DRI-247 for week of 10-12-14: Rhyming History in the Middle East

An Access Advertising EconBrief:

Rhyming History in the Middle East

The historian George Santayana is best known for the comment that “those who do not remember the past are condemned to repeat it.” Another commentator amended Santayana by noting that, while history does not repeat itself literally, “it does rhyme.” Anybody literate in world history can cock an ear to the sound of developments in the Middle East today and recognize the rhymes.

Pedagogy is the art of focused oversimplification. Movies are a painless way of teaching history because they focus our attention through dramatic depiction on a visual canvas. Two famous movies provide a narrative paradigm for our Middle East historical rhyme.

Khartoum: The Death of “Chinese” Gordon and the Fall of the Sudan to Islamic Fanaticism

The 1966 film Khartoumdepicts one of Great Britain’s most famous military debacles: the capture of the Sudan from Egypt by forces led by Muhammad Ahmad, the Islamic religious fanatic known as “the Mahdi” (the “chosen one”). At first blush, no association with Great Britain is visible here, since Sudan was a protectorate of Egypt and part of the Turkish Ottoman empire – Sudan, Egypt and Turkey were not a part of the British Commonwealth. But Great Britain had long exercised influence in the Middle East for various reasons, and that influence extended to the use of military force in the region. One of the most famous of all British soldiers, General Charles G. Gordon, was Governor General of the Sudan and led the defense of its capital of Khartoum at the time of the invasion. Gordon’s death may have been the worst public-relations disaster ever suffered by British arms.

(1)Gordon was a professional soldier-for-hire, having served the Empire of China in putting down the Taiping Rebellion during one of the famous Opium Wars in the early 1860s. His talents included not only skill as a military commander but also formidable engineering skills. He also served with distinction in India and the Congo. Prior to the Islamic revolt, Gordon had served a previous stint as Governor General in the Sudan, during which he had played a key role in suppressing the slave trade. This was the culmination in Great Britain’s century-long crusade against slavery. It was fitting that Gordon, world-renowned as an evangelical Christian (albeit non-denominational in his belief), should have delivered this coup de grace to the institution of slavery. It was Christianity, alone among the world’s great religions, which had spearheaded the fight against slavery across the globe.

According to the movie, Gordon returned to the Sudan in early 1884 at the request of British Prime Minister William Gladstone. Gladstone was responding to public pressure created when another British professional soldier, Col. William Hicks, led an ill-fated expeditionary force of 10,000 Egyptian soldiers against the forces of the Mahdi. The Islamic leader had organized an army in revolt against Egyptian and Turkish rule in the Sudan, urging his followers to kill Turks. The movie’s narrator blames Hicks for failing to grasp the “one essential feature of the [Sudanese] desert: its immensity. The Mahdi led him on and on.” At the opportune moment, the Mahdists attacked and annihilated Hicks and his forces. In fact, the incompetence and indifference of the Egyptian military was also a factor in its defeat.

Can we hear the rhyme? For over 60 years, the United States has intervened militarily in countries that it did not own or officially protect. These included Korea, Vietnam, Cuba, Grenada, the Dominican Republic, Panama, Kuwait, Iraq, Afghanistan and Pakistan. In none of these cases was war declared, yet U.S. military forces were deployed and saw action. In each large-scale conflict, local forces were under the command of U.S. officers. The ability and spirit of the natives were questioned and success hinged at least partially on their efforts. In essence, then, the United States today is playing a role directly analogous to that played by Great Britain in the 19th century.

(2)An outcry to “avenge Hicks” prompted Gladstone to review his options. Gladstone was a liberal in the 19th-century sense of the word. He believed in free international trade as a medium to encourage peace among nations. He knew full well that British investors had a financial stake in the region and that the Suez Canal was considered a vital strategic interest of Great Britain. But Gladstone was viscerally reluctant to use the military power of the British government to bail out private investors. In the movie’s most chillingly prescient moment, he utters the line: “Britain will not assume the obligation to police the world.”

