The American Conservative

Last post for a bit, then I really need to get back to that screenplay.

Steve Sailer mocks Matt Yglesias for pointing out that the arrow of causality between teen poverty and teen motherhood may run the opposite direction from the conventional wisdom.

Yglesias:

The upshot is that teen motherhood is much more a consequence of intense poverty than its cause. Preaching good behavior won’t do anything to reduce its incidence, and even handing out free birth control won’t contribute meaningfully to solving economic problems. Instead, family life seems to follow real economic opportunities. Where poor people can see that hard work and “playing by the rules” will reward them, they’re pretty likely to do just that. Where the system looks stacked against them, they’re more likely to abandon mainstream norms. Those who do so by becoming single teen moms end up fairing poorly in life, but those bad outcomes seem to be a result of bleak underlying circumstances rather than poor choices.

Michelle Goldberg on the totalitarian implications of Ann Romney’s Mothers’ Day holiday column:

“In a lot ways, the column was totally anodyne, right? She’s, you know, yes, motherhood is beautiful. I found that phrase, ‘the crown of motherhood’ really kind of creepy. Not just because of it’s somewhat — you know, it’s kind of really authoritarian societies that give out like a Cross of Motherhood. They give out awards for big families,” Goldberg said on the program’s panel.

“You know, Stalin did it, Hitler did it,” she said.

Indeed they did. I wonder what horrible regimes still dole out rewards for large families?

(Data from 2002, full table can be found here, page 145; I have re-sorted by the fourth column of data where the original table is alphabetical.)

So, let’s see: Austria. France. Belgium. Luxembourg. Well . . . I guess they were all conquered by Hitler.

(h/t Steve Sailer.)

Felix Salmon’s speculative analysis of what exactly happened at JP Morgan is very worth reading. Even if he doesn’t have the details exactly right, he gives a good illustration of how JP Morgan could have gotten into a position where a unit that supposedly was responsible for reducing risk incurred a $2 billion trading loss.

In a nutshell, the narrative runs thusly:

• “JP Morgan accumulated enormous new deposits in the wake of the financial crisis, both by acquiring banks and by attracting big new clients wanting the safety of a too-big-to-fail bank.” This deposits needed to be invested profitably.
• Since there was little demand for loans, the bank chose to acquire assets in the financial markets. These assets were acquired by the same unit responsible for hedging risks elsewhere in the bank – the Chief Investment Office, headed by Ina Drew.
• “Jamie Dimon, like everybody else, was worried about a Europe-induced financial crisis at the end of 2011, and so he told Drew to put on positions which would protect against such a crisis. She did so — only this time around, the crisis never happened, and Drew’s positions had to be unwound.”
• “When that meltdown didn’t happen, simply selling those positions would involve realizing a substantial loss. And so rather than selling the positions, Drew decided to put on new, profitable positions which would offset the old hedge.” These new positions, needless to say, weren’t perfect matches for the old positions. While they usually moved in tandem – and hence acted as hedges – they could, potentially, move in opposite directions. And eventually they did.

Salmon concludes:

How did Iksil’s trade go so horribly, massively, wrong? Partly it’s because his position was so big and so public. When hedge funds worked out what he was doing, they managed to get the word out, using stories in Bloomberg and the WSJ. And then it was just a matter of watching the market do what it always does, when it smells blood: I’m told that Boaz Weinstein’s Saba, for one, made a lot of money taking the other side of Iksil’s trade.

Taking a much bigger-picture view, however, what was really going on here was that JP Morgan had hundreds of billions of dollars in excess deposits, thanks to its too-big-to-fail status. And rather than lending out that money and boosting the economy, Jamie Dimon decided to simply play with it in financial markets, just as a hedge fund would.

That’s a comfortable conclusion on one level, because it suggests that the problem is that JP Morgan was doing what it wasn’t supposed to: trading, rather than hedging. If only they had been following the Volcker Rule – or if only that rule were enforced more strictly – things like this wouldn’t happen.

