FREELATAM

2008-05-26T18:41:00.001-07:00

Sex and the Sissy
PEEGY NOONAN

She was born in Russia, fled the pogroms with her family, was raised in Milwaukee, and worked the counter at her father's general store when she was 8. In early adulthood she made aliyah to Palestine, where she worked on a kibbutz, picking almonds and chasing chickens. She rose in politics, was the first woman in the first Israeli cabinet, soldiered on through war and rumors of war, became the first and so far only woman to be prime minister of Israel. And she knew what it is to be a woman in the world. "At work, you think of the children you've left at home. At home you think of the work you've left unfinished. . . . Your heart is rent." This of course was Golda Meir.

Golda Meir never cried 'sexism.'

Another: She was born in a family at war with itself and the reigning power outside. As a child she carried word from her important father to his fellow revolutionaries, smuggling the papers in her school bag. War and rumors of war, arrests, eight months in jail. A rise in politics -- administering refugee camps, government minister. When war came, she refused to flee an insecure border area; her stubbornness helped rally a nation. Her rivals sometimes called her "Dumb Doll," and an American president is said to have referred to her in private as "the old witch." But the prime minister of India preferred grounding her foes to dust to complaining about gender bias. In the end, and in the way of things, she was ground up too. Proud woman, Indira Gandhi.

And there is Margaret Hilda Roberts. A childhood in the besieged Britain of World War II -- she told me once of listening to the wireless and being roused by Churchill. "Westward look, the land is bright," she quoted him; she knew every stanza of the old poem. Her father, too, was a shopkeeper, and she grew up in the apartment above the store near the tracks. She went to Oxford on scholarship, worked as a chemist, entered politics, rose, became another first and only, succeeding not only in a man's world but in a class system in which they knew how to take care of ambitious little grocer's daughters from Grantham. She was to a degree an outsider within her own party, so she remade it. She lived for ideas as her colleagues lived for comfort and complaint. The Tories those days managed loss. She wanted to stop it; she wanted gain. Just before she became prime minister, the Soviets, thinking they were deftly stigmatizing an upstart, labeled her the Iron Lady. She seized the insult and wore it like a hat. This was Thatcher, stupendous Thatcher, now the baroness.

Great women, all different, but great in terms of size, of impact on the world and of struggles overcome. Struggle was not something they read about in a book. They did not use guilt to win election -- it comes up zero if you Google "Thatcher" and "You're just picking on me because I'm a woman." Instead they used the appeals men used: stronger leadership, better ideas, a superior philosophy.

* * *

You know where I'm going, for you know where she went. Hillary Clinton complained again this week that sexism has been a major dynamic in her unsuccessful bid for political dominance. She is quoted by the Washington Post's Lois Romano decrying the "sexist" treatment she received during the campaign, and the "incredible vitriol that has been engendered" by those who are "nothing but misogynists." The New York Times reported she told sympathetic bloggers in a conference call that she is saddened by the "mean-spiritedness and terrible insults" that have been thrown "at you, for supporting me, and at women in general."

Where to begin? One wants to be sympathetic to Mrs. Clinton at this point, if for no other reason than to show one's range. But her last weeks have been, and her next weeks will likely be, one long exercise in summoning further denunciations. It is something new in politics, the How Else Can I Offend You Tour. And I suppose it is aimed not at voters -- you don't persuade anyone by complaining in this way, you only reinforce what your supporters already think -- but at history, at the way history will tell the story of the reasons for her loss.

So, to address the charge that sexism did her in:

It is insulting, because it asserts that those who supported someone else this year were driven by low prejudice and mindless bias.

It is manipulative, because it asserts that if you want to be understood, both within the community and in the larger brotherhood of man, to be wholly without bias and prejudice, you must support Mrs. Clinton.

It is not true. Tough hill-country men voted for her, men so backward they'd give the lady a chair in the union hall. Tough Catholic men in the outer suburbs voted for her, men so backward they'd call a woman a lady. And all of them so naturally courteous that they'd realize, in offering the chair or addressing the lady, that they might have given offense, and awkwardly joke at themselves to take away the sting. These are great men. And Hillary got her share, more than her share, of their votes. She should be a guy and say thanks.

It is prissy. Mrs. Clinton's supporters are now complaining about the Hillary nutcrackers sold at every airport shop. Boo hoo. If Golda Meir, a woman of not only proclaimed but actual toughness, heard about Golda nutcrackers, she would have bought them by the case and given them away as party favors.

It is sissy. It is blame-gaming, whining, a way of not taking responsibility, of not seeing your flaws and addressing them. You want to say "Girl, butch up, you are playing in the leagues, they get bruised in the leagues, they break each other's bones, they like to hit you low and hear the crack, it's like that for the boys and for the girls."

And because the charge of sexism is all of the above, it is, ultimately, undermining of the position of women. Or rather it would be if its source were not someone broadly understood by friend and foe alike to be willing to say anything to gain advantage.

* * *

It is probably truer that being a woman helped Mrs. Clinton. She was the front-runner anyway and had all the money, power, Beltway backers. But the fact that she was a woman helped give her supporters the special oomph to be gotten from making history. They were by definition involved in something historic. And they were on the right side, connected to the one making the breakthrough, shattering the glass. They were going to be part of breaking it into a million little pieces that could rain down softly during the balloon drop at the historic convention, each of them catching the glow of the lights. Some network reporter was going to say, "They look like pieces of the glass ceiling that has finally been shattered."

I know: Barf. But also: Fine. Politics should be fun.

Meir and Gandhi and Mrs. Thatcher suffered through the political downside of their sex and made the most of the upside. Fair enough. As for this week's Clinton complaints, I imagine Mrs. Thatcher would bop her on the head with her purse. Mrs. Gandhi would say "That is no way to play it." Mrs. Meir? "They said I was the only woman in the cabinet and the only one with -- well, you know. I loved it."

The Obama Learning Curve

Senate Foreign Relations Committee Chairman Joe Biden took to the airwaves this week to "help" the rookie Barack Obama out of a foreign-policy jam. Oh sure, admitted Mr. Biden, the presumptive Democratic nominee had given the "wrong" answer when he said he'd meet unconditionally with leaders of rogue states. But on the upside, the guy "has learned a hell of a lot."

Somewhere Mr. Obama was muttering an expletive. But give Mr. Biden marks for honesty. As Mr. Obama finishes a week of brutal questioning over his foreign-policy judgments, it's become clear he has learned a lot – and is learning still.

Right now, for instance, he's learning how tough it can be to pivot to a general-election stance on the crucial issue of foreign policy. He's also learning Democrats won't be able to sail through a national-security debate by simply painting John McCain as the second coming of George Bush.

Remember how Mr. Obama got here. In a July debate, the Illinois senator was asked if he'd meet, "without preconditions," the "leaders of Iran, Syria, Venezuela, Cuba and North Korea." It was an unexpected question, and Mr. Obama rolled with his gut: "I would," he said, riffing that the Bush administration's policy of not negotiating with terror-sponsoring states was "ridiculous."

Hillary Clinton, who still had the aura of inevitability, and who was already thinking ahead to a general election, wouldn't bite. At that point, any initial misgivings the Obama campaign had about the boss's answer disappeared. Mr. Obama hadn't got much traction differentiating himself from Mrs. Clinton over Iraq, but this was a chance to get to her left, to cast her to liberal primary voters as a warmonger. Which he did, often, committing himself ever more to a policy of unfettered engagement.

Today's Obama, all-but-nominee, is pitching to a broad American audience less keen to legitimize Iranian President Mahmoud Ahmadinejad, who provides weapons that kill American soldiers. The senator clumsily invited this debate when he took great umbrage to President Bush's recent criticism of appeasers (which, in a wonderfully revealing moment, Democrats instantly assumed meant them). Mr. Obama has since been scrambling to neutralize his former statement.

A week ago, in Oregon, he adopted the "no-big-deal" approach, telling listeners Iran was just a "tiny" country that, unlike the Soviet Union, did not "pose a serious threat to us." But this suggested he'd missed that whole asymmetrical warfare debate – not to mention 9/11 – so by the next day, he'd switched to the "blame-Republicans" line. Iran was in fact "the greatest threat to the United States and Israel and the Middle East for a generation" – but all because of President Bush's Iraq war.

This, however, revived questions of why he'd meet with said greatest-threat leader, so his advisers jumped in, this time to float the "misunderstood" balloon. Obama senior foreign policy adviser Susan Rice, channeling Bill Clinton, said it all depended on what the definition of a "leader" is. "Well, first of all, he said he'd meet with the appropriate Iranian leaders. He hasn't named who that leader will be." (Turns out, Mr. Obama has said he will meet with . . . Mr. Ahmadinejad.)

Former Sen. Tom Daschle, channeling Ms. Rice, explained it also depended on what the definition of a precondition is: "It's important to emphasize again when we talk about preconditions, we're just saying everything needs to be on the table. I would not say that we would meet unconditionally." This is called being against preconditions before you were for them.

And so it goes, as Mr. Obama shifts and shambles, all the while telling audiences that when voting for president they should look beyond "experience" to "judgment." In this case, whatever his particular judgment on Iran is on any particular day.

It wasn't supposed to be this way. Democrats entered this race confident national security wouldn't be the drag on the party it has in the past. With an unpopular war and a rival who supports that war, they planned to wrap Mr. McCain around the unpopular Mr. Bush and be done with it. Mr. Obama is still manfully marching down this road, today spending as much time warning about a "third Bush term" as he does reassuring voters about a first Obama one.

Then again, 9/11 and five years of Iraq debate have educated voters. Mr. McCain is certainly betting they can separate the war from the urgent threat of an Iranian dictator who could possess nukes, and whose legitimization would encourage other rogues in their belligerence. This is a debate the Arizonan has been preparing for all his life and, note, Iranian diplomacy is simply the topic du jour.

Mr. McCain has every intention of running his opponent through the complete foreign-policy gamut. Explain again in what circumstances you'd use nuclear weapons? What was that about invading Pakistan? How does a policy of engaging the world include Mr. Ahmadinejad, but not our ally Colombia and its trade pact?

It explains too the strong desire among the McCain camp to get Mr. Obama on stage for debates soon. There's a feeling Mr. Obama is still climbing the foreign-policy learning curve. And they see mileage in his issuing a few more gut reactions.

'Nothing but Misogynists'

By DONALD J. BOUDREAUX

Hillary Clinton is now complaining that her candidacy has been harmed by sexism. Interviewed earlier this week by the Washington Post, Sen. Clinton said the polls show that "more people would be reluctant to vote for a woman [than] to vote for an African American." This gender bias, she grumbled, "rarely gets reported on."

So a woman who holds degrees from Wellesley and Yale – who has earned millions in the private sector, won two terms in the U.S. Senate, and gathered many more votes than John Edwards, Bill Richardson and several other middle-aged white guys in their respective bids for the 2008 Democratic nomination – feels cheated because she's a woman.

Seems doubtful. But hey, I'm a guy and perhaps hopelessly insensitive. So let's give her the benefit of the doubt and assume that her campaign has indeed suffered because of sexism.

This fact (if it be a fact) reveals a hitherto unknown, ugly truth about the Democratic Party. The alleged bastion of modern liberalism, toleration and diversity is full of (to use Mrs. Clinton's own phrase) "people who are nothing but misogynists." Large numbers of Democratic voters are sexists. Who knew?

But here's another revelation. If Mrs. Clinton is correct that she is more likely than Barack Obama to defeat John McCain in November, that implies Republicans and independents are less sexist than Democrats.

It must be so. If American voters of all parties are as sexist as the Democrats, Mr. Obama would have a better chance than Mrs. Clinton of defeating Mr. McCain. The same misogyny that thwarted her in the Democratic primaries would thwart her in the general election. Only if registered Republicans and independents are more open-minded than registered Democrats – only if people who lean GOP or who have no party affiliation are more willing than Democrats to overlook a candidate's sex and vote on the issues – could Mrs. Clinton be a stronger candidate.

I am neither a Democrat nor a Republican. But if I ever become convinced that Mrs. Clinton is correct that sexism played a role in her disappointing showing in the Democratic primaries – and that she truly is her party's strongest candidate to take on John McCain – I might finally join a party: the GOP. At least it's not infested with sexists.

Mr. Boudreaux is chairman of the economics department at George Mason University.

John Boehner
Minority Leader in a Storm

By KIMBERLEY A. STRASSEL

"Awful. Awful." That's John Boehner's candid answer when I ask what life is like for House Republicans these days. The question the 58-year-old minority leader is pondering is how long that awfulness will last.

The GOP is in a panic after a string of special election defeats that suggest voters haven't forgiven Republicans for straying from small-government principles. Rival wings of the party are fighting over where to go next. About the only thing everyone agrees on: If the GOP doesn't redefine itself soon, it's facing a rout this fall.

Ismael Roldan

Elected two years ago because of his reputation as a reformer, Mr. Boehner and his team recently unrolled its election-year agenda, entitled "Change You Deserve." It will attempt to show voters that the GOP is again ready to lead on everything from health care to energy to taxes.

Yet Mr. Boehner knows he's pushing a big rock up a steep hill. Asked how he might "win" back a majority, he cuts me off: "Earn. Earn back the majority. . . . we have to show the American people that we learned our lesson from the '06 election. That we hear what they are saying. And that means things like getting earmarks under control . . . balancing the budget, being willing to take on the tough job of entitlement reform, or the really tough job of a health-care system that insures all Americans and allows them control over who their doctor is."

Says Mr. Boehner: "My job is to lead the 200 of us on the Republican side into being real agents of change." He adds, "Some are more open to that than others."

