Author: Dr. Jonathan Kenigson, FRSA, FSJ*
Greater Nashville, TN, USA
The 1990s’ heralded the demise of Soviet socialism and the tangible consensus among Euro-American policymakers that the free market was destined to triumph over war and poverty at once [1]. At long last, Moscow’s hitherto omnipresent specter receded into the dustbin of Cold War history. To the vanquished Russian Federation and newly independent Ukraine of the 1990s’, the emergence of Western-style markets and the attendant morals of unbridled speculative enterprise portended deep misery for poor plebs and lavish excess for nimble, ruthless, and cunning “new men” [2]. Across the Atlantic, American prosperity surged: Home prices and equities skyrocketed while fuel costs remained low and the dollar remained stable [3]. The optimism of Western economists and politicians in the essential integrity of American subprime mortgage-backed securities led European banks to partake liberally of Default Mortgage Swap (DMS) instruments collateralized by real estate in booming American cities [4][5].
The American middle-class, emboldened by their recent political and economic successes, counted home ownership as a sort of definitive moral success – a tangible portent of eternal security [6]. The byzantine mysticism of DMS and the statistics of market volatility were the arcana handed to savvy wealth managers, quantitative traders, and applied mathematicians. Why not lend a hand to support the simple pleasures of suburban life? And why should NATO and EU members – stalwart allies who had persisted for half a century under the ever-present threat of nuclear holocaust – not abet this success and join it to their own?
On the eve of the economic crisis in 2008, European banks were heavily over-leveraged with volatile DMS whose valuation was effectively impossible due to nonlinearities in the complexity and volatility models [7]. These securities were actuarially unstable and were backed, as Keynes would likely opine, by the animal sensibilities of the market rather than by any rigorous laws of mathematics. In turn, European banks could not properly value their securities in proportion to their currency reserves because best-guess estimates of DMS values could not be established with adequate agreement [8].
When the subprime crash of 2008 began to infect the global financial system, the U.S. government acted in accordance with the national interest. The rhetoric of the Right filled Washington’s most storied halls with plaints of state interference that a Rothbard, Friedman, or Hayek would have bitterly lamented. Abandoning ideology for political and economic survival, elites on both sides of the Atlantic reasoned that ‘socialist’ measures were necessary to stabilize the banking system by curtailing the deflation of the dollar [9]. “Quantitative easing” consisted of the nationalization of the failing mortgage finance industry [10], the expansion of the money supply through purchase of treasuries [11], and the reduction of interest rates [12].
The massive, diverse, and resilient economy of the USA managed to quickly return to GDP growth [13]. The Eurozone, however, was in dire straits: The European Central Bank (ECB) lacked sufficient dollar reserves to securitize DMS [14], and local governments throughout the bloc that had received stable income from these securities were unable to maintain their generous domestic welfare, education, and pension outlays [14][15]. Days of European austerity unknown since the end of the Second World War were rapidly foisted upon the entire bloc [16]. These hardships disproportionately affected the overleveraged Irish, Portuguese, Spanish, and Greek economies [16][17].
Attempts at Eurozone quantitative easing were bitterly contested by Merkel’s Germany in particular [18]. Printing more Euro and securing bailout packages with German collateral were uncannily reminiscent of the days of post-Soviet reunification in which the underdevelopment of the East was assuaged with innumerable Deutschmark from the West [18]. Berlin’s political intransigence was understandable, even to Euro-sympathetic commentators at the time. Comparatively ravaged states were unable to nimbly source more Euro from the ECB when easing was needed most (2009-2011): Unlike the Fed, the so-called “Troika” of ECB, International Monetary Fund (IMF), and the European Commission (EC) did not possess unilateral currency-printing privileges [19]. They could not set interest rates or reserve ratios with the same rapidity and ease as the Fed. The Troika could, however, make loans with difficult political repercussions: Austerity in Greece, Ireland, Portugal, and others [20].
