Uribe’s Plight

Alvaro Vargas Llosa

BOGOTA, Colombia — The U.S. Congress is refusing to ratify the Colombian free-trade agreement and there is talk of reducing military aid to Bogota—a signal that has been interpreted by the enemies of Colombian President Alvaro Uribe, including Venezuela’s Hugo Chavez, as the beginning of the decline of this once invincible leader.

I recently talked to Uribe in Bogota, and mentioned one of the arguments against him—the ties between politicians close to his government and the right-wing paramilitary umbrella group known as the United Self-Defense Forces of Colombia, or AUC for its Spanish acronym.

“Under my government,” Uribe responded, “46,000 armed men and women have been demobilized, 33,000 of them right-wing paramilitaries. The information that has come out in connection to the ties you mention resulted from this process. Now the judiciary is doing its job.”

But isn’t the fact that the right-wing paramilitaries penetrated Colombia’s institutions an indictment of the government? “The Marxist groups declared war on the country,” Uribe said, “provoking the emergence of the paramilitaries. The Marxists killed, maimed, kidnapped and terrorized Colombians, but they also penetrated the institutions of the state, particularly the judicial system. The paramilitaries copied their methods, and we are cleaning that up.”

What about the argument that union leaders continue to be killed in Colombia? “The year before we started our policy of democratic security,” Uribe recalled, “256 union leaders were killed. Last year the figure was 17. My aim is to stop all the killings, but that (reduction) is considerable progress.”

Another argument used by Democrats in the U.S. Congress, and even some Republicans—that there has been a rise in coca plantations—makes Uribe defensive: “If that’s what they believe, then let them scrap Plan Colombia. The U.S. government said that last year we had 150,000 hectares of coca, but the United Nations said we had 79,000. Why don’t they learn to measure? We have extradited more than 700 criminals to the United States. What more do they want?”

Uribe is right about two things: Were it not for his policy of “democratic security,” which led to the demobilization of the AUC, the ties between the paramilitaries and part of Colombia’s establishment would not be an issue in the courts today. And the killings of union leaders have certainly dropped. Thanks to the Uribe government’s terrorist groups, the overall murder rate in Colombia has dropped by almost 50 percent.

As for coca eradication, total cultivation indeed is up. But that is more the fault of a flawed policy that has been forced on Colombia and other Andean nations from abroad than a lack of effort on the part of Colombia. Coca cultivation has also risen in Peru and Bolivia. Linking ratification of the Colombian free-trade agreement with coca cultivation is an excuse. Uribe is hated by the Latin American and European left, whose arguments the Democrats have naively accepted. They resent the fact that Uribe has pushed back the Marxist guerrillas and created a climate in which the economy is booming, with total investment amounting to 28 percent of gross domestic product. To their dismay, he has privatized part of Ecopetrol, the oil company, giving shares directly to half a million Colombians and to another 6 million through their pension plans.

The guerrillas exert pressure from the jungle thanks to their hostages such as former presidential candidate Ingrid Betancourt, who has become a cause celebre. Uribe has accepted in principle the idea of an exchange of prisoners for hostages. He is proposing a “zone of encounter” in which negotiations would be carried out with a guarantee that there would be no military intervention.

Is Uribe going soft on the guerrillas? “No”, he responds. “I accepted a proposal from Europe and the (Catholic) church. The zone of encounter would comprise only 150 square kilometers—a rural area with no military or civilian presence right now. We are demanding to see proof that all 47 hostages (the ones the Revolutionary Armed Forces of Colombia, or FARC, says it is prepared to exchange) are alive. Even as we pursue the humanitarian course, we are putting together a fund to pay money to guerrillas who want to liberate hostages against their bosses’ orders. We will not incorporate guerrillas to our armed forces.”

Uribe, who is barred from seeking a third term, does not have a successor and the left wing is making gains. Will his policies be reversed after he leaves office? “I do not believe in the pendulum theory,” he states.

As I leave the presidential palace, I reflect on Uribe’s biggest mistake—not having institutionalized a system under which his policies were less dependent on one man. His biggest challenge is not terrorism, the Democrats or even coca, but depersonalizing the presidency.

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Alvaro Vargas Llosa
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Alvaro Vargas Llosa is Senior Fellow and Director of The Center on Global Prosperity at The Independent Institute. He is a native of Peru and received his B.S.C. in international history from the London School of Economics. He is widely published and has lectured on world economic and political issues including at the Mont Pelerin Society, Naumann Foundation (Germany), FAES Foundation (Spain), Brazilian Institute of Business Studies, Fundación Libertad (Argentina), CEDICE Foundation (Venezuela), Florida International University, and the Ecuadorian Chamber of Commerce. He is the author of the Independent Institute books The Che Guevara Myth and Liberty for Latin America.

Subprime Monetary Policy

In recent years monetary policy has been conducted so as to create an expectation that the Federal Reserve will bail out investors when asset bubbles deflate. Investors have come to bank on the Fed's backing of risky ventures. The recent crisis in the subprime mortgage market is at least partly the outcome of this new approach to monetary policy. That crisis has already had widespread ramifications for homeowners and investors.

Government programs and policies often serve to insulate individuals from the full consequences of their actions. For instance, subsidized federal flood insurance leads individuals to build more homes in flood plains than would otherwise be the case. The public naturally feels sympathy for homeowners who are the victims of flooding, and supports more assistance for those caught up in these dreadful situations. The "help" often exacerbates the problem, however, by removing incentives for homeowners to rebuild on higher and drier land. The general public wonders why the catastrophes appear more frequently. Pundits ascribe them to global warming, and nature is blamed for the effects of manmade policy.

Gerald O'Driscoll is a senior fellow at the Cato Institute and was formerly vice president and economic adviser at the Federal Reserve Bank of Dallas.

More by Gerald P. O'Driscoll Jr.

Since the 1930s the federal government has insured bank deposits. That scheme inherently reduced the vigilance of bank depositors toward their banks, removing constraints on risk-taking by the insured depository institutions. The situation became acute in the 1980s and 1990s, when unconstrained risk-taking by banks and thrift institutions led to a series of banking and financial crises. Eventually the deposit-insurance system was reformed and banking put on a sounder basis. Now we are in need of a reform of monetary policy.

Crisis in the Mortgage Market

Last February the popular press discovered subprime mortgage loans (see box) when two major originators of such loans, HSBC Holdings PLC and New Century Financial, disclosed increased loan loss provisions. HSBC is a globally diversified financial company. While it was a large lender in the market, the aggregate amount of its subprime loans was not a significant portion of its total portfolio.

New Century Financial fared much less well because of the concentration of its lending in this risky category. Its stock price collapsed after problems surfaced the previous February, and the company eventually declared bankruptcy.

Other lenders in the subprime market experienced difficulties. Fears of a housing collapse and even an economic recession grew as investors gauged the size and extent of the problem in the mortgage market.

The crisis was foreseen by many. For more than a year before the bust, bankers, analysts, and even regulators knew they had a mess in the making. As John Makin of the American Enterprise Institute observed, the lending practices in the subprime market were "shoddy and absurd."

Lewis Ranieri, former chairman of Salomon Brothers, echoed those comments: "We're not really sure what the guy's income is and . . . we're not sure what the house is worth. So you can understand why some of us become a little nervous." Ranieri helped pioneer the bundling of mortgages into marketable securities ("securitization"), so he should know!

Moral Hazard

The collapse of the subprime mortgage market is the latest in a series of financial bubbles whose existence reflects, at least in part, moral hazard in financial markets. Moral hazard is the outcome of explicit or implicit guarantees to investors. At one time, deposit insurance was a major culprit. Today, monetary policy is fostering moral hazard.

Moral hazard occurs when some action or policy alters the behavior of individuals in a counterproductive way. Specifically, a policy intending to mitigate risk causes individuals instead to assume more risk. For example, a poorly designed policy insuring against fire could lead individuals to diminish resources devoted to fire prevention. In that case, the insurance would increase the probability of the insured risk occurring. (Of course, well-designed insurance policies should reduce risk. And in competitive markets, that is what normally happens.)

Earlier financial crises were the effects of deposit insurance and bank-closure policies that effectively insulated depositors and even other bank creditors from risk in the event of the failure of depository institutions. In an October 2002 speech to economists in New York, then-Fed Governor Ben Bernanke described the savings-and-loan crisis of the 1980s as "a situation . . . in which institutions can directly or indirectly take speculative positions using funds protected by the deposit insurance safety net—the classic 'heads I win, tails you lose' situation." After an intellectual and political battle of more than a decade, the deposit-insurance loophole was sealed.

[A]n ideal monetary policy is one that facilitates and does not distort economic decision-making by individuals.

To better understand moral hazard, consider the case of a gambler going to a casino. If he bears the losses, his bets will be constrained by that risk. If someone were to guarantee him against loss, but allow him to keep the profits, the gambler would have an incentive to make the riskiest possible bets. He gains all the profits but bears none of the losses. One might designate such a system as "casino capitalism." Current Fed policy has encouraged casino capitalism in the housing market.

Monetary policy can generate moral hazard if it is conducted so as to bail investors out of risky and otherwise ill-advised financial commitments. If investors come to expect that the policy will persist, they will deliberately take on additional risk without demanding commensurately higher returns. In effect, they will lend at the risk-free interest rate on risky projects, or at least at a lower rate than would otherwise be the case. Too much risky lending and investment will take place, and capital will be misallocated.

Money and Prices

To simplify a complex theoretical issue, an ideal monetary policy is one that facilitates and does not distort economic decision-making by individuals. Market prices play a critical role in that process by signaling to everyone the relative scarcity of goods and urgency of ends.

Austrian economist and Nobel laureate in economics F. A. Hayek characterized the price system as a communications mechanism for transmitting information about economic values. By communicating that valuable information, the price system helps coordinate economic activities. In its simplest formulation, prices tend to bring about equality between supply and demand in each market.

As with any communication system, it is desirable to filter out "noise," extraneous signals that interfere with communication. Money is indispensable to price formation, but money can generate noise along with information. The ideal monetary policy is one in which there is no noise, only valid price signals. The best possible monetary policy would maximize the signal-to-noise ratio.

Monetary noise comes about when policy changes the value of money. In economies on gold or silver standards, the discovery of new sources of the precious metal can set in motion forces leading to an expansion of the money supply and the depreciation in the value of money. In modern times, money is created by printing it, or through expansion of bank liabilities. In nearly all developed countries, the rate of that expansion is (or can be) controlled by central banks.

Changes in the value of money create monetary noise because investors and ordinary individuals mistake changes in money prices for changes in relative prices. For instance, during inflation prices will rise just to reflect the increase in money and not necessarily because there has been a shift in preferences.

Current monetary policy is much improved from the record of the late 1960s, 1970s, and early 1980s. That was the era of double-digit inflation and sky-high interest rates. In a December 2002 speech to the Economic Club of New York, then-Fed Chairman Alan Greenspan put monetary policy in historical context:

Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. But, in the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, had allowed a persistent overissuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess.

Some scholars have suggested that money influences not only the prices of consumer goods and wages, but also asset prices. They argue that money can work its mischief without showing up in consumer goods inflation. Widely used price indices, such as the consumer price index (CPI), do not include asset prices. A stable price index of consumer goods would thus not be a good measure of the value of money. Professor Charles Goodhart pointed to the two-decade experience of Japan, in which consumer prices were stable while asset prices fluctuated wildly. He asked rhetorically what the meaning of "inflation" is in such a context.

Goodhart argued that at least one category of assets figures so large in consumer purchases that it cannot be ignored: housing. Rental prices and housing prices do not always move in tandem. Home prices are affected by monetary policy in a number of ways, most notably through interest rates.

If asset prices are not incorporated into measures of inflation, their movements will not be action-forcing events for policymakers. Fed chairmen will wring their hands about "irrational exuberance," but will be powerless to do anything until the effects of asset-price changes are manifested in undesirable changes in current prices and output.

The Greenspan Doctrine

The new moral hazard in financial markets has its source in what can be best described as the Greenspan Doctrine. It was clearly enunciated by Greenspan in his December 19, 2002, speech, in which he made an asymmetric argument leading to an asymmetric monetary policy. He argued that asset bubbles cannot be detected and monetary policy ought not in any case to be used to offset them. The collapse of bubbles can be detected, however, and monetary policy ought to be used to offset the fallout.

Two months earlier Ben Bernanke had made a similar argument. He endorsed the Greenspan Doctrine, arguing against the use of monetary policy to prevent asset bubbles: "First, the Fed cannot reliably identify bubbles in asset prices. Second, even if it could identify bubbles, monetary policy is far too blunt a tool for effective use against them." Since Bernanke is now Fed chairman, it is reasonable for market participants to assume that the Greenspan Doctrine still governs current Fed policy.

Wrong Question

The two men were surely asking and answering the wrong question. They were implicitly treating bubbles as solely the consequences of real shocks or disturbances. (An example of a real shock is a technological innovation leading to productivity gains and higher future expected profits in a sector.) They asked whether monetary policy should be used to offset the effects of real shocks and concluded that it should not. The latter is the correct answer to the question they each posed.

A different question would be whether monetary policy should be conducted so as to create or exacerbate asset bubbles, which would not have occurred or would have been milder absent the assumed monetary policy. The answer to that question is surely no. Consider Bernanke's apt characterization of moral hazard in the context of the deposit-insurance crisis: "When this moral hazard is present, credit flows rapidly into inelastically supplied assets, such as real estate. Rapid appreciation is the result, until the inevitable albeit belated regulatory crackdown stops the flow of credit and leads to an asset-price crash."

Bernanke could have been talking about the subprime-mortgage market. That bubble and collapse cannot, however, be blamed on deposit insurance. First, deposit insurance is no longer systematically mispriced and banking supervision has improved. Second, the majority of mortgages are no longer made by insured depository institutions. Yet something generated the moral hazard that enabled shoddy underwriting of subprime mortgages to persist for years.

The Greenspan Doctrine helped create moral hazard in housing finance. The Fed announced that it will take no action against bubbles, but will act aggressively to offset the consequences of their collapse. In effect the central bank is promising at least a partial bailout of bad investments. The logic of the old deposit-insurance system is at work: policymakers should protect investors against losses, no matter their folly. Or, in Greenspan's own words: monetary policy should "mitigate the fallout [of an asset bubble] when it occurs and, hopefully, ease the transition to the next expansion."

In the present context, the "next expansion" could also be rendered as "the next asset bubble." If the Fed promises to "mitigate the fallout" from "irrational exuberance," then it is rational for investors to be exuberant. Investors may be at risk for some loss, as with a deductible on a conventional insurance policy, but losses are still being mitigated.

Rate Cut in 2000

The Fed cut the Fed Funds rate sharply after the bursting of the stock market bubble in March 2000. In the eyes of many, the Fed cut rates too far and held them down too long, fueling not only a vigorous economic expansion but also the housing bubble. In his December 2002 speech, Greenspan was at pains to deflect any argument that the Fed was inflating a housing bubble. "To be sure," he acknowledged, mortgage debt was high relative to household income [remember the date] by historical norms. But "low interest rates" were keeping the servicing requirements of the mortgage debt manageable (emphasis added). "Moreover, owing to continued large gains in residential real estate values, equity in homes has continued to rise despite very large debt-financed extractions."

How wrong the Fed chairman was! If Greenspan was not worried about interest rates resetting, why should mortgage bankers and homeowners worry? It would have been reasonable to read into the chairman's musings an implicit guarantee of continued low rates. A homeowner is certainly entitled to bet his home on the come if he wants. Should the central bank encourage such behavior?

Monetary Policy for a Free Economy

In his 2002 speech to the Economic Club of New York, Greenspan spoke disapprovingly of a policy that permits prices to nearly double in two decades. At current CPI inflation rates, however, prices will double in less than three decades. If inflation were to rise to 3 percent and remain there, prices would double in 24 years. That is not much progress against inflation, and surely we can expect better.

In a vibrant market economy with technological innovation and ever-new profit opportunities, the monetary policy that maintains true price stability in consumer goods requires substantial monetary stimulus. That stimulus will have a number of real consequences, including asset bubbles. These asset bubbles have real costs and involve misallocations of capital. For example, by the peak of the tech and telecom boom in March 2000, too much capital had been invested in high-tech companies and too little in "old-economy firms." Too much fiber-optic cable was laid and too few miles of railroad track were laid.

By 2002 the Fed was worried about the possibility of price deflation and introduced a strong anti-deflationary bias. A tilt to stimulus was understandable at the time. A continued bias against deflation at any cost, however, will produce a continued bias upward in price inflation. The inflation rate begins at the positive number. With the bursting of each asset bubble and the fear of deflationary pressure, Fed policy must ease. The Greenspan Doctrine prescribes a stimulative overkill that begins the cycle anew. The Greenspan-era gains against inflation will then prove to be only temporary. His doctrine will be the death of his legacy, a legacy that already includes a housing bubble and its aftermath.

FINANCIAL OUTLOOK 2008

GLOBAL INSIGHT: US ECONOMY HITS DANGER ZONE

Nariman Behravesh, Chief Economist

The US economy is in the danger zone. GDP growth in the fourth quarter of 2007 (0.0pc) and first half of 2008 (0.8pc in the first quarter and 1.8pc in the second quarter) is expected to be very weak.

This will make the United States extremely vulnerable to another shock. Furthermore, it is unlikely that the rest of the world will be able to shrug off the expected sharp deceleration in spending by American households.

Global Insight currently predicts that world growth will be 3.3pc in 2008, compared with 3.7pc this year. With the potential for housing crunches in some European economies and a post-Olympics slowdown (or even bust) in China, the risks for the global economy are now overwhelmingly on the downside.

US growth will be the weakest since 2002, and possibly since the last recession

Growth in 2002 was a meager 1.6pc, as the economy struggled to recover from the twin shocks of the high-tech bust and the 9/11 terrorist attacks. Growth next year will be almost as low (1.9pc), and there is a mounting risk that it could be lower.

The main culprit is housing, which will cut real GDP growth by 1 percentage point during the year. However, consumer spending growth is also predicted to decelerate from 2.8pc in 2007 to 1.7pc in 2008. Moreover, capital spending is expected to increase a lackluster 2.6pc.

The only saving grace will be net exports, which will add 0.9 percentage point to growth. Global Insight forecasts that the US economy will rebound in the second half, expanding 2.7pc, compared with 1.3pc in the first half.

Most other regions of the world will also decelerate

Except for commodity-exporting countries and regions, world growth is expected to "re-couple" with the United States and slow down.

For Canada and Mexico, weak US growth will be offset by strong oil prices.

However, Europe will be hit by multiple headwinds, including the global slowdown, a stronger currency, the continuing credit crunch, housing problems in some countries, and high oil prices.

Japan will be similarly afflicted, although there is little evidence of fallout from the subprime and housing-related problems in the United States-so far. The fate of emerging markets will depend on if and when growth in China and the rest of Asia falters.

There will be no significant cooling in China and the rest of Asia until late 2008

A mild global slowdown will only put a small dent in China's rapid rate of growth in 2008 - 10.8pc, compared with 11.5pc this year. Credit growth is still very strong and the Chinese government's modest tightening efforts have had little impact, with fixed asset investment growing at about a 30pc rate in 2007.

In the first half of 2008, there are likely to be further gradual interest rates hikes and currency appreciation. After the Beijing Olympics next August, however, the government may have no choice but to tighten credit conditions more dramatically.

This will further slow China's growth, but there is a significant risk (at least 33pc) that the landing could be hard. Such a scenario would hurt the rest of Asia.

However, since India's growth is predominantly domestic-led, this vibrant economy should be able to sustain a growth rate around 8.5pc.

Oil prices will ease, but remain at high levels

Weaker global growth will dampen oil prices and bring them more into line with supply/demand fundamentals.

These fundamentals support a price between $75 (£37.20) and $80 per barrel. Global Insight expects that, on average, a barrel of WTI will cost $75.67 next year, compared with $72.13 in 2007.

However, with markets still tight, any type of supply disruption (actual or expected) could send prices back up again-probably only temporarily. An unknown factor in oil and other commodity markets is the role of speculation.

Some have referred to the recent spike in commodity prices (especially oil) as the "next bubble." If so, the recent drop in oil prices suggests that some of these speculative positions may be unwinding.

Core inflation will edge down

The US economy is now operating well below potential. This will begin to gradually push up the unemployment rate.

This extra slack in the economy will put further downward pressure on core inflation, which Global Insight expects to fall from 2.0pc this year to 1.8pc in 2008 for the core personal consumption deflator and from 2.3pc to 2.1pc for the core CPI.

The good news, so far, is that high energy prices have had very little impact on other prices and on wage inflation. This benign state of affairs can be expected to continue for at least another year.

The Federal Reserve will keep cutting interest rates

With inflation not a serious threat, and the risks predominantly on the downside, the Fed will keep lowering rates. Global Insight now expects cuts of 50 basis points at the January 29-30 meeting, and another 25 basis points at the March 18 meeting.

Housing sector activity will bottom out in mid-2008

Housing activity will continue to slide in the first half of next year. Global Insight now expects that total starts will fall below 1 million units during 2008-less than half their level in 2005.

During the second half of the year, we expect housing activity to stabilize and begin recovering gradually. The same cannot be said about home prices, which are likely to keep sliding, at least through 2009. The peak-to-trough drop in home prices (as measured by the OFHEO price index) will probably end up being more than 10pc.

The US current-account deficit will continue to improve

The long-awaited correction of the gaping global imbalances is finally happening. The deceleration in the U.S. economy is likely to be much more pronounced than that across the rest of the world.

Moreover, the dollar has fallen more than 20pc (on a real trade-weighted basis) in the past five years and should fall a little more, before stabilizing. These developments are supercharging exports and dampening imports.

During the course of the next year, the positive contribution by trade will make all the difference whether the U.S. economy suffers through a recession or not. Global Insight forecasts that the current-account deficit will fall from $755BN in 2007 to $659BN in 2008.

The dollar will reach a trough against some currencies in 2008

While the dollar has been on a downward trend since 2002 (mostly because of the huge current-account deficit), the recent weakness is a function of fears over the subprime crisis and a US recession, combined with expectations that the Fed will cut interest rates more than other central banks.

As the economy begins to recover in the second half of 2008 and early 2009, though, sentiments on the dollar will turn more positive, at least against some currencies.

We expect that the euro will top out around $1.55 next summer and fall to $1.49 by year-end. The Canadian dollar may have peaked already, if oil prices keep falling. However, both the Japanese yen and the Chinese renminbi should keep appreciating vis-à-vis the dollar, given the large current-account surpluses in both economies.

With US growth barely positive through mid-2008, even a small shock will push the economy over the edge

For the past two years, Global Insight has been saying that it would take two or more shocks to trigger a US recession. There is a growing risk that such a scenario may be about to unfold.

The combination of the housing/subprime crisis and higher oil prices could be enough to push growth into negative territory. If oil prices continue to fall, and end up in the $75-80/barrel range early in 2008, the US economy will probably be able to escape recession.

However, either another rise in oil prices or some other shock (even a small one) could be the straw that breaks the camel's back. Global Insight has raised the probability of a US recession from 35pc to 40pc.

FINANCIAL OUTLOOK 2008

BARCLAYS: SKATING ON THIN ICE

Barclays Wealth 2008 Annual Outlook

Key themes for 2008:

• We put the probability of a US recession at 40pc.

• If there is a US downturn, the European economy will be hurt.

• Despite the market turmoil, there are several reasons to be positive on equities.

• There will be greater equities opportunities in the UK and Europe than in the US.

• Were there to be a recession, equities markets would be likely to rebound quickly.

• Banking sector stocks still look cheap.

• We continue to favour large-cap stocks.

• We think a sharp fall in sterling is likely.

• Commercial property still appears overvalued.

Macroeconomic view

A close call on a US recession

We put the probability of a US recession at 40pc, with a more likely scenario being continued, if sluggish growth. In the past, housing market busts have been like a slow-motion train crash, with severe consequences.

But the US Federal Reserve, and other central banks, seem much more willing to bolster demand than in previous crises.

US macro data remain strong, and we think that debt defaults are likely to have less of an impact than expected.

But we do think the downturn in the US housing market will have a greater impact on the demand for credit and (through ‘collateral’ effects) on consumption than most models foresee. So our forecasts for US growth are below the consensus.

Michael Dicks, Head of Research, Barclays Wealth comments: “Our analysis points to a significant global slowdown, but not a crash.

"We do not have a US recession as our central scenario – although we do put chances of a recession at 40pc.

"We are also pessimistic about the euro area, believing that it ‘cannot go it alone’. In the UK, we believe that the Bank of England will have to deliver at least 100bp of interest rate cuts if growth is to reach anywhere nears its forecasts of 2pc.”

Europe can’t go it alone

If there is a US downturn, Europe will be hurt. Economic models on economic interrelationships between countries have tended to focus heavily on trade flows.

But economic performance is in fact much more correlated than these models would predict, with financial linkages more significant than trade. There are also important ‘CNN’ effects – bad US news sending European stockmarkets and business confidence down.

In a globalised world, European firms are having to react much more aggressively to changes in economic circumstances – rather than being able to fall back on cosy relationships with bankers.

Our models suggest that the slowdown in Europe will be greater than most, or indeed the ECB, forecasts. A possible further appreciation of the Euro would not help matters.

Goldman Sachs

Modern Midas

Bumper profits and a stellar reputation. Time to worry

“IT IS important to be a bit institutionally paranoid, especially when things are going well.” Thus Lloyd Blankfein, chief executive of Goldman Sachs at a conference in November. After the year Goldman has had, Mr Blankfein cannot be far off hearing imaginary voices.

On December 18th the investment bank unveiled full-year results that contrived to be both widely expected and astonishing. Earnings in the fourth quarter stood at $3.2 billion, a 2% rise on the same period in 2006. Even as most of its peers have been dragged down by subprime-related investments, Goldman's fixed-income business has boomed, thanks in part to a proprietary bet that the value of mortgage-backed securities would fall. The rest of its businesses are also steaming ahead. Its share price, as of December 18th, remained (just) up from the start of the year. Its status as Wall Street's employer of choice is gold-plated, not least because of a bonus-and-salary pool of $20 billion. “If Goldman Sachs comes calling, you have to consider it,” says one headhunter.

Mr Blankfein's neurotic impulses are well founded, however. Being at the summit of the banking industry is all very well, but the only way left is down. There are reasons, besides the impact of a slowing economy, to think that Goldman's triumphant 2007 contains the seeds of a less comfortable 2008.

The first is that success on this scale always reaps a harvest of envy (never mind that Mr Blankfein's handsome bonus will be dwarfed by the pay-off given to Stan O'Neal for leaving Merrill Lynch in incomparably worse shape). Rich, well-connected bankers have a limited call on sympathy at the best of times. Goldman's gamble that many of America's overstretched borrowers would default on their mortgages is unlikely to win it new friends. Signs of a backlash are visible: Christopher Dodd, a Democratic senator, has raised questions about the part played by Hank Paulson, who ran Goldman before becoming treasury secretary, in fuelling the subprime mess.

The second cause for concern surrounds Goldman's finely balanced (or horribly compromised: take your pick) business model. As well as acting as an adviser and financier to clients, Goldman makes lots of money from putting its own capital to work. Proprietary trading and investments accounted for two-thirds of the firm's revenues in 2007. The tensions inherent in this approach are neither new nor unique to Goldman, but they have become much more obvious now that its traders have made hay taking short positions against debt instruments of a type peddled to clients by other parts of the bank. Accusations that Goldman has been issuing deliberately bearish research in order to drive markets down and make even more money are fanciful. But some of its clients may become more questioning.

The third trapdoor concerns Goldman's risk appetite. You may think that serenely stable share price suggests Goldman is a safe haven; its low price-earnings ratio tells a different story. Between 2003 and 2006 Goldman's traders were losing money on many more days than other Wall Street firms (see chart). The bank's risk-sensitive culture is rightly lauded; its agility in times of trouble has been proven. But it is neither cautious nor transparent, qualities that investors are likely to prize in coming months. Mr Blankfein's antennae are right to twitch.

A weird day on Wall Street

This was a weird and wonderful day on Wall Street; one for the history books.

First, we learnt that David Rubenstein of Carlyle Group had bought a copy of the Magna Carta for $23.1m and plans to keep it on display at the National Archives in near his office in Washington. He did it, he told the Wall Street Journal, to "repay a debt I have to the country".

Talking of debt, Morgan Stanley then declared a $9.4bn write-down on mortgage securities, mostly run up by a single trading desk, which is quite a lot of money for a few people to lose. It said it was taking a $5bn capital infusion from China's sovereign wealth fund and John Mack, its chief executive, would give up his annual bonus as penance.

Finally, we had a conference call to match - and indeed surpass - for strangeness the one held by Bear Stearns in the summer at which Jimmy Cayne, its chief executive disappeared halfway through the call and Bear's stock fell sharply.

This time, the conference call was held by Sallie Mae, the giant mortgage securitisation group. It started amiably but Al Lord, its chief executive, then got into a tussle with analysts about how much information he was divulging. The call ended with Mr Lord saying testily to his head of investor relations head: "Let's get the (expletive deleted) out of here" and Sallie Mae's shares dropping 21 per cent.

You might have thought that staying on a call long enough to answer questions and remaining polite would not be too much to ask of a chief executive trying to retain confidence in his company. These are strange times indeed.

About John Gappe

I am the FT’s chief business commentator and this blog is about business, finance, media, technology and related matters. I live in New York so there is a bias towards US topics but I range more widely. Comments and criticism, which hopefully are at least as interesting as anything I write, are welcome.

Morgan Stanley writedown further saps confidence

Wall Street shares reversed early gains yesterday after a rating agency lowered its credit outlook on Ambac Financial and MBIA, two bond insurers, to "negative" raising fears of heightened turmoil in credit markets.

The successful conclusion of the Federal Reserve's first $20bn term loan auction was not enough to reassure investors after S&P also cut its credit rating on ACA Financial Guaranty, a smaller bond insurer, to junk.

Morgan Stanley added to the negative sentiment after it announced another $5.7bn in writedowns but the shares gained after it secured a capital injection from China.

The S&P 500 rose as much as 0.5 per cent after the Fed published details of the loan auction and but later fell 0.2 per cent to 1,452.02. The Nasdaq Composite was flat at 2,595.58 while the Dow Jones Industrial Average declined 0.3 per cent to 13,198.82

Financials pared early gains after S&P said "worsening expectations" for the performance of mortgage-backed securities meant it was lowering its outlook on MBIA and Ambac Financial 's AAA-rating to "negative" and was cutting ACA Financial Guaranty from A to CCC. MBIA fell fell 6.4 per cent to $25.93 while Ambac declined 6.3 per cent to $25.30. Both companies may now need to raise additional capital.

Shares in Morgan Stanley climbed as much as 6.8 percent after it said China Investment Corp, an investment vehicle controlled by the Chinese government, would inject $5bn to help shore up its balance sheet. The capital infusion provided an early boost to financial stocks as traders bet that other banks will look abroad for much-needed funding.

The company is the latest financial group to seek funding from foreign investment groups, following similar moves by Citigroup and UBS. CIC owns a stake in Blackstone Group, the publicly traded private equity group. "Meaningful investments into various financial entities suggest that the capital constraint dilemma may be finding some solutions, which could be part of the stabilisation process needed to calm down both debt and equity markets," Tobias Levkovitch, chief US equity strategist at Citi Investment Research, said.

Morgan fell to a $3.6bn loss in the fourth quarter after it took $9.4bn in mortgage-related writedowns, $5.7bn more than the company had advised in November. Full-year earnings were down 62 per cent to $3.44bn. The shares were up 3.3 per cent at $49.65 at midday.

Goldman Sachs, up 0.6 per cent at $202.63, reported stellar quarterly results on Tuesday but the bank warned that a difficult November period had clouded its outlook in the near-term. Bear Stearns , 1.3 per cent weaker at $91.43, reports its fourth-quarter results today.

Stocks had climbed in early trade after the Federal Reserve revealed details of its first term loan auction which provided $20bn in funds to help ease liquidity problems. Bids totalled $61.6bn for the $20bn in available financing, and funds were awarded at a 4.65 per cent interest rate, slightly below the 4.75 per cent rate available at the discount window.

"It seems that it did have a positive reaction initially. But now we can't really get any traction to the upside," Richard Sparks, senior equities analyst at Schaeffer's Investment Research, said.

Mr Levkovitch said recent central bank moves to help ease funding could be among the building blocks of a "substantive recovery".

In other earnings news Palm disappointed after it fell to a $9.6m secondquarter loss and revenues slid 11 per cent to $349.6m, slightly below expectations. The shares sank 8.8 per cent to $5.41 after Deutsche Bank cut its price target to $4.50.

Hovnanian Enterprises , the homebuilder, fell 8.8 per cent to $7.66 after it reported a wider than expected $469m loss with the company reporting a rise in buyers cancelling contracts.