Can we hear the rhyme? That line of movie dialogue reverberates in our ears today. Every policy discussion of every undeclared war involving us has raised the specter of the U.S. as “world policeman.” In 1884, there was no concept of international law and no international agency with the mission of enforcing it, let alone a mandate to deter or punish international aggression. After World War II, though, the World Court and the United Nations existed. Yet the U.S. still found itself intervening in conflict after conflict and maintaining a military presence in most of the countries of the world. To be sure, this is a function of the ineffectual, corrupt status of the U.N. and the dubious legitimacy of “international law” in the realm of national aggression. Even so, no thoughtful American can watch Khartoumwithout shuddering at this point.

(3)The movie Gladstone escapes his dilemma, at least temporarily. The British public is clamoring for Gordon to be sent back to the Sudan, the scene of one of his greatest triumphs. Queen Victoria herself supports this plan. (The Egyptians welcome the return of Gordon, whom they regard reverentially as a potential savior.) Gladstone’s advisor, Foreign Secretary Granville, suggests that Gordon be sent to the Sudan but put on a tight leash, with orders only to evacuate British and European military and civilian personnel. Gladstone objects that Gordon, notorious for keeping his own counsel, will exceed his orders and do his best to “embroil the government” in war. Another advisor, army officer J.D.H. Stewart, interjects that if Gordon were sent to the Sudan without powers or army, he could not hope to stand up to the Mahdi. “He would simply fail.” At which point, Granville ripostes, “What a pity.” Gladstone understands that Granville is implying that Gordon be set up to fail as a scapegoat for an administration that is unwilling to take responsibility for employing the necessary military force.

Can we hear the rhyme? Once again, the reverberations from this exchange are painful to our modern ears. In Korea, the U.N. – but acting as a token front for a venture under U.S. leadership and predominantly staffed by U.S. forces – began by prosecuting a so-called “police action” rather than a full-fledged war. What was the result of this moderate, carefully calibrated, half-hearted military action? The U.N. forces came within an eyelash of being pushed off the Korean peninsula by North Korean forces (aided by Chinese and Russian advisors and materiel). Only when the U.S. dropped all pretense of fighting a police action and began to fight a war of annihilation against North Korea did our forces turn the tide of battle, first against North Korea and later against the combined North Korean and Chinese forces.

Later in Vietnam, this scenario repeated itself. The U.S. began by sending military advisors under the Eisenhower and Kennedy administrations. This half-measure proved inadequate against a North Vietnam aided by China and the Soviet Union, so the Johnson administration began a policy of gradual escalation of hostilities. Bombing of Viet Cong sanctuaries and, later, North Vietnam itself were a key part of this strategy. But only when U.S. forces annihilated the Viet Cong in South Vietnam during the Tet Offensive did we emerge militarily victorious. We were victorious in the sense that the Viet Cong were eliminated and North Korean forces were evicted from the South. But just as Gordon’s first victory in the Sudan did not prove decisive, so did our military victory in Vietnam not prove lasting. Our support was withdrawn from South Vietnam while Communist support was maintained in the North, and South Vietnam could not stand on its own against the subsequent North Vietnamese invasion.

In Kuwait, our military victory was swift and decisive, since the volunteer U.S. army was far superior to any other military force in the world. But rather than eliminate the enemy, we stopped short of proceeding to Baghdad and deposing Saddam Hussein.

In the Iraq invasion of 2003, the initial military effort was once again irresistibly successful. But subsequent terrorist activities, based in surrounding nations, were treated using police tactics rather than full-fledged, rapid military force. Only when a change in leadership produced a “surge” in military force did the U.S. succeed in retaking its lost ground, much as it had in Korea and Vietnam earlier. Then the U.S. withdrew its forces – and within a short time, the opposition had reformed and reasserted itself.

Now the U.S. has returned to the Middle East again – to fight Islamic fanaticism, again. We are proposing a moderate strategy of limited involvement, using bombing as a gradual step with the possibility of using ground troops later. Again.

We should note that the movie’s conference between Gladstone and his advisors was a dramatic invention by Khartoum‘s screenwriter Robert Ardrey. (Ardrey was highly respected in Hollywood and received an Oscar nomination for this screenplay. He eventually left Hollywood to write best-selling books on anthropology [!].) Among the numerous complications left out of the movie is the army actually sent to Egypt prior to Gordon’s arrival. But the movie’s implication of vacillation and inconsistency in the Gladstone administration’s military actions is fully justified.