That might be the minority leader's greatest challenge. His predecessor, Tom "the Hammer" DeLay from Texas, rankled many with his dictatorial style. Mr. Boehner, from Ohio, has tried to rule more by consensus, pushing members to voluntarily unite. When it works, it works brilliantly, as when Mr. Boehner rallied nearly every Republican to stand against House Democratic attempts to defund the Iraq war.

Getting members to abandon the bad habits that have lost them respect among voters is harder. Mr. Boehner stands as a role model, having never requested nor received an earmark, and having fought for reform legislation like the 2006 pension overhaul. Yet his example alone hasn't moved some Republicans to shape up. Consider his unsuccessful attempt to get House GOP members to agree to a unilateral earmark moratorium.

"The team's not ready to go there," he says, consternation in his big bass voice. Why do so many Republicans refuse to swear off pork? "I'm sure with some it's maybe about elections . . . And another group believes that the Constitution says that all spending rests with Congress; they believe that directing some of the spending to their district is part of their job."

Mr. Boehner is not in that group. "I just happened to tell my constituents when I wanted to come here that if they thought my job was to come and rob the federal Treasury on their behalf they were voting for the wrong guy. I said it, I meant it. It might have been the best decision I ever made."

The recent farm bill was a $300 billion, subsidy-laden grab bag of handouts to special interests. Mr. Boehner railed against the legislation on the House floor, urging GOP members to vote against it. The bill passed by a huge margin with the help of 100 Republicans. President Bush vetoed it, and the House promptly overrode the veto. "I wouldn't describe the farm bill we're voting on as change," he told me in something of an understatement. "As I said on the floor, we can do better."

Perhaps that's why Mr. Boehner has recently switched from cajoling to trying to use the GOP's recent misfortunes to scare Republicans out of their torpor. Some in his party are already marking down the special election losses in conservative districts in Illinois, Louisiana and Mississippi to lack of money, bad candidates and a poor message. Mr. Boehner is painting the defeats as "real wake-up calls" and warning members to think hard: "Every race is different, and there are a lot of reasons why those three races were lost. But it is clear that the American people are anxious for change. . . . and Republicans have to show we can be ready to deliver it."

As for what message Republicans should adopt to prove they've changed, Mr. Boehner is not hurting for suggestions. I ask what he thinks of a 20-page memo recently delivered to the Republican leadership by Virginia Rep. Tom Davis. This analysis declared the environment for Republicans as "toxic," outlined their financial and perception problems, and suggested the House GOP proactively embrace an emergency housing package and jump on board an energy bill that includes global-warming provisions.

"I read it, I thought it was insightful," Mr. Boehner replies. "I thought it was honest. Members all ought to read it and learn from it, in terms of helping them understand that we've got to be serious about delivering change." But he adds a caveat: "We're talking about the right kind of change, not change for change's sake. We want change rooted in freedom."

And how about Mr. Davis's suggestions the party needs quickly to distance itself from President Bush and his subterranean poll numbers? The minority leader suggests that if the party chooses simply to focus on the problems of President Bush rather than its own, it won't do itself any favors. "The president is the president of the United States and will be until January 20 next year. . . . elections are about the future and not about the past, and we've got to show people that if they were to honor us with the majority, this is what we'll do. When people go to the polls in November, they are going to be voting for Barack Obama or John McCain (or maybe Hillary Clinton). Our members are on the ballot, they've got opponents. George Bush isn't on the ballot."

The first part of Mr. Boehner's "Change You Deserve" agenda started last week, with an attempt to pitch the party's free-market ideals at the needs of modern working families with "flex time" laws and better tax policies for small business owners. This week's focus was energy, with promises to boost all energy supplies here at home to help lower prices and create jobs. In subsequent weeks they will tackle health care, taxes and security. This week, however, another blast of advice arrived on Mr. Boehner's doorstep from the conservative Republican Study Committee, many members of which feel the House leadership's new agenda is too diffuse.

Mr. Boehner's view? "As I told the members, our agenda was put together by listening to our members, and as we move forward we are going to continue listening to our members. A lot of what they offered is already in our product. I'm going to announce a meeting later this week to talk about our economic package, and we're going to bring members in who want to bring more to the package."

One message Mr. Boehner is interested in adopting is that of John McCain. The minority leader clearly realizes that at a time when the public is angry with the same-old, same-old, the Arizona senator's reformist line has resonance. He's also no doubt realized it might be in Mr. McCain's interest to run against Congressional Republicans. "I want [the Republican members] to understand, it's a presidential election year, he's our nominee. He has his own Republican brand, and part of my goal, I've told them, is to work with the McCain campaign and our folks so that our agendas are identical, our themes are the same."

Mr. Boehner's hope is that his members can project enough "change" of their own to benefit from McCain voters. "We've got 29 retirements, though 22 or 23 of those are in solid Republican seats with good candidates. But we're going to have a handful of tough open seats to defend. Still, when you begin to look at the 61 Democrat districts that George Bush won in the '04 election, I'd argue John McCain will win more than 61 currently held Democrat seats. . . . The goal is, if they're going to go vote for McCain, we just need them to vote for our candidate at the same time. But it means we need to have a credible candidate on the ballot, we need to have issues."

Another part of the Boehner strategy is hammering Democrats, an approach that has at least some in his conference worried Republicans should be spending more time promoting their own "change" message. But Mr. Boehner thinks part of the approach has to be reminding voters that "all the American people have gotten from the Democrat majority in Congress are long lists of broken promises."

The minority has spent its tenure pushing votes that forced freshman Democrats in particular to choose between their more liberal leadership and their more conservative districts. Mr. Boehner is hoping those votes will play in some of the tougher House races this year.

"These are things like voting for the largest tax increase in American history. They voted for a budget last year that had a $450 billion hole in it; this year a $685 billion hole in it, and at some point they are going to have to say if they are for the 15% capital gains rate expiring, or the death tax expiration expiring, or the 15% rate on dividends expiring, or marriage penalty relief, or the $1,000 per child tax credit. Somebody is going to have to answer. That's going to be a big issue." Republicans are also angling to use what's left of this legislative calendar to pigeonhole Democrats into a few more uncomfortable spots, on Iraq war spending, or the debate over reauthorizing the wiretap law.

And Barack Obama? How does he play into this? What are his weaknesses? "Well," he says dramatically, rolling his eyes. "He has been a member of the United States Senate for three years and four months. And has done exactly one thing for exactly three years and four months: Run for president. He hasn't done anything. Who ever heard of a subcommittee chairman never having had a hearing?" (Mr. Obama chairs a Senate subcommittee on European affairs, which has not held a policy hearing since he took over as chairman in January 2007).

Will this prove enough to get Mr. Boehner out of this "awful" minority purgatory? "You know, I didn't like the cards that were dealt 16 months ago, but . . . my job is to play the hand as best I can. So it is what it is. And my job is to lead an effort for our team to earn back the majority. And I keep pushing them and pushing them and pushing them and pushing them. Because the only way we're gonna win it back is to earn it.

"Oh, we could get lucky and [voters] could get madder at the Democrats than they were at us but what kind of majority is that? I want us to earn our way back. And we're getting there. It's just a long, slow process."

Sudan

The south on the brink

Clashes in the middle of Sudan threaten the entire north-south peace accord

NOBODY seems to know how or why the fighting in Abyei, on Sudan's north-south fault line, began. But everyone knows that if it gets out of hand, the entire peace accord that has kept an edgy calm between north and south for the past three years could dissolve in a bloodbath.

In mid-May, rumours started to spread that a local militiaman in the pay of the northern government in Khartoum had been arrested by the police run by the main southern movement. A government soldier from the north was shot. Within hours, the town of Abyei was reverberating with the clatter of machinegun fire and the crashing of mortars and rocket-propelled grenades. Tens of thousands of the town's residents fled into the bush. UN helicopters were sent to evacuate terrified aid workers under heavy fire. At least 50 people were killed in several days of fighting.

The mood in Abyei, an oil-rich area straddling Sudan's north-south border, had been darkening for months. The ruling parties of north and south—the National Congress Party (NCP), headquartered in Khartoum, and the Sudan People's Liberation Movement (SPLM), with its nerve-centre in Juba—each claim the area as theirs. There had been sporadic incidents between proxies. But the clashes that erupted on May 14th were the first sustained bout of armed conflict between the northern-based national army and former guerrillas from the south.

Abyei is at the nub of the problems that have strained relations between north and south since the Comprehensive Peace Agreement (CPA)was signed in 2005, ending two decades of war in Africa's largest country. But an argument still festers over sharing oil revenue and demarcating the border between north and south. Trust between the two sides is patently lacking.

A particular row over drawing the border through the Abyei area was a big reason why, last year, the SPLM suspended its participation in various aspects of the peace deal. It complained that the government in the north was refusing to accept the findings of an international boundary commission, which put Abyei in the south. Though the SPLM later rejoined the Sudanese unity government based in Khartoum, it unilaterally sent one of its top men, Edward Lino, to run the Abyei area, which had had no proper administration for three years. But the northerners rejected him and sent several hundred heavily armed soldiers into Abyei town. “We don't want to fight,” says Mr Lino. “But we're not going to surrender just like that. They can't just come and take over our land and people.”

The mood in Abyei has long been twitchy because of historic animosity between the Misseriya nomads, some of whom are armed by northerners in the government in Khartoum, and the southern Ngok Dinka, who look to the SPLM for protection. Since time immemorial they have clashed over land and water. Such issues can usually be resolved locally but the groups have become pawns in a bigger game. If fighting between them gets bloodier, the north-south partnership in Khartoum could collapse.

In any event, the northerners, who are mainly Arabs, have been dragging their feet over the accord of 2005, not just over Abyei, but also over other border disputes. They have been slow to withdraw troops from the south, as agreed. Some observers think they want to provoke a crisis, so that a general election due next year cannot be held. The northerners are even more loth to contemplate a referendum, due in 2011, that is part of the agreement; the southerners are entitled to opt for secession and full independence. If that happened, the south would draw the benefits of Sudan's 500,000 barrels of oil a day, much of it pumped out of Abyei. Hence the tension over the border. The Abyei area alone is said to have produced oil worth $1.8 billion since the accord was signed. The south says it has seen none of the cash at all.

The SPLM's ability to negotiate and implement a border settlement is weakened by its own disunity. Some of its top men believe in a federal Sudan, with the south getting wide autonomy. Others believe passionately that the Muslim-dominated, Arab north will never co-operate with the Christian and animist south, and that independence is the only way.

Such differences are sharpened by fierce rivalries between the southern tribes. The Dinka, among them both the SPLM's leader, Salva Kiir, and his predecessor, the late John Garang, have long held the upper hand. Several of their top people, known as “the Garang boys”, are amenable, as was Mr Garang, to the idea of a federal Sudan with an autonomous south. Mr Kiir leans towards independence. The autonomy-versus-independence debate bubbles on, sometimes angrily.

The SPLM is holding its first party convention since 1994, when it was meant to heal divisions between Mr Garang and a group led by Riek Machar, now the south's vice-president, whose Nuer people are the Dinka's chief rivals. “Most of us want separation [ie, independence] but we are worried about the problems between the tribes,” says Hassan Kuku, a trader in Juba market. “We don't want more war over this.” Moreover, corruption has worsened, making everyone edgier about the future.

Meanwhile, a fear of lawlessness has returned. Though the southern guerrillas are supposed to have disarmed under the agreement, hundreds of civilians in the past week darted into their huts to grab their hidden AK-47s to join the present fray. The accord provided for joint units of northerners and southerners to act as a neutral force; but they never materialised.

The UN Mission in Sudan, known as UNMIS, is feeble. Its diplomats call for calm, but their ability to do good on the ground is impeded by the government in Khartoum, which never wanted the mission there in the first place and limits its ability even to move around freely. The 10,000-strong mission, including some 7,000 soldiers and police, has a weak mandate; its mainly Zambian units did little more than protect a nearby UN base when the hostilities in Abyei broke out.

Since then, some 50,000 civilians have fled into the bush, leaving Abyei town virtually deserted, a stark reminder that some 2m were killed and 4m displaced during the long conflict that ended in 2005. Hectic talks between politicians of north and south are going on in Khartoum.

Yet the continuing horrors of Darfur, in western Sudan, attract more of the world's attention. Many foreign government agencies and charities have switched their focus to Darfur. For the UN, tackling southern Sudan still seems a challenge too far.

2008-05-26T18:40:00.001-07:00

Sex and the Sissy
PEEGY NOONAN

Golda Meir never cried 'sexism.'

* * *

So, to address the charge that sexism did her in:

It is insulting, because it asserts that those who supported someone else this year were driven by low prejudice and mindless bias.

* * *

I know: Barf. But also: Fine. Politics should be fun.

The Obama Learning Curve

'Nothing but Misogynists'

By DONALD J. BOUDREAUX

Seems doubtful. But hey, I'm a guy and perhaps hopelessly insensitive. So let's give her the benefit of the doubt and assume that her campaign has indeed suffered because of sexism.

Mr. Boudreaux is chairman of the economics department at George Mason University.

John Boehner
Minority Leader in a Storm

By KIMBERLEY A. STRASSEL

Ismael Roldan

Says Mr. Boehner: "My job is to lead the 200 of us on the Republican side into being real agents of change." He adds, "Some are more open to that than others."