Transport stocks also suffered a bad day after Union Pacific , the rail company, lowered its fourth-quarter guidance because of rising fuel costs. Its shares fell 4.8 per cent to $123.26. The drop hit Burlington Northern Santa Fe , down 2.5 per cent at $81.58.

Darden Restaurants , operator of the Olive Garden and Red Lobster chains, fell 19.2 per cent to $29.38 after its 2008 earnings guidance missed expectations.

Japan stocks up, banks gain on subprime fund snub

TOKYO, Dec 20 - Japanese stocks rose on Thursday after a six-day losing streak, with bank shares including Mitsubishi UFJ Financial Group (8306.T: Quote, Profile, Research) up on reports that they will refuse to contribute to a U.S.-led subprime rescue fund.

Still, amid high volatility in thin trade, coupled with lack of powerful market-moving factors, some participants said the market could go in either direction.

Takahiko Murai, general manager of equities at Nozomi Securities, said the market could move in a solid direction only if there were big surprises such as from the United States at this time of year, when many investors are already away.

"Today, too, it also depends on which way large-lot future orders come in the afternoon session."

As of 0101 GMT, the benchmark Nikkei average .N225 was up 0.3 percent at 15,081.96 and the broader TOPIX index gained 0.4 percent to 1,462.27.

Japan's three largest banks, Mitsubishi UFJ Financial, Mizuho Financial Group (8411.T: Quote, Profile, Research) and Sumitomo Mitsui Financial Group (8316.T: Quote, Profile, Research), rose sharply on talk they plan to reject a request to help finance a U.S.-led subprime rescue fund.

Financial sources said the three banks turned down the fund because of concerns over putting their capital at risk. [ID:nT102827]

MUFG climbed 2.9 percent to 1,061 yen and Mizuho rose 1.9 percent to 539,000. Sumitomo Mitsui rose 2.9 percent to 853,000.

But Nozomi's Murai said it was unlikely to be the end of the story. "I think there will be another round of requests," he said.

Steelmakers also climbed, with Nippon Steel Corp (5401.T: Quote, Profile, Research) up 2.4 percent at 632 yen and rival JFE Holdings Inc (5411.T: Quote, Profile, Research) gaining 2.3 percent to 5,360 yen.

Sumitomo Metal Industries Ltd (5405.T: Quote, Profile, Research) gained 2.2 percent to 459 yen and Kobe Steel Ltd (5406.T: Quote, Profile, Research) rose 1.2 percent to 344 yen.

Tokyo Star Bank Ltd (8384.T: Quote, Profile, Research) rose 2.3 percent to 350,000 yen but was below an expected bid price of 360,000.

Financial sources said Japanese private equity fund Advantage Partners has agreed to launch a roughly 250 billion yen ($2.2 billion) bid for Tokyo Star and will make an announcement as early as Thursday.

Advantage will offer about 360,000 yen per share, the sources said. That would be a 5 percent premium to Wednesday's close of 342,000 yen and roughly one-fifth above its level in early September when it was unclear if the deal would go through. [ID:nT184590] (Reporting by Taiga Uranaka, Editing by Michael Watson)

Our Little Thatcher

Hillary the Hawk

By PAUL W. LOVINGER

When Senator Hillary Clinton voted on October 11, 2002, to turn over to President George W. Bush the power that the Constitution vested in her and congressional colleagues to decide whether or not to wage war - or, quoting House Joint Resolution 114, whether an attack on Iraq was "necessary and appropriate" - she appeared to have a conflict of interest:

Her husband, Bill, was of course the former chief of the executive branch. And during her eight years as first lady, Mrs. Clinton never objected to Bill's eight wars, attacks, or interventions: in Afghanistan, Bosnia, Colombia, Haiti, Iraq, Somalia, Sudan, and Yugoslavia. He bombed Iraq in 1993 soon after taking office, again in 1996, and from 1998 till he left office. For a time, he was dropping bombs on Iraqis and Yugoslavs simultaneously in 1999.

None of those acts of war were authorized by Congress. The House of Representatives even voted its opposition to the undeclared bombing war on the Federal Republic of Yugoslavia, i.e. Serbia and Montenegro (4-28-99). Bill paid no attention and carried on his one-sided warfare for eleven weeks.

Mrs. Clinton had been instrumental in persuading Bill to attack Yugoslavia, according to multiple writers. Biographer Gail Sheehy wrote in "Hillary's Choice" (p. 345): "On March 21, 1999, Hillary expressed her views by phone to the president. 'I urged him to bomb [Yugoslavia].' " Bill was indecisive. She invoked the Holocaust, alluding to claims of mass killings by Milosovic and his men, and asked, "What do we have NATO for if not to defend our way of life?" (Originally it was to defend western Europe against a possible Soviet attack.) Days later the president gave the go-ahead for war, thereby usurping the constitutional prerogative of Congress.

The Milosovic-massacre tale (which Senator Clinton repeated in her 2002 Senate speech) was subsequently debunked by several European pathological teams. The Clinton-NATO air raids, however, killed a couple of thousand civilians. A year later Amnesty International charged that international law was violated by indiscriminate bombings.

Calls aggression defense

Speaking in behalf of the Iraq war resolution Senator Clinton praised her husband's bombing of Iraq and argued that "undisputed" facts linked Saddam Hussein to weapons of mass destruction, including a nuclear weapons program, and to ties to Al-Qaeda. But such a contention was indeed disputed by facts presented by the International Atomic Energy Agency, the Knight Ridder newspaper chain, buried stories in the leading papers, and many Internet sites. She denied that the resolution amounted to a rush to war, though it came from the White House, which had already decided to wage war on Iraq.

When Bush invaded Iraq in March 2003, Senator Clinton called it defense. Even after the supposed facts about WMD and terrorist ties were exposed as monstrous lies, the senator defended her vote for war, never renouncing it. She claimed it was just to support negotiation, but the resolution said nothing about negotiation. And she claimed she had been given incorrect intelligence, but cited no details. She opposed any timetable for withdrawal and advocated more troops and permanent U.S. bases in Iraq.

As of last September, that supposed defensive war was estimated, by the British polling agency Opinion Research Business, to have taken 1.2 million Iraqi lives.

Even if the lies she fell for had been proven true, the senator's lack of concern for international law would still stand revealed. The Charter of the United Nations, which as a U.S. treaty has the force of law, says (in Article 2): "All Members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state...."

The North Atlantic Treaty - the basis for the organization that Bill Clinton, with his wife's encouragement, perverted from a defensive to an aggressive force - echoes that principle (in Article 1): "The Parties undertake ... to refrain in their international relations from the threat or use of force in any manner inconsistent with the purposes of the United Nations."

Furthermore, before there was a UN or a NATO, there was the Kellogg-Briand Peace Pact of 1928, renouncing war as an instrument of national policy. It was used to convict Nazis of crimes against peace, and it remains in effect as a U.S. treaty.

Threatens Iran and others

Just as Senator Clinton accepted Bush and Cheney's fiction about danger from Iraq and supported the 2003 aggression against that country, she tends to accept their drive for an encore against Iran. At Princeton University in January 2006, she said, "A nuclear Iran is a danger to Israel, its neighbors and beyond. The regime's pro-terrorist, anti-American and anti-Israel rhetoric only underscores the urgency of the threat it poses."

In her own, anti-Iranian rhetoric, she threatened a nation that had not attacked anyone for centuries and that - U.S. intelligence now states - had given up its atomic bomb program three years earlier: "We cannot take any option off the table in sending a clear message to the current leadership of Iran -- that they will not be permitted to acquire nuclear weapons." Three months later, Bush used nearly the same expression when asked if he planned a nuclear attack on that country: "All options are on the table" (AP, 4-8-06).

Last September 26, Senator Clinton voted for a Senate resolution urging Bush to designate the Islamic Revolutionary Guard Corps, a major branch of the Iranian armed forces, as a foreign terrorist organization. She has echoed the proofless Bush charges of support for Iraqi insurgents (mostly Sunni) by Iran (Shiite).

She has refused to rule out presidential use of nuclear weapons, notwithstanding the 1996 World Court ruling that use of the weapons violates international humanitarian law because they blindly strike civilians and military targets alike. And she voted to end restrictions on countries violating the Nuclear Non-Proliferation Treaty.

Senator Clinton has called for more toughness on Syria and leftist regimes in Latin America, supported arms and training for various repressive dictatorships, opposed bans on land mines and cluster-bomb exports, and advocated even more military spending than Bush requested. More contributions from war contractors have reached Hillary for President than any competing campaign.

The senator boasts of her experience. She is indeed experienced in jumping to bellicose conclusions on the basis of meager facts and false information. If she wins, I expect her to follow the pattern of husband Bill in shooting from the hip in actions abroad, to ignore both the Constitution and international law, and to try to prove that a woman president can be just as warlike as any man.

Krugman’s Fascist Fantasies

I just cannot kick the Krugman habit. Yes, his column is awful, and, yes, I read it every Monday and Friday, just as the editors of the New York Times want me to do. (Of course, they would like for me to believe that Krugman is the Great Prophet of Economics, but they will have to settle for the fact that I read Krugman precisely because he is so bad.)

As I read yet another column lavishing praise upon John Edwards, I realized that Krugman is nothing less than a hard-core 1930s fascist. No, he does not wear the black shirt (or I don’t think he wears a black shirt), and I doubt he has a flag with a swastika hanging in his closet, but nonetheless his economic doctrines are pure and unadulterated fascism.

In a recent column, he claimed that the entire sub-prime mortgage meltdown was due to free market ideology. That’s right, a financial bubble that was created by a socialist entity called the Federal Reserve System and backed up by government-created corporations called (how cute) Fannie Mae and Freddie Mac really was an exercise in free markets. Yeah, and Princeton University (Krugman’s other employer) is offering me a job on the faculty.

As always, I will let Krugman’s words speak for themselves, as I do not want to put words in his mouth, given his own words are awful enough. Thus, I begin with his view of politics:

Broadly speaking, the serious contenders for the Democratic nomination are offering similar policy proposals – the dispute over health care mandates notwithstanding. But there are large differences among the candidates in their beliefs about what it will take to turn a progressive agenda into reality.

At one extreme, Barack Obama insists that the problem with America is that our politics are so "bitter and partisan," and insists that he can get things done by ushering in a "different kind of politics."

At the opposite extreme, John Edwards blames the power of the wealthy and corporate interests for our problems, and says, in effect, that America needs another F.D.R. – a polarizing figure, the object of much hatred from the right, who nonetheless succeeded in making big changes.

Krugman, not surprisingly, wants the guy who will confiscate property, imprison business executives, and generally destroy private enterprise. (Don’t forget, Krugman holds that the Great Depression really was a Golden Age of the U.S. economy because income inequality lessened during that time. In other words, he believes a world in which everyone is poor is better than a world in which some are poor and others are not.)

As the point man on socialist medical care, Krugman declares:

O.K., more seriously, it’s actually Mr. Obama who’s being unrealistic here, believing that the insurance and drug industries – which are, in large part, the cause of our health care problems – will be willing to play a constructive role in health reform. The fact is that there’s no way to reduce the gross wastefulness of our health system without also reducing the profits of the industries that generate the waste.

As a result, drug and insurance companies – backed by the conservative movement as a whole – will be implacably opposed to any significant reforms. And what would Mr. Obama do then? "I’ll get on television and say Harry and Louise are lying," he says. I’m sure the lobbyists are terrified.

As health care goes, so goes the rest of the progressive agenda. Anyone who thinks that the next president can achieve real change without bitter confrontation is living in a fantasy world.

Yes, as health care goes, so goes the rest of the progressive agenda. While I and many other libertarians have been critical of the pharmaceutical and health insurance industries, Krugman is going into the netherworld of fascism in which the government directs everything these companies do – if they even are permitted to exist. Krugman has written elsewhere that perhaps all of these private firms must be destroyed or "cut out of the picture altogether" (same thing as destruction, since they would not be permitted to sell products and services).

You see, Krugman really believes (1) central government planning is what this world needs most, (2) people like him – because they can do funky mathematical modeling for journal articles – are the most qualified to do central planning, and (3) that private enterprise and especially profits are the source of all ills in the economy. Anyone who truly believes that the New Deal "ended" the Great Depression and thinks that John Edwards’ "populism" is an intelligent discussion of economics should be shown the back door of any competent economics department. (I forgot. He is on the Princeton faculty. "Elite" universities don’t have to be competent, just arrogant.)

For all of the talk of confiscating property, imprisoning executives, and just trashing anyone who supposedly is rich, I find it interesting to see Krugman – a millionaire himself – shilling for John Edwards. Edwards is a former trial lawyer who raked in millions suing doctors and hospitals, and who recently built the largest house in Orange County, North Carolina, a 29,000-square-foot behemoth. Here is a guy who lives a life of sartorial splendor, yet he claims that rich people are screwing up the economy. Rich people other than himself and Krugman.

My sense is that Edwards would find a way to exempt the Paul Krugmans of the world from onerous taxation and regulation. After all, Krugman has a doctorate from M.I.T., which means he really is more intelligent than we are, and intelligent socialists really should not have to deal with the consequences of the policies they demand for others. Thus, I guess an Edwards presidency would find a way for Krugman to keep his millions – as well as Edwards’ own mansion.

As Robert Higgs has pointed out, the New Deal did not bring back prosperity. Instead, prosperity came back only after Franklin Roosevelt had died and the New Deal took a back seat to private enterprise. Writes Higgs:

Evidence from public opinion polls and corporate bond markets shows that FDR’s policies prevented a robust recovery of long-term private investment by significantly reducing investors’ confidence in the durability of private property rights. Not until the New Deal/war economy ended and resources became available for peacetime production did private investment – and the nation’s economic health – fully recover.

That is not what Krugman would like us to believe, but nonetheless for all of the accolades Krugman receives (and the big income that accompanies his fame), the man is little different than the black-shirted hoods who marched in the streets of Rome in support of Benito Mussolini (who did not make the trains run on time). Writes Krugman:

There’s a strong populist tide running in America right now. For example, a recent Democracy Corps survey of voter discontent found that the most commonly chosen phrase explaining what’s wrong with the country was "Big businesses get whatever they want in Washington."

And there’s every reason to believe that the Democrats can win big next year if they run with that populist tide. The latest evidence came from focus groups run by both Fox News and CNN during last week’s Democratic debate: both declared Mr. Edwards the clear winner.

But the news media recoil from populist appeals. The Des Moines Register, which endorsed Mr. Edwards in 2004, rejected him this time on the grounds that his "harsh anti-corporate rhetoric would make it difficult to work with the business community to forge change."

Yes, yes, it is that dastardly right-wing, free-enterprising news media. Oh, if only people would listen to Paul Krugman and the man for whom he shills in every other column, John Edwards. Oh, yes, Edwards would shut down those businesses and the government would make everyone do the right thing – or else.

As one who grew up during the Cold War and attended college at a time when professors believed that Mao’s Great Leap Forward was the economic model for all of us to follow, I have had my fill of socialist Ph.D.s in economics who would not be able to explain a price system any better than a two-year-old can explain the origin of babies.

So, I will cut to the chase. Krugman can call this garbage "populism," but the better word is fascism. That is right; Paul Krugman might be a respectable college professor, but he is a fascist, pure and simple. And being that he is the darling of the left wing these days, I guess the Left has come full circle: starting out as communists, and ending as fascists. Could not happen to nicer people.

Castro poised to pass on power to younger generation

Cuba’s Fidel Castro is looking beyond his brother Raul to a younger generation of leadership for the Marxist state, after signalling for the first time his readiness to relinquish power.

The Cuban leader, in a letter read on state television, strongly suggested that he may never come back to public life, confirming what many have suspected for months.

Experts say the bombshell statement is notable for Mr Castro’s conspicuous failure to signal that his younger brother Raul, 76, would succeed him.

His statement instead threw a spotlight on a rising generation of communist leaders, one, or perhaps several, of whom appear destined to succeed him.

“This particular statement on his part confirms what everyone has known, which is, the era of Castro is rapidly coming to a close,” US Council on Hemispheric Affairs spokesman Larry Birns said.

Raul Castro, the current acting president, may have been named the provisional leader on the communist island, but “will not hold office for very long,” Mr Birns said.

The letter is remarkable because of the fact that Fidel emphasises a new generation of leaders, Mr Birns added.

Nevertheless Raul, for decades Cuba’s defence minister, stands to play a critical role in the passing of the torch.

“He is the truly transitional figure,” Mr Birns said.

“He will be preparing the way for this new generation of Cuban men.”

Not that the next generation of Cuban leadership are political newcomers.

They include men like long-time player Ricardo Alarcon, the third-most powerful man in the country, president of the National Assembly. Another possible contender is Vice President Carlos Lage.

Passing the leadership baton

In his letter, Mr Castro said he would not cling to office. He saw it as his duty not “to block the rise of younger people,” and said his future role in Cuba would be “to pass on experiences and ideas whose modest value arises from the exceptional era in which I lived”.

Cuba watchers, like Jaime Suchlicki of the University of Miami, believe the latest comments pave the way for his resignation.

“It indicates that his health is deteriorating, that he’s now abdicating total power and he’s passing it to his brother and the leadership of Cuba to name the next president of Cuba,” he said.

Hudson Institute spokesman Jaime Daremblum said that in his view, the process of succession is already well under way.

The letter brings Cuba “one step closer to Castro’s future retirement that already began when Raul assumed the presidency”, he said.

Mr Castro’s letter is also raising the hopes of Cuban exiles in Miami.

“Right now there’s probably a power struggle within the Cuban Government. Right now, probably the younger people are tired of the older people ruling and taking everything,” it said.

But US State Department spokesman Tom Casey says it is hard to work out just what Mr Castro means.

“What we unfortunately haven’t seen is an agreement by the Castro regime to allow the Cuban people to choose their leaders in free and fair elections,” he said.

“So certainly, I don’t think, unfortunately, these remarks represent any kind of fundamental change in the views of the Cuban regime.”

US presidents - 10 of them in fact - have learnt not to second-guess Mr Castro.

He has made similar comments about his future in the past, even before he became ill. And in his latest letter, he pointedly pays tribute to Brazilian architect Oscar Niemeyer.

Mr Castro has not been in the public eye since July 2006, when he underwent emergency intestinal surgery and handed provisional power to Raul. The state of his health remains unclear.

Decades of power

Whoever succeeds Fidel has big shoes to fill.

Mr Castro has dominated the island’s politics since he came to power in 1959, surviving numerous assassination attempts and efforts - especially by the United States - to push him out.

He has spent much of his more than four decades in power railing against global capitalism and staring down numerous challenges from the US.

Inter-American Dialogue Cuba expert Dan Erikson said the larger-than-life leader was likely to be followed not just by one successor, but a leadership group.

“The leadership will be more collective in nature, more collective decision-making,” he predicted.

During his convalescence, Mr Castro has kept busy by writing regular commentaries in government newspapers and making a few appearances on state-run television, but has never yet appeared in public.

As yet, unanswered is the question of what role he will play if and when he officially relinquishes power.

Mr Birns said it was likely that Mr Castro would play the role “of an elder sage” while the communist revolution he spawned is unlikely to remain in its current form - although unfettered democracy and capitalism were unlikely to take root.

“The revolution is going to continue, but is going to be ameliorated,” Mr Birn said.

“It is going to take on more and more the complexion… of a social democracy.”

The life-long Communist turned 100 on Saturday.

Mao and the art of management

A role model, of sorts

Books on management tend to define success in the broadest possible terms—great product, happy employees, continuous improvement, gobs of profits, crushed competitors. Even when words such as “excellence” and “success” are omitted from the title, they are often implicit. A case in point is the book which many would say defined the genre, Alfred Sloan's “My Years with General Motors”, published in 1963 when GM was still an iconic company and Sloan correctly acknowledged as the architect of the well-run, decentralised, global corporation.

But focusing on how the best produce the best has its limits. Most managers, after all, do not stitch an industrial triumph from a vast bankrupt junkyard, as Sloan did. They do not delight their customer, crush competitors and create vast wealth. They struggle. They stumble.

Where is the book for them? Who can help the under-performing, over-compensated chief executive fighting to survive intrusive journalists, independent shareholders and ambitious vice-presidents who could do a better job? Where is the role model for the manager who really needs a role model most—the one who by any objective measure of performance cannot, and should not, manage at all?

An obvious candidate is Mao. Yes, he was head of a country, not a company. But he self-consciously carried a business-like title, “chairman”, while running China from 1949 until dying in office in 1976, having jailed, killed, or psychologically crushed a succession of likely replacements and therefore created the classic business problem: a succession void. He thought of himself as, in his own words, an “indefatigable teacher” and the famous “Little Red Book” drawn from his speeches is packed with managerial advice on training, motivation and evaluation of lower-level employees (cadres); innovation (“let a hundred flowers bloom”); competition (“fear no sacrifice”); and, of course, raising the game of the complacent manager (relentless self-criticism).

Mao still has at least a symbolic hold over the Chinese economy, even though it began to blossom only after death removed his suffocating hand. His portrait is emblazoned on China's currency, on bags, shirts, pins, watches and whatever else can be sold by the innumerable entrepreneurial capitalists that he ground beneath his heel when in power. No other recent leader of a viable country (outside North Korea, in other words) is so honoured—not even ones that did a good job.

It was not a nurturing management style that won Mao this adulation. According to Jung Chang's and Jon Halliday's “Mao, the Unknown Story”, admittedly an unsympathetic portrait, he was responsible for “70m deaths, more than any other 20th-century leader”. But why stop at the 20th century? In Chinese history, only Emperor Qin Shi Huang, who started building the Great Wall (in which each brick is said to have cost a life), was competition for Mao; and since the population was much smaller then, Mao is likely to have outdone him in absolute numbers.

Botched economic policies caused most of the carnage. Deng Xiaoping, Mao's successor, turned the policies, and eventually the economy, around. Yet he does not even merit an image on a coin.

The disparity between Mao's performance and his reputation is instructive, for behind it are four key ingredients which all bad managers could profitably employ.

• A powerful, mendacious slogan

Born a modestly well-off villager, Mao lived like an emperor, carried on litters by peasants, surrounded by concubines and placated by everyone. Yet his most famous slogan was “Serve the People”. This paradox illustrates one aspect of his brilliance: his ability to justify his actions, no matter how entirely self-serving, as being done for others.

CorbisAlfred Sloan would have disapproved...

Psychologists call this “cognitive dissonance”—the ability to make a compelling, heartfelt case for one thing while doing another. Being able to pull off this sort of trick is an essential skill in many professions. It allows sub-standard chief executives to rationalise huge pay packages while their underlings get peanuts (or rice).

But Mao did not just get a stamp from a compliant board and eye-rolling from employees. He convinced his countrymen of his value. That was partly because, even if his message bore no relation to his actions, it expressed precisely and succinctly what he should have been doing. Consider the truth and clarity of “serve the people” compared with the average company's mission statement, packed with a muddle of words and thoughts tied to stakeholders and CSR, that employees can barely read, let alone memorise.

Deng Xiaoping's slogan, which he used in his campaign to revive the economy, had similar virtues. “Truth from facts” is a sound-bite that Sloan would have loved and every manager should cherish, but you won't find it chiselled on a Chinese wall. It doesn't have the hypocritical idealism of Mao's version—nor was it pushed so hard.

• Ruthless media manipulation

Mao knew not just how to make a point but also how to get it out. Through posters, the “Little Red Book” and re-education circles, his message was constantly reinforced. “Where the broom does not reach”, he said, “the dust will not vanish of itself.” This process of self-aggrandisement is often dismissed as a “personality cult”, but is hard to distinguish from the modern business practice of building brand value.

Yet within China economic growth was pathetic and living conditions were wretched. So why did a vast list of Western political, military and academic leaders accept the value of Mao's brand at his own estimation? Even Stalin, no guileless observer, believed in and, to his later regret, protected Mao. The brand-building lesson is that a clear, utopian message, hammered home relentlessly, can obscure inconvenient facts. Great salesmen are born knowing this. Executives whose strategies are not delivering need to learn it.

Chief executives are not in a position to crush the media as Mao did. Nevertheless, his handling of them offers some lessons. He talked only to sycophantic journalists and his appeal in the West came mainly from hagiographies written by reporters whose careers were built on the access they had to him.

The law constrains the modern chief executive's ability to imitate Mao's PR strategy. Publicly listed companies have to publish information, rather than hand it out selectively. But many, within bounds, emulate Mao's media management; others, determined to control information about them, are delisting. Burrow beneath laudatory headlines on business and political leaders, and it becomes clear that the strategy works.

• Sacrifice of friends and colleagues

“Who are our friends? Who are our enemies? This is a question of first importance,” Mao wrote. Sloan agreed. He worried that favouritism would come at the expense of the single most valuable component of management: the objective evaluation of performance.

Corbis...but Mao's HR policies meant Happy Revolutionaries

Mao had a different goal: he did not want people too close to him, and therefore to power; so being Mao's friend often proved more dangerous than being his enemy. One purge followed another. Promotions and demotions were zealously monitored. Bundles of incentives were given and withdrawn. Some demotions turned out well. Deng Xiaoping's exile in a tractor factory may have helped him understand business, and thus rebuild the economy, but that was an unintended benefit.

This approach makes sense. Close colleagues may want your job, and relationships with them may distract you. Mao's abandonment of friends and even wives and children seemed to be based on a calculation of which investments were worth maintaining and which should be regarded as sunk costs. Past favours were not returned. According to Ms Chang and Mr Halliday, a doctor who saved his life was left to die on a prison floor after being falsely accused of disloyalty. Mao let it happen: he had other doctors by then.

Enemies, conversely, can be useful. Mao often blamed battlefield losses on rivals who were made to suffer for these defeats. The names of modern victims of this tactic will be visible on the list of people sacked at an investment bank after a rough quarter; the practitioners are their superiors, or those who have taken their jobs.

• Activity substituting for achievement

Mao was quite willing to avoid tedious or uncomfortable meetings, particularly when he was likely to be criticised. But maybe that helped him avoid getting bogged down. From the Anti-Rightist Movement of the late 1950s to the Great Leap Forward, a failed agricultural and industrial experiment in the early 1960s, to the Cultural Revolution in the late 1960s, Mao was never short of a plan.

Under Mao, China didn't drift, it careened. The propellant came from the top. Policies were poor, execution dreadful and leadership misdirected, but each initiative seemed to create a centripetal force, as everyone looked toward Beijing to see how to march forward (or avoid being trampled). The business equivalent of this is restructuring, the broader the better. Perhaps for the struggling executive, this is the single most important lesson: if you can't do anything right, do a lot. The more you have going on, the longer it will take for its disastrous consequences to become clear. And think very big: for all his flaws, Mao was inspiring.

In the long run, of course, the facts will find you out. But who cares? We all know what we are in the long run.

A Samurai Shield For Japan

Strategic Defense: A Japanese warship with the Aegis missile defense system shoots down a simulated North Korean missile. Meanwhile, the Defense Department announces that all 50 states are now protected. Thank you, Ronald Reagan.

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The Japanese know all about surprise attacks and the devastation caused by nuclear weapons, and they are determined to be victims of neither. Our former foe is now a determined ally, and between us we are rapidly unfolding a missile defense umbrella over both countries and the ocean between.

A Japanese destroyer launches an interceptor missile.

In Greek mythology, Zeus used a shield called Aegis. Today, another shield called Aegis is in the hands of the descendants of the samurai. The latest in a stunning string of missile-defense successes took place Monday, when a Standard Missile-3 (SM-3) interceptor launched from the JS Kongo knocked out a target warhead from a ballistic missile simulating the launch of a North Korean Rodong intermediate-range missile. Pyongyang has some 200 such missiles capable of reaching targets throughout the Japanese home islands.

The target missile was launched from the U.S. Navy's Pacific Missile Test Facility on Kauai. The Kongo tracked the missile, whose warhead separated from the booster rocket, requiring the interceptor to distinguish between the two objects and target the warhead. The target warhead was destroyed three minutes after launch.

In August 2006, Japan launched its sixth Aegis destroyer, the Ashigars, appropriately enough in the southeastern Japanese port city of Nagasaki.

News of Japan's successful Aegis test could not have been well-received in Pyongyang or Beijing, which itself has 900 missiles pointed at Taiwan. A fleet of Japanese and American cruisers and destroyers armed with SM-3 missiles patrolling the Sea of Japan and the Taiwan Strait puts a serious crimp in their plans.

The U.S. and Japan accelerated their joint efforts on missile defense after North Korea's missile barrage into the Sea of Japan on July 5, 2006. It included a test of its Taepodong ICBM, like the one that straddled the Japanese home islands in 1998.

According to Cybercast News Service, the Aegis sea-based system has successfully intercepted 11 of 13 missiles in the 12 tests conducted before this one. Ground-based interceptors have been successful in five of six tests.

At present, the U.S. has seven destroyers and three cruisers armed with the Aegis system and the SM-3. They include the USS Lake Erie, which helped track the target missile in the Japanese test.

Plans include eight more Aegis destroyers added to the fleet that, according to Rick Lehner, spokesman for the Missile Defense Agency, "will be deployed wherever they are needed." They'll be part of a multilayered missile defense that will include 24 ground-based interceptors installed in silos at Fort Greeley in Alaska and Vandenberg Air Force Base in California.

The goal is to have 40 based in the U.S. plus 10 in Poland. Tracking radars in Britain, Greenland and the Czech Republic will track their targets.

"We can defend all 50 states," Lehner also said. That's something we weren't allowed to do under the ABM Treaty of 1972, which President Bush abrogated shortly after taking office. That would include defending against any missiles presently deployed or under development by North Korea or Iran.

Nearly a quarter-century has passed since Ronald Reagan was ridiculed for proposing a system to detect, track and destroy incoming ballistic missiles. Today it's a reality. Another win for the Gipper.

Hungry For Trouble

International Affairs: Now the United Nations is sounding alarms about problems in the world's food supply. Typical. These people always need a crisis to justify the expansion of their powers.

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Jacques Diouf, head of the U.N.'s Food and Agriculture Organization, worries there is "a very serious risk that fewer people will be able to get food."

The International Herald Tribune reports that FAO's "food price index rose by more than 40% this year, compared with 9% the year before" — a rate, according to Diouf, "that was already unacceptable." The prices of wheat and oilseeds have reached record highs.

On the supply side of the equation, the U.N. says food is in decline. Global wheat stores have fallen 11% this year to their lowest level since 1980, while a mere eight-week supply is all that's left in corn.

Before you start putting in provisions, recall the alarms set off by Paul Ehrlich 40 years ago. In his 1968 screed "The Population Bomb," he predicted the 1970s and 1980s would be marked by the starvation of hundreds of millions as we outgrew our food supplies.

Two centuries earlier, Thomas Malthus made a similar prediction. He too was proved wrong. Today's population is six times its size in Malthus' day, yet per-person food output and consumption are far higher. So are living standards and life expectancies.

Add Diouf to the list of doomsayers whose dire predictions have gone awry. All get the attention of the media and popular culture, while the economists who've proved the Malthusians wrong have gone largely unnoticed.

Julian Simon, for one, argued that a scarcity of natural resources will be overcome by the mind of man, the ultimate resource. Development economist Peter Bauer also dismantled the dark predictions.

"Where people's abilities, motivations and social and political institutions are favorable, material progress will occur," Bauer wrote in 1972. "Where these basic determinants are unfavorable, development will not occur, even with aid."

The U.N. is perhaps the most mistake-prone organization to ever exist, but it did correctly identify one of the problems in its assessment of food supplies: The drive toward farming to produce biofuels such as ethanol has an adverse impact on prices and supplies.

Blame the Heartland's corn farmers. Their political power nets $7 million a year in government subsidies that encourage farmers to sell their crops for fuel rather than food and provides a strong incentive for farmers to plant corn instead of the unsubsidized crops they'd previously grown.

Blame environmental activists as well. Their radical opposition to fossil fuels helps drive the policy.

Regrettably, the U.N. negates its reasoned analysis about the problems created by the biofuel campaign when it claims that early stages of global warming are causing a decline in crop yields in some regions. We'd like to remind Diouf and his colleagues that global warming is a theory that hasn't been proved, but why bother?

There is also a gratuitous shot taken at prosperity, a bothersome — to the U.N. — trend that has led to people eating more meat. While that seems like progress to us, the U.N. says the world's increased carnivorous habit is diverting grain that could be eaten by humans to cattle who will be slaughtered for beef.

The United Nations is much like the arsonist who starts a fire so he can put it out and play the role of hero. But instead of lighting a fire, the U.N. is hoping to create news so unpleasant that people will beg to be saved.

Naturally, the U.N. tells us it will know exactly what to do — even if it really doesn't.

China: It's Not As Big As You Think

Competition: The common wisdom is that China's large and fast-growing economy could overtake the U.S. as soon as 2012. Not so fast. New data suggest China's not quite as big as economists once thought.

