How Bush Can Transcend the Shoe Thrower

A small outrage requires a grand gesture.

MARK BOWDEN

As a holiday gesture, President Bush ought to ask the Iraqi government to pardon Muntazer al-Zaidi — the Iraqi journalist who tried to hit him with his shoes.

Sometimes a small outrage affords an opportunity for a grand gesture. The president was not harmed by the stunt. He had the grace to joke immediately afterwards that the missiles were a “size 10.” Video of the shoe-throwing, which went viral on the Internet and has been seen now by just about everyone on the planet, has mostly elicited laughter.

But already the consequences have been no joke for Mr. Zaidi. By most accounts, he has been roughly treated in prison, where he was taken after Iraqi Prime Minister Nouri al-Maliki’s guards were seen beating him after he threw the second shoe. He now faces as many as 15 years in prison, one for every one of his 15 minutes of fame.

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This is clearly out of proportion. The stunt was rude and no doubt embarrassing to the Iraqi authorities, but it is hardly a high crime. For Americans, the only serious issue raised by the shoe-throwing episode is how Mr. Zaidi was able to throw the second one. With its national pride at stake, the Iraqi government is unlikely to cut the journalist a break. If a gesture is to be made, it has to come from Mr. Bush.

Pardoning him would be the fair thing to do, and would cost nothing. It would reflect positively on a president who, face it, could use some good publicity, and would instantly deflate whatever folk hero status Mr. Zaidi now enjoys.

It would also be a small way of acknowledging that Iraqis have borne by far the greatest measure of pain in this war, and that America’s handling of the country since chasing Saddam Hussein from power, while trending in the right direction currently, has not been a singular and shining success. Many Iraqis have come by their anger toward the U.S. honestly.

Magnanimity is a strong prerogative, too seldom used. It is a chance for the man to be as large as the office. No one was better at this than Abraham Lincoln, whose frequent public acts of forgiveness, from promoting his political rivals to commuting the death sentences of Union soldiers, earned him an enduring legacy of kindness and humility. Less remarked upon is Lincoln’s shrewdness. He was no softy. He signed many a death warrant for deliberate acts of cruelty or criminality in the ranks, but he understood that sparing a “simple soldier boy” for panicking or for falling asleep would do far more for the army’s morale than another execution would do for its discipline.

Mr. Bush missed an opportunity to rise above the fray a few years ago when the popular country-music trio The Dixie Chicks publicly insulted him. If the president, who professes to be a country music buff, had taken a public opportunity to praise the group’s harmonies, which are excellent whatever its politics, Mr. Bush would have diminished the insult and elevated himself.

As the video now plays, and plays, and plays, with just the action sequence of hurled shoes and the ducking president, Mr. Bush appears ridiculous. It will stay that way and is certain to become, with several other unfortunate tableaus (“Mission Accomplished” comes to mind), an iconic moment in the Bush presidency. With a simple gesture of reprieve, he could completely rise above it. Mr. Zaidi would be nothing more than a rude prankster. The president would be the story’s hero.

Mr. Bowden, a national correspondent for the Atlantic Monthly, is the author of “Guests of the Ayatollah” and, more recently, “The Best Game Ever,” both published by Atlantic Monthly Press.

Clinton’s Donor List Raises Lots of Questions

Can’t the United Way find better uses for its money?

MARTIN PERETZ

This is not about former President Bill Clinton’s shakedown of the sheikhs. They can take care of themselves, Clinton Foundation or no Clinton Foundation.

This is also not about Hillary Clinton’s vulnerability to her husband’s donors. She can tell him to “go stuff it,” which people say she’s been doing for a long time anyway. Rest assured, the next secretary of state will not shirk her diplomatic obligations for the benefit of some scummy foreign mineral magnate’s uranium.

What I’ve been tying to discern about the Clinton Foundation is why — aside from the annual fancy party in New York — foreign governments, other foundations and charities have given money to fund what they already do themselves.

I understand why McDonald’s of central Arkansas would make a contribution to Mr. Clinton’s present career. He has spent so much cash on Big Macs over three decades that they actually owe it to him. But I fail to grasp why the “I Won’t Cheat” foundation gave a donation to Bill’s charity. He isn’t exactly an ideal poster boy.

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None of these gifts were really big money, at least not for Mr. Clinton, for whom a million dollars isn’t at all big anymore. But the scrounging operation seems to have dug down very deep to pull in thousand-dollar gifts.

There were four United Way contributions, one from the national outfit, three from local branches. Since when is the Clinton Foundation one of the approved charities of the United Way?

Then there are more serious questions about operating charities. What was the purpose of a contribution by the National Opera of Paris? Or of hospitals themselves in strained circumstances, like Maimonides Medical Center in Brooklyn and Arkansas Children’s Hospital?

The University of Cambridge and Liverpool University in the United Kingdom threw into the pot from the other side of the pond. American universities like Tufts, Columbia, Georgetown, Iowa State, Texas, Brown, Rensselaer Polytechnic, UCLA and its school of public health all gave, plus the University of Judaism with a whopping sum between $100,000 and $250,000. (Is Bill Clinton now supporting studies in theology?) Do these educational institutions have such deep pockets to share with Bill Clinton’s ego?

On the donor list are also the names of the charities we all give to generically: Human Rights Watch (well, not me), Feed the Children, and the Hunger Project. The foundation also receives funding from the International Bank for Recovery and Development of the World Bank, and the World Health Organization. They have their own, far-reaching projects. Why would they give cash to charitable work for which Mr. Clinton is at most a matchmaker?

There’s a certain looseness here that spreads downwards: District 1199 of the Service Employees International Union gave old comrade Bill somewhere in the range of half a million bucks. And then spreads upwards, so to speak: Citi gave him from $1 million to $5 million. Perhaps Citi’s gift was just a pledge. In that case, is Treasury now paying up?

Many are focused on the contributions of the Arab states. Mr. Clinton started his charity in 1997 with four years to go in his presidency, a period when no American law provided for the most elementary public reporting of the enterprise. Still, the fact that Saudi Arabia is on the donor list comes as no surprise.

What we now know is that Mr. Clinton was indiscriminating when it came to accepting cash from all sorts of countries. He took money from poor countries like Jamaica, and more prosperous countries like Italy. He dipped into the Irish Aid Fund and the Swedish Postal Lottery for big money, and for small money from the Social Economic Council of the Netherlands. And then there was an especially strange source from which he schnorrered: Citgo, Hugo Chávez’s oil company. Even if the revolucion didn’t gain points for this, it is unseemly for an American president to ask the energy company of the Venezuelan dictatorship for spare cash.

So where did all this fund-raised money go? Wouldn’t you want to know to which philanthropic undertaking the King of Saudi Arabia and the Custodian of the Two Holy Mosques committed himself? This information is not in the report — and it doesn’t look like President-elect Obama has any interest in pushing for further disclosure. Maybe the king just gave to general expenses.

Mr. Peretz is editor in chief of The New Republic.

Get Ready for a Lost Decade

Bad times don’t produce good policy.

By HOLMAN W. JENKINS, JR.

How many times have you heard that we’ve learned the lessons of the Great Depression and won’t repeat the same mistakes?

Corbis

What ’stimulus’ looks like.

That statement is a bit of a false promise, since there was only one Great Depression, and many, many steps were taken and not taken, with no chance to rerun the experiment over and over to figure out what worked, or would have worked, and what didn’t.

Letting hundreds of banks collapse, destroying savings and confidence, is one mistake we won’t make again. But many want to insist, without evidence, that more government spending would have ended the depression. That’s the direction the Obama administration is taking. Others say government did not do enough to restore business confidence, or did too much to damage it, piling on taxes, regulation and labor unions. This at least is firmer ground. Plenty of evidence from history shows that actions hostile to business tend to be related to an absence of prosperity.

But more important than these talismanic assurances about what we’ve learned from the Great Depression is the mistake in assuming that, even if we had a coherent view of what should be done, coherent polices would therefore be implemented.

This has little relation to how policy is made in a democracy.

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Policy is always bad to a degree, but long periods of prosperity tend to be self-reinforcing since powerful interests are born with the means and motive to preserve the status quo. That status quo may really be a contributor to prosperity, such as regulatory restraint and moderate tax rates. That status quo may in some respects be ill-advised, such as excessive subsidy to housing debt.

But once prosperity blows up, the quasi-virtuous policy circle becomes an unvirtuous one as new interest groups come to the fore to exploit an appetite, previously weak, to impose their costly or vindictive wish lists. And even well-meaning policy gets twisted and rendered incoherent.

It’s already happening to our banking bailout. If injecting government capital to improve confidence in banks was a good idea, it did nothing to improve the banks’ own confidence in their borrowers. Yet now that banks have government capital, they’re being pressed to lend to politically favored constituents regardless of their own judgment about whether the borrower is good for the money.

Or take the gathering auto bailout: Taxpayer dollars are being thrown at Detroit auto makers to make them “viable,” even as Congress imposes new fuel-mileage mandates requiring them to incur tens of billions in costs unlikely to be recouped from their customers — the definition of “nonviable.”

Mr. Obama’s troops palpitate with excitement at the prospect of $1 trillion in “stimulus,” though any net benefit to the economy likely will be incidental. Al Gore has thrown out the window any unpopular carbon taxes in favor of direct subsidies to his green energy investments. He sees the moment for what it is — alarm about global warming has degenerated into a pretext. Billions will be diverted from useful purposes to create “green jobs” that deliver no meaningful impact on climate or the accumulation of atmospheric carbon.

Large “confidence” costs were always destined to flow from the extreme steps being taken, even if advisable, to prop up the economy. The federal government’s alternating takeovers and bailouts of companies are inherently destabilizing and create massive uncertainty in investors and businesses. The Fed’s shocking steps to print money and acquire every kind of private asset and, soon perhaps, washing machines and Chevy Tahoes, may in retrospect be seen as just the right medicine. At the moment, no rational investor or business manager looks upon such doings with confidence in our economic future.

On top of it all, the Madoff scandal is peculiarly demoralizing in ways that may make its impact greater than the sum of its parts.

Our point here is that the bad policy vicious circle probably has a long way to run. While it’s still possible to entertain wild hopes about an Obama administration, such hopes are partly self-liquidating on closer inspection — they exist in the first place only because Mr. Obama has given us so little to go on, except campaign boilerplate.

Bottom line: Politics is in charge — in a way that makes a lost decade of subpar prosperity more likely than not.

Happy Holidays.

Defense Spending Would Be Great Stimulus

All three service branches are in need of upgrade and repair.

MARTIN FELDSTEIN

The Department of Defense is preparing budget cuts in response to the decline in national income. The DOD budgeteers and their counterparts in the White House Office of Management and Budget apparently reason that a smaller GDP requires belt-tightening by everyone.

AP/USAF

We could use some more F-22s.

That logic is exactly backwards. As President-elect Barack Obama and his economic advisers recognize, countering a deep economic recession requires an increase in government spending to offset the sharp decline in consumer outlays and business investment that is now under way. Without that rise in government spending, the economic downturn would be deeper and longer. Although tax cuts for individuals and businesses can help, government spending will have to do the heavy lifting. That’s why the Obama team will propose a package of about $300 billion a year in additional federal government outlays and grants to states and local governments.

A temporary rise in DOD spending on supplies, equipment and manpower should be a significant part of that increase in overall government outlays. The same applies to the Department of Homeland Security, to the FBI, and to other parts of the national intelligence community.

The increase in government spending needs to be a short-term surge with greater outlays in 2009 and 2010 but then tailing off sharply in 2011 when the economy should be almost back to its prerecession level of activity. Buying military supplies and equipment, including a variety of off-the-shelf dual use items, can easily fit this surge pattern.

For the military, the increased spending will require an expanded supplemental budget for 2009 and an increased budget for 2010. A 10% increase in defense outlays for procurement and for research would contribute about $20 billion a year to the overall stimulus budget. A 5% rise in spending on operations and maintenance would add an additional $10 billion. That spending could create about 300,000 additional jobs. And raising the military’s annual recruitment goal by 15% would provide jobs for an additional 30,000 young men and women in the first year.

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An important challenge for those who are designing the overall stimulus package is to avoid wasteful spending. One way to achieve that is to do things during the period of the spending surge that must eventually be done anyway. It is better to do them now when there is excess capacity in the economy than to wait and do them later.

Replacing the supplies that have been depleted by the military activity in Iraq and Afghanistan is a good example of something that might be postponed but that should instead be done quickly. The same is true for replacing the military equipment that has been subject to excessive wear and tear. More generally, replacement schedules for vehicles and other equipment should be accelerated to do more during the next two years than would otherwise be economically efficient.

Industry experts and DOD officials confirm that military suppliers have substantial unused capacity with which to produce additional supplies and equipment. Even those production lines that are currently at full capacity can be greatly expanded by going from a single shift to a two-shift production schedule. With industrial production in the economy as a whole down sharply, there is no shortage of potential employees who can produce supplies and equipment.

Military procurement has the further advantage that almost all of the equipment and supplies that the military buys is made in the United States, creating demand and jobs here at home.

Increased military spending should involve more than just accelerated replacement schedules. Each of the military services can identify new equipment and additional quantities of existing equipment that can improve our fighting ability in Afghanistan and our ability to protect our military forces while they are in combat.

Military planners must also look ahead to the missions that each of the services may be called upon to do in the future. Additional funding would allow the Air Force to increase the production of fighter planes and transport aircraft without any delays. The Army could accelerate its combat modernization program. The Navy could build additional ships to deal with its increased responsibilities in protecting coastal shipping and in countering terrorism. And all three services have significant infrastructure needs.

Although some activities like ship building cannot be completed in the two year stimulus period, the major part of the expenditures can be brought forward in time by acquiring components and materials quickly and holding them in inventory until they are needed in the ship building process. Such a departure from just-in-time inventory management would be wasteful under normal conditions, but makes economic sense when there is temporary excess capacity.

Now is also a good time for the military to increase recruiting and training. Because of the current very high and rising unemployment rates among young men and women, it would make sense to depart from the military’s traditional enlistment rules and bring in recruits for a short, two-year period of training followed by a return to the civilian economy. As a minimum this would provide education in a variety of technical skills — electronics, equipment maintenance, computer programming, nuclear facility operations, etc. — that would lead to better civilian careers for this group. It would also provide a larger reserve force that could be called upon if needed by the military in the future.

The budgets for homeland security, for intelligence activities, and for the FBI have increased substantially during the past decade. The greater terrorist threat fully justifies these additional funds. The current two-year stimulus period provides an opportunity for additional temporary spending increases with high payoffs.

Investments in port security would reduce a major homeland vulnerability. Expanding the government’s language training programs for new intelligence community recruits would provide more translators who can monitor the terrorist communications that we are able to intercept. Additional infrastructure for the FBI would remove an important constraint on the number of new FBI agents.

The Obama team’s goal of sending a stimulus package to Congress before the end of January may not leave enough time to work out the details of expanded military and intelligence budgets. If so, the stimulus plan should ask the Congress to provide a total of at least $30 billion a year of increased outlays in these budget categories. A substantial short-term rise in spending on defense and intelligence would both stimulate our economy and strengthen our nation’s security.

Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal’s board of contributors.

Tuesday, December 23, 2008

CONVERSACIONES CON EL TIO GILBERTO III

REFLEXIONES LIBERTARIAS
UN LIBERAL EN LA REVOLUCION MEXICANA
Ricardo Valenzuela

Inicié las visitas a casa de mi tío, aunque durante las primeras, con el nerviosismo de todavía no haber asegurado un trabajo que me interesara, me resultaba difícil el concentrarme y aprovechar de esa forma los torrentes de sabiduría de ese gran hombre. Sin embrago, como el mismo Don Gilberto lo develara, finalmente Banco de Comercio me daba la oportunidad, no solo de un trabajo, sino de pasar a formar parte de las filas de su grupo elite conocido como; Desarrollo de Ejecutivos. Con esa noticia me presenté a la siguiente reunión la cual mi tío recibía con alegría pero como el mismo lo manifestaba con su; lo sabía—sin sorpresa.

Cuéntame de tu vida en Sahuaripa tío, le pido esa tarde. Me mira con algo de sorpresa e inicia. Mira hijo, me dice, yo nací a finales del siglo pasado en un Mexico totalmente controlado por el Porfirismo después de largas guerras que azotaron al país durante todo el siglo XIX. Nuestra guerra de independencia fue muy diferente a la de de los EU y, queramos o no, somos vecinos y siempre existirán las comparaciones de ambos bandos, los que admiran y los que odian a ese país. Porfirio Diaz llegaba al poder luego de años de caos y desorden, de invasiones de parte de Francia, los mismos EU, de una bacanal politica que llevó a Santana a ocupar la presidencia durante 11 veces y, ya sabemos, a perder la mitad del territorio.

La revolución de independencia de los EU, la iniciaron hombres totalmente convencidos de las ideas liberales que se expandían en Inglaterra desde el siglo XVII, pero con gran resistencia de parte de las monarquías del mundo y, en especial, de parte de la iglesia católica. Inglaterra había permitido que sus colonias se desarrollaran con gran autonomía en un experimento que el mundo entero observaba con gran curiosidad. Inglaterra, a diferencia de España, no había transplantado la monarquía a sus colonias sentando un campo fértil para esas ideas liberales. Cuando Miguel Hidalgo iniciaba los movimientos rebeldes de independencia, era ya un gran admirador de Jefferson y con voracidad leía a Rosseau, Locke, Montesquieu e inclusive, Adam Smith.

Para entender mejor la exposición de mi tío expreso lo siguiente: Es importante definir el entorno ideológico político de México tan diferente al de los EU y, sobre todo, el por qué. Uno de los primeros antecedentes de lo que luego se convirtiera en el populismo revuelto con proteccionismo, fueron las famosas Treinta Proposiciones Jurídicas de Fray Bartolomé de las Casas en 1552. Siendo el gran protector de los indios, nos daba un atisbo de la Teología de la Liberación de la Nueva España pues de ello nace la leyenda negra de la conquista. Ello seria el inicio del luego nacionalismo revolucionario que, en opinión de muchos, le ha cerrado las puertas al progreso del país.

Es decir, en lugar de cómo rezara la Constitución de los EU; Dios creo a todos lo hombres iguales, nosotros lo negábamos pidiendo protección y tratamiento especial para algunos lo cual, tal vez en esos momentos era algo válido, pero al haberse extendido a un esquema de un tipo de desigualdad aun mas cruel cuando, un pequeño grupo se adueñaba de la riqueza y después, con gran espíritu cristiano, decidían tirar migajas a esos desprotegidos en lugar de incluirlos en las oportunidades, sentaba las bases para el “nacionalismo revolucionario.”

Continúa don Gilberto; Hidalgo, prácticamente victorioso y a punto de tomar la ciudad de México con un ejército de campesinos hirviendo en odio contra las clases privilegiadas, cometía su gran error. Temiendo el saqueo y destrucción que eso provocaría, vacilaba cambiando su estrategia. Inició así una retirada que luego le costara no solo la derrota de su movimiento, sino el juicio de la sagrada inquisición y, finalmente, el ser ejecutado por el gobierno virreinal. Con la muerte de Hidalgo, morían también esas ideas liberales que ya le daban vida a los EU y, al continuar la lucha con Iturbide al frente hasta la victoria final, se iniciaba el cuento de nunca acabar: Esa enfermiza lucha de poder. Iturbide decide coronarse Emperador renegando de los principios liberales de la independencia.

A ese punto lo interrumpo. Oye tío; me describes un liberalismo muy diferente al que yo conocí en las clases de historia. ¿Estudiaste en colegio católico? Me pregunta. Si claro, le respondo. Bueno ahí tenemos el primer problema, me revira. La iglesia le declaró la guerra el liberalismo y no el liberalismo a la iglesia. En España y todas sus colonias, la iglesia y el estado vivían en una íntima sociedad para controlar sus pueblos en los cuales, la religión católica era única y obligatoria, y uno de los principios liberales es precisamente la libertad de culto. El otro, la separación de iglesia y estado. El liberalismo no es antirreligioso, pero en Mexico lo convirtieron anticatólico. El principio que le daba vida y expresado muy claramente, eran los derechos naturales del hombre heredados de Dios y, por lo mismo, superiores y anteriores al estado. Ello creaba la oposición al mandato divino de los monarcas.

Iturbide al ser coronado Emperador, surge esa figura mítica de Antonio Lopez de Santana para de inmediato derrumbar el novel imperio. A partir de esos momentos, se inicia una etapa vergonzosa en la cual, conservadores y liberales se disputan el poder en sangrientas guerras. Los conservadores luego en un acto de desafió, deciden importar a Maximiliano y establecer un nuevo imperio. Cuando Juarez los derrota, con ayuda de Don Porfirio, era ya tanto el odio entre los dos grupos que, de forma sádica, arremete contra la iglesia violando principios liberales básicos como; el de respeto a la propiedad al expropiar sus bienes; el de libertad de culto, cuando les establece una serie de límites a sus actividades y expulsa a cantidad de sus religiosos. Ahora, es importante tener en mente que la iglesia católica, en esos momentos, prácticamente controlaba la economía del país y era propietaria de bancos, negocios, el 60% de la tierra etc.

En esos años, fue cuando el liberalismo en Mexico se confundió con ese fervor antirreligioso que no es parte de su filosofía. El siglo XIX corría con velocidad, y la revolución industrial se expandía por todos los países que abrazaban el verdadero liberalismo creando enorme riqueza, mientras en Mexico nos hundíamos en luchas intestinas por el poder. Aun con el regreso de Juarez a la presidencia, luego de la ejecución de Maximiliano, el país seguía en un estado de zozobra y guerra, hasta que finalmente llega Porfirio Diaz y lo pacifica. Díaz era liberal, no hay duda. De lo que hay duda, es cómo es que su estilo tan personal de liberalismo se desarrolló.

En los EU ya se desarrollaban los mercados, instituciones, un sistema judicial autónomo, su sociedad civil, un sistema bancario y, desde su nacimiento; la declaración de independencia, su llamado “Bill of Rights” y su Constitución. Desarrollaban una cultura de trabajo y recompensa con oportunidad para todos que Jefferson bautizara como Meritocracia. México, en esos momentos, era cincelado por ideas como: El fatalismo; la vida es moldeada por fuerzas fuera de nuestro control. La herencia; la escalera social se estructura siendo parte del grupo privilegiado por nacimiento. La dignidad; la persona tiene valor independientemente de derechos, iniciativa, esfuerzo, o igualdad de oportunidades. La superioridad del hombre sobre la mujer con sus derivados del machismo y paternalismo.

Ante ese panorama, Porfirio Díaz desde el famoso grito de Gabino Barrera y con base al positivismo de Compte, dibujaba un liberalismo especial con un estado fuerte e interventor, que luego lo harían igualitario. Es decir, Diaz pensaba que los mexicanos no estábamos listos, preparados, ni queríamos decidir nuestro propio destino. Carecíamos de los ingredientes básicos como; capital, educación, instituciones, mercados, un sistema judicial, la sociedad civil. Luego, él mismo se identificaba como el único que podía llevar al país de la mano hasta su vida adulta y, por ello, se apolillaba en el poder a pesar ya inclusive de su edad.

El mismo Díaz declaraba con sorna: “En los EU la democracia funciona porque, una vez que el presidente es electo, todos se suman y lo apoyan. En México todos se suman de inmediato, para quitarlo.”

Ese era el entorno que rodeaba mi vida en Sahuaripa, un pueblo alejado de la civilización en lo alto de la sierra. Mi padre era un hombre que, a pesar de haber admirado a Díaz, se había convertido en miembro de organizaciones antireleccionistas que pensaban muy diferente. El que México estaba listo para la democracia y para asumir al timón de su nave. Desde muy chamaco absorbí esas ideas y me fui formando, no tanto antireelecionista, sino como un demócrata muy influido por el Prof. Vieyra, un gran liberal que arribara al pueblo para hacerse cargo de la secundaria. Con ese cargamento fue que partí a continuar mis estudios en Guadalajara en 1908.

U.S. to Fund Afghan Militias, Applying Iraq Tactic

YOCHI J. DREAZEN

KABUL, Afghanistan — The Afghan government will formally start a U.S.-funded effort to recruit armed local militias in the battle against the Taliban in remote parts of the country, exporting the tactic to Afghanistan from Iraq.

The first militias will be established in Wardak Province, in eastern Afghanistan, in coming weeks, officials said. If the effort in Wardak is successful, U.S. commanders hope to create similar forces in other parts of Afghanistan in early 2009.

The militia push is part of a growing American effort to bypass the struggling Afghan central government and funnel resources to Afghan villages and provinces. Senior American officials have stepped up their criticism of Afghan President Hamid Karzai in recent weeks, making clear that they believe his government needs to do more to fight corruption and deliver basic services.

In Iraq, the U.S. decision to recruit tens of thousands of Sunni Arab fighters, including many former insurgents, is widely credited with improving the country’s security situation.

View Full Image

Agence France-Presse/Getty Images

The U.S. is funding an effort to recruit local militias in Afghanistan to fight the Taliban. Above, Taliban fighters in Wardak Province.

afghan militias

“Afghanistan historically has been known as a country where local communities took care of themselves,” U.S. Ambassador William Wood said in an interview in Kabul. “The way to counter the Taliban today is to make the communities themselves stronger, so they can protect their villages, their fields, their towns and their valleys.”

During a weekend visit, Adm. Mike Mullen, the chairman of the Joint Chiefs of Staff, said the U.S. focus on establishing a strong central government in Afghanistan may have been “overstated.” He said the U.S. would now focus more on “enabling the communities, the tribes and their leaders.”

“How strong the central government will be in the future, I think, is yet to be determined,” he told reporters.

The militia push is controversial. Mr. Karzai vetoed an earlier American proposal to create local forces because he feared they might one day fall under the sway of regional warlords, according to a senior official in the Interior Ministry.

Some U.S. allies also oppose the idea. Canadian Defense Minister Peter MacKay told the Canadian Press news agency this week that creating local forces could prove “counterproductive” and said the Canadian government was “not on board” with the idea.

Still, many Afghan and U.S. officials believe local forces could help stabilize the country and prevent the Taliban from securing footholds in remote parts of Afghanistan.

“This will be a grass-roots, community-defense layer against the Taliban,” Wardak Gov. Mohammed Halim Fidai said in an interview. “We believe that the more people you involve in security, the greater the impact.”

In the first phase of the pilot program, villages throughout Wardak will convene “shura” meetings of local tribal, religious and political figures. The community elders will then be responsible for recruiting the local militias and overseeing their conduct.

As in Iraq, the new Afghan militias will be paid by the U.S. A senior American military official in Kabul said the money would likely be first funneled to the individual village shuras, which would in turn be charged with disbursing salaries to their fighters.

The U.S. won’t provide weapons or ammunition to the militias, but the local forces will be allowed to keep and use the weapons they already have. “The honest truth is that these guys don’t need us to give them guns,” the U.S. official said.

Gov. Fidai said that he hopes the local militias will attract some former insurgents, potentially boosting the Afghan government’s efforts to win over moderate members of the Taliban.

“Young people who might have joined the Taliban for financial reasons will have another option,” he said.

Still, Mr. Wood, the American ambassador, cautioned that the Taliban hadn’t yet signaled any willingness to open talks with Mr. Karzai.

Monday, December 22, 2008

Washington Is Killing Silicon Valley

Entrepreneurship was taken for granted. Now we’re seeing a lot less of it.

MICHAEL S. MALONE

Even as economic losses and unemployment levels mount, America’s most effective engine for wealth and job creation is being dangerously — perhaps fatally — compromised.

Martin Kozlowski

For more than 30 years the entrepreneurship-venture capital-IPO cycle centered in Silicon Valley has generated new wealth, commercialized innovation, and created new companies and industries. It’s also spun off millions of new jobs. The great companies created by this process — Intel, Apple, Google, eBay, Microsoft, Cisco, to name just a few — have propelled most of the growth in the U.S. economy in the last two decades. And what began as a process almost exclusively available to scientists and engineering Ph.D.s became open to just about anyone with a good business plan and a healthy dose of entrepreneurial drive.

At its best, the cycle is self-perpetuating. Entrepreneurs come up with a new idea, form a team, write a business plan, and then pitch their idea to venture capitalists. If they’re persuaded, the VCs invest, typically through several rounds during which the start-up company must meet performance benchmarks. Should the company succeed, it then makes an initial public offering of stock.