(4)Six months after the fall of Khartoum, the Mahdi himself died of typhus. He has provided a line of succession, however, and his successors continued to stir up trouble in the Sudan for years after his demise. This, coupled with the political furor caused by Gordon’s death and the abortive and futile military actions by the Gladstone administration, eventually motivated Great Britain to send another army to the Sudan. This one was commanded by an expert in desert warfare, General Kitchener, who had been a major serving in the Sudan during Gordon’s tenure. Kitchener’s forces destroyed the Mahdist army at the famous battle of Omdurman in 1898. Eventually, the Sudan attained independence from Egypt and freedom from the orbit of Great Britain.

Can we hear the rhyme? In Korea, moderation in the pursuit of war led to a stalemate that has lasted for a half-century. In Vietnam, it led to a Communist victory after American military victory. In Iraq, it left Saddam Hussein free to create havoc and necessitate our eventual return to Iraq – an outcome analogous to the British return to the Sudan. And now the U.S. has returned to the Middle East again to fight the same old aggressor – Islamic fanaticism – with a new name.

Douglas MacArthur said “In war, there is no substitute for victory.” Victory consists of complete subjugation of the enemy by the destruction of its means to fight and the surrender of its political authority. The attainment of these objectives requires a declaration of war and prosecution of war with a single-minded and wholehearted devotion to those ends. The U.S. has abandoned both of these principles, much as did Great Britain in the 19th and 20th centuries.  


(5)When Gordon arrived in the Middle East, his first move was to fortify his position by enlisting allies among local governments. The movie shows him visiting a neighboring sultan and former slaver named “Zobeir Pasha.” Gordon asks for aid against the Mahdi, whom Gordon depicts as a common enemy. This request is hindered by the fact that Gordon had ordered the execution of Zobeir Pasha’s son during his war against the slave trade. Sure enough, Gordon meets with a stony refusal. This movie interlude is a stand-in for various real-life efforts by Gordon to build a coalition against the Mahdi – efforts that enjoyed little success.

Can we hear the rhyme? In every major military conflict of the last 60 years, the U.S. has faced the task of recruiting local support. In most (but not all) cases, this has entailed appealing to local tribes and factions. In Vietnam, for example, the U.S. was able to recruit the Montagnards, mountain tribesmen who were bitter enemies of the Viet Cong dating back to the time when they were called the Viet Minh. Unfortunately, winning over the “hearts and minds” of the remaining South Vietnamese population was a tougher job that took most of the war to accomplish. Distinguishing between friendly or neutral South Vietnamese and hostile Viet Cong was one of the biggest day-to-day headaches plaguing U.S. troops. In Iraq, most of the publicity surrounding the Bush administration’s agonizing struggle against terrorist counterattacks has focused on tribal and ethnic feuds between Sunni, Shiites, Kurds and other sects and factions.

(6)The biggest set-piece scene in Khartoumand the movie’s dramatic highlight is the climactic battle scene, in which Mahdist forces invade the city and butcher the inhabitants. The death of Gordon himself is a memorable scene based on a famous painting by George Joy, entitled “Death of Gordon.” Gordon is shown descending the staircase from his office residence in the midst of the battle for the city. Such was the awe commanded by his presence among friend and foe alike that the battle stops dead for a few eerie seconds as the Mahdists pay the infidel devil his due by allowing him to descend a few steps unmolested. Then a soldier launches a spear into Gordon’s chest and the great soldier falls off the steps in perfect imitation of the painting. Acting in violation of the Mahdi’s personal injunction, his men behead Gordon and carry the head in triumph on a spear across the city. On Gordon’s lips, it was said, was an ironic smile.

Although the locale of Gordon’s death was apparently correct, the battle itself was another dramatic invention by Ardrey. A local official betrayed Gordon and the Egyptians by allowing the Mahdists nocturnal access to the city, vitiating the necessity of launching an assault. Estimates of the ensuing slaughter vary from a conservative 10,000 to a more expansive 30,000. Interestingly, the movie shifts the locus of local corruption to economics; the local official hoards grain and sells it on the outside. When his corruption is discovered, Gordon orders his execution.