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The World Bank's latest estimates for the global economy contained a stunner of a statistic: China accounts for just under 10% of the world's total output — or about 40% smaller than thought.

At $5.3 trillion based on 2005 data, China's economy is still No. 2. But it has considerably more ground to make up before passing the U.S. in absolute size — if, in fact, it should ever do so. Total world output in 2005 was $55 trillion. The U.S. produced $12.4 trillion of that — with a population only one-fourth the size of China's.

How did these new data come about? The World Bank uses what's called Purchasing Power Parities — PPP for short — to figure how big an economy is. Basically, it surveys a market basket of some 1,000 goods and services, and sees how much of each people in those countries can actually buy in their own currency.

Doing this around the world, the bank discovered that 12 economies make up more than two-thirds of the world's GDP. Seven of those are so-called high-income economies — the U.S., Japan, Germany, the U.K., France, Italy and Spain.

Five are "transitional" economies — Brazil, Russia, India and China (the so-called "BRICs") plus Mexico. Together, they make up about 20% of output.

But the one that sticks out is China. World Bank statisticians got access to real data on China for the first time ever, and came away surprised. "The previous, less reliable, methods led to estimates (of China's GDP) . . . 40% larger than the results of the new, improved methods and benchmark," the World Bank report said.

This should be a lesson for those who take international statistics at face value. Anytime you're off by 40%, it's more than a rounding error. It's a big mistake — largely China's fault, since it wouldn't let anyone accurately measure its economy before.

And this is of more than just statistical interest. It means, for instance, that there are likely more than 300 million Chinese who live below the World Bank's $1-a-day poverty line — not the 100 million previously estimated.

This helps explain why China's communist regime still cracks down hard on any manifestations of dissent — contrary to its PR of China as the land of perpetual economic boom. It knows how bad things really are in the undeveloped hinterlands.

It also calls into question China's financial ability to support a massive military buildup to challenge the U.S. Dollarwise, the country just won't have the money — at least not yet. And besides, it should be spending that money on development — not arms.

This doesn't mean China's economy isn't growing fast. It is. Nor does it mean China isn't a potential U.S. rival, both economically and militarily. Again, it is.

But to us, this smacks a bit of the CIA's faulty analysis of the Soviet threat in the 1950s and '60s. Back then, there were no good real-world data issued by the Soviets. So economics analysts fell back on the tried and true: toting up Soviet output using satellites, secret cameras and other means to count the raw number of trucks and trains leaving factories during a given month, then comparing it with the same month a year earlier. If a factory had 100 train cars leave its doors one year, and the next year it had 110, it was assumed that the plant's output expanded by at least 10%. Not a bad assumption — but a wrong one.

For while the Soviets churned out massive amounts of goods, their quality was suspect. Box cars could be filled with shoddy, virtually unusable goods intended to meet state quotas. But we pretended that output was the same as ours.

We've done something similar with China — which, intentionally or not, has deceived us for years about the true size of its economy.

Now that it has finally opened up about what its economy is truly like, we can only hope that it too will let the other shoe drop and open up its one-party political system.

The Whig Party Appears

So, let's just start this off by saying that I didn't even know there WAS a modern American Whig party when I started calling myself a “neo-Whig”. Then, as I mentioned on a recent show, I read where Keith Olbermann labeled himself as “probably a Whig” in an magazine interview. And now, lo and behold, I get a “friends request” on the show's MySpace account for an entity calling itself “The American Whig Party”.

Well, I checked out the info on their site, and they sure do sound a lot like the Whig principles from the middle 19th Century updated for the modern world. I stole the following statement of principles directly off of their site (figuring they wouldn't mind the pub...)

1. No imperial presidency: Congress makes the laws, The Supreme Court interprets the
constitutionality of the laws, and The President administers the Nation.
2. It is the responsibility of Congress to declare wars. When Congress lacks the confidence to
declare a war, we should not engage in warfare. America should use military force without a
declaration of war under extreme or urgent conditions only.
3. It is the responsibility of the government to equitably balance the needs of the public with the
rights of the individual.
4. It is the responsibility of government to protect the civil liberties of its citizens.
5. The government is responsible To care for him who shall have borne the battle, and for his
widow, and his orphan.
6. As a great nation, America must respect its neighbors and demonstrate world leadership by
example. The government is obliged to respect the treaties and contracts to which it is a party.
7. Government is responsible for protecting the environment and assuring a stable economy.
8. It is the responsibility of the government to manage the publics resources, to maximize the
public good, and to do so with little intrusion into private affairs.
9. Government is accountable to the people for how it administers the public resources.

Their influences were listed as :

Thomas Jefferson
Theodore Roosevelt
Franklin D Roosevelt
Henry Clay
Daniel Webster
Abraham Lincoln

Well...I don't know anything more than what was listed there. But, I sure think I would vote for these guys over Dems or Repubs. What do all of you think?
I will say that there does seem to be a natural vacuum as far as political parties that could attract the mainstream enough to get elected and yet not be so mainstream as to be the Democrats and Republicans. Who knows? As the older folks who grew up in a rigid duopoly give way to younger voters more cynical about the viability of the system new voting shifts become possible.

Divided Communities and Split Families

Planning the War on Immigrants

By TOM BARRY

Politics can be an ugly affair, and it doesn't get any uglier than when politicians try to best one another in the politics of hate and scapegoating.

That's what is happening in America, as politicians and political candidates at all levels of government join the anti-immigration bandwagon. Meanwhile, immigrants who do the dirtiest work in America are living in fear as they face a generalized immigration crackdown and stepped-up immigration raids.

The war against immigrants and immigration is being fought on three main fronts: in Congress, in local and state government, and on the campaign trail. While the anti-immigration movement that is coursing through American politics is beyond the control of any individual or organization, the leading restrictionist policy institutes in Washington are setting the policy agenda of the anti-immigration forces at all levels of U.S. politics.

Following their success in stopping a comprehensive immigration reform bill in the U.S. Senate that included legalization provisions, immigration restrictionists have rallied around a common strategy: "Attrition through Enforcement."

Turning Up the "Heat" on Immigrants

"Attrition through enforcement" as a restrictionist framework for immigration reform has been percolating within the anti-immigration institutes in Washington, DC for the last couple of years. But it wasn't until the restrictionist movement beat back proposals for legalization that the strategy has taken hold as a unifying framework for restrictionism in America.

The Center for Immigration Studies (CIS) took the lead in developing this strategic framework. In April 2006 this restrictionist think tank published, "Attrition through Enforcement: A Cost-Effective Strategy to Shrink the Illegal Population," which lays out the main components of a war of attrition against immigrants along with the estimated cost of a multi-front campaign to wear down immigrant residents and dissuade would-be immigrants.

CIS analyst Jessica Vaughn opens the report with this observation: "Proponents of mass legalization of the illegal alien population, whether through amnesty or expanded guestworker programs, often justify this radical step by suggesting that the only alternative-a broad campaign to remove illegal aliens by force-is unworkable."

"The purpose of attrition through enforcement," according to Vaughn, "is to increase the probability that illegal aliens will return home without the intervention of immigration enforcement agencies. In other words, it encourages voluntary compliance with immigration laws through more robust interior law enforcement."

Key components of the war of attrition include:

* Eliminating access to jobs through employer verification of Social Security numbers and immigration status.

* Ending misuse of Social Security and IRS numbers by immigrants in seeking employment, bank accounts, and driver's licenses, and improved information sharing among key federal agencies, including the Internal Revenue Service, in the effort to identify unauthorized residents.

* Increasing federal, state, and local cooperation, particularly among law enforcement agencies.

* Reducing visa overstays through better tracking systems.

* Stepping up immigration raids.

* Passing state and local laws to discourage illegal immigrants from making a home in that area and to make it more difficult for immigrants to conceal their status.

CIS predicts that a $2 billion program would over five years substantially reduce immigration flows into the United States while dramatically increasing the one-way flow of immigrants back to their sending communities. According to CIS, the attrition war would require a $400 million annual commitment-"less than 1% of the president's 2007 budget request for the Department of Homeland Security."

Without driver's licenses and without work because of employment-centered enforcement, immigrants will leave the country-as many as 1.5 million annually, predicts the CIS study. "A subtle increase in the 'heat' on illegal aliens can be enough to dramatically reduce the scale of the problem within just a few years," says Vaughn.

War of Attrition

"Attrition through enforcement" represents an aggressive step forward for restrictionism. The "attrition through enforcement" strategy signals the advance of the anti-immigration advocates from defensive and hold-the-line positions to a long-term offensive aimed at definitively taking the battlefield.

Tasting the blood of their victory over liberal immigration reform, the restrictionist movement, led by Washington, DC institutes including the Center for Immigration Studies, Federation for American Immigration Reform (FAIR), and Numbers USA, has opted for a war of attrition as the best strategy for rolling back immigration.

The "attrition through enforcement" is a strategic framework that builds on tactical approaches. To counter proposals for legalization, restrictionists successfully argued that any proposals for increased legal immigration-either through legalization or guestworker programs-should not be considered until the borders were secured and current immigration law fully enforced.

The "secure borders" and "enforcement first" frameworks for discussing immigration have been largely accepted by politicians of both parties, eliminating approval of any immigration reform initiatives that would address the plight of the 12 million-plus undocumented residents of the United States.

Over the past six months, the restrictionists have moved beyond "enforcement first" to the more aggressive "attrition through enforcement" strategy. And the federal government, state government, and Congress seem to be marching in lockstep with the restrictionists as they all harden their anti-immigration posture.

Anti-immigration groups are propagating "attrition through enforcement" as the sensible, practical "middle ground" or "third way" in immigration reform. Rather than calling for a costly and morally repugnant mass deportation of millions of immigrants, the restrictionists have united behind a strategy aimed at wearing down the will of immigrants to live and work in the United States.

Immigration raids in the interior of the country and imprisonment by immigration officials of those crossing the border illegally combined with pervasive enforcement of the "rule of law" by police and government bureaucrats will slowly but surely drive all undocumented immigrants out of the country. Restrictionists increasingly argue that mass deportation will be unnecessary since an ever-increasing number of immigrants will "self-deport."

"Attrition through enforcement" also addresses another weak point in previous restrictionist strategy. Having long demanded that the federal government gain control of the southern border, the restrictionists found that as border control increased more immigrants were staying in the United States, fearing that if they left they would never be able to return. Border control has actually increased the number of undocumented immigrants who have opted for permanent residency.

Although still demanding tighter border control with more agents and more fences (virtual and real), restrictionists also have in "attrition through enforcement" what they consider to be a pragmatic and palatable solution to ridding the country of "illegal aliens." Permanent residency in the United States, if this strategy is fully implemented, will become a permanent nightmare.

Attrition on the Campaign Trail

All the Republican Party candidates have to some degree adopted a restrictionist agenda. Even John McCain, an original sponsor with Sen. Kennedy of comprehensive immigration reform, has said that he now supports an "enforcement first" approach.

Fred Thompson won the plaudits of restrictionists when he released his immigration platform, which explicitly adopts the "attrition through enforcement" strategy. According to Thompson, "Attrition through enforcement is a more reasonable and achievable solution [than] the 'false choices' of 'either arrest and deport them all, or give them all amnesty.'"

This more "reasonable" solution supported by candidate Thompson includes measures such as denying federal money to states and local governments that provide social services to undocumented residents, and ending federal educational aid to public universities that provide in-state tuition to undocumented residents.

FAIR is spearheading the attrition war on the state level, working closely with a new group called State Legislators for Legal Immigration. Formed by right-wing restrictionists in the Pennsylvania state legislature, the group says nothing about legal immigration in its mission statement. Rather, the founders say the group "represents a 21st century Declaration of Independence."

"Similar to the American Revolution, the personal and economic safety of Pennsylvanians and all American citizens depends upon definitive action being taken by our federal, state, and local governments to end the ongoing invasion of illegal aliens through our borders," declares the legislators' organization. By turning back this invasion, they say they will protect U.S. citizens from " property theft, drug running, human trafficking, increased violent crime, increased gang activity, terrorism, and the many other clear and present dangers directly associated with illegal immigration."

State Legislators for Legal Immigration and FAIR intend to take the war of attrition to every state. According to this restrictionist group, "Once the economic attractions of illegal jobs and taxpayer-funded public benefits are severed at the source, these illegal invaders will have no choice but to go home on their own." FAIR says that the legislators' group "will be teaming up with FAIR to develop state-based initiatives to deal with the national problem of mass illegal immigration."

The war of attrition is already leaving a trail of divided communities and split families in its wake. Detentions and deportations are shattering immigrant communities and families as restrictionists applaud and call for ever-harsher measures. It is also ramping up the fear and loathing on the campaign trail.

As this war against the country's most vulnerable population deepens, the American people will need to ask themselves if they feel any safer or more secure, if they have more hope to find better-paying jobs, if their neighborhoods and town economies are more or less vibrant as immigrants leave, and if they are proud of themselves and their country.

Is the NIE Bush's Watergate?

By SAUL LANDAU

"Look, Iran was dangerous, Iran is dangerous and Iran will be dangerous, if they have the knowledge necessary to make a nuclear weapon."

-George Bush, Dec. 4, 2007

"We have no clear understanding of what bullshit is, why there is so much of it, or what functions it serves. . . . Bullshitters seek to convey a certain impression of themselves without being concerned about whether anything at all is true. They quietly change the rules governing their end of the conversation so that claims about truth and falsity are irrelevant."

-Prof. Harry Frankfurt (1986)

In early December, an intelligence report served as the instrument to disgrace Bush and Cheney. Behind this apparently benign act stood the relieved super rich and their government guardian who saw the reckless policies of Bush and Cheney as a threat to their power and fortunes.

In the early 1970s, the Establishment worried about Nixon. He brought a California crowd into the White House who didn't consult the bastions of old power and wealth. Then, "Deep Throat" serendipitously emerged to reveal to Washington Post reporters Bob Woodward and Carl Bernstein details of Nixon's involvement in a criminal break- in at Democratic Party Headquarters in Washington's Watergate complex, and of a subsequent White House cover up. In August 1974, Nixon ­ facing impeachment -- resigned. The power structure breathed a collective sigh of relief.

In December 2007, intelligence boss Mike McConnell released a National Intelligence Estimate (NIE) report that humiliated Bush and Cheney. By making facts about the non-functioning of Iran's nuke program public, the NIE removed the Bush zealots' ostensible reason for starting another war. The "experts" concluded "with high confidence" that Iran had shut down its nuclear weapons program in 2003, thus nullifying the Bush's pretext for bombing that country. The spooks also deduced that Iran might make a weapon by 2015 ­ if it reactivated its dormant program.

Compare that report with Bush's September claim that Iran's nuclear program could ignite World War III; reminiscent of Cheney's 2002 rhetoric to show why Iraq needed invading that Saddam Hussein had tried to buy yellowcake uranium in Niger to make a nuclear WMD. Bush and Cheney also scoffed at intelligence reports that cast major doubt on these allegations. Bush still rejects the conclusion that Iran shut down its nuclear weapons production. (He also rejects evolution.)

By making this NIE public, the CIA further weakened Bush's already damaged credibility. He no longer intimidates and stands exposed as a fraud.

The CIA informed Bush in August of its benign findings, but he shrugged off the facts and continued to insist on war as his answer to a non-existent threat. So, McConnell released the report which, for Bush compares with his twins making the centerfold of Playboy--on the humiliation scale.

The intelligence community sucker punched Great Intimidator -- in public. Their NIE averred implicitly that Iran's President Mahmoud Ahmadinejad, the hated Holocaust denier and only remaining axis of evil personage, had told the truth about Iran not developing nuclear weapons. Conversely, Bush and Cheney, leaders of the World Alliance for God and Good (WAGG) prevaricated through their proverbial teeth.

The NIE derailed the White House policy of bombing of Iran and led to a prolonged scream from neo con heavies like Norman Podhoretz, editor of Commentary, and Frank Gaffney of the Center for Security Policy. They now bleat on TV about "treason" in high places (CIA) and the nation's desperate need to bomb Iran immediately.

Douglas Feith, Bush's former Under Secretary of Defense for Policy from July 2001 until he resigned in August, 2005 spoke to the American Enterprise Institue in Washington in December and defended his own failed policies in Iraq. Some neo cons demand a "Team B" report to invalidate the NIE, an equivalent of former CIA Chief William Casey's ploy to resurrect the Soviet threat.

In 1980, after US intelligence concluded the USSR posed less of a threat to the West than in previous decades, Casey handpicked another team of "experts" who predictably found the declining Soviet Union more dangerous than ever. Team B thgus backed Reagan's aggressive posture to build more missiles and a Star Wars defense.

Bush and Cheney, like Reagan and Casey, disregard their intelligence services ­ for which taxpayers pay $40 billion per year -- and instead relied on Israel's Mossad, whose spies rejected the CIA findings. Israeli intelligence clings to its claim that Iran will soon build a nuke.

For Israeli Defense Minister Ehud Barak publicizing the NIE report meant a "blow to the groin" of Israel. (Truth is a kick in the balls? Bombing is good for Israeli manhood?) Will Bush now secretly encourage Israel to use some its own nuclear stockpile to launch a "preemptive strike" against Iran?

For Bush, good nations behave obediently. England and now France, for example, should possess nuclear weapons. Sort-of-good Pakistan still rates approval (obedient by mouth, which is good enough); and of course, beloved Israel ­ with 200 or more nukes.

Iran, the only remaining member of Bush's "axis of evil," began punching the United States in the fist with its face in 1953 when Iranians brazenly elected a democratic government. The CIA and their British equivalent in the name of anti-communism and in the interest of the oil companies overthrew that government and set up a puppet Shah, who ruled despotically until 1979 when militant Muslims dumped him and established a theocracy. In 1980, Iranian militants held CIA and other US officials hostage for more than a year ­thus humiliating numero uno.

The President and most presidential aspirants follow the U.S. axiom. To keep its status, Washington without casus belli invades and occupies other countries. Those who dare challenge such blatantly illegal behavior now become Islamofascists.

Acting in the Lord's name, US presidents took revenge for Iran's insolent behavior. After failing to revive the Shah's rule, the US backed the now hated but then useful Saddam Hussein who dutifully, and with US aid, invaded Iran in 1980.

After almost a decade of Iraq-Iran slaughter, the United States punished Iran with sanctions ­ while covertly selling it missiles to support anti-Sandinista rebels in Nicaragua.

9/11 allowed Bush to declare a permanent and perpetual war against terrorism, thus undermining traditional foreign policy methods for unabashed aggression. His neo con advisers usurped power from the traditional Establishment, much as Nixon did with his California outsiders. The neo cons invaded the intelligence apparatus, much as Nixon's Plumbers assumed FBI and CIA tasks. (Plumbers sealed "leaks" -- to the press.) CREEP (Committee and Finance Committee to Re-elect the President) allowed Nixon his own private budget as well as a White House intelligence and police operation. Such behavior made the traditional agency heads seriously pissed off.

Bush and Cheney's war-loving intellectuals like Richard Perle, Paul Wolfowitz and Feith manipulated intelligence in order to use 9/11 to generate fear. They pushed the country into war with Iraq ­ which had nothing to do with 9/11. Even after the invasion turned sour, the neo cons pursued their plan to attack Iran. Now discredited, these men writhe from the NIE's kick to their cerebral groins.

The repercussions from the revelation will play out in Europe as well. Bush's plan to place missiles in Poland and the Czech Republic as a defensive shield against Iran's "nuclear threat" has drawn the ire of Russian President Putin. Russia's leader sees Bush repeating Truman and Churchill's Cold War policies of 60 years ago, using a non-existent threat (Iran) as a pretext to militarily encircle Russia. In 1947, Truman declared the USSR an imminent threat to attack Western Europe while the Soviets still licked their wounds after losing more than 20 million people in World War II.

Repetition of history with a new metaphor! The groin kick ­ an intelligence report to the balls ­ should help abate the "hate Iran" fever that replaced the 2001-2003 "hate Iraq" zeal. The NIE revealed to the US public that Bush and Cheney were dangerous bullshitters who spread malicious lies about Iran. Previously, they had accused Teheran with providing Iraqi insurgents bombs to kill US military personnel, a line that remains in Bush's verbal arsenal.

Sadly, presidential hopefuls from both Parties, excepting Ron Paul and Dennis Kucinich, still buy into the anti-Iran axiom. They agree with Bush that the United States should not permit other nations to help anti-US insurgents albeit Washington feels duty bound ­ by God? -- to help pro-US insurgents fight bad countries, like the Soviet Union in Afghanistan in the 1980s. Sound like bullshit?

The imperial bullshit level has surpassed the feeble imaginations of Cheney, Bush and even the presidential candidates. It emanates from the $700 billon smelly military budget pile, passed by Congress even though no nation poses a threat.

The NIE served to discredit Bush, which reduces chances of an imminent war with Iran, but don't fool yourself: it doesn't change fundamental US policy.

Funding the Palestinians

By Daniel Pipes

Lavishing funds on Mahmoud Abbas and the Palestinian Authority to achieve peace has been a mainstay of Western, including Israeli, policy since Hamas seized Gaza in June. But this open spigot has counterproductive results and urgently must be stopped.

Some background: Paul Morro of the Congressional Research Service reports that, in 2006, the European Union and its member states gave US$815 million to the Palestinian Authority, while the United States sent it $468 million. When other donors are included, the total receipts come to about $1.5 billion.

The windfall keeps growing. President George W. Bush requested a $410 million supplement in October, beyond a $77 million donation earlier in the year. The State Department justifies this lordly sum on the grounds that it "supports a critical and immediate need to support a new Palestinian Authority (PA) government that both the U.S. and Israel view as a true ally for peace." At a recent hearing, Gary Ackerman, chairman of the House Subcommittee on the Middle East and South Asia, endorsed the supplemental donation.

Not content with spending taxpayer money, Secretary of State Condoleezza Rice launched a "U.S.-Palestinian Public Private Partnership" on Dec. 3, involving financial heavyweights such as Sandy Weill and Lester Crown, to fund, as Rice put it, "projects that reach young Palestinians directly, that prepare them for responsibilities of citizenship and leadership can have an enormous, positive impact."

One report suggests the European Union has funneled nearly $2.5 billion to the Palestinians this year.

Looking ahead, Abbas announced a goal to collect pledges of $5.8 billion in aid for a three-year period, 2008-10, at the "Donors' Conference for the Palestinian Authority" attended by over ninety states on Monday in Paris. (Using the best population estimate of 1.35 million Palestinians on the West Bank, this comes to a staggering amount of money: per capita, over $1,400 per year, or about what an Egyptian earns annually.) Endorsed by the Israeli government, Abbas immediately raised nearly that amount for 2008 at the donors' conference.

Well, it's a bargain if it works, right? A few billion to end a dangerous, century-old conflict – it's actually a steal.

But innovative research by Steven Stotsky, a research analyst for the Committee for Accuracy in Middle East Reporting in America (CAMERA) finds that an influx of money to the Palestinians has had the opposite effect historically. Relying on World Bank, International Monetary Fund, and other official statistics, Stotsky compares two figures since 1999: budgetary support aid provided annually to the Palestinian Authority and the number of Palestinian homicides annually (including both criminal and terrorist activities, and both Israeli and Palestinian victims). Graphed together, the two figures show an uncanny echo:

The correlation is even clearer when the aid of one year is superimposed on the homicides of a year later:

In brief, each $1.25 million or so of budgetary support aid translates into a death within the year. As Stotsky notes, "These statistics do not mean that foreign aid causes violence; but they do raise questions about the effectiveness of using foreign donations to promote moderation and combat terrorism."

The Palestinian record fits a broader pattern, as noted by Jean-Paul Azam and Alexandra Delacroix in a 2006 article, "Aid and the Delegated Fight Against Terrorism." They found "a pretty robust empirical result showing that the supply of terrorist activity by any country is positively correlated with the amount of foreign aid received by that country" – i.e., the more foreign aid, the more terrorism.

If these studies run exactly counter to the conventional supposition that poverty, unemployment, repression, "occupation," and malaise drive Palestinians to lethal violence, they do confirm my long-standing argument about Palestinian exhilaration being the problem. The better funded Palestinians are, the stronger they become, and the more inspired to take up arms.

A topsy-turvy understanding of war economics has prevailed in Israel since the Oslo negotiations began in 1993. Rather than deprive their Palestinian enemies of resources, Israelis have been following Shimon Peres's mystical musings, and especially his 1993 tome, The New Middle East, to empower them economically. As I wrote in 2001, this "is tantamount to sending the enemy resources while fighting is still under way – not a hugely bright idea."

Rather than further funding Palestinian bellicosity, Western states, starting with Israel, should cut off all funds to the Palestinian Authority.

Person of the Year 2007

Choosing Order Before Freedom

St. Basil's Cathedral.

Christopher Morris / VII for TIME

In a year when Al Gore won the Nobel Peace Prize and green became the new red, white and blue; when the combat in Iraq showed signs of cooling but Baghdad's politicians showed no signs of statesmanship; when China, the rising superpower, juggled its pride in hosting next summer's Olympic Games with its embarrassment at shipping toxic toys around the world; and when J.K. Rowling set millions of minds and hearts on fire with the final volume of her 17-year saga—one nation that had fallen off our mental map, led by one steely and determined man, emerged as a critical linchpin of the 21st century.

Russia lives in history—and history lives in Russia. Throughout much of the 20th century, the Soviet Union cast an ominous shadow over the world. It was the U.S.'s dark twin. But after the fall of the Berlin Wall, Russia receded from the American consciousness as we became mired in our own polarized politics. And it lost its place in the great game of geopolitics, its significance dwarfed not just by the U.S. but also by the rising giants of China and India. That view was always naive. Russia is central to our world—and the new world that is being born. It is the largest country on earth; it shares a 2,600-mile (4,200 km) border with China; it has a significant and restive Islamic population; it has the world's largest stockpile of weapons of mass destruction and a lethal nuclear arsenal; it is the world's second largest oil producer after Saudi Arabia; and it is an indispensable player in whatever happens in the Middle East. For all these reasons, if Russia fails, all bets are off for the 21st century. And if Russia succeeds as a nation-state in the family of nations, it will owe much of that success to one man, Vladimir Vladimirovich Putin.

No one would label Putin a child of destiny. The only surviving son of a Leningrad factory worker, he was born after what the Russians call the Great Patriotic War, in which they lost more than 26 million people. The only evidence that fate played a part in Putin's story comes from his grandfather's job: he cooked for Joseph Stalin, the dictator who inflicted ungodly terrors on his nation.

When this intense and brooding KGB agent took over as President of Russia in 2000, he found a country on the verge of becoming a failed state. With dauntless persistence, a sharp vision of what Russia should become and a sense that he embodied the spirit of Mother Russia, Putin has put his country back on the map. And he intends to redraw it himself. Though he will step down as Russia's President in March, he will continue to lead his country as its Prime Minister and attempt to transform it into a new kind of nation, beholden to neither East nor West.

TIME's Person of the Year is not and never has been an honor. It is not an endorsement. It is not a popularity contest. At its best, it is a clear-eyed recognition of the world as it is and of the most powerful individuals and forces shaping that world—for better or for worse. It is ultimately about leadership—bold, earth-changing leadership. Putin is not a boy scout. He is not a democrat in any way that the West would define it. He is not a paragon of free speech. He stands, above all, for stability—stability before freedom, stability before choice, stability in a country that has hardly seen it for a hundred years. Whether he becomes more like the man for whom his grandfather prepared blinis—who himself was twice TIME's Person of the Year—or like Peter the Great, the historical figure he most admires; whether he proves to be a reformer or an autocrat who takes Russia back to an era of repression—this we will know only over the next decade. At significant cost to the principles and ideas that free nations prize, he has performed an extraordinary feat of leadership in imposing stability on a nation that has rarely known it and brought Russia back to the table of world power. For that reason, Vladimir Putin is TIME's 2007 Person of the Year.

Canadian DisHonor Murder

Aqsa Parvez is dead, and the main thing that many analysts want you to know about her death is that it had nothing to do with Islam.

Aqsa Parvez was sixteen years old; her father has been charged with strangling her to death because she refused to wear the hijab. Shahina Siddiqui, president of the Islamic Social Services Association, declared: “The strangulation death of Ms. Parvez was the result of domestic violence, a problem that cuts across Canadian society and is blind to colour or creed.” Sheikh Alaa El-Sayyed, imam of the Islamic Society of North America in Mississauga, Ontario, agreed: “The bottom line is, it’s a domestic violence issue.” Nor was this denial limited only to Muslims. Lorne Gunter said in the Edmonton Journal: “I see nothing uniquely Muslim in her death. If, indeed, her father killed her, her death is his doing, not Islam’s.”

Gunter explains: “Of course, other cultures are also prone to intergenerational clashes and Muslim fathers have so far shown no more predilection for murder than fathers of other cultures.” Quite so. Is, then, any linkage of Islam with the murder of Aqsa Parvez simply a manifestation of bigotry? Or is an examination of some elements of Islamic theology and culture necessary in order to try to prevent more young Muslim girls from being similarly victimized in the future?

Toronto radio host John Oakley has declared: “No one is on a witch hunt here trying to demonize an entire faith, but rather to get to the bottom of what seems to be a nasty little secret within a certain segment of the community; women are treated as second-class citizens. If that is, in fact, at the root of violence and abuse meted out by some Muslim men, it’s high time to take ownership and confront the elephant in the room….Denial is not an option.”

Are women indeed treated as second class within Islamic culture? Certainly there is plenty of divine sanction for their being thus treated. The Qur’an declares that a woman’s testimony is worth half that of a man: “Get two witnesses, out of your own men, and if there are not two men, then a man and two women, such as ye choose, for witnesses, so that if one of them errs, the other can remind her” (2:282). It allows men to marry up to four wives, and have sex with slave girls also: “If ye fear that ye shall not be able to deal justly with the orphans, marry women of your choice, two or three or four; but if ye fear that ye shall not be able to deal justly (with them), then only one, or (a captive) that your right hands possess, that will be more suitable, to prevent you from doing injustice” (4:3). It rules that a son’s inheritance should be twice the size of that of a daughter: “Allah (thus) directs you as regards your children’s (inheritance): to the male, a portion equal to that of two females” (4:11).

Worst of all, the Qur’an tells husbands to beat their disobedient wives: “Men are in charge of women, because Allah hath made the one of them to excel the other, and because they spend of their property (for the support of women). So good women are the obedient, guarding in secret that which Allah hath guarded. As for those from whom ye fear rebellion, admonish them and banish them to beds apart, and scourge them” (4:34).

Numerous hadiths even have Muhammad informing a group of women that their gender will populate hell: “Once Allah’s Apostle went out to the Musalla (to offer the prayer) of ‘Id-al-Adha or Al-Fitr prayer. Then he passed by the women and said, ‘O women! Give alms, as I have seen that the majority of the dwellers of Hell-fire were you (women).’”

When they ask him why, he explains, “You curse frequently and are ungrateful to your husbands. I have not seen anyone more deficient in intelligence and religion than you. A cautious sensible man could be led astray by some of you.”

Muhammad’s assessment of their deficiencies comes from his Qur’an, as he explains further: “Is not the evidence of two women equal to the witness of one man? [cf. Qur’an 2:282, above]...This is the deficiency in her intelligence. Isn’t it true that a woman can neither pray nor fast during her menses?...This is the deficiency in her religion” (Bukhari 1.6.301). The idea that hell will be filled with more women than men occurs frequently in the hadith. According to Muhammad, “I looked at Paradise and saw that the majority of its residents were the poor; and I looked at the (Hell) Fire and saw that the majority of its residents were women” (Bukhari 7.62.126).

These traditions demonstrate why some Muslim men have so often fit the stereotype that they treat women with suspicion, disdain and derision. When they deal with women, they are dealing with a group that suffers from severe moral and intellectual deficiencies, not to mention all sorts of physical impurities in a religion obsessed with ritual cleanliness. Women are, consequently, headed for hell.

In light of all this, think for a minute about what Muslim spokesmen in Canada could be saying. They could acknowledge that the divine sanction given to the beating of disobedient women by Qur’an 4:34 has created a culture in which such abuse is accepted as normal. They could call for a searching reevaluation of the meaning and continued relevance of that verse and other traditional material that reinforces it, and call in no uncertain terms for Muslims to reject definitively its literal meaning, now and for all time to come. They could acknowledge the prevalence of honor killing in Islamic culture, which has no sanction as such in Islamic theology but nonetheless enjoys enough Islamic approval that the Jordanian Parliament a few years ago rejected on Islamic grounds attempts to stiffen penalties for it. They could call for sweeping reform and reexamination of the status of women in Islam.

For any of this to happen, Muslim leaders in Canada would have to adopt an unfamiliar and uncharacteristic stance of self-criticism, and Canadian leaders would have to abandon their ongoing infatuation with multiculturalism.