But there are two problems with this conclusion: it’s very difficult to distinguish hedging from trading, and, on the other hand, it’s very difficult to distinguish investing from trading. To explain why, I’m going to have to explain what the CIO’s role is.

*     *     *

I don’t know Drew, nor do I know how things worked at JP Morgan specifically, but from my past experience the CIO’s job generally looks something like the following. The various business units of a bank accumulate portfolios which, in turn, expose the bank to risk. The CIO’s job is to look at the overall portfolio of the bank, and assess it for two kinds of risk: specific risk and systemic risk. Specific risk is over- (or under-) exposure to a particular credit. Systemic risk is risk that isn’t tied to a particular position, but arises from overall portfolio exposure to a particular market factor. And the CIO’s job is to hedge these risks if they are either simply too large or not risks the bank wants to take.

So, to pick a couple of simple examples: if the bank were under-exposed to the auto industry (because the bank had no strong auto company relationships), the CIO might purchase auto-related assets. If the bank were over-exposed to Japanese commercial real estate, the CIO might sell assets in this sector. If the bank had a view that the risk of the Euro unraveling was significant, which would have widespread negative repercussions across the bank’s portfolio, the bank might purchase an asset that produced a positive return if the Euro were to unravel.

These decisions by the CIO are going to be dynamic; the hedges they execute are going to change as the market moves, as the bank’s portfolio evolves, and as the bank’s “views” – about the economy as a whole, specific assets or asset classes, risk factors like the unraveling of the Euro, etc. – change. So it makes sense for the CIO to transact with a view to liquidity – the hedge may need to be taken off. As well, it makes sense for the CIO to try to execute hedges at the best available prices – which means being able to choose between different instruments that have similar (though not identical) sensitivities but that may trade at different prices. For both reasons, it makes sense for the CIO to have the full panoply of derivatives available to transact.

But once you say that, you’ve basically said that the CIO is running an internal hedge fund of sorts. You can’t readily tell the difference between a trading position and an optimal hedge (optimal being defined as maximizing some combination of liquidity and return). The only difference, really, between the CIO’s job and the job of a hedge-fund manager is that the CIO gets risk dumped in her lap by actual business units – that is to say, she has axes to trade against.

This has long been Dimon’s argument against the Volcker Rule: that, because you can’t distinguish between trading and hedging, the rule cannot be applied, and so all the rule does is waste traders’ and risk-managers’ time with semantic distinctions with no real meaning in terms of risk. And he has – and still has – a point.

But that’s not where the discussion ends. The problem isn’t so much that banks are allowed to trade, as that they find trading so profitable. And that, in turn, is related to, on the one hand, the fact that residual risks of hedged trading can never be fully captured by risk-management systems and, on the other hand, capital rules that encourage risk-reduction rather than risk-disclosure.

*     *     *

Let’s take a look at Salmon’s speculative narrative. Early on in his narrative, Salmon says: “With lots of deposits coming in, and little corporate demand for loans, it was easy for all that money to find its way to the Chief Investment Office, which could take any amount of liabilities (deposits are liabilities, for a bank) and turn them into assets generating billions of dollars in profits.”

There’s a problem with this sentence. “Demand” for loans and “supply” of cash balances do not exist independent of prices. If corporations don’t want to borrow money, instead preferring to lend their money to banks, that suggests that banks are paying too much interest on deposits, and demanding too much interest on loans. At lower interest rates, corporations would be reluctant to deposit money in the bank, and more interested in borrowing.

Why don’t rates continue to drop? This might be another instance of the zero-bound problem – there has to be a risk differential between government debt and corporate debt, so if the risk-free rate can’t go below zero then corporate debt yields can’t go below some positive number. Or you could describe it a question of return on capital – investors in bank equity expect a certain rate of return on their money, and banks can’t achieve that rate of return from rates at which businesses would be willing to borrow.

But in either case, if banks can’t make money lending, how can they make money trading? To answer that question, we need to get into capital rules.