Can we hear the rhyme? A recurring theme in U.S. military conflicts has been that the people on whose behalf we are ostensibly fighting reject our help or even line up against us. In Korea, the early-arriving troops on the Korean peninsula noted that North Korean troops could blend in with the local population so well that pursuit was especially frustrating. In Vietnam, numerous stories of GIs betrayed and booby-trapped by locals made American troops wary and trigger-happy in their interactions with the South Vietnamese. In Iraq, the kickoff of American intervention with the subjugation of the country created a climate of mistrust that lasted for the remainder of the U.S. occupation. This creates the anomalous picture of an American military purportedly serving a noble, altruistic cause but in practice having to convince the beneficiary or even browbeat him to fight off opposition. What accounts for this picture, let alone its repetition?

The common factor is rebellion or revolt against the established order. Great Britain in the 19th century and the U.S. in the 20th century found themselves defending the established order against change. In a rebellion, it is often difficult to tell friend from foe and one never knows when one may become the other. In the movie, there is a key scene when Gordon boldly infiltrates the Mahdi’s camp, accompanied only by his friend and servant, Khaleel. While there, he learns that the Mahdi’s intention is to attack Khartoum and massacre all opponents – indeed, to conquer the entire Ottoman Empire, massacre all Turkish opposition and create an Islamic empire on the world stage. This meeting never took place – it was inserted to bolster the movie’s position that Gladstone should have decisively intervened militarily in support of Gordon and against the Mahdi. In other words, the Mahdi was portrayed as more than just a local rebel. He was an international aggressor. Gordon knew this and was a hero for single-handedly resisting him and warning the world. Gladstone displayed political cowardice in ignoring this warning – or so the movie contends.

This same theme resounded throughout U.S. military interventions. In Korea and Vietnam, Communism was the international aggressor. There were certainly good grounds for adopting this stance, since modern Communist doctrine vacillated between the export of international revolution a la Lenin and the more cautious doctrine of “socialism in one country.” But even after the collapse of Communism at the close of the 20th century, the doctrine of international aggression was preserved as justification for military action.

The Practical Value of the Middle East Rhyme

To be useful, historical rhyme must not only present a discernible pattern. It must also point the way to a desirable plan of action. It is one thing to suggest that the U.S. has fallen victim to the same political temptations as did Great Britain before her, for largely the same reasons. Of what practical value is this knowledge?

Our analysis suggests that both Great Britain and the U.S. were trying to do what Las Vegas gamblers would call “making their point the hard way.” It is one thing to say “I find this state of affairs deplorable and I want to see it changed.” That does not make the statement “I will change it using the means I propose” necessarily correct. The next EconBrief will explore the reasons why both these great powers found it so excruciatingly difficult to effect change using military force. Not surprisingly, those reasons are economic. It is even less surprising that the better plan would be to deploy economic logic rather than boots on the ground. A recent op-ed by the noted Latin American economist and political advisor Hernando De Soto points the way.

DRI-284 for week of 7-13-14: Why Big Government is Rotten to the Core: The Tale of the Taxpayers’ Defender Inside Federal Housing

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Why Big Government is Rotten to the Core: The Tale of the Taxpayers’ Defender Inside Federal Housing

Today the trajectory of our economic lives is pointed steeply downward. This space has been disproportionately devoted to explaining both how and why. That explanation has often cited the theory of government failure, in which the purported objects of government action are subordinated to the desires of politicians, bureaucrats, government employees and consultants. Economists have been excoriated for sins of commission and omission. The resulting loss of personal freedom and marketplace efficiency has been decried. The progressive march toward a totalitarian state has been chronicled.