Unfortunately for Muslim women in Canada and elsewhere, neither seems likely. But Aqsa Parvez deserves no less.

Bigotry, terror masked as faith

by Salim Mansur Everywhere, moderate and modern Muslims are being beseiged by the radicals. News stories of Muslims - and from the Muslim world - continue to be deplorable and to reveal how terribly the malady of a broken civilization is consuming its own people, while threatening the freedom and security of others. In the Greater Toronto Area a Muslim father, in a rage over his teenage daughter not complying with his fundamentalist belief - the wearing of prescribed garments for women in public - allegedly strangled her to death. This is the latest of seemingly endless atrocities committed by Muslims, and from the Muslim world, with the most vulnerable victims being women and children. The cold-blooded murder of 16-year-old Aqsa Parvez was not like any other crime that cuts across ethnic and faith boundaries, as Muslim apologists in Canada will do their best to characterize it. The murder was prompted by an ideology of bigotry and terror masked as a faith-tradition - an ideology of radical Islamism at war with the modern world of freedom and democracy. The fear of this perverted ideology and its fanatical promoters silences most Muslims, regardless of their numbers in society, for they fear that speaking out against this ideology might place them in greater jeopardy within their community and with those who claim its leadership. Then there are Muslim organizations - such as the Canadian Islamic Congress (CIC) - in free societies such as Canada. Their deafening silence in condemning Muslim violence against Muslims and non-Muslims alike is revealing of their true nature. These are front organizations for global radical Islamism making apologies for their ideological brethren, and directing polemics against the West for victimizing Muslims and undermining Islam. Moreover, they are fraudulent in their claims of representing Muslims in general as the CIC does. The fact is, on the contrary, most Muslims in Canada and elsewhere in the West left their native lands to escape from unmitigated cruelty, heartlessness and hypocrisy of Muslim rulers and religious leaders. But these organizations are sinister in their objectives of taking full advantage of free societies and subverting their institutions for the purpose of undermining freedom and democracy. For instance, Canadians have never heard from or witnessed Muslim organizations such as the CIC publicly mobilizing Canadian Muslims in denouncing suicide-bombings, honour killings of hapless women, genocide on display in Darfur and persecution of dissident Muslims in the Arab-Muslim world. Instead, as fraudsters they have developed the swindler's art of blackmailing free societies as the CIC has done by filing complaints with the Human Rights Commissions (HRC) federally, and in Ontario and British Columbia, against Maclean's magazine and one of its contributors, Mark Steyn. The complaints are frivolous, claiming Maclean's defamed Canadian Muslims by publishing some writings of Steyn as excerpts from his best-selling book, America Alone. But the greater frivolity is the HRC's willingness to hear the complaint from an organization whose president, Mohamed Elmasry, is on public record in Canada for the suggestion -- though later retracted under duress -- that Israelis in general over the age of 18 are legitimate targets for Palestinian suicide-bombers. The murder of Aqsa Parvez and of countless other women among Muslims will continue not merely because Muslims cower in silence in their fear of radical Islamists, but also for the apathy of the Western public and politicians supinely appeasing and accommodating Muslim organizations such as the SIC

Do you want some good news? US current account deficit shrinks to $178.5 billion

A currency trader inspects US banknotes
©AFP/File - Bay Ismoyo

WASHINGTON - The US current account deficit narrowed by more than anticipated in the third quarter to 178.5 billion dollars from 188.9 billion in the second quarter, the Commerce Department said Monday.

The current account deficit is viewed as the broadest measure of US trade and income flows. The government survey showed that the vast debt the United States owes the rest of the world eased between July and September.

Most economists had only expected the deficit to shrink to around 183 billion dollars.

"The combination of slower growth in US demand, solid growth in overseas economies, and a declining dollar has been pulling the trade deficit lower as exports have outstripped imports," said Nigel Gault, a US economist at Global Insight.

The balance of payments deficit declined to around 5.1 percent of US economic output or gross domestic product (GDP) during the quarter, marking its lowest level since the first quarter of 2004 and shaving several percentage points off the second quarter's 5.5 percent reading.

The second quarter payments deficit was revised lower to 188.9 billion dollars from an original tally of 190.8 billion.

"Increases in the surpluses on income and on services and a decrease in the deficit on goods more than accounted for the (overall current account) decrease," the government said.

The current account partly shrank as US corporations with overseas operations saw their foreign profits fattened by the weak dollar.

The survey showed the third quarter trade deficit on goods and services narrowed to 173.2 billion dollars compared with 178.4 billion previously.

The services sector posted a surplus of 26.5 billion dollars compared with 25.8 in the prior quarter helping to drive the overall deficit lower.

A pickup in tourism also helped narrow the deficit, the survey showed, in a further reflection of how a weakened dollar is helping trim America's debts with the rest of the world.

The goods deficit meanwhile narrowed only slightly to 199.7 billion dollars compared with a prior reading of 204.2 billon.

"The huge deficit on trade in goods is mostly caused by a combination of an overvalued dollar against the Chinese yuan, a dysfunctional national energy policy that increases US dependence on foreign oil, and the competitive woes of the three domestic automakers," said Peter Morici, a business professor at the University of Maryland.

The United States is the world's biggest energy consumer and has to import much of the crude oil needed to keep its economy lubricated.

The US surplus on income ballooned to 20.5 billion dollars in the third quarter compared with 12.7 billion in the second quarter, partly as the income Americans reaped from assets overseas improved.

Net financial inflows into the United States slowed dramatically amid US economic uncertainty as the economy continues to be buffeted by a prolonged housing downturn and credit crunch.

A cargo ship waits to be unloaded at Port Everglades in Florida
©AFP/File - Robert Sullivan

Financial inflows -- which subtract the value of acquisitions by foreigners in the United States from acquisitions by Americans overseas -- declined to 93.4 billion dollars in the quarter, down from 152.8 billion dollars previously.

Foreigners also opted to sell off large tranches of US securities and stocks during the quarter, the report showed.

The ailing dollar, however, has boosted exports.

"The narrower current-account deficit is a welcome sign that international trade and payments imbalances are beginning to ease. We expect the deficit to continue to decline, hitting 4.6 percent of GDP in 2008," Gault added.

ECB's $500 Billion Loan Won't Help Solvency Problems

ECB's $500 Billion Loan Won't Help Solvency Problems

The cost to borrow in euros through the end of the year plunged after the European Central Bank added an unprecedented $500 billion to the banking system as part of a global effort to ease credit-market gridlock.

The amount banks charge each other for two-week loans in euros dropped a record 50 basis points to 4.45 percent, the European Banking Federation said today. The rate had soared 83 basis points in the past two weeks as banks anticipated a squeeze on credit through year-end.

"These are strong-arm tactics intended to show the market they're seriously committed to breaking the deadlock," said Marc Ostwald, a fixed-income strategist at Insinger De Beaufort SA in London. "The ECB is helping to bankroll banks out of a problem that they themselves created."

The Bank of England held the first of two special operations today, offering 10 billion pounds ($20 billion) of three-month cash. The cost of borrowing pounds for three months dropped 4 basis points to 6.39 percent, the fourth straight decline. That's still 89 basis points higher than the central bank's benchmark interest rate.

Minyan Peter had this to say:

"$500 billion is an enormous amount of money. To put it into perspective, $500 bln is 5% of total US banking system assets. My eyes are on LIBOR. If $500 bln doesn't move the rate...

Furthermore, everyone should remember that the $500 bln is funding just through year end. Come January this will need to be refinanced or rolled over."

Big Yawn In US

So while there was a whopping reaction in Europe, there was a big yawn in the US and UK. Curve watchers anonymous offers this chart to consider.

US LIBOR as of December 18



click on chart for sharper image

A casual look shows LIBOR to be 40 basis points lower than it was a year ago. But that is not what everyone should be watching. The important factor is where LIBOR is in relation to the Fed Funds Rate. In this case it is a whopping 70 basis points higher than it was a year ago. A normal spread would be closer to 10 basis points.

LIBOR was sitting at 5.25 right before the last rate cut by the Fed so it merely dropped with the cut plus another 5 basis points. It has not budged today.

Yield Curve as of December 18



click on chart for a sharper image

US Banks Continue To Hoard Cash

Impact of the ECB's move on the US yield curve was negligible. The short end of the curve actually rose a couple of basis points. Banks in the US are continuing to hoard cash. Who can blame them? The Bloomberg article above offers a possible explanation:

"U.S. corporate defaults probably will quadruple next year after the number of companies that lost their investment-grade credit ratings rose at the fastest pace since 2003, according to Moody's Investors Service."

Note that 10-year rates are sitting at 4.10.
Say what you want but that is anything but an "inflation concern".

Headed For The Front Page

• Corporate defaults are not front page news yet.
• Commercial real estate woes are not front page news yet.
• Credit card issues are not front page news yet.
• Rapidly rising unemployment is not front page news yet.

The key word in all for point above is "yet". News about housing, subprime lending, SIVs, and other related stories are what dominate the headlines now. However, second, third, and fourth waves of the economic tsunami are coming. Right now, most of those stories have not hit the front page yet, certainly not day after day. They will.

If this $500 billion "emergency funding" was just a year-end phenomenon, that would be one thing. But this is not a liquidity issue this a solvency issue and a growing solvency issue as well. See Missing the Boat on Monetary Easing for more on this topic.

You can't cure drug addicts by giving them more drugs nor can you cure insolvent credit junkies by dramatically increasing the size of the loans. I suspect the "emergency" is going to last a lot longer than the ECB thinks.

.

Now, world buoys U.S. economy

Rising demand for US exports has offset the domestic downturn in home-building.

With concern growing about a possible recession, the United States is leaning increasingly on other nations as a source of economic growth.

It's not that the export of American-made goods can single-handedly prevent a slump if US consumers start spending less.

But after years when American consumers have pulled the global economy forward, today the roles are largely reversed. A growing global economy is providing the best source of momentum America has right now, as the nation's consumers struggle to cope with high oil prices and a downturn in the housing market.

How big is the momentum? Enough to offset much of housing's negative impact. Over the year that ended on Sept. 30, a rise in US exports has equaled the decline in residential construction that represents the biggest portion of housing's current drag on growth.

"One of the reasons that the US economy has avoided a recession so far, despite a ... prolonged downturn in the housing industry, is because of the stimulus that the US has received from the global boom," says Ed Yardeni, an economist at Yardeni Research Inc. in Great Neck, N.Y. "It's been a big benefit, and I think it will continue be so."

Global growth benefits the US through several channels:

•The most obvious is that exports have been rising, now running at an annualized pace of $1.7 trillion, up from $1.5 trillion a year ago.

•America's largest companies also gain profits from sales of goods and services by their foreign-based operations. The employees are overseas, but the resulting profits provide a cushion for these companies during a US slowdown. Just ask General Motors Corp.

•The US enjoys access to foreign sources of capital that are more abundant than ever. This includes a continuing flow of investment funds – despite the drawbacks of a weaker dollar and the mortgage woes of US banks. It also means direct investment by foreign firms in US operations.

On Monday, for example, the British/Australian mining giant Rio Tinto announced plans to invest $300 million in a Michigan-based nickel and copper mine.

In some cases, the funding can come from controversial "sovereign wealth funds" owned by foreign governments. But at a time when many US banks are struggling to raise capital, the biggest – Citigroup – recently welcomed an influx of cash from one of those funds, the Abu Dhabi Investment Authority.

These gains don't wipe away the significant challenges facing the US economy. Nor do they mean that the rest of the world is on an unstoppable roll.

The risk of a US recession remains high. Some economists believe such a contraction in economic activity is already under way, or will be early in 2008.

Europe and Japan, two other global heavyweights, are seeing some signs of slower growth. And the rest of the world is vulnerable to the negative effects of a US slump.

"The places that have good momentum are probably also the places that would be hurt by a US slowdown," says Jay Bryson, an economist at Wachovia Corp., a bank and investment firm based in Charlotte, N.C. That includes trading partners in Asia and Latin America.

Moreover, windfalls of investment from oil-rich nations in the Middle East are, to some extent, just the flip side of higher oil prices that have hit US consumers.

Still, there are more than a few grains of truth to the story about solid global growth – and the lift that gives to America. Perhaps the most significant factor is that developing nations are growing robustly – with fortunes tied to more than just exports to US consumers. These nations are selling to one another, and to their own domestic consumers, more than ever before. And they have more cash on hand for emergencies.

Joseph Quinlan, chief strategist at Bank of America's Investment Strategies Group in New York, says that rising personal consumption in developing nations is as powerful as any force in the global economy now. "It isn't just Asia," he says. "It's Central Europe. It's the Middle East. It's Latin America."

That, he says, should mean that even as the global economy cools somewhat in 2008, it will still grow a bit above its long-term average of 3.7 percent a year. And that helps the US, too.

"I think it will carry us through," without a recession, Mr. Quinlan says.

In 2000, by his research, the US accounted for nearly 19 percent of all imports worldwide. Today, thanks to emerging-nation growth, that percentage has fallen to 14 percent – a level not seen since the early 1990s.

That's part of the reason behind a shrinking in the US trade deficit, in numbers released by the US Commerce Department Monday.

Seller Beware

Latin America may well take a serious hit in 2008 – the jury is still out and much depends on how hellish the external environment gets. But as 2007 drew to a close, the tide finally turned on borrowers, many of which had enjoyed unprecedented easy access to capital for almost five years.

The change was not pronounced, and in some markets it was barely perceptible. But dedicated investors were most definitely pushing back, even if some high grade clients still refused to believe it. In the cloak and dagger world of syndicated loans, bankers had to break news of higher margins to corporations with enhanced balance sheets in countries cruising towards investment grade.

Some are still trying to play the relationship card, and there may be some banks dumb enough to fall for that. But funding costs have gone up globally and borrowers must realize this. Their deals will now include covenants and other structural fortifications. They may even be flexed much higher if the reversal extends.

In equities, the dream ended in tears, especially for Brazilian small caps, the bulk of which priced below target in November as once bitten investors got selective. Banco Panamericano hobbled over the finish line with its IPO, but it bagged 28% less than target. The deal was the tenth botched effort by leading equity house UBS so far this year. It adds to a pack of 2007 equity barkers, including Agrenco, Helbor and Laep.

Meanwhile in bonds, high yield corporates were sent packing by a skittish investor base looking to conserve the year's robust fixed income gains. An unprecedented number of junk offerings was pulled – even those with fairly conservative tenors and fat yields, some in the order of 12% – in one of the bloodiest Novembers in recent memory.

This all sounds like a long overdue return to sanity. The capital is being sourced from a riskier developed world. And even though a billion dollar loss seems to mean nothing these days – everyone's doing it, so what's the problem? – the price must go up.

Issuers have had it too good too long and some will be caught with their pants down as the cheap money exits. Just a few months back, issuers could get away with sloppy execution because the money just seemed to keep on coming. But shoddy aftermarket performance by high yield issuers like Digicel and Durango will be remembered when these and others like them next need to place debt.

It's time for issuers to face the music. LatAm markets are still hopping, but borrowers are no longer leading the dance.

Paulson Gets Diminishing Return With Bush, Like Powell, O'Neill

-- Henry Paulson escaped the Nixon White House with his reputation enhanced. He won't be so lucky this time around.

Paulson, who stepped down as chairman of Goldman Sachs Group Inc. to become President George W. Bush's Treasury secretary, may fall victim to the same jinx that has tarnished previous administration luminaries. Colin Powell, Paul O'Neill, Donald Rumsfeld and Dick Cheney all had their standing diminished by serving under Bush.

Every presidency produces political stars: Robert Rubin under Bill Clinton; James Baker and George Shultz under George H. W. Bush and Ronald Reagan. Even Richard Nixon, forced from office by scandal, had Henry Kissinger and Peter G. Peterson, the Commerce secretary who went on to co-found Blackstone Group LP.

By contrast, ``I can't think of anybody who has emerged from this White House with an enhanced reputation,'' said Bruce Bartlett, who served as a Treasury Department economist under the first President Bush and a policy aide under Reagan. ``But I can certainly think of lots of people who must rue the day they accepted an appointment in this administration.''

Eighteen months after coming to Washington, Paulson, 61, finds himself fending off an economic storm that includes a squeeze in credit markets, a wave of defaults by subprime borrowers and the growing threat of a downturn.

`Recession'

``If this administration ends in a recession, Paulson will really be under a cloud,'' said presidential historian Robert Dallek, the biographer of Presidents John F. Kennedy and Lyndon Johnson.

Paulson, who in the early 1970s worked as an assistant to John Ehrlichman, a Nixon aide later jailed for crimes related to the Watergate scandal, returned to Washington in July 2006. His 32 years of Wall Street experience led to optimism that he could strike deals with the Democrats who control Congress and persuade Chinese leaders to redirect their export-led economy.

Many expected him to be a Republican version of Rubin, 69, a fellow Goldman alumnus who as Clinton's Treasury secretary got credit for managing the Asian financial crisis and pushing for a balanced budget.

``There were high expectations,'' said Edwin Truman, a former Federal Reserve and Treasury official now at the Peterson Institute for International Economics in Washington. ``The terms on which Paulson came and his background meant the Treasury secretary might be able to play a more important role.''

Dollar

Instead, because of Bush's plummeting approval ratings and growing animosity between the White House and Congress, Paulson has made little progress. What's more, his term has been dogged by a housing slump, record energy prices and the plunge in the dollar's value.

``Secretary Paulson came to Washington knowing these are tough issues and what the political atmosphere was,'' said Michele Davis, a Treasury spokeswoman. ``He'll continue to push through the next year.''

He also has had to contend with tepid White House support for his agenda. Last year, Paulson attempted to revive stalled negotiations on shoring up Social Security, which is forecast to go bankrupt by 2041. His strategy of keeping Democrats engaged by remaining open to all remedies was undercut when Vice President Cheney told Fox News that tax increases were out of the question.

`Results'

As a result, the early enthusiasm about Paulson has ebbed somewhat. ``Paulson hasn't had the results that he and everyone else would have hoped for,'' said Michael Holland, chairman of Holland & Co. LLC, a private investment firm in New York.

To be sure, the Treasury secretary can point to accomplishments, including several measures to lessen the economic impact of the subprime mortgage crisis. He also set up a twice-yearly meeting with Chinese officials to ease trade tensions and address the enduring friction over China's exchange-rate policy.

``Paulson has improved significantly the impact of our interactions with China,'' said Representative Philip English, a Pennsylvania Republican. On subprime, Paulson has promoted policies that he ``successfully calculated would calm the markets.''

In his attempts to take on overhauls of Social Security and the tax code, however, Paulson has suffered the same fate as O'Neill, Bush's first Treasury secretary, who was forced out in December 2002.

Disengaged

Bush, 61, was often disengaged from the policy-making process, O'Neill later said in a 2004 book, ``The Price of Loyalty: George W. Bush, the White House and the Education of Paul O'Neill.''

``I wondered, from the first, if the president didn't know the questions to ask or did he know and just not want to know the answers,'' O'Neill said, describing a meeting with Bush on economic policy.

Julian Zelizer, a professor of history and public administration at Princeton University, said there appears to be a ``recurring pattern'' for high-profile members of Bush's Cabinet. Former Secretary of State Powell ``was talked about as a future president'' when he entered the administration, Zelizer said. Powell left in 2005 amid criticism over the failure to find the weapons of mass destruction that had been invoked to justify the March 2003 U.S. invasion of Iraq.

``He's been devastated as far as Americans think of him,'' Zelizer said.

Defense Secretary Rumsfeld, who served in the same position under President Gerald Ford, also left the Bush administration with his reputation in tatters in the aftermath of the Iraq war. Vice President Cheney, who took office with a reputation for nonpartisan competence, has become widely unpopular among both Democrats and Republicans.

``Failure follows people around,'' Dallek said. Because of Bush's ``stumbles and failures, no one looks good.''

Ireland `Celtic Tiger' Economy May Withstand Property Collapse

-- Ireland's ``Celtic tiger'' economy may continue to purr even if some of the roar has gone, says the economist who coined the term in 1994.

While ``the economy won't grow at the same ferocious rate that it did over the last decade,'' it ``won't give up the gains of the boom,'' says Kevin Gardiner, head of global equity strategy at HSBC Holdings Plc in London, who as a Morgan Stanley economist labeled Ireland a new ``tiger'' economy to rival Asia's.

Ireland's growth was fueled by a fourfold increase in property prices over the past decade. Now a 184-billion euro ($265 billion) government plan to rebuild roads, bridges and power stations, coupled with investments by companies such as Microsoft Corp., may help overcome a construction slump triggered by a real-estate reversal.

Ireland's economy will expand 3.5 percent in 2008 after 4.9 percent this year, the European Commission forecast on Nov. 9. While that's down from an average 5.3 percent in the previous five years, it still beats the 2.2 percent forecast for the euro region and the 1.7 percent predicted for the U.S.

As in the U.S. and Spain, the predictions for economic growth depend on Ireland's ability to weather a housing recession.

Home prices are falling after eight interest-rate increases by the European Central Bank since late 2005 doubled borrowing costs. Prices declined 1.3 percent in October, the most in at least 11 years.

``The construction slowdown is overshadowing the fact that the rest of the economy is doing fine,'' says Alan Barrett, an economist at the Dublin-based Economic and Social Research Institute. ``The pessimism is overdone.''

Stock Market Decline

Stock-market investors, at least, aren't so sure. Irish shares are the biggest losers in the euro region this year.

The drop in real estate and building may be amplified by the euro's rise against the dollar and sterling, says Bernard Connolly, AIG Financial Products Corp. global strategist. That threatens to slow export growth, with some companies including Waterford Wedgwood Plc, the crystal maker, already hurting. Almost 40 percent of Ireland's exports go to the U.K. and U.S.

The benchmark ISEQ Index has slumped 27 percent in 2007, led by Waterford's 79 percent plunge.

``Ireland will suffer more than any other in the euro area from a slowdown in the U.S., which is already happening, and in Britain, which will soon happen, and from euro appreciation,'' Connolly wrote in a research note. He calls Ireland's prospects ``simply dreadful.''

Exports, Spending

The government disagrees, saying exports may rise at least 5 percent through 2010, bolstered in part by U.S. companies lured to Ireland by a 12.5 percent tax rate.

Microsoft, the world's biggest software maker, plans to open a $500 million data center in Dublin. Ireland won more biotechnology and pharmaceutical investments than any other European country in the year to June, according to Belfast-based OCO Global, which supplies foreign-investment statistics.

Growth may even accelerate after next year's slowdown as Prime Minister Bertie Ahern spends more than the gross domestic product on the nation's infrastructure over the next seven years.

The European Commission sees an expansion of 3.8 percent in 2009 as the rest of the economy picks up the slack left by the decline in construction, which accounts for less than one-tenth of GDP. Consumer spending accounts for half of the economy.

New Jobs

Almost 70,000 jobs were created in the year through August, led by financial and business-services companies. Irish Life & Permanent Plc, the nation's largest life insurer, said Nov. 7 it will hire 100 personal financial advisers from across Europe.

A 4.4 percent unemployment rate, the euro-region's third lowest, has so far kept shoppers buying.

The average Irish household will outspend all others in Europe for Christmas gifts this year, according to Deloitte Touche Tohmatsu's annual consumer survey. Retailers Ikea AB and Travis Perkins Plc are planning to expand.

``I know from our radio properties, sales and advertising are very strong,'' says Denis O'Brien, the fourth-richest person in Ireland, according to the London-based Sunday Times. He owns five radio stations in Ireland. ``There's a lot of confidence in Ireland, it's just that the property market is off.''

While household-spending growth may ease to 3.4 percent in 2008, that would still be one-third faster than the euro-area average and twice the pace in the U.S., according to European Commission forecasts.

Even construction will begin to grow again toward the end of next year as homebuilding levels off and the government's plan to fix Ireland's infrastructure moves ahead.

``Housing has got a fair old thump in conversation and analysis overseas at the expense of the wider economic story,'' says David Drumm, chief executive officer at Anglo Irish Bank Plc. ``Ireland's economic story is an extremely strong one, and to that extent, the baby has been thrown out with the bathwater.''

Money Market Rates Fall for Second Day on ECB Action (Update2)

Dec. 19 -- Money market rates fell for a second day, adding to evidence that central banks are making headway in their attempts to counter turmoil in money markets.

The three-month euro interbank offered rate, or Euribor, dropped 7 basis points to 4.81 percent, the lowest since Nov. 30, the European Banking Federation said today. The three-month rate for pounds declined 18 basis points to 6.21 percent, the lowest in four months, the British Bankers' Association said.

The European Central Bank, which injected a record $500 billion into the banking system yesterday, ``stands ready to act'' again, council member Klaus Liebscher said today. The cost of three-month cash remained 81 basis points higher than the main refinancing rate. ECB President Jean-Claude Trichet said the coming weeks may be ``challenging'' for financial markets.

``The liquidity injections by the central banks are starting to have some impact,'' said Ciaran O'Hagan, head of interest-rate research in Paris at Societe Generale SA, France's second-biggest bank by market value. ``Our traders expect the normalization trend to extend further in the coming days.''

In the largest coordinated action since the Sept. 11, 2001, terrorist attacks, central banks in the U.S., U.K., Canada, Switzerland and the euro region are seeking to revive interbank lending to prevent the soaring cost of short-term credit from undermining economic growth. Financial institutions have reported losses of more than $70 billion on securities linked to the collapse of the U.S. subprime-mortgage market this year.

Fed Auction Result

The Federal Reserve will announce the result of an emergency $20 billion one-month money auction today. The ECB loaned 348.6 billion euros ($501.5 billion) of cash for two weeks yesterday, almost 170 billion euros more than it estimated was needed. It was the Frankfurt-based bank's biggest open-market operation. The Bank of England also held the first of two special operations yesterday, offering three-month loans in pounds.

The one-month euro rate fell 7 basis points to 4.56 percent, its fifth consecutive decline, the EBF said today. That's still 56 basis points more than the ECB's benchmark rate. The two-week rate, which tumbled a record 50 basis points yesterday, rose 9 basis points to 4.54 percent. The ECB said today it will drain 133.6 billion euros ($192.3 billion) from the euro-region money market.

``The financial crisis isn't over,'' said Giuseppe Maraffino, a fixed-income strategist at UniCredit Global Research in Milan. ``We need to see how much banks want to borrow and if money market rates fall.''

Treasury notes rose for a third day as stocks in Europe fell and U.S. stock index futures retreated. The TED spread, or difference between what the U.S. government and banks pay for three-month loans, stayed at 1.89 percentage points, up from 35 basis points at the start of the year.

Stocks Fall

The Dow Jones Stoxx 600 Index lost 0.6 percent, taking its decline this year to 1.5 percent, the worst performance since 2002. The U.K.'s FTSE 100 declined 0.3 percent, Germany's DAX slipped 0.5 percent and France's CAC 40 dropped 0.5 percent. Standard and Poor's 500 Index futures expiring in March were down 0.5 percent.

Implied yields on Euribor futures contracts fell from near a four-month high, with the June 2008 contract dropping 5 basis points to 4.43 percent. The implied yield on the March 2008 contract fell 2 basis points to 4.51 percent. A basis point is 0.01 percentage point.

The ECB first offered extra cash on Aug. 9, when it lent 95 billion euros of emergency funds. Banks also borrowed about 2.4 billion euros at 5 percent on Dec. 17, the most since Sept. 26, the ECB said yesterday.

Trichet Speaks

Trichet told the European Parliament's economic and monetary affairs committee in Brussels today that policy makers were responding to complaints from banks that they faced limited liquidity over the end-of-year period, when lending activity is subdued and they are trying to prepare their balance sheets.

``Given the uncertainties, the adjustment process in the financial system in the coming period may be challenging and we have to be prepared to the materialization of risks at any time,'' he said.

The bank's attempts to ease financial-market volatility and deliver price stability would remain separate, Trichet said. ``These two responsibilities are clearly distinct and should not be mixed.''

Trichet Signals No Room to Cut Rates; German Confidence Drops

Dec. 19 -- European Central Bank President Jean- Claude Trichet signaled faster inflation will prevent a cut in borrowing costs as German business confidence fell to the lowest in almost two years.

The Munich-based Ifo research institute's business climate index, based on a survey of 7,000 executives, declined to 103 from 104.2 in November. Economists expected a reading of 103.8, the median of 38 forecasts in a Bloomberg News survey showed.

Waning sentiment underscores the bind facing central bankers as an economic expansion fades. In testimony today to lawmakers in Brussels, Trichet said the euro-area economy faces a ``more protracted'' period of elevated inflation than previously expected, indicating no imminent plan to reduce interest rates.

The ECB ``is not of the view at this stage that the outlook has deteriorated to such an extent that inflation risks can be put to one side,'' said Michael Hume, chief European economist at Lehman Brothers Holdings Inc. in London. Policy makers won't change their rhetoric ``until it becomes much clearer that the credit crunch is having an effect on growth.''

The U.S. housing slump has pushed up credit costs worldwide, dimming the outlook for company investment at the same time as a stronger euro makes exports less competitive. Oil prices above $90 a barrel are spurring inflation, sapping company and consumer purchasing power and prompting workers to press for higher pay.

Growth Cools

Growth in Germany will cool to 1.9 percent next year after 2.5 percent in 2007, the Bundesbank said this week. Investment growth in Germany will probably slow to about 4 percent in 2008 from about 9.2 percent this year, Ifo said Dec. 12.

Borrowing costs have surged as banks hoarded cash following disclosures of write offs linked to U.S. subprime mortgages, which are aimed at people with poor credit histories. Losses stemming from subprime mortgage foreclosures will probably reach $300 billion, the Organization for Economic Cooperation and Development predicted on Nov. 22.

Adding to executives' concern, crude oil reached a record $99.29 a barrel on Nov. 21. German producer prices rose the most in 19 months in November as companies passed on higher energy costs. Consumer-price inflation accelerated to 3.3 percent this month, the fastest pace in 12 years. The ECB aims to keep that rate below 2 percent

``The risks to price stability over the medium term are clearly on the upside,'' Trichet said in Brussels today.

`Difficult Situation'

``The ECB is in a very difficult situation. On the one hand you have headline inflation and the way it spills over into inflation expectations, and on the other hand you have a credit crisis,'' said Joachim Fels, co-chief global economist at Morgan Stanley in London. ``Eventually the ECB will be forced into a U- turn and the next move in rates will be down rather than up.''

German consumer confidence dropped to a two-year low last month as inflation is ``poisoning'' spending, research company GfK said Nov. 28. German chemical workers and public employees said they will demand as much as 7 percent more pay next year to compensate for higher living expenses.

At the same time, the euro's 9 percent gain against the dollar this year is eroding export returns.

Airbus SAS Chief Executive Officer Thomas Enders last month called the currency's appreciation ``life threatening'' for the world's largest plane maker and said the company may have to cut its research budget to trim costs.

``Exports are of course being curbed by the strong euro and this weighs on the mood in our industry,'' Ulrich Lehner, chief executive officer of Henkel KGaA, said in an interview today. ``On the other hand, the weak dollar brings advantages on the cost side'' by lowering import prices.

Some German companies are coping with the euro's ascent. Manufacturing orders rose more than economists forecast in October as foreign sales surged, and the economy ``is still in a solid upswing,'' which will continue for the next two years, the Bundesbank said.

Castro Hints at Retiring from Cuban Leadership

Ailing Cuban leader Fidel Castro said in a letter read on national television he does not want to stay in power forever, suggesting he may retire from leadership. In Miami, VOA's Brian Wagner reports the comments were made ahead of nationwide elections that begin next month.

Cuban state television broadcast the comments from the 81-year-old Cuban leader, who has not been seen in public since undergoing intestinal surgery in July 2006. A presenter read the letter, which Mr. Castro devoted mostly to the Bali summit on global warming.

He also said his duty is not to hold on to positions or block the path of younger people, but to share the experiences and ideas from his life.

Mr. Castro handed power to his brother, Raul, 16 months ago, and since then has written a series of essays and letters, including some where he says his physical recovery has been a difficult process. Officially, he remains head of Cuba's government.

Mr. Castro has been nominated to stand for re-election to the National Assembly in next month's election. Only as a member of the assembly he would be eligible to serve on the Council of State and as its president.

Fidel Castro is one of the world's most enduring heads of state, having served in that role since 1959.

Pentagon Wants Bush To Drawdown Iraq Forces, Beef Up Afghanistan Forces

With violence on the decline in Iraq but on the upswing in Afghanistan, President Bush is facing new pressure from the U.S. military to accelerate a troop drawdown in Iraq and bulk up force levels in Afghanistan, according to senior U.S. officials.

Administration officials said the White House could start to debate the future of the American military commitment in both Iraq and Afghanistan as early as next month. Some Pentagon officials are urging a further drawdown of forces in Iraq beyond that envisioned by the White House, which is set to reduce the number of combat brigades from 20 to 15 by the end of next summer. At the same time, commanders in Afghanistan are looking for several additional battalions, helicopters and other resources to confront a resurgent Taliban movement.

