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A generation ago, banks took deposits, made loans and collected payments.
Back then, bankers quickly felt the consequences of money lent to folks unlikely to repay.
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During the 1980s, deregulation pushed up interest rates on deposits. Banks got caught with old mortgages on their books yielding less than they paid for deposits. The U.S. Savings and Loan Crisis resulted, motivating banks to sell new loans to investors instead of holding those in their portfolios.
Banks wrote mortgages and sold those to Wall Street financial institutions, who bundled loans into bonds and sold those to investors such as insurance companies and foreign governments.
Often, separate mortgage service companies were established to collect payments — and foreclose on delinquent loans.
From loan officers to the Wall Street bond salesmen, opportunities to exaggerate the quality of loans emerged. If local banks or Wall Street financial houses could pawn off high-risk, high-fee loans as reasonably safe, they enjoyed big paydays.
Wall Street bankers wrote bogus insurance policies called SWAPS that were supposed to limit losses for investors when mortgages defaulted. One of the modern world’s biggest culprits, AIG, wrote many SWAPS without capital to back them up, and banks even wrote SWAPS on each other’s mortgages.
It was as if two homeowners on a North Carolina beach promised to pay one another in the event of a hurricane.
Well, the storm came, and AIG and several big banks became insolvent. In a flash, Washington decided they were too big to fail and bailed them out.
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And wouldn’t you know it, the key point of writing SWAPS and selling bad bonds to unwitting investors was to permit bankers to earn huge profits and bonuses. When too many mortgages failed, investors and bank shareholders took enormous losses — and U.S. taxpayers had to bail out the banks.
Apart from the TARP, the U.S. Federal Reserve and FDIC permitted banks to borrow at rock bottom interest rates and enjoy big profits to rebuild their capital. Consequently, widows relying on Certificates of Deposit for income now receive much-reduced interest rates. That’s right — Ben Bernanke is taxing grandma to bail out Goldman Sachs.
Flush with profits, the banks are up to their old tricks. Once again, they are creating highly engineered financial products, selling swaps, setting aside massive profits for bonuses — and manufacturing conditions for another crisis.
If Wall Street banks are too big to fail, then they are too big to be allowed to continue this irresponsible behavior.
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French and German regulators advocate limits on bank compensation, and the Federal Reserve is considering prohibitions on compensation practices that encourage excessive risk taking. The latter is too complex to be realistic — the banks would run circles around such rules, much like lawyers creating tax shelters.
Better to limit bonuses and salaries of bankers to a fixed percentage of net income that aligns financial sector salaries with those of other industries.
Harsh for sure, but so is the pain bankers’ recklessness has imposed.
Bankers should not be allowed to pay themselves royally — and put the United States or any other nation, for that matter, at risk again.
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Fiscal policy — public spending, taxes and debt management — has thus returned, rather abruptly, to the heart of the public policy debate.
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If fiscal policy has been policymakers' tool of choice for responding to the crisis (many believed they, in fact, had no choice), it can also be used effectively in the longer-term fight to reduce poverty and excessive inequality.
The Obama Administration apparently aims to do precisely that — implement today’s necessary fiscal policy in ways that are more attuned to reducing long-term inequality in the United States. But how much reduction in inequality can, or should, the United States expect to achieve through fiscal policy?
We can get some idea of the potential impact of fiscal policy on inequality in the United States by looking at how taxes and government spending affect income distribution in Europe and Latin America.
European countries generally have lower inequality than the United States. But in Latin America, as U.S. Secretary of State Hillary Clinton observed recently, the inequality between rich and poor is "the greatest gap of any region in the world." What is the role of fiscal policy in these differences?
We can evaluate the impact of fiscal policy on income inequality by looking at inequality of household income before taxes and government transfer payments, and then see how much this inequality is changed through the combined effects of taxation and public spending.
Progressive taxation — taxes that take a bigger share of the income of rich families than poor families — tends to reduce income inequality, as does universal child support, pensions for lower-income workers, food stamps and other spending programs that are more important to the poor than to the rich.
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On the other hand, regressive taxes (such as sales taxes) and government spending that directly or indirectly favors the better-off often fails to reduce income inequality, and can even raise it.