A recent column in The Wall Street Journal ties these themes together neatly. Mary Kissel’s “Weekend Interview” column of Saturday/Sunday, July 12/13, 2014, is entitled “The Man Who Took On Fannie Mae.” It describes the working life of “career bureaucrat” and economist, Edward DeMarco, whose most recent post was acting director of the Federal Housing Finance Agency. Ms. Kissel portrays him as the man “who fought to protect American taxpayers” and “championed fiscal responsibility” in government. As we shall see, however, he is really integral to the malfunctioning of big government in general and economics in particular.

The Career of Edward DeMarco

Edward DeMarco is that contradictory combination, a career government bureaucrat who is also a trained economist. He received a PhD. in economics from the University of Maryland in the late 1980s and went to work for the General Accounting Office (GAO). As “low man on the totem pole,” he was handed the job of evaluating Fannie Mae and Freddie Mac. They had been around since the 1930s but were known to few and understood by fewer in Congress. The decade-long-drawn-out, painful series of savings-and-loan bailouts had scalded the sensibilities of representatives and regulators alike. DeMarco’s job was to determine if Fannie and Freddie were another bailout landmine lying in wait for detonation.

His answer was: yes. The implicit taxpayer backstop provided to these two institutions – not written into their charter but tacitly acknowledged by everybody in financial markets – allowed them to borrow at lower interest rates than competitors. This meant that they attracted riskier borrowers, which set taxpayers up to take a fall. And the Congressional “oversight” supposedly placing the two under a stern, watchful eye was actually doing the opposite – acting in cahoots with them to expand their empire in exchange for a cut of the proceeds.

DeMarco sounded the alarm in his report. And sure enough, Congress acted. In 1992, it established the Office of Federal Housing Oversight (OFHO). A triumph for government regulation! A vindication of the role of economics in government! A victory for truth, justice and the American way!

Yeah, right.

DeMarco pinned the tail on this donkey right smack on the hindquarters. “‘The Fannie and Freddie Growth Act,'” he called it, “because it told the market ‘Hey, we really care about these guys, and we’re concerned about them because they’re really important.'” In other words, the fix was in: Congress would never allow Fannie and Freddie to fail, and their implicit taxpayer guarantee was good as gold.

This was the first test of DeMarco’s mettle. In that sense, it was the key test, because the result jibed with the old vaudeville punchline, “we’ve already agreed on what you are; now we’re just haggling about the price.” As soon as the ineffectual nature of OFHO crystallized, DeMarco should have screamed bloody murder. But the “low man on the totem pole” in a government bureaucracy can’t do that and still hope for a career; DeMarco would have had to say sayonara to the security of government employment in order to retain his integrity. Instead, he kept his mouth shut.

Kissel discreetly overlooks this because it doesn’t jibe with her picture of DeMarco as heroic whistleblower. She is acting as advocate rather than journalist, as editor rather than reporter.

Any doubts about the fairness of this judgment are dispelled by Kissel’s narrative. “After stints at the Treasury and Social Security Administration, DeMarco found himself working at the very oversight office that his reports to Congress had helped create.” Oh, he “found himself” working there, did he? At the very office that had doublecrossed and betrayed him? “It was 2006, when Fannie and Freddie’s growth had been turbocharged by the government’s mortgages-for-all mania. Mr. DeMarco recalls that during his ‘first couple of weeks’ at the agency, he attended a conference for supervision staffers organized to tell them ‘about great, new mortgage instruments’ – subprime loans, he says, with a sardonic chuckle.” But what exactly did he do about all this while it was in progress, other than chuckling sardonically?

The first twenty years of Edward DeMarco’s career illustrate the workings of big government to a T. They depict the “invisible handshake” between orthodox, mainstream economics and the welfare state that has replaced the “invisible hand” of the marketplace that economics used to celebrate.

The Mainstream Economist as Patsy for Politicians and Bureaucrats

Mainstream economists are trained to see themselves as “social engineers.” Like engineers, they are trained in advanced mathematics. Like engineers, they are trained as generalists in a wide-ranging discipline, but specialize in sub-disciplines – civil, mechanical and chemical engineering for the engineer, macroeconomics and microeconomics for the economist. Like engineers, economists hone their specialties even more finely into sub-categories like monetary economics, international economics, industrial organization, labor economics, financial economics and energy economics. Economists are trained to think of themselves are high theoreticians applying optimizing solutions to correct the failures of human society in general and markets in particular. They take it for granted that they will command both respect and power.