Bush's decisions on Iraq and Afghanistan could heavily influence his ability to pass on to his successor stable situations in both countries, an objective his advisers describe as one of the president's paramount goals for his final year in office. They say Bush will listen closely to his military commanders on the ground before making any decisions on troops but is unlikely to do anything he believes could jeopardize recent, hard-won security improvements in Iraq.

Administration officials say the White House has become more concerned in recent months about the situation in Afghanistan, where grinding poverty, rampant corruption, poor infrastructure and the growing challenge from the Taliban are hindering U.S. stabilization efforts. Senior administration officials now believe Afghanistan may pose a greater longer-term challenge than Iraq.

"There's a real dilemma there for the U.S.," said retired Lt. Gen. David W. Barno, the former commander of U.S.-led coalition forces in Afghanistan. "In some ways, the paradox is you could make an argument that the insurgency is diminishing in Iraq and increasing in Afghanistan."

Administration officials said the White House is considering a range of steps to stem the erosion, including the appointment of a leading international political figure to try to better coordinate efforts in Afghanistan. European newspapers have focused on Paddy Ashdown, a British politician and envoy, but a former senior military officer said his appointment would be considered controversial and seems unlikely.

Bush also plans to step up his personal diplomacy with Afghan President Hamid Karzai and will soon start regular videoconferences with him aimed at more closely monitoring and influencing the situation there, officials said. Bush has long held such videoconferences with Iraqi Prime Minister Nouri al-Maliki.

Afghanistan is so poor and so starved for modern infrastructure, one senior administration official said, that it could well be "a longer, if not larger, challenge than Iraq." The senior official, who spoke on the condition of anonymity because he was not authorized to speak publicly, said the situation in Afghanistan is "not getting better. It's not getting worse. In a war footing, that's not good enough."

U.S. Army Gen. Dan K. McNeill, the top NATO commander in Afghanistan, is asking for an additional three battalions of troops from NATO countries - the equivalent of another brigade combat team - but colleagues believe that would not be enough. U.S. officials are doubtful that allies will provide all the requested troops, and predict Bush will be faced with a request for even more U.S. troops, possibly after attending a NATO summit in April in Bucharest, Romania.

The United States has about 26,000 troops in Afghanistan. NATO provides most of the additional 28,000 foreign troops in the country. Among NATO-led forces, Britain, the Netherlands, Canada and Australia have assumed the heaviest part of the combat burden alongside U.S. troops.

"I suspect that we will see increasing enemy pressure over time, which may well create demands for combat forces in the future beyond the three battalions cited now," said Barno.

U.S. officials said Bush may also consider revamping the current military structure in Afghanistan, which has McNeill serving alongside a four-star NATO commander. Restrictions by NATO members on how their troops can be used - Germany, for instance, limits where its forces can be deployed - have made it difficult to mount a coherent response to the Taliban resurgence. U.S. forces, which have been largely confined to a small part of the country in the east, have little presence in the south, where much of the insurgency has taken hold.

Debate within the administration on Afghanistan and Iraq will come to a head this spring. Gen. David H. Petraeus, the top U.S. commander in Iraq, is planning to return to Washington with his own assessment of whether recent security gains in that country can be sustained with fewer U.S. troops. The NATO summit is expected to focus heavily on the situation in Afghanistan.

As the White House looks at Iraq, it once again faces competing pressures from different quarters of the military. At Petraeus's recommendation, Bush has already agreed to withdraw five combat brigades by July, bringing the total down to 15. The Joint Chiefs of Staff want to pull out another five by the end of 2008, on the assumption that 10 brigades would be a sustainable force that would allow them to ease the broader stresses on the armed forces, administration officials say.

Petraeus has been more cautious and may want to keep more troops in Iraq to ensure that security gains are not lost. As violence in Iraq falls, Petraeus's stock has risen sharply within the administration, particularly since his strategy appears to be having an effect, and his views may carry the day with Bush. By contrast, many in the Pentagon opposed this year's troop "surge" and are likely to see their influence with the White House diminished.

"The president will have a lot of different advice between now and March, when General Petraeus and Ambassador [Ryan] Crocker come back from Baghdad and report to the Congress," said White House spokesman Gordon Johndroe. "He's going to listen to what everyone has to say, but at the end of the day, he wants to know what his commanders on the ground say. So he will listen to what General Petraeus says he needs to maintain the security gains we have made in Iraq."

Some who follow Iraq closely say that the current drop in violence is only a temporary result of American and Iraqi money spread to certain tribes, and a calculated gambit by insurgent forces and militias to wait out an anticipated U.S. withdrawal. "Quiet doesn't signify loyalty and quiet doesn't signify surrender," said Michael Rubin, a former political adviser to the initial U.S. occupation authority in Iraq and now a scholar at the American Enterprise Institute. "Quiet signifies that [they] get more from being quiet. ... What we've gotten is a breather. It's not a permanent truce."

Administration officials and outside experts predicted that Bush will be very cautious about accelerating withdrawals. They note that he was the main instigator of the buildup in Iraq, which added 30,000 troops to the war effort earlier this year, despite heavy pressure from inside and outside the administration to begin withdrawing troops.

A new White House emphasis on Afghanistan would probably expose Bush to even more criticism from Democrats, who have long accused him of taking his eye off the hunt for Osama bin Laden with the invasion of Iraq. "It's about time they recognized the problem" in Afghanistan, said former U.N. ambassador Richard Holbrooke, a Democrat, who says Secretary of State Condoleezza Rice and national security adviser Stephen J. Hadley called him last spring to say that a newspaper column he wrote raising concerns about conditions in Afghanistan was too pessimistic.

Even friends of the White House have voiced concerns. "The strategic consequences of failure in both [Iraq and Afghanistan] are pretty severe," said retired Marine Gen. James L. Jones, former NATO supreme commander, in an interview last month, before his appointment by Rice as a Middle East adviser. "The rest of the world is listening to what we are talking about, and we are not talking about Afghanistan on a daily basis. ... To the extent that we let that slip out of the headlines, that's a mistake."

A Growing Edge To Russian Military Sales Part Two

disclaimer: image is for illustration purposes only

Russia's ability to sell vast quantities of tough, durable, modern weapons systems to nations around the world is rooted in the military experience and consequent design experience of its arms industry -- one very different from that of the United States.

For decades, U.S. military supremacy in war, as well as its prosperous and remarkably growing dynamic economy and society in peacetime, has been based on the principle of cutting-edge technology and innovation. This was how the United States in the past quarter century was able to dramatically outpace Japan and Germany in applying the lessons of the information technology revolution from communications to iPods and personal computers.

This philosophy has served the United States well in its wars, too. The Union Army during the Civil War pioneered the use of railroad logistics, supply and rapid transportation of larger military forces. Even then, U.S. use of air power in the forms of observation balloons and sea power in terms of pioneering ironclad, armored, powered warships was remarkably innovative and years, sometimes decades, ahead of European practice.

By contrast, Russia was the world's dominant land continental power for hundreds of years, dominating vast tracts of both Europe and Asia, and repeatedly forced to fight for its very survival in long, bloody land wars involving hundreds of thousands, and eventually millions of troops on both sides.

Russia was a predominantly command economy with the state directing and controlling the lion's share of resources even under the czars and even then, military power and overwhelming superiority in numbers of troops and weapons over neighbors was the primary concern of the state. This tendency only intensified under the Soviet system after the 1917 communist revolution.

The Soviet Union won its 1941-45 Great Patriotic War against Nazi Germany -- the longest, bloodiest and most intense single military conflict in recorded history -- in large part because it was able to manufacture enormous numbers of extremely cheap, mass-produced, durable weapons systems that were simple but highly effective and easily replaced.

The U.S. achievement in producing enormous numbers of weapons -- especially combat bombers, fighters, transport aircraft, trucks, heavy artillery and warships during World War II -- was even more impressive than the Soviet Union's.

Nevertheless, the motivating traditions that came out of the U.S. World War II experience were very different:

In large part because of the outstanding achievements of such aircraft as the Boeing B-29 Superfortress strategic bomber and the North American P-51 Mustang air superiority combat fighter, and the remarkable achievement of designing and constructing the world's first atomic bombs, the United States came out of the war with conviction that cutting-edge superiority in advanced technology was the dominant factor in building weapons systems to assure America's security and dominant global position.

The trauma caused by the sensational series of Soviet space firsts from the first artificial satellite Sputnik 1 launched in October 1957 to Col. Yury Gagarin's achievement as the first man in space and the first human to orbit the Earth in April 1961 intensified this American obsession on regaining and maintaining high-tech dominance.

It led directly to the creation in 1958 of the Defense Advanced Research Projects Agency, and it has served the American public and economy as well as the U.S. military exceptionally well over the past six decades.

But the fact remains that this fundamental difference in design philosophy underlies why the Russian arms industry, while decade behind the United States in many advanced technology areas, still manages to perform so well today.

(Next: Where the Russian advantage works)

PKK threatens retaliation after Turkish raids

Turkey says Iraq raids hit targets All Kurdish rebel positions targeted in weekend air strikes in northern Iraq were hit and there were no civilian casualties, the Turkish military said Monday. "Initial evaluations show all planned targets received direct hits," a general staff statement said, adding that casualty and damage assessment was continuing. No civilians were targeted in Sunday's strikes on positions along the Turkish border and in the Qandil mountains to the east, where the rebel Kurdistan Workers' Party (PKK) is known to have a major base, it said. "All targets were set after careful and detailed analysis and were included on the list after it was firmly determined that they were not in civilian inhabited areas," it said, denying reports that civilians were targeted. The PKK said seven people were killed, two of them civilians. Locals said schools and bridges were destroyed in the foothills of the Qandil mountains. Turkish chief of staff General Yasar Buyukanit has said the United States gave tacit consent for the operation by providing "intelligence" and opening Iraqi airspace. After talks with Turkish Prime Minister Recep Tayyip Erdogan in Washington in November, US President George W. Bush called the PKK a "common enemy" and promised to provide Turkey with real-time intelligence on rebel movements. Bush's pledge was seen as barely veiled US approval for limited cross-border Turkish strikes against PKK targets in northern Iraq.

The separatist Kurdistan Workers' Party (PKK) threatened retaliation on Monday following Turkish air strikes on its bases in northern Iraq at the weekend.

"Our people have every right to defend themselves and to retaliate. This right is sacred and our people will do what is required," the PKK said in a statement carried by the Firat news agency, considered to be a rebel mouthpiece.

The PKK said five of its militants and two civilians were killed in Sunday's raids on positions along the Turkish border and in the Qandil mountains to the east along the Iraqi-Iranian frontier, where the PKK is known to have bases.

The Turkish army strongly denied its warplanes targeted civilians. It has not yet given a casualty figure.

Chief of staff General Yasar Buyukanit said the United States gave tacit consent for the operation by providing "intelligence" and opening Iraqi airspace.

The PKK said its positions also came under artillery fire from Iran following the Turkish air raid and put the "primary" blame on the United States.

"Even though this attack ... was conducted by the Turkish and Iranian armies, it is obvious that the United States is primarily responsible for providing this opportunity," the statement, published on Firat's website, said.

The PKK, listed as a terrorist group by Ankara and much of the international community, enjoys refuge in the rugged mountains of Kurdish-populated northern Iraq and uses bases there as a springboard for attacks in southeast Turkey.

It has waged a bloody campaign for Kurdish self-rule since 1984 in a conflict that has claimed more than 37,000 lives.

Iran, which has its own restive Kurdish minority, also complains that Kurdish rebels from PJAK, a PKK-linked group, take refuge in northern Iraq.

related report
Iraq parliament condemns 'cruel' Turkish air strikes
Iraq strongly condemned Monday Turkish air strikes on Kurdish rebel bases in its northern territory, branding them a "cruel attack" on Iraqi sovereignty that claimed innocent lives.

Amid expressions of concern from the European Union, the Turkish military denied there were any civilian casualties, while the separatist Kurdistan Workers' Party (PKK) vowed retaliation against Turkish targets.

"We strongly condemn this cruel attack on Iraqi sovereignty and on the principle of friendly neighbourhood," the Iraqi parliament said in a statement that spoke of "several innocent civilian casualties".

Sunday's raids saw Turkish warplanes bomb a number of villages in northern Iraq, targeting rear-bases of the PKK, which said seven people were killed, including two civilians.

"Our people have every right to defend themselves and to retaliate," the rebel group said in a statement carried by the Firat news agency, considered to be a PKK mouthpiece.

"This right is sacred and our people will do what is required," the statement said.

Locals said schools and bridges were also destroyed in the foothills of the Qandil mountains along the border.

"We all were asleep when the warplanes struck our village," said Hassan Ibrahim, 75, a farmer from the village of Qalatuqa along the Iraq-Turkey border.

"When the attack came I got out of the house. We were all suffocating because of the dust."

He said Turkish warplanes had been overflying the region for the past month.

"Earlier it was Saddam who destroyed our homes, now it is the Turks," an angry Ibrahim told AFP as he prepared to leave his home.

Witnesses said the bombings had razed dozens of buildings in Qalatuqa, including a soon-to-be-opened school building.

Asaka Abdullah, 40, said she woke up shocked with the noise of the bombings.

"I was asleep when the sound of the explosion woke me up. When I stepped out of my house I saw people fleeing barefoot," she said.

"We really have no choice but to flee to the mountains to escape the bombs."

In Baghdad, the parliament demanded that Ankara exercise military restraint and focus on dialogue to solve the PKK problem.

The PKK has been fighting for self-rule in southeastern Turkey since 1984. More than 37,000 people have died on both sides of the conflict.

Turkey has threatened a full-scale incursion against PKK bases in northern Iraq unless Baghdad and the United States make greater efforts to curb the rebels' cross-border operations.

Iraqi Foreign Minister Hoshyar Zebari condemned the Turkish air strikes.

"We understand Turkish concerns over the presence of PKK, but yesterday there was some collateral damages to civilians... Such action must be coordinated with the Iraqi government," said Zebari, who did not give casualty figures.

The European Union also expressed concern in a statement issued by Portugal, which holds the EU's rotating presidency.

"The presidency calls on the Turkish authorities to exercise restraint, to respect the territorial integrity of Iraq and refrain from taking any military action that could undermine regional peace and stability," it said.

On Sunday, Ankara's most senior general Yasar Buyukanit said Turkey had received tacit US consent for the operation by providing "intelligence" and opening up northern Iraqi airspace.

The US State Department declined to confirm or deny what help might have been given, saying only that the strikes were "in keeping with" past air raids in northern Iraq.

"That said, we want to make sure that the actions that are taken are done in an appropriate way, that hit only those targets that are PKK and avoid civilian casualties," said State Department spokesman Tom Casey.

An Open Letter to Anarchists on Behalf of Ron Paul

by Anthony Gregory
by Anthony Gr

	Read More Open Letters

I do not believe the state – any state – is legitimate. All states, at a minimum, use aggressive means to maintain a territorial monopoly on legal violence and to finance themselves, most commonly through taxation. In practice, their aggression never stops there. Morally I cannot support such institutions, and as a strident believer in free markets and voluntary cooperation, I oppose the use of violent, institutionalized central planning for practical reasons too. The economic case against state socialism applies to the state’s law-and-order functions as well as it applies to the socialist provision of any other good or service. Empirically, government justice is a sham.

Why, then, am I asking fellow anarchists – those who also reject the state on ethical or practical grounds – to lend support to Ron Paul, a Republican politician running for president? How can an anarchist of any stripe get excited about a man who seeks the most powerful office in the most powerful state in world history?

Some anarchists oppose Ron Paul’s candidacy simply because he is not an anarchist and the presidency itself is an office that can never be defended, no matter who holds it. This is a respectable enough position, but it neglects the full significance of this campaign, both short and long term, to the cause of liberty.

If Ron Paul were to actually win, he would indeed fail to smash the state entirely. That is neither his intention nor his promise. However, he would clearly move American society far closer toward the anarchist ideal. He would put to rest the most tyrannical and hierarchical organization as it concerns international affairs – the US empire. He would close down the American bases on foreign soil, halt the murderous invasions and bombings, stop dictating terms to other nations, and end the horrifying US regime of torture and indefinite, unchecked detentions. He would end the war on terror, which the two parties intend to maintain for a lifetime. All this alone would make Paul a remarkably unique president. On the world scene, it would finally mean anarchy between nations: There would be no global policeman, the role currently executed by the US government.

We would also see an end to the Federal Reserve’s monopoly on currency – the very mainspring from which the entire US corporate state emerges. We would see the federal drug war finally ended. We would see the greatest retrenchment of American state power since the end of World War I, if not ever.

How could an anarchist not cheer all of this? Most anarchists will admit some preference among different forms of government, different rulers and different regimes. As much as we all agree that all states are evil and intolerable, it would be extreme myopia to pretend there is no difference between Hitler’s Germany and the modern Swiss government, for example. We would all prefer less oppression to more, and a Paulian system of government would mean much, much, much less. It would rate among the most radical revolutions in all the course of human experience.

The poet and pioneer in pharmacology, Dale Pendell, has formulated the concept of "horizon anarchism."* Our goal should be to move ever closer toward anarchy, toward freedom and voluntarism, even if we do not achieve the full ideal in our lifetimes. To eschew all radical reform proposals that do not go all the way toward our ideal would be folly. After all, we will likely never see all criminality and violence eradicated, even if we were to somehow achieve political anarchy; yet that is no reason not to move forward and celebrate all progress toward our goal of a peaceful, voluntary society. Similarly, we might never see the total absence of government – this is no reason not to welcome all steps in that direction.

Since all social conditions, including political structures, are a reflection of public ideology, the Ron Paul Revolution has grand implications for the anarchist struggle, even should he not win the presidency. It has already woken many people up to the principles of liberty. It has exposed many of the contradictions of the state. It has encouraged the idea that the government is far too large and powerful – a conceptual first step for nearly anyone who comes around to adopt anarchism altogether. Most of us anarchists were not always such, and we owe much of our own understanding to intellectual movements over hundreds of years, especially the classical liberal tradition, which had a relationship of mutual influence with individualist anarchism in the nineteenth century. And today, Paul himself welcomes this long-established relationship, even pointing out at speaking engagements that the Ron Paul Revolution has its share of anarchists. What other politician would explicitly boast his anarchist support? Ron Paul's movement is one that puts liberty at the center, and can only be of great benefit to the anarchist cause in the future.

This brings me to a word for the left-anarchists. Many of you have, with some justification, pointed out that rightwing libertarians and conservatives sometimes misunderstand the true essence of state power and have political priorities that are not just flawed but counterproductive to the cause of liberty. Minarchists and conservatives who embrace the government’s police power, its law-and-order functions and military wing, and save most of their animosity for the welfare state, just don’t get it.

Although I consider the welfare state to be a truly stifling and reactionary organization – Noam Chomsky’s brand of anarchism notwithstanding – this left-anarchist critique of the right has some merit. Indeed, stealing money from taxpayers and giving it to welfare recipients is not as despicable or aggressive as stealing the same amount of money and using it to murder children abroad or lock up peaceful people at home.

Well, for what it’s worth, Ron Paul is not a typical conservative, or even like all too many libertarians, in this respect. He is running mostly to dismantle the empire and national-security state; his first priority is not to kick anyone onto the street, and he has stressed this many times. He further understands that just because the military is a Constitutional function of government does not mean it should get a pass whereas the food stamp programs should not. He really does want to dramatically slash the state’s most egregious instruments – those of mass murder, mass destruction and totalitarian control of foreign and domestic subjects. When the issue of social entitlements comes up, he makes clear that his top priority is eliminating the entitlements to the military industrial complex, which he considers the most immoral and unjustified subsidies of all. No liberal Democrat of any stature goes nearly as far as Ron Paul does in opposing the warfare state. While he also opposes the welfare state, he knows that he’ll have his hands full with ending the war and will be somewhat restrained by Congressional prerogative. He also knows the most pressing moral mandate is to stop the killing. When asked about what he considered the most urgent ethical crisis of our time, he says it is the American culture’s adoption of aggressive war as acceptable policy.

As for corporatism, taxation and economic issues, Ron Paul says what the phony limited-government Republicans never dare to utter: The most evil and destructive of taxes is the inflation tax, the printing of money that robs from the value of the poor man’s dollar and shovels profits into the coffers of Wall Street, the big energy and pharmaceutical firms, and especially the defense contractors.

Every time the subject of spending comes up, he focuses on cutting the military. Every time the subject of taxes comes up, he focuses on the most regressive one of all: inflation. All too many leftist radicals ignore this clandestine and cruel robbery of the working and middle classes, and those on fixed incomes, to fund lavish corporate welfare. Ron Paul, in contrast, has for decades considered it a fundamental issue. Taking the federal government’s legal tender monopoly away would truly be the most revolutionary economic reform in a century, and it is near the top of Paul’s agenda.

Anarchists should take notice that Paul is also nearly alone in opposing the state-corporate partnerships that emerge in American agricultural policy, phony international "free-trade" agreements, and the administration of health care subsidies to Big Pharma. When he champions free trade, he takes it seriously, condemning trade sanctions as tools of war and agitating to normalize relations with the Cuban people. He is opposed to the government having a monopoly on weapons, and so he rejects all federal gun control laws. He opposes censorship in all forms.

There are a few particular issues where I don’t agree with Dr. Paul. I take issue with his positions on intellectual property and immigration. But even here we cannot expect the imperial and police-state practices we would get in practically any other administration. There is no reason to expect Paul to use the empire to enforce US copyright laws in the Third World. As to immigration, he has made clear that immigrants should not be scapegoated and would be welcome in the freer, prosperous America that he would work tirelessly to achieve. He has emphasized the cutting of excessive and unsustainable welfare benefits to illegals – a reduction in state activity – while ruling out mass deportations, a national ID card, and violations of the freedom and privacy of employment contracts. While my position, the position that I believe is most compatible with anarchism, is to seek the end of all national borders and the elimination of all border protection and immigration restrictions, we cannot expect anyone running for president to get anywhere with that abolitionist position. For those anarchists who oppose all politicians out of principle, the particular critique of Paul on this issue is of secondary concern. But if we’re going to concede any value whatever in electoral activism, it is understandable that he takes the stance he does, given that he is not an anarchist.

Even on those particular issues where anarchists might most disagree with Paul, his position is far less tyrannical and nationalist than the likes of Hillary Clinton and Rudy Giuliani, and still offers a better approach than we can expect to get from US politics. And while we disagree, his movement is still a blessing for the public’s overall consciousness regarding liberty. Finally, to reiterate, he is running not so much on the few issues where he accepts a somewhat active role for the state, but mostly on his strongest issue – the most important issue of our time – the long-overdue dismantling of the American empire, after more than a century of international mayhem, financial fraudulence and relentless assaults on our liberty at home.

It is from his priorities that we can tell Paul has no interest in power for its own sake. He does not promise to feed the masses from cradle to grave and protect them from every cave-dwelling extremist in the Middle East because he knows the limits of power and the superiority of liberty over false security. He knows the full danger of centralized power in particular, which is why he would not use the central state even to impose his agenda on local polities. This decentralist emphasis we see in his campaign – which parallels nicely with the spontaneous, voluntary, decentralized and anarchic nature of his grassroots support – is an important component in any meaningful program to actually reduce state power. The federal government, being the largest and most internationally belligerent in all the world, must be shrunk first, and as much as possible, for any of us to have a lasting chance at freedom.

When it comes to understanding the true meaning of liberty and having the right priorities, Ron Paul is actually better than many mainstream libertarians and even self-described anarchists. He has awoken Americans to the key issues of foreign policy, civil liberties, and inflationary finance in a way no politician ever has. He might not excite those anarchists who, not engaged in the real world, do not care particularly much about what form or powers our government takes or how many people it kills and tortures and imprisons. On the other hand, for all anarchists who see US aggression abroad, the destruction of habeas corpus and privacy, the secret torture chambers, the economic fascism, the drug war gulags and the burgeoning domestic police state as crucial issues, constituting a colossal national emergency, Ron Paul’s movement is one to be cheered far and wide.

And if Ron Paul does win, ushering in the era of limited government, we anarchists can and should oppose what is left of the state. I look forward to a time when government is so small that the debate between anarchism and constitutional libertarianism is the most relevant one before us. In the meantime, I can only support and root for the one man most likely to bring us far closer to that glorious day.

*Thanks to my great friend Tony Burke for explaining to me the connection between Ron Paul and horizon anarchism, and also for helping me convert to anarchism years ago.

BOJ Likely to Keep Rate at 0.5% as Confidence Wanes (Update2)

Dec. 18 -- The Bank of Japan will probably refrain from raising interest rates this week after a drop in business confidence signaled companies are bracing for slower economic growth.

Governor Toshihiko Fukui and his colleagues will leave the benchmark overnight lending rate at 0.5 percent on Dec. 20, according to all 44 economists surveyed by Bloomberg News. The rate, doubled in February, is the lowest among major economies.

Costlier oil and raw materials are eating into corporate earnings just as a decelerating U.S. economy dims prospects for global growth and demand for exports. The decline in business sentiment may undermine the central bank's case that rising profits will filter into higher wages and consumer spending.

``It's getting clearer that the economy is drifting from the Bank of Japan's bullish outlook,'' said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. ``Downside risks are mounting both at home and overseas, and the bank will probably be forced to keep a policy status quo through 2008.''

Fukui, who last year oversaw the bank's shift from a policy of keeping rates near zero percent, probably won't be able to increase borrowing costs again before his term expires in March. Of 31 economists surveyed, 21 said the bank will keep the key rate on hold at least until the second half of 2008.

Weak profits at small companies could hamper wage growth and consumer spending, Fukui said this month. He acknowledged that the benefits of Japan's corporate-led expansion aren't flowing to households as quickly as he'd anticipated.

Weak Profits

Japan's large manufacturers and service companies became the least optimistic about the economic outlook in more than two years, the central bank's Tankan survey showed on Dec. 14. Companies surveyed said costs were rising faster than they could pass on to clients.

Households last month became the most pessimistic in almost four years as gasoline and food prices surged while wages fell.

``Until recently, the Bank of Japan argued it couldn't raise rates because of the U.S. home-loan problem,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. ``Now they'll say it's because of a slowdown in the domestic economy, even if the subprime effect recedes.''

The Federal Reserve, European Central Bank and three other central banks last week jointly pledged to add cash to money markets to alleviate a credit squeeze threatening global growth.

No Choice

``The reality is, it's impossible for the Bank of Japan to do the opposite when the U.S. and European central banks are attempting to provide more liquidity,'' said Akio Makabe, a professor of economics at Shinshu University in Nagano, central Japan. ``The BOJ will have no other choice but to push back its next rate hike, probably until around June.''

The Bank of Japan raised the key rate from near zero percent for the first time in almost six years in July 2006 amid signs the economy was emerging from deflation. Consumer prices resumed sliding seven months later.

Core prices, which exclude fresh food, rose for the first time this year in October. Most of the 0.1 percent gain came from near-record energy costs and food price increases caused by costlier grains and dairy products.

``Consumer-price increases without wage growth are bad inflation and harmful for economic growth,'' said Masaaki Kanno, chief economist at JPMorgan in Tokyo and a former central bank official. ``Rising energy and food prices are eroding disposable incomes and hampering consumption.''

Investors see a 1 percent chance of a rate increase at this week's meeting, according to Credit Suisse Group calculations based on interest-rate swap trading.

Board member Atsushi Mizuno, the sole advocate of a rate increase since July, may vote with the majority, said Seiji Shiraishi, chief economist at HSBC Securities in Tokyo.

The central bank will announce its policy decision on Dec. 20 in Tokyo, probably by early afternoon. It will publish its monthly assessment of the economy at 3 p.m. and Fukui will hold a news briefing at 3:30 p.m.

===========================================================
As of 12/18/07           BOJ     BOJ     BOJ     BOJ
                      Rates   Rates   Rates   Rates
===========================================================
Date of Release         12/20   01/22   02/15   03/07
Time period             2007    2008    2008    2008
Measure                   %       %       %       %
-----------------------------------------------------------
# of replies             44      32      31      31
Median Forecast         0.50%   0.50%   0.50%   0.50%
% Forecast at Median   100.0%  100.0%   96.8%   96.8%
Average Forecast        0.50%   0.50%   0.51%   0.51%
Expected change         0.00%   0.00%  -0.25%  -0.25%
High Forecast           0.50%   0.50%   0.75%   0.75%
Low Forecast            0.50%   0.50%   0.50%   0.50%
Previous forecast       0.50%   0.50%   0.75%   0.75%
-----------------------------------------------------------
ABN Amro Sec.           0.50%   0.50%   0.50%   0.50%
Action Economics        0.50%    ---     ---     ---
Aletti Gestielle        0.50%   0.50%   0.50%   0.50%
BNP Paribas             0.50%   0.50%   0.50%   0.50%
Bank of America         0.50%   0.50%   0.50%   0.50%
Bayerische Landesbank   0.50%   0.50%   0.50%   0.50%
CFC Seymour             0.50%   0.50%   0.50%   0.50%
Calyon                  0.50%    ---     ---     ---
Capital Economics       0.50%   0.50%   0.75%   0.75%
Commerzbank             0.50%    ---     ---     ---
Credit Suisse           0.50%   0.50%   0.50%   0.50%
DBS Group               0.50%   0.50%   0.50%   0.50%
DZ Bank                 0.50%   0.50%   0.50%   0.50%
Dai-Ichi Life Resrch    0.50%   0.50%   0.50%   0.50%
Daiwa Research Inst.    0.50%   0.50%   0.50%   0.50%
Daiwa Sec SMBC          0.50%   0.50%   0.50%   0.50%
Deutsche Bank           0.50%   0.50%    ---     ---
Dresdner Kleinwort      0.50%    ---     ---     ---
Dun & Bradstreet        0.50%    ---     ---     ---
Fortis Bank             0.50%    ---     ---     ---
Goldman Sachs           0.50%   0.50%   0.50%   0.50%
HSBC                    0.50%   0.50%   0.50%   0.50%
Helaba                  0.50%   0.50%   0.50%   0.50%
ING                     0.50%    ---     ---     ---
IXIS CIB                0.50%   0.50%   0.50%   0.50%
J.P. Morgan             0.50%   0.50%   0.50%   0.50%
Lloyd's TSB             0.50%   0.50%   0.50%   0.50%
M.M. Warburg & Co.      0.50%   0.50%   0.50%   0.50%
Merrill Lynch           0.50%   0.50%   0.50%   0.50%
Mitsubishi UFJ Sec      0.50%   0.50%   0.50%   0.50%
Mizuho Securities       0.50%   0.50%   0.50%   0.50%
Morgan Stanley          0.50%   0.50%   0.50%   0.50%
Nikko Citigroup         0.50%   0.50%   0.50%   0.50%
Nomura Securities       0.50%   0.50%   0.50%   0.50%
Norinchukin Research    0.50%   0.50%   0.50%   0.50%
Ried Thunberg           0.50%    ---     ---     ---
RBS Securities          0.50%   0.50%   0.50%   0.50%
Shinkin Asset           0.50%    ---     ---     ---
Shinshu Univeristy      0.50%   0.50%   0.50%   0.50%
Standard Chartered      0.50%    ---     ---     ---
Stone & McCarthy        0.50%    ---     ---     ---
Totan Research          0.50%   0.50%   0.50%   0.50%
UBS Securities          0.50%   0.50%   0.50%   0.50%
Unicredit MIB           0.50%    ---     ---     ---
===========================================================

Asian Stocks Drop to Three-Month Low; Toyota, BHP Billiton Fall

Dec. 18 -- Asian stocks fell, extending a global equity rout, on mounting concern that the U.S. housing slump and credit crisis will stall growth in the world's biggest economy.

Toyota Motor Corp., No. 2 in U.S. sales, led declines among exporters. BHP Billiton Ltd. and Posco dropped after metal and oil prices fell.

The MSCI Asia Pacific Index lost 0.6 percent to 151.43 as of 10:14 a.m. in Tokyo, adding to a four-day, 7.9 percent drop and set for its lowest close since Sept. 18. All Asia's benchmarks open for trading fell.

U.S. stocks completed their sharpest two-day decline yesterday in more than a month, pushing the Standard & Poor's 500 Index down 1.5 percent and trimming its gain for the year to less than 2 percent.

Homebuilder confidence remained at a record low in the U.S. and manufacturing in New York expanded this month at the slowest pace since May.

National benchmarks fell in all 18 western European markets except Portugal yesterday. France's CAC 40 dropped 1.6 percent, as did Germany's DAX. The U.K.'s FTSE 100 slipped 1.9 percent.

Iraq Tribal Alliances Pay Off

Photo courtesy AFP.

Nearly five years into the occupation of Iraq the United States is learning what the British, the Turks and even Saddam Hussein knew and practiced before them: Forming alliances with tribal sheiks is essential to pacifying and governing the country.