The IPO can reward the founders and venture-capital investors, and enables the general public to participate in the company’s success. Thousands of secretaries, clerks and technicians at these companies also have come away from the IPO richer than they ever dreamed. Meanwhile, some of those gains are invested in new venture funds, and the cycle begins again.

It has been a system of amazing efficiency, its biggest past weakness being that it sometimes (as in the dot-com “bubble”) creates too many companies of dubious viability. Now, this very efficiency may be proving to be its downfall.

From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators. They treat it as if it is a natural phenomenon that can be manipulated and exploited, rather than the fragile creation of several generations of hard work, risk-taking and inventiveness. In the name of “fairness,” preventing future Enrons, and increased oversight, Congress, the SEC and the Financial Accounting Standards Board (FASB) have piled burdens onto the economy that put entrepreneurship at risk.

The new laws and regulations have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the U.S., cripple the venture capital business, and damage entrepreneurship. According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986.

Faced with crushing reporting costs if they go public, new companies are instead selling themselves to big, existing corporations. For the last four years it has seemed that every new business plan in Silicon Valley has ended with the statement “And then we sell to Google.” The venture capital industry is now underwater, paying out less than it is taking in. Small potential shareholders are denied access to future gains. Power is being ever more centralized in big, established companies.

For all of this, we can first thank Sarbanes-Oxley. Cooked up in the wake of accounting scandals earlier this decade, it has essentially killed the creation of new public companies in America, hamstrung the NYSE and Nasdaq (while making the London Stock Exchange rich), and cost U.S. industry more than $200 billion by some estimates.

Meanwhile, FASB has fiddled with the accounting rules so much that, as one of America’s most dynamic business executives, T.J. Rodgers of Cypress Semiconductor, recently blogged: “My financial statements are a mystery, even to me.” FASB’s “mark-to-market” accounting rules helped drive AIG and Bear Stearns into bankruptcy, even though they were cash-positive.

But FASB’s biggest crime against the economy and the American people came when it decided to measure the impossible: options expensing. Given that most stock options in new start-up companies are never worth anything, this would seem a fool’s errand. But FASB went ahead — thereby drying up options as an incentive for people to take the risk of joining a young company and guaranteeing that the legendary millionaire secretaries would never be seen again.

Not to be outdone, the SEC has, through the minefield of “full disclosure” requirements and other regulations, made sure that corporate directors would never again have financial privacy and would be personally culpable for malfeasance anywhere in the company. This has led to a mass exodus of talented people from boards of directors in places like Silicon Valley. Full disclosure was supposed to make boards more responsible. Instead, it has made them less competent.

The most important government actions to foster business creation were the 1978 Steiger Amendment, which cut taxes on capital gains to 28% from 49%, and President Ronald Regan’s tax cuts, which reduced them still further to 20%. These tax cuts unleashed the PC and consumer electronics booms of the 1980s, just as the Taxpayer Relief Act of 1997 restored the 20% rate and did the same for the Internet economy in the late 1990s.

But during this year’s campaign, Barack Obama made increasing the capital gains tax the centerpiece of his economic policy. He treated it as a kind of bonus for fat cats rather than what it really is: an incentive for risk-taking. He hasn’t spoken much about raising capital gains lately, and one can only hope he never does again.

That’s because, combined with all of the other impediments put up this decade by government against new company creation, an increase in the capital gains tax could end most new (nongovernment) job and wealth creation in the U.S. for a generation. If Mr. Obama is serious about getting the country out of this recession using something more than public make-work projects, he should restore the integrity of the new company creation cycle: rewrite full disclosure, throw out options expensing, make compliance with Sarbanes-Oxley rules voluntary, and if he won’t cut it, then at least leave the capital gains tax rate alone.

Otherwise, Mr. Obama might end up being remembered as the second Herbert Hoover, not the next FDR.

Mr. Malone, a columnist for ABCNews.com, is the author of “The Future Arrived Yesterday,” forthcoming from Crown Business.

Will El Salvador Veer Left?

By MARY ANASTASIA O’GRADY

Wishes for peace on Earth are on the lips of the faithful throughout Latin America this week. But in El Salvador, these hopeful sentiments mask trepidation about what 2009 will bring.

President Saca has given capitalism a bad name.

The fears stem from the fact that the former guerrilla group Farabundo Marti Front for National Liberation — aka the FMLN — is now leading in the opinion polls for the March 15 presidential elections. FMLN candidate Mauricio Funes is widely considered a moderate leftist. But other party honchos — including vice-presidential candidate Salvador Sánchez Cerén — are of the more traditional (i.e., militant) FMLN variety. Many Salvadorans are worried that if the party comes to power, its radicalized elements will overwhelm the likes of Mr. Funes and pull the country hard to the left.

This would be tragic for the tiny, market-oriented Central American nation, which suffered so much in the 1980s at the hands of the Soviet-backed FMLN. Yet if the FMLN wins the election, don’t blame Hugo Chávez, Fidel Castro or neighboring Nicaraguan President Daniel Ortega, who still fly the revolution’s tattered banner.

Mary Anastasia O’Grady tells Kelsey Hubbard that economic discontent may drive voters in El Salvador towards some radical candidates. (Dec. 22)

Instead, look to Salvadoran President Elias Antonio Saca of the center-right Arena Party. Mr. Saca was in Washington last week promising President Bush Salvadoran help in fighting the U.S. “war on drugs” and trying to pass himself off as a champion of traditional American economic values. But back home in El Salvador, his actions have earned him a reputation for undermining democratic capitalism through the abrogation of contracts.

Take the case of Pacific Rim Mining Corp. As I reported in this column four months ago, the company says that from 2002-2006 it invested $77 million in an old gold mine near the Honduran border with the encouragement of the Salvadoran government. By 2006, Pacific Rim says it had exceeded all environmental requirements at the El Dorado mine and fully expected to get the permit needed to begin operating.

The Americas in the News

Get the latest information in Spanish from The Wall Street Journal’s Americas page.

Two years later the company still doesn’t have a permit, nor does it have any word from the government that it has not complied with the law. CEO Thomas Shrake says the government’s “inaction” has put his company in desperate straits. So desperate that two weeks ago it filed a “notice of intent” to seek arbitration under the Central American Free Trade Agreement (Cafta) for “breaches of international and El Salvadoran law.” If there is no resolution by March 9, Pacific Rim says it will proceed to arbitration and ask for monetary damages in the hundreds of millions of dollars.

That’s a high price for a poor country. More expensive, however, is the lost opportunity for Salvadorans. Mr. Shrake, who is a geologist, says that El Salvador sits in the center of the Central American Gold Belt and that gold, as an engine of growth, has the potential to transform the country’s economy in the same way that copper changed Chile. But Mr. Saca’s government, he says, has “effectively shut down the mining industry.”

Why the government has refused to act on the Pacific Rim project remains unclear, and my many efforts to get an explanation from the government have gone unanswered. Certainly Mr. Saca can’t blame it on politics. Though some nongovernmental organizations have tried to block the mine, polls show that a majority of Salvadorans and politicians across party lines support mining, providing there are environmental precautions. Mr. Shrake says the government has not given him a reason for the permit denial.

Meanwhile, another mystery has gained attention in Salvador: From late September to early November, especially high volumes of Pacific Rim stock traded on the American and Toronto stock exchanges. This means that a large quantity of stock was being acquired and at a very good price; after the company’s announcement in August that it had to suspend operations at El Dorado, the share value dropped 90%. This seems like a risky trade but should the permit come through the stock is likely to recover, making buyers at distressed prices very rich.

Pacific Rim is not the only company claiming its rights are being violated by Mr. Saca’s administration. In November, the Italian power company Enel filed a suit against the government alleging it broke a contract that would have allowed Enel to increase its ownership in the state energy company LaGEO.

Allegations that the Saca government is violating its own laws have damaged the country’s image at a time when foreign investors already are skittish due to election-year uncertainty and global economic weakness. Pacific Rim used to have 262 direct employees in Salvador. It expected the mine would create 500 direct jobs in all and another 2,500 indirectly. Instead, the company’s El Salvador staff is now down to 36.

This is precisely why voters are likely to take a chance on the FMLN come election day. If they do, Mr. Funes will have Mr. Saca to thank.

Quantum of Solis

Big labor wants Obama to dilute union disclosure rules.

There is joy in Unionville this Christmas. Barack Obama’s pick for Secretary of Labor — Hilda Solis — brings impeccable big labor credentials. The California Congresswoman first rode to power with labor backing against a fellow Democrat, has voted with the AFL-CIO 97% of the time, and got three-quarters of her campaign contributions from unions.

Hilda Solis.

Ms. Solis says her goal is to expand the reach and power of unions in America, and she supports such union priorities as the Employee Free Choice Act, which would do the opposite of its name and end secret balloting to unionize a workplace. Look for a showdown on that legislation in 2009. Meanwhile, the other drama to watch is whether Ms. Solis will turn a blind eye to union corruption by weakening federal oversight.

From day one of the Obama era, union leaders want the lights dimmed on how they spend their mandatory member dues. The AFL-CIO’s representative on the Obama transition team for Labor is Deborah Greenfield, and we’re told her first inspection stop was the Office of Labor-Management Standards, or OLMS, which monitors union compliance with federal law.

Ms. Greenfield declined to comment, citing Obama transition rules, but her mission is clear enough. The AFL-CIO’s formal “recommendations” to the Obama team call for the realignment of “the allocation of budgetary resources” from OLMS to other Labor agencies. The Secretary should “temporarily stay all financial reporting regulations that have not gone into effect,” and “revise or rescind the onerous and unreasonable new requirements,” such as the LM-2 and T-1 reporting forms. The explicit goal is to “restore the Department of Labor to its mission and role of advocating for, protecting and advancing the interests of workers.” In other words, while transparency is fine for business, unions are demanding a pass for themselves.

Current Secretary Elaine Chao boosted Labor’s enforcement office and tightened disclosure rules after years of neglect by the Clinton Administration. Staffing rose to 331 from 274 in 2000 — still modest by federal standards — and picked up the pace of surprise audits and investigations of abuse. Big labor wants Ms. Solis to reverse all that, though with its growing political clout it deserves more scrutiny than ever.

In the Illinois pay-to-play scandal, Gov. Rod Blagojevich’s chief of staff approached the two-million strong Service Employees International Union about a possible job for the Governor. The SEIU was Mr. Blagojevich’s biggest campaign donor. No one at the union has been charged with any wrongdoing and the SEIU says it is cooperating with the federal investigation.

In Puerto Rico, meanwhile, the SEIU supported Gov. Aníbal Acevedo Vilá, who was indicted this year for corruption. The biggest fraud case of the year involved the SEIU’s home-care workers local in Los Angeles. Its boss, the 39-year-old Tyrone Freeman, was a protégé of SEIU chief Andy Stern. Both Mr. Freeman and his former chief of staff were ousted; a third senior SEIU official is on leave pending an internal investigation, while a federal probe is also under way.

As some labor officials privately admit, Ms. Chao’s financial disclosure rules helped to expose Mr. Freeman. Hundreds of thousands of misspent dollars — including a $13,000 tab Mr. Freeman had rung up at the Grand Havana Room cigar club in Beverly Hills and $650,000 for his wife’s video company — were pulled from the same revised LM-2 forms that unions had so vociferously opposed in 2004.

Anna Berger, the SEIU’s secretary-treasurer, says the information required by Labor now is “incredibly ridiculous,” adding “there was huge transparency” before. But Sal Rosselli, president of the dissident SEIU-United Healthcare Workers-West, told us Friday that the union does a poor job of policing itself. He noted that an internal investigation revealed that the California problems were brought to the union’s D.C. leadership’s attention as far back as 2001, without prompting any action.

We’re as allergic to government red tape as anyone. But union complaints about administrative burdens aren’t borne out by the LM-2s, which include their accounting costs. Compared to the burdens of Sarbanes-Oxley, they’re hardly onerous. And one constituency is grateful that Labor makes this information public and, if necessary, prosecutes abuse: Dues-paying union members.

As for Mr. Obama, this spring he quietly promised to end federal oversight of the Teamsters, imposed in 1992 to eliminate mob influence; the union endorsed him over Hillary Clinton. Another California House liberal, George Miller, last year pushed through a cut in funding for the OLMS. Congress will surely target the office again next year. Ms. Solis backed the Miller measure in 2007. It’d be nice to think that in her new job she’ll make union supervision as much of a priority as union promotion, but don’t expect it.

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When My Recession Becomes Your Great Depression: Amity Shlaes
Commentary by Amity Shlaes– The difference between recession and depression is simple. Recession, goes the saying, is when you lose your job; depression is when I lose mine.

These days recession is starting to feel like depression to a lot of people. Recession starts to feel like depression every night at General Motors Corp. when they turn off the escalators and turn down the lights in the faint hope that one more person will get to keep his wage and benefits one more day.

Ron Gettelfinger, head of the United Auto Workers union, knows that worker packages, which cost carmakers $74 an hour in wages and benefits, are way out of line with deflationary reality. But most of Gettelfinger’s proposals aren’t about slashing those packages. Instead, Gettelfinger is emphasizing plans for federal assistance to manufacturers, or federal cash to improve terms of auto loans.

These latter approaches aim to fortify the overall economy. In a recovered economy, the logic runs, worker pay won’t seem so egregious. Behind Gettelfinger stand economists who argue that bringing down wages isn’t right or possible, even in a troubled period. Wages, economists says, may move up, but they are “sticky downward.”

These economists cite the U.K.’s John Maynard Keynes. They also often cite one of the parents of modern economics, Irving Fisher of Yale. Around World War I, Fisher wrote up a then-novel plan: index wages to the growth of the economy so that raises are automatic.

But in recent years scholars have been making a different argument. Lee Ohanian and Harold Cole of the University of California, Los Angeles, say that the high-wage method of fending off economic depression can make a depression more likely.

Ultimate Depression

The model Ohanian and Cole use is the ultimate depression, the Great Depression of the 1930s. Early in that depression, unemployment hit 25 percent. It fell all the way to 13 percent or 14 percent in the mid-1930s, only to head up to 19 percent in the later 1930s. This was a huge shift from the preceding decade, when unemployment averaged less than 5 percent.

What was transpiring at GM or Ford Motor Co. in those days? In the 1920s, Henry Ford pushed for wage increases in the faith that they would enable workers to buy more cars. A young labor leader named John L. Lewis was also pushing for higher wages. Lewis convinced Herbert Hoover, who, first as Commerce secretary, and then as president, insisted higher was better. After the stock market crash of 1929 — the equivalent period to now, more or less — Hoover sought to block wage cuts.

Reverse Order

In the 1930s, the Roosevelt administration continued the trend, leading Congress in passing the Wagner Act. This gave unions the power to organize Detroit and threaten sit-down strikes. At the same time, unemployment was heading up.

Until now, many economists have tended to blame broad monetary forces for a general decline, and hence the new joblessness.

But the order was probably the other way around. Ohanian and Cole ran the numbers and found that in the late 1930s, manufacturing wages were 20 percent above the trend for the rest of the century. They posit that employers were unable to cut wages, so they simply fired or failed to hire.

Another truism that we all know — “nice work if you can get it” — captured this period perfectly. The unions got, the jobless paid. The Depression duly earned its adjective, “Great.”

At the time, employers knew what was going on. When executives were asked to rank what New Deal laws they wanted to see repealed, they put the Wagner Act high on the list, way above, say, the law that created the Securities and Exchange Commission or deposit insurance.

Nothing Wrong

Fast forward to today’s auto industry and the famous $74 hourly package. Everyone knows the U.S. automakers would have a better chance of survival if that package were pared. But an economist who follows manufacturing closely, Ken Mayland of Clear View Economics LLC in Pepper Pike, Ohio, notes that in the modern discussion, “price and labor are not allowed to adjust.” Instead the pressure is, as in the 1930s, to address trouble via other methods.

Maybe it’s worth trying out the idea that there’s nothing wrong with allowing wages to fall. Sometimes they just have to go down. Even one of the favored fathers cited above — Irving Fisher — acknowledged this.

In 1918, Fisher wrote of what his proposed index system would do for employers if the general price level dropped: “Those firms which have advanced their employees’ wages on the basis of index numbers can make a reduction, at least to the point at which they started, with the understanding on the part of the employees that the reduction is the automatic result of a price change similar but opposite to that which gave the high- cost of living compensation.”

Gas prices are down today. So are prices at the mall, even pre-Christmas. If the U.S. automakers and their workers can make reasonable packages their goal, then we’re all less likely to have our own personal depression.

Obama Said to Tap Vilsack for Agriculture Secretary (Update1)

Dec. 17 (Bloomberg) — Former Iowa Governor Thomas Vilsack is set to be named by President-elect Barack Obama as his choice for Agriculture secretary, and Colorado Senator Ken Salazar is being selected for Interior secretary, a Democratic official said.

Obama will formally announce his intention to nominate the two men today in Chicago, according to the official, who spoke on the condition of anonymity. Vilsack and Salazar will join Obama at the news conference, scheduled for 10:45 a.m. Chicago time.

Vilsack, 58, was elected as Iowa’s governor in 1998, the first Democrat to win the office in 32 years. He was re-elected in 2002. Now an attorney at the Dorsey Trial group, Vilsack endorsed New York Senator Hillary Clinton during the Democratic presidential primary campaign after ending his own presidential bid in February 2007, before the first contest took place.

He would bring to the Department of Agriculture experience as the former chief executive of a state heavily reliant on agriculture and related industries. Iowa is one of the nation’s top producers of corn, soybeans, hogs and eggs and ranks third in the value of agricultural products sold, according to government statistics.

Agriculture is the fourth-largest Cabinet agency, with a budget of about $100 billion and 110,000 employees.

Salazar, 53, is in his first term in the Senate after serving as Colorado attorney general and executive director of its department of natural resources.

Oil Production

He has criticized the Bush administration’s efforts to develop oil from Western shale formations, saying that while shale may have potential to produce billions of barrels, the technology may not be commercially viable. He also says it isn’t clear how much pollution would result from shale oil development or how much water would be needed for the process. Salazar supports more oil and gas drilling off U.S. shores.

The Interior Department, which has been called the “department of everything else,” encompasses the National Park Service, Bureau of Land Management, Fish and Wildlife Service and Bureau of Indian Affairs, among other agencies. It has more than 70,000 employees and a budget of $16.8 billion.

Salazar’s support for expanded energy production raised concerns from some environmentalists.

“The Department of the Interior desperately needs a strong, forward looking, reform-minded secretary,” Kieran Suckling, executive director of the Tucson-based Center for Biological Diversity, said in a statement yesterday. “Unfortunately, Ken Salazar is not that man.”

Announcement in Chicago

Both posts are subject to confirmation by the Senate. Colorado Governor Bill Ritter, a Democrat, would name Salazar’s replacement in the Senate for the remainder of the term if Salazar is nominated and confirmed.

Obama has moved faster than any modern president-elect in selecting his Cabinet and other top members of his administration. He is expected to wrap up the remainder of his Cabinet appointments this week before he leaves for vacation in Hawaii.

Obama named Arne Duncan, chief executive of the Chicago public school system, to be the next secretary of education. He has yet to name secretaries of Labor, Transportation and the Director of Central Intelligence. His choices for U.S. trade representative and director of national intelligence also haven’t been announced.

World Confidence Drops as Slump Deepens, Bloomberg Survey Shows
Dec. 18 (Bloomberg) — Confidence in the world economy fell in December as a recession spread beyond the U.S. and growth weakened in China and Latin America, a survey of Bloomberg users on six continents showed.

The Bloomberg Professional Global Confidence Index slipped to 6.1 from 6.6 in November. A reading below 50 means pessimists outnumber optimists. The index, which is a year old, reached an all-time low of 4 in October.

“Confidence is still very shaky,” said Alvin Liew, an economist at Standard Chartered Plc in Singapore, who took part in the survey. “Some countries are already in recession and 2009 will be even more challenging.

Shrinking economies in the U.S., Europe and Japan are forcing policy makers to push interest rates toward zero and try to resuscitate consumer and business spending by buying bonds directly and guaranteeing loans. In China and Brazil, a collapse in exports and commodity prices is undermining economies once considered a bulwark against a global downturn.

The U.S. Federal Reserve yesterday cut the main U.S. interest rate to between zero and 0.25 percent and said it “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”

A measure of confidence in the U.S. increased to 7 from 6.9, the survey showed. Sentiment worsened in most other surveyed economies, with the index for Japan halving to 3.9 from 8. The gauge for Western Europe fell to 6.5 from 9.2 and the reading for the U.K. slipped to 4.1 from 4.8.

‘Bad News’

The survey of 2,991 Bloomberg users in 10 countries was conducted between Dec. 8 and Dec. 12. Since the November survey, U.S. jobless claims surged to a 26-year high, recessions were confirmed in Japan and the euro region, and Chinese exports fell for the first time in seven years.

“It’s bad news on top of bad news,” said Lindsey Piegza, an economist at FTN Financial in New York. “People are wondering who’s going to fail next, who’s going to lie to us, and there’s just a lot of mistrust and skepticism. Confidence in the banking and financial system has been eroded.”

The global crisis has cost banks almost $1 trillion so far in writedowns and losses. Citigroup Inc. announced plans to eliminate 52,000 jobs and accepted a $45 billion bailout from the U.S. government. Bernard Madoff was arrested last week for allegedly defrauding investors of $50 billion in a Ponzi scheme.

The International Monetary Fund on Nov. 6 forecast that global growth will slow to 2.2 percent in 2009 from 3.7 percent this year.

Emerging Markets Hit

“Economies previously regarded as doing well have taken a dive,” said Dominic Bryant, an economist at BNP Paribas SA in London and a regular participant in the survey. “It’s going to get very bad before it gets better.”

The Bloomberg confidence index for Brazil, where economic growth accelerated in the third quarter, slipped to 16.6 from 30.2.

“People are scared,” said Roberto Padovani, a senior strategist at Banco WestLB do Brazil SA in Sao Paulo who took part in this month’s survey. “The dive in the U.S. is much bigger than expected and good fundamentals in Brazil and China aren’t enough to offset pressure in the other direction.”

Bloomberg users in all surveyed countries expect short-term and central bank interest rates to fall further, the survey showed. The U.K. has already cut borrowing costs to the lowest since 1951 and the European Central Bank last month cut its benchmark rate the most in its 10-year history.

Views were almost evenly divided on whether the U.S. dollar will rise or fall in the next six months against the world’s most active currencies, with the index at 50.2 compared with 60 in November. The majority of users in the U.K. expect the pound to depreciate further.

U.K. unemployment rose at the fastest pace since 1991 in November, the country’s statistics office said today.

“We are in the weakest spot,” said Aurelio Maccario, chief euro-area economist at UniCredit SpA in Milan and a participant in the survey. “We are bound to experience the current weakness until after the first quarter of 2009.”

Madoff Enjoyed $50 Pedicures, 9.8 Handicap, Boat Called ‘Bull’

Dec. 17 (Bloomberg) — Two weeks ago, Bernard Madoff stopped by the Everglades Barber Shop off Worth Avenue in Palm Beach, Florida, for the usual: a $65 haircut, a $40 shave, a $50 pedicure and a $22 manicure.

“For me, he was a gentleman,” said Senio Figliozzi, 72, the owner of the three-seat barber shop who has been cutting Madoff’s hair for the past 17 winters. “What he did outside, it was news to me.”

What Madoff did outside — running an alleged Ponzi scheme that may have bilked investors around the world out of $50 billion — has been the talk of Palm Beach this week. The arrested money manager owns a $21 million home on the Intracoastal Waterway about a mile from the Palm Beach Country Club. He was a regular at the club, where his 9.8 handicap this year has been as steady as the returns he promised investors.

It was those returns that lured Marilyn Lane, 72, and her husband, William, 81, into Madoff’s orbit. The Lanes, who own a Chevrolet and Saturn dealership in Manassas, Virginia, and a place in Palm Beach, invested more than $1 million with Madoff about six months ago.

“He certainly had a track record,” Lane said at Green’s Pharmacy and Luncheonette, a popular Palm Beach breakfast and lunch spot. “Everyone you spoke to highly recommended him. It wasn’t like you were going with a fly-by-night scheme. You think.”

Many of those who gave their money to the 70-year-old Madoff say the same thing: He was gregarious, generous and highly regarded — all excellent qualities for an alleged con man. Whether they met him at the Palm Beach Country Club or in Montauk, Long Island, where he owned a beachfront home, or in New York, where he lived with his wife, Ruth, in a duplex on East 64th Street, most were impressed with his credentials and his manner.

Table in Front

“He’s very personable, very charming,” said Jerry Reisman, an attorney in Garden City, New York, who recalls meeting Madoff five or six years ago at the Glen Oaks Country Club, a golf course in Westbury, New York. “He moved in the best circles. He was a pro at it. He was probably one of the best social networkers in America.”

Now Reisman, a lawyer with Reisman, Peirez & Reisman in Garden City, New York, is representing 10 people who invested with Madoff and say they lost a total of about $150 million.

At the Palm, a steak restaurant in East Hampton, New York, manager Tomas Romano says Madoff has been a regular for 20 years. He always insisted on a table in the front of the restaurant, Romano said, and was often surrounded by well- wishers. Many of the people listed as victims of Madoff’s fraud, he noted, were also customers of the Palm.

Mystery Adviser

“Even Spielberg,” he said, referring to filmmaker Steven Spielberg, whose Wunderkinder Foundation had money invested in Bernard L. Madoff Investment Securities.

“It’s like when you profile somebody,” Romano said. “You say, ‘No, this person couldn’t do that.’”

If Madoff enjoyed himself in public, his advisory activities were a mystery to most people at the company he founded in 1960, said two employees who declined to be identified, citing concern they might be drawn into the probe.

The firm occupied several floors of what is known as the Lipstick Building on Third Avenue in midtown Manhattan. Madoff’s market-making and proprietary trading units were on the 19th and back-office functions on the 18th, the employees said. The advisory operations were on the 17th floor, which wasn’t linked to the others. There was little interaction between the groups, according to the employees. The units used separate computer systems, a person with knowledge of the arrangement said.

Draw the Blinds

Madoff’s sons, who ran the market-making and proprietary units, told employees their father kept them in the dark about the advisory unit, the employees said. While Madoff seldom appeared on the 18th and 19th floors during the workday, he was known to inspect during the evening for sloppy desks or window shades that weren’t fully drawn, one of the employees said.

Madoff lived about 10 blocks from the office in an apartment in a tan-brick building on the corner of Park Avenue and 64th Street that he bought in 1990 for $3.325 million, according to county real estate records. He also owned a 55-foot wooden fishing boat that he bought in 1977 for $462,000. The yacht, built in 1969 by Rybovich & Sons in Riviera Beach, Florida, is called “Bull.”

Both Madoff and his wife were born in Queens. Bernard graduated from Hofstra University in Hempstead, New York, in 1960 and served as a trustee from 2004 until he was suspended on Dec. 12, according to Stu Vincent, a spokesman for the school. Ruth graduated from Queens College in 1961. She joined the board of the Queens College Foundation in 1993 and voluntarily stepped down from her job as secretary of the foundation several days ago, said Phyllis Cohen Stevens, a spokeswoman for the school.

‘You’re Finished’

Ruth Madoff, who also has a master of science degree in nutrition from New York University, co-edited a cookbook in 1996 called “The Great Chefs of America Cook Kosher.” The book contains recipes for kosher dishes by well-known chefs, such as Daniel Boulud and Wolfgang Puck.

The couple has two sons — Mark, 44, who graduated from the University of Michigan in Ann Arbor in 1986, and Andrew, 42, who graduated from the University of Pennsylvania in Philadelphia in 1988. The family was very close, according to a person who knows the Madoffs, and both boys went to work at their father’s firm after graduating from college. Madoff’s brother, Peter, also worked at the firm, as chief compliance officer.

Mark and Andrew have both lost millions of dollars, the person said, and they haven’t talked to their father since his arrest.

There are plenty of people in Palm Beach and elsewhere who would like to talk to Madoff, if only to find out how everything could have gone up in smoke.

“This town isn’t about class or culture,” said Laurence Leamer, a Palm Beach resident since 1994 and author of “Madness Under the Royal Palms: Love and Death Behind the Gates of Palm Beach,” which will be published in January. “This town is about money. Bernie was revered because he had money. If you lose your money, you’re finished.”

Dollar Falls Most Against Euro Since 1999 Debut on Fed’s Rate

Dec. 17 (Bloomberg) — The dollar declined the most against the euro since the 15-nation currency’s 1999 debut and sank to a 13-year low versus the yen as near-zero interest rates and rising budget deficits led traders to abandon the greenback.