Inequality can be gauged by an index called the "Gini coefficient." This index varies from zero (every household has the same income) to 100 (all the income in the land is concentrated in a single household). Typically, the effects of labor and capital markets combined are to generate before-tax-and-transfer Gini coefficients of 40 to 50, although in Latin America (and Africa) several countries have Gini indexes above 50.
For example, in Western Europe, only Portugal has a pre-tax-and-transfer Gini slightly above 50, and only the Netherlands’ is (slightly) below 40. The United States’ pre-tax-and-transfer Gini index is 46, fairly typical of advanced industrial countries.
These similarities dissolve when we look at inequality after taxes and public spending. In Europe, the effect of taxes and transfer spending is dramatic. Fiscal policy reduces the average Gini coefficient from 48 to 28.
In the United States, fiscal policy also reduces inequality, but much less than in Europe. Fiscal policy in the United States reduces the Gini coefficient from 46 to 38.
In Latin America, fiscal policy has a negligible effect on income distribution in most countries.
The high before-tax-and-transfer-payment inequality — Latin American countries have an average Gini of 52 before fiscal policy — remains stratospheric compared to Europe and even to the United States after taxes and public spending. After fiscal policy, income inequality in Latin America still tips the Gini scale at 50.
So fiscal policy — the combined impact of taxes and public spending — reduces income inequality in Europe by about 40% (i.e., by almost 20 Gini points), in the United States by about 17% (8 Gini points) and in Latin America by a mere 4% (2 Gini points).
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Source: "Latin American Economic Outlook 2009," OECD Development Centre (2008), and "Growing Unequal?" OECD (2008).
Why is taxation and public spending so ineffective in ameliorating income inequality in Latin America? Three facts, listed in order of decreasing importance, go far to explain this ineffectiveness:
First, in Latin America, only a privileged minority qualifies for public pensions and other "poverty alleviation" spending. Most of the population is outside the social security system. Even education and other "universal" programs are often of poor quality, and tend to be avoided by those who can afford private alternatives.
Put simply, the main problem in Latin America is that governments generate far too few benefits for most of their populations from the money they spend in terms of the quality of the public goods provided with that money — be it spent on education, health care, public safety or whatever.
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This leaves the poor no better off after the government intervenes than before. And it means that an increase in public spending without fundamental changes in the way the money is spent will not even begin to solve the problem.
Second, Europe and North America rely much more on income taxes than Latin America, where sales taxes and value-added tax (VAT) are more important. Personal income taxes are 27% of government revenues in Europe and the United States, but only 4% in Latin America.
Third, the public sector is smaller in Latin America than in Europe or North America. Taxes in Europe average 38% of GDP. In the U.S. they are 27% and in Latin America they are 20%.
Trends in the United States suggest that the Latin American model of fiscal ineffectiveness is dangerously relevant. Again and again in the past few decades, U.S. voters have favored tax cuts over tax increases to support improved public services.
The erosion of popular support for public spending on education illustrates this trend, as the small proportion of U.S. children who are schooled in private academies and at home has gradually risen.
More strikingly, California voters in a May 19, 2009, referendum chose to close down public services — rather than make adjustments for the economic crisis.
Also symptomatic is the current upheaval, and apparent Democratic backpedaling, over a possible surtax on the wealthiest Americans to finance badly needed health care reform.
Looking to the future, because President Obama’s stimulus package necessarily adds to the nation’s already large fiscal imbalance, the United States will need to further adjust taxes and spending as the economy recovers.
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The strength of pressures to avoid solutions that burden the wealthy, such as the surtax for health care reform, and the appeal of adjustments that are painless for the wealthy — privatization of Social Security, withdrawal of support to public schools, the elimination of income support programs for the indigent — constantly threaten the modest income redistribution effects of the U.S. fiscal system.
They also have perverse macroeconomic effects, and help preserve an economic system that allows some Wall Street executives to make huge under-taxed incomes through irresponsible risk taking. Too much of the burden of that risk is shifted to the public in times of major failure. And both growth and resource allocation tend to be driven, somewhat artificially, more by financial than real innovation.
President Obama's plans to create a public health care safety net for all — and to extend public education to those aged 2-5 — may well clash with the perceived individual economic interests of older, wealthier, established voters who can easily turn against him if they feel their narrow economic interests are threatened.
