LFTC - Letter From The Capitol

Index 3/31/09

5 posts: (1) Barack's New Economic Order--and Blumenthal's New Legal Order--The Home Front; (2) Federal Help: Suffocating, Unconstitutional or Both?--The Home Front; (3) Civilization in Space: Unveiled--"It's the Earth Stupid!"; (4) Iraq Update: Baghdad Nights--Us v. Them; (5) Upstate New York: Today's Race Bears Watching--The Home Front.

Barack's New Economic Order--and Blumenthal's New Legal Order

New Economic Order.  Several articles help paste together the New Economic Order that now is emerging.  They do not paint a pretty picture.  Robert Samuelson calls the federal government a giant hedge fund--Geithner's highly-leveraged toxic asset investment plan.  Reagan-era Justice Department official Victoria Toensing warns business folks that when taxpayer money is invested, rigid rules of frugal financial conduct will follow for private firms.  WSJ pundit L. Gordon Crovitz sees transparency as central to the new regime, and notes an accounting system that may help give answers that inform investors and avoid the panic caused by opacity.

David Brooks sees General Motors as sure to survive as a zombie firm, creating the world's most expensive jobs program, because no politician dares to kill it. The WSJ reports on the West Wing remake of Detroit that put the Big Three into federal receivership.   The WSJ editors note that GM's best-sellers --11 of its top 20 models--are not Green, but Green cars are what Obama Autoworks will produce.

Partnering with government is no picnic.  Technology maven Peter Huber warns that the government will prove a poor high-tech investor.  Baby Boomers who will be hit with a negative lifetime return on their Social Security investment will not be pleased to learn that several huge state pension plans invested in private equity ISO high returns; the top 20 public pension funds took a total plunge of $140B, and now face losses likely greater than that for the S&P 500's 44 percent drop in 2008, as the funds were highly leveraged.

WSJ economics maven Stephen Moore fears the financial calamity of the Presidents "fuzzy math" and what it will likely produce:

Here are the unhappy totals: the debt is $6 trillion higher from 2010 to 2019 than Obama's forecast. In no single year over the next decade, even when counting the Social Security trust fund surpluses, does the budget deficit fall below $800 billion. The interest on the national debt rises to $850 billion a year by the middle of the next decade, which will be the largest single expenditure item in the budget--eight times more than we now spend on education and four times more than we spend on homeland security. Federal spending remains well over 25 percent of GDP and in some years creeps closer to 28 percent of GDP under the Obama budget, which ironically enough is entitled "A New Era of Responsibility."

We are closing in on stagnant Western European levels of government intrusion into the economy. That economic model, by the way, which the left in the United States openly wants to emulate, has created half the jobs that the United States has over the past two decades and generated half the growth rates. Is it any wonder that the Chinese want an extra guarantee on U.S. Treasury debt and say it might be time for a new reserve currency?

I have never been a fear monger when it comes to deficits and debt. If the economy grows faster than the debt, as occurred in the 1980s and 1990s then the nation's burden of financing government borrowing becomes smaller over time. Incurring debt is legitimate, moreover, if the borrowing is paying for future prosperity. The 1980s deficits were probably one of the highest-return investments in American history. We bought a victory over the Evil Empire in the Cold War and borrowed to finance reductions in tax rates that launched America's greatest ever period of wealth and prosperity: 1982-2007. The national debt grew by about $6 trillion while U.S. net wealth grew by $40 trillion. A pretty good trade.

This debt we are now incurring is paying for windmills, unemployment benefits, new cars for federal employees, weatherizing homes, high-speed trains to nowhere, and the like. It buys almost nothing of long-term economic benefit. Most of the money that has been borrowed since September 2008 has been used to bail out irresponsible borrowers, failed financial institutions and car companies, and for expansions of welfare programs. The three biggest areas of government expenditure increases sought by the Obama budget are education, energy, and health care. Any unbiased assessment of the return on investment--to use an Obama term--for these programs would find dismally low payoffs for taxpayers. Government programs are the only things in the world that when they yield failing results, we reward them with more money.

All it takes is worse performance than Team 44 dreams of, and we will face trillion-dollar annual interest payments.  This will come from the political party whose leaders and supporters bemoaned GOP deficits one decimal point (one order of magnitude) smaller.