The dollar extended its drop against a gauge of currencies of six U.S. trading partners, falling 11 percent from a 2 1/2- year high reached Nov. 21. Investors including hedge funds reversed bets that the dollar will appreciate to minimize losses as the end of the year approached, traders said.

“This move is historic,” said Russell LaScala, New York- based head of North American foreign exchange at Deutsche Bank AG, the world’s biggest currency trader. “It’s just going to keep going until the last bit of pain stops. I would not be shocked to see $1.50.”

The dollar fell as much as 3 percent to $1.4437 per euro, the weakest level since Sept. 29, from $1.4002 yesterday, before trading at $1.4402 at 4:08 p.m. in New York. It was the biggest intraday drop since the euro’s inception. The U.S. currency decreased 1.8 percent to 87.43 yen from 89.05 and reached 87.14, the lowest since July 1995. The euro increased 0.9 percent to 125.81 yen from 124.71.

The pound weakened for the first time beyond 93 pence per euro after the Office for National Statistics said jobless claims rose last month at the fastest pace since 1991. Bank of England policy makers voted 9-0 to cut the nation’s benchmark on Dec. 4 to 2 percent, minutes showed. Sterling slid as much as 3.5 percent to 93.27 pence per euro. The pound dropped 0.4 percent to $1.5518.

Dollar Index

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, fell 2.2 percent to 78.908. The dollar has given back about half of a rally in which it increased 24 percent from a low of 71.314 on July 15 to 88.463 on Nov. 21.

The Fed lowered its target rate yesterday to a range of zero to 0.25 percent, from 1 percent, below the Bank of Japan’s 0.3 percent rate. The central bank reiterated plans to purchase agency debt and mortgage-backed securities and said it will study buying Treasuries, a policy known as quantitative easing.

“This is a very much a panic exodus from the dollar,” said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “The primary reason is the Fed’s embrace of quantitative easing, in which they start printing dollars and start flooding the market with U.S. assets.”

The federal budget deficit widened last month to $164.4 billion, compared with a gap of $98.2 billion in November a year earlier, the Treasury Department reported last week.

Yen’s Gain

The U.S. currency depreciated 21 percent against the yen this year, the most since 1987, as more than $1 trillion of credit-market losses sparked a seizure in money markets and threw the world’s largest economy into a recession.

Japan’s Finance Minister Shoichi Nakagawa said the government is ready to take steps in the currency market to help the economy, Dow Jones Newswires reported. Nakagawa earlier told reporters he isn’t considering intervention now.

The government needs to take action on the yen “swiftly,” Honda Motor Co. President Takeo Fukui said at a press conference today. The country’s second-largest automaker cut its operating profit forecast for a third time for the year ending March 31 to 180 billion yen ($2.03 billion) from a prior estimate of 550 billion yen as the currency’s gains pushed up prices for overseas customers.

G-7 Intervention

Central banks intervene when they buy or sell currencies to influence exchange rates. The Group of Seven, which comprises the U.S., Japan, Germany, the U.K., France, Italy and Canada, propped up the dollar in 1995, when it declined to a post-World War II low of 79.75 yen.

The fed funds target was cut to below the BOJ’s rate for the first time since 1993. Japanese policy makers struggled in the 1990s to revive growth as deflation and recessions stranded the nation in what is known as the Lost Decade.

A dollar turnaround could come as early as the first quarter of next year as other central banks lower their interest rates, according to Nick Bennenbroek, head of currency strategy at Wells Fargo & Co.

“The Federal Reserve remains ahead of the curve or more aggressive than most central banks with what it’s doing with its monetary policy,” said Bennenbroek, who forecast the euro will reach $1.45 and possibly $1.50 against the dollar. “Given how severe conditions are, a lot of other central banks are also very rapidly moving their interest rates down toward zero.”

Expectations for currency appreciation were the highest in Japan, Mexico and Germany, a monthly survey of 2,991 Bloomberg users last week showed.

Currency Outlook

The Bloomberg Professional Global Confidence Index for the yen was 67.16, compared with 71.23 last month. For Mexico it was little changed at 61.96, from 61.95 in November. In Germany, a proxy for the euro, it jumped to 63.67 from 46.56. A reading above 50 indicates participants expect a currency to gain.

Mexico’s peso declined for the first time in three days, dropping 0.2 percent to 13.0826 per dollar on concern the Fed may have few tools left to boost the global economy.

Madoff Under House Arrest as SEC Says It Missed Signs (Update1)

Dec. 17 (Bloomberg) — Bernard Madoff, accused mastermind of a $50 billion investment fraud, was placed under house arrest as pressure mounted on the Securities and Exchange Commission to explain its failure to detect his financial wrongdoing for almost a decade.

Madoff, 70, will be subject to electronic monitoring and a 7 p.m. curfew while his wife, Ruth, agreed to give up homes in Montauk, New York, and Palm Beach, Florida, if her husband flees. Madoff, who appeared briefly today with his wife in Manhattan federal court, was arrested Dec. 11 after telling his sons that his firm was “one big lie,” the SEC said.

The legal developments came after SEC Chairman Christopher Cox said yesterday the agency failed to act on “credible, specific” allegations about Madoff dating back to 1999. The Madoff affair will be at the center of planned congressional hearings on the reform of the SEC, said a senior Senate official, speaking on condition of anonymity.

The allegations “were repeatedly brought to the attention of SEC staff, but were never recommended to the commission for action,” Cox, 56, said in a statement yesterday, without detailing the allegations. He announced an internal probe to review the “deeply troubling” revelations. Cox today said the agency has no evidence of any wrongdoing by SEC personnel.

The SEC, already faulted in connection with the collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc., now faces criticism for failing to detect what Madoff termed “a giant Ponzi scheme.” Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Senator Charles Grassley, an Iowa Republican, have questioned its vigilance in enforcing securities laws. A House panel will hold a hearing next month.

Victims

Victims of Madoff’s fraud stretch from Tokyo to Paris, encompassing foundations set up by Boston philanthropist Carl Shapiro and Nobel laureate Elie Wiesel and clients of global banks such as Banco Santander SA of Spain, Nomura Holdings Inc of Japan, and HSBC Holdings Plc of the U.K. Yeshiva University in New York lost $110 million, mostly through hedge funds controlled by trustee J. Ezra Merkin.

Madoff’s responses during a 2005 SEC inspection of his brokerage operation should have raised suspicions and prompted further inquiries, said two people familiar with the matter.

Two years later, the agency closed a separate probe into tips and press reports suggesting his investment returns were too good to be true. Money manager Harry Markopolos helped trigger that inquiry by suggesting Madoff may be running a Ponzi scheme or front-running, in which traders buy shares for their account before filling customers’ orders, a person with knowledge of the case said.

Front-Running

Investigators focused on the front-running theory and, after encountering obstacles, didn’t finish verifying trades Madoff claimed were for advisory clients, the person said. His company’s trades had been cleared through a single account at the Depository Trust & Clearing Corp., making it difficult to distinguish transactions specifically for Madoff’s advisory business. Others transactions were completed through foreign brokerages, forcing the SEC to persuade foreign regulators to collect the data. Instead, investigators closed the case.

Cox, a Republican appointed by President George W. Bush, has said he will leave office when Bush leaves office Jan. 20. Cox’s term ends in June 2009 after taking over in August 2005. President-elect Barack Obama may name Cox’s successor as soon as tomorrow, people familiar with the matter said.

Instead of wielding subpoena power to obtain information, SEC staff “relied upon information voluntarily produced by Mr. Madoff and his firm,” Cox said.

Recusals

The internal review will include “all staff contact and relationships with the Madoff family and firm,” he said, and mandate the recusal of any SEC employee with more than an “insubstantial personal” contact with Madoff and his family.

Eric Swanson, a former assistant director of compliance and examinations at the SEC, is married to Madoff’s niece, Shana, who was a compliance lawyer at the Madoff firm. Swanson left the SEC in August 2006 and is now general counsel of Bats Trading Inc., the third-largest U.S. equity exchange by trading volume.

Cox, speaking after a commission meeting today, said determining what happened is of “utmost’ importance and he had “no reason” to think staff suppressed the Madoff allegations. Cox declined to discuss possible action against any employees.

“We have thus far found no evidence of any wrongdoing by any SEC personnel,” Cox told reporters.

DiPascali

Besides talking with Madoff, who met with federal prosecutors yesterday, authorities are scrutinizing the role of Frank DiPascali, a senior official in Madoff’s investment advisory firm, according to people familiar with the case.

Janice Oh, a spokeswoman for acting Manhattan U.S. Attorney Lev Dassin, declined to comment. Madoff’s lawyer, Ira Sorkin, didn’t return a call seeking comment.

“Like everyone else, we’re trying to sort out everything and learn the facts,” DiPascali’s lawyer, Marc Mukasey of Bracewell & Giuliani in New York, said in an interview, declining further comment.

U.S. Attorney General Michael Mukasey, Marc Mukasey’s father, has recused himself from the Justice Department’s investigation into Madoff because his son represents someone involved in the case, a department spokesman said today.

Michael Mukasey is a 1959 graduate of the Ramaz School, a modern Orthodox Jewish school in New York that invested as much as $6 million in a fund that invested with Madoff, said Kenny Rochlin, Ramaz’s director of institutional advancement. Mukasey’s wife, Susan, was headmistress of Ramaz’s Lower School for children in primary grades, Rochlin said.

Passports Surrendered

U.S. Magistrate Judge Gabriel Gorenstein in Manhattan also ordered Madoff and his wife, Ruth, to surrender their passports. The ruling came as a bail hearing for her husband was postponed for a second time in as many days.

The number of co-signers on his $10 million bond was reduced by Gorenstein from four to two after Madoff was unable to find two additional guarantors. Madoff’s wife and brother, Peter, have co-signed the bond.

Madoff and his wife were in court today to sign a confession of judgment to properties they in Montauk, Palm Beach and on Manhattan’s Park Avenue.

The case is U.S. v. Madoff, 08-mag-2735, U.S. District Court, Southern District of New York (Manhattan).

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on December 17, 2008 at 9:51 pm Leave a Comment

The economy

Days of open wallet

Barack Obama is promising a vast new public-works programme as his solution to America’s economic woes

NO SOONER had the worst job losses in a generation been reported (on December 5th, a Friday), than Barack Obama stepped up his calls for an ambitious fiscal stimulus package, taking to the airwaves twice over the weekend to do it. Not only would his plan prop up the sinking economy, he said, but it would equip America with more productive and efficient infrastructure, aiding future growth. His remarks gathered infinitely more attention than those of the actual president, who confined himself to vague optimism and a hard-to-substantiate claim that the frozen financial system is starting to thaw.

There seems no doubt that resistance from politicians and investors to a seriously big package is melting. The December 5th figures showed that America lost 533,000 jobs in November, the biggest monthly loss in absolute terms for 34 years, though at 0.4% of the workforce, it was a bit less bad—only the worst since 1980. The unemployment rate rose to 6.7% from 6.5%, and would have risen far more if so many unemployed workers hadn’t given up looking for work. Losses were especially severe in construction, retailing and manufacturing. Macroeconomic Advisers, a forecasting firm, estimates that the economy will shrink at an annual rate of 5.5% this quarter and 4.25% next. A fiscal stimulus of $500 billion over two years would come too late to alter that but could bring the recession to an end by mid-2009 and hold the unemployment rate to 8.5%, the firm estimates. Without such a stimulus, the recession would stretch into the third quarter and unemployment would hit 9.5%.

For once, politicians and economists agree the deficit should not be a worry. The credit crunch and the collapse in the stockmarket mean households are trying to consume less and save more. But for them to do so collectively, some other sector must consume more and save less. Corporations are not going to do it: they are cutting investment and hoarding cash in the hope of staving off a liquidity crisis or even bankruptcy. Demand is not going to come from the rest of the world: many other countries are in recession. Even in China, which is still growing fast, demand for foreign goods is contracting sharply: by 18% year-on-year, according to figures released on December 10th. So that leaves the federal government.

Mr Obama has not yet provided any precise details of the sort of fiscal plan he will seek to drive through Congress once he takes the reins at noon on January 20th, although speculation has centred on a package worth some $300 billion a year (or 2% of GDP), comprising hiring credits for employers, permanent tax cuts (or credits) for workers and a public-works programme which, he pledged, would be the biggest since Dwight Eisenhower created the interstate highway system in the 1950s. (That project, at $400 billion in today’s dollars, cost four times as much and took three times as long as planned.)

State and local governments account for most public investment (see chart). Their spending on highways and schools for baby-boomers lifted such investment above 3% of GDP in the 1950s and 1960s. But the federal government pays for much of it, and so gets a significant say in how the money is spent.

The conundrum is that it is hard to spend both rapidly and wisely. America’s transport infrastructure is in need of overhaul (see article), and many worthy projects exist that could boost energy efficiency or alternative fuel sources. But there may not be enough of them to absorb large sums quickly. Often such projects are kept on the drawing board not by lack of money but by politics and planning. Adapting the electricity grid, for example, to use more alternative energy may require new transmission lines for which approval can take years. In September the non-partisan Congressional Budget Office estimated it would take two years to spend just 60% of $37 billion in infrastructure funds in a stimulus bill passed by the House of Representatives (but not yet acted on by the Senate).

State and local governments say they have thousands of “shovel-ready” projects that could be started as soon as federal money becomes available. The Conference of Mayors, seizing the moment, released an 803-page report this week listing 11,000 projects which, they claim, would create more than 800,000 jobs over the next two years. But the economic merit of many is dubious. Their list includes $1.5m to coax prostitutes off the streets of Dayton, Ohio, and $200,000 for a dog park in Hercules, California. Douglas Holtz-Eakin, a former economic adviser to John McCain, says many unfunded projects are “ready to go because they were drawn up, reviewed and rejected” by government. Mr Obama has promised not to spend money the “old Washington way” but those ways are hard to change.

Mr Obama also considered an early implementation of the $500-per-worker or $1,000-per-household tax cut (or, for those who don’t pay enough income tax, a payment) which he promised during the campaign. But tax cuts provide limited bang for the deficit buck: only about 30% of last summer’s $110 billion in tax rebates were spent. The impact could probably be larger now, partly because more households are strapped for cash, but also because a permanent boost to income is more likely to be spent than a one-off rebate.

Even so, such rebates will raise the deficit sharply relative to how much they boost growth. And that highlights another problem. The budget deficit could top $1 trillion, or 7% of GDP, this fiscal year. That may be necessary in the short run, but could be dangerously destabilising before long. Rudolph Penner, a former CBO director, predicts that the federal debt (excluding debt owed to other parts of the federal government) will soar from 38% of GDP this year to 55% at the end of 2010, the highest since the early 1950s, when the country was still in hock from fighting a war.

Japan offers a cautionary tale on the risks of infrastructure-based stimulus. A spree of public-works projects designed to spur growth left construction equal to an unwieldy 20% of GDP, compared with 10% in America, and drove the national debt to one of the highest levels relative to GDP in the OECD. America’s construction industry is not as politically powerful, inefficient and corrupt as it historically has been in Japan, and Japan worsened its slump by increasing the sales tax to deal with the debt. Still, Mr Obama should take note if he wants to get his stimulus right.

Causes of conflicts

Why wars happen

Analysing the causes of conflicts

THERE have been nine wars and almost 130 violent conflicts across the world this year, according to an annual report released on Monday December 15th by the Heidelberg Institute for International Conflict Research, a think-tank. The study classifies conflict broadly to include peaceful disputes over politics or borders (low intensity), as well as those involving sporadic or constant violence (medium or high intensity). In 2008 previously non-violent conflicts escalated into violence in countries such as Kenya and Yemen. Ideological change is both the most common cause of conflict and the root of most wars, but there is rarely only one cause of dispute. Congo’s ongoing conflict encompasses a battle for its mineral resources and, according to some, an invasion by another state, Rwanda.

Russia’s economy

Boom to bust and worse

The state of the economy in Russia looks worse with each passing day

ECONOMIC growth and political stability: those were the two proudest achievements of Vladimir Putin and his ex-KGB associates in the eight years since they gained control of Russia. Now the economy is looking wobbly—industrial output in November slumped by 8.7% compared with a year earlier, according to figures published on Tuesday December 16th—the big question is whether the regime’s political control will crack too.

The rouble—a rock-hard currency since the oil price started to rise—is losing value at an accelerating rate, down by 3% this week against a basket of currencies. It has lost around 15% of its value since the summer. Even so, Russia’s huge foreign-currency reserves are steadily shrinking as the authorities defend the rouble. They are down by more than a quarter, or around $160 billion, from their August peak of $600 billion.

Russia has been hit by a double blow. One is a collapse in the oil price. Urals crude is trading around $44 a barrel, whereas Russia’s budget had pencilled in an oil price of $70. The other is the credit crunch which means an end to cheap loans for an economy that had become used to a flood of petroroubles.

The stockmarket has fallen by some 70% since its peak in May. Lay-offs are mounting. Western credit ratings agencies are downgrading Russian banks; earlier this month Standard & Poor’s downgraded Russia’s sovereign debt for the first time in nearly a decade. Industrial production is plummeting: this week marked the steepest fall since the crisis of 1998. Oleg Vyugin, a former deputy finance minister, reckons that 2009 may see GDP shrinking by as much as 4%. (The Economist Intelligence Unit, more optimistically, has cut its growth forecast from 3.7% to 3%.)

Finding an economic-policy mix to deal with that is a daunting task. Russia’s main macroeconomic problem of the past two years—inflation—is far from vanquished: it was down only slightly to 13.8% in November. But a far bigger problem is maintaining growth in an economy that during the boom years borrowed recklessly and used the money for higher living standards rather than diversification.

The rouble’s depreciation does cut Russia’s current-account deficit, by making imports pricier. It takes some of the strain off the budget. But it does not help much else. Russia’s underlying uncompetitiveness was disguised by the oil boom. Now it is exposed.

Nor do bail-outs seem to be working. A $200 billion programme is helping Kremlin-linked companies stay afloat (and also consolidating the authorities’ control of the economy). But much of the money that was meant to unblock the financial system is instead going offshore. Confidence is shrivelling.

A rise in the oil price might buy the Kremlin some time. President Dmitry Medvedev last week suggested that Russia might even join OPEC, the oil-producers’ cartel. It is unclear how that would square with the nominally private ownership of most of Russia’s oil industry, or Russia’s membership of the G8 club of rich industrialised countries. OPEC members themselves may be unconvinced by Russia’s new-found enthusiasm.

Public discontent is beginning to simmer. The problem is less the tiny self-proclaimed opposition, but spontaneous protests by citizens fed up with incompetent and arbitrary behaviour. A protest by drivers in the Russian far east brought a nervy response from official Kremlin media. The regime’s popularity rested on a combination of higher living standards and selective repression. The economic crisis has weakened the effect of the former. The latter is one of the few options left. The signs are ominous. Memorial, a group that champions the cause of truth about the Stalin era, has had its computers seized in a police raid. The Soldiers’ Mothers Committee, which campaigns against conscription, says law-enforcement officials have asked its staff to prove that their offices are not used for drug-dealing.

For now, the economic crisis is scarcely discussed in Russia’s mainstream media, which has come under steadily tighter control since Mr Putin came to power. That is not likely to persuade Russians that the authorities have everything under control.

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on December 16, 2008 at 10:40 pm Leave a Comment

Illinois Pols, Cash Must Come Out of the Closet: Amity Shlaes
Commentary by Amity Shlaes

– It probably comes as a surprise to some that now a fourth Illinois governor is facing jail time. Governor Rod Blagojevich was arrested this week by U.S. Attorney General Patrick J. Fitzgerald for allegedly trying to sell the president-elect’s Senate seat.

But the surprised don’t include people from Illinois. Illinois people know the state has two kinds of politicians. One is the Abe Lincoln kind. The other is the Richard J. Daley kind, after the legendary “boss” who ran Chicago as mayor from 1955 until his death in 1976. These two types are less different than they seem.

The Lincoln kind is usually tall, usually an egghead, impossibly moral, and always a reformer. In this class stood hulking Paul Douglas, almost 6-feet, 3-inches. Senator Douglas saved the Indiana Dunes from development, led lawmakers on Capitol Hill in integrating their office staffs, and joined the U.S. Marines as a private at age 50 to show his patriotism.

Yet another in the Lincoln line was Adlai Stevenson II, the U.S. ambassador to the United Nations who stood up against the Soviet Union during the Cuban Missile Crisis. Stevenson famously continued to wear a shoe even after he’d worn a hole in its sole by campaigning so hard. President-elect Barack Obama aspires to fall into this category.

Running Into Trouble

This first sort represent Illinois, often outside Illinois. The second sort run Illinois.

And they run into trouble, at least most of the time. Richard J. Daley, the current mayor’s father, clashed loudly with reforming Democrats from his own party. The early 1970s brought the conviction of Otto Kerner, a former governor and federal judge. While governor, Kerner acquired shares in a race track association and then helped its owner secure favorable dates for races.

More recently there is the sad case of George Ryan. He won the attention of many of us in early 2003 for reviving the gubernatorial pardon and commuting the sentences of 167 people on death row. Now parked in prison in Terre Haute, Indiana, Ryan was convicted of illegally steering contracts in exchange for favors.

A third governor to go to prison was Dan Walker. In his youth Walker was a crusading lawyer who made his name documenting the very real brutality of the first Mayor Daley’s police at the Democratic National Convention in Chicago in 1968. Then Walker ran for governor in a blue work shirt as an anti-Machine candidate. But after his term in Springfield, Walker was convicted of fraud involving a failing savings and loan. In other words, Walker belonged, by turns, to both categories.

And of course there are those in this second category who win the race to the grave without a pit stop in prison. Richard J. Daley himself was one. Another was a former Illinois secretary of state, Paul Powell. At Powell’s death, the New York Times reported, the governor actually placed guards outside the official’s office to keep staff from removing documents.

Cash in Boxes

Then Powell’s executor found $800,000 in shoe boxes in Powell’s closet at the Hotel St. Nicholas. “I have tried as hard as I can to find where the money came from,” the embarrassed man — a university chancellor, no less — said.

There’s something wrong with this dynamic of public angels and closet crooks.

For one thing, the Lincoln line’s idealism limits its success. Stevenson lost both of his presidential campaigns against Dwight Eisenhower. He himself explained why: “Governor Stevenson, all thinking men are for you,” a voice in a crowd is said to have cried out. “Yes,” the governor replied. “But I need a majority to win.”

For another, the two categories do blur, as the above pictures suggest. Some who fell afoul of the law also do a lot of good — Ryan’s death row moves, Mayor Richard J. Daley’s city management. Some who hang with the old crowd, or come out of it – - the sons of the old mayor — are reformers.

Fickle Voters

Voters are fickle. First they cheer the prosecution of the politicians. Then they turn around and re-elect the prosecutor’s dream targets. If showy trials actually reestablished the rule of law, then Illinois would be all cleaned up by now, just like the waters of Lake Michigan. But the 78-page-length of Fitzgerald’s complaint suggests that little has changed since they dragged out Powell’s shoe boxes.

Another problem is that we fail to remember that prosecutors can be wrong. Fitzgerald’s New York corollary, Eliot Spitzer, fell as spectacularly as a statue of Stalin. With the revelations of Spitzer’s personal errors have come second thoughts about the worthiness of his prosecutions.

In Illinois, the preoccupation with scandalous business has made it more difficult to pass reform that serves legitimate business.

Though it’s hard to remember when you’re reading about Blagojevich’s efforts to place his wife on corporate boards, Illinois is in a budget crisis. Pensions of employees of one its biggest companies, the Tribune Co., are in jeopardy. Yet Topic A is that Blagojevich tried to silence a Tribune editorialist.

In short, sure, pull the pols and their wads out of their closets. But remember, especially now, as the states queue up for their bailouts, that there are all shades of error committed each day in our states. And most of those are better addressed in the state house than at a prosecutor’s press conference.

New $3 Trillion Bailout Is Coming to the Masses: Kevin Hassett
Commentary by Kevin Hassett

Dec. 15 (Bloomberg) — Pollster Frank Luntz asked a large audience at a conference in Washington last week to raise their hands if they had received a government bailout. While they chuckled and rested their hands on their laps, Luntz made an important observation. Bailout money is snowing down in an unprecedented blizzard, and if the moves fail to stimulate the economy, there will be a lot of angry voters.

Perhaps the same realization moved President-elect Barack Obama’s economic advisers to begin considering a bailout for the masses.

If Luntz asks the same question a few months from now, everyone may well lift their hand.

Bloomberg News last week reported that the chairman- designate of the National Economic Council, Lawrence Summers, had been conferring with conservative icon and Columbia Business School Dean Glenn Hubbard about a housing plan Hubbard designed with Columbia colleague Christopher Mayer. Obama’s economic advisers appear to have embraced the proposal, which is already “on a fast track at the Treasury,” according to the story.

The Hubbard-Mayer plan calls for the government to revive the moribund housing market by providing just about everybody with access to a 30-year fixed-rate mortgage with a 4.5 percent interest rate. That’s almost a full percentage point lower than the average national rate of 5.47 percent currently.

Buyers could borrow as much as 95 percent of the value of the home they purchase. The plan might extend to those with existing mortgages, allowing them to refinance and get the same terms. When either type of deal is complete, the lender will place the loan with Fannie Mae or Freddie Mac.

Splitting the Loss

Anyone refinancing with positive equity in their home would be relatively easy to accommodate. For those with negative equity — meaning the dollar amount of their mortgage exceeds the value of their house — Hubbard and Mayer recommend that homeowners and lenders split the loss evenly and start over with a clean mortgage reset to reflect the property’s current market value.

With some forecasts for fourth-quarter gross domestic product growth inching toward negative 8 percent at an annualized rate, drastic policy measures are becoming increasingly palatable.

This mortgage plan is radical, and might just be powerful enough to help turn this troubled economy around.

The bottom line: if you have a mortgage, this plan would put extra money in your pocket.

Imagine, for example, that you have a $500,000 mortgage with a 30-year fixed-rate loan carrying an interest rate of 6.1 percent, the average rate for a fixed 30-year mortgage issued this year. Lowering the interest rate to 4.5 percent would reduce monthly payments by about $500 monthly. Someone with a mortgage of $150,000 would save about $150 a month.

Better Than Rebates

These monthly payments changes are different from tax rebates because they would last for many years. For that reason, consumers would be fairly likely to increase their spending. After all, if your monthly housing expenses just dropped by $400, then adding a new car payment of $300 a month might seem a lot less frightening, even in these difficult times.

These subsidized mortgages should increase the number of home buyers and help push property values back up. There are a lot of problems in the economy, but they all began in the housing sector and it seems likely that staunching the bleeding there is a prerequisite for achieving financial stability.

Make no mistake, this remedy will be costly.

$3 Trillion

Last week’s report suggests that the Obama team may be wary of allowing everyone access to this plan, since it costs so much — $3 trillion by one recent estimate. One constraint being discussed is to disallow refinancing, limiting the program to home buyers.

The restriction will be impossible to impose, however. All that you would need to do to qualify for the 4.5 percent rate would be to find a “bailout buddy” and agree to purchase each others’ homes with the new low-rate loan. You could then either swap the homes back, or agree to rent the homes to each other for the same fee.

Also, the program will have the largest possible effect on home prices, a key target of the policy, only if borrowers expect it to last a long time. After all, if the person you sell your house to in the future has to borrow at a high interest rate to finance the purchase, then he will offer a lower price. That realization should affect the price you are willing to pay today.

Thus, the cost will be steep for two reasons. It will be tough to limit the new mortgage to home buyers, and the program will have to be sustained for a long time.

In the past, steep costs would have killed such a bill. But in today’s environment, it has almost become a political necessity to give voters their bailout too.

Ladies and gentlemen, grab your bailout buddy, help is on the way.

Central Banks Can Do Better Than Just Mopping Up: Caroline Baum

Dec. 11 (Bloomberg) — Central banks care about financial stability.

Asset bubbles can be financially destabilizing.

Therefore, central banks care about asset bubbles.

If only policy makers found this syllogism persuasive.

Until now, central bankers pretty much cared about asset bubbles only to the extent that asset prices affected their ability to deliver price stability and, in the case of the Federal Reserve’s dual mandate, maximum employment. Otherwise, the operative doctrine was laissez-faire-’til-after-they-burst.