Was the election of President Obama and Democratic majorities in the U.S. House and Senate truly a choice for stronger social safety nets and a stronger economy, together with more effective support for those whom the market tends to leave behind?
Or will the United States move more toward a Latin American pattern, where fiscal policy is so constrained by powerful interest groups that critical opportunities to strengthen the economy and reduce excessive inequality are lost?
The broader fiscal-policy challenge for all governments is to create a progressive tax system — and to use public spending in ways that simultaneously encourage the use of demonstrated best practices and secure the social support needed to leverage that spending for a stronger economy.
Reaping higher returns from public investment in the formation of both physical and human capital requires governments to ensure that public spending is efficient and well targeted. To do so is as important today for the United States as for Latin America.
Slip in Home Sales Hurts Stocks
Stocks fell Thursday, led by the materials sector, after a weak reading of home sales deepened investors' worries about the broader U.S. economy.
The Dow Jones Industrial Average fell by 41.11 points, or 0.4%, to 9707.44. Alcoa sank by 4.5%, while Bank of America, Caterpillar, Dupont and General Electric declined by more than 2%.
![[Markets Data]](http://s.wsj.net/public/resources/images/MDGpromo_D01222009151210.jpg)
The market had received an early boost from better-than-expected data on first-time unemployment claims, but the gains quickly evaporated after the National Association of Realtors said that sales of existing homes fell 2.7% last month, snapping a four-month streak of rising sales.
The big-picture fears that roiled the market Thursday came in the wake of the latest policy announcement by the Federal Reserve's rate committee. The panel kept its key rate target steady and said it would phase out its purchases of $1.25 trillion in agency mortgage-backed securities and up to $200 billion in agency debt by the first quarter of 2010, rather than by the end of this year.
Stephen Wood, chief market strategist at Russell Investments, said that some market watchers had been expecting the Fed to more clearly articulate an exit strategy from its emergency supports for the financial system.
"That would have been a sign that the economy was a little bit stronger," which is what investors were hoping for, he said.
The S&P 500 fell 10.09 points, or 1%, to 1050.78, led by a 2.2% decline in its materials sector. Its energy category fell 1.4% as crude oil dropped 4.5% to the lowest leven in nine weeks. The technology-focused Nasdaq Composite Index sank 23.81 points, or 1.1%, to 2107.61, and the small-stock Russell 2000 fell 11.62 points, or 1.6% to 601.75.
Strategist Carmine Grigoli of Mizuho Securities USA is optimistic that stocks can resume their recent rally, which pushed indexes up nearly 50% from their March lows. He doesn't necessarily believe the latest bout of weakness will turn into a 10% decline that traditionally defines a market correction.
Moody's shares fell 4.4% after the House oversight panel postponed a hearing on credit-ratings agencies after the committee's chairman said new information about Moody's. McGraw-Hill, which owns Moody's rival Standard & Poor's, tumbled 6.5%. Both stocks have fallen nearly 30% this month.
Treasury prices gained after a strong auction of seven-year notes. Ten-year Treasurys rose 11/32 to yield 3.374%. Two-year Treasurys rose 1/32, yielding 0.941%. Yields move inversely to prices.
Gold prices also fell. Comex gold for September delivery sank by $15.50 a troy ounce, or 1.53% to $997.50, the largest one-day dollar and percentage slide for the yellow metal since July 8 and the lowest settlement since Sept. 10.
Netanyahu Blasts Ahmadinejad at U.N.
CHRISTOPHER RHOADS
![[Benjamin Netanyahu]](http://s.wsj.net/public/resources/images/OB-EN460_0924ne_F_20090924133609.jpg)
Associated Press Israel's Benjamin Netanyahu holds up Nazi documents during his speech to the U.N. General Assembly on Thursday.
Israeli Prime Minister Benjamin Netanyahu issued a blistering attack on the floor of the United Nations Thursday on Mahmoud Ahmadinejad, saying the hearing granted the Iranian president the night before amounted to a "disgrace of the U.N. charter."
Mr. Netanyahu dramatically held up copies of minutes of the meeting of Nazi officials in 1942 where plans were made for the extermination of the Jews, as well as constructions plans of Nazi concentration camps.
