Ape Man

The difference between a good general and a bad general is simple. A good general wants to win; a bad general wants to avoid losing. Things like charisma, Intelligence, or training are of only minor importance.

Nothing demonstrates this better then the Civil War. George McClellan and Robert Lee had both graduated second in their class when they went to West Point. They both had similar strengths, especially when it came to the construction of defensive fortifications. They both excelled in everything they did after graduation from West Point until the Civil War.

But when the war arrived, McClellan did everything he could to avoid battle. He was always demanding more troops and more men. His worst fear is that he would lose. By contrast, Lee was always taking risks to achieve victory when more prudent men would have settled for a stalemate.

Sometimes this did not pay off. Arguably, Lee would have been better off calling it a day and going home at Gettysburg instead of trying to go for victory. But overall, Lee’s instinct to try for victory no matter what is what made him one of history’s great generals.

Grant drives home the point. Unlike McClellan and Lee, he graduated in the bottom half of his West Point class. He was failure at almost everything he did outside of his military service. But in spite of lacking Lee’s and McClellan’s intellectual abilities, Grant went on to demonstrate that he was a good general.

In fact, it is now fashionable in some circles to claim that Grant was an intellectual giant. Those who argue this point are willing to acknowledge that Lee may have been the better tactician. But they say that Grant had the better strategic sense. I disagree with this view.

In the first place, this view point slights Winfield Scot whose Anaconda Plan laid out the path to victory over the south. It was this plan that Grant basically followed (before then it was largely ignored because McClellan thought it would take too long to bring about victory). More to point of this post, a lot of Grant’s “brilliance” was just taking big risks to do things by the book.

For example, take Grant’s Vicksburg campaign. This is widely held up as proof of Grant’s great genius. But when you get right down to it, all he did was bypass an enemy strong point, cut off their line of supply, and starved them out. That is the standard method of taking an enemy strong point since the dawn of time.

But in order to execute this by the book method of taking a strong point, Grant had to rush his ships past the southern guns at Vicksburg so that his army could cross the Mississippi river. Once across the Mississippi river Grant was cut off from his supply lines. If the southern forces had managed to stop Grant from cutting their supply lines it would have been a complete disaster. But they didn’t so his plan worked.

The thing that separated Grant from most other generals (including his subordinates who thought that his plan to take Vicksburg was fool hardy) was not that he had some special insight on how to take a strong point. Rather, Grant was the only one who was willing to take the risks to do what everyone knew needed to be done if you were going to take a strong point.

Lee took a lot of risks as well. But he had a genius for reading enemy intentions that cannot be reduced to by the book tactics. That is why I think he was on a different level then Grant.

I don’t mean to make it seem as if I am disparaging Grant. On the contrary, I think he is more inspirational then Lee. If you are born a genius, you got a lot going for you right from the start. But Grant demonstrates that plain old fashioned courage can get you three quarters of the way to success all by itself.

The Civil War would have been a lot shorter and lot less people would have died if Lee had been commanding Union forces and Grant had been commanding the South. But there is no shame in that. Not everyone can be born with the gifts that Lee had.

What is shameful is that so many union generals, McClellan foremost among them, put fear for their personal reputations above what was necessary for victory. That is what caused the war to drag out as long as it did. And in the long run, McClellan’s caution got more people killed that Grant’s determined but bloody wilderness campaign.

What got me on to this subject was a recent post by Macro Man called “Does Moral Hazard Apply to SWFs?” The occasion for this post was recent comments from a former adviser to China’s Central Banks to the affect that America’s government had better guarantee agency debt or else. This post kicked up quite of bit a stir in Macro Man’s comment section. As I read over Macro Man’s post and read through the comments, I was struck by how much fear of disaster is governing policy maker’s every move. Everyone is acting like a bad general. They all are trying to avoid losing instead of going for victory.

Take this comment from Macro Man’s comment section for example.…..

As a diehard free marketer, I think that CBs should be free to buy up GSE debt in large amounts. The Fed’s actions to bail the GSEs are necessary to keep the overall US market from crashing and the CBs debt owners are the beneficiaries. However, as a US tax payer I find the whole mess very discouraging and resent the threats of Yu. I beleive that he knew was already holding a winning hand but must have wanted to talk tough just in case.