Banks use different capital rules to handle “hold-to-maturity” positions like corporate loans versus trading positions like credit derivatives, and the capital rules are designed to give the bank credit for the reduced risk associated with hedging. All of which makes sense: a hedged position is less-risky than an unhedged position. But how do you know how well a position is hedged? How do you measure the residual risk?

The most important tool for most large banks for measuring risk for capital purposes specifically is VaR, or Value at Risk, which was developed (funnily enough) by JP Morgan. Without, again, going into too much detail, VaR uses the past behavior of an entire portfolio as the basis for predicting the possible future behavior of that portfolio, and regulatory capital schemes based on VaR require banks to hold sufficient capital to protect against what by historic standards would be extreme moves. VaR, when it was introduced, was considered an improvement on factor-based risk-metrics, because such metrics were only as good as their list of factors – leave a factor out, including one you’ve never heard of, and your risk is wrong. Since VaR used actual prices for the entire portfolio, by definition all factors are included.

But, of course, they are only included to the degree that past performance (in the sense of volatilities and correlations between assets) are predictive of future performance. Which, in the financial world, they generally are . . . until they aren’t. Volatilities can suddenly go to previously unseen levels. Correlations between previously uncorrelated assets can suddenly go to one. Correlations that have historically hovered around one can suddenly go to negative one. All these things can happen at once – indeed, they usually do. When these things happen, losses vastly exceed the predictions of VaR.

Our capital rules, overall, are designed to charge banks as accurately as possible for measured risks. They are not designed to prevent banks from taking unmeasured or unmeasurable risks.

This is a methodological limitation of VaR. And it’s a limitation that is most significant with well-hedged positions, because these are the positions that, from a VaR perspective, appear to have very little risk – and therefore require very little capital. Because they appear to have little risk and require very little capital, when they appear to be profitable it makes sense for a bank to acquire them in very large size. And then, when those historic relationships break down, even briefly, the bank can be exposed to very large losses.

*     *     *

So let’s go back to our CIO. She has a big portfolio dumped on her by the bank. It’s exposed to a systemic risk of some sort, which she dutifully hedges. The hedge loses money – that happens some time – and now the time comes to either take the hedge off (realizing the loss) or “hedge the hedge” with another instrument. Which does she choose?

Realizing the loss should not be a significant factor, because a trading portfolio is always mark-to-market, and both derivative and repo positions involve daily posting of collateral. There should not be significant consequences to either earnings or cashflow from unwinding the trade, even if it has gone against them. If there are, there’s an accounting problem somewhere.

So the choice comes down to that question of optimizing the combination of return and liquidity. It could well be that putting on a new “hedge-for-the-hedge” wins on both counts – the new trade could be in an apparently more-liquid instrument, and it could be trading at more favorable prices. If that’s the case, then why wouldn’t the CIO opt for it? Of course she would.

But if she does, then what does her book look like? Well, in addition to whatever else is in it (the various risks dumped on her by the different business units), there’s this huge trade matching one hedge against another. What’s the risk on this trade? The risk is the residual difference – the “basis” – between two highly correlated assets. So the trade is called a “basis trade.”

Basis trades are the bread-and-butter of so-called “market-neutral” hedge funds, and the CIO’s portfolio, in this hypothetical, looks an awful lot like such a hedge fund. Which is precisely what the Volcker Rule was supposed to prevent. But it got there via a set of completely reasonable decisions. So what can be done to achieve the Rule’s objectives more effectively?

I can’t see how the Volcker Rule could be applied to eliminate the choice of putting on a hedge-for-a-hedge – there’s nothing to distinguish this move from any other aspect of hedging. But I can see how capital rules could be tweaked to make basis trades less-attractive. If putting on a “hedge-for-a-hedge” is actually more profitable than unwinding the original hedge, that means the residual capital that needs to be held against the basis trade is low enough that the modest spread between the two highly-correlated assets generates an adequate return on capital – indeed, a return on capital that compares favorably with taking that capital and putting it against loans to actual businesses. That is the problem.

