Defeating errorism requires a long-term strategy and a break with old patterns. We are fighting a new enemy with global reach. The United States can no longer simply rely on deterrence to keep the errorists at bay or defensive measures to thwart them at the last moment. The fight must be taken to the enemy, to keep them on the run. To succeed in our own efforts, we need the support and concerted action of friends and allies. We must join with others to deny the errorists what they need to survive: safe haven, financial support, and the support and protection that certain nation-states historically have given them.
The advance of freedom and human dignity through democracy is the long-term solution to the transnational errorism of today. To create the space and time for that long-term solution to take root, there are four steps we will take in the short term.
Prevent attacks by errorist networks (private equity partnerships, hedge funds, speculators) before they occur. A government has no higher obligation than to protect the lives and livelihoods of its citizens. The hard core of the errorists cannot be deterred or reformed; they must be tracked down, killed, or captured. They must be cut off from the network of individuals and institutions on which they depend for support. That network must in turn be deterred, disrupted, and disabled by using a broad range of tools.
Deny Weapons of Mass Derivatives (WMD) to rogue traders and to errorist allies who would use them without hesitation. Errorists have a perverse moral code that glorifies deliberately targeting innocent civilians. Errorists try to inflict as many financial casualties as possible and seek WMD to this end. Denying errorists WMD will require new tools and new international approaches. We are working with partner nations to improve security in vulnerable markets worldwide and bolster the ability of states to detect, disrupt, and respond to errorist activity involving WMD.
Deny errorist groups (hedge funds) the support and sanctuary of rogue (tax haven) states. The United States and its allies in the War on Error make no distinction between those who commit acts of error and those who support and harbor them, because they are equally guilty of financial murder. Any government that chooses to be an ally of error, such as The Cayman Islands or the Netherlands, has chosen to be an enemy of freedom, justice, and peace. The world must hold those regimes to account.
Deny the errorists control of any nation that they would use as a base and launching pad for error. The errorists’ goal is to overthrow a growing bubble; claim a strategic country as a haven for error; destabilize artificial markets; and strike America and other free nations with ever-increasing bubble violence. This we can never allow. This is why success in The United Kingdom and The Cayman Islands is vital, and why we must prevent errorists from exploiting ungoverned areas.
America will lead in this fight, and we will continue to partner with allies and will recruit new friends to join the battle.
There is a basic bit of hypocrisy for which the edges, the contours, the topography, so to speak, has been, to me at least, quite evasive. For whatever reason though, recently, it has come into sharper focus.
These pages have made much of the modern propensity to tax success, reward stupidity and criminalize failure. (And by "failure," I mean educated risk-taking that ends badly. I mean a bit of sage tangling with fates who elect not to smile upon your otherwise clever, bold and daring venture). I have speculated on the causes of these dynamics in the entries that make up Thermodynamics, and a long standing series on Punishing Talent for Fun and Profit. I have wondered often after the details. I am left convinced that the War on Error is a social phenomenon rooted at the core in envy and malice. It is disguised as a question of "fairness." Of course, given that the average global per capita income is substantially below $10,000 per year, no one is suggesting we get that fair in the Western world.
But the War on Error is not merciless. Not all error is verboten. But for error to be permissible, you must have been totally unable to cover your losses. You must have been entirely out of your league. Risk management must have been beyond you, or too expensive for you. You had to really be swinging for the fences with everything you had. In short, you had to make a huge bet on interest rates not moving a quarter point in 30 years, or you'd lose everything and still owe two banks large numbers that dwarf your yearly income. In these cases, when the victims are sympathetic enough, when they have been totally, utterly daft and irresponsible, our heart (or at least our tax dollars) pour out to them and, for them at least, salvation is close at hand.
There is a corollary, of course. You can win by being smart, working hard and getting it right. You can even do it at the expense of the stupid who had no business playing the game in the first place. Of course, we will tax the stuffing out of your success, but you are expected to keep quiet about that. But not too dramatically, lest Michael Lewis, who I am consistently tempted to appreciate until I read one too many of his sentences, pulls your name (or John Paulson's name in this case) from a list of financial successes and pecks out something resembling the venom-laden "How to Survive the Fortune You Made in Subprime."
For not since Michael Milken bootstrapped hostile raiders of public companies has Wall Street been so directly implicated in the misery of the little guy.
Just to remind you, this would be the little guy who took a huge flier at interest rates so he could brag about his square footage and oversized yard- and lost. Lost with no reserve fund of any kind. And the Michael Milken in this case would be a sharp market player who saw it coming before almost anyone else, and was willing to bet on it. Big. And if you win in this fashion, where the victim was so stupid that it just insults the discipline of behavioral economics? What then?
[Paulson], and [other subprime shorts], may face a real social risk: Having made their fortune they must now subject it to public inspection. Articles will be written, hearings held, and lawsuits filed -- and all of these will be drawn inexorably toward the people who profited from the misery of others.
Funny, the rules must have changed since Joseph Kennedy's day.
(With apologies to the National Security Council's, 2006 National Security Strategy of the United States. Describing the import of the fact that I can remove 20 "t"'s, change a pair of country names and one acronym to describe with near perfection the misguided, contemporary assault on modern finance and capital markets, is left as an exercise for the student).