Desperate times are lit by the flames of vague omens, portents of subterfuge, and repressed public rage expressed at the politicians of a generation pockmarked by narratives of collective loss. As 1930s’ Weimar should have taught, periods of economic crisis are punctuated by attempts at brinkmanship, appeasement, and deft political opportunism. In 2009, Ukraine’s fledgling economy had withstood 80 years of communism followed by another decade of deep recession, endemic corruption, and faltering attempts to introduce a stable national currency [21]. The economic chaos in neighboring NATO countries seemed to get bleaker by the month. Janus-faced statements from Brussels that centered upon the political, moral, and economic value of pan-European unity in a post-Soviet age did little to assuage the hungry, homeless, and desperate states on the Eurozone’s hinterlands .
Meanwhile, the Ukrainian steel and iron industries centered in Kyiv, Donetsk, Kharkiv, and Sevastopol – mostly in the Russian-speaking Ukrainian east – had been massive employers in the Soviet days, providing limited (albeit assured) jobs, healthcare, food, housing, and leisure [22]. This industry was impacted most brutally from the economic downturn, provoking fears of mass unemployment, natural gas shortages, and bank failures [23]. Putin understood that his Eurasian Customs Union could ease these fears with tangible benefits: Gas subsidies, massive loans with favorable terms, military cooperation, and ample opportunities for foreign direct investment [24]. His offer to Kyiv was made all the more tempting by the ongoing political deadlock in Brussels and Washington and the insultingly paltry counter-offers these parties made [25].
Meanwhile, the Euromaidan Crisis in 2014 installed a new coalition government in Kyiv that was sympathetic to Western values and could see beyond the immediate implications of Moscow’s ostensible largesse [26]. Poland had prospered since cleaving to the West, while mere kilometres away, members of the Commonwealth of Independent States (CIS) that emerged after the dissolution of the Soviet Union had suffered terribly [27]. Unlike the Central Asian members of the CIS, these European states were not in possession of vast oil reserves that could be lucratively traded to India and China in Dollars rather than Roubles or Yuan [28]. When Ukraine’s new government reneged on the Customs Union package in 2014, hawkish Russian politicians were able to blame the West for Ukraine’s internal instability at precisely the historical moment when neither NATO nor the EU could respond in a united, convincing, and coordinated manner.
After all, the UK itself was floating the notion of leaving the EU (Brexit) – a crisis that an embattled conservative Cameron wrongly suspected would evaporate when economic conditions in Britain improved [29]. At the same time, a small but vocal chorus of French, German, and UK firebrands found it expedient to deploy anti-immigrant rhetoric in efforts to curtail domestic ire [30]. Citing Weimar, Madeleine Albright correctly reasoned that such domestic gambits were the stuff of rank populist Fascism, but Labour had no easy answers to the Euroskeptics who demanded an external enemy upon which to pin common people’s continued hardships [31].
Everywhere he looked, Putin saw chaos, all of which redounded heartily to his invasion of the Donbas and Crimea in 2014. He struck when the West was divided and NATO, the EU, and Washington faced such grievous political crises that Ukrainian sovereignty was a mere afterthought. A decade later, the West is still paying the political and economic price of the political crises that had first been inaugurated by a subprime mortgage meltdown that the European Bank could not cauterize. Only time will tell how many billions of Euro more will hemorrhage and how much sheer human misery will be generated by the Russo-Ukrainian War. Washington’s response will need to be carefully calibrated to avoid outright military confrontation with Russia while assuring continued support of democratic government in Ukraine and beyond.
Coda.
Mighty mountains, row on row, blanketed with cloud,
Planted thick with human woe, laved with human blood.
‘Twas there that We, the Gracious, found
Poor freedom hiding ‘mid the crags
(A hungry thing, and all in rags),
And sick’d our dogs to drag her down.
A host of soldiers on those hills
Gave up their lives. And as for blood!?
All emperors could drink their fill,
In widows’ tears alone they could
Be drowned together with their seed!
The sweethearts’ tears, in secret shed!
Unsolaceable mothers’ tears!
The heavy tears of fathers hoary!
Not streams, but veritable seas
Of blazing tears! So—Glory! Glory!
Taras Shevchenko
Тарас Шевченко
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