Netanyahu Blasts Comments on Holocaust
0:49Israeli Prime Minister Benjamin Netanyahu attacks Iranian leader Mahmoud Ahmadinejad's comments about the Holocaust, calling them a "disgrace" and a "mockery."
"Are these protocols lies?" he asked, waving them in his hand. "Are the successive German governments that have kept these documents for posterity all liars?"
He opened his remarks by saying that the greatest threat to the U.N. effort to prevent a repetition of the carnage of the World War II is the "assault on truth."
"Yesterday the president of Iran stood at this very podium and spewed his anti-Semitic rants," he said. "Just a few days earlier he claimed that the Holocaust was a lie." He then described how he had obtained the documents he held up before the assembly.
"Nearly one-third of all Jews at the time perished in the Holocaust," he said. "Nearly every family was affected, including my own."
Mr. Netanyahu continued about Mr. Ahmadinejad, "Perhaps some of you think this man and his odious regime only threaten the Jews. Well, if you think that you are wrong, dead wrong.
"What starts as attacks on Jews always ends up engulfing others … this regime embodies the extremes of Islamic fundamentalism."
He concluded by quoting Winston Churchill, and his warnings about mounting threats in the run-up to World War II.
Down to Business
![[SB125381619451938363]](http://s.wsj.net/public/resources/images/OB-EN480_0924un_D_20090924141939.jpg)
President Barack Obama and British Prime Minister Gordon Brown left the Security Council meeting together.
Say Who?
![[ahmadinejad]](http://s.wsj.net/public/resources/images/OB-EN187_UNname_D_20090923131520.jpg)
Emmanuel Dunand/AFP/Getty Images Click for a guide for hard-to-pronounce heads of state.
"The question facing the international community is whether it is prepared to confront these forces or just accommodate them," he said.
Mr. Netanyahu also denounced a U.N. report accusing Israel of war crimes in its winter war against Palestinian militants in the Gaza Strip. He said the report turned the victims into the aggressors and encouraged terrorism.
Meanwhile, Palestinian President Mahmoud Abbas said that Palestinians cannot return to peace talks at this time because of "fundamental disagreements" with Israel on what should be on the agenda, the Associated Press reported.
Mr. Abbas rebuffed an appeal by President Barack Obama that both sides get back to the table promptly.
The Palestinian leader said he wanted to avoid a crisis with the Obama administration at any cost and emphasized that dialogue was the only way to close the gaps and resume negotiations. But he said that for now "there is no common ground" with Mr. Netanyahu.
Now Even Millionaires Can See the Benefits of Budgeting
SOMEONE with $100 million has nothing to fear, not even fear itself.
“People who would get a new Mercedes S550 every couple of years aren’t doing it now,” said G. Moffett Cochran, chief executive of Silvercrest Asset Management.
Wealth Matters
Paul Sullivan writes about strategies that the wealthy use to manage their money and their overall well-being.
Paul Sullivan’s Columns »But not long ago, a client with such assets called and asked Bruce Bickel, her wealth adviser at PNC Wealth Management, to put her on a budget.
“She said we’ve never done this before, and we think we should,” said Mr. Bickel, managing director of private foundation management services at PNC. “It’s all relative. Their loss has put them in a fear response.”
That mindset is a direct result of the financial panic that turned one year old this week. At this time last year, Richard Fuld was center stage in the financial crisis; Ken Lewis, chief executive of Bank of America, was being hailed as Merrill Lynch’s savior; and Bernard L. Madoff was little known beyond the financial world.
None of that is true today. And even though a year has passed, wealthy investors remain cautious.
The Boston Consulting Group predicted this week that worldwide wealth would not return to 2007 precrisis levels until 2013. It also said it found that the number of millionaires was down 18 percent and that, across the board, clients of wealth management firms had lost trust in their advisers.
“There is a shattered confidence we haven’t seen in a long time,” said Bruce Holley, senior partner at the firm. “The wealth management business is a very emotional business, and people can react in kind to that.”
This explains how someone with more than $100 million in assets can ask her adviser to put her on a budget. As far-fetched as it may sound to someone struggling to make a mortgage payment, such a request reflects the changes in attitudes about wealth in the last year.