New Legal Order.  Enter Richard Blumenthal, the Democrat who is Connecticut's long-serving Attorney-General, on Glenn Beck's show yesterday.  RB admitted, under questioning by GB, that payment of bonus sums to AIG's Financial Products group violated no state law--the best RB could manage it that state law did not require such payments, which no one suggests is the case.  RB, asked by GB if an A-G's job is to enforce the laws, said that advocating change is part of his job as well.  But what RB did a fortnight ago was put pressure on AIG--which might gain public popularity if it changed its corporate name to Al-Qaeda Insurance Group--to give the dough back.  GB avowed that while the bonuses were an outrage (a position I have taken on LFTC and on radio), the A-G should not have acted, because no law had been broken.  Point to Beck, but Blumenthal gave Beck's viewers a glimpse into the New Legal Order, where public scolds can force undoing of legal acts deemed reprehensible by public officials, if enough folks share the view.

But there is political peril for Team 44 in all this.  Witness this AP report on auto worker attitudes toward how they were treated, versus how Wall Street types were treated:

"It's the age-old Wall Street vs. Main Street smackdown again," said Brian Fredline, president of UAW Local 602 at a plant near Lansing. "You have all kinds of funding available to banks that are apparently too big to fail, but they're also too big to be responsible."

"But when it comes to auto manufacturing and middle-class jobs and people that don't matter on Wall Street, there are certainly different standards that we have to meet -- higher standards -- than the financials. That is a double standard that exists and it's unfair," Fredline said.

Many workers -- not generally known for their affection toward executives -- even sympathized with Rick Wagoner, who was forced to step down as chief executive of General Motors Corp. He was by turns called a "sacrificial lamb," "scapegoat" and "fall guy."

"We knew someone was going to have to take the proverbial `bullet,' and it would have made it a lot easier to accept that had the CEOs of the banks also been required to give up their jobs," said Jim Graham, president of a union local in Lordstown, Ohio, where GM produces the Cobalt and Pontiac G5 fuel-efficient cars.

Bonus Tip: Congress v. Stock Market.  When Nancy Pelosi is in town, Sell, warns Forbes.  The Congressional Effect Fund (launched May 2008) invests in T-bills when Congress is in session, and in the S&P 500 when Congress is out of session.  In 2008 the strategy returned an 0.6 percent loss, compared to a 44 percent loss for the S&P 500; for the 44 years through end-2008 (1965 - 2008), the numbers would have been an average annual 0.3 percent S& P 500 return (dividends excluded) with Congress in--7,244 days, versus 16.1 percent return during the 3,21 days Congress was away.

Federal Help: Suffocating, Unconstitutional or Both?

Mark Steyn fears that Obama & Geithner intend to kill private capitalism and replace it with suffocating planetary regulation.  He cites 44's citation of the need to rescue folks from "a chaotic and unforgiving capitalism"; 44, writes Steyn, will replace this with a suffocating global nanny:

Barack Obama, even when he's not yukking it up on "60 Minutes," barely disguises his indifference to economic matters. He is not an economist, a political philosopher, a geopolitical strategist. He is the President as social engineer, the Community-Organizer-in-Chief. His plan to reduce tax deductions for charitable giving, for example, is not intended primarily to raise revenue, but to advance government as the distributor of largesse and diminish alternative sources of societal organization, such as civic groups. Likewise, his big plans for socialized health care, a green economy, universal college education: they're about extending the reach of the state.

Unfortunately, all of it costs money he doesn't have. So he has to borrow it, in your name. Where does the world's hyperpower go to borrow more dough than anyone's ever borrowed in human history? More to the point, given that, partly at the behest of Obama and Geithner, almost every other Western government is ramping up national debt to cover massive bank bailouts and other phony-baloney "stimuli," is there enough money out there to buy up the debt that's already been run up? Last week, at the official British Treasury auction, investors failed to buy the full complement of so-called "gilt-edged" 40-year bonds. Two such auctions have already failed in Germany. The U.S. Treasury, facing similar investor reluctance to snap up $34 billion of five-year notes, was forced to increase the interest it will pay on them. The Chinese and the Saudis have long taken the view that it's to their advantage to own as much of the Western world as they can snaffle up, but it's unclear whether even they have pockets deep enough for what America and the many Bailoutistans of Europe are proposing to spend.

In their first two months, Obama and Geithner have done nothing but vaporize your wealth, and your children's future. What began as an economic crisis is now principally a political usurpation. And, to return to the president's "false choice," that "chaotic and unforgiving capitalism" is exactly what we need right now. It's the quickest, cheapest, fairest, most efficient route to economic stabilization and renewal. A regimented and eternally forgiving global command economy with no moral hazard will destroy us all.