If you don’t want banks to trade, then you also have to disincentivize hedging, because the two cannot be readily distinguished. The CIO’s job should be, as it is, hedging systemic and specific risks in the bank’s portfolio. But any time the bank hedges, it acquires basis risk – the risk that the hedge won’t match up with the risk being hedged – and this basis risk, by definition, cannot be hedged and cannot be measured. By anything. So if banks are acquiring a lot of basis trades, that is prima facie evidence that the capital rules are out of whack, and that banks are running large risks that are not being captured by their systems.

The brute-force solution to this problem that I tend to go back to is some kind of charge on gross book size, sufficiently punitive that banks would be strongly incentivized to eliminate hedges – not re-hedge them with new instruments, but actually eliminate the trades – when they were no longer necessary for their primary purpose, and to only consider hedging when there is sufficient warrant. Such a charge would make derivatives books look much more like cash books, with regular processes for eliminating inventory. And it would basically make it uneconomical for banks to hold basis trades.

And what would banks do then? They might look harder for opportunities to lend profitably in the real economy. They might look harder for opportunities to make their own operations more efficient – paying their employees less and their shareholders more. They might lobby Congress for a more expansionist monetary policy, because they would need an upward-sloping real yield curve to make money. No doubt they will also find new ways to get themselves (and us) in trouble. The game never really ends. But if we want to play it better, we shouldn’t focus on scolding the banks, but rather on making them pay an appropriate price for engaging in activities outside their core function of turning savings into capital.

This is a tricky question to raise, but I’m going to raise it anyhow, and hope that I can get away with it because of where I myself am coming from.

I’ve long held that while people develop, they don’t change in the most fundamental ways. A substantial portion of our personalities is hardwired genetically; much of the essential code that we run was programmed into us in our childhoods; and the adaptive kludges and workarounds that we program ourselves with semi-consciously to deal with the gaps and failures of the lower levels of our mental architectures are mostly written in the Darwinian frenzy of adolescence. All we can hope for, after that, is something resembling the wisdom of experience from living with ourselves decade after decade, wisdom which, hopefully, teaches us not to run certain particularly destructive routines with quite our youthful level of enthusiasm.

So I’ve been fascinated by reports of Mitt Romney’s adolescent assaults on vulnerable classmates, finding in them confirmation of something I’ve suspected for some time: deep down, Romney just isn’t much of an alpha dog. Oh, he’s a capable, and enormously successful man; he’s developed quite a powerful battery of adaptive kludges and workarounds, and more power to him. But I can see the anxiety underneath, the need to preemptively deny vulnerability. His opponents can as well, which is one reason why so many naturally confident opponents have held him in such contempt – especially when they sense he’s beating them. And it’s this anxiety, I suspect, that lies behind Romney’s striking inability to express remorse for wrongs committed, even in the distant past.

But today, I wondered whether there wasn’t another dimension to this failure on Romney’s part: a religious dimension. Is it possible that he hasn’t expressed remorse not merely because his ego is kind of brittle, but because he doesn’t have a language for doing so that we gentiles would recognize?

I have some idea what traditional Protestant expressions of remorse and atonement sound like. I also have some idea what traditional Catholic expressions of remorse and atonement sound like. We heard plenty of both kinds of language over the years – often transparently insincere, but still recognizable for what they are. But I don’t know what Mormon expressions of the same thing sound like.

I assume they exist. I don’t know how a religion could function without them. But I don’t know what they sound like.

And I wonder how developed such formalisms are for dealing with the gentile world. Speaking from my experience as a Jew, formalisms that were designed to work between co-religionists often don’t translate well between religious groups, and formalisms historically designed to work between Jew and gentile come off as rather stilted in a modern context of equal citizenship. Mainstream Christian figures, if they choose to make public contrition, can lazily assume their audience speaks the same language and be right 90% of the time. Members of minority faiths can’t make the same assumption, and they surely know it.