SHOW ME THE MONEY Watching where your money goes is more than just having a budget. “One of my families said, ‘If you’re worried about spending, then you’re not wealthy,’ ” Mr. Bickel said. “But across the board, there is greater discernment with use of discretionary income.”
That discernment has taken many forms. One is charity. Many of the two dozen private foundations Mr. Bickel advises have become more focused in their giving. In one case, the family used to give to various cancer-related charities, but it now concentrates on cancer research. The family has not reduced what it gives, just focused it on a particular area to have greater effect.
Still, any budgeting is bound to encompass personal expenses, even for those with plenty.
“People who would get a new Mercedes S550 every couple of years aren’t doing it now,” said G. Moffett Cochran, chief executive of Silvercrest Asset Management, which has an average account size of $30 million. “The next car may not be an S550; it may be an Acura. There’s an awareness of conspicuous consumption.”
This feeling is gaining ground. Mr. Bickel said he has been helping parents talk to children about cutting back and doing so without feeling guilty. “They say, ‘My teenager isn’t driving a BMW; she has to drive a Ford Focus,’ ” he said. “I tell them not to worry about it. The need is the car. The desire is the BMW.”
In both cases, the car buyers could probably buy any car they wanted. But they are thinking more about what else they could do with that money. This caution, too, is reflected in their investing practices.
EASY DOES IT Even though stock markets have rebounded from their lows this year, wealthy investors have not rushed back in.
Nancy Rooney, head of the Northeast investment business for J.P. Morgan private wealth management, which serves clients with $1 million to $25 million, said she has seen two types of investors become cautious in their investing.
The first have new money and had not experienced serious market swings before. They had been focused on their quarterly gains and largely ignored the risks. Having lost a lot more money than they thought possible, they are struggling with the shock of it.
Or, as Mr. Cochran put it, “Many people thought they were gunslingers.” Now, he said, “They’re not gunslingers any more.” Mr. Holley described the sentiment as a return to “meat and potatoes” investing.
Now, that group is focused more on the risk of an investment than its possible return. One result is they are poring through all the disclosures before investing, and they are not as worried about missing out if they are pressured to invest too quickly.
The second group is older and held wealth longer. They exhibited almost a knee-jerk reaction to the crisis and put a lot of money into cash early on. They continued to stand on the sidelines through the initial rebound. Only now are they looking to invest in safe assets, like prerefunded bonds secured by United States government obligations.
“We are very gradually working with them,” Ms. Rooney said. “For many of them, it was a loss of confidence in themselves as well as in the markets.”
Mr. Cochran said he believed many clients thought the world was coming to an end last September. That it did not end has not consoled them. They are still hesitant with new investments.
One reason is that many do not want to tie up their assets and then not have access when and if they need money. No one wants to have to sell a good asset at a bad price to cover living costs. The problem, though, is that cash or money market funds will not keep pace with inflation. So they will have to dip into the principal of their portfolio.
One longtime real estate investor Ms. Rooney spoke to said he understood the ebb and flow of investment returns but was still spooked by what happened last fall. “The inability to access all of his funds immediately sent a panic though him that he hadn’t focused on before,” she said.
This means, for now at least, that even savvy investors are willing to pass on investing with a top manager if they feel their money would be locked up too long.
“Even when the markets rebound, we don’t expect people to get in with the same speed as before to the high-yielding assets,” said Monish Kumar, global leader of asset and wealth management at Boston Consulting.
THE FUTURE Caution, like thrift, can be detrimental to an economy in crisis. If wealthy investors steer clear of stocks for the medium term, the trading rally of the last few months could slow. If they are afraid to lock up their capital for the longer term, private equity partnerships and hedge funds could suffer. And if wealthier people eschew the heavy debt load they had recently embraced, their savings may increase but the banks that had eagerly lent to them will feel the effect. And this will then affect less-affluent investors.
Yet these are all ifs born of a mild recovery. Last year at this time, few advisers would have predicted that the economy would have come back this far this soon.
“Many of our clients are very happy to be sitting on bond portfolios and cash reserves,” Mr. Cochran said. “What I can’t answer is whether that money is permanently on the sidelines.”
Regardless, a budget isn’t a bad idea.
by Bill BonnerWhat’s a Consumer Economy Need in Order to Keep Growing?