George Will raises anew constitutional questions; he sees executive branch arrogation of legislative power in the air, with Congress going along with the administration by passing the Troubled Assets Relief Program (TARP) bill last September--the Emergency Economic Stabilization Act of 2008 (ESSA)--and asks the Supremes to step in:

Since the New Deal era, few laws have been invalidated on the ground that they improperly delegated legislative powers. And Chief Justice John Marshall did say that the "precise boundary" of the power to "make" or the power to "execute" the law "is a subject of delicate and difficult inquiry." Still, surely sometimes the judiciary must adjudicate such boundary disputes.

The Supreme Court has said: "That Congress cannot delegate legislative power to the president is a principle universally recognized as vital to the integrity and maintenance of the system of government ordained by the Constitution." And the court has said that properly delegated discretion must come with "an intelligible principle" and must "clearly delineate" a policy that limits the discretion. EESA flunks that test.

With EESA, Congress forces the country to ponder the paradox of sovereignty: If sovereign people freely choose to surrender their sovereignty, is this willed subordination really subordination?

It is. Congress has done that. A court should hear the argument that Congress cannot so divest itself of powers vested in it.

This is a complex legal argument--arcane to non-lawyers.  In broad terms, our federal Constitution establishes three branches--legislative, executive and judicial--with powers that while mostly separate do overlap in certain, not infrequent, circumstances.  The essence of the legislative power is to pass laws; the executive administers the laws; and the judiciary interprets them, using judicial review (a power not expressly granted in the Constitution, but interpreted as part of the judicial power) to construe how the laws relate to the Constitution and striking down those it deems to violate it.

One key, if arcane to lay folk, concept is that of "non-delegation": No branch may delegate its essential function to another branch.  In practice this means that the legislative branch does not act as judge or administrator--hence, bills of attainder are prohibited, as well as delegating all lawmaking power to regulatory agencies (who are, with rare exceptions, part of the executive branch); the executive branch does not make laws or judge cases; and judges are not to make new law (a stricture they frequently violate, and get away with).

GW argues that ESSA turns the executive branch into a legislative body making laws, because ESSA gives the executive branch plenary, blanket discretion to spend gazillions without meaningful legislative guidance.  He wants the Supremes to so declare, exercising judicial review.  If it does so, perhaps constitutional fealty is served.  But then our future is cast into the hands of the likes of Barney Frank...

Talk about the twin perils of Scylla and Charybdis....

Civilization in Space: Unveiled

I have oft inveighed against international boondoggles, including the International Space Station, which I felt excessively costly for the science involved and human life risk.  But nonetheless the ISS is an impressive technological feat.  Check out the ISS Timeline recently posted by USA Today; it runs about two minutes, and gives a marvelous sense of what has taken about twenty years to assemble in orbit.  And cheers to the success of STS-119, which landed Saturday after visiting the ISS, and whose mission--and much more--is at NASA's Kennedy Space Center website.

Iraq Update: Baghdad Nights

"Baghdad in Fragments" is soldier-blogger Michael Totten's latest report from Iraq.  Well worth a look at the full report, but here is a sample that is self-explanatory, in which Totten chats up a soldier.

“The majority don't want to us to leave,” he said.

“How do you know?” I said, unsure if I should really believe it.

“They tell us one on one,” he said. “We tell them the country has to sink or swim at some point. They don't like the Iraqi Police or the Iraqi Army. The Iraqi Police used to kidnap and murder people. The Iraqi Police at JSS Adhamiyah won't go on patrols unless we make them. They’re pretty much useless, but at least they're less dangerous now that we're watching them. Some civilians here say they want us to stay forever because things are better with us around. They don't necessarily want us out in the streets every day, but they do want us somewhere in Iraq.”

Upsate New York: Today's Race Bears Watching

Now that college basketball's March Madness is over and done with, back to the country's only permanent sporting--and often unsportsmanlike (Janet Napolitano would of course say "unsportspersonlike")--contest year-round in America: politics.  WSJ ace political reporter John Fund spotlights today's race for the upstate New York House seat vacated by Kirsten Gillibrand when she accepted appointment to the Senate.  Although the Democrat is favored slightly, the White House is playing it low-key, fearing possible loss of a seat in a district that the President carried in November with 65 percent of the vote.