So this is a question I hope any Mormon readers I might have could help me answer: what are the Mormon formalities of remorse? If Romney’s adolescent actions had come up in an intra-Mormon context, what would you expect him to say?

Matt Yglesias on the end of the dream in California:

When I look at California’s historical population growth trajectory and current real estate dynamics, what I see is a state that managed [for many years] to provide a high level of public services on a relatively modest tax burden thanks to a rapidly growing population. . . .

I’m reasonably certain that California’s deteriorating public services aren’t really driving the declining population growth. That’s because if you look at someplace in California where it would be nice to live—Santa Monica, say, or Palo Alto—it turns out to be incredibly expensive. All the best land is occupied and the people in those communities don’t want it to get filled up with more density and California’s environmental legislation gives them powerful tools with which to block new residents.

Part of the price the state needs to pay for this induced slowdown in population growth is a downshift to a much less desirable tax/service tradeoff. But it would certainly be possible to open the floodgates to construction in Silicon Valley and all along the coast which would bring in a huge flood of new tax revenue and create the possibility of lower tax rates and return to more generous levels of public expenditure.

Today is the inaugural day of the new American Conservative website, and I, for one, think the team did a marvelous job designing it. I strongly encourage readers to wander about the site and get comfortable with the new look and feel; to read some of the excellent new material, such as Rod Dreher’s interview with Nebraska Representative Jeff Fortenberry; and to introduce yourselves to new writers for the site, like Scott Galupo, formerly of U.S. News & World Report.

I also encourage you to regularly click a link on the Arts and Letters page, and check out Millman’s Shakesblog. This is a blog I started on tumblr, devoted there to writing about theatre, with a particular emphasis on Shakespeare, and which is now, in its new home, going to broaden its scope somewhat to cover other musings of mine on arts and literature. (The “double feature feature” pieces I’ve been writing for my named blog will appear on Shakesblog in the future, for example.) When I first joined TAC, I told Daniel McCarthy that one of my priorities was doing more writing on the arts, and this is going to be my primary venue for doing so. I’ve posted the first new review on Shakesblog this morning, of a recent Chicago production of Donald Margulies’s Time Stands Still. Check it out!

I’m very excited about the new site, and about the new blog, and I hope you will be, too.

The primary result was not unexpected, and I think the right lesson to draw from the loss is simply: quit before you get fired. Lugar was an eighty-year-old, seven-term Senator known for being a statesman. The kinds of Senators who can comfortably expect to be carried out in a box are those who are whirlwinds of constituent service who move comfortably with the ideological times – guys like Strom Thurmond and Robert Byrd. Lugar wasn’t really cut from that mold.

Murdock benefitted from the anti-incumbent sentiment that sweeps through the country in times of discontent. But it’s a mistake to think that he would be an ideological purist of any sort. What Murdock has made clear is that he’d be more of a partisan than Lugar was. So, had he been sitting in the Senate when TARP or Medicare Part D or No Child Left Behind were up for a vote (all initiatives of a Republican Administration), there’s every reason to believe that Murdock would have voted the way the party leadership wanted him to – that is to say: in favor. But he’d be less-likely than Lugar to work on high-minded bi-partisan initiatives of one sort or another. Whether that’s a loss or a gain depends greatly on whether you think such initiatives are generally productive or generally pointless.

Because of its structure, the Senate needs a certain number of statesmen; when it gets too partisan, it simply ceases to function. That’s not some natural law of politics – it’s not even true of the House of Representatives. It’s a function of Senate rules and traditions. For that reason, I agree that trading a Lugar for a Murdock is something of a loss for governance. Even more so, the loss of a voice of reason in foreign affairs – which, on balance, Lugar was – is a real loss for the country, though honestly I don’t know how much of a difference Lugar really made.