Sudan

The south on the brink

Clashes in the middle of Sudan threaten the entire north-south peace accord

2008-05-25T12:19:00.001-07:00

Mexican banks

Riding high

Mexico's fast-growing banks appear unusually unaffected by the financial crisis north of the border

AFTER the 1994 peso crash, the risk of Mexico's difficulties spilling over into America was considered so great that the Clinton administration helped bail out its southern neighbour. In the first quarter of 2008, the boot was on the other foot, though the scale was entirely different. Now it was the turn of Banamex, one of Mexico's two largest banks, to help out Citigroup, its crisis-stricken parent. Banamex provided $453m of the $1.1 billion Citi earned in net income from its overseas operations between January and March (Citi lost $5.1 billion overall). You could almost hear Vikram Pandit, Citi's new chief, mutter “Gracias, compadre.”

Yet Banamex was not even the best-performing of the Mexican banks. Of Mexico's five largest financial institutions (which control three-quarters of the market and also include Bancomer, Santander, HSBC and Banorte), it was the only one that did not show a big rise in year-on-year profits in the first quarter. The performance of the banks was impressive for two reasons. Firstly, Mexico has one of the most open banking systems in the world; two of its top five banks are Spanish-owned, one is American, one British, and only one is Mexican. Yet the crisis in global banking has barely ruffled it. Also, Mexico's economy is usually more exposed than almost any other to a slowdown in America. As Alejandro Valenzuela, boss of Banorte, delicately puts it: “Decoupling is the wrong word, but there is now a certain shield.”

That shield, however brittle, has been forged both from financial reform in recent years and from macroeconomic stability. On the financial front, lending has ballooned. According to the central bank, credit to the private sector has nearly tripled since 2001, while consumer credit has increased by around seven times. The banks have also feathered their nests with relatively high consumer-banking fees.

Meanwhile, the market has grown more sophisticated, thanks to some shrewd moves by regulators. Chief among these, according to an IMF working paper released this week, were reforms to bank-secrecy laws which allowed the creation of a successful credit-reporting system, as well as reforms to bankruptcy laws. These have given birth to a thriving mortgage-backed securities industry. If that sets off alarm bells, Alejandro Werner, the deputy finance minister, notes that over the past seven years, the accumulated increase in house prices in Mexico has been less than inflation: there is no bubble yet.

There are also economic reforms to thank. Marcos Martínez, the head of Santander in Mexico, says that infrastructure investment as well as a huge public-sector mortgage programme have boosted demand. It helps that Mexican GDP closely correlates with America's industrial production, rather than its overall economy. The brunt of the slowdown in America has been borne by the services sector.

Although Mexican economic growth is likely to remain sluggish, at something under 3%, the health of the banking industry is a salutary sign. For once, Mexicans can look northward with a sense of sympathy rather than envy.

Colombia and Venezuela

The FARC files

Just how much help has Hugo Chávez given to Colombia's guerrillas?

THEY represent only one side of a story, and most of their claims have yet to be independently corroborated. But Interpol has now concluded that the huge cache of e-mails and other documents recovered from the computers of Raúl Reyes, a senior leader of the FARC guerrillas killed in a Colombian bombing raid on his camp in Ecuador on March 1st, are authentic and undoctored. The documents throw new light on the inner workings of the FARC. And they raise some very pointed questions about the ties between Venezuela's leftist president, Hugo Chávez, and a group considered to be terrorists by the United States and the European Union (EU).

Batches of the documents have been seen by The Economist and several other publications. They appear to show that Mr Chávez offered the FARC up to $300m, and talked of allocating the guerrillas an oil ration which they could sell for profit. They also suggest that Venezuelan army officers helped the FARC to obtain small arms, such as rocket-propelled grenades, and to set up meetings with arms dealers.

Venezuelan officials have dismissed the documents as fabrications. That was contradicted by Ronald Noble, Interpol's secretary-general, who announced in Bogotá on May 15th, after two months of study by a team of 64 foreign experts, that the computer files came from the FARC camp and had not been modified in any way. Mr Chávez called this “ridiculous”, questioning the impartiality of Mr Noble, who is American, and labelling him a “gringo policeman”. However, in one indication of their accuracy, the documents provided information that in March guided police in Costa Rica to a house where they found $480,000 in cash, as an e-mail suggested.

The FARC are in some ways a throwback to a past era in Latin America. In other ways they are part of the new face of organised crime in the region. Old-fashioned Marxists unmoved by the collapse of the Soviet Union, they have flourished since then by drug-trafficking and kidnapping. Their war against Colombia's elected government has almost no public support, especially since they showed no interest in making peace during three years of talks with the government from 1999 to 2002. Since then, a determined security build-up by Álvaro Uribe, Colombia's popular president, has put the FARC on the defensive, driving it into remote jungles and savannahs—and towards the country's borders.

Mr Chávez has long expressed sympathy for the FARC. But Colombian officials, backed by detailed testimony from guerrilla deserters, accuse Venezuela and Ecuador of more than rhetoric, saying they have turned a blind eye to guerrilla camps on their territory. The killing of Mr Reyes, a member of the FARC's seven-man secretariat, underlined the point. The captured documents seem to confirm that FARC commanders have co-ordinated closely with Venezuelan army and intelligence officers on the border for several years, according to a Colombian official.

The documents also cast light on the FARC's strategic thinking. Its overriding objective seems to be to obtain international recognition as a “belligerent force” and to persuade the EU to stop labelling it a terrorist group. The guerrillas are desperate to establish a “strategic alliance” with Mr Chávez. But that was still just an aspiration in early 2007, the documents suggest. “We don't know if we enjoy their trust,” writes Jorge Briceño (alias “Mono Jojoy”), the FARC's military leader, to other members of the secretariat.

Contacts intensified last September after Mr Uribe asked Mr Chávez to mediate with the FARC to release the guerrillas' hostages, including Ingrid Betancourt, a politician with French and Colombian nationality. The secretariat agreed to send one of its members, Iván Márquez, to meet Mr Chávez in Caracas to talk about swapping the hostages for jailed guerrillas—but also, wrote Mr Briceño, “to lay the foundations for mutual political relations...even though this might be in the long term.”

At their meeting, Mr Chávez “approved totally and without batting an eyelid” a FARC request for $300m, Mr Márquez reported to his colleagues in a message published by Spain's El País and Colombia's Semana. In a long e-mail 12 days later, Mr Briceño notes that it was not clear whether the money was “a loan or for solidarity” but that the FARC should offer Mr Chávez help in return. According to a document obtained by the Wall Street Journal, Mr Chávez's interior minister, Ramón Rodríguez Chacín, asked the FARC to train Venezuelan soldiers in guerrilla tactics for use if the United States were to invade.

In an e-mail dated February 8th, Mr Márquez and a colleague report that Mr Chávez (whom they identify with the pseudonym “Ángel”) had told them that the first $50m was “available”, with another $200m over the course of the year. However, there is no corroboration as to whether any money was actually paid. Colombian officials have long said that the FARC was wealthy through drug money. So why were they so jubilant about the loan? Perhaps because army pressure against the guerrillas has disrupted their drug business. The government has evidence that some FARC fronts are short of cash and have trouble paying farmers for coca paste, says Sergio Jaramillo, the deputy defence minister.

The secretariat's e-mail correspondence sheds light on several other matters. It confirms that Manuel Marulanda, the FARC's veteran leader, is still alive and apparently in overall command. It also shows the FARC's cynicism about the plight of its hostages. Mr Briceño says repeatedly that he does not expect to achieve the hostage-for-prisoners swap while Mr Uribe is in power but that the FARC will keep pushing it to create problems for the president. When Mr Chávez asked for Ms Betancourt's release “we told him that if we did that we would be without cards,” Mr Márquez writes.

The e-mails show the extent to which the army has the FARC on the run: the secretariat members often complain of their difficulties in communicating with each other. Days after Mr Reyes was killed another member of the secretariat, Iván Ríos, was murdered by his own bodyguard. This week Mr Ríos's deputy, Nelly Ávila Moreno (aka “Karina”), surrendered. But the FARC is far from defeated. In an e-mail last August Mr Briceño notes that guerrilla landmines are undermining army morale. Their impact is “very good and we are going to increase them,” he writes.

The e-mails released so far represent only a fraction of the almost 40,000 written documents and 610 gigabytes of data on the computers. For all his bravado, Mr Chávez is clearly discomfited by all this. At a get-together of European and Latin American leaders in Lima on May 16th he was unusually conciliatory. Some Republicans in the United States have seized upon the computer cache as grounds for declaring Venezuela to be a state sponsor of terrorism. This could require the United States to impose trade sanctions on a country from which it buys some 10% of its imported oil—and so is unlikely to happen. And the e-mails are not a smoking gun implicating Mr Chávez unequivocally. It was Mr Márquez and other FARC commanders, not Mr Reyes, who handled relations with Venezuela. So there are no e-mails from Venezuelan officials on his computer.

Even so, the documents should trouble Venezuela's South American neighbours. None of them echoed Mr Chávez's call in January for the FARC to be recognised as legitimate belligerents. The centre-left governments in many countries are wary of Colombia's close alliance with the United States, which supplies it with military aid. But all have signed the Organisation of American States' democratic charter, requiring them to support, not undermine, each other's democracies. Last month José Miguel Insulza, the OAS's secretary-general, said that “no evidence” linked Venezuela to the FARC. But the evidence from the laptops suggests that there is certainly a case to be answered—by something more than a blustering denial.

2008-05-17T09:09:00.001-07:00

Drug violence in Mexico

Can the army out-gun the drug lords?

Four top police officers, and more than a hundred people, are killed over the course of a single week in drug-related shootings

“FEAR is our chief safeguard,” Pericles declared in his funeral oration, “for it teaches us to obey the magistrates and the laws.” In Mexico, however, fear has become the chief aid not of the state, but of those who are trying to subvert it. On May 8th, Edgar Millán Gómez, Mexico's acting chief of police, was shot nine times as he arrived home late at night. One of his bodyguards, who was also wounded, managed to wrestle the police chief's assailant to the ground and arrest him. Mr Millán was conscious for long enough to ask his killer who was behind the hit, but died before he could get a reply.

The answer to his question, provided later by investigators, helps cast some light on why it is so hard to end drug-related violence in Mexico. They say that his assassin was sent by José Antonio Montes Garfias, another federal police officer. Furthermore, the people who organised Mr Millán's killing were also behind the assassination on May 1st of Roberto Velasco Bravo, head of the federal police's organised crime division.

In addition to Mr Millán's assassination, the past few days have seen the murder of a top official in Mexico City's police force; of the police second-in-command in the border town of Juárez; and of the administrative head of the Estado Mayor, a military body charged with protecting the president. Such targeting of senior law-enforcement officials is unprecedented in Mexican history.

The gangs have not restricted themselves to killing senior policemen, though. According to Guillermo Zepeda of CIDAC, a think-tank in Mexico City, the week leading up to May 12th saw a total of 113 murders in Mexico, including 17 people on a single day. Estimates of the total number of deaths linked to drugs and organised crime so far this year range from 1,100 to 2,500 people. The war on drugs has never seemed less like a metaphor.

The involvement of the police in some of the killings helps to explain the lack of sympathy for dead policemen. “When police die in the line of duty, there is no condemnation of the violence in society,” says Ernesto López Portillo of Insyde, another think-tank. Part of the problem, he says, is that it is impossible to know which police officers lost their lives because they were doing their jobs, and which ones died because they were allied with a drug gang. The lack of public confidence in the police undermines their effectiveness and makes them more open to corruption.

Unable to rely on the police, President Felipe Calderón's habitual response to violence has been to send the army into trouble spots. This week the president dispatched 2,700 federal troops and police to the state of Sinaloa, where much of the violence has taken place. The army is now widely deployed around the country. Some Mexican legislators are even calling for troops to be deployed in Mexico City. Replacing the police by the army while the former were being reformed was meant to be only a temporary measure. But it is fast taking on an air of permanence.

As no figures are available for the volume of drugs being traded, the best way to measure it is to look at what is happening to drug prices north of the border. Mexico used to be one of the world's biggest producers of methamphetamines, and Mexican gangs still control meth distribution in the United States. They also dominate the wholesale distribution of cocaine there, as well as the transit of the drug through Mexico from South America. According to the United States' Drug Enforcement Administration, the average price of methamphetamine jumped 73% between January and September last year (the most recent figures available). The price of cocaine rose by 44% over the same period, despite a decline in purity.

The recent killings are a response to this success. Police officials said the murders of Messrs Millán and Velasco were probably both ordered by Arturo Beltrán Leyva, a capo in the Sinaloa drug cartel. Mr Beltrán Leyva's brother, another Sinaloa leader, was arrested in January. Joaquin Guzmán, the gang's head, escaped from prison in early 2001 under still unexplained circumstances. Government pressure has also prompted infighting among the gangs; Mr Guzmán's son was killed the same day as Mr Millán in a shoot-out thought to have been between his father's faction and a rival group from Juárez.

But setting the army on the drug-traffickers cannot be a permanent solution to the problem. The army was not trained for this job and has come under heavy criticism from human-rights groups. The government has shown little tolerance of this, forcing (according to some accounts) the representative of the UN High Commissioner for Human Rights to leave the country for being too critical of the army.

In a speech after the latest killings, the president called for “a transformation in the administration of justice”. Under a controversial new law, due to come into effect soon, the police will be allowed to hold suspected drug-traffickers and other suspected participants in organised crime for up to 80 days without charge. But a real transformation means a greater upheaval of the police, something that Mr Calderón promised when he first deployed the army nearly a year and a half ago, though there is little sign of it yet.

America is partly to blame. Last October the American and Mexican governments announced a plan under which the United States would contribute $500m a year to Mexican law-enforcement, equipment and training. But neither government bothered to consult its legislature. The programme is now stalled in the United States Congress. As its research service dryly noted in March, “there is no legislative vehicle for the funding request”, and that is still true. If the programme does ever materialise, it will almost certainly be a lot smaller in scope.