You wanna know what is going on? David Rosenberg explains...
"US consumers are cutting back, and where they are not cutting back, they are scaling down. This new cycle is all about 'getting small' and it is deflationary. For yet another in the litany of signs pointing in the direction of social change towards thrift, have a look at what is transpiring at the upper echelons of the income strata – Now Even Millionaires See the Benefits of Budgeting on page B5 of the Saturday NYT is a must read.
"Not only are the rich trading down, but the article quotes a high net worth financial advisor who said 'many of our clients are very happy to be sitting on bond portfolios and cash reserves.' And see the article on page 2 of the Sunday NYT – Beauty Products Lose Some Appeal During Recession. According to the NPD Research Group, total sales of department store beauty products are down 7% from year-ago levels. Women are apparently opting for the 'natural look' – "some people are selectively replacing higher-priced items with cheaper products from drug stores and discount stores."
Right on, David!
And here's the CEO of Pepsico:
"The age of thrift is here."
Even in Japan, after 20 years of coughing and sneezing, people have caught "the thrift bug," says The New York Times.
What's a consumer economy need in order to keep growing?
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Uh...it's needs consumer spending.
What do consumers need in order to boost spending?
Uh...they need more money!
Oh, there's where it all starts to come apart, doesn't it? Where do they get more money? They either earn it...or they borrow it. And right now, they can't earn it – not with 12% unemployment in California! Workers have no bargaining power. And they can't borrow it either. The banks won't lend – not with the value of their collateral still falling.
Word comes this morning that mortgage delinquencies have hit a new record. And here's a headline warning of worse to come:
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"$30 billion home loan time bomb set for 2010."
Even solvent homeowners who aren't forced into foreclosure still find it beneficial to walk away from their houses. "Strategic defaults," says The Los Angeles Times, are becoming a problem for mortgage lenders.
We didn't read the article. Instead, we began to think. What if we owned a house worth $200,000 with a $300,000 mortgage? What would be the smart thing to do? Easy...walk away from it. Then, buy it back at auction!
Desperate consumers do what they have to do. Canny consumers do what's smart. And now it's smart to walk away from any debt that you don't actually have to pay.
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As for adding more debt, you can gage yourself from the comments above, consumers are not eager to borrow. They've seen what happens when they go too far into debt. They're older and wiser than they were in the bubble years. It's been 10 years since the tech bubble exploded. Since then, stock market investors have made nothing – zero. And now houses are falling too.
So, if a fellow needs money for his retirement, where is he going to get it? Not from his house. Not from a pay raise. And not from his stocks either. He needs savings. He needs real money.
Americans aren't so stupid after all. When they need to stop spending, they stop spending. When they need to save, they save. Too bad about the economy.
Yes, what is good for individuals seems to be bad for the economy. When people save instead of spend, the consumer economy stalls. And then economists think there is something wrong. They think an economy needs to expand constantly. And so, they try to find "solutions" to the "problem."
Actually, there is no problem at all. It's just the way capitalism works. There are booms. And there are busts. Periods of growth...and periods when the mistakes made during the boom are corrected. There's a time for every purpose under heaven. That's the way it works. The economy breathes in and it breathes out.
And there's always some dumb economist trying to smother it with a pillow!
Irving Kristol, RIP
The "godfather" of the neocons leaves a legacy of perpetual war
To my knowledge, the late Irving Kristol was the only self-admitted neoconservative in existence. With his death, at the age of 89, does this mean the species is extinct? Far from it. In spite of the odd tendency of neoconservatives to deny their ideological heritage, there is no escaping it. The title of Kristol’s 1999 book pinpoints the problem: Neoconservatism: The Autobiography of an Idea.
Neoconservatism, the successful promotion of which Kristol devoted a good part of his life to, is biography at least as much as ideology. It is the story of the so-called New York intellectuals, who spent their misbegotten youth as Trotskyists, penning furious polemics against U.S. imperialism, but mostly against each other – and some of whom, including the ex-Trotskyist Kristol, wound up in the pay of the CIA, writing for Encounter and its French and Italian equivalents. (For a fascinating account of the neocon-CIA convergence, see Christopher Lasch’s essay on the Congress of Cultural Freedom, a CIA front that nurtured Kristol in the early days of the Cold War.)