Index 3/30/09

6 posts: (1) Team 44's Domestic Diplomatic Negotiations--The Home Front; (2) Did the Fed Cause the Housing Bubble?--The Home Front; (3) Afghan Agonistes: Chapter Umpteen--Us v. Them; (4) Palin Preoccupied: Governance Calls--The Home Front; (5) Pat Oliphant Sinks into Anti-Semitic Swamp--Wobble Watch; (6) UN: Free Speech, Hah!--Turtle Bay Tortoise.

Team 44's Domestic Diplomatic Negotiations

The Financial Times headline says it all: Bank Chiefs Hold Peace Talks with Obama.  Yes, peace talks.  An administration that jettisons "global war on terror" as a label in favor of "overseas contingency operations" is waging a war against America's bankers.  One need not greatly admire bankers to marvel at an administration that may well think its domestic opponents are greater enemies than adversaries overseas.  In the latter vein, NRO's Andy McCarthy writes, of OCOs:

That this “overseas contingency” on which we are “operating” has left a rather large hole in the ground in lower Manhattan apparently is beside the point. Or maybe that’s exactly the point. War is a powerful word, redolent of power, force, zeal, and national purpose. That’s precisely why the Left routinely invokes war in its beloved campaigns against poverty, obesity, and other abstractions. But real wars, the forcible defense of our nation and the pursuit of our interests, are to be avoided. As are real enemies. Thus, the complementary announcement that “enemy combatants” aren’t enemy combatants anymore. They are simply “individuals currently detained at Guantanamo Bay,” according to an affirmation filed in federal court by Attorney General Eric Holder.

In a way, the domestic "war" metaphor dates back 44 years, to Lyndon Johnson's War on Poverty.  GOP administrations are hardly immune--witness Richard Nixon's War on Cancer.  Nor are peacenik labels for war against self-designated adversaries--N.B., self-designated, as our adversaries are not at all shy about calling us enemies--alone the province of Americans.  In January 2008 UK Home Secretary Jacqui Smith gave Gordon Brown's prime minster-ship a memorable moment, naming Islamic terrorism "anti-Islamic activity" in an unintentionally comical effort to woo England's hundreds of thousands of deeply disgruntled Muslims.  McCarthy wryly suggests that the Arabic translation for "contingency operations" is jihad.

But there is a sinister message in the FT's headline, which, I think, accurately portrays Team 44's attitude.  Given its goal to socialize the American economy, those perceived as capitalist avatars can expect to be regarded as enemies.  It is one thing to declare poverty, a deplorable human condition, as an evil; or to declare cancer, a loathsome, often fatal disease of cellular malfunction, as an evil.  It is quite another, and a breathtaking leap, to regard bankers as (by implication, comparably) evil.  Yes, bankers contributed mightily to the near destruction of the global financial system.  But so did government.  Those on the far right regard Government is the Enemy.  This too, is excess.  But far rightists are not occupying the Oval office, wielding the power of the Presidency.

Did the Fed Cause the Housing Bubble?

Friday the Wall Street Journal posted a symposium on whether the Fed caused the housing bubble.  It merits a careful read, as a broad spectrum of views is presented, and lots of detail on each side.  I am posting it today because there was too much clutter Friday after Thursday's Geithner II financial reform release.

Afghan Agonistes: Chapter Umpteen

The Afghan War drags on, as Americans turn inward, and Islamists press on.  What will Team Obama do, and can it work?

Administration Policy.  Begin with A New Strategy for Afghanistan and Pakistan, an address by President Obama.  Here is the March 27 White House Press Briefing on the new strategy for the region.  And here is the March 27 MacNeil Lehrer Online NewsHour interview with General David Petraeus & special regional envoy Richard Holbrooke.

President Obama's speech summarizes his view of things in seven crisp paragraphs:

Many people in the United States - and many in partner countries that have sacrificed so much - have a simple question: What is our purpose in Afghanistan? After so many years, they ask, why do our men and women still fight and die there? They deserve a straightforward answer.

So let me be clear: al Qaeda and its allies - the terrorists who planned and supported the 9/11 attacks - are in Pakistan and Afghanistan. Multiple intelligence estimates have warned that al Qaeda is actively planning attacks on the U.S. homeland from its safe-haven in Pakistan. And if the Afghan government falls to the Taliban - or allows al Qaeda to go unchallenged - that country will again be a base for terrorists who want to kill as many of our people as they possibly can.