Thickening the blue line

Furthermore, some say the plan is not particularly well thought through. Geoff Thale of the Washington Office on Latin America, a think-tank, told the United States Congress that the approach to police training, a centrepiece of the initiative, was wrong to focus on creating specialised police units, which could easily be undermined or corrupted, rather than concentrating on institutional reform.

The status quo leaves both the army and the police vulnerable. In a brazen bit of nose-thumbing, the Zetas, a paramilitary wing of the Gulf cartel (the Sinaloa gang's main rivals), recently hung up banners in several border towns inviting current and former soldiers to join them. The Zetas themselves were originally formed by army deserters.

Following this week's murders, Eduardo Medina Mora, Mexico's attorney-general, said that the violence was a sign of “weakness, desperation, and frustration” on the part of organised crime. That is partly true. But as Mr Millán's killing makes clear, the distinction between law-enforcement authorities and organised crime is sometimes blurred. So far Mr Calderón's administration has failed to come up with a solution to an abiding paradox: success in disrupting drug cartels only leads to more violence as gang members fight to fill power vacuums and continue to supply the ever-lucrative drug market.

Kuwait

An election in Kuwait

Kuwait holds a parliamentary election. Is democracy slowly spreading in the Gulf?

WHAT does a parliamentary election in Kuwait, on Saturday May 17th, suggest about the progress of democracy in the region as a whole? Kuwait is certainly one of the more democratic corners of the Gulf, with a freer press and more elections than most. For this round of voting the number of constituencies has been reduced from 25 to five, in an effort to discourage vote-buying. And Kuwait manages to introduce elements of a modern system—these are only the second elections in which women have been able both to stand for office and to vote—while preserving older forms of public expression of opinion: an effort by the cabinet to restrict diwaniyas, traditional public meetings, was rebuffed by popular demonstrations.

It is still far from a democratic free-for-all. The country remains dominated by the head of state, Sheikh Sabah al-Sabah, and his ruling family; its democratic representatives enjoy limited power and their institutions still look pretty feeble. The new parliament chosen on Saturday will be as a result of the third election in just five years. The previous parliament was dissolved after the entire cabinet, which is appointed by the emir, resigned in protest over the lack of co-operation from parliamentarians.

But the parliamentarians have had power enough, according to the cabinet, to do the country harm. Critics say that MPs have prevented much-needed economic reform, while focusing, instead, on local issues or the promotion of Islamist policies. And as they have fiddled, for example in failing to pass a long-awaited bill designed to attract foreign investment, neighbours have moved ahead. Dubai, Qatar and Bahrain are developing more diverse economies, by establishing themselves as centres for finance and tourism, whereas Kuwait does little more than rely on pumping oil.

Whether responsibility for Kuwait’s failure to diversify can mostly be laid at the door of the parliamentarians is doubtful. But others in the region could be forgiven for wondering whether democracy brings any general benefits. Elections in Iraq, or in Lebanon, have done little to suggest that voting helps to sort out the dreadful messes in those countries. In the Gulf those who are experimenting with democracy are mostly doing so only with baby steps: Qatar introduced its first written constitution in 2005 which provided for some democratic reforms; Saudi Arabia has announced that women will be able to vote and stand in the municipal elections next year.

Even if further democratic reform in the region is likely, few expect to see rapid change. High oil prices—the cost of a barrel has passed $127 on May 16th, another new record—are providing governments with the means to buy off critics, for example with hefty welfare handouts. Perhaps it is because Bahrain is likely to be one of the first in the region to run out of oil that it is also one of the most forward in carrying out political and economic reforms. Bahrain has held open elections in which women can take part; as in Kuwait, Bahrain has a (partially-elected) parliament with limited powers. In recent months it has also seen several riots and protests over wages and high prices. If such pressures increase, in Bahrain, Kuwait or elsewhere, the demand for more democratic changes may rise, too.

Yahoo!

Now the rebellion

Enraged shareholders and activists are pushing Yahoo!’s board to revive takeover talks with Microsoft

YAHOO!’S co-founder and boss, Jerry Yang, and his board had this coming. For three months they did everything they could to rebuff Microsoft, which was offering to buy the internet company at a big premium to its value before the bid. They succeeded, if that is the word, when Microsoft walked away in frustration this month. Yahoo!’s shareholders were livid, and have been saying so. The proxy fight that Microsoft itself shied away from now appears likely to start anyway.

The person to launch it is Carl Icahn, a shareholder activist who is feared by boards across America that he has taken on or threatened. Since Microsoft dropped its bid for Yahoo!, Mr Icahn has bought 59m shares, worth more than $1.5 billion, in the company and has applied for regulatory permission to buy lots more. And his first action as a shareholder has been to send Yahoo!’s board a letter that amounts to a public flogging.

Yahoo!’s board, Mr Icahn wrote, “acted irrationally” in its response to Microsoft. It has “lost the faith of shareholders,” he continued. To him it is “obvious” that Microsoft’s bid was “superior” to any value Yahoo! could create on its own. He is “perplexed” by the board’s behaviour, he said, which is “irresponsible” and “unconscionable.”

One pictures Yahoo!’s wounded fiduciaries gulping. They may indeed be on their way out, because Mr Icahn is nominating his own slate of ten directors in their stead. It is a cheeky line-up, consisting of himself and several private investors who have been his partners. There is also a corporate-governance professor and a media tycoon turned investor. Above all, there is Adam Dell, the brother of Michael, founder of the eponymous computer company, who once sold a company to Yahoo!; and Mark Cuban, who got rich by selling Broadcast.com to Yahoo! at the height of the dotcom bubble and now owns the Dallas Mavericks, a basketball team.

Mr Icahn does not always succeed in his attacks on boards he considers soft, but often. He recently played a big role in forcing another technology company, BEA Systems, a neighbour of Yahoo!’s in Silicon Valley, to resume negotiations with Oracle, another software company in the valley, that led to its acquistion.

In Mr Icahn’s favour is that he has a good point. The overwhelming logic for a combination of Microsoft and Yahoo! is that this appears to be the only way that the two can put up a good fight against the new superpower of web search, online advertising and the Internet in general, which is Google. As a reminder, on the day of Mr Icahn’s letter, Hitwise, an online-measurement firm, released the latest market-share numbers in American web searches. Google’s share once again went up, to 67.9%, and both Yahoo! and Microsoft fell, to 20.28% and 6.26% respectively.

And what has been Mr Yang’s proposed alternative so far? To do a deal with Google, in which Yahoo! would outsource part of its search-advertising technology. Mathematically, this could indeed boost Yahoo!’s profits somewhat, and thus raise its technical value, because Google is better at placing ads next to search results that consumers actually click on, and collects more revenue for each such click. But for Yahoo! this would amount to total capitulation in its effort, after years and billions spent, to catch up with Google in precisely this technology. Yahoo! would in effect resign to becoming a second-tier internet player, not unlike Ask.com, another search engine that uses Google’s advertising technology.

Even assuming that Mr Yang and his board now feel the pressure, would Microsoft come back to the table? Mr Ballmer, its boss, may just be playing the game tactically, but his frustration appears to have been real. Engineers in both companies have been griping about a combination. In the bigger battle against Google to attract and retain the brightest geeks—ultimately the crucial factor in the search wars—the uncertainty of an acquistion cannot help. Mr Yang had better become very co-operative indeed, and quickly.

McCain Iraq, Iran Policies Make Him Favored Candidate to Saudis

-- John McCain, who is trying to strike a distance from the policies of President George W. Bush, accuses Saudi Arabia of sponsoring insurgents in Iraq and condemns it for human-rights violations, including imprisoning people whose ``only crime is to worship God in their own way.''

That should make the prospect of a McCain presidency a nightmare for the Saudi rulers, who have enjoyed close ties to the Bush family. Instead, Saudis are privately rooting for the presumptive Republican nominee, discounting some of his rhetoric because he's the only candidate to promise to keep U.S. troops in Iraq and to deter Iran.

``The royal family and other elites would like to see McCain,'' Mai Yamani, a visiting scholar with the Carnegie Middle East Center in Beirut, said yesterday in a telephone interview from London.

``He would keep the troops in Iraq, and that is their main worry, that the U.S. may withdraw or minimize its presence,'' said Yamani, whose father, Sheikh Ahmed Zaki Yamani, was the kingdom's oil minister from 1962 to 1986. U.S. forces are needed to counter the spread of Iranian influence from Iraq, which many Saudis believe ``now is ruled by Iran,'' she said.

Oil Prices

Bush today will visit King Abdullah's horse farm to mark the 75th anniversary of U.S.-Saudi ties, which have been strained by what the Saudis view as mismanagement of the war in Iraq and soaring oil prices. Bush is set to discuss oil prices with the Saudis, the world's largest producer, during his visit.

As former Texas oilmen, Bush, 61, and his father, President George Herbert Walker Bush, 83, were both known quantities to the Saudis. McCain has no business experience, though the Saudis appreciate his military and national-security credentials.

The Saudis, like other Gulf Arabs, are comforted by McCain's repeated commitment to stay in Iraq. Campaigning in Columbus, Ohio, the Arizona senator said yesterday that he envisions a successful outcome to the war by 2013, when Iraq will be ``a functioning democracy.''

For the Saudis, that is preferable to the positions of either of the Democratic candidates -- Senators Barack Obama of Illinois and Hillary Clinton of New York -- who both have vowed to undertake an Iraq withdrawal as one of their first acts in office, analysts said.

`Very Nervous'

``They are worried about any deal the Democrats may cut with Iran,'' said Henri Barkey, a foreign policy adviser to Obama and former State Department policy planner, who now heads the international relations department at Lehigh University in Bethlehem, Pennsylvania.

The Saudis are preoccupied by Iranian influence in their region. The McCain campaign points to Obama's pledge to engage in direct talks with Iranian president Mahmoud Ahmadinejad as evidence that the Democratic candidate lacks the experience to become president.

``Unconditionally meeting Ahmadinejad would fatally undermine any chance that we have of building a coalition of Arab states willing and able to contain Iranian power,'' said Randy Scheunemann, a McCain foreign-policy adviser.

Obama, 46, is eager to debate Iran policy with McCain, said Denis McDonough, an Obama foreign-policy adviser.

`Status Quo'

``What's evident is the status quo as it relates to Iran, and which John McCain seems to support, has resulted in an expanded Iranian nuclear program and expanded Iranian influence,'' McDonough said.

McCain has encouraged the perception that he would restore the pragmatist tradition of the first President Bush, and resolve conflicts with Saudi Arabia behind closed doors.

A McCain administration would practice a policy of ``speak softly and press firmly,'' Scheunemann said.

McCain's signals to the Saudis, however, haven't been consistent. On the one hand, he said this month that his personal connections would allow him ``to manage our strategic relationship'' with the Saudis, while also pressuring them on other subjects.

McCain said May 6 aboard his campaign bus that he knows Prince Bandar bin Sultan, the former Saudi ambassador to U.S., ``very well,'' citing a 25-year relationship and the bond they share as former military pilots. McCain's campaign co-chairman, Tom Loeffler, is a registered lobbyist for Saudi Arabia, which earned his firm, the Washington-based Loeffler Group, close to $10 million in the last two years.

`They Know' McCain

The Saudis ``feel like they know John McCain,'' said Hady Amr, the director of the Brookings Institution's Doha Center.

At the same time, however, McCain has used some tough language toward Saudi Arabia. He has promised to bring more pressure on the country on human rights and has accused the Saudis of sponsoring the Sunnis who are attacking U.S. forces in Iraq. Last week, McCain lumped Saudi Arabia with Iran, Burma, Sudan and North Korea, describing them as nations that have imprisoned ``tens of thousands of people'' for their religious beliefs.

Wyche Fowler Jr., a U.S. ambassador to Saudi Arabia from 1996 to 2001 who is now chairman of the Middle East Institute in Washington, said the criticism may not matter to the Saudis. Fowler met in Riyadh last month with senior Saudi officials, including King Abdullah.

``They are used to a certain amount of Saudi bashing every four years,'' he said.

Fed, BOE Foreshadow End of Rate Cuts as Prices Rise (Update2)

-- The world's most powerful central banks are telegraphing the end of interest-rate cuts, and traders already anticipate the first steps in the opposite direction.

Federal Reserve officials this week flagged inflation risks after slashing borrowing costs seven times since September and Bank of England Governor Mervyn King unveiled Britain's worst price outlook in a decade. Faster growth is vindicating European Central Bank President Jean-Claude Trichet's refusal to cut rates in response to the credit crisis.

``The central banks are taking a pause, but that could turn into a permanent end to rate cuts,'' said Thomas Mayer, co-chief economist at Deutsche Bank AG in London. ``The risk we won't see more cuts from the Fed and Bank of England has grown, and markets have pushed out expectations of ECB easing.''

The danger is that food and oil prices are rising so fast that inflation will replace costlier credit as the chief threat to the global economy. That may force the Fed to turn a deaf ear to what King labels the ``siren'' calls for rate cuts and perhaps consider raising them instead.

Fed Chairman Ben S. Bernanke, 54, and his team reduced their benchmark rate by 3.25 percentage points to 2 percent. The Bank of England has cut its main rate three times to 5 percent and Canada's central bank has moved on four occasions to 3 percent.

Now, Merrill Lynch & Co. forecasts global inflation will accelerate to 4.7 percent this year, the fastest pace since 1999, from 3.4 percent in 2007.