In his 1977 essay, "Memoirs of a Trotskyist," Kristol describes the denizens of Alcove No. 1 at New York’s City College – the favorite hangout of the anti-Stalinist leftists on campus, including Irving Howe, Seymour Martin Lipset, Daniel Bell, Nathan Glazer, and, indeed, an entire generation of social scientists who later became prominent in academia. Here was the birthplace what we know today as the neoconservative movement, an intellectual tendency in modern American politics that has had an outsized impact on the nation, especially our foreign policy.
The intellectual odyssey of the neoconservatives is too well-known to go into here at length: the story has been told, especially by the participants, time and again. They even made a movie out of it, in which Kristol played a starring role. As a dedicated Trotskyist on the eve of World War II, young Kristol was caught up in the internecine feuds that consumed the movement and ultimately ripped it into two then three factions. The question was how to respond to the Hitler-Stalin Pact and the occupation of Europe by the twin totalitarian powers. The side Kristol chose propelled him on an intellectual journey, along with his friends and cohorts, that would take him to the heights of power in the inner councils of the very capitalist class he was once pledged to overthrow.
The debate that broke out in the Socialist Workers Party, the main Trotskyist group in the U.S. at the time, pitted the "orthodox" Trotskyists, led by Trotsky and James P. Cannon – who considered the Soviet Union a "workers state," because property was collectivized – against the revisionists, led by Max Shachtman and James Burnham, who held that the USSR had morphed into "bureaucratic collectivism," a new form of class society based on collectivized property forms, and was no longer worth defending. The movement split, with the Shachtmanite minority going its own way. Kristol went with them, and this was just the beginning of multiple defections.
A few months after the setting up of Shachtman’s group, the Workers Party, Burnham, a professor of philosophy at New York University, resigned. He was well on his way to repudiating Marxism altogether. Burnham took a few party members with him, as was usual in these splits, among them Kristol, who became the editor of the "theoretical journal" of the "Shermanites," who described themselves as "revolutionary anti-Bolsheviks." In the pages of Enquiry, Kristol attacked Sidney Hook for his pro-war stance, yet Professor Hook was just ahead of his time. Soon enough, Kristol and the rest of the Alcove No. 1 gang would follow Hook down the same path, not merely reconciling themselves to what they used to denounce as "imperialism," but becoming its most fervent cheerleaders.
In his "Memoirs" essay, Kristol explicitly gives thanks for the training provided by the Trotskyist movement as the ideal school for an intellectual entrepreneur such as himself. The scholasticism, the organizational discipline, the single-minded devotion to ideas as weapons of combat: all were good preparation for the task that lay ahead of him, which was nothing less than taking over the conservative movement and the Republican Party – and finally, with the election of George W. Bush, taking the White House.
Kristol became known as the "godfather" of neoconservatism, and for a very good reason. He was the quintessential organizer and spark plug of the movement, which took on various organizational forms over the years, and which he best summed up as a "persuasion." The autobiographical details of the various neoconservative intellectuals vary with temperament and circumstance: James Burnham went to work for the CIA and later signed on at National Review, along with several other ex-Communists of one sort or another. Others stayed on the Left but tempered their former radicalism with an emphasis on anti-Stalinism. Shachtman, for example, wound up supporting the Vietnam War while remaining faithful to the doctrine of socialism. His followers found their champion in Sen. Henry "Scoop" Jackson, whose centrist liberalism on domestic issues and ferocious militarism perfectly embodied the ideological parameters of the neoconservative persuasion. Jackson’s aides – Paul Wolfowitz, Richard Perle, and Elliott Abrams – became the core group that would later have an outsized influence on the course of American foreign policy.
These two tendencies, however, soon met up and reemerged as the Cold War progressed into semi-hotness. The neoconservative movement has always been focused on foreign policy, although Kristol’s journal, The Public Interest, was concerned with domestic policy, seeking to ameliorate the rampant liberalism of the Great Society with a dose of hard-headed realism. The main goal of the neoconservatives during the Cold War era was the elimination, by military means, of their old nemeses, the Stalinists.