I believe the above comment perfectly captures the attitude of Bernanke, Paulson, and other heavy weight financial policy makers. Always we are told we must do this or that because of the possible consequences. But usually, everyone agrees that what we “must” do is moving us in a direction that we don’t want to go. The excuse is always that this is only temporary and that as soon as things settle down we will do the right thing.

We are told that “must” bail out the agencies. Brad Setser spells out the conventional view in the comments to Macro Man’s post….

A pure cost-benefit calculation leaves me with the conclusion that the us had to bailout out central bank creditors of the agencies. yeah, they get a bit of a windfall (so do domestic banks, so it has an aspect of being a covert bailout/ recapitalization). but the US needs them to keep lending, and that gives them leverage. moreover, if the agencies were restrutured and could no longer support the mortgage market, the price of homes would keep fallin and the treasury likely would have to step in more directly to support consumption/ the housing sector/ the bnaks. and central banks would either shift to funding the treasury or would stop financing the US altogether. the risk return isn’t worth it, in my view. Especially when most CB holdings of agencies are pretty short-term and the size of the windfall isn’t that big.

Dr. Setser’s position sounds pretty convincing. But think about it. Where are we going to get the money to bail out the agencies? Why, we are going to borrow it from the Chinese of course. So what Dr. Setser is saying is that we need to borrow a lot more money from the Chinese so that we can pay the Chinese what they think they are owed. Not what they were promised (unless back room deals were made that I don’t know about). The agency bonds explicitly said that they were not backed by the US government. Everyone just assumed that was a lie.

And we should remember that when we talk about bailing out the Agencies, we are not talking about pocket change. S&P estimated that it would take between 400 billion and I trillion dollars to fix the agencies’ problems. Granted that is a worst case scenario, but worst case scenarios have been right on the money lately. Even if you cut that figure in half, you are still taking about serious dough.

At best, Dr. Setser plan will save us from rescission while greatly increasing our debt to GDP ratio. And this with the baby boom retirement and attendant higher health care costs just around the corner. Furthermore, there is a huge political risks with greatly expanding the amount of money we owe china. As Macro Man dryly notes…..

However, without rendering normative judgment, I am starting to seriously wonder if the electorate in the US and other Western countries won’t view the status quo as an abrogation of the social contract; while benefit from the China quid-pro-quo (to give a simple name to a very deep and complicated relationship that obviously comprises more nations than just the US and China) may accrue to society as a whole, it may not accrue to the median citizen voter.

To put it more bluntly, anyone who thinks that it is impossible that the US would pull an Argentina style default spends too much time around eggheads and not enough time around rednecks. If it ever gets to the point where Medicare is seriously straining the budget and interest payments are at a all time high, what do you think is going to be cut first? I would hate to be the politician who tried to run against the guy who promised to preserve health benefits for the elderly by screwing the Chinese.

Everyone understands what needs to happen. Brad Setser, Macro Man, and everyone who is sane understands that America as a whole has to stop spending like a drunken sailor. Everyone understands that you can’t grow debt faster than GDP forever. But few people want to tackle these problems now. “We should wait till tomorrow when we will be healthier”, they say. But that tomorrow is never going to come.

The ironic thing about all this is that Brad Setser is arguing against himself. He says we should bail out the agencies because we need China (and other emerging markets) to fund our current account deficit. But he is also on record as saying that China and other emerging markets should stop loaning so much to the US.

Which is it? Granted, a failure to bail out the agencies will lead to rising borrowing cost for everyone in the US. But that is what should happen to a nation that borrows and spends like a drunken sailor. It’s called market discipline. Without it American is never going to ditch its addiction to credit anymore then we were willing to give up SUV’s without high gas prices.

If you don’t think debt can continue to grow faster than GDP forever then you have to face the fact that the US is going to have to pay higher interest rates. If not now, when? Shall we wait till the baby boomers are retiring in earnest?

Not bailing out agencies is my preferred option. But there are other ways of accomplishing the same thing. Perhaps Dr. Setser would prefer it if we struck a deal with the Chinese. We will bail out the agencies if you let the Yuan float freely. But I can’t see how the results of that would be any different than failing to bail out the agencies.

The bottom line is that I would rather see the Agencies default now then have the US Treasury default or hyper inflate down the road. And if we don’t sharply slow the growth rate of our net debt that is what is going to happen. If it takes a lot of pain to make that happen, so be it. I would rather go see the US go for victory rather than vainly try to stave off defeat.

This entry was posted on Wednesday, August 27th, 2008 at 9:10 pm and is filed under Economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.