Tying Hands

``Inflation is constraining the hand of central banks,'' said Tim Drayson, global economist at ABN Amro Holding NV in London. ``They are starting to realize that they will have to see weaker economies to control inflation.''

Some traders are increasing their bets the Fed will reverse recent cuts later this year. Fed funds futures traded at the Chicago Board of Trade signal a 22 percent probability the Fed will raise its main rate to 2.25 percent by the Sept. 16 policy meeting, compared with 7 percent a week ago.

While U.S. consumer prices rose less than forecast in April, signs that financial markets are improving have prompted policy makers to reappraise the risks facing the economy. Bank of San Francisco President Janet Yellen said May 13 that rate cuts to date ``could lead to higher inflation expectations and an erosion of our credibility.''

Former Fed Chairman Paul Volcker warned on May 14 that ``there is some resemblance to where we are now in the inflation picture to the early 1970s,'' when central banks failed to contain a pickup in prices.

Siren Call

In the U.K., King warned on May 14 against the risk of lowering borrowing costs too much, suggesting the Fed may have overdone it. ``We did not fall prey to the sirens to cut interest rates further as some other central banks have done,'' the 60-year-old King said.

Still, his proclaimed prudence failed to stop U.K. inflation from jumping the most in six years in April as it accelerated to the government's upper limit of 3 percent. The rate on the December rate futures contract has risen 63 basis points to 5.74 percent this week, suggesting traders have abandoned bets on rate cuts this year.

Nevertheless, a further deterioration in credit markets will deal another blow to the global economy, requiring more policy action. Vincent Reinhart, a former Fed economist and now a scholar at the American Enterprise Institute in Washington, cautions against a ``premature'' end to rate cuts.

Reinhart's Warning

If credit markets deteriorate again and growth falters, ``central banks will have to roll back talk of future tightening and may even ease,'' he said.

King on May 14 said it's ``quite possible we may get the odd quarter or two of negative growth'' and further ``shocks'' could make matters worse. While Bernanke said this week that tensions in markets have eased, conditions are still ``far from normal.''

Inflation concerns in the U.S. and U.K. chime with those often sounded by Trichet and central bankers from Brazil to Taiwan since markets seized up in August. With the Middle East and Asia still driving the global economy and pushing food and oil prices higher, inflation threatens to become entrenched.

The ECB has left its rate at 4 percent since June. Data released yesterday showed the 15-nation euro economy growing faster than expected in the first quarter, while inflation held above the ECB's ceiling for an eighth month.

Risks Undiminished

Trichet, 65, said in a speech in Brussels today that ``there is no place for complacency'' amid clear inflation pressure. In an interview in Vienna, ECB Governing Council member Klaus Liebscher signaled the bank may leave rates unchanged throughout this year.

Asked if the bank could lower rates in 2008, he said, ``given the risks for price stability, I think the answer is a clear one. The risks have not diminished.''

Eonia swap contracts, a widely used market gauge of rate expectations for the euro-area, rose to 4.05 percent yesterday from around 3.2 percent in mid-March, showing traders no longer expect cuts from the ECB.

``Trichet is sitting pretty,'' said Jean-Michel Six, chief European economist at Standard & Poor's in Paris. ``He's been against the consensus in saying of the twin evils inflation is a bigger threat than a slowdown.''

Fed's Lockhart Says Slowdown to Reduce U.S. Inflation (Update1)

May 17 (Bloomberg) -- Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. economic slowdown may moderate inflation that has been spurred by rising prices of energy and commodities.

``We expect inflation to abate somewhat in the second half and going into 2009 based upon our forecast of weak economic growth,'' Lockhart said in response to a question following a speech today in Atlanta. ``There is some early indication that the strength of inflation has softened.''

Lockhart's comments contrast with remarks this week by Kansas City Fed President Thomas Hoenig and Richard Fisher of the Dallas Fed, who warned about rising prices. Hoenig said inflation was at an ``unacceptable level,'' while Fisher said the economy may recover from its slowdown ``at much higher base rates of inflation than we would want.''

Policy makers indicated last month they may take a breather after lowering the benchmark U.S. interest rate by 3.25 percentage points since September. The reduction in rates this year has been the most aggressive in two decades.

U.S. consumer prices rose less than forecast in April, reflecting cheaper furniture and lodging costs, the Labor Department said May 14. Prices rose 3.9 percent in the 12 months ended in April, down from a 4 percent year-over-year gain in March.

Energy Prices

``The U.S. economy is in the midst of a pronounced slowdown, with very little growth recorded for two consecutive quarters,'' Lockhart said in the text of his speech. At the same time, ``the United States has experienced elevated inflation levels partially driven by a run-up of energy and other commodity prices.''

Lockhart didn't discuss the path of interest rates. The Federal Open Market Committee next meets June 24-25.

U.S. weakness, initially concentrated in housing, has undermined consumer spending, which generates about two-thirds of U.S. gross domestic product, Lockhart said.

``Personal consumption has softened,'' Lockhart told the Southern Center for International Studies at an event at Emory University. ``To the extent the world relies on strong U.S. consumer activity, this weakness could pose a threat to continued global expansion.''

For now, ``growth appears to be softening but still growing nicely'' in emerging economies, he said. While the U.S. slowdown will be felt worldwide, it won't as severe as predicted by some forecasters, he also said.

Lockhart in the question period said the U.S. economy wasn't ``technically'' in recession, adding the second quarter may show economic growth.

Global Problem

Increasing prices have become a global problem, Lockhart said, citing ``unrest'' over food prices in several countries.

``Recently inflation in many parts of the world has begun to pick up,'' he said. That ``is a growing issue for emerging economies.''

U.S. consumers expect an inflation rate of 5.2 percent over the next 12 months, according to a Reuters/University of Michigan survey on May 16, compared with 4.8 percent in the April survey. Longer term, Americans projected prices would increase 3.3 percent, up from a 3.2 percent estimate last month.

Lower demand for energy could bring a reduction in those prices, Lockhart added in the question period, saying prices were likely to be ``somewhat lower but relatively high.''

The U.S. should take a ``realistic'' view of sovereign wealth funds, Lockhart also said, echoing comments made May 15 by Fed Chairman Ben S. Bernanke. The funds have accounted for about one-third of the capital raised by financial companies during the credit crisis, the Fed chief said.

``There has been a fair amount of hand-wringing recently about sovereign wealth funds accumulating U.S. assets,'' the Atlanta Fed official said. ``I believe our posture has to be realistic. One country's trade deficit -- ours, in this case -- is another country's investment surplus.''

Lockhart, responding to questions, said the U.S. dollar would remain ``the dominant currency'' in the world even though some countries may diversify their reserves.

Dollar Falls Most Against Euro in Seven Weeks on Sentiment, Oil

May 17 (Bloomberg) -- The dollar fell the most against the euro since March as a drop in consumer confidence and record crude oil prices raised concern U.S. economic growth will slow.

The dollar's second consecutive weekly decline against the euro pared its increase from the all-time low reached last month to 2.7 percent. The Australian dollar rose to the strongest level against the greenback since 1984 as oil pushed up prices of other commodities. Mexico's peso rose to a five-year high, while the Brazilian real strengthened to the most since 1999.

``The economic backdrop in the U.S. argues against the continuing gains in the dollar,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York.

The dollar fell 0.6 percent to $1.5577 per euro this week, from $1.5482 on May 9. It touched the record low of $1.6019 per euro on April 22. The yen declined 1.2 percent to 104.04 per dollar this week, from 102.87. Japan's currency fell 1.8 percent to 162.27 per euro, from 159.21, the biggest decline since the week ended April 18.

Crude oil rallied to the all-time high of $127.82 a barrel yesterday as Goldman Sachs Group Inc. raised its forecast for the second half of this year to an average of $141 a barrel, citing supply constraints.

The correlation coefficient between oil and the euro-dollar exchange rate has been 0.95 for the past year, indicating they have moved in the same direction 95 percent of the time. The correlation is calculated based on the price changes of oil and the currencies.

`Higher' Oil

``There is no fresh catalyst to mount a successful rally in the U.S. dollar,'' said Michael Woolfolk, a senior currency strategist in New York at Bank of New York Mellon Corp. ``Oil prices are significantly higher.''

The Australian dollar increased 1.1 percent this week and touched 95.60 U.S. cents yesterday, the highest level since 1984, on higher commodity prices. Exports of raw materials, such as iron ore, account for 17 percent of Australia's economy. The Brazilian real rose to the nine-year high of 1.6402 versus the dollar, while Mexico's peso appreciated to 10.3912 the strongest in almost five years.

Iceland's krona was the best performer against the dollar among emerging-market currencies, increasing 6.9 percent to 74.69 after the central banks of Denmark, Sweden and Norway pledged as much as 1.5 billion euros ($2.3 billion) in emergency funds yesterday. The krona jumped 3.5 percent to 116.17 per euro. Before yesterday, it had slumped 24 percent against the euro this year.

Weaker Yen

Japan's currency fell against all of the major currencies this week as global stock gains and lower volatility increased carry trades, in which investors borrow funds in countries with low interest rates and buy assets where returns are higher.

The yen fell 4.9 percent to 13.95 against South Africa's rand and 4 percent to 63.48 against Brazil's real. The Bank of Japan is forecast by 35 economists surveyed by Bloomberg to hold the target lending rate at 0.5 percent next week. That compares with 11.75 percent in Brazil and 11.5 percent in South Africa.

Implied volatility on one-month dollar-yen options fell to 11.26 percent yesterday, from 12.70 percent on May 9, approaching the lowest since Feb. 27. Lower volatility tends to encourage carry trades by making it easier to predict profit. The Standard & Poor's 500 Index rose 2.6 percent this week, the biggest gain since mid-April.

The dollar weakened yesterday as a report showed confidence among U.S. consumers fell in May to the lowest level in almost 28 years. The Reuters/University of Michigan consumer sentiment index dropped to 59.5 this month, from 62.6 in April.

Sales of previously owned homes probably dropped in April to an annual rate of 4.85 million, the all-time low, according to the median forecast of 46 economists surveyed by Bloomberg News. The National Association of Realtors is scheduled to release the report on May 22.

Fed Rate Outlook

Futures on the Chicago Board of Trade yesterday showed 88 percent odds that the Fed will hold the target lending rate at 2 percent at its next meeting on June 25. The balance of bets is for a reduction of a quarter-percentage point. There's a 21 percent chance of an increase to 2.25 percent in September.

The euro got a boost on May 15 as the European Union's statistics office said gross domestic product in the 15 countries that use the currency increased to 0.7 percent in the first quarter. The pace exceeded the 0.5 percent estimate of 32 economists surveyed by Bloomberg News. Germany's 1.5 percent expansion from the previous quarter was more than double what economists had expected.

European Central Bank President Jean-Claude Trichet said yesterday the bank can't relax in its fight against inflation.

``There is no place for complacency,'' he said in a speech in Brussels. ``Price stability in the medium term has to be'' ensured. It's ``a necessary condition to sustain economic growth, job creation and social cohesion.''

The ECB has held its main refinancing rate at a six-year high of 4 percent since last June to control inflation, which accelerated to the fastest pace in 16 years in March.

2008-03-11T16:12:00.001-07:00

Colombia-Ecuador-Venezuela: A Close Call

• Santander and Bolivar Called to the Colors to Butress Uribe and Chávez
• Uribe tries out for The Dick Cheney Role
• A Narrow Escape from Brinkmanship
• No victors, but Uribe clearly is a loser

As last week’s diplomatic crisis between Venezuela and Colombia demonstrates, Chávez has once again sought to appropriate historical symbols in an effort to score political points. Employing explosive language, Chávez remarked “Some day Colombia will be freed from the hand of the (U.S.) empire. We have to liberate Colombia.”

At its peak, the political battle lines of the triangular confrontation embracing Colombia, Venezuela, and Ecuador had been drawn. On the one side was Colombia, a key U.S. ally headed by rightist Álvaro Uribe. On the other side was Chávez, who seeks to turn Venezuela into a powerful regional player that may serve as a counterweight to Washington’s desire to project its authority. Ultimately, Chávez seeks to plant his socialist economic agenda fused with a parliamentary democratic political system throughout the region and to this end he has been able to recruit key allies such as Ecuador, Bolivia, Nicaragua, and, or course, Cuba.

Bolívar and His Historical Legacy
When Chávez employs the word “liberate,” he conjures up the epic struggles from South America’s stormy political past which gave the continent its present borders. The Venezuelan leader clearly intends to make an association with Bolívar, a Venezuelan native hero who liberated Colombia from the Spanish. Bolívar, the “Great Liberator” is revered by many as a great hero in the lands that he freed from Spain.

A tactical military genius, Bolívar was also a skilled politician who in 1819 adroitly managed to briefly unify Ecuador, Colombia, Venezuela and Panama into one large nation state called the Republic of Gran Colombia. The Great Liberator believed Venezuela would carry more prestige as part of a larger entity than it could ever hope to acquire on its own. “Only a Venezuela united with New Granada [Colombia] could form a nation that would inspire in others the proper consideration due to her,” Bolívar once argued. Because of Bolívar’s cult-like status in the region, it’s critical for Chávez to prove that he is on the right side of history, and that he, and no one else, has inherited the true mantle of the Great Liberator.

The Standoff
The recent crisis involving a Colombian military incursion into Ecuador is politically tailor-made for Chávez, and the Venezuelan leader has wasted little time in seeking to exploit it. The diplomatic tit-for-tat was set into motion on March 1st when, in flagrant disregard for Ecuadoran sovereignty, the Colombian government ordered an attack of a FARC guerilla camp site in Ecuador, a mile from the Colombian border. For years, the Marxist FARC has been locked in a protracted struggle with successive Colombian governments in Bogotá.

