe-throwing and booing’s, the security guards scrambled to catch the offending individuals but were unable to do so. Instead, the president’s automobile quickly sped away to avoid further embarrassment. Following the incident, all the president’s provincial excursion tours have been indefinitely cancelled and the Iranian media have been strictly forbidden to report on the episode—for very good reason.”
Of course much of the world press, including the Iranian press, has been very gleeful in describing the shoe-throwing incident directed at then-President George Bush visiting Iraq. So these new incidents might be described as examples of the old saying, “What goes around comes around.”
From the point of view of Generational Dynamics, it’s not a surprise that there’s a change in attitude among rural voters that’s similar to the change in attitude among Tehran students. After all, the change is a generational change, and the same young generations are growing up in rural areas.
So if the shoe-throwing incident in Orumieh represents a widespread change in rural attitudes towards Ahmadinejad, then he could indeed be in serious trouble in the June 12 election.
That’s the reason why the title of this article is, “President Obama casts a vote against Iran’s President Ahmadinejad.” In the current climate, the kids are going to support the reformist candidate, and Obama may have given their cause a boost.
The main reformist candidate was originally going to be Mohammad Khatami, but he stepped down last week, giving as a reason that there were several “reformist” candidates, and he didn’t want to split the vote, although other news stories hint that he was pressured, and perhaps threatened with violence.
That leaves the hopes of the reformists in Mir-Hossein Musavi. Musavi also served in the Iran/Iraq war, but he’s less well-known than Khatami, and his “reformist” credentials are sometimes questioned by student groups. Furthermore he will have to split the vote with another “reformist” candidate, Medhi Karrubi.
Today, the election favorite would have to be Ahmadinejad. However, the election is now 2½ months away, and that amount of time is an eternity in politics.
If Ahmadinejad loses, then President Obama’s supporters will undoubtedly claim some of the credit for him. This will be a bright spot for him, since the financial crisis and other policy areas will give him little or nothing to crow about.
(Comments: For reader comments, questions and discussion, as well as more frequent updates on this subject, see the Iran thread of the Generational Dynamics forum.) (22-Mar-2009)