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In the discussion section of Steve Verdon’s Obama the Fear Monger post, commentor Drew and I had a brief debate about the possibility of using TARP funds to create new banks rather than try to rescue old ones.  In today’s Wall Street Journal, Paul Romer of the Stanford Institute for Economic Policy Research makes this argument as well, with more sophistication than I could muster.  The core of his argument is:

The government has $350 billion in Troubled Asset Relief Program (TARP) funds that it can use to encourage new bank lending. If this money is directed to newly created good banks with pristine balance sheets, it could support $3.5 trillion in new lending with a modest 9-to-1 leverage. Right out of the gate, the newly created banks could do what the Fed has already been doing — buying pools of loans originated by existing banks that meet high underwriting standards.

If the TARP funds go to existing banks, much of them will end up stuck in financial institutions that are still bad after the transfer. We know from the previous round of TARP that giving more capital to bad banks generates very little net new lending.

Proposals for turning existing banks into good banks — recapitalizing them, nationalizing them, transferring the toxic assets off their balance sheets, or insuring the toxic assets — require prices for all these hard-to-value assets or, worse still, prices for derivative contracts on the toxic assets. (Calling the derivatives “insurance” doesn’t make them any easier to price.) Without reliable market prices for the hard-to-value assets, any proposal for turning bad banks into good banks could lead to huge transfers of wealth between taxpayers and bank shareholders.

Since I was proposing this as well, I obviously agree with the sentiment.  The key question is whether we think it is even possible to salvage some of our large troubled banks.  If it is, then it probably makes sense to do so and tap into their existing relationships and expertise (tarnished though it is).  But if you think – as I do – that they cannot be saved given the finite resources that can be committed due to political constraints, then this approach, as ugly and messy as it seems may turn out to be the most promising.

Hat tip: Matt Yglesias

Having already devoted several thousand words to the topic of American involvement in the Middle East, I will make my closing comments brief.

First, I’d like to thank Dave for a vigorous debate, James for hosting this discussion, and all the readers who have taken the time to follow the back-and-forth and comment on the posts.  This has been a useful exercise for me, pushing me to justify and clarify and even do some actual new research in defense of my arguments.

Second, I want to clarify a few points.  I don’t believe that the U.S. presence in the Middle East has raised the price of oil.  Rather I simply believe that our presence has not had the stabilizing effect on prices that proponents of active engagement suggest.  I also do not believe that the American presence has caused movements like al Qaeda to arise, but I do believe that our highly visible role gives credibility to their extreme, conspiracy-dominated interpretations of history.  My point is not that we are making things worse necessarily, but rather that the benefits of our presence are largely illusory.

Finally, I am not making a call for isolationism.  Quite the contrary.  I believe the United States should have a significant global role.  But I’d like to see us adopt an internationalism that is more reflective than reflexive.  Instead of simply rationalizing a ratchet-like expansion of the American role anywhere and everywhere, we have to be aware of the costs and benefits and tradeoffs of our commitments.  I believe that in the Middle East, our assessments are out of balance.  Our policies there provide many fewer benefits than expected while carrying many more costs than commonly assumed.

Dave Schuler’s arguments and his responses to my cross-examination questions highlight three critical failings in his argument. These flaws are his preference for inertia over strategic assessment, overweighing ambiguous evidence that marginally supports his case while ignoring compelling evidence that refutes it, and a failure to account for what might be called “conditions on the ground.” I will address each in turn.

First, Dave’s insistence that the burden of proof ought to rest on me may be good debate technique, but it is poor policy analysis. As I argued in an earlier post, the burden of proof for making policy changes should not be determined by arcane rules of procedure, but rather by a fair-minded assessment of the current status of the policy. For instance, though I support gay marriage personally, I am cognizant of the fact that traditional marriage is a pretty successful policy, and that as a result gay marriage proponents bear some burden of proof to show that it will not damage the institution. In the Middle East, the reverse case obtains. America’s Middle East policy is a disaster. It cries out for change, and the burden of proof for the status quo rests firmly in those proponents of the status quo. But instead of debating the rules of the game, why not deal with reality? An argument is only as powerful as its ability to persuade.