That’s about to change, said William White, who recently retired from the Bank for International Settlements, where he was economic adviser and head of the Monetary and Economic Department from 1995 to June 2008.

“The most calamitous downturns were not preceded by any degree of inflation,” White said in a telephone interview yesterday. “There was no inflation in 1873-74, in the 1920s, in the 1980s in Japan and in the 1990s in Southeast Asia.”

All these extended credit cycles ended badly. The U.S. economy contracted for 65 months, a record, from 1873 to 1879.

The bursting of the housing bubble and the deepening financial and economic crisis should be sobering to those who resist the idea that asset bubbles, when they burst, can be as destabilizing as inflation, which is the reason central bankers adopted inflation targets.

In Denial

Central banks are still holding the line, at least publicly, on the inappropriateness of “targeting” asset prices, which misrepresents the issue. (More on that later.) Federal Reserve Vice Chairman Don Kohn said in a speech last month that he had reexamined the evidence and had came to the conclusion that he agrees with Alan Greenspan, his former boss and long-time advocate of bubble mop-up.

Bank of England policy makers are equally dug in, with Andrew Sentance, Charlie Bean and Sir John Gieve all arguing in recent speeches that using monetary policy, or interest rates, to “lean against the wind” is inadequate or inappropriate.

All these arguments miss the point. No one is suggesting central bankers target asset prices (Dow 13,000?). Nor is the issue bubble detection or identification, which implies policy makers know the appropriate level for asset prices and inspires visions of Sherlock Holmes-like characters looking under rocks in the hopes of making a discovery.

Economics is a social science. Econometric models spit out results that lack the accuracy of chemistry experiments and the precision of mathematical equations.

Asset Prices as Symptom

Central bankers are forced to deal in the realm of the touchy-feely all the time. If their work could be reduced to an equation, we wouldn’t a) need them or b) find ourselves in the mess we’re in now. So why is it so hard for policy makers to grasp what White and his BIS colleagues have been saying for a decade?

“Targeting asset prices is not at all what we’ve been suggesting,” White said. “Asset prices are a symptom. The underlying problem is excess credit growth.”

Too much effort goes into differentiating this asset bubble from the rest: what White calls “the school of what’s different: the CDOs, CDO-squareds, the SIVs, the rating agencies.”

It makes more sense to focus on “the school of what’s the same, and that’s the credit cycle. There’s always something new, but there’s always something the same: leverage, speculation, declining credit standards,” he said.

Leaning vs Cleaning

Cracks are starting to appear in the asset-bubble-resistance facade. Questioned about a change in approach at an Oct. 15 speech, Fed chief Ben Bernanke said policy makers would have “to look very hard at that issue and what can be done about it.” He said it was unclear whether monetary policy or regulation and supervision was the proper tool.

Until now, there has been a persuasive argument for a hands- off approach to asset bubbles.

“Is it possible to lean against the upturn, or is it preferable to wait and clean up afterwards?” White said. “The models say you can wait. And it always worked. That’s a pretty powerful argument.”

The counter argument is that models aren’t always reliable. What worked in the past may not work now.

If the recession proves to be longer, deeper and more intractable than recent slumps, central bankers may come to appreciate the merits of leaning versus cleaning. Leaning may entail both “macroprudential instruments,” such as raising reserve requirements, capital requirements and loan-to-value ratios, and a “monetary instrument,” White said.

Prevention as Cure

Cleaning appeared to have worked in the past, following the 1987 stock market crash, the early 1990s recovery from the savings and loan crisis in the U.S., and the late 1990s Asian financial crisis and near-collapse of Long-Term Capital Management. But “it works at the expense of making it worse next time around,” White said.

Cleansing, not cleaning, is what’s really needed. Without it, central banks have to “use a monetary instrument that is ever more aggressive” and will eventually cease to work, he said.

The best medicine, as with most things, may be an ounce of prevention.

“When you see a combination of rapid credit growth, a rapid rise in asset prices across a broad spectrum and changes in spending behavior, it should be a wake-up call that says: We have a problem,” White said.

Central bankers should realize that a lack of action during the credit upswing may impose greater costs to society.

“The facts are so obvious,” White said. “You don’t need to be a rocket scientist. Even an economist, when he sees something happen, will admit it is possible.”

Madoff’s Investors Needed a Blagojevich Moment: Ann Woolner

Dec. 16 (Bloomberg) — Kind to employees, generous to charities, devoted to regulation of the financial services industry, Bernard Madoff was a much-admired man whose oldest, dearest friends are among his biggest victims.

Now it seems those fine attributes cultivated over a lifetime were nothing more than a con, a cover for one of the more blatant ways to steal money without gun or mask.

He told his sons last week he had been running a “giant Ponzi scheme,” precipitating his arrest.

A former chairman of the Nasdaq Stock Market, Madoff was so smooth, so reassuring, so sophisticated, and such a stalwart on Wall Street, that few suspected. If he had been as profane and as blatant about helping himself as Illinois Governor Rod Blagojevich was, the feds would have been on him years ago.

But Madoff’s joyride lasted for decades, judging from the aging red flags now being reported. He made suckers out of some of the most sophisticated investors in the world.

Investment management firms Fairfield Greenwich Advisors, Kingate Management Ltd., Tremont Capital Management and banks in Spain, France and Switzerland are counting up their losses.

In Ponzi schemes, new investors unwittingly supply cash for what passes for dividends to earlier investors, but the securities don’t exist. The operator pockets the rest. And as long as new investors keep showing up and few folks demand their capital back, it all works just fine.

Scam With Longevity

This scam’s longevity helps explain why so many financial sophisticates went for it. Ponzis tend not to last long, and Madoff had been in business since 1960. Their involvement reassured others like them to invest, thus keeping it going.

“Who could ever fathom that an individual who had achieved such a lofty reputation of legitimacy and propriety could ever be capable — in operation or in mentality — of betraying the trust of so many people in so elaborate a manner?” asks Stephen Weiss, a lawyer with Seeger Weiss, who is preparing a lawsuit for Madoff victims.

The question explains how Madoff got away with it. Hardly anyone did fathom it. And those who did, who tried to warn, were waved off.

Like so many Ponzi operators, Madoff seems to have preyed on people much like him. This happens so frequently that it has a name: affinity fraud.

Developing Trust

“A lot of Ponzi schemes involve members of a church or a particular nationality who invest in part because they trust the people who are already investing,” says Carl Loewenson, former federal prosecutor and co-chairman of Morrison & Foerster’s securities litigation and white-collar group. He has no connection to the Madoff matter.

There have been Ponzi schemes targeting Mormons, Orthodox Jews and evangelical Christians. Another targeted Haitian immigrants in Miami.

Madoff’s customers were much like himself, financially sophisticated and wealthy. Many, like him, are Jewish, and a hub of activity was the Palm Beach Country Club, where Madoff had long been a member.

He plied his trade within his social community, his philanthropic network, his professional peers. Many of his victims had been intimate friends for generations.

“When people get investment advice from people who are part of their group, they tend to rely on it,” Loewenson says.

And when they rely on it, so do others in their group. When this group includes the most sophisticated investors around, then why not credit their judgment. Trusting that someone else did the due diligence relieves you of the chore, right?

Great Record

Besides, Madoff produced consistently solid returns that weren’t so outrageous as to look Ponzi-like. “It was not something that sprung up six months ago and paid 60 percent returns,” Loewenson says. “He had a great track record.”

This helps explain the international banks, money managers and institutional investors who flocked to his funds.

OK, but surely somebody, somewhere actually paid attention to where they were sinking millions of dollars. Where was the paperwork? Who was producing it?

When Aksia LLC, a hedge fund investment adviser, noticed that a three-person accounting firm was auditing Madoff’s massive assets, which NASD puts at $17.1 billion, it warned clients to stay away.

And now the auditor, Friehling & Horowitz, finds itself under investigation by a suburban New York district attorney.

It took 70-year-old Madoff’s confession to his sons and employees to finally put an end to all this. His reputation had kept him under the radar and silenced whatever alarms might have otherwise alerted authorities.

With more bravado, he might have been a Blagojevich and the feds would have taken notice. For investors, a crack in the Madoff façade could have saved a lot of heartbreak and many billions of dollars.

Merrill Oil Guru Shifts From Bull to Bear and Back (Update1)

Dec. 16 (Bloomberg) — Francisco Blanch, the Merrill Lynch & Co. analyst who called the $147.27 record crude-oil price almost on the nose, sent markets into a tailspin with his forecast that the next move may be back to $25 a barrel in 2009. Such relief for consumers may be short-lived once the global recession ends, he said.

“If we reignite economic growth to a very fast level, we will have a shortage of energy again,” said the 35-year-old head of global commodity research at Merrill Lynch in London. Oil may rise to $150 in two or three years, said Blanch. World growth will reach 2.2 percent next year and rise to 4.8 percent by 2011, according to the International Monetary Fund.

Blanch changed his 2009 price forecast at least four times this year as the worst global slowdown since 2001 spreads. His most recent estimate that crude may fall to $25 came on Nov. 26. The Organization of Petroleum Exporting Countries’ 13 members meet in Oran, Algeria, tomorrow to try to stem crude’s decline.

“A shift of views from an analyst is a good thing,” said Pierre Andurand, chief investment officer at BlueGold Capital Management LLP, a London-based hedge fund that manages $1.1 billion. “It means he takes the change in economic conditions and the change in balances into account. We can’t say that for many of them.”

On Aug. 7, with crude about $27 below the record set about a month earlier, Blanch said he expected oil demand to be supported by “very healthy” growth in emerging markets.

The following month, Lehman Brothers Holdings Inc. declared bankruptcy, credit markets froze and recessions in the U.S. and the Europe deepened.

Global Recession

Blanch lowered his average 2009 forecast to $90 on Oct. 2 and said crude may fall to $50 in a global recession. Following the announcement, prices dropped 4.6 percent to $93.97 a barrel on the New York Mercantile Exchange.

Two months later, he forecast a fall to $25 if the recession extended to China. Oil tumbled 13 percent to $40.50 a barrel that day and the next.

“What changed our views is that the credit cycle became explosive. Suddenly the cost of money just absolutely ballooned,” said Blanch, who lives in London’s Hampstead area with his wife, Gabriela, a human rights lawyer, and a golden retriever named Guero.

Goldman Sachs Group Inc. analysts Jeffrey Currie and Allison Nathan, and Deutsche Bank AG’s Adam Sieminski, have also reduced price forecasts.

Other Forecasts

London-based Currie and Nathan, in New York, predicted on Dec. 11 that oil would drop to $30 in the first quarter of 2009, half their previous forecast. Washington-based Sieminski predicted an average price of $47.50 for 2009.

Oil for January delivery rose 51 cents, or 1.2 percent, to $45.02 a barrel at 8:34 a.m. on the New York Mercantile Exchange. The price has fallen 51 percent in the past three months.

Born in Madrid, Blanch received a doctorate in economics from the city’s Complutense University and a master’s degree in public administration from Harvard University’s John F. Kennedy School of Government. He was in South Korea to research East Asian economic growth when a financial crisis struck the region, sending oil to $10.35 in December 1998.

At the time, he had “pretty much the same feeling we have now,” Blanch said.

After working as an energy economist for Goldman, Sachs & Co. and consulting for the European Commission, Blanch joined Merrill Lynch in April 2005. He declined to discuss his future after Merrill’s takeover by Bank of America Corp.

Blanch forecast $150 oil in November 2007 when crude was about $96, saying that would set the stage for a global economic slowdown sending the price to $50.

‘Cold Outside’

His $25 prediction may have received more weight than it deserved, said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Massachusetts.

“Sure, if the Chinese economy gets really bad, we could go below $25,” she said. “It’s kind of like saying if the temperature drops, it will be cold outside.”

Blanch, who runs half-marathons and takes the subway to work, said the likelihood of $25 oil is less than one in three.

“The best you can do is sort of set out a number of alternatives and try to set out within your central forecast what are the risks around it and what are the alternatives,” he said. “Nobody has a crystal ball.”

U.S. Stocks Rally, Led by Banks, as Fed Cuts Rate to Record Low
Dec. 16 (Bloomberg) — U.S. stocks rallied and the Standard & Poor’s 500 Index climbed to a five-week high after the Federal Reserve cut its benchmark interest rate to a record low and said it will employ “all available tools” to revive the economy.

Citigroup Inc. jumped 11 percent and JPMorgan Chase & Co. climbed 13 percent after the central bank said it “stands ready to expand” purchases of mortgage-backed securities. Goldman Sachs Group Inc. rallied 14 percent after its first quarterly loss as a public company was smaller than some analysts’ estimates. Boeing Co. and Intel Corp. jumped more than 7.2 percent as all 10 industry groups in the S&P 500 increased more than 2.2 percent after the Fed’s announcement.

“A big, widespread, explosive, incendiary shell has come out of the Fed’s cannon,” said Frederic Dickson, who helps oversee about $19 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. “It’s a bloody big deal. This is the kick-it-up-a-notch moment.”

The S&P 500 added 5.1 percent to 913.16. The advance put the benchmark index above its average level during the past 50 days for the first time since September. The Dow Jones Industrial Average gained 359.61 points, or 4.2 percent, to 8,924.14. The Russell 2000 Index of small companies increased 6.7 percent.

The Fed cut its target rate for overnight loans between banks to a range of zero to 0.25 percent. The Fed’s decision came after simultaneous recessions in the U.S., Europe and Japan dragged the S&P 500 down almost 45 percent from its 2007 record and sent benchmark indexes from Brazil to Bangkok into bear markets.

Banks Rally

Citigroup climbed 83 cents to $8.23, while JPMorgan jumped $3.72 to $32.35. The S&P 500 Financials Index jumped 11 percent, the steepest gain among 10 industries and the group’s steepest advance since Nov. 24.

The Fed said in its statement that the recession is likely to warrant exceptionally low levels of the federal funds rate “for some time.” The statement noted that the Fed has already announced it will purchase agency debt and mortgage-backed securities, and said the central bank is ready to expand the program. Policy makers continue to weigh the potential benefits of buying longer-term Treasury securities, the statement said.

“They’re trying to rekindle the confidence of consumers and businesses, and that ultimately drives profits in the stock market,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio, which manages $30 billion.

Treasury notes rallied, sending yields to record lows, on expectations the Fed will buy the securities to force borrowing costs lower. The dollar weakened to $1.40 against the euro for the first time in two months.

Goldman’s Loss

Goldman Sachs added $9.54, the most since Nov. 24, to $76. Its loss of $4.97 a share in the three months ended Nov. 28 was the company’s first quarterly deficit since going public in 1999 as asset values and investment-banking fees declined. The average estimate of 18 analysts surveyed by Bloomberg was for a loss of $3.73, with UBS AG’s Glenn Schorr estimating a loss of as much as $5.50 a share.

Compensation and benefits, the firm’s biggest expense, fell to a negative $490 million in the quarter, as the company cut 2,500 jobs and lowered average pay per employee 45 percent to $363,654. The company that set a Wall Street profit record in 2007 converted to a bank-holding company and accepted $10 billion from the U.S. government earlier this year as investors lost confidence in companies that rely on debt-market funding.

Morgan Stanley, the Goldman Sachs competitor that also became a bank, rallied 18 percent to $16.13. The firm will report fourth-quarter results tomorrow. Analysts estimate a loss of 34 cents a share, excluding some items, according to a Bloomberg survey.

Fed Cuts Rate to as Low as Zero, Will Use All Tools (Update2)

Dec. 16 (Bloomberg) — The Federal Reserve cut the main U.S. interest rate to as low as zero and said it will buy debt as the next step in combating the longest recession in a quarter-century and reviving credit.

The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said today in a statement in Washington. “Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

Treasury notes rallied in anticipation the Fed will buy the securities to force borrowing costs for consumers and companies lower. Nine rate cuts in the prior 14 months and $1.4 trillion in emergency lending failed to reverse the economic downturn. Today, the Fed said it will target a federal funds rate of between zero and 0.25 percent.

“The focus of the committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level,” the FOMC said.

The dollar tumbled against the euro and yen. Stocks climbed, pushing the Dow Jones Industrial Average up 216 points, or 2.6 percent, to 8797.12 at 2:53 p.m.

Printing Money

“The Fed is sending a message that it will print money to an unlimited extent until it starts to see the economy expanding,” William Poole, former president of the St. Louis Fed and now a senior fellow at the Cato Institute in Washington, said in an interview with Bloomberg Television. Poole is also a contributor to Bloomberg News.

The statement noted that the Fed has already announced it will purchase the debt issued or backed by government-chartered housing finance companies, and said the Fed is ready to expand the program. The central bank said it continues to weigh the potential benefits of buying longer-term Treasury securities.

The deepening economic slump pushed unemployment to 6.7 percent last month, the highest level since 1993, while builders broke ground on the fewest new homes since record-keeping began in 1947. Deflation is also emerging as a risk: consumer prices fell the most on record in November, the Labor Department said earlier today.

No Dissent

Today’s vote was unanimous. In a related move, the Fed lowered the rate on direct loans to banks and securities dealers to 0.5 percent. It set the payment on the reserves that commercial banks hold at the Fed at 0.25 percent, down from 1 percent.

Fed policy makers twice pared the federal funds rate, or overnight lending rate, to 1 percent since adopting it as the main tool of monetary policy in the late 1980s. The 1 percent rate held from June 2003 to June 2004, and again from the end of October to today.

The Bank of Japan has been the only major central bank in modern times to mix a policy of steep rate reductions with quantitative easing, or the strategy of injecting more reserves into the banking system than needed to keep the target rate at zero.

Japan’s central bank kept its main rate at zero from 2001 to 2006 while flooding the banking system with extra cash to encourage lending, spur growth and overcome deflation. The abundant funds failed to prompt lending by commercial banks, which expanded their reserves at the central bank almost nine times by early 2004.

Emergency Loans

Bernanke, acting with New York Fed President Timothy Geithner, has set up emergency loan programs aimed at averting a collapse of the nation’s credit markets. Geithner is President- elect Barack Obama’s pick for Treasury secretary and didn’t attend today’s meeting.

The Fed has enlarged bank reserves, supported issuance of commercial paper and provided liquidity to government bond dealers. It is also swapping dollars with the European Central Bank and its other counterparts to supply banks in other countries.

The moves have swelled the Fed’s balance sheet to $2.26 trillion from $868 billion in July 2007. That’s in addition to the $700 billion Troubled Asset Relief Program, which the U.S. Treasury has used since October to channel about $335 billion of capital injections into banks and other financial companies.

Still, the economy has crumbled, with employers cutting 533,000 jobs from payrolls in November for a total loss this year of 1.9 million, which more than erases the 2007 gain of 1.1 million.

Credit remains scarce in many markets and major financial institutions worldwide continue to report losses and writedowns totaling $994 billion.

Shrinking Economy

Macroeconomic Advisers LLC, a St. Louis-based consultant, says the economy is probably shrinking at a 6.5 percent annual pace this quarter, which would be the biggest drop since 1980.

The firm forecasts a 4.2 percent annual contraction rate in the first quarter, returning to no growth in the second quarter and a 2.3 percent expansion rate in the second half of 2009.

Early this month, as a panel of leading U.S. economists declared the recession began in December 2007, Bernanke signaled he was ready to dig deeper into the central bank’s toolkit. He said he may use less conventional policies, such as buying Treasury securities, because his room to lower the main U.S. rate from the current 1 percent level was “obviously limited.”

Fading Relevance

The federal funds target rate has weakened as a monetary policy tool because the Fed’s flood of funds has caused the average daily rate to trade below the policy goal every day since Oct. 10.

The gap between the target and the effective rate, or average daily market rate, has averaged about a half point since Sept. 12. The gap averaged just above zero from the start of this year through Sept. 2.

The central bank is trying to lower mortgage rates by purchasing up to $100 billion of debt issued by housing-finance providers Fannie Mae and Freddie Mac and $500 billion of mortgage-backed securities guaranteed by the companies.

The Fed’s counterparts around the world have staged their own interest-rate cuts. The ECB has lowered its main rate to 2.5 percent this month from 4.25 percent in July, while the Bank of England reduced its rate to 2 percent this month from 5.75 percent in July.

ECB President Jean-Claude Trichet said yesterday there’s a limit to how far the bank can cut interest rates and signaled policy makers may pause in January. “Do we have a feeling there is a limit to the decrease in rates? At this stage certainly yes,” Trichet told journalists in Frankfurt.

While the Fed can’t push interest rates below zero, “the second arrow in the Federal Reserve’s quiver — the provision of liquidity — remains effective,” Bernanke said in a Dec. 1 speech.

US interest rate slashed to 0.25%

US Federal Reserve chairman Ben Bernanke

The US Federal Reserve has slashed its key interest rate from 1% to 0.25% as it battles the country’s recession.

The central bank’s key rate, the target rate for overnight federal funds, is at its lowest since records began in 1954.

The rate has been cut drastically by the Federal Reserve from the 5.25% where it stood in September 2007.

Earlier in the day, official data confirmed that the threat of inflation is receding, as consumer prices fell a record 1.7% in November.

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Kristof: Obama’s ’secretary of food’?

As Barack Obama ponders whom to pick as agriculture secretary, he should reframe the question. What he needs is actually a bold reformer in a position renamed “secretary of food.”

A Department of Agriculture made sense 100 years ago when 35 percent of Americans engaged in farming. But today, fewer than 2 percent are farmers. In contrast, 100 percent of Americans eat.

Renaming the department would signal that Obama seeks to move away from a bankrupt structure of factory farming that squanders energy, exacerbates climate change and makes Americans unhealthy – all while costing taxpayers billions of dollars.

“We’re subsidizing the least healthy calories in the supermarket – high fructose corn syrup and hydrogenated soy oil, and we’re doing very little for farmers trying to grow real food,” notes Michael Pollan, author of such books as “The Omnivore’s Dilemma” and “In Defense of Food.”

The Agriculture Department – and the agriculture committees in Congress – have traditionally been handed over to industrial farming interests by Democrats and Republicans alike. The farm lobby uses that perch to inflict unhealthy food on American children in school lunch programs, exacerbating America’s national crisis with diabetes and obesity.

But let’s be clear. The problem isn’t farmers. It’s the farm lobby – hijacked by industrial operators – and a bipartisan tradition of kowtowing to it.

I grew up on a farm in Yamhill, Oregon, where my family grew cherries and timber and raised sheep and, at times, small numbers of cattle, hogs and geese. One of my regrets is that my kids don’t have the chance to grow up on a farm as well.

Yet the Agriculture Department doesn’t support rural towns like Yamhill; it bolsters industrial operations that have lobbying clout. The result is that family farms have to sell out to larger operators, undermining small towns.

One measure of the absurdity of the system: Every year the American taxpayer sends me a check for $588 in exchange for me not growing crops on timberland I own in Oregon (I forward the money to a charity). That’s right. The Agriculture Department pays a New York journalist not to grow crops in a forest in Oregon.

Modern confinement operations are less like farms than like meat assembly lines. They are dazzlingly efficient in some ways, but they use vast amounts of grain, as well as low-level antibiotics to reduce infections – and the result is a public health threat from antibiotic-resistant infections.

An industrial farm with 5,000 hogs produces as much waste as a town with 20,000 people. But while the town is required to have a sewage system, the industrial farm isn’t.

“They look profitable because we’re paying for their wastes,” notes Robert P. Martin, executive director of the Pew Commission on Industrial Farm Animal Production. “And then there’s the cost of antibiotic resistance to the economy as a whole.”

One study suggests that these large operations receive, in effect, a $24 subsidy for each hog raised. We face an obesity crisis and a budget crisis, and we subsidize bacon?

The need for change is increasingly obvious, for health, climate and even humanitarian reasons. California voters last month passed a landmark referendum (over the farm lobby’s furious protests) that will require factory farms to give minimum amounts of space to poultry and livestock. Society is becoming concerned not only with little boys who abuse cats but also with tycoons whose business model is abusing farm animals.

An online petition at www.fooddemocracynow.org calls for a reformist pick for agriculture secretary – and names six terrific candidates, such as Chuck Hassebrook, a reformer in Nebraska. On several occasions in the campaign, Obama made comments showing a deep understanding of food issues, but the names people in the food industry say are under consideration for agriculture secretary represent the problem more than the solution.

Change we can believe in?

The most powerful signal Obama could send would be to name a reformer to a renamed position. A former secretary of agriculture, John Block, said publicly the other day that the agency should be renamed “the Department of Food, Agriculture and Forestry.”

And another, Ann Veneman, told me that she believes it should be renamed, “Department of Food and Agriculture.” I’d prefer to see simply “Department of Food,” giving primacy to America’s 300 million eaters.

As Pollan told me: “Even if you don’t think agriculture is a high priority, given all the other problems we face, we’re not going to make progress on the issues Obama campaigned on – health care, climate change and energy independence – unless we reform agriculture.”

Your move, Mr. President-elect. I invite you to visit my blog, On the Ground and join me on Facebook. You can also watch my Youtube videos and follow me on Twitter.

PAULSON DEFIES HIS OWN PREDICTIONS

Rich Lowry

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Breaking all his promises on bailout spending.

HERE’S the three-point pro gram for determining how the $700 billion of the Paul son bailout plan will be deployed:

1) Listen to what Treasury Secretary Henry Paulson says he’ll do with the money; 2) Wait a few weeks; 3) Watch him do the precise opposite.

A few weeks ago, Paulson insisted that troubled US automakers “fall outside” the bailout program’s original purpose, which “was aimed at the financial system.” That’s quite categorical. Clearly, funds can’t be used for a purpose for which they were never intended. At least that’s what the civics books lead us to believe.

The books should be sent back for a rewrite. Last week, the Bush administration all but committed bailout funds to the – in the great economist Joseph Schumpeter’s phrase – “hopelessly maladapted” auto companies. Congress held multiple hearings on what to do about the automakers and had a fierce debate culminating in a tense, high-wire meeting between Tennessee Sen. Bob Corker and United Auto Workers officials.

They were all play actors in a simulacrum of democratic deliberation. The Bush administration had the Paulson slush fund that it could choose to tap or not at whim. It’s hard to see how GM or Chrysler constitutes a financial institution. Never mind. Logic will be tortured to shovel them money as necessary.

When Lehman Brothers went down in September, the financial system faced a crisis. Paulson needed the flexibility to adjust to dire and unpredictable circumstances, but in retrospect his conduct verges on bad faith. His $700 billion program is called the Troubled Assets Relief Program for a reason: It was premised on relieving financial institutions of their troubled assets through government purchases of them. Paulson ended up instead injecting capital directly into banks, an idea he had repeatedly opposed during his TARP testimony.

He can certainly change his mind, but Congress deserved a clearer window into his thinking before it handed him hundreds of billions of dollars. Paulson told The Washington Post that his staff was working on an option to inject capital directly even as he was declaring to Congress he wouldn’t do it.

Democrats wanted to limit the pay of executives, so they inserted a provision stipulating that any firm taking TARP funds had to restrict executive compensation. But the administration insisted on adding a sentence saying the restriction only applied to firms selling their troubled assets to the government, thus gutting the restriction since the funds have never been used for that – its stated – purpose.

It was Federal Reserve Chairman Ben Bernanke who originally suggested to Paulson that he go to Congress. Bernanke worried that there wasn’t enough democratic accountability in the two of them deciding on their own authority how to deploy tens of billions of dollars in case-by-case bailouts. Maybe they figure it’s the thought that counts?

Bernanke and Paulson have said they didn’t bail out Lehman – generally considered a near-catastrophic mistake – because they didn’t have the legal power. This excuse is, as Abraham Lincoln put it, “thinner than soup made from the shadow of a pigeon that starved to death.”

Bernanke and Paulson strained for any plausible authority to do anything else they wanted during the crisis, with the Federal Reserve drastically increasing its power with a raft of new lending programs whose obscure initials – TAF, TSLF, PDCF, etc. – put the New Deal to shame.

Paradigm shifts in American politics usually begin before the figures who are associated with them in history actually take power. Herbert Hoover broke with the minimalist governing vision of Calvin Coolidge before Franklin Roosevelt won the White House. Jimmy Carter began implementing deregulation before Ronald Reagan was elected.

Now, through TARP, George W. Bush has removed any restraint on Washington spending and extended a lifeline to automakers in a step toward pre-1980s industrial policy, thus paving the way for the ambitious activism of Barack Obama.

If asked, surely Paulson would have said this wasn’t what they intended – in yet another inoperative assurance.