For tribal identification in Iraq is not just an asterisk in a personal biography, it's fundamental to identity, even a person's place in society and livelihood.

In western Anbar province, U.S. courting and alliance-building means paying special attention to al-bu Nimr. The influential tribe, which mainly lives on or near the Euphrates between Ramadi, Hit and Haditha, numbers between 300,000 and 400,000 people. It was one of the first Sunni tribes to battle al-Qaida on its own, and one of the first to begin cooperating with coalition forces early in the occupation.

"Two groups (tribes) in Anbar went to the coalition forces," Sheik Hatim Abdal Razzaq said. "One was in the west and one in the east of the province. We were both attacked by terrorists and insurgents for it.

"We lost people. We gave blood. But by working with the coalition forces we saw a future ¿¿ and we agreed to get together, and we've cleaned up the bad areas like Hit."

Hatim, 27, took over the leadership of the tribe two years ago following the death of his father. His uncle, Sheik Jabair, was the de facto head of the tribe then but stepped aside because of ill health. He acts, however, as Hatim's chief adviser and confidant.

Hatim's and Jubair's relationship with U.S. forces is on many levels and complicated, a balancing act between short- and long-term U.S. interests, Iraqi government interests, and the payback interests of the tribe, whose militia now make up the majority of police forces in the Hit district.

The U.S. part of the courtship involves growing the friendship and cooperation of Hatim and Jubair, but at the same time ensuring that other tribes aren't slighted, that infrastructure projects and governance actions wanted by the them benefit all the people of the Hit district as equitably as possible.

It's a juggling act on both sides, pure and simple, and one that's given heavy attention by Marine Lt. Col. Jeffrey Dill, the commander of U.S. forces in Hit who has forged a strong personal relationship with the sheiks. That relationship means frequent and lengthy informal meetings with Hatim over endless cups of sweet tea and huge platters of lamb kabob and chicken at the sheik's compound.

Those meetings all start the same: with a handshake, a kiss on the cheek and a bumping of right shoulders. It's the greeting of friends rather than official counterparts.

During those meetings serious subjects are broached and discussed almost casually, as if in passing, as each side gauges the other's intent and the seriousness of the issue at hand. "Oblique" rather than "direct" is the operative word, although blunt discussion also takes place when needed. This especially occurs during formal meetings with sheiks and officials in city council meetings around the district.

The young sheik was in a good mood the night a reporter accompanied Dill to the tribal compound on one of his "courtesy" calls. Eyes dancing, and with an amused look he wanted to be questioned by his new guest.

When asked if he or his tribe received financial consideration for cooperation, he insisted he did not. (Payoffs were a practice of previous Iraqi governments and foreign occupiers).

"Feluus (money)?" he asked rhetorically while rubbing his fingers together and laughing. "Laa, laa -- no, no feluus."

"We get respect from the coalition forces and they trust us, we have security ¿¿ they make many projects here, and projects mean jobs for the people."

Hatim voiced concern over tribal and political rivalries in Shiite tribal areas that could further tear Iraq apart, but ever the diplomat said in the end all the political and sectarian factions would realize they were Iraqis and fighting would destroy chances of a better national future. But he also cautioned that a strong, central government was years away and patience was needed.

"For 35 years Saddam Hussein was president," Hatim said. "Now his government is gone and the one we have is not yet strong. Now we face the problems his government caused or ignored. And it's not easy, it will take time.

"I like the future for the Iraqi people. I like the security for the Iraqi people because without security we will have nothing."

The alliance between Hatim and U.S. forces is still a work in progress, as are other budding relationships with Sunni sheiks and tribes. But the special importance of the al-bu Nimr connection was highlighted last September when Hatim was one of five sheiks in the province invited to meet with U.S. President George W. Bush during his visit to Iraq.

That meeting -- including the news photo published around the world of it -- put the young sheik high -- very high -- on al-Qaida's hit list, a U.S. intelligence source said. At least one of the five has already been assassinated, which may help explain why Hatim and his uncle openly carry pistols in the compound despite being surrounded by heavily armed bodyguards.

Wall Street Sees 20% M&A Slump on Scarce LBO Credit (Update1)

Dec. 17 -- Even Goldman Sachs Group Inc., the world's leading takeover adviser since 2001, is prepared for a decline in mergers and acquisitions income next year when a slowing economy reduces the market for leveraged buyouts.

The value of transactions may fall 20 percent from a record $3.9 trillion this year, executives at JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Bank of America Corp. estimate. That may reduce fees on Wall Street and contribute to Goldman's first profit drop since 2002, the last year M&A decreased, according to analysts surveyed by Bloomberg.

LBO firms, responsible for half of this year's 10 biggest purchases, now face financing costs that have more than doubled since June to the highest in four years. The pace of takeovers fell 33 percent since the end of the second quarter as chief executive officers at companies, including Virgin Media Inc. and Cadbury Schweppes Plc, delayed asset sales amid signs economic growth in countries ranging from the U.S. to Britain is ebbing.

``It's the end of an era for a while for the very large LBOs,'' said Piero Novelli, 42, the London-based head of global M&A at UBS AG, Switzerland's biggest bank.

Lehman's backlog of investment banking fees is lower than earlier in the year, Chief Financial Officer Erin Callan told investors on Dec. 13 after the No. 4 U.S. securities firm said fourth-quarter earnings dropped 12 percent. Callan estimates M&A may fall 20 percent next year. Her comments echoed Goldman CFO David Viniar, who said in September that the investment-banking pipeline at Wall Street's most profitable firm fell from a record in the second quarter.

Fed's Outlook

``We're in a very different environment than we were a year ago,'' said Stefan Selig, 44, the New York-based global head of mergers at Bank of America Corp. The value of deals may drop by 15 percent to 20 percent, he said.

The size of acquisitions may hinge on the U.S. economy, which the Federal Reserve has said will grow as little as 1.8 percent next year, which would be the slowest pace since 2002 when global mergers declined 29 percent.

The proportion of matchmaking from the U.S. declined to 42 percent since July 1, the lowest since the first half of 2002, data compiled by Bloomberg show. The largest transactions announced today were in the U.S., led by Ingersoll-Rand Co.'s $10.1 billion agreement to buy Trane Inc., the Piscataway, New Jersey-based maker of air conditioners for vehicles.

Botched Sale

Leveraged buyouts accounted for 24 percent of the $2.4 trillion of purchases announced in the first half, crowned by the $32 billion offer for Dallas-based power producer TXU Corp. by a group led by New York-based Kohlberg Kravis Roberts & Co. LBO firms comprised just 10 percent of the $1 trillion total since Aug. 1.

``There are more bankers chasing less transactions,'' said Jimmy Elliott, 55, global head of mergers at JPMorgan in New York, who predicts acquisitions may slump as much as 30 percent. ``There's no evidence that there will be any large public-to- private transactions in the near and intermediate future.''

UBS's Novelli expects global takeovers to drop at least 15 percent next year. The slowdown will be particularly severe in the U.S., where rising borrowing costs caused by the collapse of the subprime mortgage market hurt private-equity firms, he said.

Cerberus Capital Management LP, the New York-based private equity firm that buys troubled companies and corporate cast-offs, scrapped a $6.2 billion bid for Dallas-based Affiliated Computer Services Inc., the biggest processor of U.S. student loans, in October, saying funding had become harder to arrange. Georgica Plc, the U.K.'s largest operator of pool halls and bowling alleys, ended talks with bidders Dec. 12, blaming a ``difficult banking market and deteriorating trading conditions.''

Falling Fees

``There is a pure systemic lack of trust in the financial system,'' said Eric Bissonnier, Geneva-based chief investment officer for Asia and Europe at EIM, which has $14 billion invested in hedge funds. ``Costs are higher and the outlook for the economy is bleaker, so if you put that together, people will hesitate to do deals.''

Global fees from acquisitions will fall 5 percent in 2008 from this year's $36.9 billion, said Teck-Tjuan Yap, managing director at Freeman & Co., the New York-based research firm that tracks the securities industry. Revenue will decline 10 percent in the Americas and 3 percent in Europe, he said.

Morgan Stanley banker Michael Zaoui predicts 2008 will be a ``strong year.''

``The beauty of the mergers business is that it's a permanent feature of capitalism,'' said Zaoui, 50, chairman of European M&A, in a Dec. 10 interview in Paris.

Market Volatility

Goldman, Morgan Stanley, Citigroup Inc. and JPMorgan, all based in New York, were the top financial advisers this year, Bloomberg data show. Private-equity clients accounted for about 30 percent of their assignments.

Lehman, which ranks as the No. 6 adviser this year, won't cut jobs as M&A fees clients because it plans to win clients from rivals, said Mark Shafir, 51, the firm's global head of mergers, in an interview with Bloomberg TV today.

``The mega-LBO is dead,'' said Tom Willett, 39, joint head of European takeovers at ABN Amro Holding NV in London. ``Equity markets are extremely volatile.''

The recent increase in stock-market swings is making it difficult for buyers and sellers to agree on prices, said Joel Cohen, 69, chairman of Sagent Advisors Inc., a New York-based investment bank. Market movements measured by the Chicago Board Options Exchange SPX Volatility Index, or VIX, rose in November to the highest since 2003.

Blankfein's View

``If stock-market volatility stays high, it may be an impediment to equity-based deals as the value of both the bidder's and the target's stock moves around,'' said Frances Hudson, a market strategist at Standard Life Investments in Edinburgh, which has 142 billion pounds ($289 billion) of funds under management. ``On the funding side, there may be less investor appetite for rights issues to fund cash bids.''

Buyout firms are paying 370 basis points over benchmark rates for senior bank debt instead of 200 basis points earlier in the year, according to Guy Hands, CEO of London-based LBO company Terra Firma Capital Partners Ltd. Banks also are lending an average of 5.7 times of a target company's earnings, down from 10 times earlier this year.

Lloyd Blankfein, Goldman's chief executive officer, told investors last month the company strives to dominate the most- active parts of the market. The firm's advisory fees jumped 53 percent in the first three quarters to $2.98 billion, comprising about 8 percent of revenue.

Earnings Outlook

``Throughout recent cycles, we have consistently been sought out as a strategic or financial adviser across industries and regions,'' Blankfein said in a Nov. 13 speech at an industry conference in New York. The firm was the top adviser to financial institutions during a merger wave in the early 1990s, and to technology companies during the Internet boom later in the decade, he said.

Goldman's profit probably will fall 8 percent to $10.5 billion next year from a record $11.4 billion in 2007, according to the average estimate of analysts surveyed by Bloomberg. Lucas van Praag, a New York-based spokesman for Goldman, declined to provide M&A estimates for next year.

Goldman, Morgan Stanley and Bear Stearns Cos. are scheduled to report fourth-quarter results later this week. Analysts estimate Goldman's earnings declined 1.5 percent to $3.1 billion, or $6.64 a share, while Morgan Stanley may report a loss of $397 million, or 39 cents a share, and Bear Stearns may post a loss of $248 million, or $1.82 a share.

Sovereign Funds

Areas of strength for M&A bankers include advising gas, electricity and water companies, and sovereign wealth funds. Funds from the oil-rich Persian Gulf states and China were together responsible for about 4 percent of takeovers this year, up from less than 3 percent in 2006, according to Bloomberg data.

Gulf investors more than doubled their spending on acquisitions this year to about $76 billion, as oil prices soared 58 percent, Bloomberg data show. With crude above $90 a barrel, oil produced by Gulf nations, including Saudi Arabia and the U.A.E., is worth at least $1.3 billion a day.

Citigroup, the biggest U.S. bank by assets, said Nov. 26 it will receive a $7.5 billion cash infusion from Abu Dhabi to replenish capital after record mortgage losses caused the stock to fall almost 50 percent. Saudi Basic Industries Corp., the biggest chemicals company by market capitalization, agreed in May to buy General Electric Co.'s plastics unit for $11.6 billion in a record acquisition for the Gulf.

`Funding Appetite'

Russian steelmaker OAO Severstal bid for London-based Celtic Resources Holdings Plc, its first purchase in precious metals. Industrial & Commercial Bank of China Ltd., that nation's largest bank, invested $5.6 billion in Johannesburg-based Standard Bank Group Ltd., Africa's largest lender.

``You will see emerging markets plugging in the gap,'' said Thomas King, 47, the London-based head of European investment banking for Citigroup. ``The further you move from the U.S, the less affected the markets tend to be. Transactions in the emerging markets are getting larger.''

Tata Steel Ltd., India's oldest producer of the metal, completed the 6.2 billion-pound purchase of the U.K.'s Corus Group Plc in April. China's sovereign wealth fund this year bought a $3 billion stake in New York-based buyout firm Blackstone Group LP.

Macquarie Group Ltd., the world's largest private infrastructure investor, is betting on Europe.

``The focus is on strong cash-flow producing businesses such as utilities, toll roads, ports, airports,'' said Andrew Hunter, the London-based head of Macquarie Capital Advisers Europe. ``Credit markets will slow down M&A activity more generally, but in defensive assets that produce stable and predictable cash flows, we expect deal flow and funding appetite to be no less than 2007.''

U.S. Stocks Fall; Exxon, Freeport-McMoRan, Caterpillar Decline

Dec. 17 -- U.S. stocks extended their worst weekly drop in a month, led by energy producers and chipmakers, on growing concern that the U.S. economy will slow.

Exxon Mobil Corp., the biggest U.S. oil company, and Freeport-McMoRan Copper & Gold Inc., the world's second-largest copper producer, declined on slumping fuel and metals prices. Micron Technology Inc., the biggest U.S. producer of computer- memory chips, fell the most in two months after an analyst forecast a wider loss. Caterpillar Inc. dropped to the lowest since Nov. 27 after Morgan Stanley said construction-equipment sales will slow next year.

The Standard & Poor's 500 Index slipped 16.03, or 1.1 percent, to 1,451.92 at 2:11 p.m. in New York. The Dow Jones Industrial Average sank 134.21, or 1 percent, to 13,205.64. The Nasdaq Composite Index lost 44.37, or 1.7 percent, to 2,591.37. Almost three stocks dropped for every one that rose on the New York Stock Exchange. Benchmark indexes in Asia and Europe retreated.

``You're going to see tight credit markets result in lower economic growth,'' said Wayne Wicker, who helps oversee $31.5 billion as chief investment officer at Vantagepoint Funds in Washington. ``We're not going to have the ebullient times that we've had in the past.''

Today's retreat trimmed the S&P 500's gain for the year to 2.4 percent, while the Dow is up 6 percent in 2007 and the Nasdaq has gained 7.3 percent. Treasury notes rose for the first time in four days as a decline in global stocks fueled demand for the safety of government debt.

Exxon, Freeport

Exxon lost $1.42 to $89.76 after crude oil fell below $90 a barrel in New York on concern inflation and subprime mortgage losses will reduce economic growth. Freeport-McMoRan tumbled $4.75 to $97.36 after copper fell to a nine-month low.

Micron Technology fell 49 cents, or 5.9 percent, to $7.88. The company's product prices have dropped below the cost of production because of an industry glut of dynamic random access memory chips, the main memory in personal computers, said Jefferies & Co. analyst John Lau. Intel Corp., the world's biggest maker of computer chips, slumped 58 cents to $25.72.

Caterpillar Inc. decreased $2.35 to $71.04. Morgan Stanley cut the shares to ``underweight'' from ``equal weight.'' U.S. construction equipment volumes and prices will decline in 2008, analysts including Robert Wertheimer wrote in a note to client.

EBay, Amazon

EBay Inc., the largest Web-based auction company, and Amazon.com Inc., the biggest Internet retailer, slumped on signs holiday sales growth online is slowing. ComScore Inc., a research firm, said online spending from Nov. 1 through Dec. 14 rose 18 percent to $22.7 billion, trailing the firm's forecast for 20 percent growth in November and December and last year's 26 percent gain.

EBay fell 45 cents to $32.25. Amazon.com declined $3.22 to $85.86.

A jump in consumer prices and $70 billion in bank losses on mortgage-backed securities has spurred concern that the U.S. economy may slow as spending and borrowing decline. Through the first 11 months of this year, consumer prices rose at an annual rate of 4.2 percent. That's up from 2.5 percent for all of 2006 and, if maintained in December, would be the highest rate in 17 years.

``We see the economy contracting'' on higher fuel costs and falling home prices, said David Darst, who manages more than $700 billion as chief investment strategist at Morgan Stanley Global Wealth Management in New York. ``We have some further shoes to drop as we unfold in '08.''

M&A

Trane Inc. surged $8.37 to $45.57 after the maker of heaters and air conditioners agreed to be bought by Ingersoll- Rand Co. for $10.1 billion in cash and stock. Ingersoll-Rand will pay $36.50 in cash and 0.23 of a share for Trane, valuing the manufacturer at $47.81 based on the Dec. 14 closing price. The offer is 29 percent more than Trane's close that day.

Ingersoll-Rand posted its biggest loss in more than seven years, slumping $5.29, or 11 percent, to $43.89.

Grant Prideco Inc. jumped $6.29 to $53.75. National Oilwell Varco Inc., the largest U.S. maker of oilfield equipment, agreed to buy its smaller rival for about $7.4 billion to add sales of drilling pipes and bits. The company said it will pay a combination of cash and stock that values Grant Prideco at $58 per share, a 22 percent premium. National Oilwell tumbled $7.26 to $70.11.

Illinois Tool Works Inc. slumped $2.61 to $53.29. The maker of Duo-Fast nail guns cut its full-year profit forecast as acquisitions and lower-than expected sales in North America cut profits.

Bond Insurers

Bond insurers gained after Moody's Investors Service affirmed AAA credit ratings for Ambac Financial Group Inc. and MBIA Inc. Ambac, the world's second-largest bond insurer, was affirmed with a stable outlook after the close of trading on Dec. 14, surprising analysts who expected the company to be more at risk of a downgrade than competitors. The shares surged $3.69 to $26.50.

MBIA, the largest bond insurer, rose $1.11 to $28.71 after being affirmed with a negative outlook.

Manufacturing in New York expanded at the weakest pace since May as orders for new business slowed and companies cut inventories. The New York Federal Reserve Bank's general economic index fell to 10.3 from 27.4 in November, the bank's Buffalo branch said, lower than the reading of 20 forecast by economists in a Bloomberg survey.

Shaping The Battlefield

The government contends that its "war on the cartels" has weakened the drug gangs, especially the Gulf drug cartel. However, the war is a long one; President Felipe Calderon recently called it "a permanent battle." Endemic political, police, and judicial corruption allows the drug gangs and "old left" rebel organizations like the EPR "operational space." Put bluntly, money buys off the cops. This is why one year ago Calderon launched a combined military and police offensive against the cartels and associated gangs. Calderon judged, correctly, that the Mexican military was the most professional and reliable force in Mexico. The multi-state strike force included task-organized federal police units that Calderon's government also rated as reliable Calderon's government decided to fight the "war on the cartels" as an insurgency. This was a smart decision. The cartels employ paramilitary forces that in many respects operate as "the armed wings" of classic political insurgencies. Though there is no convincing evidence that the cartels have co-opted political rebel organizations, there are plenty of rumors. When the money is right, gangsters cooperate with political rebels in the Balkans, South America and in the Middle East. Afghanistan is an example of this phenomenon, where Taliban religious zealots also protect opium smugglers.

A recent statement by the Mexican attorney general's office reiterated a common complaint that Mexico needs US cooperation to defeat the gangs. This complaint serves a political purpose in Mexico, but the statement isn't pure spin. Smugglers bring US weapons into Mexico – that's a fact. The big fact is that the US has a huge appetite for illegal drugs. Critics point out that the US and Western demand for drugs often supports anti-Western guerrilla organizations (Afghanistan, again). Mexican Marxist outfits like the EPR are definitely anti-US. The Gulf drug cartel isn't anti US in a political sense (though it's anti-FBI and DEA), but organized crime is a destructive force in American society. As far as the Mexican government is concerned the illegal narcotics market in the US is financing the "drug insurgents."

The Mexican military now has around 22,000 soldiers and sailors involved in the counter-insurgent war. During the past 12 months the military has at times deployed as many as 30,000 troops in at least ten Mexican state: Guerrero, Michoacan, Sinaloa, Sonora, Baja California (Norte), Chihuahua, Nuevo Leon, Tamaulipas, Veracruz, and Durango. The military operations began in several western Mexican states the moved north and finally to Mexico's east coast. Combined military and police operations in Tamaulipas, Nuevo Leon, and Chihuahua have been particularly important, since these are the Gulf cartel's strongholds.

December 12, 2007: The military announced that troops arrested three senior members of the Gulf drug cartel. One of the men was identified as Marco Ramirez, allegedly the commander of the cartel's "hit team" (paramilitary strike force).

December 7, 2007: Call it "political shaping of the battlefield." president Felipe Calderon has told Foreign Ministry consuls in the U.S. to try to counter-act what he called "anti-Mexican" attitudes expressed by presidential candidates. One quote in Calderon's statement was particularly striking: Calderon said he wanted to "neutralize this strategy of confrontation and discrimination…" Calderon said that he does not want animosity to harm the "U.S. and Mexican bilateral relationship." Calderon is worried that Mexicans will react very negatively to the highly-charged U.S. presidential campaign debate over illegal immigration. That negative reaction will make it harder for him to cooperate with the U.S. on what he believes are key bi-lateral security issues. He also thinks (knows) this will harm U.S. border security efforts.

December 6, 2007: The Mexican military reinforced its on-going operation in the state of Tamaulipas with a combined task force of 3,000 army soldiers, Mexican marines, and federal police. That brings the strike force operating in Tamaulipas to approximately 5,000.

December 4, 2007: A police commander in the town of Tecate was murdered by gunmen. Mexican officials suggested the murder may have been linked to a police operation that discovered a "drug smuggling tunnel" that ran under the Mexico-California border. The Mexican police commander had played a central role in finding the tunnel.

Mitt Romney and the Politics of Religious Bigotry in America

Of Mormons and Muslims

By RAMZY BAROUD

Republican presidential candidate Mitt Romney's speech on December 6th - in which he tried to 'explain' his Mormon faith - was met with a mostly sympathetic reception at George Bush Library in Texas.

The speech has been long anticipated, not so much for its relevance to the pressing debate on the defining role of religion in American politics, and how this undermines the very meaning of secular democracy. It was awaited simply because Romney belongs to the wrong faith. Recent polls indicate that one out of every three Republicans will not vote for Romney because he is a Mormon.

The whole affair has done much to reveal the hypocrisy of institutional democracy in the United States. While every presidential candidate, Republican or Democrat, has unreservedly uttered lip service to democratic ideals, very few have dared push the boundaries by actually explaining their personal views on what separation of church and state means.

Given the Republicans' reservations on Romney and the fact that the religious vote has long been shown to be a formidable factor in determining who claims the throne of the Oval Office, one can easily deduce that religion is hardly a personal matter in the American political milieu. Imagine, for instance, the sort of chances a presidential candidate would have as a dedicated atheist, or worse, as a devout Muslim.

It might be a long time - if ever - before the possibility of a Muslim candidate representing a major party is put to the test. But one need not wait that long to appreciate the narrow-mindedness of the media and politicians, and how this influences public opinion.

While the urgency of 'responding' to Islamic fundamentalism has been consistently highlighted in the ongoing presidential campaign, very little has been said about Christian, Jewish or other religious fundamentalisms. Rarely has a candidate ­ with the exception of Democrat Dennis Kucinich ­ dared to examine the relationship between Christian fundamentalism and the Iraq war, or Jewish fundamentalism and the Israeli occupation of Palestine. Religious fanaticism and fundamentalism are rarely discussed as perilous phenomena in their own right; if it's not 'Islamic' it simply doesn't count.

Such short-sightedness has wide-ranging and deeply harmful implications. All that a volunteer for Senator Hilary Clinton's presidential campaign needed to do to temporarily disrupt the recent gains of Barack Obama's campaign was to distribute an email suggesting that Obama was a Muslim intent on 'destroying' the United Sates. As laughable as this may sound, one cannot underestimate the impact that such rumours have on voters filled with fear and disdain for everything Muslim. Of course, Christian fundamentalist President George W. Bush's wholesale destruction of a Muslim country, Iraq, is not a mere rumour. That this is not considered noteworthy is most telling. Chances are Obama will do his utmost to distance himself from the rumour ­ as he has done in the past - which could reinvigorate the old accusation that he spent time studying at a Muslim school. Obama previously responded by vowing to respond severely to Muslim terrorism, going so far as to say he would bomb Pakistan if necessary. Whether he will upgrade further his hostile language to show his worthiness to lead America is yet to be seen.

Although Islam and Muslims were hardly relevant to Romney's speech, Naomi Schaefer Riley of the conservative Wall Street Journal couldn't prevent herself from shoving Islam into the picture, predictably in an unfavorable light. In her article, 'What Iowans Should Know About Mormons' (December 7), Riley cites a recent Pew poll which shows that "only 53% of Americans have a favourable opinion of Mormons." She then observes: "That's roughly the same percentage who feel that way toward Muslims. By contrast, more than three-quarters of Americans have a favorable opinion of Jews and Catholics."

Riley then gets to her main and vindictive point: "Whatever the validity of such judgments, one has to wonder: Why does a faith professed by the 9/11 hijackers rank alongside that of a peaceful, productive, highly educated religious group founded within our own borders?"

Not only did Riley isolate 9/11 from the pre and post 9/11 contexts (again conveniently neglecting the fact that nearly a million Iraqis were killed by those who mostly profess the Christian faith), she also implicitly indicated that Mormonism is everything that Islam is not. The latter religion is thus hostile, unproductive, backward and alien.

Riley was hardly satisfied with selectively linking a religion professed by over a billion people of all colors and ethnicities worldwide - including millions of Americans - to a few hijackers. She used the rest of her inadequate 'analysis' to inappropriately bring Islam to a discussion from which it should have been entirely spared.

One can understand the urge of the faithful of any religion to make preferences for presidential candidates on the basis of their faith. One can thus also understand why politicians cater to the religious sensibilities of their constituents, even if this means resorting to untruths. But one cannot in any way sympathize with the mainstream media ­ perceived largely as 'liberal' ­ for failing to realign the debate by bringing it back to its proper boundaries: that of equitable democracy vs religious prejudices, looking at Romney as a man who can do good, or bad for America rather than a man who professes a 'wacky' or 'cult-like' faith.

It's odd that in the first decade of the 21st century, the media still validates the same religious thoughtlessness that had prevailed in America when Catholic John F. Kennedy made his famous statement in 1960 asserting that the Pope would not sway his presidency. Indeed, the media should have chastised the entire debate which ranks potential presidents based on whose God is best, or whether comparative religion should be discussed at all. Needless to say mediocre journalism like that of Riley should have never made it to print in the first place.

Ramzy Baroud teaches mass communication at Curtin University of Technology and is the author of The Second Palestinian Intifada: A Chronicle of a People's Struggle. He is also the editor-in-chief of PalestineChronicle.com. He can be contacted at: editor@palestinechronicle.com

Venerating Cop-Killers

By Mark D. Tooley

Always determined to prove that America is the center of global injustice, the Religious Left is now championing the cause of 8 former Black Liberation Army (BLA) militants who face charges for having killed a San Francisco area policeman in 1971. The Marxist BLA was an offshoot of the Black Panthers, whom it deemed too moderate, and is believed to have assassinated 13 police officers during the early 1970's in a deliberate terror campaign.

Hailed the militants as persecuted martyrs, a World Council of Churches (WCC) press conference in New York recently demanded the immediate release of the so-called "San Francisco 8." A WCC official gravely intoned: "The time has come to set free those who have been bound. The case of the SF8 requires all of us to come together, and take an active stand for justice for all U.S. political prisoners."

Armed with new forensics evidence that implicates the "political prisoners" in murder, San Francisco has reopened the 36 year old case, re-arresting 6 of the aging militants and charging two more who are already serving time in a New York prison for killing two New York police officers. Seven of the 8 are being charged directly in the murder of San Francisco Police Sergeant John Young. He was killed on August 29, 1971 when BLA activists shot him in a police station. The remaining BLA militant is charged with conspiracy in the killing. On the same evening, the California Department of Prisons in Sacramento and San Francisco were bombed, probably in a coordinated attack.

Besides Officer Young's killing, the "San Francisco 8" are charged with the attempted murder of four police officers, the bombing of a police officer's funeral, the murder of two New York City police officers, the attempted bombing of a police station and three armed bank robberies,
all between 1968 and 1973.

The two BLA militants already incarcerated in New York are Herman Bell and Anthony Bottom, also known as Jalil Muntaqim. They murdered two New York City police officers, Waverly Jones and Joseph Piagentini, by shooting them from behind in Harlem on May 21, 1971. The other former BLA militants who were arrested earlier this year for the San Francisco murder are Francisco Torres of New York, Ray Michael Boudreaux of Altadena, Calif., Richard Brown of San Francisco, Henry Watson Jones of Altadena, and Harold Taylor of Panama City, Florida. Richard O'Neal of San Francisco is charged with conspiracy. In 1971, Torres was unsuccessfully charged in the New York police killings. He later served time for a bank robbery whose intent was to fund the BLA.

Bell is believed to have shot the San Francisco officer with a shotgun, while Torres attempted to dynamite the police station, with help from Jones. Bowman, Brown and Taylor are charged with being the lookouts, while Boudreaux is charged as a getaway driver. On the same 1971 evening, Bottom and Washington shot at but failed to hurt another San Francisco police employee. When arrested, they possessed the 45-caliber gun that had earlier killed the two New York City officers.

Earlier this year, New York Police Commissioner Raymond Kelly praised the recent arrests of the BLA militants. "They shot two New York City police officers in the back as part of a series of assassinations directed against police officers in those murderous days," he said. "It may have been 35 years ago, but I certainly haven't forgotten. Neither has anyone who was a member of the police department back then."

San Francisco Deputy Police Chief David Shinn similarly reacted. "This was an organized group that went after police officers who were literally tasked with providing for the safety of San Francisco," he said. "These were very heinous acts that resulted in the deaths of police officers. ... We lost members of our family."

Why is the Religious Left so interested in protecting 8 aging militants involved in police killings 36 years ago? Three of the "San Francisco 8" were arrested in 1973 in New Orleans. During their 1975 trial, the judge dismissed the charges by asserting that the evidence against them was gained through torture by New Orleans police. Torture! The Religious Left was almost never interested in torture until The War Against Terror allowed it to charge the U.S. with routinely torturing terrorist inmates.

The Religious Left's press conference on behalf of the "San Francisco 8" convened at the Church Interfaith Center in New York City on November 30. Harold Taylor, charged with being the look out in the murder of San Francisco Officer Young, shared his story, not about Young's murder, but Taylor's alleged torture by New Orleans police 34 years ago. "They puta plastic bag over my head and waited until I about suffocated," he told his attentive audience.

Besides the World Council of Churches (WCC), the press conference alsowas hosted by the United Methodist Church's Women's Division, which joined in the the "International Call on the San Francisco 8." The Call demands not only that its martyrs be exonerated but that U.S. end all"torture in the criminal justice system" and investigate the FBI and other police agencies. UM Women's Division Chief Lois Dauway observed that her group, along with the WCC, of which she is also an officer, has taken "a very clear stand on torture," even though "there is a belief amongst many that torture does not exist in this country." Dauway's agency, already distressed about torture allegations against U.S. forces in Afghanistan, Iraq and Guantanamo Bay, has bravely called on its church to "move towards a prophetic stance against the use of torture."

Also shouting "Torture!" at the press conference was Jill-Soffiyah Elijah, legal adviser to the "San Francisco 8" and deputy director of the Criminal Justice Institute at Harvard Law School. She claimed: "Torture is the foundation of the case today." She is incorrect. The case against the alleged killers was reopened thanks to forensics evidence from finger prints and shell casings.

In countless prisons around the world, many thousands of genuine "political prisoners" are suffering because of their political or religious beliefs. Millions of Christians and other religious believers live daily with the threat of imprisonment or worse. Few of these genuine victims earn the sympathy or even the attention of the United Methodist Women's Division or the World Council of Churches, who prefer advocating on behalf of the police killing "San Francisco 8."

The Other Side of the CIA Tapes

The New York Times is more concerned about the rights of al-Qaeda terrorists than one of the most important Islamic inspirations of the global jihad movement, Sayyed Imam Al-Shari. The latter has directed his outrage against al-Qaeda’s leaders for carrying out the 9/11 attacks in the first place and the backlash that it caused against the Muslim people. They "ignited strife that found its way into every home," Sayyed said, "and they were the cause of the imprisonment of thousands of Muslims in the prisons of various countries. They bear the responsibility for all of this." ¹ As far as Sayyed was concerned, whatever harsh fate awaited the al-Qaeda leaders was entirely of their own making.