Dave: Instead of appealing to imaginary judges applying obscure scoring rules, let’s let the readers decide. At the end of this debate, let’s poll the readers of OTB, who are, on the whole part of the best informed and most thoughtful blog community out there. Let’s ask them who they think won the debate.

Second, my claim about the burden of proof relies upon more than just positioning. Ultimately, I think this procedural debate reflects an underlying dispute about what the evidence of the case is. Dave argues the following:

I won’t deny that my motives are partly altruistic but that’s not the only reason we should want stability in the Middle East. Avoidance of oil price shocks doesn’t just benefit the United States but every country that buys oil whether they’re in South America, Africa, or Asia.

He also says,

From World War II to the promulgation of the Carter Doctrine and increased U. S. engagement with the Middle East, the countries of the region went to war with each other and European countries more than 15 times. The U. S. wasn’t a party to any of these conflicts. When the Carter Doctrine was promulgated Lebanon was engaged in a lengthy civil war, the Soviet were engaged in a war in Afghanistan, Iran had overthrown the Shah, invaded our embassy, and was holding our diplomats hostage, and relations between Iran and Iraq had already deteriorated. This deterioration culminated in the war between the two countries that took more than 800,000 lives. The entire region threatened to descend into chaos. That’s when we became involved.

Since our increased involvement there have been additional wars in the Middle East but their tempo and severity have decreased. Nothing has approached the level of tension evident in 1980 at least until the deterioration of the situation in Iraq in 2005 and 2006 following the U. S.-led invasion of Iraq in 2003 (don’t look to me to defend the invasion of Iraq—I opposed it).

I believe the evidence speaks clearly: the increased U. S. engagement in the region has overall been a stabilizing force.

In short, Dave believes that the Middle East is more stable now that the U.S. is more involved. He’s wrong. It isn’t. The price of oil is not more stable. And conflict has not particularly diminished.

Let’s talk about oil first. One measure of the volatility of the price of oil is to the take the standard deviation of the monthly price and divide it by the current price. There are other ways to measure how stable prices are, but they will show similar results. Between 1946 and 1972, the average monthly standard deviation in the price of oil as a percentage of the price of oil was 1.69%, demonstrating tremendous price stability. From 1973 to 1989, it was 9.41%. From 1990 to the present it is 11.07%. (spreadsheet available here)

As American involvement in the region has deepened, the price of oil has become progressively more volatile. Since the 1990-91 Gulf War prices are more volatile even than the period that cover the “oil shocks” of the 1970s. The consequences have been smaller because we are better now at hedging against volatility with reserves and future contracts, not because the price has stabilized. More American involvement correlates with increased volatility, not stability.

The same is mirrored in the security realm. Yes, there were over a dozen “wars” in the Middle East between World War II and 1980. Dave’s list includes:

1. 1948 Arab-Israeli War
2. 1956 Suez War
3. 1961-1991 Eritrean War of Independence
4. 1962-1970 North Yemen Civil War (Saudi, Egyptian regulars participated)
5. 1967 Six Day War
6. 1967 Iraq-Kuwait conflict
7. 1970 War of Attrition
8. 1970 PLO-Jordanian War (Syrian regulars participated)
9. 1973 Yom Kippur War
10. 1973 Iraq-Kuwait conflict
11. 1975-1990 Lebanon Civil War (Syrian regulars participated)
12. 1976 Iraq-Kuwait conflict
13. 1977 Libya-Egypt War
14. 1980-1988 Iran-Iraq War

Several of those were pretty minor. The 1970 War of Attrition including involved no significant conventional ground forces but were instead extended artillery duels and quick, vicious air-combat operations. Three more of these “conflicts” were border spats between Iraq and Kuwait in 1967, 1973, and 1976. The 1970 PLO-Jordan War was not a sign of instability, but rather a counter-terrorism operation by the Jordanians. And in the case of the Iran-Iraq War, we quietly supported Iraq. I had never even heard of the 1977 Libya-Egypt War.