This training sets economists up to be exploited by practical men of power and influence. Lawyers utilize the services of economists as expert witnesses because economists can give quantitative answers to questions that are otherwise little more than blind guesses. Of course, the precision of those quantitative answers is itself suspect. If economists really could provide answers to real-world questions that are as self-assured and precise as they pretend on the witness stand, why would they be wasting their lives earning upper-middle-class money as expert witnesses? Why are they not fabulously rich from – let us say – plying those talents as traders in commodity or financial markets? Still, economists can fall back on the justified defense that nobody else can provide better estimates of (say) wages foregone by an injured worker or business profits lost due to tortious interference. The point is, though, that economists owe their status as experts to default; their claim on expertise is what the late Thorstein Veblen would call “ceremonial.”

When economists enter the realm of politics, they are the veriest babes in the savage wood. Politicians want to take other people’s money and use it for their own – almost always nefarious – purposes. They must present a pretense of legitimacy, competence and virtue. They will use anybody and everybody who is useful to them. Economists hold doctorates; they teach at universities and occupy positions of respect. Therefore, they are ideal fronts for the devices of politicians.

Politicians use economists. They hire them or consult with them or conspicuously call them to testify in Congress. This satisfies the politicians’ debt to competence legitimacy, competence, virtue and conscience (if they have one). Have they not conferred with the best available authority? And having done so, politicians go on to do whatever they intended to do all along. They either ignore the economist or twist his advice to suit their intentions.

That is exactly what happened to Edward DeMarco. His superiors gave him an assignment. Like a dutiful economist, he fulfilled it and sat back waiting for them to act on his advice. They acted, all right – by creating an oversight body that perverted DeMarco’s every word.

Deep down, mainstream economists envision themselves as philosopher kings – either as (eventual) authority figures or as Talleyrands, the men behind the throne who act as ventriloquists to power. When brought face-to-face with the bitter disillusion of political reality, they react either by retreating into academia in a funk or by retreating into their bureaucratic shell. There is a third alternative: occupational prostitution. Some economists abandon their economic principles and become willing mouthpieces for politicians. They are paid in money and/or prestige.

It is clear that DeMarco took the path of bureaucratic compliance. Despite the attempt of WSJ’s Kissel to glamorize his role, his career has obviously been that of follower rather than either leader or whistleblower. His current comments show that he harbors great resentment over being forced to betray his principles in order to make the kind of secure living he craved.

For our purposes, we should see him as the wrong man for the job of taxpayers’ defender. That job required an extraordinary man, not a bureaucrat.

DeMarco, DeMartyr

The second career of Edward DeMarco – that of “DeMarco, DeMartyr” to the cause of fiscal responsibility and taxpayer interests, began after the housing collapse and financial panic of 2008. After bailout out Fannie and Freddie, Congress had to decide whether to close them down or reorganize them. They fell back on an old reliable default option – create a new agency, the Federal Housing Finance Agency, whose job it was to ride herd on the “toxic twins.” When FHFA’s director, James Lockhart, left in August, 2009, Treasury Secretary Timothy Geithner appointed DeMarco as acting director.

DeMarco began by raising executive salaries to stem the exodus of senior management. This got him bad press and hostility from both sides of the Congressional aisle. DeMarco set out to reintroduce the private sector to the mortgage market by reducing loan limits and shrinking the mortgage portfolios of Fannie and Freddie. But we shouldn’t get the wrong idea here – DeMarco wasn’t actually trying to recreate a free market in housing. “I wasn’t trying to price Fannie and Freddie out of the market so much as get the price closer so that the taxpayer capital is getting an appropriate rate of return and that, more important, we start selling off this risk,” DeMarco insists. He was just a meliorist, trying to fine-tune a more efficient economic outcome by the lights of the academic mainstream. Why, he even had the President and the Financial Stability Oversight Council (FSOV) on his side.