By contrast, the New York Times has continued to focus its outrage against President Bush for the harsh interrogation techniques such as water boarding used on perhaps three al-Qaeda prisoners to extract life-saving information. The New York Times rarely, if ever, puts the primary moral responsibility on the terrorists themselves for precipitating the chain of events leading to the Bush administration’s harsh reprisals. In an editorial published last Friday entitled "Notes from the Global War on Terror," for example, the Times condemned the Bush administration for turning "intelligence agents and uniformed soldiers into torturers at outlaw prisons."

In the immediate wake of 9/11, most Americans understood clearly who the enemy was and were determined to crush them. Even Nancy Pelosi, who along with other Congressional leaders was briefed in detail back in 2002 on the CIA’s aggressive interrogation techniques used against the inhuman monsters who authored the 9/11 massacre, did not raise a peep. With the embers of that day still burning in the collective consciousness of the country, no Congressional leader of either party would have dared question the CIA’s tactics to prevent a repeat of that horrific atrocity.

Time Magazine columnist Joe Klein (no relation) wrote recently in a blog that Americans were not thinking clearly during the months following 9/11: "There was fear that we would be attacked again by terrorists, and on a regular basis. Few were thinking clearly about the nature of the threat and how to deal with it."

My namesake had it completely wrong. We were thinking very clearly back then. We wanted our intelligence agencies to do whatever was necessary to stop the terrorists before they struck again. Since then we have allowed the passage of time and the absence of any new attack on our homeland to lull us into a sense of false security.

One of the al-Qaeda leaders captured shortly after 9/11 and reportedly subjected to water boarding was Abu Zubaydah. This suffering guest of the CIA was a member of Osama bin Laden’s inner circle, who was in the midst of devising more terrorist attacks to follow al-Qaeda’s 9/11 success when he was captured. He was allegedly behind the successful attack on the U.S.S. Cole in October 2000, the foiled "millennium plot" to bomb the Los Angeles International Airport, and a planned attack on the American embassy in Paris. He also advised Richard Reid, the so-called shoe bomber arrested on board a flight from Paris to Miami in December 2001.

According to a New York Times report in 2002, Zubaydah was anything but a cooperative witness while facing more traditional, non-coercive interrogation. He had mocked his interrogators and fed them false information.²

Then something changed. Zubaydah began to tell the truth about more terrorist attacks against our country that were in advanced planning stages. He also provided vital information about the identity of one of the central planners of the September 11 attacks, Khalid Shaikh Mohammed, who in turn was captured and treated to the same CIA ‘hospitality’ as Zubaydah was accorded.

What happened? The CIA evidently stepped up the pressure, including limited use of waterboarding. Some members of Congress knew what the CIA was doing after receiving classified briefings, although they now feign shock that America could have ever used such methods. It took just 35 seconds of water boarding to turn Zubaydah into a water spout of information, which has helped save innocent lives. Khalid Mohammed reportedly endured two minutes of water boarding before he cracked, providing more life-saving intelligence.

So, what exactly are the moral values that are supposedly being compromised here? The human rights extremists believe that the ends never justify the means. They believe that if the terrorist leaders are not willing to tell us what they know out of the goodness of their own hearts, they should simply be left alone. Thus, those concerned more about the terrorists’ "rights" than innocent Americans’ lives have become unwitting accomplices to the most extreme violators of human rights on the face of the earth. They would have been willing to let thousands more innocent Americans die in other terrorist attacks rather than subject a few al-Qaeda ringleaders to the level of temporary (and not life-threatening) suffering necessary to wring the truth out of them in time to stop future attacks. Fortunately, the Bush administration and the CIA followed the right moral path and carried out their duty to protect the American people.

The fact that there have been no terrorist attacks on American soil for more than six years was not a result of Islamist jihadists suddenly deciding to embrace non-violence. They have been busy sowing violence since 9/11 in Europe, Asia, and Africa, killing innocent men, women, and children with abandon. The most recent brutal attack occurred just last week in Algeria, killing at least 17 UN workers and many Algerians. As Secretary General Ban Ki Moon declared, "This was an attack not only against the United Nations, not only against Algerians, but against humankind itself…Those who target innocent civilians in this way commit an unspeakable crime."

But no such attack has occurred on our own soil since 9/11. It is indeed very easy to demonize a president’s actions when looking at them through a rearview mirror and imposing a holier-than-thou attitude. President Truman, for example, has faced criticism from some commentators in recent years for his decision to authorize the dropping of atomic bombs on Hiroshima and Nagasaki, which killed more than 100,000 Japanese. The view of some human rights advocates is that Truman committed war crimes worthy of prosecution under the standards applied against the Nazis at Nuremberg.³ But Truman authorized the bombings only as a last resort, because the Japanese rulers refused to surrender. He weighed and rejected the alternative of losing as many as 250,000 American lives if he decided on an invasion of Japan to end the war rather than the bombings:

We were approaching an experiment with the atom explosion. I was informed that event would take place within a possible thirty days. I then suggested that after that experimental test of the fission of the atom, that we give Japan a chance to stop the war by a surrender. That plan was followed. Japan refused to surrender and the bomb was dropped on two targets after which event the surrender took place.⁴

Likewise, Zubaydah and Khalid Mohammed brought their suffering in captivity upon themselves by participating in terrorism and refusing to tell the truth to their captors about future terrorist plots.

If Congress now wants to legislate against coercive interrogation techniques and risk the loss of more American lives, then it should do so. Until then, it has no standing to complain about what its leaders sanctioned at a time when concern about preventing another 9/11 was paramount. As for the CIA’s videos of their interrogations that were destroyed, the Department of Justice and ultimately the courts can consider whether any crime was committed. Congressional investigations are, to say the very least, premature.

The most compelling reason for regretting the loss of the videos is that they undoubtedly would have shown the broken spirit of the al-Qaeda leaders, who have asked others to die as martyrs for their cause, as they cracked under pressure and gave up their colleagues to save their own hides. The image of these cowering leaders would have done more to demoralize prospective recruits to militant jihad than virtually anything else we have done so far in the global War on Terror.

Russian general says missiles could target US shield: report

Russia's nuclear weapons chief threatened Monday to target a planned US missile defence shield in central Europe if Washington fails to take into account Moscow's worries, the Interfax news agency reported.

General Nikolai Solovtsov, head of strategic missile forces, said that such a decision could be taken if the US shield is seen to "undermine the Russian nuclear deterrent capability."

In that case, "I do not exclude... the missile defence shield sites in Poland and the Czech Republic being chosen as targets for some of our intercontinental ballistic missiles," Solovtsov said, according to Interfax.

Washington says the plans to install radar in the Czech Republic and 10 interceptor rockets in Poland would guard against theoretical missile strikes from "rogue" nations such as Iran, without denting Russia's massive nuclear offensive arsenal.

But Moscow claims the United States is exaggerating the threat from Iran and describes the shield as the thin end of a wedge aimed at changing the current balance of military power.

On Saturday, the Russian chief of staff, General Yury Baluyevsky, warned that the launch of US interceptor missiles could accidentally trigger a Russian retaliatory strike.

Polish Prime Minister Donald Tusk denounced the comments as "unacceptable" and said that "no declaration of this kind will influence Polish-American negotiations."

Solovtsov, speaking hours after state television showed images of a ballistic missile being test fired from a submerged submarine at a target on the other side of Russia, said the United States was untrustworthy.

"If the Americans signed a treaty with us that they would only deploy 10 anti-missile rockets in Poland and one radar in the Czech Republic and will never put anything else there, then we could deal with this," he said.

"However they won't sign, they just tell us verbally, 'We won't threaten you'."

"They already cheated Russia once," he said, referring to NATO expansion into former Soviet-dominated territory after the fall of the Berlin Wall in 1989. "Verbally they already told us that when we re-unite Germany there won't be one NATO soldier there. Now where are they?"

East-West relations are increasingly strained as Russia and NATO countries argue over how to ensure security in the post-Cold War landscape.

Russia froze compliance last week with the Conventional Forces in Europe (CFE) treaty, which imposes strict limits on deployment of troops around the country.

The Foreign Ministry offered reassurance that Russia had "no current plans to accumulate massive armaments on our neighbours' borders."

However the decision was criticised by NATO, the United States and other Western powers.

Fox vs. Chavez

Alvaro Vargas Llosa

SAN CRISTOBAL RANCH, Mexico—Vicente Fox is defying that old Mexican tradition by which presidents become nonentities once they leave office. As Fox’s recent tour of the United States to promote his autobiography indicates, this former Mexican president is speaking out and building a front to stop Venezuela’s Hugo Chavez from spreading his revolution.

Although Fox presided over an admirable transition from the one-party era of the Institutional Revolutionary Party (PRI) to multiparty democracy, he was unwilling to push through a series of unpopular but necessary reforms during his single term as president. Now the fire in his belly is back.

I recently spent a day with Fox at his family’s San Cristobal Ranch in Guanajuato state, where he is building a huge center that will serve as a think tank, cultural venue, library and consulting firm. He is enlisting the help of former Brazilian President Fernando Henrique Cardoso and former Chilean President Ricardo Lagos for his campaign in favor of the rule of law and the market economy.

“Latin America lost the 20th century miserably,” Fox told me. “We cannot allow some populist autocrat to steal the 21st century from us. Chavez’s defeat in the recent referendum on constitutional reform is welcome news, but as long as we have so many people listening to the siren song of socialism because they own scant property, we will not be free.”

I asked him why, at the Summit of the Americas in Mar del Plata, Argentina, in 2005, Chavez managed to block the nations of the Western Hemisphere from creating a free trade area that might eventually eliminate all barriers to the flow of goods, services and people. “Because we were too polite and shy,” he responds. “Argentine President Nestor Kirchner allowed Chavez to bend the rules and speak for three hours instead of three minutes. My mistake was to leave the room. I should have stayed and taken more time than I was allowed to confront him head-on.”

What role has the U.S. played in Latin America in recent years? “Two factors got in the way,” Fox responded. “One was the terrorist attacks of 9/11, which made Americans shy away from immigration reform. The other factor was lack of courage on the part of President Bush on that same issue. The procrastination left a vacuum that was filled by xenophobic commentators like Lou Dobbs and Bill O’Reilly, who stoked up America’s fear of the outside world.”

Fox thinks that immigration reform in the United States would have given him more political clout in the region at a time when Chavez was moving his pawns.

“The United States needs our immigrants. Who is going to pay for the baby boomers’ retirement? The governor of the state of Washington told me that if it weren’t for immigrants, their apples would rot. The California authorities admit that without Mexicans, vegetables would disappear from America’s table. Mayor (Michael) Bloomberg once said to me that New York would collapse if they (immigrants) were expelled. Mexican immigrants have even been hired to build the wall Americans want to erect in order to stop Mexican immigration! A comprehensive reform that addresses the fears of many Americans while recognizing these obvious facts would undermine the anti-American populist message south of the border.”

As we strolled through his center’s construction site and he told me about his grandfather—an American who migrated from Cincinnati to Guanajuato in search of a better life—and the seizure of much of his family’s land at the hands of the PRI, I wondered to myself why so many Latin American incumbents have shied away from confronting Chavez even after he meddled in their countries.

Can Fox pull this off, and where does he think Mexico is headed?

“I am teaming up with Social Democrats as well,” he noted, “because many of them are against Chavez’s stupidities. According to a study by Goldman Sachs, Mexico will be the world’s fifth-largest economy in 2040. Although many reforms are still pending, including ending our oil monopoly, the opening of our economy is already bearing fruit. We defeated (the populist candidate) at the last election because many Mexicans who have moved into the middle class feel they have something to protect. We cannot afford to stray from the current course if we want to become prosperous.”

It is unclear how effective Fox will be because he cannot run for office again. But, since so few Latin American statesmen have dared to engage the Venezuelan thug in recent years, Fox’s new mission cannot possibly do any harm.

Can Liberty be Bought and Sold?

A People's Penny for the Magna Carta

Magna Carta is up for sale next week at Sotheby's and this last week it was up for grabs in the U.S. Supreme Court.

Privatized in auction, this thirteenth century version of Magna Carta has ceased to be common property. Of course, it is only a foot and a half of vellum (sheep's skin), and there are other copies. This one of 1297 was the first time the charter became statute law, and it has remained ever since the first in the statute books. The Texas millionaire, Ross Perot, purchased it in 1984 and loaned it to the National Archives in whose rotunda it has been exhibited, until now, alongside the U.S. Constitution and the Bill of Rights. It belongs with them, historically, legally.

In the spring of 1776 Tom Paine wrote Common Sense. He called on Americans to frame "a continental charter, or Charter of the United Colonies (answering to what is called the Magna Carta of England)." He called for independence from the Crown and unity among the colonies. The Declaration of Independence was the first result of his call and it named several violations of Magna Carta in the 27 usurpations by George III including his "transporting us beyond Seas to be tried for pretended offences."

The U.S. Constitution of 1789 came after, and habeas corpus, "the Great Writ of Liberty" as it is known in English law, figures in its article one section nine. We find Magna Carta again in the Fifth Amendment of the Bill of Rights, and in the Fourteenth Amendment following the Civil War, because in those amendments persons are guaranteed "due process of law."

In the cases heard last week, 5 December, sixteen petitioners (four from Kuwait, twelve from Yemen) in Khaled A.F. Al-Odah et al v. U.S.A. quote Magna Carta's chapter 39, "No freeman shall be taken, or imprisoned, or disseised, or outlawed, or exiled, or in any way destroyed, nor will we go upon or send upon him, except by the lawful judgment of his peers or by the law of the land." Those final five words became "due process of law." The entire chapter was included in some colonial charters, it pervaded common law, and in time parts entered the U.S. Constitution.

I have quantified the relation of Magna Carta to the U.S. Constitution as interpreted by the Supreme Court by finding that it was cited by name 407 times in 195 different cases between 1790 and 2005. The cases concern major issues of American history ­ slavery, women's rights, corporations, death penalty, jury trials. The decisions in these cases turned on habeas and due process.

These precisely are denied to the Guatánamo Bay prisoners, first by President Bush and then by the Military Tribunals Act. Will the U.S. Supreme Court, sitting as it does in a chamber under a marble frieze which includes a seven foot bas-relief of a troubled King John gripping Magna Carta as if life depended on it, find for Magna Carta and give the prisoners a fair and square hearing?

Some due processes of law have been omitted by the Military Commissions Act of 2006: the prohibition of evidence obtained by torture, the ability to confront witnesses, the right to be represented by counsel, and the opportunity to rebut argument and testimony. The military tribunals are therefore an inadequate substitute for the remedies provided by habeas corpus. Two other provisions deriving from the same chapter are also relevant to the cases. Trial by jury and the prohibition of torture, both denied by Congress and the President to the Gitmo prisoners, have been carefully nurtured over the centuries from the tiny seeds in the same chapter of Magna Carta.

At one time these principles of Magna Carta comprised our common sense of liberty. Now that common sense is lost. There is a long shot that common sense may be recovered by discovering a sense of the commons, as follows:

Magna Carta is called Magna Carta because there was a smaller one, the Charter of the Forest. They both were lost after 1215 only to be recovered on 11 September 1217. Then, a new and profound theme appeared in The Great Charters of the Liberties of England, a theme expressed in one of the most complex and beautiful words of English language, the commons.

Chapter 7 of the Charter was amended to provide widows with fuel in the commons. Moreover, the entire Charter of the Forest recognized common rights to what in that day and age were hydrocarbon energy resources, or a commoner's wherewithal in the woodlands. The commons can act as a check to the greed of privatization, the lust for power, and the ambition for empire.

The sale at Sotheby's parallels the selling off of forests in Sumatra, Montana, Congo, Chiapas, Colorado - it is world-wide. And though it is merely an old piece of skin (vellum), still something of the spirit of our discommoning times is expressed by this sale: Ross Perot bought it for $1.5 million in 1984 and estimates for its sale next week go as high as $30 million.

Yet, can liberty be bought and sold? After chapter 39 comes chapter 40, and King John promises "to no one will we sell, to no one deny or delay right or justice."

Economic growth relies on production, not just spending.

By: Robert P. Murphy

Our financial press is always stuck in a Keynesian mindset, but the tendency is particularly pronounced during the Christmas season—here’s a typical article. The moral seems to be that if only consumers would go out and spend more money, the economy would grow, stores would hire more people, and workers would have more money to spend, thus completing the circle. Yet as with most Keynesian ideas, this view has things largely backwards.

The overall purpose of economic behavior is consumption, not production. We don’t have malls in order to provide people with retail jobs. On the contrary, we have malls to facilitate purchases of goods and services, and in order to achieve that goal we also need some members of the population to provide unpleasant labor at these malls. Now in order to induce these people to labor at the malls, we give them money so that they in turn can obtain goodies at the mall (or from some other seller). What I’m saying is pretty straightforward, yet to read some of the financial commentators, you would think that the real joy is having a job at the mall, and that consumers must begrudgingly spend their money in order to finance the payroll.

Why am I so confident that my interpretation of the causality is the right one? Simple: Consider the following thought experiment. Suppose one day a particular mall announced, “Starting today, all wages for people who work here will be $0 per hour, and the prices of all goods sold here will also be $0. But workers are still free to show up and work, and customers are still free to show up and shop.” Which of the two groups—workers or consumers—would go to the mall that day?

When it comes to the different components of the economy, the hard part is producing; it’s easy to consume. As the thought experiment above showed, you can always induce people to snatch up goods that have already been produced; you just need to slash their prices. The hard part is to induce workers to toil all day in order to make these goods.

The classical economist Jean-Baptiste Say’s “law of markets” summed up this concept quite nicely. Many people nowadays believe that “Say’s Law” proclaims, “Supply creates its own demand.” On the surface, that’s obviously false—if I create 1,000 self-portraits, believe me, there will be inadequate demand for them, at any price. But what Say really said was more sophisticated. The means through which the baker ultimately “demands” shoes is not so much with cash, but rather with his corresponding supply of bread. If he wants to purchase more shoes, he needs to produce more bread. Thus, if the cobbler’s sales are weak the problem isn’t a lack of “purchasing power” in the community, but really a lack of production among others in the community.

Now back to the present day: Suppose everyone were to follow the implicit recommendation in these typical news articles, and went out and spent money with complete abandon. What would happen? Retailers would see a huge upswing in their sales, that’s true. And workers in this sector would also benefit.

But the downside is that other businesses would suffer. The effect might not be obvious at first, but if the typical household spent all of its savings on Christmas presents, it necessarily would have less to spend (or invest) elsewhere. As employment grew in the retail sector, it would shrink in other sectors.

A fundamental problem with the Keynesian mindset is that it focuses almost exclusively on current consumption. When a family doesn’t spend every last penny of its wealth this holiday season, and decides instead to leave some money in the checking account, and much more invested in retirement plans and the stock market, this wealth isn’t therefore “lost” to the economy. No, it provides the savings with which businesses can invest and grow over time. Really, the household isn’t deciding between “spending” versus “non-spending,” it’s instead deciding between “spending now” versus “spending later.”

The purpose of a competitive, free market economic system is to mobilize labor and other resources in the most efficient manner possible, in order to best satisfy the consumption desires of the people. If everybody spent more on Christmas this season, that wouldn’t make us all wealthier. It would just redirect our scarce resources from other potential goods into more candy and toys. If that’s what people really prefer, so be it. But consumers shouldn’t be brow beaten into buying more stuff than they really want.

America's Taliban-Support Program

by Jacob Sullum -

America's drug policies provide a major boost to the Taliban insurgency in Afghanistan. Given how disastrous these same policies have been in Columbia, isn't it high time to re-think our approach?

According to a recent report from the U.N. Office on Drugs and Crime, 19,047 hectares of poppies were eradicated in Afghanistan this year, 24 percent more than in 2006.

Meanwhile, the number of opium-free provinces more than doubled, from six to 13.

Those victories were somewhat overshadowed by the news that the total amount of land devoted to opium poppies in Afghanistan rose from 165,000 to 193,000 hectares, an increase of 17 percent.

Due to “favorable weather conditions,” estimated opium production rose even more, hitting an all-time high of 8,200 metric tons, 34 percent more than the previous record, set last year.

Since their efforts have had precisely the opposite of the result they intended, U.S. drug warriors, predictably enough, plan to try harder, calling for more eradication, possibly including aerial herbicide spraying, and more interdiction.

Over the long term, if history is any guide, these supply-reduction measures will have little or no impact on heroin consumption. Over the short term, they will continue to strengthen the Taliban insurgency.

The U.N. report emphasizes that poppy growing is becoming increasingly concentrated in the southern provinces where the Taliban are strongest.

Having forgotten whatever religious scruples they may once have had about the opium trade, the Taliban make money by charging poppy farmers for protection and taxing traffickers at checkpoints, a fundraising opportunity created by U.S. demands that the Afghan government wipe out a crop the U.N. says accounts for one-third of the Afghan economy.

A field of opium poppies (from Burma)

“Afghanistan’s drug money corrupts the government, weakens institutions, and strengthens the Taliban,” says a new report from the U.S. State Department.

It would be more accurate to say that America’s drug policy, which it insists on exporting to every other country in the world, corrupts the Afghan government, weakens institutions, and strengthens the Taliban.

The State Department draws exactly the wrong conclusion from this situation, saying “the increasing linkage between the region’s major drug trafficking organizations and insurgencies prompts the need to elevate the drug enforcement mission and integrate it appropriately into the comprehensive security strategy.”

In fact, the “drug enforcement mission” — which alienates Afghans from their government, helps fund the insurgency and distracts NATO and Afghan forces from the central goal of reducing violence and establishing order — is fundamentally at odds with the “security strategy.”

The U.N. says this year’s opium output, which represents 93 percent of the illicit world supply, “exceeds global demand by a large margin,” indicating a stockpile of thousands of tons.

Despite their concerns that opium profits are helping to fund terrorism, U.S. and U.N. drug warriors seem intent on raising the value of that stockpile by curtailing production.

Even if they’re successful, they cannot reasonably hope to have a lasting impact on heroin availability. If cracking down on opium production in some Afghan provinces simply shifts it to others, cracking down on opium production throughout Afghanistan will simply shift it to other countries.

That has been the general pattern during the last century of opium “eradication,” which might more accurately be called opium relocation.

A decade ago, Pino Arlacchi, then the head of the U.N.’s anti-drug program, declared that “global coca leaf and opium poppy acreage totals an area less than half the size of Puerto Rico,” so “there is no reason it cannot be eliminated.”

For a less optimistic man, the fact that such a tiny percentage of the earth’s surface is needed to supply the world with heroin and cocaine would be cause to doubt the effectiveness of eradication.

Speaking of cocaine, in recent years, the U.S. government has spent billions of dollars on anti-drug aid to Colombia, with no discernible effect on prices or purity.

Colombia, which still supplies about 90 percent of America’s illicit cocaine, has been helping to train Afghan police in anti-drug tactics, and Gen. Peter Pace, chairman of the Joint Chiefs of Staff, says it provides “a good model” for Afghanistan.

The Role of Government in Modern U.S. Society: What Would Adam Smith Say?

Jody W. Lipford, Jerry Slice

The role of government in the United States and other western democracies has expanded dramatically over the last century. Compared to its pre-twentieth century functions, government has taken on new and vast roles, including old-age pensions, government-provided health care, and a host of other programs that typically comprise a modern welfare state.

What would Adam Smith, the eighteenth-century Scottish moral philosopher, say about the expanded role of our modern government? For Smith, the ideal functions of government were few and well defined. In his classic work, An Inquiry into the Nature and Causes of the Wealth of Nations, written in 1776, Smith outlined three important government functions: national defense, administration of justice (law and order), and the provision of certain public goods (e.g., transportation infrastructure and basic and applied education). Clearly, government has grown beyond the bounds of these simple duties.

Some would argue that government has expanded because of necessity, that modern society requires redistribution of wealth for stability and regulation to constrain the excesses of an unfettered market. Many believe it is unrealistic for government in the twenty-first century to adhere to the limited roles envisioned by Smith. We have our doubts about these arguments. However, we raise a different but related question: if Smith is right that national defense, administration of justice, and public goods are essential to a free and prosperous society, might government’s expanded roles one day crowd out its traditional and essential functions to that society’s detriment?

When we examine evidence on this question, the findings are striking. We first categorize national government expenditures according to whether or not Smith would support them. Under the category Smith would support, we include expenditures on national defense, administration of justice, transportation, and education. We consider social expenditures on Social Security, Medicare, health, income security, and labor and social services beyond the bounds that Smith would support. Next, we examine trends in these expenditures.

Here are some of our findings:

• In 1962, expenditures that Smith advocated accounted for 54.4 percent of the U.S. budget. Yet, by 2005, this percentage had fallen to 27.6 percent, with the Congressional Budget Office projecting this percentage to fall to 22.0 percent by 2011.
  
  
• The trend for the social expenditure category runs in the opposite direction. In 1962, social expenditures accounted for only 23.4 percent of the U.S. budget, but by 2005, they accounted for 58.1 percent, and they are expected to account for 63.3 percent of the budget by 2011.
  
  
• When we examine state and local government expenditures, we find the same trends, though they are less pronounced than their federal counterparts. The trends show no sign of reversal for either level of government.

Our analysis shows that social spending is rapidly replacing expenditures on traditional government functions advocated by Smith. As a result, governments will find it increasingly difficult to provide and maintain traditional services without significant tax increases or larger deficits.

These observations are not lost on federal budgetary experts. The Congressional Budget Office (CBO) documents that the amount and composition of federal spending have “changed dramatically,” and that most of that growth has been in three programs: Social Security, Medicare, and Medicaid. These programs now account for 42 percent of federal expenditures. In total, mandatory programs now account for over half of federal spending. The CBO notes that health expenditures will increase much more than Social Security expenditures in coming years, and that “if past growth rates persist, spending for health care will eventually consume such a large share of the nation’s output that real (inflation-adjusted) spending on other goods will have to decline sharply.”

The consequences are clear. Continued higher rates of social spending will require higher taxes, larger deficits, or dramatic cuts in other government programs, such as those deemed essential by Smith. These, in turn, may cause “slow private capital formation, lower economic growth, and in the extreme...a sustained economic contraction,” according to the CBO. These outcomes are the opposite of Smith’s model for economic prosperity.

Despite these dire predictions and their resulting consequences, the political will for change is weak. And the longer these trends continue, the more difficult it will be politically to change them. Perhaps it is time for the American public and its elected officials to give more heed to the wise words of a Scottish philosopher who wrote some 230 years ago.

Butt Out of the Mortgage Crisis

Larry Elder -

The problems faced by lenders and borrowers in the current subprime mortgage "crisis" do not merit a taxpayer-funded bailout. In fact, as many experts have noted, the best thing the government can do is butt out.

Our catastrophe-obsessed traditional media calls it the subprime mortgage “crisis” or “meltdown.” Here’s what happened:

Borrowers with shaky creditworthiness received low interest “teaser” rates. No problem, as long as housing prices continue to rise.

But with house prices stagnating, if not declining, this places some borrowers and the holders of their “paper” on financial shaky ground.

In other words, lenders lent and borrowers borrowed. Some borrowers took on debt only to find themselves unable to pay their mortgages, and the carriers of their debt now find their holdings less valuable.

But what about the responsibility of both lender and borrower? The Media Research Center examined news coverage of the subprime “crisis.” Of 156 stories broadcast between November 2006 and August 2007, 62 percent “ignored the consumer’s responsibility for debt.”

No one put a gun to either lenders’ or borrowers’ heads, and now both sides of the transaction find themselves in financial difficulty. Lawmakers scream for more laws. Never mind that lenders already operate under many regulations including, but not limited to, full disclosure requirements.

Democrats, and many Republicans, cry for some sort of government (read “taxpayer”) bailout. A New York Times editorial demands legislation, “including a rule that lenders must verify a borrower’s ability to pay”!?

House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry Reid (D-Nev.) seek legislation to make Federal Housing Authority “loans more widely available in order to help both new homeowners and those struggling with abusive mortgages.”

They also demanded that President Bush fund nonprofit foreclosure prevention counseling, and appoint a senior administration official to oversee federal response to the “crisis.”

Instead, the President has offered a sort of middle ground, suggesting a five-year freeze on mortgage rates for some subprime borrowers facing default on their mortgages.

Suppose you stayed on the sideline and rented or stayed in a smaller home in order to move up? Too bad, for the Bush plan artificially props up home prices.

The President’s plan also enables some homeowners to receive Federal Housing Authority loans in which the government — taxpayers — pay lenders in the event of a default. The plan also does nothing to prevent lawsuits by investors who hold the mortgaged securities in expectation of a certain return.

George Mason University economist Tyler Cowen says, “We’ve all heard about the defaults on subprime mortgage loans. But so far, the real story is how little the broader American economy has suffered. ...

“Today, banks usually sell their loans to third parties. ... You might have originally borrowed money from Wells Fargo, but now a bank overseas cashes your mortgage checks.

“If a large group of people can’t pay their mortgages, they may lose their homes. But the banks don’t suffer as they used to — local American lenders have already converted those loans into cash and sold off their risk. In fact, German regional banks suffered some of the most significant losses from bad American mortgages.

“Other European and Asian banks and hedge funds took their lumps as well. American banks essentially bought insurance by exporting their risk overseas.”

Let’s not minimize the trouble faced by thinly collateralized borrowers and their lenders, given the soft housing market. But the financial difficulties affecting both sides of transactions voluntarily entered into do not warrant a taxpayer bailout.

U.S. homeowners’ equity today equals almost $11 trillion. Price declines for this year and next year may amount to $6 billion, or a 0.05 percent decline — a worry, but hardly Judgment Day.

Christopher Cagan, of First American Real Estate Solutions, estimates that “the impact of rate sensitivity and subsequent defaults will be … well below one-half percent of total mortgage debt outstanding” and spread out over several years.

Donald Trump, who knows a bit about crisis management, having dealt with his own financial “meltdown,” suggested a simple, direct approach: Cut a deal with your lender.

Similarly, Treasury Secretary Henry Paulson has already urged banks and borrowers to get together and renegotiate the terms of their loans.

So what would a bailout say to those who avoided the subprime lending fervor? The Wall Street Journal reports that — unlike Citigroup and Merrill Lynch — Goldman Sachs “maintain(ed) relatively small holdings of collateralized debt obligations, or CDOs, the complex mortgage-related securities whose rapid devaluation prompted the massive writ-downs at other firms.”

Should government reward the shortsighted losers and, by extension, punish firms such as Goldman Sachs and Lehman Brothers that had the foresight to protect themselves?

People in the insurance business use a term called “moral hazard.” This means actions, however well-intended, that shield people from the consequences of their behavior lead to even more irresponsible behavior. Secretary Paulson recently said, “I have no interest in bailing out lenders or property speculators.”

OK, then butt out!

Christmas Books

by Thomas Sowell -

Still looking for a few Christmas gifts? Here are some excellent books published this year that are well-written, enjoyable to read, and guaranteed to provide a perspective you don't hear often.

Books are good gifts to receive and even better gifts to give because you can get books without half the hassles involved in buying many other kinds of gifts. You can easily buy books from the Internet and avoid the mob scenes at the shopping malls.

This has been a good year for books that shoot down false and nonsensical notions on major issues of our time.

The Immigration Solution by Heather Mac Donald, Steve Malanga, and Victor Davis Hanson

The Immigration Solution is an excellent new book that discusses illegal immigration without the political rhetoric, spin, demagoguery, and unsubstantiated claims that have become all too common in the media and among politicians.

It was written by three scholars at leading think tanks — Heather Mac Donald and Steve Malanga of the Manhattan Institute and Victor Davis Hanson of the Hoover Institution at Stanford University. Unlike many other scholars, they know how to write so that the general public can understand what they are saying.

Mugged by Reality by John Agresto (discussed in more detail here) is an eyewitness account of life inside Iraq by someone who does not take either the Bush administration line or the Congressional Democrats’ line. Nor does he hesitate to admit that what he saw in Iraq changed the opinions with which he first entered the country.

It is a sobering and insightful account of what has happened and of the problems with various alternative courses of action. It is one of those books that adds a new dimension to your understanding, whether you agree or disagree with the author.

The Prince of Darkness by Robert Novak is a big book detailing half a century of his experiences in Washington, dealing with both political figures and other members of the print and broadcast media. He names names.

This book should be especially valuable to those young people who have been brainwashed with the notion that it is somehow nobler to be in “public service” than in the private sector.

The Forgotten Man by Amity Shlaes

For those who like history, there is a new history of one of the most decisive decades in American history — the decade of the Great Depression of the 1930s — titled The Forgotten Man by Amity Shlaes.

It tells a revealing story of the people and the policies that shaped that decade, as that decade has shaped much of what has happened with government intervention in the economy ever since then.

For those who want more in-depth analysis of the economic consequences of New Deal policies, Jim Powell’s book FDR’s Folly would make an excellent supplement to Amity Shlaes’ book.

Until Proven Innocent by Stuart Taylor and K.C. Johnson is an account of the Duke University “rape” case that goes far beyond the misdeeds of the disgraced District Attorney Michael Nifong.