The future of Afghanistan is inextricably linked to the future of its neighbor, Pakistan. In the nearly eight years since 9/11, al Qaeda and its extremist allies have moved across the border to the remote areas of the Pakistani frontier. This almost certainly includes al Qaeda's leadership: Osama bin Laden and Ayman al-Zawahiri. They have used this mountainous terrain as a safe-haven to hide, train terrorists, communicate with followers, plot attacks, and send fighters to support the insurgency in Afghanistan. For the American people, this border region has become the most dangerous place in the world.

But this is not simply an American problem - far from it. It is, instead, an international security challenge of the highest order. Terrorist attacks in London and Bali were tied to al Qaeda and its allies in Pakistan, as were attacks in North Africa and the Middle East, in Islamabad and Kabul. If there is a major attack on an Asian, European, or African city, it - too - is likely to have ties to al Qaeda's leadership in Pakistan. The safety of people around the world is at stake.

For the Afghan people, a return to Taliban rule would condemn their country to brutal governance, international isolation, a paralyzed economy, and the denial of basic human rights to the Afghan people - especially women and girls. The return in force of al Qaeda terrorists who would accompany the core Taliban leadership would cast Afghanistan under the shadow of perpetual violence.

As President, my greatest responsibility is to protect the American people. We are not in Afghanistan to control that country or to dictate its future. We are in Afghanistan to confront a common enemy that threatens the United States, our friends and allies, and the people of Afghanistan and Pakistan who have suffered the most at the hands of violent extremists.

So I want the American people to understand that we have a clear and focused goal: to disrupt, dismantle, and defeat al Qaeda in Pakistan and Afghanistan, and to prevent their return to either country in the future. That is the goal that must be achieved. That is a cause that could not be more just. And to the terrorists who oppose us, my message is the same: we will defeat you.

44 believes that the peoples there want the same kind of life we do, a debatable proposition.  He reaffirmed his intent to take out "high-level" targets as opportunity arises from actionable intelligence.  He proposes a minuscule aid package--$1.5B over 5 years--for Pakistan.  He notes American losses of 700 dead in the 7-plus Afghan War years.  Finally, he wants a new "Contact Group" that includes...lran, Russia & China, nations whose interests in Southwest Asia are by no means congruent with ours--indeed, often opposed.  Such a coalition will likely prove a recipe for foreign policy paralysis.

Yet this press conference exchange with two senior aides encapsulates the administration's commitment to defeat, rather than negotiate with, the Taliban:

Q    The Taliban has come out with a statement in response to the President this morning.  They basically said that the U.S. is repeating the mistakes of the Russians, and if winning the war by military power worked then the Russians would still be in charge.  I wonder if you have any comment to that.  And if that's the kind of rhetoric that they're -- they sound like they're ready to fight.  Is the U.S. ready for casualties, more Afghan casualties?  And how can the U.S. engage with them in any productive way?

MR. RIEDEL:  Let me comment on the Taliban.  It's no surprise.  We know that the core Taliban leadership, led by Mullah Omar, is determined not to negotiate with anybody.  They want to take Afghanistan back to the medieval hell that they created in the 1990s.  But there are many of the -- those involved in the insurgency who may not be so committed as that, and if we see the momentum of the Taliban broken this summer and over the course of the fighting season, we may see some fractures within that movement.  And I suspect that the core Taliban leadership is very, very worried about just that kind of thing happening.

MS. FLOURNOY:  And I would just further add that there's absolutely no valid comparison between the Soviet occupation of Afghanistan, which was an occupation to control a country, repress a population, install their own sort of puppet leadership.  We are there to, first and foremost, combat terrorism and protect our own interests and our own people from attack.  But we're also there to help the Afghan people and enable them to reclaim their country.  There is absolutely no comparison that's valid between the two. 

Psywar is a major theme:

The way I think we've avoided it is that this is a not a straitjacket, a detailed blueprint.  It's a framework within which there's plenty of flexibility to bring in ideas which are not in the report.  One of the most important ideas in this report -- which is new for this country but has been done in many other wars, including Iraq -- is the information issue.  We can -- in Swat, for example, there are about 150 illegal FM radio stations, and Fazlullah is going around every night broadcasting the names of people they're going to behead or they've beheaded.  Any of you who have a sense of recent history know that that's exactly what happened with Radio Mille Collines in Rwanda, and the United States did nothing, to our eternal regret.

