Thursday, April 22, 2010

It's the Narrative, Stupid!

Many of us have been so puzzled by the ineptitude of Obama's approach to Israel that we have assumed that there must be method to the madness.

If Obama were trying to solve the problems between the Israelis and Palestinians by diplomacy-- whether smart diplomacy or smart-ass diplomacy-- his approach would make no sense.

But what if he is not conducting policy? What if he is simply constructing and marketing a narrative about Islamic terrorism?

You know the outline of the narrative. Terrorism is the outgrowth of a history of Western oppression of the Islamic world. Righteous Muslims have been forced to rebel against Western tyranny by the only means at their disposal. They brought terrorism to America because the successive American Administrations had demonstrated their contempt for Islam by openly siding with Israel against the Palestinians. American support for Israel is causing jihadis across Central Asia to continue to kill Americans.

According to the narrative, these tensions can be resolved by gestures of friendship toward Islam, and, more importantly, by denouncing Israeli occupation of Arab lands.

This kind of mythmaking caused Obama to enter the maelstrom of the Israeli-Palestinian problem by declaring that Israeli settlements were the primary obstacle to peace. Picking a fight with Prime Minister Netanyahu over some apartments in Jerusalem served to solidify the narrative.

When Obama followed up by treating Netanyahu like the leader of a pariah regime when he visited the White House last month, the final piece of the narrative was in place. If Israeli presence on Arab land was the problem, scapegoating the nation of Israel was the solution.

Scapegoating satisfied the needs of the narrative.The fact that this approach produces increased Palestinian intransigence and causes the world to see the United States as an inconstant and unreliable ally does not matter to the structure of the narrative.

Obama is also hard at work constructing a narrative of the Great Recession. His goal seems less to fix the system than to fix the blame. At first, it was convenient to blame George Bush. Yet, the more people understand what went wrong, the more the epicenter shifts away from George Bush toward government agencies and Wall Street bankers.

To satisfy the narrative Obama needs to identify a scapegoat, then to perform a ritual sacrifice of the scapegoat's reputation. Once that reputation has been sacrificed, the system will be cleansed of the noxious and corrupting element that produced the crisis.

As of today, the scapegoat is Goldman Sachs. We need not argue the merits of the SEC suit against Goldman Sachs. And we will not argue that Goldman Sachs is more or less honorable or corrupt than anyone else. Clearly, there was enough responsibility to go around... including government agencies.

As of now, whatever the merits of the case, the blame is being squarely fixed on Goldman Sachs. It is a clear instance of scapegoating, accompanied by ritual sacrifice.

It makes sense to most of the world that people who are charged with running the banking system, and who are paid very handsomely for keeping running, should bear some responsibility for its failure. But this is not quite the same thing as identifying Goldman Sachs as a corrupt enterprise whose ravenous lust for profit brought the world financial system to its knees.

The reputation of Goldman Sachs is presently being deconstructed. Today Michael Lewis channeled the mindset of a Goldman trader who does not know what hit him: "You did nothing worse than live by the ethical assumptions of your market-- any money-making event short of obviously illegal is admirable-- and now your own grandfather thinks you are some kind of monster. Your world feels upside down: What was right is now wrong; what was good is now bad; what once felt like winning now feels like losing." Link here.

Will scapegoating Goldman Sachs cure what ails the financial system? Will the elimination of this source of systemic corruption lead to free and open and honest markets? Probably not. There is no such thing as a system of regulations that smart people cannot game.

And besides, the problem is getting the economy moving, to the point where it is creating new jobs. As Mayor Michael Bloomberg said at a press conference yesterday, Obama's regulatory reform proposal will hurt Wall Street, diminish city tax receipts and therefore hurt the economy of New York City.

However well Goldman Sachs survives, it has now been stigmatized for having caused the Great Recession. If you have a taste for schadenfreude you might ponder the fact that the president whose administration is scapegoating Goldman Sachs as a proxy for Wall Street received a great deal of support from Goldman Sachs. And the Democratic party that is hitching its future electoral prospects to a backlash against Goldman Sachs is still receiving generous donations from Goldman Sachs.

Does this make Goldman Sachs more than usually clueless? It suggests that however well Goldman Sachs understands the derivatives market, it doesn't have a clue about the marketplace of ideas.

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