There have also been plenty of conflicts since 1980 – multiple Israeli interventions in Lebanon, insurgencies in Algeria, Egypt, and Yemen. Two Intifadas. The difference is not in the overall level of political violence, but rather in the number of large-scale, organized conflicts between Israel and its Arab neighbors. That’s where the perception comes from that the Middle East is now more peaceful.

But let’s be honest here, war has never been quite as endemic as Israeli apologists have tried to make it seem. Yes, there was conflict after decolonization in 1948. But the 1956 “war” was just a British-French-Israeli plot to seize the Suez Canal. True, from 1967 to 1973 was a period of essentially open warfare between Israel and a combination of Egypt, Syria, and Jordan. But after 1973, three dynamics operated to quell that conflict. First, Israel essentially made clear its nuclear status. Second, politics in Syria and Egypt gradually transitioned from a post-colonization period of rule by populist demagogues into rule by entrenched elites with dynastic ambitions (and hence low risk tolerance). Third, the United States helped sponsor a peace agreement between Egypt and Israel and solidified it with a multi-billion dollar annual aid package. From my perspective, that makes the lack of interstate wars between Israel and its neighbors over-determined. And at this juncture, peace between Israel, Egypt, and Syria is sustained by dynamics that operate independent of American actions.

So, the price of oil is more volatile, not less, and the reduction is warfare is mostly an illusion and can be ascribed to broader trends and developments moreso than to active American diplomacy.

One last point about ambiguous evidence: Sayyid Qutb. Without getting down in the weeds, Qutb was an Egyptian intellectual who helped develop the Muslim Brotherhood movement in Egypt. He did influence al Qaeda in some ways, though the differences are more significant than the similarities from an American perspective. Qutb felt that the Muslim world was mired in poverty, weakness, and humiliation because Muslims had turned their backs on Islam. He further made a revolutionary argument that since Muslim leaders were complicit in this rejection of Islam and mainstream clerics were in the employ of these apostate leaders, it was up to righteous Muslims individually to fight for the creation of a new, pure Islamic state. Qutbism is a problem for Muslim rulers. What al Qaeda did was externalize the argument, saying that while local rulers were indeed a problem, no progress could be achieved without first defeating foreign countries that were supporting those apostate rulers – the “far enemy.”

Dave’s argument, which conflates Qutbism with bin Ladenism is at the root of the misguided nature of American foreign policy. The United States simply cannot be against Islamism as a general principle. If people want to be governed by religious law, it is none of our business. It becomes our business when their quest encourages them to attack American interest. Dave’s claims about Qutb and the Muslim Brotherhood make my case, not his. There is a powerful populist movement in the Muslim world that ought to be primarily focused on domestic reform and is instead increasingly focused on anti-American violence because of our meddling. We have essentially transformed local grievances into international terrorism.

Finally, a few words about conditions on the ground. Dave would like more contact between Americans and Middle Easterners, rather than less. Let’s discuss the face of American power. The American presence in the Middle East is ominous and provocative. It is missile strikes and renditions. Our embassies are massive concrete structures, set back from the road, with triple rings of security barriers. Our businesses operate behind barbed wire and are protected by private security. Americans travel in armed convoys and stay in secluded hotels that also feature fortress-like precautions. The Lebanon hostage crises of the 1980s, attacks on tourists since 1992 in Egypt, and the 1998 Embassy bombings have combined to create a distance between Americans and ordinary citizens in many Arab countries. We simply cannot turn the clock back to an idealized day when broad-based, informal contact was the norm. Beyond that, there are just not that many great business opportunities. Throughout the region, corruption is rife, security a challenge, language barriers remain significant. The Middle East is just not going to be a particularly promising area for American involvement in the near future.

Engagement and disengagement are not binary values. My call is not for zero presence, but rather for a diminished visibility of our role in the region. I will provide some additional thoughts in final post, but at this juncture I think it should be clearly that the case for continued involvement – as ably laid out by Dave Schuler – is ultimately seriously flawed on procedural, logical, and empirical grounds.