From a military and strategic standpoint, Uribe has some reason to be pleased: seventeen rebels were killed in the raid, as well as Raúl Reyes, the FARC’s second in command. Though there’s no evidence that the U.S. helped to plan the attack, the Southern Command in Miami might have played a role by providing intelligence to the Colombian military.

For years, the U.S. has provided billions of dollars in military aid to the Colombian government which has been at war not only with left wing guerrillas but also with other progressive forces such as indigenous peoples, human rights workers, and labor union activists. The Uribe government has been tainted by human rights abuses and its association with right wing paramilitary death squads.

While Uribe has been aggressively prosecuting the war almost from the onset of his presidential term, he has now succeeded in escalating the conflict beyond its borders. Predictably, Ecuador immediately recalled its ambassador to Colombia and ordered troops to deploy to the border. Predictably, Chávez backed up Ecuador by similarly recalling its ambassador to Colombia and massing troops on its western border. Uribe then hit back against Chávez, accusing him of supporting the FARC guerrilla insurgency and encouraging terrorism.

Employing Bolívar as a Rhetorical Tool
Although it has always been somewhat unlikely that the border dispute would result in actual military hostilities, it appeared to be very risky (at least for part of the time). For a while, Chávez appeared intent on stepping up his non-stop public relations blitz against President Uribe. For the Venezuelan leader, part of his future efforts are likely to hinge on appropriating historical symbols such as Bolívar and casting the Colombian regime as enemies of the Great Liberator and his legacy. Bolívar, Chávez has said, was a socialist like himself; was stridently opposed to the United States, and, also like himself, was determined to build a classless society. What’s more, the Venezuelan leader argues, Bolívar’s dream of uniting Latin America represented a threat to oligarchs and imperialists, thus awakening the ire of the United States.

Chávez has no doubt taken some historical liberties and embellished his causal intellectual ties to Bolívar. The Liberator never talked about class struggle per se, though he did refer to the need to abolish slavery. The Liberator also issued decrees for the establishment of schools (for boys as well as girls), deplored the misery of indigenous peoples, and ordered the conservation of forest resources.

But Bolívar was perhaps most forward looking when he spoke of the necessity of integrating Latin America. It was Bolívar, early on, who understood that the region had no future unless it confronted both Europe and the U.S. as a unified bloc. The United States, Bolívar once famously declared, seemed “destined by providence to plague America with misery on behalf of freedom.”

Chávez has said that he will not rest until Venezuela is liberated from the “imperialist and anti-Boliviaran threat.” He frequently draws comparisons between Bolívar’s struggle against the Spanish Empire and his own political confrontation with the United States (which Chávez habitually refers to as “The Empire”). Employing his usual penchant for making over self-serving historical connections, however far-fetched they may be, Chávez recently warned Colombian “oligarchs” not to tangle with Venezuela. “Don’t even think about it,” he said, or “you would run into the soldiers of Bolívar.”

Bolívar’s Cult of Personality in Venezuela
Given the prominence that Chávez has attached to Bolívar in his public speeches, it’s not surprising that books about the Great Liberator are briskly selling in Caracas. In Venezuela, Bolívar is revered as a God-like figure and his popularity continues to soar. Indeed, a popular religion based on the fertility goddess of María Lionza has appropriated Bolívar as one of its central ritual figures. The faith is based on indigenous, black, African, and Catholic roots, and priests hold ceremonies in which the spirit of the Liberator is channeled through a medium who coughs when Bolívar is present, since Venezuela’s most distinguished native son had a debilitating case of tuberculosis. Meanwhile, religious altars of the faithful generally feature a portrait of Bolívar.

Venezuela’s currency, main squares, and universities bear the Liberator’s name. His sayings are taught in schools, broadcast on the radio and emblazoned on government buildings. Chávez almost reverentially has referred to his political movement as a “Bolivarian Revolution.” Chávez has renamed his country the Bolivarian Republic of Venezuela and has reportedly left a chair empty at meetings to honor the Liberator.

Chávez supporters, or Chavistas, have dubbed the areas they politically control as “liberated zones of the Bolivarian Republic,” and adorn offices and homes with portraits of the Liberator. Chávez has promoted so-called Bolivarian Circles, local grassroots groups at the local or barrio level, which lobby the government for important grass-root resources.

Meanwhile, Chávez champions Bolívar’s idea of a unified South America, and echoes the Liberator’s words during his televised speeches. Chávez also likes to appear on television with a portrait of Bolívar near at hand. Riding along Caracas highways, one may see repeated instances of murals juxtaposing portraits of Chávez and Bolívar.

In Caracas, a key historic landmark is Bolívar’s house as a youth. Located along downtown streets crowded with informal vendors, the house is often full of visiting school children. In conjunction with the author’s next book, Revolution! South America and the Rise of the New Left (to be released April 1 with Palgrave-Macmillan), a visit is paid to the museum, and its director, Mercedes García, is interviewed.

According to her, Chávez’s chronically lengthy speeches awakened an interest in the Liberator. The volume of people visiting the museum has been increasing, and at the time I visited, 3,500 individuals were showing up every week. In particular, there was great curiosity amongst the military, and soldiers from all over the county were paying visits to the museum.

War of Words Between Chávez and Uribe: It’s All About Bolívar
Uribe however has sought to question Chávez’s almost exclusive appropriation of Bolívar as a political icon. “The truth, President Chávez, is that if you are pursuing an expansionist project in this continent, Colombia has no place for that, project,” Uribe remarked. “One cannot set fire to the continent, as you are doing, speaking one day against Spain, the next against the United States; abusing Mexico one day and Peru the next, and the day after that, Bolivia,” Uribe continued. “One cannot abuse a whole continent, or set it on fire as you do, by speaking of imperialism, when you, based on your own ambitions, are looking to set up an empire.”

Seeking to rip down Chávez’s historical narrative, Uribe said “We cannot abuse history, we cannot stain the memory of our heroes, by disfiguring them in popular demagoguery, in misleading the people. We cannot mislead the people by misinterpreting the legacy of the Liberator Bolívar. Bolívar was an integrationist, but not an expansionist.”

Bolívar, Uribe continued, brought independence to South American nations, “but he did not bring them [newly independent countries] a new era of subjection.” Turning up the rhetoric, Uribe added, “Bolívar did not spend his time trying to remove European domination from the Americans, only to impose his own terms with the power at his disposal—as you wish to do—on the people of Venezuela and on the people of Colombia.”

Sparing no opportunity to exploit his favorite subject, Chávez has accused Uribe of being a spokesperson of the “anti-Bolivarian oligarchy.” The Colombian oligarchy, Chávez remarked, “Doesn’t want peace and believes it can mess around with us. Neither the Colombian oligarchy nor any other oligarchy can mess with us. Venezuela needs to be respected.” In one of his typical bombastic flourishes, Chávez added that when Uribe accused him of carrying out Bolivarian expansionism in South America, the Colombian politician was talking like the U.S. President. Underneath Uribe’s mask, Chávez said, lurked President Bush.

Colombian Elite: Fearful of Bolivarian Revolution
Uribe’s diplomatic ripostes are not surprising, given the fortress mentality now prevalent within the Colombian elite. Within a rising tide of left social movements and progressive-minded regimes that have flourished throughout the region, Colombia remains a bastion of conservatism and reaction. What’s worse, many ordinary Colombians are beginning to gain inspiration from Chávez and his so-called Bolivarian Revolution, thus adding to the Colombian elite’s sense of political isolation.

In several Colombian provincial states, Bolívar has again been politicized. Recently, Colombians formed Bolivarian Circles similar to those common in Venezuela. In Barranquilla, a Colombian port, barrio and social activists, union organizers and some members from the Polo Democrático left opposition have united to form the Corriente Bolivariana Colombiana (Colombian Bolivarian Current), a political organization that claims almost 5,000 members and fields candidates in local elections.

A worrying consideration for the Colombian elite is that Chávez may have an ideological impact not only upon ordinary Colombians, but also those Colombians living in Venezuela. For years, Colombian immigrants have fled the war in their country, fleeing across the border and seeking greater economic opportunity. Unfortunately for the Colombian elite, many émigrés have returned to Colombia and helped to organize Bolivarian movements at home.

Oscar Manduca, a Bolivarian organizer and candidate in Atlántico state on the Caribbean coast, has remarked, “This is a social movement against poverty in Colombia. Venezuela’s revolution can help change things here through solidarity and cooperation across the frontier.” Meanwhile the Movimiento Bolivariano de Colombia S A (sin armas)—the Bolivarian Movement of Colombia (without arms)—is presenting an electoral challenge to right wing politicians who control politics along the Colombian frontier in Santander state.

Containing the Bolivarian Revolution
Ever since Chávez was elected in 1998, the Colombian media establishment has been implacably opposed to the Venezuelan leader and commonly refers to Chávez as a dictator or caudillo. Venezuelan commentator Gabriel Bustamante believes that Colombian journalists “don’t know, and don’t want to know, anything positive” about political and social changes in his country. “Revolutions threaten their privileges, so there is a need to create ‘Chávezphobia’—an excessive and irrational fear about Chávez and even Bolívar to try to stop Colombians being influenced,” he said.

There would seem to be a fair degree of truth in what Bustamante says. The newspaper El Tiempo, a bastion of elite sentiment in Bogotá, has editorialized that “Caudillos like Chávez have historically impeded the consolidation of liberal democracy in Latin America.” Rafael Nieto, a columnist at the Colombian magazine Semana, worries that “Polo Democrático leaders going to Caracas and Bolivarian officials in Bogotá could become a daily occurrence.”

Echoing elite opinion, the Uribe government has acted to limit Chávez’s political influence within Colombia. Before diplomatic relations wound up in tatters, Uribe was careful in handling Chávez when the latter visited Colombia. Uribe forced the Venezuelan president to meet him at an isolated hacienda rather than allow his presidential motorcade to travel through the capital.

What’s more, a meeting with opposition Polo Democrático leaders had to be conducted after midnight, in private at the Venezuelan Embassy. When Chávez asked to visit Bolívar’s historic hacienda in central Bogotá, the authorities (who were afraid that the Venezuelan leader would come into contact with ordinary Colombians) denied his request. Meanwhile, Colombia’s intelligence services cracked down on the Corriente Bolivariana Colombiana, raiding a political meeting of the group on the coast. Armed Forces Commander Freddy Padilla commented that “Bolivarian circles are spreading all over Latin America, and particularly here in Colombia we want to prevent this from happening.”

Santander: Chávez’s Great Historical Villain
Within this climate of escalating political tensions, Chávez has whipped up a furor by making skillful use of his own historical narrative. He has referred to the “Colombian oligarchy” as the most rancid and criminal elite group in Latin America. The oligarchy, Chávez says, descends from a despicable historical figure named Francisco Paula de Santander. For Chávez, Santander, Bolívar’s Vice President, is a great historical villain.

It was Santander, Chávez charges, who was most responsible for bringing down South American unity and dashing any hope that the Bolivarian independence struggle might lead to real political change. By 1825, Bolívar’s influence on the countries that he had liberated was on the wane. Returning to Bogotá from his military campaigns, the Liberator resumed his duties as president of Colombia but found that he had little political support from government officials and the local citizenry.

In 1827 he pushed for a new Colombian constitution that would have increased the power of the president. But a constitutional convention in 1828 rebuffed Bolívar and rejected any change to the constitution. It was a stunning reversal for him. Egged on by his supporters however, he struck back by assuming dictatorial powers. Predictably, such a move did not go over well amongst Colombia’s political elite.

Sporadic uprisings broke out in opposition to Bolivarian rule, and in 1828 a group of conspirators in Bogotá, tiring of his dictatorship, broke into the presidential palace intent on murdering him. It was Santander, Chávez claims, who was the intellectual author of the plot to kill Bolívar and thus sabotage the Great Liberator’s political project.
Though Bolívar survived the infamous ‘Black September Night’ attempt against his life, Colombia’s continued opposition to his united Latin America dream disillusioned him. Dispirited and disheartened, the Great Liberator resigned as president. By now sick with tuberculosis, Bolívar departed Bogotá for the Caribbean coast.

Gran Colombia was already in shambles: Venezuela had left the Republic as had Ecuador and the new nations Bolívar helped to found were wracked by violence and internal dissension. Bolívar died on the way to Cartagena on December 17, 1830, at the age of 47. Bolívar asked to be buried in his home city of Caracas, but he had so many political enemies that his family feared for the safety of his remains. In 1842, his body was finally taken home.

Seeking to take advantage of Bolívar’s tragic death and political eclipse, Chávez has remarked, in yet another questionable historical leap, that Uribe is a spokesperson for the “Santanderean” and “anti-Bolivarian” oligarchy. Uribe responded in turn that the Venezuelan president was manipulating history and that Santander “gave us the example of adherence to the law. The truth, President Chávez, is that we cannot make a mockery of the law, as you do, trying to abuse General Santander, and exchange the rule of law for personal whim.”

Bolívar’s Death: Chávez Suspects Foul Play
Taking his picturesque concept of history to yet greater political heights, Chávez is now intent on proving that Bolívar was poisoned by corrupt oligarchs and did not succumb to tuberculosis. The Venezuelan leader asserts that in Bolívar’s day, tuberculosis was not lethal enough to cause death in a few scant weeks. As evidence to support his version of the medical arts, Chávez points to one of Bolívar’s letters in which the Liberator discusses his future plans. Bolívar wrote the letter shortly before his own death.