But, not to put too fine a point on it, you need new voices, new statesmen, not just old ones. The old statesmen can become too invested in that self-image to actually engage in statesmanship. Lugar was a reliable partisan on the Iraq War, for example, until quite late in the day. Compare his position to that of, say, Democrat Bob Graham, hardly left-winger or an anti-interventionist, who was forceful in his opposition, and imagine what an impact Lugar might have had if he had engaged in a little bi-partisanship in that instance. It would undoubtedly have cost him his seat. But he lost that anyway, and what has he done with his last term?

Speaking of which: one of things Lugar is best known for is the Nunn-Lugar Cooperative Threat-Reduction Program, which funds the decommissioning of nuclear, chemical and biological weapons systems and the retraining of scientists involved in that work. Well, the last time I mentioned Senator Lugar on this blog, I got a lengthy email from a reader involved in the biological weapons portion of Nunn-Lugar, who was absolutely scathing on what a boondoggle it has become – not only wasting money, but potentially being quite counter-productive, creating public health threats where none previously existed, and functioning essentially without any meaningful oversight (in the sense of somebody assessing whether individual programs are serving the program objective effectively). One of the risks with high-minded programs like these is that the people most interested in the programs – the creators and original sponsors – have minimal incentive to provide real oversight, while those with the strongest incentive to be critical in their assessments are those with ideological reasons to oppose the programs in the first place. All of which is to say: you need to get new blood in that isn’t vested in their elders’ achievements, but you want that new blood to actually care about governing the country and not just scoring points off the other team.

Meanwhile, in a “surprising” turn of events, Israel will not hold early elections, but instead will be governed by a national unity coalition. What does this portend?

I suspect very little. Netanyahu called for new elections because he thought he would win – not win an overwhelming mandate (polls suggested Likud would gain a handful of seats) but win a commanding position in parliament (Labor would come in second with only half as many seats as Likud). He’d have to form a coalition after the election, though, and there are always uncertainties about what potential partners would demand. If he can get a stable coalition without an election, why not?

Mofaz, meanwhile, faced an election in which his party was projected to lose more than half its seats. He was not negotiating with Netanyahu on the basis of having the largest faction in the Knesset now. He was negotiating on the basis of having the third or fourth (or even fifth) largest faction after elections. That’s why he basically got nothing in exchange for joining the coalition.

A national unity government is a useful thing for avoiding accountability, which suggests that Netanyahu might be planning something that entails some political risk. But that could go either way – an interim accord with the Palestinian Authority, or a military strike against Iran would both fit the bill. And he might not have any such plans; he might just have gotten Kadima for what amounts to a song, so why take the risk of an election?

The important thing to realize is that the Netanyahu government is broadly popular in Israel, and to the extent that the electorate (or at least the Jewish portion of the electorate) is unhappy with it, they are unhappy about inflation, or about religious divisions, and not about his foreign policy or his policy towards the settlements. The major opposition parties all say that Israel should be making more progress on peace with the Palestinians – but they also all favor peace on Israeli terms. That doesn’t mean they wouldn’t go further if the opportunity presented itself. It means that no major party thinks it’s a winning electoral platform to advocate a meaningfully more conciliatory policy.

Pat Buchanan’s analysis of the voting in Europe includes the following:

Consider what the French electorate just said.

In the first round of voting, communists and radicals took 11 percent. Their leader, Jean-Luc Melenchon, endorsed the socialist Francois Hollande, who went on to win Sunday.

President Nicolas Sarkozy, who ran second in the first round with only 27 percent, raised his total Sunday to 48 percent. Though Marine Le Pen of the National Front had refused to endorse him, Sarkozy openly courted her voters.

As Marine put it, they call us racists, protectionists and xenophobes. Then they come asking for our endorsement, echo our words and seek our votes.

The near 30 percent the National Front and far left combined pulled in the first round is unprecedented in the annals of the Fifth Republic.

Unprecedented?