Question 1 (Finel): You write: “I believe the evidence speaks clearly: the increased U. S. engagement in the region has overall been a stabilizing force.” What is the precise benefit to the United States of this increased stability? Are American interests in the region more or less secure today as a result? Or is this purely a altruistic argument on your part?

Schuler: I won’t deny that my motives are partly altruistic but that’s not the only reason we should want stability in the Middle East. Avoidance of oil price shocks doesn’t just benefit the United States but every country that buys oil whether they’re in South America, Africa, or Asia. Some of the governments in these places are holding on very tenuously as it is. An oil price shock could send them over the edge. We recently saw risks of that in Pakistan.

Pakistan recently applied for a World Bank loan because of the high price of oil. The significantly higher price spike caused by an interruption in Gulf oil might well have sent them over the edge. That presents a very real direct security threat to us. The Pakistani government is bad enough at preventing terrorist training camps from operating in the country as it is; a failure of that government would make matters even worse. Additionally, our supply lines for Afghanistan run through Pakistan. A collapse of the Pakistani government would be a very bad thing for our troops there.

Repeat that in Central America, South America, and Africa and you’d aggravate the poverty and misery in the countries in those areas. People in poor, chaotic places can be driven to great lengths. They resort to piracy as in Somalia or drug production and trafficking as in Afghanistan. They go where they think they might find work or relief—here, France, Italy, the United Kingdom. That places strains on our health and educational systems among others, not to mention social stresses.

And people living in prosperous countries make better customers for American goods and services than people in poor, chaotic countries do. Improving security is a fine example of doing good while doing well.

Question 2 (Finel): You quote from Sayyid Qutb. What evidence can you produce to show that Qutbism is followed by anything more than a tiny sliver of the population of the Middle East?

Schuler: A recent Pew poll suggested that roughly 8% of Muslims living in the United States expressed opinions which I’d interpret as radical Islamist ones. The number of foreign-born Muslims, particularly Arabs, who expressed such views among the whole was somewhat higher. I wouldn’t be surprised if 10% of the population of the Middle East had such views. That’s tens of millions of people.

The membership of the Muslim Brotherhood is certainly estimated to be in the millions. I don’t think there’s any doubt that his teachings are very influential.

I’m not certain whether the absolute numbers are particularly important. There weren’t a lot of Japanese who believed that Japan should attack the United States sixty years ago and only a very small number actually took part in the attack. We engaged in total war against the Japanese anyway. My point is emphatically not that we should be engaging in total war but that a relatively small number of people can create a lot of misery.

Question 3 (Finel): How would you guarantee the security of “American tourists, American products, American students, and, especially, American businessmen”? Which of the security measures undertaken after the 1998 embassy bombings would you reverse in order to encourage greater contact between these groups and the people of Middle Eastern countries?

Schuler: It’s certainly a problem and I’m open to suggestions. I don’t know that I’m advocating reversing any of the post-1998 measures. I’m not advocating a sudden flood of Americans but a gradual increase. American businesses aren’t doing as much business as they could be in the Middle East and North Africa and real as opposed to perceived security concerns probably aren’t the most important reason for that.

Clearly, some places are riskier than others. Iraq would be pretty darned risky. However, to the best of my knowledge there’s only been one murder of an American in Jordan over the period of the last 20 years. There are all sorts of places in the Middle East and North African where American tourists and businessmen aren’t in considerably more danger than British or French tourists or businessmen and the British and French are doing quite a bit of business in the Middle East.

It would also help if there weren’t exaggerated and mistaken impressions given in our own media. For example, the early reports of the attacks in Mumbai last month emphasized that the terrorists were after Americans and Britons. Later reports tended to refute that. There’s never been a definitive answer to whether that was the case and our media accounts have left us with the impression that Americans were particular targets whether that was the case or not. That makes it hard to assess the actual risks.

The most recent Pew Survey of Global Attitudes found that people in other countries who had more personal exposure to America and Americans were also more likely to have a favorable attitude towards America and Americans. We aren’t going to improve our security situation by barricading ourselves within our borders. Ignorance and isolation are our enemies not our friends.