Bush Touts Alliances on Trip to Iraq and Afghanistan

President George W. Bush made surprise visits to Iraq and Afghanistan, seeking to boost support for his responses to the 2001 terrorist attacks and solidify his foreign-policy legacy.

Reuters

President George W. Bush and Iraqi Prime Minister Nouri al-Maliki in Baghdad on Sunday celebrated the approval of a security agreement that establishes the basis for a continued U.S. military presence in Iraq.

In Iraq, the president highlighted a new security agreement intended to cement recent security gains and form the basis for a long-term alliance. Later, as he headed to Afghanistan, Mr. Bush said the U.S. was putting policies in place there similar to the ones that brought improvements in Iraq, including a troop surge, in response to recent deterioration in military and political conditions.

“It’s the same mission we had before [in Iraq], to have the young democracy develop the institutions so it can survive on its own…and to deny a safe haven for al Qaeda,” Mr. Bush said in a roundtable interview on the way to Afghanistan from Iraq.

On arrival at Bagram Air Base in Afghanistan, Mr. Bush spoke to more than a thousand U.S. soldiers and Marines at a hangar on the tarmac. “Afghanistan is a dramatically different country than it was eight years ago,” the president said. “We are making hopeful gains.” Mr. Bush also was set to meet on Monday with Afghan President Hamid Karzai.

Man Throws Shoes at Bush

A television correspondent tossed two shoes at President George W. Bush during a news conference in Baghdad Sunday.

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The security agreement, covering military relations and broader cooperation, replaces a series of United Nations Security Council resolutions as the legal basis for foreign troops’ presence in Iraq. Comments by Gen. Raymond Odierno, the commander in charge of U.S. troops in Iraq, suggested the pact leaves some matters to interpretation and could open the door to broader roles for U.S. forces in Iraq. That could complicate decision making for the administration of President-elect Barack Obama, who has pushed for a clear timetable for withdrawal.

Mr. Bush expressed optimism that Mr. Obama shares his commitment to achieving U.S. goals in Iraq. “I believe he understands the strategic importance of Iraq, and now he’s got a framework from which to make decisions.”

Gen. Odierno said Saturday that U.S. forces will remain indefinitely in dozens of small bases in Iraq’s cities, despite language in the pact that appeared to require a withdrawal by next summer. He said the provision applied only to combat personnel. U.S. commanders classify the urban counterinsurgency forces that mentor and fight alongside Iraqi troops as training personnel, he said.

The commander said he was operating under the assumption all American forces would leave Iraq by December 2011 as called for by the agreement. But he said U.S. commanders were talking to their Iraqi counterparts about the possibility of leaving combat personnel in Mosul beyond next summer. He said the Iraqi government will make the final decision.

The Secrets of Marketing in a Web 2.0 World

Consumers are flocking to blogs, social-networking sites and virtual worlds. And they are leaving a lot of marketers behind.

SALVATORE PARISE PATRICIA J. GUINAN and BRUCE D. WEINBERG

For marketers, Web 2.0 offers a remarkable new opportunity to engage consumers.

If only they knew how to do it.

That’s where this article aims to help. We interviewed more than 30 executives and managers in both large and small organizations that are at the forefront of experimenting with Web 2.0 tools. From those conversations and further research, we identified a set of emerging principles for marketing.

But first, a more basic question: What is Web 2.0, anyway? Essentially, it encompasses the set of tools that allow people to build social and business connections, share information and collaborate on projects online. That includes blogs, wikis, social-networking sites and other online communities, and virtual worlds.

Millions of people have become familiar with these tools through sites like Facebook, Wikipedia and Second Life, or by writing their own blogs. And a growing number of marketers are using Web 2.0 tools to collaborate with consumers on product development, service enhancement and promotion. But most companies still don’t appear to be well versed in this area.

So here’s a look at the principles we arrived at — and how marketers can use them to get the best results.

Don’t just talk at consumers — work with them throughout the marketing process.

Web 2.0 tools can be used to do what traditional advertising does: persuade consumers to buy a company’s products or services. An executive can write a blog, for instance, that regularly talks up the company’s goods. But that kind of approach misses the point of 2.0. Instead, companies should use these tools to get the consumers involved, inviting them to participate in marketing-related activities from product development to feedback to customer service.

How can you do that? A leading greeting-card and gift company that we spoke with is one of many that have set up an online community — a site where it can talk to consumers and the consumers can talk to each other. The company solicits opinions on various aspects of greeting-card design and on ideas for gifts and their pricing. It also asks the consumers to talk about their lifestyles and even upload photos of themselves, so that it can better understand its market.

A marketing manager at the company says that, as a way to obtain consumer feedback and ideas for product development, the online community is much faster and cheaper than the traditional focus groups and surveys used in the past. The conversations consumers have with each other, he adds, result in “some of the most interesting insights,” including gift ideas for specific occasions, such as a college graduation, and the prices consumers are willing to pay for different gifts.

Similarly, a large technology company uses several Web 2.0 tools to improve collaboration with both its business partners and consumers. Among other things, company employees have created wikis — Web sites that allow users to add, delete and edit content — to list answers to frequently asked questions about each product, and consumers have added significant contributions. For instance, within days of the release of a new piece of software by the company, consumers spotted a problem with it and posted a way for users to deal with it. They later proposed a way to fix the problem, which the company adopted. Having those solutions available so quickly showed customers that the company was on top of problems with its products.

Peter & Maria Hoey

Give consumers a reason to participate.

Consumers have to have some incentive to share their thoughts, opinions and experiences on a company Web site.

One lure is to make sure consumers can use the online community to network among themselves on topics of their own choosing. That way the site isn’t all about the company, it’s also about them. For instance, a toy company that created a community of hundreds of mothers to solicit their opinions and ideas on toys also enables them to write their own blogs on the site, a feature that many use to discuss family issues.

Other companies provide more-direct incentives: cash rewards or products, some of which are available only to members of the online community. Still others offer consumers peer recognition by awarding points each time they post comments, answer questions or contribute to a wiki entry. Such recognition not only encourages participation, but also has the benefit of allowing both the company and the other members of the community to identify experts on various topics.

Many companies told us that a moderator plays a critical role in keeping conversations going, highlighting information that’s important to a discussion and maintaining order. That’s important because consumers are likely to drift away if conversations peter out or if they feel that their voices are lost in a chaotic flood of comments. The moderator can also see to it that consumer input is seen and responded to by the right people within the company.

Getting Sociable

A New Approach: Marketing these days is more about building a two-way relationship with consumers. Web 2.0 tools are a powerful way to do that.
The Pioneers: A growing number of companies are learning how to collaborate with consumers online on product development, service enhancement and promotion.
The Lessons: From these early efforts, a set of marketing principles have emerged. Among them: get consumers involved in all aspects of marketing, listen to and join the online conversation about your products outside your site, and give the consumers you work with plenty of leeway to express their opinions.

And, of course, it’s important to make a site as easy to use as possible. For instance, there should be clear, simple instructions for consumers to set up a blog or contribute to a wiki.

Listen to — and join — the conversation outside your site.

Consumers tend to trust one another’s opinions more than a company’s marketing pitch. And there is no shortage of opinions online.

The managers we interviewed accept that this type of content is here to stay and are aware of its potential impact — positive or negative — on consumers’ buying decisions. So they monitor relevant online conversations among consumers and, when appropriate, look for opportunities to inject themselves into a conversation or initiate a potential collaboration.

For example, a marketing manager of a leading consumer-electronics company monitors blogs immediately after a new-product launch in order to understand “how customers are actually reacting to the product.” Other managers keep an eye on sites like Digg.com and Del.icio.us that track the most popular topics on the Web, to see if there’s any buzz around their new products, and whether they should be adjusting, say, features or prices.

In one case, a company found a popular blogger who had spoken highly of the company’s brand. Just prior to launching a new product, the company sent the blogger a free sample, inviting him to review it with no strings attached. The end result: The blogger wrote a favorable review and generated a flood of comments. So the company got nearly free publicity and feedback.

Peter & Maria Hoey

Resist the temptation to sell, sell, sell.

Many marketers have been trained to bludgeon consumers with advertising — to sell, sell, sell anytime and anywhere consumers can be found. In an online community, it pays to resist that temptation.

When consumers are invited to participate in online communities, they expect marketers to listen and to consider their ideas. They don’t want to feel like they’re simply a captive audience for advertising, and if they do they’re likely to abandon the community.

The head of consumer research for a leading consumer-electronics organization created an online community of nearly 50,000 consumers to discuss product-development and marketing issues. One of the key principles of the community, she says, was “not to do anything about marketing, because we weren’t about selling; we were about conversing.”

In short order, community members not only identified what it was they were looking for in the company’s products, but also suggested innovations to satisfy those needs. The company quickly developed prototypes based on those suggestions, and got an enthusiastic response: Community members asked when they would be able to buy the products and if they would get the first opportunity to buy them. They didn’t have to be sold on anything.

Don’t control, let it go.

In an online community, every company needs to find an effective balance between trying to steer the conversation about its products and allowing the conversation to flow freely. In general, though, the managers we interviewed believe that companies are better off giving consumers the opportunity to say whatever is on their minds, positive or negative. Moderators can keep things running smoothly and coherently, but they shouldn’t always keep the conversation on a predetermined track. The more that consumers talk freely, the more a company can learn about how it can improve its products and its marketing.

For Further Reading

See these related articles from MIT Sloan Management Review.

Harnessing the Power of the Oh-So-Social Web

By Josh Bernoff and Charlene Li (Spring 2008)
The authors develop a strategic framework that businesses can use to implement social applications in a number of departments, including research and development, marketing, sales, customer support and operations.
http://sloanreview.mit.edu/smr/issue/2008/spring/01/

Enterprise 2.0: The Dawn of Emergent Collaboration

By Andrew P. McAfee (Spring 2006)
There is a new wave of business communication tools including blogs, wikis and group messaging software that allow for more spontaneous, knowledge-based collaboration.
http://sloanreview.mit.edu/smr/issue/2006/spring/06/

Beyond Enterprise 2.0

By Erik Brynjolfsson and Andrew McAfee (Spring 2007)
The authors explore the complementary relationship between traditional managerial tools and the evolving modes of collaboration and communication, such as wikis.
http://sloanreview.mit.edu/smr/issue/2007/spring/16/

Systems Marketing for the Information Age

By John G. Singer (Fall 2006)
The authors suggest that companies must take a marketing ecosystems view, which shifts away from the logic of “brand” as the primary unit for business strategy.
http://sloanreview.mit.edu/smr/issue/2006/fall/18/

How to Market to Generation M(obile)

By Fareena Sultan and Andrew J. Rohm (Summer 2008)
The mobile platform provides the perfect mechanism for reaching young consumers.
http://sloanreview.mit.edu/smr/issue/2008/summer/12/

One marketing executive recalled the first time she let an online community created for a client interact with very little control or moderation, resulting in an animated discussion about the look of the company’s product. The client, with great concern, asked. “Who told them [the consumers] they could do this, that they could go this far?” Of course, when this process resulted in totally new packaging that helped boost sales, the client was ecstatic.

As another executive of a company that creates online communities for clients told us: “You have to let the members drive. When community members feel controlled, told how to respond and how to act, the community shuts down.”

Find a ‘marketing technopologist.’

So who should direct a company’s forays into Web 2.0 marketing? A number of managers identified an ideal set of skills for an executive that go beyond those of a typical M.B.A. holder or tech expert. We coined the term marketing technopologist for a person who brings together strengths in marketing, technology and social interaction. A manager said, “I’d want to see someone with the usual M.B.A. consultant’s background, strong interest in psychology and sociology, and good social-networking skills throughout the organization.”

Foot soldiers need to be carefully selected as well. One large technology company weighs employees’ proven skills to choose writers for blogs that are read by consumers. The company has long used blogs internally to help employees discuss technical issues, products, and company and industry topics. When it decided to use blogs to raise its profile online, it recruited those who had shown the most skill at blogging within the company. The company currently has about 15 employees who blog publicly, mostly on technology trends, and is recruiting more the same way. Meanwhile, the bloggers plan to meet occasionally to share the lessons learned from their experiences.

Embrace experimentation.

One Web 2.0 strategy does not fit all, and sometimes the best way to find out what’s best for a given company is to try some things out and see what happens.

Blogs, wikis and online communities are among the tools that companies are most commonly using for marketing, but there are other ways to reach consumers. Some of the companies we talked with have gotten their feet wet in the online virtual world Second Life, where millions of users interact with each other through avatars. Companies can sell their goods and services and sponsor events in Second Life just as they do in the real world; one sponsored a contest for the best avatar.

Others are considering new ways to use more-familiar tools. For instance, many companies have long used instant messaging on their Web sites to allow shoppers to chat with customer-service representatives. One executive we spoke with said he would like to experiment with allowing consumers to chat with each other as they shop on his company’s site.

—Dr. Parise is an assistant professor of technology, operations and information management at Babson College in Wellesley, Mass. Dr. Guinan is an associate professor of technology, operations and information management at Babson College. Dr. Weinberg is chairman of the marketing department and an associate professor of marketing and e-commerce at Bentley University in Waltham, Mass. They can be reached at reports@wsj.com.

Process to Oust Governor Starts

Illinois Lawmakers Set to Form Committee to Explore Impeaching Blagojevich

SPRINGFIELD, Ill. — Illinois lawmakers started impeachment proceedings Monday against Gov. Rod Blagojevich as he continued to show up for work in Chicago and firmed up his legal team to fight corruption charges.

Associated Press

Illinois Gov. Rod Blagojevich on Monday, when state lawmakers started impeachment proceedings against him.

The state House of Representatives unanimously authorized a bipartisan committee to explore the possibility of ousting the two-term Democratic governor, by a vote of 113 to zero. But lawmakers did not move forward with a bill to create a special election to fill the U.S. Senate seat vacated by President-elect Barack Obama, which Gov. Blagojevich is accused of trying to sell.

The special committee to consider the impeachment begins meeting Tuesday. The committee will be made up of 12 Democrats and nine Republicans.

“We’re going to proceed with all due speed, but we’re going to make sure that what we do is done correctly,” said state House Speaker Michael Madigan.

Once the committee makes a recommendation, the full state House will decide whether to file impeachment charges against the governor. The state Senate ultimately would rule on them.

Republicans were irate that the special election wasn’t acted on.

“I think it was a huge mistake,” said House Republican leader Tom Cross. “I think we have to avoid the appearance of impropriety and the way to do that is through a special election. It’s one way to erase some of the cynicism.”

“The speaker called the House members back into session this week specifically to deal with special-election legislation,” said Republican Rep. Tim Schmitz. “A special election is what the people of Illinois want….Mr. Speaker, we’re here. Let’s get on with it!”

Democrats were quick to criticize the governor but are reluctant to risk a special election unless they have to, said longtime Chicago political consultant Don Rose.

Mr. Madigan, a political rival of the governor who nonetheless served as co-chairman of Gov. Blagojevich’s 2006 re-election committee, said he wasn’t surprised when he learned of the arrest of Gov. Blagojevich.

“I’ve had an opportunity to get to know Mr. Blagojevich over six years, so I was not surprised,” Mr. Madigan said.

Mr. Cross said he supports the impeachment move, saying he wants the process to be “swift and fair.”

Also, Chicago law firm Genson & Gillespie confirmed that it would represent the governor in the unfolding federal investigation. Partners Edward M. Genson and Terence Gillespie have played high-profile roles as attorneys for decades in some of the most well-known corruption cases in the state.

Mr. Genson is known as a lawyer prone to taking cases to trial and not as one likely to work out plea deals for clients. One person familiar with the dealings between the firm and the governor said Gov. Blagojevich plans to go to trial if indicted by a federal grand jury, but emphasized that such decisions aren’t set in stone. “You can take that position on Monday, and take a different one on Wednesday,” this person said.

Monday, December 15, 2008

Barack Obama-san

As January 20 nears, Barack Obama’s ambitions for spending on the likes of roads, bridges and jobless benefits keep growing. The latest leak puts the “stimulus” at $1 trillion over a couple of years, and the political class is embracing it as a miracle cure.

Not to spoil the party, but this is not a new idea. Keynesian “pump-priming” in a recession has often been tried, and as an economic stimulus it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment.

In the Age of Obama, we seem fated to re-explain these eternal lessons. So for today we thought we’d recount the history of the last major country that tried to spend its way to “stimulus” — Japan during its “lost decade” of the 1990s. In 1992, Japanese Prime Minister Kiichi Miyazawa faced falling property prices and a stock market that had sunk 60% in three years. Mr. Miyazawa’s Liberal Democratic Party won re-election promising that Japan would spend its way to becoming a “lifestyle superpower.” The country embarked on a great Keynesian experiment:

August 1992: 10.7 trillion yen ($85 billion). Japan passed its largest-ever stimulus package to that time, with 8.6 trillion yen earmarked for public works, 1.2 trillion to expand loan quotas for small- and medium-sized businesses and 900 billion for the Japan Development Bank. The package passed in December, but investment kept falling and unemployment rose. By the end of the year, Japan’s debt-to-GDP ratio was 68.6%.

April 1993: 13.2 trillion yen. At exchange rates of the day, this was a whopping $117 billion giveaway, again mostly for public works and small businesses. Tokyo erupted into domestic politicking over election practices, the economy went sideways, and the government fell. New Prime Minister Morihiro Hosokawa floated tax cuts, deregulation and decentralization to spur growth. But as the economy worsened — inflation-adjusted GNP shrank 0.5% in the April to June quarter — the political drumbeat for handouts increased.

September 1993: 6.2 trillion yen. Mr. Hosokawa announced a compromise “smaller” stimulus of $59 billion, along with minor deregulation. He dropped plans for an income-tax cut. The stimulus included 2.9 trillion yen in low-interest home financing, one trillion yen for “social infrastructure,” and another trillion for business. The economy didn’t respond. By the end of the year, Japan’s debt-to-GDP reached 74.7%.

Is any of this beginning to sound familiar? There’s more.

February 1994: 15.3 trillion yen. This stimulus included 5.8 trillion in income-tax cuts, 7.2 trillion in public investment, 1.5 trillion for small business and employment-support, 500 billion for land purchases and 230 billion for agricultural modernization. The income tax cut was temporary, effective only for 1994. The economy stagnated and Prime Minister Hosokawa resigned amid a corruption scandal. By the end of the year, debt-to-GDP was 80.2%.

September 1995: 14.2 trillion yen. The Socialist government of Tomiichi Murayama, with a wobbly coalition, rolled out a $137 billion whopper, with 4.6 trillion in public works, 3.2 trillion for government land purchases, 1.3 trillion in business loans, and more. Mr. Murayama resigned in early 1996, and in June Prime Minister Ryutaro Hashimoto agreed to raise consumption taxes to 5% from 3%, starting in April 1997, to reduce the fiscal deficit.

In 1994 and 1995, Japan spent 3.1% and 2.9% of its annual GDP, and (helped by central bank easing) the economy did respond with modest growth for about two years. Debt-to-GDP hit 87.6%.

April 1998: 16.7 trillion yen. When growth starting slowing again, the re-elected LDP turned to old medicine: 7.7 trillion yen for public works. The $128 billion grab-bag also included 2.3 trillion for the disposal of bad loans. The government announced four trillion yen in (again) temporary income-tax cuts, spread over two years. Mr. Hashimoto resigned in July after voters registered their discontent at the polls.

November 1998: 23.9 trillion yen. Desperate to get the economy moving, Prime Minister Keizo Obuchi rolled out the country’s largest-ever stimulus, valued at $195 billion. The giveaway included 8.1 trillion yen in social public works, 5.9 trillion for business loans, one trillion for job-creation programs, 700 billion in cash handouts to 35 million households, and more. By the end of the year, debt-to-GDP hit 114.3%.

November 1999: 18 trillion yen. In a “last push,” Mr. Obuchi’s government spent 7.4 trillion yen to prop up businesses, 6.8 trillion yen for social infrastructure projects like telecommunications and environmental projects, and two trillion yen for housing loans, among other things. Debt-to-GDP reached 128.3%.

Japan’s economy grow anemically over that decade, but as the nearby chart shows, its national debt exploded. Only in this decade, with a monetary reflation and Prime Minister Junichiro Koizumi’s decision to privatize state assets and force banks to acknowledge their bad debts, did the economy recover. Yet recent governments have rolled back Mr. Koizumi’s reforms and returned to their spending habits. But Japan does have better roads.

Now we’re told that a similar spending program — a new New Deal — will revive the U.S. economy. How do you say “good luck” in Japanese?

Let’s Buy Pakistan’s Nukes

By BRET STEPHENS

Every visitor to Pakistan has seen them: 20-foot tall roadside replicas of a remote mountain where, a decade ago, Pakistan conducted its first overt nuclear tests. This is what the country’s leaders — military, secular, Islamist — consider their greatest achievement.

A model of Chaghi mountain, the site of Pakistan’s nuclear test.

So here’s a modest proposal: Let’s buy their arsenal.

A.Q. Khan, father of Pakistan’s nuclear program (and midwife to a few others), likes to point out what a feat it was that a country “where we can’t even make a bicycle chain” could succeed at such an immense technological task. He exaggerates somewhat: Pakistan got its bomb largely through a combination of industrial theft, systematic violation of Western export controls, and a blueprint of a weapon courtesy of Beijing.

Still, give Mr. Khan this: Thanks partly to his efforts, a country that has impoverished the great mass of its own people, corruptly enriched a tiny handful of elites, served as a base of terrorism against its neighbors, lost control of its intelligence services, radicalized untold numbers of Muslims in its madrassas, handed the presidency to a man known as Mr. 10%, and proliferated nuclear technology to Libya and Iran (among others) has, nevertheless, made itself a power to be reckoned with. Congratulations.

But if Pakistanis thought a bomb would be a net national asset, they miscalculated. Yes, Islamabad gained parity with its adversaries in New Delhi, gained prestige in the Muslim world, and gained a day of national pride, celebrated every May 28.

What Pakistan didn’t gain was greater security. “The most significant reality was that the bomb promoted a culture of violence which . . . acquired the form of a monster with innumerable heads of terror,” wrote Pakistani nuclear physicist Pervez Hoodbhoy earlier this year. “Because of this bomb, we can definitely destroy India and be destroyed in its response. But its function is limited to this.”

In 2007, some 1,500 Pakistani civilians were killed in terrorist attacks. None of those attacks were perpetrated by India or any other country against which Pakistan’s warheads could be targeted, unless it aimed at itself. But Pakistan’s nuclear arsenal has made it an inviting target for the jihadists who blew up Islamabad’s Marriott hotel in September and would gladly blow up the rest of the capital as a prelude to taking it over.

The day that happens may not be so very far off. President Asif Ali Zardari was recently in the U.S. asking for $100 billion to stave off economic collapse. So far, the international community has ponied up about $15 billion. That puts Mr. Zardari $85 billion shy of his fund-raising target. Meantime, the average Taliban foot soldier brings home monthly wages that are 30% higher than uniformed Pakistani security personnel.

Preventing the disintegration of Pakistan, perhaps in the wake of a war with India (how much restraint will New Delhi show after the next Mumbai-style atrocity?), will be the Obama administration’s most urgent foreign-policy challenge. Since Mr. Obama has already committed a trillion or so in new domestic spending, what’s $100 billion in the cause of saving the world?

This is the deal I have in mind. The government of Pakistan would verifiably eliminate its entire nuclear stockpile and the industrial base that sustains it. In exchange, the U.S. and other Western donors would agree to a $100 billion economic package, administered by an independent authority and disbursed over 10 years, on condition that Pakistan remain a democratic and secular state (no military rulers; no Sharia law). It would supplement that package with military aid similar to what the U.S. provides Israel: F-35 fighters, M-1 tanks, Apache helicopters. The U.S. would also extend its nuclear umbrella to Pakistan, just as Hillary Clinton now proposes to do for Israel.

A pipe dream? Not necessarily. People forget that the world has subtracted more nuclear powers over the past two decades than it has added: Kazakhstan, Belarus, Ukraine and South Africa all voluntarily relinquished their stockpiles in the 1990s. Libya did away with its program in 2003 when Moammar Gadhafi concluded that a bomb would be a net liability, and that he had more to gain by coming to terms with the West.

There’s no compelling reason Mr. Zardari and his military brass shouldn’t reach the same conclusion, assuming excellent terms and desperate circumstances. Sure, a large segment of Pakistanis will never agree. Others, who have subsisted on a diet of leaves and grass so Pakistan could have its bomb, might take a more pragmatic view.

The tragedy of Pakistan is that it remains a country that can’t do the basics, like make a bicycle chain. If what its leaders want is prestige, prosperity and lasting security, they could start by creating an economy that can make one — while unlearning how to make the bomb.

The Return of Realpolitik in Arabia

Bush’s ‘diplomacy of freedom’ gives way to Obama’s caution and reticence. The Middle East may test our fatigue.

FOUAD AJAMI

President Bush assumed office promising a “humble foreign policy.” But it was his luck, or fate, to have much of his presidency consumed by adventures in the Greater Middle East. It is clear from the passion of his valedictory tour that he has caught the bug of that region, that it has worked its way on him as he himself worked his will, and the power available to him, on its settled and ruinous ways.

Ismael Roldan

President-elect Barack Obama has signaled that the foreign world will not be his primary concern, that the repair of the American economy will trump all other pursuits and temptations. On the lands and the peoples of the Middle East, Mr. Obama has been largely silent, if not detached. He was in the Illinois Senate when a huge storm blew over the Islamic world. He was lucky, as his secretary of state designate endlessly reminded us, to have given a solitary speech on Iraq when the challenge came calling.

There is a detached tone to Mr. Obama’s utterances on the Islamic world, a kind of knowingness. In part, it is no doubt an intended contrast to the heat and fervor of George W. Bush. If Mr. Bush believed he could remake that old and broken and wily region, Mr. Obama signals a fatigue with it, an acceptance of its order of power. If Mr. Bush believed that he could insert himself into the internal affairs of distant Islamic lands, Mr. Obama and his foreign-policy advisers portend a return to realpolitik and to a resigned acceptance of the ways of foreign autocracies. We have erred, the Obama worldview preaches, and overreached. We have overread the verdict of 9/11, and it is time to make our peace with regimes we have offended in the Bush years. It is the Scowcroftian way — other lands, other ways.

Then, too, the Obama reticence about those burning grounds of the Islamic world is, in part, a matter of biography. The Islamic faith was the faith of his father. A candidate with the middle name of Hussein could not afford soaring rhetoric about the ability of freedom to survive on Islamic soil.

In contrast, George W. Bush had been free and confident enough to take up the cause of reform and drastic change in the Islamic world. True, he did not know much about the ways of those lands, but neither did Woodrow Wilson. His doctrine of self-determination in the aftermath of the Great War, and the dissolution of the Ottoman empire, endures as the most consequential and revolutionary American message taken to the lands of old empires.

Wilson himself, it should be recalled, had been chastened by the radical sweep and impact of his own doctrine; he had preached the gospel of self-determination, he said, “without the knowledge that nationalities existed, which are coming to us day after day.” Detailed “knowledge” can be overrated in the choices that history opens up. The post-Ottoman world was never the same after that American president who had known so little about it. A circle was closed between that Wilsonian policy and the massive American push into Arab and Islamic lands by George W. Bush.

One thing is sure to go with Mr. Bush when he departs to Crawford, Texas: his “diplomacy of freedom.” That diplomacy — which propelled the wars in Afghanistan and Iraq, which drove the Syrians out of Lebanon after they had all but destroyed the sovereignty of that country, and had challenged pro-American allies in Egypt and the Arabian Peninsula — is gone for good.

It was an odd spectacle, the time behind us: a conservative American president preaching the gospel of liberty for lands beyond, his liberal detractors at home giving voice to a deep skepticism about liberty’s chances in inhospitable settings. No one was more revealing of the liberal temper — and of things to come — than Vice President-elect Joe Biden (then the point man for foreign policy among the Democrats) speaking in December 2006 about the hazards of believing in liberty’s appeal to Muslim lands. Of President Bush, he said: “He has this wholesome but naive view that Westerners’ notions of liberty are easily transported to that area of the world.” Mr. Biden knew better: He warned the president, he said, that Grand Ayatollah Ali Sistani’s view of liberty differed from “our view of liberty . . . I think the president thinks there’s a Thomas Jefferson or Madison behind every sand dune waiting to jump up. And there are none.”