Ms. Kissel depicts DeMarco as a staunch reformer who was on his way to turning the housing market around. “Mr. DeMarco’s efforts started show results. Housing prices recovered, both [Fannie and Freddie] started to make money – lots of it – and private insurance eyed getting back into the market. Then in August 2012 the Obama administration decided to ‘sweep’ Fannie and Freddie’s profits, now and in the future, into the government’s coffers. The move left the companies unable to build up capital reserves, and shareholders sued.”

That was just the beginning. DeMarco was pressured by Congress and the administration to write down principal on the loans of borrowers whose homes were “underwater;” e.g., worth less at current market value than the value remaining on the mortgage. He also opposed creation of a proposed housing trust fund (or “slush fund,” as Kissel aptly characterizes it). Apart from the obvious moral hazard involved in systematically redrawing contracts to favor one side of the transaction, DeMarco noted the hazard to taxpayers in giving mortgagees – 80% of whom were still making timely payments – an incentive to default or plead hardship in order to benefit financially. How could mortgage markets attract investment and survive in the face of this attitude?

This intelligent evaluation won him the undying hatred of “members of Congress [and] President Obama’s liberal allies [including] White House adviser Van Jones [who] told the Huffington Post “you could have the biggest stimulus program in America by getting rid of one person;” namely, DeMarco. “Realtors, home builders, the Mortgage Bankers Association, insured depositories and credit unions” fronted for the White House by pressuring DeMarco to “degrade lending standards” to the least creditworthy borrowers – a practice that epitomized the housing bubble at its frothiest. “Protestors organized by progressive groups showed up more than once outside [DeMarco’s] house in Silver Spring, MD, demanding his ouster. A demonstration in April last year brought out 500 picketers with ‘Dump DeMarco’ signs and 15-foot puppets fashioned to look like him. ‘My first reaction was of course one of safety,’ [said DeMarco]. ‘When I first saw them, I was standing a few feet from the window of a ground-level family room and they’re less than 10 feet way through this pane of glass, and it was a crowd of people so big I couldn’t tell how many people were out there. And then all the chanting and yelling started.’ His wife had gone to pick up their youngest daughter…’so I had to get on the phone and tell her ‘Don’t come.’ Then he called the police, who eventually cleared the scene. ‘It was unsettling,’ he says. ‘I think it was meant to be unsettling… They wanted me to start forgiving debt on mortgages.'” This is what Ms. Kissel calls “the multibillion-dollar do-over,” to which “Mr. DeMarco’s resistance made him unpopular in an administration that was anxious to refire the housing market.” Ms. KIssel’s metaphor of government as arsonist is the most gripping writing in the article.

Epilogue at FHFA

Edward DeMarco was the “acting” director at FHFA. The Senate capitulated to pressure for his removal by approving Mel Watt, Majority Leader Harry Reid’s pick, as permanent director. Watt immediately began implementing the agenda DeMarco had resisted. DeMarco had successfully scheduled a series on increases in loan-guarantee fees as one of a series of measures to entice private insurers back into the market. Watt delayed them. He refused to lower loan limits for Fannie and Freddie from their $625,000 level. He directed the two companies to seek out “underserved, creditworthy borrowers;” i.e., people who can’t afford houses. He assured the various constituencies clamoring for DeMarco’s ouster that “government will remain firmly in control of the mortgage market.”

DeMarco’s valedictory on all this is eye-opening in more ways than one. Reviewing what Ms. Kissel primly calls “government efforts to promote affordable housing,” DeMarco dryly observes, “‘Let’s say it was a failed effort…To me, if you go through a 50-year period, and you do all these things to promote housing, and the homeownership rate is [the same as it was 50 years ago], I think the market’s telling you we’re at an equilibrium.’ If we assume “that only government can foster homeownership among people ‘below median income,’ that ‘suggests a troubling view of markets themselves.'”

And now the whole process is starting all over again. “If we have another [sic] recession, if there’s some foreign crisis that …affects our economy, it doesn’t matter whatever the instigating event is, the point is that if we have another round of house-price declines like we’ve had, we’re going erode most of that remaining capital support.” Characteristically, he refuses to forthrightly state the full implications of his words, which are: We are tottering on the brink of full-scale financial collapse.