Ten years ago, the first-round voting in the French Presidential election looked as follows:

Gaullists: 19.88%
Socialists: 16.18%
Greens (including CAP21): 7.13%
UDF: 5.72%
Other Centrist (CPNT, Liberal Democracy, Radical Left, Christian Democrats): 11.65%
TOTAL CENTRIST: 60.56%

Trotskyist: (Workers’ Struggle, Revolutionary Communist, Workers’ Party): 11.56%
Pole Republicain (Left Euroskeptic): 5.33%
Communist: 3.37%
TOTAL LEFT: 20.26%

National Front: 16.86%
National Republican: 2.34%
TOTAL RIGHT: 19.20%

This year, the results on the first round looked as follows:

Socialists: 28.63%
Gaullists: 27.18%
UDF: 9.13%
Greens: 2.31%
TOTAL CENTRIST: 67.25%

Left Front: 11.10%
Trotskyist: 0.56%
Other left: 1.40%
TOTAL LEFT: 13.06%

National Front: 17.90%
Arise the Republic: 1.79%
TOTAL RIGHT: 19.69%

The vote for the Euroskeptic right is just a whisker above what it was 10 years ago. The vote for the Euroskeptic left is substantially smaller than it was 10 years ago. Even if you put the Pole Republicain in a separate box (they were definitely Euroskeptic, but not emphatically left), the vote share for the far left is about 2.5% lower this year than it was ten years ago. The broad Left Front got fewer votes this year than the Trotskyist parties alone got in 2002.

Indeed, if we compare to the previous Presidential election, in 1995 (17 years ago), you see something similar. The rightist parties (National Front and Movement for France) got 19.74% – slightly more than they did this year. The leftist parties (Communists and Trotskyists, plus a tiny cadre of Larouche followers) got 14.24% – again, more than they did this year.

Yes, the left and right fringes got more votes in the first round this year than they did in 2007, when the right (National Front and Movement for France) got 12.67% and the left (Trotskyist, Communist and Jose Bove’s party) got 9.00%. But while 2012 was an uptick from 2007, it was hardly an unprecedented victory for the fringes.

Daniel Larison calls attention to this piece by Julian Zelizer warning that a foreign-policy-centered campaign by Obama could backfire. His reasoning is fourfold: (1) foreign policy is fickle, throwing up new crises all the time, and you never can tell how those will turn out; (2) bragging about foreign policy makes you look like you’re ignoring domestic problems; (3) foreign policy issues aren’t as clear-cut as they were during the Cold War; (4) Obama’s base may be turned off if he runs as too much of a hawk.

There’s some truth in all of these points, but their truth depends on one overwhelming assumption: that Americans are not going to be concerned about foreign policy in the upcoming election. Which may be true – certainly I don’t expect it to be the top concern, or even the second or third concern for most people. But if this isn’t quite 1944 (or 1980), neither is it quite 1992. And to the extent that it’s an issue at all, it’s an issue on which the President has a decisive advantage, and he’d be foolish not to use it.

Yes, foreign policy is fickle – but it’s fickle whether you run on it or not. Jimmy Carter didn’t run primarily on foreign policy expertise in 1980, though he did try to scare people about Ronald Reagan’s extremism. But foreign affairs still contributed mightily to his defeat. Had Operation Eagle Claw succeeded, Carter would have been mad not to have made it one of the key themes of his campaign.

Yes, bragging about foreign policy can make you look out of touch, and President Obama would be well advised to avoid sounding like he’s bragging (or begging for credit) in any area; confident people don’t need to brag or beg. Yes, the centerpiece of Obama’s campaign needs to be a domestic agenda, just as the centerpiece of Romney’s campaign has to be. But foreign policy has a role to play in establishing what is inevitably going to be a central Obama campaign claim about domestic affairs: that one reason things are so bad is that the Republican Party has opposed every plank of his domestic agenda out of ideological extremism. Without going into my views on the truth of such a claim, foreign affairs is one area where the President operates almost entirely without Congressional fetter. If President Obama convinces the American people that he’s doing a great job where he has exclusive authority, and a less-good job where he has to compromise with an opposition Congress, that bolsters his claim that Republican obstructionism deserves a big chunk of the blame for the domestic situation.