The course of history can shred the most detailed of briefing books. On the face of it, the new team tells us that there shall be no attachment to the gains we made in Iraq. This is not Mr. Obama’s cause, or call. That country can fend for itself, it is implied. The new cause shall be a return to the struggle for Afghanistan. This is the liberal narrative: the bad, unilateral “war of choice” in Iraq, the good, multilateral “war of necessity” in Afghanistan. The doves on Iraq can thus be hawks on the Afghan-Pakistan frontier. The strategic gurus who preached that Iraq is a hopeless, artificial state put together by Gertrude Bell and Winston Churchill and T.E. Lawrence can try for victory and nation building in the unforgiving tribal lands of Afghanistan and Pakistan. If there is an artificial state in our world of nations, Afghanistan must be its closest approximation. If there is a false national boundary — mocked by ethnicity and historical allegiance — it is the Durand Line, drawn up by British power in the 1890s, between Afghanistan and Pakistan, through the lands of the Pashtuns. Afghanistan could yet thwart President Bush’s successors, frustrate them in the way Iraq frustrated him.

Our country will be forgiving toward the new foreign-policy team, it is fair to assume. The hubris and self-confidence needed for expeditions into foreign lands have been devastated by the economic meltdown in our midst.

Of the good manners and pliability of foreign regimes, we can be less certain. Nature abhors a vacuum, and challengers are sure to step forth. To its surprise, the new administration could yet discover that our adversaries do not wish to see our withdrawal from their midst. The Iranians thrive on the American presence in the Persian Gulf and feed off it. They are the quintessential oppositional force. They are not good at generating policies of their own. Their work consists of subversive attacks on Pax Americana in the region. The call by President Bush’s critics for a dialogue with Iran will be exposed for the pathetic fraud it has been all along. The American drama swirling around the rise of Mr. Obama is of no interest to the theocrats in Tehran. For them, it is business as usual in the Persian Gulf.

We have witnessed the gains and the heartbreak of American activism and ambition on foreign shores. Around the corner lurk the risks of caution and reticence, of enemies who could see through, and test, our fatigue. The world is under no obligation to accommodate us.

Mr. Ajami is professor of Middle East Studies at The Johns Hopkins University, School of Advanced International Studies. He is also an adjunct research fellow at Stanford University’s Hoover Institution.

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Barack Obama-san

Is any of this beginning to sound familiar? There’s more.

In 1994 and 1995, Japan spent 3.1% and 2.9% of its annual GDP, and (helped by central bank easing) the economy did respond with modest growth for about two years. Debt-to-GDP hit 87.6%.

Now we’re told that a similar spending program — a new New Deal — will revive the U.S. economy. How do you say “good luck” in Japanese?

Let’s Buy Pakistan’s Nukes

By BRET STEPHENS

A model of Chaghi mountain, the site of Pakistan’s nuclear test.

So here’s a modest proposal: Let’s buy their arsenal.

The Return of Realpolitik in Arabia

Bush’s ‘diplomacy of freedom’ gives way to Obama’s caution and reticence. The Middle East may test our fatigue.

FOUAD AJAMI

Ismael Roldan

Disarming Ourselves

A new report warns Obama about our aging nuclear weapons.

Iraq, Afghanistan and Guantanamo get more press, but among the most urgent national security challenges facing President-elect Obama is what to do about America’s stockpile of aging nuclear weapons. No less an authority than Secretary of Defense Robert Gates calls the situation “bleak” and is urging immediate modernization.

Department of Defense

Robert Gates.

On the campaign trail, Mr. Gates’s new boss appeared to take a different view. Candidate Obama said he “seeks a world without nuclear weapons” and vowed to make “the goal of eliminating all nuclear weapons a central element in our nuclear policy.” His woolly words have given a boost to the world disarmament movement, including last week’s launch of Global Zero, the effort by Richard Branson and Queen Noor to eliminate nuclear weapons in 25 years. Naturally, they want to start with cuts in the U.S. arsenal.

But the reality of power has a way of focusing those charged with defending the U.S., and Mr. Obama will soon have to decide to modernize America’s nuclear deterrent or let it continue to deteriorate. Every U.S. warhead is more than 20 years old, with some dating to the 1960s. The last test was 1992, when the U.S. adopted a unilateral test moratorium and since relied on computer modeling. Meanwhile, engineers and scientists with experience designing and building nuclear weapons are retiring or dying, and young Ph.D.s have little incentive to enter a field where innovation is taboo. The U.S. has zero production capability, beyond a few weapons in a lab.

Background Reading

COMMENTARY

THE WEEKEND INTERVIEW

Gen. Kevin Chilton: Sounding the Nuclear Alarm (11/22/08)
– Melanie Kirkpatrick

We’re told Mr. Gates’s alarm will be echoed soon in a report by the Congressionally mandated commission charged with reviewing the role of nuclear weapons and the overall U.S. strategic posture. The commission’s chairman is William Perry, a former Clinton Defense Secretary and a close Obama adviser. Mr. Perry is also one of the “Four Horsemen of the Apocalypse,” the nickname given to him, George Shultz, Henry Kissinger and Sam Nunn for an op-ed published in these pages last year offering a blueprint for ridding the world of nuclear weapons.

The commission’s interim report is due out any day now, and the advance word is that Mr. Perry has come back to Earth. We’re told the report’s central finding is that the U.S. will need a nuclear deterrent for the indefinite future. A deterrent is credible, the report further notes, only if enemies believe it will work. That means modernization.

That logic ought to be obvious, but it escapes many in Congress who have stymied the Bush Administration’s efforts to modernize. Britain, France, Russia and China are all updating their nuclear forces, but Mr. Bush couldn’t even get Congress this year to fund so much as R&D for the Reliable Replacement Warhead (RRW) program. Senator Dianne Feinstein dismissed the RRW, saying “the Bush Administration’s goal was to reopen the nuclear door.”

In the House, similar damage has been done by Ellen Tauscher, chairman of the subcommittee on strategic weapons. Ms. Tauscher, whose California district includes the Lawrence Livermore National Laboratory, likes to talk about a strong nuclear deterrent while bragging about killing the RRW. She also wants to revive the unenforceable Comprehensive Test Ban Treaty, which the Senate rejected in 1999. Let’s hope the Perry report helps with her nuclear re-education.

If Congress isn’t paying attention, U.S. allies are. The U.S. provides a nuclear umbrella for 30-plus countries, including several — Japan, Germany and South Korea, for example — capable of developing their own nuclear weapons. If they lose confidence in Washington’s ability to protect them, the Perry report notes, they’ll kick off a new nuclear arms race that will spread world-wide.

In a speech this fall, Mr. Gates said “there is no way we can maintain a credible deterrent” without “resorting to testing” or “pursuing a modernization program.” General Kevin Chilton, the four-star in charge of U.S. strategic forces, has also spent the past year making the case for modernization. “The time to act is now,” he told a Washington audience this month.

The aging U.S. nuclear arsenal is an urgent worry. A world free of nuclear weapons is a worthy goal, shared by many Presidents, including Ronald Reagan. Until that day arrives, no U.S. President can afford to let our nuclear deterrent erode.

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Disarming Ourselves

A new report warns Obama about our aging nuclear weapons.

Department of Defense

Robert Gates.

Background Reading

COMMENTARY

THE WEEKEND INTERVIEW

Gen. Kevin Chilton: Sounding the Nuclear Alarm (11/22/08)
– Melanie Kirkpatrick

The Spirit of ’76

Welcome back, Carter

By Philip Jenkins

Historical analogies have been much in vogue since this election. Are we living at the end of 1932, preparing to face the glories and disasters of a revived New Deal? Or are we in a mirror-image 1980, the beginning of an era of liberal dominance, with a massive party realignment that might not even reach full fruition for another decade or so? These questions matter, not just because such debates give employment to academic historians. Deciding which year offers the closest parallel to the present forces conservatives to think how they will adjust to the new order. Just how radically have public attitudes shifted?

Actually, the year that offers the closest historical parallels to the present might be neither 1932 nor 1980 but 1976, and that analogy helps us understand the directions in which the country will be moving. Both in government and opposition, people might want to hold off on planning for the next New Deal, still less for a coming generation of liberal hegemony. In three or four years, the main political fact in this country could well be a ruinous crisis of Democratic liberalism.

Why 1976? That was the year Jimmy Carter defeated Gerald Ford for the presidency by a slim but convincing margin: Ford won 48 percent of the popular vote, a little more than John McCain’s 46 percent. Democrats did significantly better in the House in 1976 than they did last month. They held a two-to-one majority of seats, and they retained a supermajority of 61 in the Senate. Broadly, however, the 1976 results look similar to 2008.

The mood of the country in 1976 also parallels our present situation, with a pervasive sense of disgust at politics as usual and widespread fears of national decline. As if the end of the Vietnam War and the Watergate fiasco were not catastrophic enough, foreign-policy disasters in Africa and Asia suggested that the U.S. was losing its hegemony. The oil crisis pointed to a vast transfer of wealth and power to the Middle East, while many pundits predicted environmental catastrophe. The sharp economic downturn resulted in heavy unemployment and rising inflation. A concatenation of scandals tarnished once-trusted institutions: corporations, the military, intelligence agencies, police, and, of course, the politicians.

So disaffected was bicentennial America that it sought leaders unconnected to the establishment. In Jimmy Carter, voters found a candidate whose main qualifications were his lack of experience and connections within the Beltway or corporate worlds. Like Barack Obama, Carter claimed to rise above failed partisanship, while his New South background allowed him to symbolize racial healing. Carter, like Obama, sold himself mainly on the virtues of his character. He presented himself as a man of simple honesty, faith, and decency, and his lack of a track record allowed voters to see in him what they wanted, however far-fetched those hopes might be. If they hadn’t believed it, they wouldn’t have seen it with their own eyes. Above all, Carter promised change, a message that carried weight as long as its details remained nonspecific. The problem with messiahs from nowhere is that when they do exercise power, people discover to their horror what their leader’s actual views and talents are. The disillusion can be dreadful.

The rhetoric and psychology of the Democratic Party in 1976 also foreshadows the present day. And as they did in 1976, Democrats now show every sign of repeating the blunders that led to a generation-long discrediting of liberalism. As the phrase goes, they have learned nothing in the intervening years, and they have forgotten nothing. And they will soon face a barrage of issues that they have neither the will nor competence to understand. Liberal triumph in 1976 led inexorably to evisceration in 1980. The same trajectory is likely to recur in the Obama years.

The key mistake Democrats made in 1976 was failing to realize what brought them to power. Democrats won because of public dissatisfaction with the previous regime, which had overseen the economic crisis, and also because of a wider fear that America would have to live with diminished expectations. But although they won on largely economic grounds, Democrats acted as if they had a sweeping mandate for cultural transformation—for social libertarianism, affirmative action and egalitarianism, dovish internationalism, and idealistic notions of human rights. These ideas dominated a radical Congress and were enthusiastically adopted by the cohort of Carter appointments to the judiciary. They all ignored a basic principle: just because people are unhappy where they are does not mean they are willing to go anywhere you try to lead them.

In 1976, liberals were wrong on multiple counts, and all the signs point to them repeating the same mistakes. Even if Obama plays Mr. Moderate, the congressional party contains more than enough take-no-prisoners far leftists to torpedo any chance of bipartisanship or restraint. Specifically, liberals believe that the public will support radical change in three highly sensitive areas, and in each area they will overreach to the point of self-destruction. In domestic affairs, they believe the culture wars are over and that revolutionary social changes like gay marriage can now advance unchecked. They think that popular concern over environmental problems will translate into a blank check for limitless government spending and the decisive transfer of U.S. sovereignty to international agencies. And liberals are now sure that all that foolishness with international dangers and crises is firmly behind us so that we no longer need the military or intelligence capabilities developed to respond to them. As the coming three or four years will show, they are dreadfully wrong on all counts.

In the 1970s, liberal hubris manifested itself especially in domestic politics. Democrats focused obsessively on race and class, to the exclusion of culture, morals, and religion. Reading the situation in those terms allowed liberals an easy framework for explaining opposition to their policies, which must be based on overt or disguised forms of racism (and that was before they had a President Obama). If every social problem boiled down to matters of economic and racial justice, then there could be no legitimate grounds for concerns that presented themselves as cultural or religious.

That severely blinkered view goes a very long way to explaining the collapse of liberalism in 1979-80. America in the 1970s was undergoing traumatic social and moral changes, which caused widespread unhappiness and fear. Many social conservatives were alarmed that governments were using children as tools in social experimentation, an issue made most explicit in school busing. Popular opposition focused on the defense of community and local autonomy but above all on child safety. Once again, though, liberals had no valid answer to these fears, as any questioning of public education must of necessity be a disguised form of vulgar prejudice. Their response was predictable: Damn the racists, full speed ahead.

Across the board, the critical pressure points in the social politics of the 1970s involved children and young people. For the ’60s generation, progress demanded removing restraints on the actions of consenting adults, whether this involved sexual experimentation, gay rights, drug use, or participation in weird and wonderful fringe religions. Who was to say that individuals should not be allowed to go to hell in their chosen way? That principle worked splendidly, unless and until people began to reflect on the effects on children. Yes, an adult could consent to engage in bizarre or self-destructive behavior, but that libertarian approach did not and could not extend to the young. Time and again, Americans have shown themselves liberal on social issues that are framed in terms of “live and let live.” They draw the line when the behavior in question appears to threaten youth. Hence the most successful conservative campaigns on domestic issues of the late 1970s focused strictly on child protection, and those movements coalesced into a general concern about defending and restoring American culture.

From 1977—the pivotal year of the social-conservative revival—liberals suffered reversal after reversal, on issues of drug abuse, pornography, and gay rights. In every case, child protection gave the key to victory. Carter administration plans to decriminalize drugs foundered on the opposition of a burgeoning parents’ movement. Popular fears of threats to children defeated referenda on gay rights. Near universal nausea about the availability of child porn provoked the first serious questioning of ever expanding sexual frankness. Fears about threats against children merged easily with concerns about threats by children. The astonishing rise of violent youth crime, which reached its Himalayan peak between 1979 and 1981, was read as a symptom of a feral generation that had not been subject to appropriate family restraints or care. By the end of the 1970s, these various child-related themes drove a triumphant social conservative coalition, which included those newly galvanized religious voters mobilized in the Moral Majority.

America today has changed enormously since 1978, but many of those older issues survive in latent form and should resurface shortly. Questions of youth protection will transform the gay-marriage debate, which for most media observers has been framed in terms of social justice and equality. Presumably by judicial fiat, the practice will extend to many more states in the coming years and quite conceivably to all 50 states. This in itself will not be a popular move: recall the recent California referendum, which was decided by the blacks and Latinos who turned out to support Obama but who favored traditional family models.

How will attitudes to gay marriage evolve when people contemplate the proper age of consent in such unions? Assuming the age is to be the same as in heterosexual marriages, then adolescents of 18 will marry freely, and in many states parental consent will grant that right to boys of 16 or so. Are Americans ready to see blushing teenage male brides? And if boys of that age can marry, demands to reduce the age of sexual consent for all youngsters will certainly follow.

The more strenuously liberals press for gay equality in matters involving youth, in marriage and adoption, the more they will generate a child-protection reaction, even among people who consider themselves socially liberal, and the more likely this reaction is to take religious forms. Following the recent California referendum, Mormons bore the brunt of liberal fury, and Catholics and other religious groups will face legal challenges for refusing to participate in gay adoptions and marriages. Other areas like abortion, contraception, and transgender surgery promise to generate many confrontations between religious believers and the current sexual revolution, and religious sensibilities can expect no sympathy from government, courts, or media. The resulting battles should re-energize a religious constituency that is currently disoriented and disillusioned. Anyone for Moral Majority II: The Sequel?

As in the 1970s, the problem of out-of-control youth could very soon be back on the political agenda. Although youth crime hasn’t been on the national radar since the crack boom of the early 1990s, demographic trends confidently predict a rising storm that should break within two years or so. The crime surge of the 1970s was in large part the consequence of the baby boom reaching its most crime-prone years, as the huge cohort of those born around 1960 hit their late teens. Something very similar is about to happen again. The number of babies born in the U.S. in 1990 was only slightly smaller than the 1960 generation, and by 2010 we could be entering an alarming era of violent crime, manifested in soaring rates for homicide and robbery. Factor in the economic crisis, and American cities could look as frightening and dangerous as they did at the time of New York City’s 1977 blackout, with its rioting and looting.

Making the situation still worse, the massive expansion of union membership for which many Democrats clamor will add mightily to the plethora of urban problems. Imagine cities devastated by youth crime and gang wars, while emergency workers, hospitals, buses, and garbage services are regularly on strike. If you think Americans were alienated from government in 2008, come back in two years. Liberals will try to interpret the coming crisis in terms of race and class, a problem to be solved by unlimited social spending. Conservatives had better be ready to respond with ideas of individual and family responsibility and the defense of social order.

In other ways, too, liberals utterly misread public sentiment and will build their policy upon those delusions. Americans have shown themselves open to green rhetoric and feel that policies to protect the environment are generally a good thing. Few conservatives would criticize any move in the direction of energy independence, which would be a wonderful first step toward extracting the nation from Middle Eastern quagmires. But of course, that is not what we are going to get. We will instead be facing a determined and fanatical campaign to eliminate the vastly exaggerated menace of global warming, which will mean a wholesale assault on America’s energy supplies. This will translate into striking at coal- and oil-based energy while refusing to make progress toward reliance on nuclear resources, all the while seeking to curb carbon usage through onerous taxes and surcharges. Remember those Americans infuriated by strikes and intimidated by crime? They are also going to be freezing, living with rationed energy and brownouts. A grossly underpowered economy will find it all but impossible to reconstruct and revive when the coming depression ends.

As if all this isn’t bad enough, expect global-warming rhetoric to be used as a wedge to undermine national sovereignty. Under Obama, we face the virtual certainty of American accession to new treaties that go far beyond Kyoto in demanding radical cutbacks in carbon usage. The U.S. will presumably stand out as the only power attempting to enforce these standards, which would institutionalize the nation’s relative decline in the face of Chinese and Indian growth. The moral and political issue of sovereignty will thus be linked to the practical daily realities of the energy crisis at home.

And then there is national security. Democrats observe, quite rightly, that Americans are uncomfortable with images of Guantanamo and waterboarding, and they are profoundly unhappy with open-ended military commitments in Iraq and Afghanistan. But here, too, liberals will overreach when they interpret these moral qualms as a basis for winding up American military and intelligence capabilities.

However dreadful the Carter administration may have been, however widespread the domestic discontent, what actually finished off the Democrats and opened the door for Ronald Reagan was the Iran hostage crisis. And that was a direct and predictable consequence of overreach by the administration and Congress. Since 1976, congressional liberals had led a series of campaigns against the intelligence services, exposing supposed abuses and atrocities, and in the process discrediting the whole work of intelligence. By 1977, massive purges had removed many of the CIA’s best agents, while congressional restrictions made it all but impossible for the agency to pursue its work. In the Middle East and elsewhere, America was flying blind.

Underlying these bizarre actions was a theory of human rights that assumed the whole world could and should operate according to Western theories of democratic liberalism. Unfortunately, it didn’t. In Iran, the shah was an unsavory dictator with a heavy-handed secret police, but he exercised his powers to pursue a pro-American policy. Under the Carter regime, the U.S. ended its support of the shah, while ceasing to pay off the truly dangerous radical Islamists who would eventually replace him. American efforts at self-immolation succeeded in 1979, with the Islamic Revolution and the hostage crisis that destroyed the Carter administration.

Surely congressional liberals are not stupid enough to do anything like that again? Don’t believe it. By the end of 2009, expect a purge of U.S. intelligence agencies, as well as suffocating new constraints on intelligence-gathering capacities. These moves will probably be accompanied by a series of congressional hearings, which will provide maximum opportunities for showboating by politicos, while embarrassing the CIA. A blinded and disarmed Obama administration will then blunder anew into confrontations that will once again plumb the depths of national humiliation—if not in Iran, then in Taiwan, Ukraine, Venezuela, or Pakistan. If we’re very unlucky, airliners will again be crashing into our skyscrapers and cargo ships will be exploding in our ports. And as in the late 1970s, there will be plenty of discharged and disaffected former intelligence agents wandering the corridors of power, serving as endless sources of leaks and disinformation against the Obama regime. Expect the worst age of political scandal since, well, the 1970s.

All analogies limp, and no one is suggesting a straight replay of the Carter years, still less that some kind of new Reagan era is its inevitable sequel. But if liberals seem so determined to repeat the mistakes of that era, then we have at least a plausible sketch of the coming Obama administration—of its rise and ruin.
__________________________________________

Philip Jenkins the author, most recently, of The Lost History of Christianity.

The Future of U.S. Affluence
By Robert J. Samuelson

In order to understand the economic challenges of the U.S. economy today, we must look to the past. And as Newsweek’s Robert Samuelson — and the author of “The Great Inflation and Its Aftermath” — points out, “History is what we say it is.” In the following questions and answers, based on his book, Samuelson explains economic trends and discusses changes that he believes would improve America’s economic prospects.

What is going on in the global economy?

“At present, the world economy is growing topsy-turvy, with more countries coming under its influence. Global markets — shaped both by impersonal forces and by governments’ political decisions — are poorly understood.”

Where’s the real pitfall?

“Most nations are tempted to pursue their own narrow interests on the assumption that some other country — or group of countries — will watch over everyone’s collective interests.”

“Social Security and Medicare have moved beyond their original purpose of protecting people from destitution — and have become welfare payments to enable people to enjoy their ‘golden years.’”

What about the role of the United States in all of this? Why are you worried?

“Sometimes, the global economy needs governmental supervision. The question is whether it will be there in the future. The United States is less able to perform the stabilizing role — its trading position is diminished, its currency is less preeminent, its military power is less effective against terrorist threats — but there is no obvious substitute.”

What is the impact on Americans’ economic well-being?

“Americans’ personal borrowing will mainly follow the contours dictated by today’s high debt burdens, an aging society and the maturing of consumer credit markets.”

Doesn’t productivity offer the way out of this mess?

“Productivity gains may or may not match past performance, but even if they do, most of the increases may be siphoned off into higher taxes, higher energy prices (to combat global warming, among other things) and high health costs. The residual gains in purchasing power for many households may be slight.”

What do you see as the solution?

“The welfare state has in part created a reverse Robin Hood effect: It sometimes transfers income from the struggling young to the relaxed old.”

“We need to stem the welfare state’s mounting costs. This means curbing the spending for older Americans. If we don’t, the great danger is that the economy and welfare state will go into a death spiral.”

How about other options?

“Taxes may have to go up somewhat, but if they go up too much, they will lead to lower economic growth. The same is true of a permanent increase in the size of budget deficits.

“Lower economic growth in turn would make the promised benefits harder to pay — and threaten yet higher taxes or budget deficits. Social Security, Medicare and Medicaid are essential parts of the U.S. social fabric, but that does not mean that every benefit must be perpetuated forever.”

What was the reasoning behind the welfare state when it was created decades ago?

“When the U.S. Congress enacted Social Security and Medicare in 1935 and 1965, respectively, many older Americans were poorer than the rest of the population.

“The global economy needs governmental supervision. The United States is less able to perform the stabilizing role — but there is no obvious substitute.”

In the Great Depression, from 30% to 50% of the 65-and-over populations was thrown onto the mercy of children, relatives and friends for food, shelter and care.

“Social Security and Medicare have moved beyond their original purpose of protecting people from destitution and have become retirement subsidies — welfare payments to enable people to enjoy their ‘golden years.’”

Is there anything wrong with wanting to live well in your “golden years”?

“The welfare state has in part created a reverse Robin Hood effect: It sometimes transfers income from the struggling young to the relaxed old. Even if this did not threaten economic growth, it would pose a moral issue: Is it fair?”

As Of This Briefing, We Have Commenced Operation Global Penumbra

By Dept. Head Rawlings

Good afternoon, gentlemen, Mei-Ling, Your Grace, Madame Secretary. Welcome to the Department for Special Acquisitions and Liquidations. May I entreat you to take your seats? I thank you all for arriving early and am sorry there was not time to brief you en route. I’m sure you’ll understand our need for expediency when I tell you that 18 hours and 33 minutes ago our department, sensing the worldwide sociopolitical climate was favorable to our needs, launched DSAL Project GFG-33.1 variant 4, code referent “Penumbra” in every nation you all serve and/or represent.

Please, everyone, spare me your murmurs and grumbles. After recent events in the Italian Alps, the discovery of certain…deposits in the Adirondacks, and the unforseen but certainly fortuitous crash in the Gobi, you must have at least suspected the moment was at hand. Operatives are currently working toward the goals outlined in the briefing, a document with which I hope you are familiar but which I will review now in order to be certain we are all of the same mind.

But I forget my duty as host of this august gathering. Coffee? It’s quite excellent. Feel free to have some port, or a snifter of this excellent Armagnac, if you wish.

Ah, good. Now that we are all comfortable: a brief synopsis. It goes without saying that the first-approximation disposition of our globe is one of great political and financial anxiety, mixed with a certain guarded optimism. Very carefully mixed indeed, for which I must congratulate our new asst. dept. head. Well played, Mei-Ling. The cultivation and nurturing of the correct pan-cultural anxieto-psychosexual frame of reference, or “mood,” is no trifling matter, and it is vital that Penumbra be carried out in a world that is ready for its implications. That Mei-Ling was able to foster this “mood” worldwide, without the creation of new churches or television networks, is a credit to all those clever lying bastards she keeps locked up on the 11th floor.

From the metaphysical to the geophysical, we go now to the map—don’t blink, now, your ocular nerves will accept the retinal projection momentarily—where we see our ambitious plan for the future of the Gulf Stream is actually ahead of schedule, with all that implies for Penumbra in Europe. Luckily, the world’s mere governments will still be squabbling over the Middle East, Central Asia, and the American South during the expected period of increased volcanic activity we’re projecting. I’ll admit, this field of study is a new one for us, and unfamiliar, but when we found our rivals were researching in the field….

We cannot afford to play catch-up. Remember Barcelona.

In any case, climactic realignment will, through drastically altered patterns of farming and tourism, also help offset the inevitable side effects of our low-level economic proxy wars on the American continent. As a sidenote, I observe that banking is still one area where we are unopposed and unequaled, although for the nth time please remember that the money question is of little importance to Penumbra. While we will lose a few trillion out of the budget, I urge you to think of that as…. Let us term it, without being cynical, an investment in large-scale urban renewal.

And the rest of the Penumbra dossier, I’m afraid, is mostly spreadsheet after spreadsheet, which any of you can read as easily as Russian—which in turn, as you’ll note on page 608, will soon be as much use to anyone as Etruscan. I urge you to pay special attention to the following sections of your briefing: Tailored petro-algae, the tentative schedule for encouraging fruitful internal tensions within the Hindu faith, and for those with a flexible sense of humor, the parts dealing with China.

Again, thank you for your attention. We are in for a very active 50 years or so. Please leave the dossiers where you found them. The aides will see you to your aircraft.

Would someone wake the archbishop? Thank you, Pierre.

Iran’s Nuclear Operation Revealed To Be Cover For Greatest Roller Coaster Ever

December 15, 2008

TEHRAN, IRAN—Nearly 30 years of tense relations between the U.S. and Iran came to a dramatic end this March when Iranian president Mahmoud Ahmadinejad revealed that his country’s suspected nuclear program was in fact a covert operation to build “Ali Baba and the 40 Loops”—the largest, most thrilling roller coaster in the Middle East.

In a globally televised address before the United Nations, Ahmadinejad unveiled the 500-foot-tall steel coaster, which he called a “very real threat” to anyone not interested in having a blast. The Iranian leader then challenged all thrill-seekers—young and old, Christian, Muslim, or Jew—to ride the mighty coaster, which can reportedly reach speeds of 165 mph by using a newly developed electromagnetic propulsion system previously seen only in blurry satellite images.

Enlarge Image

All U.N. inspectors were given complimentary season passes for being so patient.

“I regret having kept you in the dark for this long, but doesn’t the surprise make it so much better?” a smiling Ahmadinejad said while gesturing to the massive coaster’s interlocking quadruple vertical corkscrews. “And to think, you were all afraid we would use this technology for evil. Well, the only thing the world should fear now is Ali Baba’s heart-stopping 400-foot drop!”

Members of a special U.N. envoy were immediately granted access to the new ride, and spent the next six hours conducting more than 30 separate critical examinations of the roller coaster. By late evening, however, inspectors said their findings were still inconclusive and determined that the fact-finding mission would require further test rides, corn dogs for everyone, and photographic documentation of their efforts.