“Some say he [Bolívar] was very ill and knew he was going to die, and he wanted to die by the side of the sea and he died happy, and Colombia was happy and Venezuela was happy,” Chávez said in a long speech. “How the oligarchs fooled us, the ones here, the ones there. How the historians who falsified history fooled us.”

The Venezuelan leader recently convened a high commission, led by his vice president and composed of nine cabinet ministers and the attorney general. Their mission: exhume Bolívar’s remains, which lie in a sarcophagus at the National Pantheon in downtown Caracas, and conduct scientific tests to confirm Chávez’s contention—that diabolical assassins murdered Bolívar. “This commission has been created because the executive considers it to be of great historical and cultural value to clarify important doubts regarding the death of the Liberator,” Venezuela’s official Gazette said.

Even Chávez’s most stalwart supporters say their leader may have gone too far this time. “This doesn’t make any sense,” said Alberto Mueller Rojas, a retired general who works as a presidential adviser on international affairs and military matters. “Why should I care? Bolívar died. If they killed him, they killed him. If he died of tuberculosis, he died of tuberculosis. In this day and age, this doesn’t have any significance.”

In his historical novel, The General in His Labyrinth, the legendary Colombian writer Gabriel García Márquez portrayed Bolívar as a man of the people opposed by a reactionary oligarchy. However, neither García Márquez nor any serious historian has suggested that the Liberator was poisoned. John Lynch, a Bolívar biographer, points out that as the Liberator lay dying he was watched over by a “qualified and conscientious” French doctor whose medical bulletins were later published in Caracas. Lynch has accused Chávez of “a modern perversion” of the mythical cult of Bolívar.

It’s unlikely that Chávez will ever be able to prove his historical hypothesis by exhuming Bolívar’s tomb, but at least he will have succeeded in scoring more points in the never-ending propaganda war against Uribe. As the frail diplomatic engagement continues in the upcoming weeks, and Ecuador, Colombia and Venezuela try to tame their simmering wrath, it won’t be surprising if we hear yet more Bolivarian rhetoric coming from adjunct professor Chávez. Almost two hundred years after his death, Bolívar is still the central and defining figure in the lands that he formerly liberated, a region still wracked by chronic political instability, poverty, and glaring social inequalities.

2008-03-11T16:09:00.000-07:00

UK war costs double as equipment replacement soars

IRNA - Islamic Republic News Agency

The combined cost of Britain's military operations in Afghanistan and Iraq is expected to almost double in the year ending March 2008, according to an all-party group of MPs.

A reported by the Defence Select Committee showed that the cost of operations by British forces in Afghanistan has risen to more than Pnds 1.6 billion (Dlrs 3.2 bn), a year-on-year increase of 122 percent compared with 2006/07.

More surprisingly, given the reduction in troops in Iraq, the cost of Britain's military deployment there has also increased to Pnds 1.6 bn, a year-on-year rise of 72 percent.

The combined costs, about 50 percent more than the government forecast three months ago, come as military officials have made it clear that the number of British troops in Iraq would not now be cut to 2,500 by spring, as Prime Minister Gordon Brown has suggested.

Committee chair James Arbuthnot said that few people will object to the investment being made in better facilities and equipment for our troops in Iraq and Afghanistan.

"However, this estimate represents a lot of public money. The MoD (Ministry of Defence) needs to provide better information about what it is all being spent on," Arbuthnot warned.

The sharpest increases were for buying, repairing and replacing new armoured vehicles and other equipment acquired under a special Urgent Operation Requirements system, referred to as UORs.

The total cost of operations in Iraq and Afghanistan since the so-called war on terrorism began back in 2001 now totals some Pnds 10 bn, compared with only some Pnds 7 bn previously set aside.

A new book published last month, co-authored by Joseph Stiglitz, former World Bank, said that the cost of Britain's two wars was expected to rise to more than Pnds 20 bn, including social costs, by 2010.

Nick Harvey, Liberal Democrat defence spokesman, warned that the new parliamentary report "clearly shows how the Iraq war is continuing to bleed our finances dry, leaving soldiers in Afghanistan overstretched and under-equipped."
Kate Hudson, the chair of CND peace group, said there was also clear human costs of the wars in Iraq and Afghanistan are clear, with an estimated 655,000 dead in Iraq alone.

"The opportunities lost by spending these billions on further destruction rather than on humanitarian reconstruction adds to the long list of tragedies unleashed by Bush's wars," Hudson said.

2008-03-11T16:06:00.000-07:00

Brand Cuba

By MICHAEL CASEY

As Fidel Castro brings his reign in Cuba to a long overdue end, we are left to ponder how a leader with such a dismal economic record could retain power for a half-century.

There is merit to many of the standard explanations for Castro's longevity -- both those of his critics, who cite political repression, and those of his fans, who believe the Cuban majority was won over by advances in health and literacy. There is also some merit in the arguments blaming Washington, either for its self-defeating trade embargo or for not being tough enough.

But these only tell part of the story. Instead, if we view Castro's political machine through the apolitical prism of the market, we can attribute its durability to a concept that's alien to his socialist rhetoric, and deeply rooted in the American capitalist system he claims to despise: branding. Castro's political "success" is a case study in managing the global information economy.

The Cuban Revolution is and always has been a brand. Its face has changed over time -- from the "barbudo" rebels of the Sierra Maestra to Che Guevara's piercing stare, from Cuba's graying salsa legends to its globe-trotting medics -- but incredibly, its essence has survived.

Marketing gurus tell us that a successful brand functions as a store of values. It encapsulates a pool of attractive ideas that satisfy customers' desire for meaning. To encourage loyalty to a brand, they say, the marketer must cultivate a sense of belonging and personal identification with the individual.

For many within a core constituency of left-leaning, relatively well-educated people both inside and outside Cuba, Castro's "revolution" achieved precisely this. To this niche market, Cuba evokes a set of magical buzz words long-favored by the radical left: "resistance," "social justice," "struggle." It represents an idealized, selfless counterpoint to ruthless, greedy capitalism. It is the alternative to brand U.S.A.

This is, of course, a constructed "Cuba," one with little relation to the real Cuba, with its dysfunctional, increasingly inequitable social and economic structure. But savvy brand managers are rarely hindered by a divergence from reality. Has the availability of perfectly safe, free tap water stopped marketers from touting the life-giving powers of their bottled alternatives?

Castro has long been blessed with a great ability to manipulate information and images in the interest of self-promotion. During a pivotal 1957 interview with New York Times correspondent Herbert Matthews, he had his men move around in the trees to create the illusion of a bigger rebel force. Five decades later, the art had not deserted him. After his intestinal illness was first revealed in July 2006, the delayed, staggered release of photos of the convalescing Cuban leader in an Adidas tracksuit seemed designed to give his archenemies enough rope to hang themselves. Many Miami Cuban bloggers prematurely pronounced Castro dead and denounced the first images as fakes.

In the early 1960s, Castro was forever trailed by a clique of talented photographers -- including Alberto Korda, who took the most famous photo of Che Guevara. Preferring Life magazine's documentary style over the bleak genre of Soviet socialist realism, they portrayed the bearded Cuban leader in a humanistic light, and gave his revolution a vibrant, hopeful and distinctly American aesthetic.

Later, when CIA-backed Bolivian soldiers killed Guevara in 1967 -- converting the Argentine-born revolutionary into a martyr-hero for Paris and Berkeley radicals -- Castro wrapped himself in the image of his former comrade-in-arms, which conveniently helped him cover up Cuba's very un-revolutionary submission to Soviet dominance. The Cuban government actively promoted Korda's iconic image, which the country's poster artists soon gave a Pop Art makeover. The now-ubiquitous Che brand was born.

Years later, in the 1990s, branding helped hide the wealth divide and graft in Cuba that arose out of the post-Soviet dual-currency system. Decrepit Havana was marketed as a giant museum, a revolution frozen in time -- complete with rusted '50s Chevys and octogenarian musicians. Later, with the rise of the anti-globalization movement, Che was re-resurrected in a pitch to younger tourists, one that came with Cuban-made calendars, watches, postcards and all manner of trinkets bearing Korda's image.

Now Cuba's brand centers on health care. Its free hospitals are depicted as alternatives to an unfair, inefficient U.S. system, while its foreign-posted doctors put a face on the country's projected spirit of humanitarianism.

Some 200 of these medics turned up at last October's 40th anniversary of Che's execution in La Higuera, Bolivia. They demonstrated how the Cuban revolution's brand has been simultaneously altered and preserved through a period of sweeping transformation on the island and in the world outside it.

These doctors -- members of a 30,000-strong foreign medical corps, whose work gives Havana access to badly-needed goods like Venezuelan oil -- are unwittingly contributing to a mounting problem back home. Their absence exacerbates staffing constraints in Cuba's once well-regarded hospitals, now stretched by the demands of an aging population. Nonetheless, in the long string of speeches at La Higuera, Cuban, Venezuelan and Bolivian officials feted the physicians as model revolutionaries -- guerrillas with stethoscopes in place of rifles. And in case the branding tie-in wasn't clear, each medic was dressed in a white lab coat opened to reveal a red or blue Che T-shirt.

Mr. Casey is Dow Jones Newswires bureau chief in Buenos Aires, and author of "Che's Afterlife," a forthcoming book to be published by Vintage on Alberto Korda's famous image of Che Guevara.

McCAIN'S TAX CUTS PLAN

Bush and the Dollar

By DAVID MALPASS

When President George W. Bush addresses the Economic Club of New York on Friday, his comments on the dollar crisis will be the crucial issue for markets and the economy. The best thing he could do would be to state clearly that he wants a stronger dollar. That would draw liquidity back to the U.S., lower inflation risks, and head off the growing calls for government bailouts and support programs.

Absent administration support for the dollar, recent Fed rate cuts have simply sped up the flood of capital away from the U.S. without providing enough domestic stimulus. The rest of the world is already full of cheap dollars, pushing gold and oil to new highs, European tourists onto Madison Avenue, and petro-dollar sovereign wealth funds into building islands to use up their excess.

A clear presidential preference for a stronger dollar could cause an immediate leap in financial markets. U.S. stocks and corporate bonds are attractively priced -- except for the dollar risk. No matter how high a bond yield or how strong the track record of a U.S. private-equity manager, the threat of continued dollar weakness holds global liquidity at bay. The prospect of a stronger dollar would reverse that.

This week, Mr. Bush may well use the same inadequate mantras that the administration has repeated since 2001: A strong dollar is in the "national interest," and the dollar should reflect U.S. economic "fundamentals." U.S. Treasury Secretary Hank Paulson used these standard phrases, now taken to be code words for a weaker dollar, on March 3, with predictable results -- the dollar hit new lows last week. Jean-Claude Trichet, the hard-money head of the European Central Bank, perhaps holding his nose, voiced similar encouragement for the dollar on March 3 (and yesterday): "I consider it very important what has been affirmed and reaffirmed by the U.S. authorities . . . according to whom a strong dollar is in the interest of America."

Damned by faint praise. The officials are not saying they want a stronger dollar, or that they will do something to stop the dollar's plunge. In fact, the U.S. has repeatedly prevented the G-7 group of finance ministers and central bankers from discussing ways to strengthen the dollar, most recently by imposing a dollar-lite agenda at the February G-7 meeting.

The current dollar mantra, coined in the 1990s, never made sense. Saying a strong dollar is in our "national interest" ignored the need for dollar stability. It set no upper bound on the dollar's strength, causing a destructive global deflation cycle from 1997 to 2001.

The dollar is now weaker than the loonie, the Canadian dollar, yet the same hollow 1990s phrases are being mouthed. If a strong dollar is in the "national interest," then the seven-year dollar collapse is clearly in need of a remedy. There's an equally deep logical flaw in claiming that the dollar should depend on economic "fundamentals." A strong, stable currency is itself one of a country's most valuable fundamentals, not a byproduct of other fundamentals. Our fundamentals haven't been nearly as bad as the dollar's seven-year slide. More likely, the weak dollar trend is itself a bad economic fundamental, masking health elsewhere.

The policy shift to a stronger dollar is as critical for national security as it is for economic health. Oil would cost less if the dollar were stronger, slowing the transfers to our antagonists in Venezuela, Iran and Russia. A stronger dollar would allow U.S. wealth to grow as fast as foreign wealth, adding to our strength and independence.

Though many economists still support the theory of unlimited free-floating exchange rates, no weak-currency country has had a healthy economy. Momentum takes over and pushes currencies to extremes that can't be hedged. Many also think current interest rates control currencies. But 1% more or less in annual interest won't make up for a country's longer term intentions for its currency. Markets have labeled the U.S. a weak-currency country. That's an albatross that the president should dump.

An administration decision to support a stronger dollar would be dramatic, and probably so unexpected that it would break the dollar's downward momentum, and with it the defeatism now dragging us down. If the dollar started up, the vicious cycle -- dollar weakness causing economic weakness and more dollar weakness -- could be reversed.

The president's dollar preferences matter even in the short run, setting expectations that become self-fulfilling. The many speculators now short-selling the dollar, or betting against the U.S. in favor of commodities and other currencies, would have to reduce their positions. This would immediately add to U.S. liquidity, and improve the outlook. Treasury would begin working to achieve a stronger dollar, opening the possibility, anathema to dollar shorts, of a G-7 preference for a stronger dollar or even coordinated currency intervention.

There's more at stake in the dollar debate than a recession, inflation and a bear market. In the economic confusion created by the weak-dollar policy, presidential campaigners are blaming Nafta and free trade, not the weak-and-weaker dollar, for hard times.

The president should state a preference for a stronger and stable dollar. It has a good chance of stopping the credit crunch. It's free and easy. And let's face it: Other measures aren't working.