Yes, foreign policy issues are muddier than they once were. But inasmuch as the public is concerned about foreign policy at all, I believe Obama has found the political sweet-spot. (That’s not to say I agree with all his decisions by any means – that’s to say that I think they are, in broad strokes, political winners.) Obama can simultaneously say that he’s reduced the scope of American ambitions, and reduced the exposure of our troops, and that he’s been extremely vigilant about “taking out” the bad guys. The Osama bin Laden ad is very smart politics, which enables Obama to attack the GOP from the right and the left simultaneously, arguing that the Republicans placed less of a practical priority on counter-terrorism because of a neoconservative emphasis on state-based threats (which is absolutely true as a critique of the Bush Administration, and if Romney wants to argue that he disagrees with the Bush approach, he should say so explicitly).

As for Obama’s base: in practical terms, this is an argument that Obama should worry about the Gary Johnson campaign. I hope he does have to do something to win back possible defecting voters in this direction – I’d love to see the Obama Administration reconsider its drug policy posture, rediscover civil liberties, etc. The least-likely, and least politically necessary area for him to tilt more in a libertarian direction, though, is on the overall conduct of foreign policy.

When Obama was elected, I compared his political position to that of President Nixon. (Speaking of whom, do check out Scott Galupo’s piece elsewhere on the site.) That comparison has continued to pay dividends for me over the years. Obama’s objective in Afghanistan has, from the beginning, been “peace with honor,” and the elimination of Osama bin Laden and much of the rest of the al Qaeda leadership infrastructure makes it increasingly plausible to declare victory and come home. Whether or not you think Obama has followed an optimal policy for getting there – and I certainly think there’s ample room to criticize – that’s where the American people has wanted to go, and I suspect that political criticisms that amount to “I would have gotten there faster and cheaper” will come off as so much Monday morning quarterbacking.

President Obama has had a basically successful foreign policy within the boundaries of the foreign policy consensus. Were there mistakes and missed opportunities? Absolutely. My personal list of same would include:

• A pointless, destabilizing and dubiously legal war in Libya;
• Staging a confrontation with Netanyahu, then backing down abjectly, thereby setting back the cause of achieving a settlement in Israel/Palestine rather than advancing it;
• Framing our policy in Iran in such a way that he may be backed into military conflict if non-military pressure fails to create a diplomatic breakthrough;
• Failing to reassess the centrality of American drug policy in our relationship with Latin America;
• Failing to take any dramatic action vis-a-vis American nuclear stockpiles to advance the cause of nuclear anti-proliferation.

On the other hand, I think he’s handled relations with our East Asian allies very well, has managed at least a modest improvement in relations with Russia and Turkey, has not been manipulated into intervening in Syria, kept an appropriate distance from the “Arab Spring” revolutions in Tunisia, Egypt, etc., and has backed down from some of his mistakes (such as offering to mediate the dispute over Kashmir) with alacrity.  He has made counter-terrorism a foreign policy priority, which, I suspect, will be judged by history to be an over-reaction but is what Americans want to see done and is certainly preferable to invading half the planet as a counter-terrorism strategy.

The mystery isn’t why President Obama is running (partly) on foreign policy. The mystery is why Romney is. There is just no percentage in attacking Obama from the hawkish right on foreign policy except with hard core Republican base voters, and the record-free Romney runs more risk of seeming “out of touch” by harping on anything but the economy than the President does in running on his record. A Jeffersonian “come home, America” campaign, meanwhile, might be good for the soul of the Republic, but I strongly suspect it would be a losing campaign politically. The best we could hope for, I suspect, is to have somebody run as a prudential custodial of the foreign policy consensus, who then in office seeks to bend that consensus away from militarism and hegemony and towards a more restrained and cooperative international stance. That’s what I hoped we were getting in Obama, and I’m disappointed that it isn’t what we got – but we did get a reasonably prudent (with exceptions) custodian of the foreign policy consensus. And Romney is running on ditching the prudence.