Kristol’s role in this was to provide the organizational and – more importantly – the financial framework for the nascent neoconservative ascendancy on the Right. He somehow managed to persuade the old conservative money – the heirs of fortunes that had once supported the "isolationist" America First Committee and opposed the "reforms" of the New Deal tooth and nail – to modify its opposition to the welfare-warfare state, accepting "two cheers for capitalism" instead of three and completely abandoning the old right-wing anti-interventionism of Robert A. Taft and the America Firsters for the Burnhamite vision of a new world war, as outlined in the Fifties tome The Struggle for the World, which advocated a nuclear first strike on the Soviet Union.
This Strangelovian mindset permeated neoconservative circles in the Cold War years, but the collapse of the Soviet Union took them by surprise. At first, they excoriated Ronald Reagan, their former hero, for welcoming Mikhail Gorbachev’s attempt to make concessions: the whole thing was a trap, they said, and the Soviets would soon resume their dastardly ways. When the Soviet empire collapsed, it left a void at the center of a movement that was, in very large part, autobiographical. All these embittered ex-commies and renegade Trotskyists had nothing to direct their considerable ire at, and the post-Soviet era saw them largely dormant. Kristol and Co. kept busy, however, filling the rather large intellectual vacuum that constituted the "mainstream" conservative movement and kicking William F. Buckley upstairs at his own magazine, where he descended from time to time to utter an irrelevant homily.
At this point, the neocons held the organizational and financial reins of the American Right in their hands, and by the time George W. Bush was on his way to the White House, they had managed to inveigle themselves into the inner councils of the administration’s foreign policy team. They arrived with a firm commitment to a vastly increased military budget and an expansive foreign policy of "democracy-promotion" – by force of arms if need be. They were perfectly positioned, when the 9/11 terrorist attacked occurred, to take full advantage of the power persistence and providence had delivered into their hands. Their agenda had been set out years ago by Kristol’s son, William, in an essay co-authored with Robert Kagan, "Toward a Neo-Reaganite Foreign Policy," in which they summed up the goal of U.S. foreign policy in a single evocative phrase: "benevolent global hegemony." 9/11 provided the perfect context in which to launch a war to implement the neoconservative dream of world conquest. The results are all around us – in Iraq, in Afghanistan, in Pakistan, and beyond.
It’s funny, but to describe someone as a neoconservative is practically considered a hate crime in certain quarters – in neoconservative quarters, that is. The reason is that many of the original neocons were Jewish, and one major doctrinal pillar of the persuasion is fealty to Israel and its perceived interests. To call out the neocons, to even describe them as such, is therefore evidence of "anti-Semitism," as Jonah Goldberg once complained. Of course, now that conservatives are complaining that all opposition to President Obama’s policies is being caricatured as "racist," the neocons can hardly take this tack.
In any case, the lasting legacy of Irving Kristol is that he was instrumental in turning the conservative movement away from its radical anti-statism and toward an almost exclusive concentration on the moral imperative of an aggressively interventionist foreign policy. His followers and epigones, who carry on the work in his wake, are the warmongers at the Weekly Standard and the Limbaugh-Hannity know-nothing Right, which sees every recognition of the limitations of American power – government power – as a "betrayal." This is surely a most unconservative – even anti-conservative – vision, a form of radicalism that resembles nothing so much as Trotskyism-turned-inside-out.
One of the big differences between Stalin and Trotsky was the former’s conception of "socialism in one country" – the idea that communism could survive only in the Soviet Union and its satellites, without inciting a world revolution. Trotsky, sticking to the orthodox Marxist-Leninist position, held that a world revolution was imperative, or else the Soviet Union was doomed to fail, encircled as it was by the hostile, capitalist West.
What the neocons did was simply switch allegiances from the old Soviet Union to the United States, taking their hotheaded Trotskyist temperament with them – and finally aspiring to lead a world revolution with the United States government at its head. When George W. Bush announced the launching of what he called a "global democratic revolution," he was merely echoing the neo-Trotskyist rhetoric of his closest advisers and the intellectual movement from which they sprang.
The prospects of that revolution grow dimmer by the day, but the idea lives on, as does neoconservatism. In the age of Obama, it takes on new forms – as I explained in my last column – but the essence remains the same: war, war, and yet more war, as far as the eye can see. That, in brief, is the program of the neoconservatives, and Kristol’s legacy for the ages.
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