Until Proven Innocent by Stuart Taylor and K.C. Johnson

Until Proven Innocent turns over a lot of rocks and shows what was crawling underneath — in the media and in academia, as well as in law enforcement, that produced a lynch mob atmosphere in which evidence meant nothing.

Because Duke University is by no means unique in the attitudes of its faculty and administration, what happened at Duke could happen at any number of prestigious universities around the country. It is something to think about for those who have their hearts set on getting into Prestige U.

An excellent present for those parents and students who want to find academic institutions that have not succumbed to the ideological corruption found at Duke and other colleges and universities would be the book Choosing the Right College.

My Grandfather's Son, a memoir by Clarence Thomas

The latest edition, just published, is over a thousand pages long and goes into the campus atmosphere at numerous colleges and universities, in addition to dealing with academic questions, such as the presence or absence of a curriculum.

A very moving account of the life of Supreme Court Justice Clarence Thomas can be found in his very readable and insightful memoir, My Grandfather’s Son, which has been on the best-seller list for eight weeks thus far.

(More background here on Thomas and his memoir.)

In these politically correct times, we are only supposed to say “happy holidays,” lest we offend someone by being politically incorrect, but I wish you all a Merry Christmas and a Happy New Year!

Shrinking the US Dollar from the Inside-Out

By PAUL CRAIG ROBERTS

On December 8, Chinese and French news services reported that Iran had stopped billing its oil exports in dollars.

Americans might never hear this news as the independence of the US media was destroyed in the 1990s when Rupert Murdoch persuaded the Clinton administration and the quislings in Congress to allow the US media to be monopolized by a few mega-corporations.

Iran's oil minister, Gholam Hossein Nozari, declared: "The dollar is an unreliable currency in regards to its devaluation and the loss oil exporters have endured from this trend." Iran has proposed to OPEC that the US dollar no longer be used by any oil exporting countries. As the oil emirates and the Saudis have already decided to reduce their holdings of US dollars, the US might actually find itself having to pay for its energy imports in euros or yen.

Venezuela's Chavez, survivor of a US-led coup against him and a likely target of a US assassination attempt, might follow the Iranian lead. Also, Russia's Putin, who is fed up with the US government's efforts to encircle Russia militarily, will be tempted to add Russia's oil exports to the symbolic assault on the dollar.

The assault is symbolic, because the dollar is not the reserve currency due to oil exports being billed in dollars. It's the other way around. Oil exports are billed in dollars, because the dollar is the reserve currency.

What is important to the dollar's value and its role as reserve currency is whether foreigners continue to consider dollar-denominated assets sufficiently attractive to absorb the constant flow of red ink from US trade and budget deficits. If Iran and other countries do not want dollars, they can exchange them for other currencies regardless of the currency in which oil is billed.

Indeed, the evidence is that foreigners are not finding dollar-denominated assets sufficiently attractive. The dollar has declined dramatically during the Bush regime regardless of the fact that oil is billed in dollars. Iran is dropping dollars in response to the dollar's loss of value. This is a market response to a depreciating currency, not a punitive action by Iran to sink the dollar.

Oil bills are only a small part of the problem. Oil minister Nozari's statement about the loss suffered by oil exporters applies to all exporters of all products.

A quarter century ago US oil imports accounted for the US trade deficit. The concerns expressed over the years about "energy dependence" accustomed Americans to think of trade problems only in terms of oil. The desire to gain "energy independence" has led to such foolish policies as subsidies for ethanol, the main effect of which is to drive up food prices and further ravage the poor.

Today oil imports comprise a small part of the US trade deficit. During the decades when Americans were fixated on "the energy deficit," the US became three to four times more dependent on foreign made manufactures. America's trade deficit in manufactured goods, including advanced technology products, dwarfs the US energy deficit.

For example, the US trade deficit with China is more than twice the size of the US trade deficit with OPEC. The US deficit with Japan is about the size of the US deficit with OPEC. With an overall US trade deficit of more than $800 billion, the deficit with OPEC only comprises one-eighth.

If abandonment of the dollar by oil exporters is not the cause of the dollar's woes, what is?

There are two reasons for the dollar's demise. One is the practice of American corporations offshoring their production for US consumers. When US corporations move to foreign countries their production of goods and services for American consumers, they convert US Gross Domestic Product (GDP) into imports. US production declines, US jobs and skill pools are destroyed, and the trade deficit increases. Foreign GDP, employment, and exports rise.

US corporations that offshore their production for US markets account for a larger share of the US trade deficit than does the OPEC energy deficit. Half or more of the US trade deficit with China consists of the offshored production of US firms. In 2006, the US trade deficit with China was $233 billion, half of which is $116.5 billion or $10 billion more than the US deficit with OPEC.

The other reason for the dollar's demise is the ignorance and nonchalance of "libertarian free market free trade economists" about offshoring and the trade deficit.

There is a great deal to be said in behalf of free markets and free trade. However, for many economists free trade has become an ideology, and they have ceased to think.

Such economists have become insouciant shills for the offshoring interests that fund their research and institutes. Their interests are tied together with those of the offshoring corporations.

Free trade economists have made three massive errors: (1) they confuse labor arbitrage across international borders with free trade when nothing in fact is being traded, (2) they have forgot the two necessary conditions in order for the classic theory of free trade, which rests on the principle of comparative advantage, to be valid, and (3) they are ignorant of the latest work in trade theory, which shows that free trade theory was never correct even when the conditions on which it is based were prevalent.

When a US firm moves its output abroad, the firm is arbitraging labor (and taxes, regulation, etc.) across international borders in pursuit of absolute advantage, not in pursuit of comparative advantage at home. When the US firm brings its offshored goods and services to the US to be marketed, those goods and services count as imports.

David Ricardo based comparative advantage on two necessary conditions: One is that a country's capital seek comparative advantage at home and not seek absolute advantage abroad. The other is that countries have different relative cost ratios of producing tradable goods. Under the Ricardian conditions, offshoring is prohibited.

Today capital is as internationally mobile as traded goods, and knowledge-based production functions have the same relative cost ratios regardless of the country of location. The famous Ricardian conditions for free trade are not present in today's world.

In the most important development in trade theory in 200 years, the distinguished mathematician Ralph Gomory and the distinguished economist and former president of the American Economics Association, William Baumol, have shown that the case for free trade was invalid even when the Ricardian conditions were present in the world. Their book, Global Trade and Conflicting National Interests, first presented as lectures at the London School of Economics, was published in 2000 by MIT Press.

While free trade economists hold on to their doctrine-turned-ideology, the US dollar and the American economy are dying.

One of the great lies of the offshoring interests is that US manufacturing is in trouble because of poor US education and a shortage of US scientists and engineers. Pundits such as Thomas Friedman have helped to spread this ignorance until it has become a dogma. Recently, General Electric CEO Jeffrey Immelt lent his weight to this falsehood. (See "The US No Longer Drives Global Economic Growth," Manufacturing & Technology News, Nov. 30, 2007.)

The fact of the matter is that the offshoring of US engineering and R&D jobs and the importation of foreign engineers and scientists on work visas have combined with educational subsidies to produce a surplus of American scientists and engineers, many of whom are unable to find jobs when they graduate from university or become casualties of offshoring and H-1b visas.

Corporate interests continue to lobby Congress for more foreign workers, claiming a non-existent shortage of trained Americans, even as the Commission on Professionals in Science and Technology concludes that real salary growth for American scientists and engineers has been flat or declining for the past 10 years. The "long trend of strong US demand for scientific and technical specialists" has come to an end with no signs of revival. (See "Job and Income Growth for Scientists and Engineers Comes to an End," Manufacturing & Technology News, November 30, 2007.)

What economist has ever heard of a labor shortage resulting in flat or declining pay?

There is no more of a shortage of US scientists and engineers than there were weapons of mass destruction in Iraq. The US media has no investigative capability and serves up the lies that serve short-term corporate and political interests. If it were not for the Internet that provides Americans with access to foreign news sources, Americans would live in a world of perfect disinformation.

Offshoring interests and economic dogmas have combined to create a false picture of America's economic position. While the ladders of upward mobility are being dismantled, Americans are being told that they have never had it better.

Can Liberty be Bought and Sold?

A People's Penny for the Magna Carta

Magna Carta is up for sale next week at Sotheby's and this last week it was up for grabs in the U.S. Supreme Court.

Privatized in auction, this thirteenth century version of Magna Carta has ceased to be common property. Of course, it is only a foot and a half of vellum (sheep's skin), and there are other copies. This one of 1297 was the first time the charter became statute law, and it has remained ever since the first in the statute books. The Texas millionaire, Ross Perot, purchased it in 1984 and loaned it to the National Archives in whose rotunda it has been exhibited, until now, alongside the U.S. Constitution and the Bill of Rights. It belongs with them, historically, legally.

In the spring of 1776 Tom Paine wrote Common Sense. He called on Americans to frame "a continental charter, or Charter of the United Colonies (answering to what is called the Magna Carta of England)." He called for independence from the Crown and unity among the colonies. The Declaration of Independence was the first result of his call and it named several violations of Magna Carta in the 27 usurpations by George III including his "transporting us beyond Seas to be tried for pretended offences."

The U.S. Constitution of 1789 came after, and habeas corpus, "the Great Writ of Liberty" as it is known in English law, figures in its article one section nine. We find Magna Carta again in the Fifth Amendment of the Bill of Rights, and in the Fourteenth Amendment following the Civil War, because in those amendments persons are guaranteed "due process of law."

In the cases heard last week, 5 December, sixteen petitioners (four from Kuwait, twelve from Yemen) in Khaled A.F. Al-Odah et al v. U.S.A. quote Magna Carta's chapter 39, "No freeman shall be taken, or imprisoned, or disseised, or outlawed, or exiled, or in any way destroyed, nor will we go upon or send upon him, except by the lawful judgment of his peers or by the law of the land." Those final five words became "due process of law." The entire chapter was included in some colonial charters, it pervaded common law, and in time parts entered the U.S. Constitution.

I have quantified the relation of Magna Carta to the U.S. Constitution as interpreted by the Supreme Court by finding that it was cited by name 407 times in 195 different cases between 1790 and 2005. The cases concern major issues of American history ­ slavery, women's rights, corporations, death penalty, jury trials. The decisions in these cases turned on habeas and due process.

These precisely are denied to the Guatánamo Bay prisoners, first by President Bush and then by the Military Tribunals Act. Will the U.S. Supreme Court, sitting as it does in a chamber under a marble frieze which includes a seven foot bas-relief of a troubled King John gripping Magna Carta as if life depended on it, find for Magna Carta and give the prisoners a fair and square hearing?

Some due processes of law have been omitted by the Military Commissions Act of 2006: the prohibition of evidence obtained by torture, the ability to confront witnesses, the right to be represented by counsel, and the opportunity to rebut argument and testimony. The military tribunals are therefore an inadequate substitute for the remedies provided by habeas corpus. Two other provisions deriving from the same chapter are also relevant to the cases. Trial by jury and the prohibition of torture, both denied by Congress and the President to the Gitmo prisoners, have been carefully nurtured over the centuries from the tiny seeds in the same chapter of Magna Carta.

At one time these principles of Magna Carta comprised our common sense of liberty. Now that common sense is lost. There is a long shot that common sense may be recovered by discovering a sense of the commons, as follows:

Magna Carta is called Magna Carta because there was a smaller one, the Charter of the Forest. They both were lost after 1215 only to be recovered on 11 September 1217. Then, a new and profound theme appeared in The Great Charters of the Liberties of England, a theme expressed in one of the most complex and beautiful words of English language, the commons.

Chapter 7 of the Charter was amended to provide widows with fuel in the commons. Moreover, the entire Charter of the Forest recognized common rights to what in that day and age were hydrocarbon energy resources, or a commoner's wherewithal in the woodlands. The commons can act as a check to the greed of privatization, the lust for power, and the ambition for empire.

The sale at Sotheby's parallels the selling off of forests in Sumatra, Montana, Congo, Chiapas, Colorado - it is world-wide. And though it is merely an old piece of skin (vellum), still something of the spirit of our discommoning times is expressed by this sale: Ross Perot bought it for $1.5 million in 1984 and estimates for its sale next week go as high as $30 million.

Yet, can liberty be bought and sold? After chapter 39 comes chapter 40, and King John promises "to no one will we sell, to no one deny or delay right or justice."

The Global Establishment and Global Inequality

By Rainer Falk

World Economy and Development
November - December, 2007

In its most recent World Economic Outlook even the International Monetary Fund (IMF) dealt with the issue of "globalisation and inequality". In the last two decades, according to the IMF, income inequality has increased in most regions and in most countries worldwide. At the same time, however, per capita incomes rose as well, even for the poorest. Since the income of the well-to-do rose much faster inequality increased. The IMF pinpoints technological progress - and financial globalisation - as major factors in this development. Contrary to popular belief, the IMF says, trade globalisation triggered a reduction in inequality thus partially offsetting the negative effects of technology and financial globalisation (for example by making globally traded products and services cheaper).

IMF: Welcome to the club

The IMF's strange line of argumentation can be easily discarded as Mark Weisbrot shows in a comment in the International Herald Tribune (18.10.2007) by exposing the selective perception of the fund's authors: They simply overlook the extensive processes of change in world economy, caused for example by the IMF's own reform agenda. Case in point: The drastic slow-down in per capita income growth in most middle- and low-income countries. Moreover, one can hardly separate globalisation and technological innovation the way the IMF authors try to do. Indeed, globalisation processes are inconceivable without technical progress and vice versa.

After all, the IMF demands that in the future the fruits of globalisation and economic progress be distributed more evenly among the people. The suggested instruments - more education, better access to financing, more trade liberalisation for example for agricultural products from developing countries - are not particularly original but they demonstrate that the IMF has finally joined the wing of the international economics establishment which is busy trying to find out how to fend off the anticipated "globalisation backlash".

Academic doubts

Firstly, academic economists - and not only unconventional thinkers such as Paul Krugman or Joseph Stiglitz - are getting increasingly fidgety. This summer, the former US government advisor Matthew Slaughter and Kenneth F. Scheve published their call for a "New Deal for Globalization" in Foreign Affairs (Jul-Aug 2007). They say: "Globalization has brought huge overall benefits, but earnings for most US workers - even those with college degrees - have been falling recently; inequality is greater now than at any other time in the last 70 years. Whatever the cause, the result has been a surge in protectionism. To save globalization, policymakers must spread its gains more widely. The best way to do that is by redistributing income."

The authors draw clear links between globalisation and living standards: "US policy is becoming more protectionist because the American public is becoming more protectionist, and this shift in attitudes is a result of stagnant or falling incomes. Public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor."

Taxing globalisation's winners

Secondly, renowned and internationally read papers that in the past have fiercely defended the advantages of free trade and globalisation are now looking at how the other half lives. In the Wall Street Journal ("The Case for Taxing Globalization's Big Winners"; 14.6.2007), David Wessell arrived at the following conclusion: "What to do? To preserve political support for the globalization dividend, spread the benefits more broadly by taxing winners more and losers less... Counting on the inevitability of globalization is imprudent; politics and policy can interfere. Expecting market forces to reverse the recent trend toward ever-bigger winnings for those at the top is unwise; the forces are too strong. Taxing winners isn't without risk; as Mr. Summers says, globalization makes it easier for them to 'pick up their marbles and go somewhere else.' But using the tax code to slice the apple more evenly is far more palatable than trying to hold back globalization with policies that risk shrinking the economic apple."

In a Financial Times editorial entitled "Globalisation needs more than PR to be sold to its losers" we are told: "Many people do not mind that Bill Gates or Warren Buffett are worth billions. Both earned their wealth under the set of rules that apply to most others in rich countries. But the worry is that the global market system works to the disadvantage of people in already low-paid, low-skilled jobs in developed economies. So government policies should focus on enabling the individual to feel as confident as possible within the global system. This could be through funding additional training or other means to help those who have lost their jobs to re-enter the market quickly. It might also imply a more progressive tax system, partial wage insurance, and untying social benefits such as basic healthcare from jobs to avoid undue fears of unemployment."

From Pascal Lamy to Angel Gurria

Thirdly, even the orthodox international defenders of the faith begin to voice doubts as the IMF example above shows. The IMF is neither the first nor the only one. In a speech held in Peking, WTO director Pascal Lamy dealt with the dark side of globalisation: "The speed of globalisation is affecting our social fabric in a much harsher way than in previous stages of globalisation. If globalisation has benefited some individuals, it has also weakened the position of many others, in particular the weakest and poorest among us, whether in developed or developing countries. Hence, one of the most important challenges of our generation is to ensure that the benefits of globalisation are more fairly and widely shared, and in particular that they reach more people in developing countries."

Along the same line the most recent OECD employment outlook (see reference) contained a chapter "OECD workers in the global economy: increasingly vulnerable?". In a press release, the OECD elaborated: "Rather than seeing globalisation as a threat, OECD governments should focus on improving labour regulations and social protection systems to help people adapt to changing job markets." The report examines in detail how offshoring weakens the bargaining power of less qualified workers: "Whether real or threatened, the prospect of offshoring may be increasing the vulnerability of jobs and wages in developed countries."

The OECD report praises the so-called Flexicurity, a concept practised in Denmark and Austria: "In Austria, for example, workers have individual savings accounts, instead of traditional severance pay schemes, that move with them as they move jobs. If they lose their job, they can choose to withdraw funds from the account or save the entitlements built up towards a future pension." The authors concede that in the course of globalisation job insecurity may increase permanently while employers become ever more vulnerable to external shocks. OECD Secretary General Angel Gurria tries to immediately placate the worriers by pointing out that the job loss threat is highly overestimated. He urged politicians to present the advantages and disadvantages of globalization in a more balanced way: "The story has to be told better".

This recommendation did not impress the Financial Times. In an editorial the paper agreed that better PR might do some good, but insisted that above all governments need to do more to help the globalization losers. Which in turn prompted US economist Dani Rodrik to comment: "You know something is going on when the FT berates globalization's cheerleaders for their complacency."

• FEDS INVESTIGATE SHARPTON FINANCES

• Racial agitator and Founder of the National Action Network
• Helped incite anti-Jewish riots in Crown Heights, New York in 1991 in which a Jewish student was murdered
• Convicted of libel for his role in the Tawana Brawley hoax
• Incited anti-Semites against Freddy's Mart which was burned by one of Sharpton's followers, killing seven people
• Democratic Party presidential candidate, 2004

According to the New York Daily News: "Teams of federal agents swooped down on up to 10 close associates of the Rev. Al Sharpton Wednesday, demanding the flamboyant clergyman's financial records since 2001. Sharpton's former chief of staff said he was roused at his Harlem home about 6:30 a.m. by two FBI agents who handed him a subpoena to bring the records to a federal grand jury the day after Christmas. Several employees of Sharpton's National Action Network also got wakeup subpoenas to testify before the Brooklyn panel, the rabble-rousing reverend's lawyer said.

"The FBI and IRS are investigating whether Sharpton improperly misstated the amount of money he raised during his 2004 White House run to illegally obtain federal matching funds, a source familiar with the probe said. Sharpton, although forced to return $100,000 in matching taxpayer funds after an investigation two years ago, denied any wrongdoing at the time. The feds are also looking into allegations of tax fraud, including whether Sharpton commingled funds from his nonprofit National Action Network with several of his for-profit ventures, the source said.

Alfred Charles Sharpton was born in Brooklyn, New York in 1954, to comparatively prosperous parents. He demonstrated considerable verbal dexterity at an early age and was touted as "the Wonder Boy Preacher" by age 7, when he toured with gospel singer Mahalia Jackson and F.D. Washington, the Pentecostal minister of the Washington Temple Church of God in Christ in Brooklyn. Washington personally ordained Sharpton a minister at age 9.

Sharpton's parents divorced when he was 10, leaving Sharpton and his mother impoverished. In 1969 he began his affiliation with Jesse Jackson, who appointed him youth director of Operation Breadbasket, a group that boycotted businesses which did not hire blacks.

In 1971 Sharpton established the National Youth Movement, an organization that sought to fight drug use and to raise money for impoverished youth. He would lead the group for the next 17 years.

Sharpton dropped out of Brooklyn College after two years and has had no additional higher education or formal seminary training since. Upon the completion of his academic career, he began working for the entertainer James Brown and, later, for boxing promoter Don King. He made an unsuccessful run for the New York State Senate in 1978.

A 2002 telecast of HBO's Real Sports with Bryant Gumbel showed a 1983 FBI surveillance video in which Sharpton was taped discussing a money-laundering scheme with mobster-turned-informant Michael Franzese, onetime captain for the Colombo crime family. On the tape, Sharpton appeared to offer to broker a meeting between Don King and a South American drug lord. No indictments were filed.

Sharpton first entered the national consciousness in November 1987, when he injected himself into the case of 15-year-old Tawana Brawley, who claimed that she had been abducted, raped, and smeared with feces by a mysterious gang of six whites that included some law-enforcement officers in Dutchess County, New York. Despite a complete absence of any credible evidence, Sharpton (along with attorneys Alton Maddox and C. Vernon Mason) made increasingly wild accusations, culminating in charges that then-Duchess County assistant prosecutor Steve Pagones was one of Brawley's assailants. Sharpton appeared on the Phil Donahue and Geraldo Rivera programs, Nightline, and other local and national television shows repeating his claims about Pagones and calling him a sexual predator. Brutal anti-Semitic statements were made by both Sharpton and Maddox about New York State Attorney General Robert Abrams.

Brawley's account was eventually demonstrated to be without basis by extensive testing and investigation by law-enforcement officials; a grand jury dismissed Brawley's accusations.

When Pagones sued Sharpton for defamation of character in 1997, the latter portrayed himself as a wrongly persecuted man of honor who, mysteriously, could "no longer recall" having made a number of his slanderous accusations against Pagones and other law-enforcement officials years earlier. When asked whether he had made even the slightest attempt to verify Brawley's allegations about Pagones before going public with them, Sharpton self-righteously retorted, "I would not engage in sex talk with a 15-year-old girl." Pagones won a court judgment against Sharpton for $345,000, which Sharpton never paid. Moreover, during the decade prior to Pagones' long-awaited vindication in court, the former prosecutor had suffered constant stress and anxiety (exacerbated by numerous death threats from Sharpton's credulous followers) that contributed heavily to the devastating dissolution of Pagones' marriage and the virtual ruin of his life. Sharpton has never acknowledged or apologized for what he did to Pagones.

In 1991 Sharpton formed the National Action Network, whose platform "revolves around activism against racial profiling, police brutality, women's issues, economic reform, public education, international affairs, including abolishing slavery in Africa, job awareness, AIDS awareness, and more."

That same year, anti-Semitic riots in Brooklyn's Crown Heights section erupted after 7-year old Gavin Cato, a black child, was accidentally killed by an out-of-control car driven by a Hasidic Jew. Within three hours, a black mob had hunted down and killed an innocent rabbinical student, Yankel Rosenbaum. Sharpton fanned the flames of racial hatred by publicly announcing that it was not merely a car accident that had killed Gavin Cato, but rather "the social accident of apartheid." He organized angry demonstrations and challenged local Jews -- who he derisively called "diamond merchants" -- to "pin their yarmulkes back and come over to my house" to settle the score. Finally he claimed, without proof, that the Jewish driver had run over the Cato children while in a drunken stupor. Stirred in part by such rhetoric, hundreds of Crown Heights blacks took violently to the streets for three days and nights of rioting. Sharpton reacted to chaos by stating, "We must not reprimand our children for outrage, when it is the outrage that was put in them by an oppressive system."

After 1991, Sharpton attempted to magnify his political profile, running unsuccessfully for Senate in 1992 and 1994, and receiving 32 percent of the vote in the 1997 Democratic mayoral primary in New York City.

In 1995 Sharpton led his National Action Network in an ugly boycott against Freddy's Fashion Mart, a Jewish-owned business in Harlem, New York. The boycott started when Freddy's owners announced that because they wanted to expand their own business, they would no longer sublet part of their store to a black-owned record shop. The street leader of the boycott, Morris Powell, was the head of Sharpton's "Buy Black" Committee. Repeatedly referring to the Jewish proprietors of Freddy's as "crackers," Powell and his fellow protesters menacingly told passersby, "Keep [going] right on past Freddy's, he's one of the greedy Jew bastards killing our [black] people. Don't give the Jew a dime." Some picketers openly threatened violence against whites and Jews -- all under the watchful, approving eye of Sharpton. The subsequent picketing became increasingly menacing in its tone until one of the protesters eventually shot four whites in the store and then set the building on fire -- killing seven employees, most of whom were Hispanics.

In 2001 Sharpton's National Action Network urged a boycott of Arab-owned gas stations in Michigan, alleging that Arabs engaged in racial profiling and citing instances of Arab violence against blacks. Sharpton, needing to restore his credentials with the Arab community, reversed his ground in 2002.

A harsh critic of the war in Iraq, Sharpton has called for an immediate withdrawal of all U.S. troops from the region. "Mr. Bush put the honor of this nation aside when he deceived the public by putting us in harm's way with no weapons of mass destruction," he said. Sharpton is also opposed to the Patriot Act, which in June 2003 he characterized as "unpatriotic illegitimate legislation."

Sharpton campaigned for the U.S. presidency in 2004, unsuccessfully. But the Democratic Party establishment allowed him to speak in the 9 p.m. prime-time slot on the third day of its national convention.

In August 2005 Sharpton visited antiwar activist Cindy Sheehan in Crawford, Texas to show support for her anti-war, anti-Bush protest campaign.

Sharpton has been a featured speaker at the Socialist Scholars Conference, which is held each year by the City University of New York's chapter of the Democratic Socialists of America. Past speakers and panel members have included Michael Moore, Noam Chomsky, Stanley Aronowitz, John Bellamy Foster, Ron Dellums, Jerrold Nadler, and Major Owens.

Sharpton currently hosts his own radio program, which airs for three hours each weekday in New York. Posted by Lucas Rosemblatt at 11:43

Analysis: India intel fails to halt terror

disclaimer: image is for illustration purposes only

India says its state intelligence departments are not equipped to take on terrorism following failures that have put their efficiency in doubt.

"The repeated intelligence failures of SIDs have put their efficiency in handling terrorism in doubt," said Interior Minister Shivraj Patil.

Patil said officials in the state intelligence departments should be retained for sufficient periods and given incentives to improve the bodies' functioning. SIDs were criticized following the serial bomb blasts at courts in the northern Indian state of Uttar Pradesh and others across the nation.

"Intelligence collection of all state agencies is not at fault. But the problem lies with human intelligence gathering, which is believed to be more accurate and requires skill," said Nikhil Kumar, an intelligence expert and former head of the National Security Guard, an elite national security agency.

The state intelligence agencies, however, have argued they don't have a dedicated staff and are running short of funds. They are viewed as places to dump reluctant officials.

According to a federal Interior Ministry official, the government is thinking of formulating a comprehensive action plan to rejuvenate the state intelligence departments to equip them with modern gadgets, adequate funding and a proper and effective staff. The draft action plan is expected to be deliberated upon Dec. 20 when Prime Minister Manmohan Singh is expected to chair a meeting of state chief ministers to discuss issues relating to internal security and the functioning of state intelligence departments.

The Interior Ministry set up an inter-ministerial group on security-related issues within the ministry. The group was assigned the task of formulating a plan to tackle terrorism. The group, which held its fifth meeting Tuesday, reportedly drafted a plan that is expected to be presented before the chief minister-level meeting.

Factors affecting the motivation and performance of the state intelligence departments are a lack of continuity in tenures, absence of executive powers and negligible recognition in society. The Interior Ministry has advised state governments to grant longer tenures to officials so they can cultivate informers and sharpen intelligence gathering.

"The officials at the state intelligence departments have not been working effectively. In fact, they are apathetic to their responsibilities and duties. Their source of intelligence-gathering is local police," said Ajai Sahani, executive director of Center for Conflict Management, a non-governmental organization that deals with security and terrorism-related matters.

Sahani said increasing the numbers of officials in state intelligence agencies would not help improve their functioning, as what matters in intelligence is the quality and dedication of the officials, not their numbers. Generally, officials in SIDs are given a term of three years and in many cases they were transferred even before completing their terms due to political pressure. A parliamentary standing committee attached to the Interior Ministry in its report suggested that a term of at least five years should be given to the officials.

"What we need is to develop the concept of double-agents, which is not much in use. We need to expand our telephone and e-mail-interrupt systems and integrate them with the intelligence gathering and the investigating agencies," said Y.P. Singh, a former officer of the Indian Police Service.

There is a lack of trust between the federal and state intelligence agencies and police. This sometime leads to a serious clash among them. In a few cases where central intelligence agencies try to plant a mole in a terrorist outfit or insurgent group, police arrest the mole. The police argued that intelligence agencies do not give them prior information about their plans.

India has a four-tier intelligence setup, which includes special branches with local police, state intelligence departments, the Intelligence Bureau at the national-level and Research and Analysis Wing, responsible for foreign intelligence. All these agencies have a common grievance that their successes are not acknowledged while failures are magnified.

Dichter: NIE proves that Israel failed

Washington's stance on the Iranian nuclear threat in the wake of the National Intelligence Estimate will lead to a "regional Yom Kippur," in which other states besides Israel will be seriously threatened, Public Security Minister Avi Dichter said Saturday.

Public Security Minister Avi Dichter.
Photo: AP

"The softened intelligence report proves that Israel failed to provide the Americans with the whole picture concerning the Iranian nuclear threat," Dichter said during a speech at a 'Cultural Shabbat' event in Holon.

Nevertheless, the public security minister went on to say the US was a "powerful country" that conducts its affairs in a "logical manner" and, therefore, if Israel manages to convince it that Iran has not stopped its nuclear weapons program, this will have a major influence on the Americans.

He said the report does not reflect the severity of the Iranian threat and urged Israel and other countries to supply the US with new information and intelligence assessments.

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Regarding the Palestinians, Dichter warned that retired US general James Jones, who heads the mechanism to judge the implementation of road map obligations, is likely to get an inaccurate picture and that there were no guarantees he would not make a serious error of judgment regarding the Palestinians' commitments.

"Israel cannot allow a situation in which Hamas conducts a war of attrition from Gaza, while Israel is simultaneously holding negotiations with the Palestinians," said the public security minister.

Dichter stressed the need for the Palestinians to establish "real and operational" law enforcement, legislative and judicial systems.

On the issue of Jerusalem, he said there should be no argument about the fact that the Old City and the Temple Mount are part of Israel.

Concerning a possible peace deal with Syria, Dichter conceded that there could be no agreement without Israel withdrawing from the Golan and that the question was what guarantees Israel would receive in return.

The case against Kosovo independence

If I were to say that Israel deserved to qualify for the European championship, most local football fans might agree. Israel played really well - the best ever. However, England deserved to qualify too - especially if you look back in history: They invented the game, after all. Nevertheless, neither of them will be heading to the championship because there are certain rules and conditions which preclude that from happening.

An estimated 1,000 Kosovo Albanians participate in a pro-independence rally, Monday.
Photo: AP

If someone came along insisting that Israel and England take part in the finals anyway and made room for them by excluding teams that had won their places fair and square, such behavior would destroy the entire football enterprise. The championships would become meaningless.

This is how things work in professional sports. Agreed upon rules must be applied - equally across the board.

And that's also how international relations must work. Fair is fair and rules are rules.

For instance, when someone states: "Kosovo deserves independence," as my colleague Tonin Gjuraj, ambassador of Albania, did in his Jerusalem Post op-ed (November 27), people of good intentions would be inclined to first ask: What are the rules of the game?

OK, they would say, if that's possible, why not? But in this case the rules are clear: It is not possible without agreement from Serbia! International law, above all the UN Charter and its fundamental principle of sovereignty, guarantees territorial integrity and equality of states, and Kosovo is part of sovereign state - the Republic of Serbia. That has been approved once again by Resolution 1244 of the Security Council.

Regarding the rights of national minorities, Albanians of Kosovo included, it is clear that creating a state of their own is not one of those rights.

That is why Albania's ambassador, wisely choosing his words, claims that Kosovo deserves independence; he does not say that it has the right. He is advocating for his fellow Albanians - that is understandable - but also carefully avoiding mentioning that an independent Kosovo would be another Albanian state in Europe.

Two states, side by side, for about four million people - that would be difficult to explain to Israelis who are struggling to preserve a single Jewish state.

Creating a state for Kosovo could be a first step toward joining it with the Albanian state - that was Hitler's solution. Only during the Hitler period did a so-called Greater Albania exist, and only during the Nazi regime was Kosovo treated as a separate region by itself, named New Albania.

That was a time of ethnic cleansing which produced the Albanian majority in the area. How could anyone justify such an approach today? Wherever you look in history, Kosovo was part of either Serbia or some other empire that occasionally dominated in the Balkans, but never part of the Albanian s