Despite years of economic sanctions and the constant threat of military action, Iran reportedly continued working on the clandestine project by stockpiling metal tubes for the tracks, enriching uranium to provide glow-in-the dark lighting for the subterranean portion of the ride, and purchasing hundreds of gallons of neon green paint from Pakistan.

“We have moved wisely and decisively to establish Iran as a regional power in the amusement park field,” said Ahmadinejad, adding defiantly that the nation would not succumb to Western standards for height requirements. “Wheeeee!”

In response to rumors that the new Iranian amusement park will include a ride dedicated to bridging the foreign relations gap with Israel, Ahmedinejad flatly denied the existence of the so-called “Holocoaster.”

Bernie Madoff

Ponzi squared

From Economist.com

Just when Wall Street needs it least, Bernie Madoff’s pyramid scheme takes financial fraud to new lows

FOLLOWERS of the past year and a half’s financial misadventures have become inured to bucketfuls of red ink. Even so, the potential losses from the scam perpetrated by Bernie Madoff, a Wall Street veteran, are jaw-dropping. The $17 billion of investors’ funds that his firm supposedly held earlier this year have all but evaporated and the hole could be as big as $50 billion. That would make it the biggest financial fraud in history.

Details are still emerging, but Mr Madoff has himself described it as a giant Ponzi scheme. For years, it seems, the returns paid to investors came, in part at least, not from real investment gains but from inflows from new clients. It might still have been going on, were it not for the global financial crisis. Redemption requests for $7 billion, by investors looking to pull back from turbulent stockmarkets, forced Mr Madoff to admit that his coffers were empty—bearing out Warren Buffett’s adage that only when the tide goes out is it clear who was swimming naked.

The affair has robbed an embarrassingly long list of supposedly sophisticated investors of their swimwear. Hundreds of banks, hedge funds and wealthy individuals parked money with Mr Madoff, impressed by the steady returns on offer: 10-15% a year, even in rough times, with barely a down month. Global banks such as Banco Santander, BNP Paribas and HSBC, all three of which had until now survived the credit crisis relatively unscathed, are among those reported to be heavily exposed. So too is Bramdean Alternatives, a fund run by Nicola “Superwoman” Horlick, a celebrated British money manager. Others had most or even all of their eggs in the Madoff basket. Several well-heeled Americans have reportedly lost everything but their properties.

Why were they not suspicious of the unnaturally consistent returns? Mr Madoff’s pedigree may have played a part. A former chairman of the NASDAQ stockmarket, he has long been a fixture on Wall Street. He even has an exemption (to the former “uptick rule” for short-selling) named after him. He has served on an advisory committee assembled by the Securities and Exchange Commission (SEC), America’s main market watchdog. Savvy marketing was another factor. Investors had to be invited, lending his operation an air of exclusivity. This went down well in the country clubs of Florida, Minnesota and other states, where the firm’s unofficial agents told of Bernie’s magic touch, explaining that not anyone could get in, yet always somehow finding space for those who fancied a piece.

According to reports, some of those who put their faith in Mr Madoff suspected that he was engaged in wrongdoing, but not the sort that would endanger their money. They thought he might be trading illegally for their benefit on information gleaned by a separate business within his group, which made a market in shares. The firm had been investigated for “front-running”, using information about client orders to trade for its own account before filling those orders.

Even so, the affair has—like the subprime-mortgage debacle—exposed a stunning lack of due diligence. Droves of investors who should have known better tossed in billions, preferring to keep their fingers crossed rather than ask awkward questions of a firm whose investment strategy was vague and opaque. Even within his own group, Mr Madoff’s money-management business was a black box: no one but he had full access to the accounts. As a broker-dealer, it was able to clear its own trades, a privilege that should give pause for thought. Worse, questions had been hanging over the operation since the mid-1990s. Some institutional investors have long steered clear of Mr Madoff, unable to understand how he spun his gold, or uneasy that his books were audited by a tiny, three-person accounting firm.

The SEC, which seems to have been taken aback by the scale of the malfeasance, can hardly hold its head up high either. It did not get round to examining the books of Mr Madoff’s money-management business, even though he registered it with the commission in September 2006—though it did probe the market-making arm and found that it had violated some technical rules.

For an agency that is fighting for its life, that is unfortunate. Even before this scandal the SEC was on the back foot, having stood by as the big Wall Street investment banks it was charged with policing ran amok. In its defence, the commission argued that its primary role was investor protection, not prudential regulation. Now it has been shown wanting in its core competence—though, with 11,000 fund managers to oversee, not to mention the boom in mortgage-related cases, some may think it inevitable. Congress is next year expected to revamp America’s dysfunctional system of financial regulation. One option, already proposed by Hank Paulson, the outgoing treasury secretary, is to fold the SEC’s responsibilities into a new set of agencies.

The sloppy regulators and credulous investors whom Mr Madoff duped must now hope that he has pulled off one last deceit: exaggerating the scale of the losses. Even in these accident-prone times $50 billion sounds like an awful lot for one man to lose. But it is just about possible if he levered up his bets with borrowed money or supercharged them with derivatives (which he is known to have used to reduce volatility). But even if the fraud extends no further than the $17 billion under management, it will go down as a humdinger. Indeed, it makes Charles Ponzi’s promise in 1920 to double investors’ money in three months—which caused losses equivalent to around $160m in today’s money—look like a trifle. Perhaps from now on it should be known as the “Madoff scheme”.

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CHINA

Business in China

Recession’s blessing

Falling Western demand is keeping high-quality Chinese goods in China

ON THE shelves of Chinese shops is the usual assortment of toys, clothing, appliances and cookware. But over the past month the quality of many of the goods on offer has improved. In part this is because scandals over toxic paint and poisoned milk have brought closer scrutiny from inspectors and hence less corner-cutting. But it is also partly because of falling demand for Chinese goods from America, Europe and the Middle East, which has given China’s manufacturers and local government a big incentive to work around the country’s formidable export-promotion policies and to sell at home.

Chinese manufacturers are well aware that they operate in one of the few large markets that is still showing a pulse. Retail sales in October were up by 22% compared with the same month in 2007—a slight drop from 23.2% in September, but an impressive figure nonetheless. That certainly exaggerates the country’s economic vigour (growth in car sales, for example, is declining), but it would be a stretch to believe that China is in recession.

As domestic consumption booms, China’s export-oriented manufacturers are under siege. Figures announced on December 10th showed that exports fell by a startling 2.2% in November, compared with a year earlier. Analysts had expected an increase of around 15%; it was the first fall in exports for seven years. The news followed a government survey, released on December 1st, that showed a precipitous decline in the fortunes of export manufacturers, confirming lots of anecdotal evidence. Every week brings fresh reports of factory closings, particularly in the industrial belt around the Pearl River delta in southern China. Unpaid workers have been staging violent protests. Diverting goods intended for export to the domestic market makes sense for factory owners, who want their firms to survive, and for local officials, who wish to maintain order.

There is, however, a problem. This scheme conflicts with government policy, which is to promote exports. China encourages the import of industrial commodities, such as oil, base metals and even quality fabrics and industrial machinery—provided goods made with them are sent abroad. Accordingly, a tax is imposed on imports, and is then mostly reimbursed when finished goods are exported. (Products brought into special zones devoted to manufacturing for markets abroad avoid the tax altogether.)

Reuters

At least some people are still shopping

As a result of pressure from China’s trading partners, these tax rebates on exports had been contracting. But in November a new stimulus plan was announced that increased the rebates on more than 3,000 items. Evidently China’s officials hope the country can once again export its way to higher growth, despite the financial troubles in its main markets.

Given that demand is more robust at home than abroad, the market is pushing in the opposite direction to the government. But circumventing official policy is difficult. Along with the loss of the rebate, say manufacturers, comes an increase in attention from public authorities that most companies prefer to avoid. Some manufacturers therefore avoid the domestic market in China entirely; others run separate factories for domestic and foreign goods.

One solution is to route goods to the domestic market via Hong Kong, so that they qualify as exports, but this takes time and money and strikes many operators as a huge waste of both. China and Hong Kong are filled with small trading companies noted for their ability to handle these problems using one murky method or another. The sudden appearance of higher-quality goods suggests that officials are being less zealous than usual in enforcing the export rules, for fear of causing job losses.

Chinese consumers, for their part, must surely be pleased that they can buy better products at keen prices. A year ago, the boom was expected to be the means of breaking down the divide between China’s domestic and export-led economies. But perhaps a bust is what was required.

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DECEMBER 15, 2008

Bernie Madoff

Ponzi squared

From Economist.com

Just when Wall Street needs it least, Bernie Madoff’s pyramid scheme takes financial fraud to new lows

Evidence that the Fed Caused the Housing Boom

Daily Article by Robert P. Murphy

In this forum I have argued that Alan Greenspan’s low-interest-rate policy after the dot-com bust and 9/11 attacks sowed the seeds for our current recession and the housing bubble. I have also criticized the alternate theory that a foreign “savings glut” was the true culprit, rather than the Fed. In the present article, I want to deal with a few empirical objections to the case against Greenspan. That is, several different economic analysts are familiar with the theory that “the Fed did it,” and they claim that the facts just don’t add up. In the space below, I hope to demonstrate that the evidence against Greenspan is indeed damning.

Greenspan’s “Smallish” Injection?

One argument advanced in the attempted exoneration of Greenspan is that he didn’t really pump that much money into the credit markets. For example, popular blogger Megan McArdle writes,

Both right wing Austrians and many liberals have a common theory of how all this happened: Alan Greenspan dunnit. The mechanisms by which he accomplished his foul task are different in the two cases, of course. Austrians, and many other free-market types, believe that by lowering short-term interest rates after 9/11, Alan Greenspan made the housing bubble, and its eventual bust, inevitable… Here’s the problem: if markets are so great, how come the entire system can be brought low by a smallish injection of short-term capital? (emphasis added)

Brad DeLong makes a similar claim in his critique of Larry White, whom DeLong praises as the “best of the Austrians.” (DeLong does not tell us who the best-looking Austrian is, though I hope to at least be nominated.) DeLong writes,

Moreover, I do not think that Larry White has gotten the part of the story that he does cover right…. From the start of 2002 to the start of 2006 the Federal Reserve bought $200 billion in Treasury bills for cash. This $200 billion reduction in outstanding bonds and increase in cash surely did lead to an increase in demand for private bonds. But recall the magnitudes here. We have $2 trillion of losses on $8 trillion in face value of mortgages that ex post should not have been made. Are we supposed to believe that $200 billion of open-market purchases by the Fed drives private agents into making $8 trillion of privately unprofitable loans? Not likely. I can see how monetary contraction can make previously profitable loans unprofitable. But I see no way that this amount of monetary expansion can force private agents to make that amount of unprofitable loans. The magnitudes just do not match.

Similarly, David Henderson and Jeff Hummel[1] write that monetary growth was tamed during the years of the housing boom, and so Greenspan can’t be the culprit:

A better, although now unfashionable, way to judge monetary policy is to look at the monetary measures: MZM, M2, M1, and the monetary base. Since 2001, the annual year-to-year growth rate of MZM fell from over 20 percent to nearly 0 percent by 2006. During that same time, M2 growth fell from over 10 percent to around 2 percent and M1 growth fell from over 10 percent to negative rates. Admittedly the Fed’s control over the broader monetary aggregates has become quite attenuated, for reasons elucidated below. But even the year-to-year annual growth rate of the monetary base since 2001 fell from 10 percent to below 5 percent in 2006 and by June of 2008 was around 1.5 percent, despite Ben S. Bernanke’s alleged reflation. When all of these measures agree, it suggests that monetary policy was not all that expansionary during 2002 and 2003 under Greenspan, despite the low interest rates.

Greenspan Presented in a Less Flattering Light

I realize that these disputes may just further convince some readers that economics is not a science but rather an ideological contest in which each side throws its own set of lying statistics at the other. But even so, I will now use the same underlying data as the writers above, to reach the opposite conclusion: Greenspan allowed the monetary base to grow quite rapidly precisely when the housing boom shifted into high gear, and precisely when interest rates collapsed.

Before proceeding, I want to remind readers that my story is the textbook explanation of how the Fed operates. It is the writers above who are downplaying the Fed’s ability to push down interest rates or to “stimulate” (however temporarily and artificially) the economy. During the boom years, Greenspan and his fans wanted to take credit for his “merciful” low rates which allowed the United States to avoid a painful recession, but now Greenspan and his defenders want to claim that he was an innocent bystander in the face of Asian thrift and shortsighted bankers. In any event, on to the data, this time presented by the “prosecution” as it were.

First, let’s take McArdle and DeLong’s discussion of the injection of base money, and how it was too insignificant to cause the effects we have seen. According to DeLong, there was a $200 billion injection through open-market operations, and yet we have to explain $2 trillion in losses. Well, my first thought is that — as DeLong no doubt teaches his principles-of-macro students — our fractional-reserve system has a built-in multiplier. In particular, if the required reserve ratio is 10 percent, then a given injection of new reserves (through Fed purchases of securities) allows up to a tenfold increase in the quantity of new money. So with that rule of thumb, a $200 billion injection would be expected to have an impact of … $2 trillion.

Now let me anticipate an obvious response from DeLong. He could say, “OK fine, but that still makes no sense. Why would expanding the quantity of money by $2 trillion lead private investors to make so many bad loans?” That’s a good question, but it’s different from the issue of magnitudes. Even if Greenspan flooded the economy with $100 trillion in new money, it doesn’t automatically follow that investors should make dumb lending decisions. My point here is simply that this alleged (by McArdle and DeLong) quantitative mismatch is in fact perfectly adequate; Greenspan injected a lot more than a “smallish” amount of short-term capital, once we recall the nature of our fractional-reserve system.

Now when it comes to Henderson and Hummel, look again at their actual quotation above: they are trying to prove that monetary expansion was nothing unusual in 2002 and 2003, and to do this they quote the starting and ending annual rates of expansion in 2001 and then in 2006. But this is a bit like saying Keanu Reeves in the movie Speed didn’t drive recklessly, because, after all, the bus’s velocity was lower when he got off than when he first got on. To know if Greenspan had a tight or loose monetary policy during 2002 and 2003, it’s not enough to know that the policy in 2006 (when the boom was winding down, after all!) was lower than in 2001.

For the following chart, I have taken the annual averages of the monetary-base series (as compiled by the St. Louis Fed), and plotted the growth rates:

There are a few interesting features of the above graph. First, note that the growth rate in 2002 (8.7%) was higher than in 2001 (5.6%). (Henderson and Hummel may have given the opposite impression, because of the units involved. The base bounced around like crazy because of huge injections and then drainages because of Y2K and 9/11.) Second, note that the base growth in 2002 was about as high as any year from the 1970s, except 1979 (when base growth was 9.2%).[2] Everybody in this debate agrees that the 1970s were characterized by excessively loose monetary policy. It is hard to see then how Greenspan’s behavior during the serious onset of the housing boom can be described as moderate.

Before leaving this section, I should acknowledge that the graph above does seem puzzling in one respect: the growth in the base during the early 2000s is admittedly large by historical standards (even compared to the 1970s), but it is obviously not unprecedented. In particular, there were larger spikes during the 1980s and 1990s.

This is true, but I would remind the reader that there was a massive real-estate bust and stock-market crash in the 1980s as well, and of course the dot-com bubble in the late 1990s. The Austrians would blame those unfortunate events on the Fed (as well as other contributing causes) too.

Mortgage Rates Not Unusual?

The last claim we’ll analyze in this article is made by the excellent Chicago economist Casey Mulligan, who writes,

Another version of the subsidy hypothesis says that public policy encouraged low mortgage rates, which raised housing prices. I believe that housing prices would not have gotten so high if mortgage rates had been higher, but low mortgage rates may not explain why 2006 housing prices were so high relative to housing prices in 2003 or 2008. 30-year fixed-mortgage rates were around six percent per year for most of the boom, and continue to be about six percent.

No one is denying that there must be some endogeneity to the explanation of the housing bubble; after all, the federal-funds rate right now is just as low as under Greenspan, and nobody expects a housing bubble to develop. But again, I think Mulligan’s breezy claims about mortgage rates might give the reader a false impression. He is making it sound as if mortgage rates really have nothing to do with the onset of the boom, because after all they “were around six percent for most of the boom.” But in fact, the fall in mortgage rates fits in very well with the serious onset of the boom.

The following chart plots the 30-year conventional mortgage rate against year-over-year increases in the S&P/Case-Shiller Home Price Index:

Conventional 30-Year Mortgage Rates (Blue, Left)

vs. Year/Year Percentage Growth in Home Prices (Red, Right)

(monthly data)

Thirty-year mortgage rates plummeted from about 8.5% in mid-2000 to below 5.5% three years later. The connection certainly isn’t robotic, but this period also saw a spike in monetary base growth (thus leading us to suspect Greenspan’s influence, not just Asian savers) and the acceleration in the housing boom. On this last point, consider that mortgage rates dropped from about 7% down to about 5.5% from April 2002 to April 2003. Even with perfectly rational neoclassical consumers, that would be expected to raise home prices about 17%.[3] And lo and behold, over this same period the home price index rose about 14.5%.

In a follow-up post in the same Cato Unbound symposium, Mulligan makes an odd claim in his disagreement with White:

Perhaps Professor White would argue that market participants expected short term interest rates to remain low for much longer than a couple of years. If so, he is on shaky ground. First, such a claim is at odds with long-term interest-rate data. As I indicated in my article, long-term mortgage rates were not low during the housing boom. It’s not hard to find commentary from those years recognizing the low short-term rates were not expected to last. (emphasis added)

Again, this is one of those casual claims in the debate over the housing bubble that is liable to mislead some readers. Check out the following chart of 30-year mortgage rates:

As the chart above indicates, mortgage rates during the peak of the housing bubble were the lowest in the entire 37 years for which the St. Louis Fed keeps records. Perhaps Mulligan had in mind inflation-adjusted mortgage rates, but if so we’re stuck, because we don’t yet know what the correct, inflation-adjusted rates on 30-year mortgages were for any mortgages granted after 1978.

I ask the reader to once again look at the chart above. Is it really such a leap to think that perhaps Fed manipulation of interest rates might have something to do with the housing bubble?

Conclusion

Some Austrians are concerned that empirical exercises such as I have performed above will fall into the mainstream habit of aping the physicists, rather than developing a priori theories. However, we all know what the logical, verbal arguments of Mises and Hayek are, regarding the boom-bust cycle caused by central banks. The critics are claiming that this story doesn’t fit the facts. Hence, the only way to respond is to argue that the Misesian theory really does fit the facts.

Despite claims to the contrary, it appears that Alan Greenspan’s ultralow interest rates — which went hand in hand with monetary growth rates comparable to those of the 1970s — were at the very least a large contributing factor to the housing boom. I feel confident in claiming that the housing boom would not have occurred if money and banking had been left in the hands of the private sector, as opposed to the state-organized cartel that we currently “enjoy.”

Iraq rally for Bush shoe attacker

Bush shoe-ing worst Arab insult

Thousands of Iraqis have demanded the release of a local TV reporter who threw his shoes at US President George W Bush at a Baghdad news conference.

Crowds gathered in Baghdad’s Sadr City district, calling for “hero” Muntadar al-Zaidi to be freed from custody.

Officials at the Iraqi-owned TV station, al-Baghdadiya, called for the release of their journalist, saying he was exercising freedom of expression.

Iraqi officials have described the incident as shameful.

A statement released by the government said Mr Zaidi’s actions, which also included him shouting insults at President Bush, “harmed the reputation of Iraqi journalists and Iraqi journalism in general”.

Correspondents say the protesters are supporters of Shia cleric Moqtada Sadr – a leading critic of the US presence in Iraq. Smaller protests were reported in Basra and Najaf.

President Bush ducks as the shoes are thrown

The Iraqi government has demanded an on-air apology from his employer.

An Iraqi official was quoted by the Associated Press as saying that the journalist was being interrogated to determine whether anybody paid him to throw his shoes at President Bush.

He was also being tested for alcohol and drugs, and his shoes were being held as evidence, said the official, speaking on condition of anonymity.

The Cairo-based al-Baghdadiya TV channel said Mr Zaidi should be freed because he had been exercising freedom of expression – something which the Americans had promised to Iraqis on the ousting of former Iraqi leader Saddam Hussein.

“Any measures against Muntadar will be considered the acts of a dictatorial regime,” the firm said in a statement.

The programming director for al-Baghdadiya, Muzhir al-Khafaji, described the journalist as a “proud Arab and an open-minded man”.

He said he was afraid for Mr Zaidi’s safety, adding that the reporter had been arrested by US officials twice before.

“We fear that our correspondents in Iraq will be arrested. We have 200 correspondents there,” he added.

‘Proud Arab’

Mr Zaidi leapt from his chair at Sunday’s news conference and hurled first one shoe and then the other at Mr Bush, who was joined at the podium by Iraqi Prime Minister Nouri Maliki.

He [George Bush] deserves to be hit with 100, not just one or two shoes. Who wants him to come here?

A Baghdad resident

The shoes missed as Mr Bush ducked, and Mr Zaidi was immediately wrestled to the ground by security guards and frogmarched from the room.

“This is a farewell kiss, you dog,” he yelled in Arabic as he threw his shoes. “This is from the widows, the orphans and those who were killed in Iraq.”

Arabic TV stations have been repeatedly showing footage of the incident, which was also front-page news in many papers.

Correspondents say the journalist’s tirade was echoed by Arabs across the Middle East who are fed up with US policy in the region.

“He [George Bush] deserves to be hit with 100, not just one or two shoes. Who wants him to come here?” said a man in Baghdad.

But his view was not expressed by everyone.

“I think this incident is unnecessary, to be honest. That was a press conference, not a war. If someone wants to express his opinion he should do so in the proper manner, not this way,” said another Baghdad resident.

Courts criticised

Also on Monday, Human Rights Watch accused Iraq’s main criminal court of failing to meet basic international standards of justice.

The New York-based group said torture and abuse of prisoners before trial appeared common, and legal representation was often ineffectual.

Human Rights Watch said some of the court’s failings showed disturbing similarities to those that existed during the Saddam Hussein era.

The group called on Iraq to take immediate steps to protect detainees from torture, and ensure they had access to proper defence and received a prompt hearing.

Banks hit worldwide by US fraud

Bernard Madoff in 1999 - AP Photo/The New York Times, Ruby Washington

Mr Madoff is the former chairman of the Nasdaq stock exchange

Some of the world’s biggest banks have revealed that they are victims of a fraud which has lost $50bn (£33bn).

Bernard Madoff has been charged with fraud in what is being described as one of the biggest-ever such cases.

Among the banks which have been hit are Britain’s HSBC and RBS, Spain’s Santander and France’s BNP Paribas.

One of the City’s best-known fund managers has criticised US financial regulators for failing to detect the alleged fraud.

Meanwhile the Serious Fraud Office (SFO) has called on workers, former staff and shareholders to come forward with evidence of any corporate wrongdoing in the wake of the credit crunch.

‘Financial scandal’

Nicola Horlick, boss of Bramdean investments, told the BBC: “I think now it is very difficult for people to invest in things that are meant to be regulated in America, because they have fallen down on the job.”

FROM THE TODAY PROGRAMME

Sunday, December 14, 2008

Internet Attacks Are a Real and Growing Problem

A new report says cyberwar isn’t science fiction.

By L. GORDON CROVITZ

In the 1960s, the Pentagon looked for a secure way to keep its lines of communication going in the event of all-out war. The interlinked packet networks of computers became the Internet. Fast-forward to today, and that system of open protocols brings the enormous benefits of the Web to civilian life. But the Web has also become an open field for cyber warriors seeking to harm the U.S.

We’re only now realizing that many of these attacks have happened, as evidence mounts that outsiders accessed sensitive government networks and other databases. A report based on closed-door information about cyber attacks reached a sobering conclusion: Foreign governments and terrorist groups are focused on cyber offensives in a “battle we are losing.”

Last week’s Center for Strategic and International Studies report disclosed that the departments of Defense, State, Homeland Security and Commerce all have had intrusions by unknown foreign entities. The Pentagon’s computers are probed “hundreds of thousands of times each day.” An official at the State Department says terabytes of its information have been compromised. The Commerce Department’s Bureau of Industry and Security had to go offline for several months. NASA has stopped using email before shuttle launches. Jihadist hackers are trying to confuse military computers into mistaking the identities of friendly and unfriendly forces in Afghanistan and Iraq.

The quasigovernmental commission revealing these cyber attacks is made up of private-sector information executives, military and intelligence officials, and two members of Congress. The study found that no department knew the extent of damage done to other departments. The extent of the harm is not known.

“The organization of the federal government, which dates to the 1930s or earlier, is part of the reason we are vulnerable,” says the report. “Our industrial-age organization makes a cyber-dependent government vulnerable and inefficient. A collection of hierarchical ’stovepipes’ is easier to attack and harder to defend because security programs are not of equal strength (the weakest link compromises all) and stovepiped defenders cannot appreciate the scope of, and respond well to, a multiagency attack.”

As the first to build out an Internet grid, the U.S. is more vulnerable than countries that have built their infrastructure later. China, for example, constructed its Internet much later, on a more secure set of protocols. “Many Americans believe that our nation still leads in cyberspace, just as many Americans in 1957 believed that the U.S. led in space until a Soviet satellite appeared over their heads,” the study says.

It’s telling that the U.S. doesn’t have a publicly stated doctrine on cyber defense that warns enemies and commits to taking action in response. Likening today’s issues to the Cold War, the report says there should be clear rules about who will be punished how for what. It’s in the nature of cyber attacks that it’s hard to know exactly who’s responsible, but some response must be made. “These uncertainties limit the value of deterrence for cybersecurity,” the report says. “The deterrent effect of an unknown doctrine is quite limited.”

One problem is that Russia and China are the main suspects, but the U.S. defense establishment hesitates to say so too loudly. It’s true that few cyber attackers are ever clearly identified. No one knows for sure who brought down the Internet in Estonia in 2007, when Moscow was outraged when a Soviet-era war memorial was relocated in Tallinn. Or who was behind the cyber attacks that virtually shut down government communications and financial transactions in the former Soviet republic of Georgia earlier this year. Likewise, many foreign visitors had their PCs and BlackBerrys compromised during the Olympics in Beijing, where cybersnooping equipment is widely available.

Data are lost, communications are compromised, and “denial of service” attacks bring down selected Web sites and national networks. Supposedly confidential corporate information, the report warns, is almost certainly being hacked. As more individuals and companies rely on “cloud computing” — storing information and services such as email remotely on supposedly secure servers — foreign intelligence agencies and commercial snoops may have access.

A former official at Darpa, the Pentagon research agency that launched the Web, testified to Congress last year that a major cyber attack on the U.S. could knock out electricity, banking and digital-based communications. Americans would be left rooting around for food and water, trading with one another for firewood (presumably not on eBay). Even if end-of-the-world visions are overdone, it’s past time to assess risks and justify countermeasures.

The report has recommendations for the Obama administration, including a new government structure for cyber protection and working more closely with the private sector on security research. The broader point is that it’s about time that we knew the extent of the cyberwarring against us. The first step to fighting back is to admit that there’s a fight on.

Madoff and Markets

Shakespeare is a better investor than the SEC.

Capitalism runs on trust, so inevitably there will be men like Bernard Madoff who attempt to steal from the trusting. His alleged $50 billion Ponzi scheme is exceptional mainly for its size, the length of time he was able to run his con, and the affluent and sophisticated circles in which he operated. There is something especially shocking when a man held in high esteem turns out to be a thief.

Splash News

Bernard Madoff.

Among the stranger arguments in the wake of Mr. Madoff’s disclosure is that this proves the case for regulating hedge funds. Huh? Hedge funds were among the main victims here, along with well-heeled individual investors, nonprofit endowment funds and foreign financial companies.

As a broker-dealer, Mr. Madoff’s firm was already heavily regulated, and news reports say the Securities and Exchange Commission investigated him in 1992 without finding anything wrong. The SEC said in a statement Friday that its New York staff also conducted inquiries into Mr. Madoff’s firm in 2005 and 2007. Mr. Madoff’s separate investment company registered with the SEC in 2006, which is all that hedge funds would have had to do under the SEC’s proposed (but failed) hedge-fund rule of a few years back.

In the wake of Enron, Congress also gave the SEC more money and people, as well as new political motivation, to pursue wrongdoers. And Mr. Madoff also operated in New York, under the supposedly watchful and relentless eye of former Attorney General Eliot Spitzer.