BEST OF THE WEB TODAY

Political Diary

Just What the Doctor Ordered

House Ways and Means Chairman Charles Rangel has been spending time in the hospital with the flu the last few days, but he is likely to have gotten a real morale booster yesterday with the news of Gov. Eliot Spitzer's meltdown.

Mr. Rangel, who has represented Harlem in Congress for 38 years, is known to hold the prickly governor in minimal high regard. He has often snidely referred to Mr. Spitzer as "the smartest man in the world," a reference to the governor's well-known arrogance.

Should Mr. Spitzer resign, Mr. Rangel would also be in the catbird's seat. Lt. Gov. David Paterson, a former state senator from Harlem, is a longtime protege of Mr. Rangel and would likely grant his mentor wide influence over patronage and fiscal issues. "Rangel could have instant access to Paterson anytime of the day or night," is how one New York Democratic leader evaluates Mr. Rangel's likely importance in a Patterson administration.

So if Mr. Rangel makes an even swifter recovery from the flu than is expected, there will be good reasons for that new spring in his step and twinkle in his eye.

-- John Fund

Deus Ex Machine Politics

There is little chance that New York will be competitive in the presidential race this year, but the Spitzer scandal will breathe new life into New York's battered GOP. Poised to fill the governor's seat is Lt. Gov. David A. Paterson, a Democrat who has little name recognition and lacks the force of personality that animated Mr. Spitzer's political career. Mr. Paterson, an ally of Rep. Charlie Rangel, will likely be a seat-warmer while both parties prepare to battle for the governor's mansion in 2010. Democrat Attorney General Andrew Cuomo will likely now become the de facto leader of his party in the state.

Meanwhile, Senate Republican leader Joe Bruno, a veteran political infighter, will take the lieutenant governor's seat, giving him a larger platform to use for Republican advantage. He could run for governor himself in two years. But it's more likely that he'll find someone else within his party to carry the Republican banner. If Rudy Giuliani wants to get back into the game, this is his chance. There's also a possibility that New York Mayor Michael Bloomberg could be interested. And then there's John Spencer, the former mayor of Yonkers who ran against Hillary Clinton for senate in 2006. He has a fundraising base, knows what it takes to run a statewide campaign and has executive experience.

A little more than a year ago, Eliot Spitzer's gubernatorial landslide (69%) was the biggest the state had ever seen. New York seemed on a path to becoming a one-party state. Democrats tightened their grip on the state's General Assembly, won every state-wide elective office and even won in a few upstate congressional districts that traditionally favor Republicans. This year, led by Mr. Spitzer, Democrats looked likely to win control of the last vestige of Republican power in New York, the state Senate. How quickly things change. Republicans now see an opening to reverse their fortunes in New York, only helped if Mr. Spitzer tries to cling to office. It remains to be seen if the state and national GOPs are up to seizing the opportunity.

-- Brendan Miniter

Quote of the Day

"In lead stories Monday night about New York Governor Eliot Spitzer being linked to a prostitution ring, neither ABC's World News nor the NBC Nightly News verbally identified Spitzer's political party. Must mean he's a liberal Democrat -- and he is. CBS anchor Katie Couric, however, managed to squeeze in a mention of his party. On ABC, the only hints as to Spitzer's party were a few seconds of video of Spitzer beside Hillary Clinton as they walked down some steps and a (D) on screen by Spitzer's name over part of one soundbite. NBC didn't even do that. While ABC and NBC failed to cite Spitzer's political affiliation in the four minutes or so each network dedicated to the revelations, both managed to find time to applaud his reputation and effectiveness as the Empire State's Attorney General before becoming Governor" -- Brent Baker of the conservative Media Research Institute.

Follow the Money

The fall of Eliot Spitzer, caught in the roll-up of a high-end prostitution ring, is bound to be an occasion for a great deal of dime-store psychoanalysis about what led to his self-destructive behavior.

But perhaps the most interesting detail isn't the all-too-familiar tale of a politician imagining himself immune to the laws and standards he prescribes for others. The most interesting detail is how he got caught.

The New York Governor, who made his bones doggedly pursuing alleged financial crimes, was undone by his own bankers. The financial transactions by which he endeavored to conceal his payments to the Emperors Club were unusual enough that they prompted a referral by his bank to the IRS, which in turn brought in the FBI and ultimately the prosecutors. Based on the information currently available, Mr. Spitzer himself was the thread that began the unraveling of the Emperor's Club prostitution ring.

Prosecutors are supposed to know better. But in this case, Mr. Spitzer appears to have left behind precisely the kind of paper trail that he once used himself in pursuit of Wall Street malefactors, real or imagined. The latest burble from the TV talking heads this morning now suggests that Mr. Spitzer is delaying his resignation as leverage for a favorable plea bargain. If so, he apparently learned at least one thing from his years as a dictator of humiliating plea bargains to those caught up in his publicity-seeking investigations. All the more ironic, then, that the Sheriff of Wall Street gave himself away with his slippery financial dealings, rather than his sordid appetites, ending in his disgra

Obama, Clinton Turn Focus to Pennsylvania Primary (Update1)

March 11 (Bloomberg) -- Democratic presidential candidates Barack Obama and Hillary Clinton kept up their sparring while campaigning today in Pennsylvania even as voters in Mississippi headed to the polls for a primary there.

Obama made a final appeal to Mississippi voters this morning, talking about energy, education and the economy in Greenville, before heading north. Obama, who's vying to become the first black U.S. president, is heavily favored in the state, where more than half of the Democratic electorate is black.

Clinton renewed her line of attack on the Illinois senator's experience and record, telling a crowd of several thousand people in Harrisburg, ``There's a big difference between talk and action.''

The former first lady ``will say and do anything to win this election,'' Obama spokesman Bill Burton said in a statement sent to reporters ahead of her speech.

Both campaigns are turning their attention to Pennsylvania, which has 158 pledged delegates available in its primary on April 22, compared with 33 at stake today in Mississippi. Clinton, a senator from New York, trails Obama in the race for Democratic convention delegates who will select the party's nominee. She has set Pennsylvania as a key test of her campaign.

Labor Support

Clinton stood on stage at a downtown concert hall with dozens of supporters behind her, including a group representing union workers. She's counting on organized labor to help her score a victory in Pennsylvania, which has lost more than 200,000 manufacturing jobs since the beginning of 2001.

The 35-minute speech focused on the economy and on Clinton's experience as a senator and first lady.

``I want you to be voting on the basis of who you believe will be our best president, who can be our commander-in-chief from Day One,'' Clinton, 60, said. ``I don't want you voting on a leap of faith, I want you to look at the record, I want you to look at the results.''

She told the audience that the ``eyes of America and the world are on Pennsylvania.'' She also drew applause from the audience when she said she would reduce U.S. dependence on foreign oil.

In Greenville, Mississippi, this morning, Obama made a campaign stop at Buck's Restaurant, where he ate a breakfast of scrambled eggs, grits, turkey sausage and wheat toast with the town's mayor and other city officials.

They spoke about education and ``clean energy'' jobs, among other topics. As they talked, some in the crowd outside were chanting ``Yes, we can,'' Obama's campaign slogan.

Obama Supporter

Restaurant owner S.B. Buck, 60, said he's supporting Obama over Clinton, even though he thinks the candidate's husband, Bill Clinton, was a great president. Buck, who is black, said he was turned off by some of the tactics used by the Clinton campaign that have injected race into the political debate.

``I think they did more to put people in his corner than take them out,'' Buck said in an interview.

Obama's aides spoke out against statements made by Clinton supporter Geraldine Ferraro, a former U.S. representative from New York and the Democratic vice presidential nominee in 1984. In an interview with the Daily Breeze newspaper in Torrance, California, Ferraro said Obama has advanced because of his race.

Ferraro Remarks

``If Obama was a white man, he would not be in this position,'' Ferraro was quoted as saying by the newspaper in a story published March 7. ``And if he was a woman he would not be in this position.''

Clinton today disavowed the remarks and called them ``regrettable.'' In an interview with the Associated Press, Clinton said, ``We ought to keep this on the issues.''

Obama adviser David Axelrod called on Clinton to remove Ferraro from any position with her campaign and said doing anything less would encourage other supporters to make such statements. Another Obama campaign adviser, Susan Rice, said the remarks were ``really outrageous and offensive.''

``It is the sort of comment that we have heard repeatedly, I'm afraid, from some of the Clinton surrogates,'' she said on MSNBC today.

An Obama adviser, Samantha Power, resigned last week after she was quoted in a Scottish newspaper calling Clinton ``a monster.'' Rice said Ferraro's comments were ``far worse.''

Senator John McCain of Arizona, who has secured the Republican presidential nomination, is holding fundraisers this week while campaigning in townhall-style forums.

Economic Downturn

In St. Louis today he promoted his economic agenda and emphasized his understanding that the economy was in a downturn.

``We know that Americans are hurting. We know that these are difficult times,'' said McCain, 71.

He also took shots at Clinton and Obama over their statements that they would begin withdrawing U.S. combat troops from Iraq if elected and would demand that Mexico and Canada agree to modifications to the North American Free Trade Agreement.

Pulling out of Iraq too soon would mean that ``the conflict will spread and we will be back, with greater sacrifices,'' he said.

McCain said an attempt to renegotiate the free-trade agreement with the nation's two neighbors would throw U.S. credibility into question in other treaty talks.

Fallon Stepping Down as Mideast Commander, Gates Says (Update2)

March 11 (Bloomberg) -- Admiral William Fallon is stepping down as head of U.S. Central Command because of perceived differences on Iran policy with the Bush administration, Defense Secretary Robert Gates said today.

Fallon, 63, assumed command of all U.S. forces in the Middle East and Central Asia a year ago, with responsibility for the wars in Iraq and Afghanistan. He informed Gates of his decision today in the wake of an Esquire magazine article that portrayed him as an ardent opponent within the administration of war with Iran to halt its possible building of a nuclear bomb.

While the U.S. is pursuing a policy of diplomatic pressure on Iran at the United Nations and unilateral sanctions to weaken its access to the international banking system, the Bush administration hasn't ruled out military action as an option.

``Recent press reports suggesting a disconnect between my views and the president's policy objectives have become a distraction at a critical time and hamper efforts in the Centcom region,'' Fallon said in a statement.

Fallon said while he doesn't believe a policy rift exists, ``the simple perception that there is makes it difficult for me to effectively serve America's interests there.''

Gates said Fallon ``reached this difficult decision entirely on his own.''

`Right Thing'

``I believe it was the right thing to do, even though I do not believe there are in fact significant differences between his views and administration policy,'' Gates told reporters at the Pentagon.

The Esquire piece praised Fallon as ``the rarest of creatures in the Bush universe: the good cop on Iran, and a man of strategic brilliance.''

The article said Fallon had created tensions with the White House by opposing the administration's Iran rhetoric and cited well-placed observers as saying ``it will come as no surprise if Fallon is relieved of his command before his time is up next spring, maybe as early as this summer, in favor of a commander the White House considers to be more pliable.''

Gates described as ``just ridiculous'' an idea raised in the article that if Fallon leaves, it may mean the U.S. is going to war with Iran.

Fallon will leave his post at the end of the month. Army Lieutenant General Martin Dempsey, the deputy commander of Central Command, will serve as acting commander once Fallon steps down, Gates said.

`Enormously Talented'

``Admiral Fallon will be difficult to replace,'' Gates said. ``He is enormously talented.''

Before taking the Mideast command, Fallon was in charge of U.S. forces in the Pacific.

Democratic Senate Majority Leader Harry Reid called Fallon's departure ``yet another example that independence and the frank, open airing of experts' views are not welcomed in this administration.''

In an interview last month in Doha, Qatar, Fallon said Iran continued to supply lethal aid and training to extremist militias in Iraq and said the U.S. was looking for ``a long-term change'' in Iranian behavior.

Fallon, a former fighter pilot known to friends as ``Fox,'' routinely rejected news stories that suggested he clashed with General David Petraeus, the top U.S. military commander in Iraq. Fallon's resignation comes just weeks before Petraeus is scheduled to testify before Congress on security conditions in Iraq.

Iraq Pause

In the interview last month, Fallon endorsed Petraeus's decision to pause this summer before deciding whether to continue withdrawing U.S. combat brigades from Iraq later in the year.

Fallon's appointment was part of a broad shakeup of the U.S. military's command structure in the Middle East that coincided with President George W. Bush's decision to add 21,500 combat troops in Iraq to the 131,000 already there, with the primary goal of stabilizing Baghdad.

Bush, in a statement, said Fallon, a Vietnam veteran who previously served as head of U.S. Pacific Command, had served the U.S. ``with great distinction'' for 40 years. He was the first Navy officer to head Central Command.

2007-12-20T09:02:00.001-08:00

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.

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.

2007-12-19T20:48:00.001-08:00

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.

2007-12-19T19:01:00.001-08:00

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)

2007-12-19T18:12:00.001-08:00

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.

2007-12-19T16:15:00.000-08:00

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.

2007-12-19T16:13:00.001-08:00

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.

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.

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.

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.

2007-12-19T10:29:00.002-08:00

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.

2007-12-19T10:29:00.001-08:00

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.

2007-12-19T10:28:00.001-08:00

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.

2007-12-19T08:36:00.000-08:00

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.

2007-12-19T08:33:00.000-08:00

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.

2007-12-19T08:32:00.000-08:00

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

2007-12-19T07:55:00.000-08:00

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

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.

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.

2007-12-19T07:50:00.000-08:00

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.

2007-12-19T07:46:00.000-08:00

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.

2007-12-19T06:26:00.001-08:00

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.

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