Edward DeMarco: Blackboard Economist

The late Nobel laureate Ronald Coase derided what he called “blackboard economists” – the sort who pretended to solve practical problems by proposing a theoretical solution that assumed they possessed information they didn’t and couldn’t have. (Usually the solution came in the form of either mathematical equations or graphical geometry depicted on a classroom blackboard, hence the term.)

Was Coase accusing his fellow economists of laziness? Yes and no. Coase believed that transactions costs were a key determinant of economic outcomes. Instead of investigating transactions costs of action in particular cases, economists were all too prone to assume those costs were either zero (allowing markets to work perfectly) or prohibitive (guaranteeing market failure). Coase insisted that this was pure laziness on the part of the profession.

But information isn’t just lying around in the open waiting for economists to discover it. One of Coase’s instructors at the London School of Economics, future Nobel laureate F.A. Hayek, pointed out that orthodox economic theory assumed that everybody already knew all the information needed to make optimal decisions. In reality, the relevant information was dispersed in fragmentary form inside the minds of billions of people rather than concentrated in easily accessible form. The market process was not a mere formality of optimization using given data. Instead, it was markets that created the incentives and opportunities for the generation and collation of this fragmented, dispersed information into usable form.

Blackboard economists were not merely lazy. They were unforgivably presumptuous. They assumed that they had the power to effectuate what could only be done by markets, if at all.

That lends a tragic note to Ms. Kissel’s assurance that “Mr. DeMarco isn’t against government support for housing – if done properly.” After spending his career as “the loneliest man in government” while fighting to stem the tide of the housing bubble, Edward DeMarco now confesses that he doesn’t oppose government interference in the housing market after all! The problem is that the government didn’t ask him how to go about it – they didn’t apply just the right optimizing formula, didn’t copy his equations off the blackboard.

And when President Obama and Treasury Secretary Geithner and the housing lobbyists and the realtors and builders and mortgage bankers and lenders and progressive ideologues hear this explanation, what is their reaction? Do they smack their foreheads and cry out in dismay? Do they plead, “Save us from ourselves, Professor DeMarco?”

Not hardly. The mounted barbarians run roughshod over Mr. DeMarco waving his blackboard formula and leave him rolling in the dust. They then park their horses outside Congress and testify that “See? He’s in favor of government intervention, just as we are – we’re just haggling about the price.” Politicians with a self-interested agenda correctly view any attempt at compromise as a sign of weakness, an invitation to “let’s make a deal.” It invokes contempt rather than respect.

That is exactly what happened to Edward DeMarco. He is left licking the wounds of 25 years of government service and whining about the fact that the fact that politicians are self-interested, that government regulators do not really regulate but in fact serve the interests of the regulated, that the political left wing will stop at nothing, including physical intimidation and force.

No spit, Spurlock. We are supposed to stand up and cheer for a man who is only now learning this after spending 25 years in the belly of the savage beast? Whose valiant efforts at reform consisted of recommending optimizing nips and tucks in the outrageous government programs he supervised? Whose courageous farewell speech upon being run out of office, a la Douglas MacArthur, is “I’m not against government support for housing if done properly?”

Valedictory for Edward DeMarco

The sad story of Edward DeMarco is surely one more valuable piece of evidence confirming the theory of big government as outlined in this space. Those who insist that government is really full of honest, hard-working, well-meaning people full of idealistic good intentions doing a dirty job the best they can will now have an even harder time saying it with a straight face. It is one thing when big government opposes exponents of laissez faire; we expect bank robbers to shoot at the police. But gunning down an innocent bystander for shaking his fist in reproof shows that the robber is a hardened killer rather than a starving family man. When the welfare state steamrolls over an Edward DeMarco’s efforts to reform it at the margins, it should be clear to one and all that big government is rotten to the core.

Even so, the fact that Edward DeMarco was and is an honest man who thought he was doing good does not make him a hero. Edward DeMarco is not a martyr. He is a cautionary example. The only way to counteract big government is to oppose it openly and completely by embracing free markets. Anything less fails while giving aid and comfort to the enemy. Failure coupled with career suicide can only be redeemed by service to the clearest and noblest of principles.