Yet Mr. Madoff pulled off his alleged con despite all of this market supervision. We are now supposed to believe that the same SEC lawyers who couldn’t detect a fraud at a firm for which they were directly responsible would somehow have done so if only they had been able to examine other hedge funds that invested in Madoff Securities. Thus does every enforcement failure become an excuse for more enforcement, especially among law-school professors and journalists who specialize in hindsight. Mr. Madoff, by the way, was a big donor to Democrats who favor tougher financial regulation. Perhaps that was also part of his strategy to avoid more scrutiny.

The reality is that it is impossible for the SEC or any regulator to prevent every financial fraud, just as it is impossible for city police to prevent every burglary. If even Mr. Madoff’s two sons claim not to have known about the scheme, despite working at the firm for decades, how can we expect outside regulators to do better?

Mr. Madoff’s investors will in retrospect kick themselves for not asking more questions, especially about the remarkable consistency of his returns over the years, his apparently fly-by-night auditing shop, and his small trading book despite having so much money under management. But the broker’s long record of showing gains and years of rising stock prices no doubt provided reassurance. The 70-year-old Mr. Madoff wasn’t some dot-com upstart but a pillar of the community and philanthropist. The best con men are always those you least suspect.

The real lesson here is about men, not markets. Human nature doesn’t change, and crooks will always be with us. For investors the lessons are the eternal ones of diversification and diligence. Don’t trust your life savings with any single money manager or investment. Don’t assume that passing some new federal law will banish financial fraud, any more than “campaign finance reform” will stop the likes of Rod Blagojevich from trading political favors for money. As Shakespeare understood, the fault is not in our stars, but in ourselves.

Innocents Die in the Drug War

By MARY ANASTASIA O’GRADY

Of all the casualties claimed by the U.S. “war on drugs” in Latin America, perhaps none so fully captures its senselessness and injustice as the 2001 CIA-directed killing of Christian missionary Veronica Bowers and her daughter Charity in Peru.

Reuters

Roni Bowers and her infant daughter Charity (seated second from right).

No one is suggesting that the CIA intentionally killed Mrs. Bowers and her baby. It was an accident. But according to Rep. Pete Hoekstra (R., Mich.), it was an accident waiting to happen because of the way in which the CIA operated the drug interdiction plan in Peru known as the Airbridge Denial Program. Mr. Hoekstra says the goods to prove his charge are in a classified report from the CIA Inspector General that he received in October.

Under the program, initiated by President Clinton, the CIA was charged with identifying small civilian aircraft suspected of carrying cocaine over Peru on a path to Colombia, and directing the Peruvian military to force them down.

Mary Anastasia O’Grady talks to Kelsey Hubbard about the collateral damage caused by the CIA’s fight against drug trafficking.

Strict procedures were put in place to minimize the risks to innocents. But after viewing the IG report, Mr. Hoekstra — the ranking member of the House Intelligence Committee — says that it is clear that those procedures had gone out the window long before the April 20, 2001 tragedy.

On that day the Bowers family was flying in a single-engine plane over the Amazon toward their home in Iquitos. Mrs. Bowers was holding the infant on her lap when a bullet fired by the Peruvian Air Force, under direction of the CIA, hit the aircraft, traveled through her back and into Charity’s skull. The plane crash-landed on the Amazon River. Mr. Bowers, his young son and the pilot survived. Neither the plane nor its passengers were found to be involved in any way in the drug business and initial reports said that the mistaken attack was a tragic one-time error.

The Americas in the News

Get the latest information in Spanish from The Wall Street Journal’s Americas page.

The IG report looked at the Airbridge Denial Program from its inception in 1995 until its termination in 2001 and took seven years to complete. In statements to the press last month Mr. Hoekstra said it demonstrates every one of the 15 “shootdowns” that the CIA participated in over the life of the program had “violations of required procedures.” He also said that the report “found that CIA officers knew of and condoned the violations, fostering an environment of negligence and disregard for the procedures.”

Equally troubling, the congressman says, is the IG finding that after the tragedy there was an attempt to cover up what had been going on in Peru. He has also said that the IG report finds that there were “unauthorized modifications” made to “the presidentially mandated intercept procedures by people who had no authority to do so” and that “there was effectively no legal oversight of the program.” He further charges that “there is evidence that CIA officials made false or misleading statements to Congress,” and that “the CIA denied Congress, the NSC [National Security Council] and the Department of Justice access to key findings of internal reviews that established and documented the sustained and significant violations of the required procedures.”

“It was a rogue operation,” he told me by telephone on Tuesday. “They knew they weren’t following the rules, and they never did anything about it. They were callous about it.” When I asked him to explain further, he said: “My take on this is that they became obsessed with the mission.”

The CIA says that director Michael Hayden has “recognized the seriousness of [the report's] findings” and “is absolutely committed to a process looking at systemic issues and accountability that is as thorough and fair as possible.” The office of House Intelligence Committee Chairman Silvestre Reyes (D., Texas) won’t comment on the report. But Mr. Hoekstra is calling for more of it to be declassified and for the Justice Department to review “whether further criminal investigation is warranted.”

Yet to honor the memory of Mrs. Bowers and her daughter and spare innocent lives in the future, a broader discussion in Congress about U.S. drug policy in the region is needed.

Consider the fact that Mr. Clinton’s justification for the Airbridge Denial Program was that drug trafficking was a threat to Peruvian national security. Of course it was: Prohibition naturally produces powerful criminal networks that undermine the rule of law. But as a 2001 Senate Intelligence Committee report found, the drug runners learned to avoid detection by altering their routes via Brazil. It also found that while Peru’s coca business shrank, Colombia’s took off.

Since then, U.S. interdiction has put the pressure on Colombia and the problem is now resurging in Peru. The latest reports are that Mexican cartels are teaming up with remnants of the Shining Path terror network to rebuild the business, proving once again the futility of the supply-side attack as a way of minimizing drug use in the U.S.

Bush arrives in Kabul for talks

George Bush addresses US troops at Bagram air base, Afghanistan (15 December 2008)

Hundreds of US troops greeted Mr Bush with cheers at Bagram air base

US President George W Bush has arrived in Afghanistan on a surprise visit, his last before stepping down in January.

Mr Bush addressed US troops at Bagram air base before leaving for talks with his Afghan counterpart, Hamid Karzai.

He said Afghanistan was a “dramatically different country than it was eight years ago”, when US-led forces invaded.

Mr Bush flew to Afghanistan from Iraq, where a news conference was disrupted when an Iraqi TV journalist threw his shoes and shouted insults at him.

The president ducked and just missed the shoes, which hit the wall behind. The journalist was wrestled to the floor by security guards.

During the trip, Mr Bush and Iraqi Prime Minister Nouri Maliki signed a new security agreement between their countries, which paves the way for the withdrawal of US troops from Iraq by 2011.

‘Hopeful gains’

President Bush was met at Bagram air base, north of Kabul, early on Sunday by Gen David McKiernan, the US commander of Nato-led troops in Afghanistan.

He was then led into a giant white tent, where hundreds of US troops greeted him with cheers as he thanked them for serving.

The degree of difficulty is high. It’s hard. Nevertheless the mission is essential

US President George W Bush

“I am confident we will succeed in Afghanistan because our cause is just,” he said in a speech.

“Afghanistan is a dramatically different country than it was eight years ago,” he added. “We are making hopeful gains.”

Mr Bush said he recognised that more troops were needed in the country and that he supported President-elect Barack Obama’s pledge to increase numbers.

He also said it was important to continue working with Pakistan so that pressure was kept on militants based along its border with Afghanistan.

US soldiers in Khost province, Afghanistan (15 November 2008)

Mr Bush said he recognised that more troops were needed in Afghanistan

“If Pakistan is a place from which people feel comfortable attacking infrastructure, citizens, troops, it’s going to make it difficult to succeed in Afghanistan,” he said.

“The more we can get Pakistan and Afghanistan to co-operate, the easier it will be to enforce that part of the border regions.”

Speaking on Air Force One en route to Afghanistan, Mr Bush told reporters that his country’s goal there was similar to the one in Iraq – to let the new democracy develop its institutions so that it could survive on its own.

“The degree of difficulty is high. It’s hard. Nevertheless the mission is essential,” he said.

“We cannot… achieve our objective of removing the safe havens, kicking out the Taleban, and say: ‘OK, now let’s leave’,” he added.

‘Goodbye kiss’

While visiting Baghdad on Saturday, Mr Bush said the war in Iraq was not yet over and that much work still needed to be done there.

If you want the facts, it’s a size 10 shoe that he threw

US President George W Bush

“The work hasn’t been easy but it’s been necessary for American security, Iraqi hope and world peace,” he said during talks with President Jalal Talabani.

The Iraqi leader called Mr Bush “a great friend for the Iraqi people, who helped us liberate our country”.

Later, Mr Bush signed a security pact with Prime Minister Maliki which calls for US troops to be withdrawn from Iraq by the end of 2011. They are first to withdraw from Iraqi cities by June next year.

But in the middle of a news conference with Mr Maliki in the Green Zone, Iraqi television journalist Muntadar al-Zaidi stood up and shouted “this is a goodbye kiss from the Iraqi people, dog,” before hurling a shoe at Mr Bush which narrowly missed him.

With his second shoe, which the president also dodged, Mr Zaidi said: “This is for the widows and orphans and all those killed in Iraq.”

President Bush ducks as the shoes are thrown

Mr Zaidi, a correspondent for Cairo-based al-Baghdadiya TV, was then wrestled to the ground by security personnel and hauled away.

“If you want the facts, it’s a size 10 shoe that he threw,” Mr Bush joked afterwards.

Correspondents say showing the soles of shoes is a sign of contempt in Arab culture. Iraqis threw shoes and used them to beat Saddam Hussein’s statue in Baghdad after he was overthrown in 2003.

Mr Bush’s unannounced visit to Baghdad came a day after Defence Secretary Robert Gates told US troops that the Iraq mission was in its “endgame”.

The BBC’s Sarah Morris in Washington says the presidential trip to Iraq and Afghanistan was planned with meticulous secrecy.

The accompanying journalists were asked to tell no-one other than a superior and their spouse. The White House even published a false schedule of events.

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Russian Official Says Recession Has Already Started in Country

MOSCOW — Russia is entering a period of recession, a senior government official said, confirming that the robust economic growth of the past few years has come to an abrupt end.

Associated Press

Russia’s Putin reiterated Friday he won’t let the ruble collapse.

The comments, the government’s most somber yet on the subject, came at the end of a particularly painful week for the country. Gross-domestic-product growth slowed to a three-year low in the third quarter, the country’s massive oil wealth showed further hemorrhaging, and severe downward pressure on the ruble — which the Kremlin only months ago touted as a symbol of economic might — continued.

“Recession in Russia has already started, and I’m afraid it won’t last just two quarters,” Deputy Economy Minister Andrei Klepach said, according to Russian news agencies.

Prime Minister Vladimir Putin, who for months had boasted that Russia had enough financial buffers to remain resilient, has only recently begun preparing the nation for a prolonged and painful slowdown.

On Friday, Mr. Putin said GDP growth this year will be “about 6%,” which is below earlier estimates of between 6.8% and 7% growth.

Third-quarter data showed the economy expanding at a still-robust rate of 6.2% due to strong growth from recent periods.

Many economists fear the economy already stagnated by year’s end and that next year’s 3% GDP growth forecast, frequently cited by international banks and organizations, is overly optimistic.

“The question is not so much how far growth could slow to next year, but whether the economy will grow at all,” said Neil Shearing, an emerging Europe economist at Capital Economics in London.

Russians have increasingly joined investors in their mistrust toward the ruble, contributing to the massive capital flight that saw more than $83 billion leaving the country since August.

Mr. Putin reiterated his pledge to prevent a collapse of the ruble. The central bank has allowed for a gradual weakening of the currency by 5% since early November, but many observers say that tumbling oil prices and continuing capital flight have left the currency 15% to 20% overvalued.

Ecuador Says It Will Default on Its Foreign Debt

MATT MOFFETT and JOANNA SLATER

Ecuador’s President Rafael Correa said his nation is defaulting on its foreign debt, in a hardball move prompted as much by leftist ideology as economic distress.

Agence France-Presse/Getty Images

President Rafael Correa said Ecuador would skip a $30.6 million payment to bondholders due on Monday, calling foreign creditors ‘real monsters.’

Mr. Correa said Ecuador will skip a $30.6 million payment to bondholders due Monday, asserting that there are irregularities in how the debt had been contracted by an earlier administration. Mr. Correa, an economist who is close to Venezuelan president Hugo Chávez, lashed out at foreign creditors as “real monsters.”

Oil-rich Ecuador’s move marks the first sovereign default since the onset of the global financial crisis in September. While Ecuador had put markets on notice last month that it was threatening such action, the announcement still left some investors agape, as Ecuador has $2 billion in cash on hand to pay.

“Correa is really, really convinced foreign debt is like the devil and he doesn’t have to pay,” says Alberto Bernal, head of emerging-market macroeconomic strategy at Bulltick Capital Markets in Miami. “There’s a strong ideological component here.”

Investors said the main impact of Ecuador’s move would be to make money managers even more pessimistic than they already are about the prospects of countries like Argentina and Venezuela. Together with Ecuador, these countries are considered exceptional cases within the broader group of emerging-market borrowers because of their unorthodox economic policies. All three are also heavily dependent on commodities, whose prices have fallen sharply since September. Argentina has been taking increasingly desperate measures, such as nationalizing private pension funds, to come up with resources to stay afloat.

More broadly, Ecuador’s move could be a sign of what’s to come as borrowers world-wide contend with a much more difficult environment. “Companies or countries that are heavily reliant on capital flows are going to struggle, some more than others,” says Mike Conelius, who manages $2 billion in emerging-market debt at T. Rowe Price in Baltimore. “We should get used to defaults.” He adds that across emerging markets, companies are more vulnerable than governments, which are in better shape.

Claudio Loser, president of Centennial Group Latin America consultants and formerly the International Monetary Fund’s chief for Latin America, said he didn’t think there would be too much contagion, outside of Argentina and Venezuela. “Markets have already discriminated between Ecuador and other countries,” he said. With less than $4 billion in global bonds outstanding, Ecuador isn’t a major player in global markets.

The Andean country of 14 million is volatile even by Latin American standards. It previously defaulted on its debt in 1999. Ecuador went through seven presidents in the decade prior to Mr. Correa’s ascension in January 2007. One of the presidents, Abdala Bucaram, recorded an album called “The Madman Who Loves” while in office. He was deposed by congress for “mental incapacity.”

Mr. Correa, who was educated at the University of Illinois, has frequently played games of brinksmanship with creditors since taking office. But this time he went a step further, convening a special committee to investigate how the debt was contracted before his presidency began.

The committee said last month that it found “serious indications of illegality” and that Ecuador was availing itself of a 30-day grace period to decide whether or not to pay. While Ecuador has cash on hand, analysts say the likelihood of future budget restrictions caused by lower oil prices probably also influenced his decision.

“I think President Correa thinks the country should default pre-emptively, not when it’s in fiscal distress, because it maximizes their bargaining power,” says Alberto Ramos, an economist at Goldman Sachs.

Mr. Correa indicated he would propose a restructuring plan to investors. Investors rejected Ecuador’s rationale for the default, which was that the debt was illegal. “That’s like Obama coming in and saying that Bush issued Treasurys that were not legitimate,” says Arthur Byrnes of Deltec Asset Management in New York. “It’s almost embarrassing for them.”

The default sets the stage for what’s likely to be a fierce legal battle between Ecuador and its creditors. “There’s going to be a barrage of litigation against the country,” says Mr. Ramos of Goldman Sachs. He says Ecuador doesn’t have many foreign assets that creditors could lay hold of. Nevertheless, Ecuador will have to be careful of how payments for its oil exports are transmitted, as creditors will be keen to pounce on any funds they can get, he says.

Argentina’s default on more than $100 billion in foreign debt in 2001 was the largest sovereign default ever and the last major one in Latin America. In 2005, Argentina restructured most of the debt, offering creditors around 30 cents on the dollar.

EU Backs Emissions Proposal After Concessions to Industry

CHARLES FORELLE and JOHN W. MILLER

BRUSSELS — European Union leaders on Friday backed landmark proposals to cut the bloc’s greenhouse-gas emissions by 20% in coming years, but gave substantial concessions to industry and to coal-burning countries in Eastern Europe.

The tension over how much to pay to fight climate change reflects the strains the global downturn is putting on the EU’s agenda, as Germany and the United Kingdom square off over the wisdom of running up debt to boost growth.

Leaders from the EU’s 27 nations approved on Friday a coordinated call for fiscal-stimulus packages of around 1.5% of the bloc’s gross-domestic product, or about €200 billion ($267 billion). The language they used, however, was vague enough to permit countries to do more or less.

Associated Press

French President Nicolas Sarkozy, right, talks with German Chancellor Angela Merkel during a round table meeting at an EU summit in Brussels.

Germany has proposed a stimulus package that would pump around €4 billion ($5.3 billion) into the economy over the next year. Meanwhile the U.K. plans about £20 billion ($30 billion) in stimulus by 2010, including short-term tax cuts.

“All this will do is raise Britain’s debt to a level that will take a whole generation to work off,” German Finance Minister Peer Steinbrück said in an interview with Newsweek. U.K. Prime Minister Gordon Brown dismissed the comments, saying they reflected internal German politics.

Friday’s EU agreement won’t force Germany to expand its stimulus package. However, Chancellor Angela Merkel said she will discuss possible new stimulus measures in January.

The steel industry and other business lobbies welcomed Friday’s climate-change deal, while it drew criticism from environmental groups. “Millions of poor people have been left in danger because EU leaders bowed to business-lobby pressure,” said Elise Ford, head of the Brussels office of the Oxfam charity.

French President Nicolas Sarkozy hailed the agreement as historic. It would require the EU to cut emissions by at least 20% and raise use of renewable energy to 20% of the bloc’s energy mix by 2020. The package must still be approved by the European Parliament.

The European Commission had proposed that polluting power plants pay in auctions for permits to emit greenhouse gases. Under Friday’s agreement, poorer EU countries that rely heavily on coal — a description tailored to Poland and others in Central and Eastern Europe — will be allowed to give a large number of permits to power plants for free.

In a concession to industry backed by Germany, polluters that might otherwise relocate their plants to avoid EU rules would get some free emissions permits. In addition, polluters would be able to buy a large share of their permits from a United Nations system that operates in developing countries, freeing them from the expensive task of cutting gas output at their own plants.

Polish consumers could face a doubling or more of their electricity bills, Mr. Sarkozy said, defending the compromises. “It’s not a matter of environmental protection,” he said. “It’s simply not socially acceptable.”

On another contentious issue, EU leaders agreed to concessions that open the way for Ireland to hold a new referendum on an EU institutional reform. Known as the Lisbon treaty, it would hand Brussels more authority, strengthen the bloc’s foreign policy tools and give it a permanent president.

Irish voters rejected the treaty in June. The other 26 nations approved the treaty by parliamentary vote.

Ireland got assurances it would keep a seat on the commission, the EU’s executive arm. The bloc had planned to cut the number of commissioners — now one per country — by a third. The other leaders also agreed to write guarantees protecting Ireland’s low corporate-tax rates and its restrictions on abortion.

As long as the “detail work” is approved, Ireland will hold a referendum before the end of October 2009, Irish Prime Minister Brian Cowen said.

Bush Makes Surprise Trip to Iraq

BAGHDAD — On a farewell trip to Iraq, President George W. Bush said Sunday the war has been hard but was necessary to protect the U.S. and give Iraqis hope for a peaceful future.

Mr. Bush visited the Iraqi capital just 37 days before he hands the war off to President-elect Barack Obama, who has pledged to end it. At the end of nearly two hours of meetings at an ornate, marble-floored palace along the shores of the Tigris River, Mr. Bush defended the war, now in its sixth year.

[President Bush and Iraqi President Jalal Talabani]

Associated Press

President George W. Bush walks with Iraqi President Jalal Talabani after arriving for a surprise visit to the country.

“The work hasn’t been easy, but it has been necessary for American security, Iraqi hope and world peace,” the president said. “I’m just so grateful I had the chance to come back to Iraq before my presidency ends.”

But in many ways, the unannounced trip was a victory lap without a victory. Nearly 150,000 U.S. troops remain in Iraq fighting a war that is remarkably unpopular in the United States and across the globe. More than 4,209 members of the U.S. military have died and the war has cost U.S. taxpayers $576 billion since it began five years and nine months ago.

After an arrival ceremony, Mr. Bush began a rapid-fire series of meetings with top Iraqi leaders. The president wanted to highlight a drop in violence in a nation still riven by ethnic strife and to celebrate a recent U.S.-Iraq security agreement, which calls for U.S. troops to withdraw by the end of 2011.

Air Force One landed at Baghdad International Airport in the afternoon local time after a secretive Saturday night departure from Washington. In a sign of security gains in this war zone, Mr. Bush received a formal arrival ceremony — a flourish absent in his three earlier trips.

Referring to Iraqi President Jalal Talabani, seated beside him, and the country’s two vice presidents, mr. Bush said: “I’ve known these men for a long time, and I’ve come to admire them for their courage and their determination to succeed.”

Mr. Bush’s meetings at the palace were held as the sun set outside and darkness fell over Baghdad. Mr. Talabani called Mr. Bush “our great friend,” who “helped to liberate” Iraq. “Thanks to him and his courageous leadership, we are here,” Mr. Talabani said.

Mr. Bush and Iraqi Prime Minister Nouri al-Maliki planned a ceremonial signing of the security agreement — a “remarkable document,” according to Mr. Bush’s national security adviser, Stephen Hadley. He said the pact was unique in the Arab world because it was publicly debated, discussed and adopted by an elected parliament.

Mr. Hadley said the trip proved that the U.S.-Iraq relationship was changing “with Iraqis rightfully exercising greater sovereignty” and the U.S. “in an increasingly subordinate role.”

The Bush administration and even White House critics credit last year’s military buildup with the security gains in Iraq. Last month, attacks fell to the lowest monthly level since the war began in 2003. Still, it’s unclear what will happen when the U.S. troops leave. While violence has slowed in Iraq, attacks continue, especially in the north. At least 55 people were killed Thursday in a suicide bombing in a restaurant near Kirkuk.

For Mr. Bush, the war is the issue around which both he and the country defined his two terms in office. He saw the invasion and continuing fight — even after weapons of mass destruction, the initial justification for invading Iraq, were not found — as a necessary action to protect Americans and fight terrorism. Though his decision won support at first, the public now has largely decided that the U.S. needs to get out of Iraq.

It was Mr. Bush’s last trip to the war zone before Mr. Obama takes office Jan. 20. Mr. Obama won an election largely viewed as a referendum on Mr. Bush, who has endured low approval ratings because of the war and more recently, the U.S. recession.

Mr. Obama has promised he will bring all U.S. combat troops back home from Iraq a little over a year into his term, as long as commanders agree a withdrawal would not endanger American personnel or Iraq’s security. Mr. Obama has said that on his first day as president, he will summon the Joint Chiefs of Staff to the White House and give them a new mission: responsibly ending the war.

Mr. Obama has said the drawdown in Iraq would allow him to shift troops and bolster the U.S. presence in Afghanistan. Commanders there want at least 20,000 more forces, but cannot get them unless some leave Iraq.

After a 10 1/2 hour fight, Mr. Bush was met at the airport by U.S. Ambassador Ryan Crocker and the top U.S. commander Gen. Raymond Odierno. The president then climbed aboard a helicopter for a five-minute flight to the presidential palace.

The trip was conducted under heavy security and a strict cloak of secrecy. People traveling with the president agreed to tell almost no one about the plans, and the White House released false schedules detailing activities planned for Bush in Washington on Sunday.

Mr. Bush’s visit came after Defense Secretary Robert Gates’ unannounced stop in Iraq on Saturday, at a sprawling military base in the central part of the country. Mr. Gates will be the lone Republican holdover from the Bush Cabinet in the Obama administration.

The new U.S.-Iraqi security pact goes into effect next month. It replaces a U.N. mandate that gives the U.S.-led coalition broad powers to conduct military operations and detain people without charge if they were believed to pose a security threat. The bilateral agreement changes some of those terms and calls for all American troops to be withdrawn by the end of 2011, in two stages.

The first stage begins next year, when U.S. troops pull back from Baghdad and other Iraqi cities by the end of June.

Gen. Odierno said Saturday that even after that summer deadline, some U.S. troops will remain in Iraqi cities. They will serve in local security stations as training and mentoring teams, and so will not violate the mandate for American combat forces to leave urban areas, he said.

Iraq’s Defense Ministry said Sunday that U.S. commanders would have to get Baghdad’s permission for keep the troops there.

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We believe in free markets and free people, the principles, if you will, marked in the watershed year of 1776 by Thomas Jefferson’s Declaration of Independence and Adam Smith’s “Wealth of Nations.”

How Bush Can Transcend the Shoe Thrower

A small outrage requires a grand gesture.

Clinton’s Donor List Raises Lots of Questions

Can’t the United Way find better uses for its money?

Get Ready for a Lost Decade

Bad times don’t produce good policy.

By HOLMAN W. JENKINS, JR.

Defense Spending Would Be Great Stimulus

All three service branches are in need of upgrade and repair.

Tuesday, December 23, 2008

U.S. to Fund Afghan Militias, Applying Iraq Tactic

Monday, December 22, 2008

Washington Is Killing Silicon Valley

Entrepreneurship was taken for granted. Now we’re seeing a lot less of it.

Will El Salvador Veer Left?

By MARY ANASTASIA O’GRADY

The Americas in the News

Quantum of Solis

Big labor wants Obama to dilute union disclosure rules.

Days of open wallet

Barack Obama is promising a vast new public-works programme as his solution to America’s economic woes

Why wars happen

Analysing the causes of conflicts

Boom to bust and worse

The state of the economy in Russia looks worse with each passing day

US interest rate slashed to 0.25%

Kristof: Obama’s ’secretary of food’?

PAULSON DEFIES HIS OWN PREDICTIONS

Bush Touts Alliances on Trip to Iraq and Afghanistan

More Video

Man Throws Shoes at Bush

The Secrets of Marketing in a Web 2.0 World

Consumers are flocking to blogs, social-networking sites and virtual worlds. And they are leaving a lot of marketers behind.

SALVATORE PARISE PATRICIA J. GUINAN and BRUCE D. WEINBERG

Getting Sociable

For Further Reading

Process to Oust Governor Starts

Illinois Lawmakers Set to Form Committee to Explore Impeaching Blagojevich

Monday, December 15, 2008

Barack Obama-san

Let’s Buy Pakistan’s Nukes

By BRET STEPHENS

The Return of Realpolitik in Arabia

Bush’s ‘diplomacy of freedom’ gives way to Obama’s caution and reticence. The Middle East may test our fatigue.

Barack Obama-san

Let’s Buy Pakistan’s Nukes

By BRET STEPHENS

The Return of Realpolitik in Arabia

Bush’s ‘diplomacy of freedom’ gives way to Obama’s caution and reticence. The Middle East may test our fatigue.

Disarming Ourselves

A new report warns Obama about our aging nuclear weapons.

Background Reading

Disarming Ourselves

A new report warns Obama about our aging nuclear weapons.

Background Reading

What is going on in the global economy?

Where’s the real pitfall?

What about the role of the United States in all of this? Why are you worried?

What is the impact on Americans’ economic well-being?

Doesn’t productivity offer the way out of this mess?

What do you see as the solution?

How about other options?

What was the reasoning behind the welfare state when it was created decades ago?

Is there anything wrong with wanting to live well in your “golden years”?

As Of This Briefing, We Have Commenced Operation Global Penumbra

Iran’s Nuclear Operation Revealed To Be Cover For Greatest Roller Coaster Ever

Ponzi squared

Just when Wall Street needs it least, Bernie Madoff’s pyramid scheme takes financial fraud to new lows

Recession’s blessing

Falling Western demand is keeping high-quality Chinese goods in China

Ponzi squared

Just when Wall Street needs it least, Bernie Madoff’s pyramid scheme takes financial fraud to new lows

Evidence that the Fed Caused the Housing Boom

Greenspan’s “Smallish” Injection?

Greenspan Presented in a Less Flattering Light

Mortgage Rates Not Unusual?

Conclusion

Iraq rally for Bush shoe attacker

Banks hit worldwide by US fraud