And nothing has been done so far about that.  These are unimpeded.  We have identified the information issue -- sometimes called psychological operations or strategic communication; used to have different names in the old days -- as a major, major gap to be filled.  Senator Kerry is pushing this very hard from the Senate side.  So this is the kind of thing that emerged from our discussions.

The MacNeil-Lehrer interview contains three nuggets.  First, General Petraeus & Ambassador Holbrooke have spoken with the Pakistani ISI chief--the Inter-Services Intelligence agency intimately involved in playing both sides--about tamping down ISI aid to al-Qaeda.  Second, the administration believes that Iran shares a common interest in regional stability with us, a highly dubious proposition; they gain more from our defeat than they would gain from more stability in Southwest Asia.  Third, the administration sees evidence that most Afghans fighting under the Taliban banner are not doing so because they share the same goals.  Consider this exchange:

MARGARET WARNER: Let me ask about something else President Obama put on the table a few weeks ago, which was negotiating with some elements of the Afghan Taliban. Today, he seemed to indicate that he is talking about lower-level elements. Yet, the Afghan government is talking -- I mean, President Karzai talked about the need to reach out to Mullah Omar. Is that a serious split between these two governments? And how do you propose to go about it?

GENERAL PETREAUS: There's actually something, which you know, I'm sure, in their constitution about the reintegration and reconciliation, if you will. Our sense is that it is most profitable, at this time, to pursue that at the lower, middle levels in local areas where, for a variety of different reasons, the Taliban has been able to muscle in, to buy their way in or to bring people to their side for ills against, perhaps, the local governance, even.

But in all those cases, there is an opportunity, we think, to split off the more hardcore and then to try to bring back, if you will, to the new Afghanistan, those others. Whether that's possible at the top, I think, is a bigger question indeed. And I think President Obama's description today was revealing.

AMBASSADOR HOLBROOKE: Margaret, the majority of people fighting for the Taliban are not fighting for the precepts of returning to a 14th century caliphate or for Mullah Omar's precepts. They're fighting either because it's a gun culture and they -- and it's a long-standing thing, or because they've been misguided to thinking we're the latest round of foreign invaders rather than coming in to liberate them from the Taliban.

We think that's probably over 70 percent, according to polling. We have to find ways to give these people alternatives -- jobs in the agricultural sector. Make them understand that they've been misled by Mullah Omar and his core leadership.

GENERAL PETREAUS: I think it's very important, in fact, to stress that the Taliban brand, if you will, is still very damaged, as I'm sure you found in your several weeks in Afghanistan recently. But this also highlights the importance of not just more forces, but also the proper employment of those forces.

General McKiernan, for example, just issued counterinsurgency guidance to the ISAF U.S. forces in Afghanistan. That should govern the way our forces operate. We have to be seen as, actually, good guests. We have to be seen as, not conquerors, but as friends -- as there to help secure and to actually serve the people. And that is paramount as this goes forward.

Five Experts Weigh In.  Now, five estimable, serious experts weigh in.

Ralph Peters sees 44 channeling LBJ in Vietnam: committing troops in excess ISO an unattainable goal of a pacified, democratic Afghanistan:

Obama rightly identified the main threat to us as al Qaeda, which he wants to "disrupt, dismantle and defeat." Then why are his efforts overwhelmingly directed toward the Taliban?

I don't like the Talibs, but they didn't attack us on 9/11. Dirt poor, they just made the mistake of renting some fleabag motel rooms to al Qaeda. And they paid heavily for it.

The Taliban strategy is to make Afghanistan ungovernable for us. What if, instead of trying to claim worthless territory in the name of a corruption-poisoned Afghan government, we flipped the rules and just kept Afghanistan ungovernable for the Taliban?

44 fails to see, writes RP, that Pakistan is not America's friend:

Start with his inane -- but touchingly American -- statement that "the people of Pakistan want the same things we want." Oh, really?

How many Post readers think Sharia law would be a good idea? How about beating the crap out of women just for yuks? Or stoning them to death because they smiled at the wrong time? And let's ban alcohol, bare arms, dating and jobs for women. And grow those beards, fellas!

Yeah, we're tight. We're such good buds that, while the Pakistanis protect the worst elements within the Taliban, manipulate our key supply line and pander to terrorists, Obama wants to guarantee Pakistan's stunningly corrupt politicians $1.5 billion in aid every year. Plus military aid.

Why on earth should the Pakistanis help us when we reward them lavishly for screwing us?

Turn now to ex-CNN reporter Peter Bergen (who in the late 1990s actually interviewed Osama bin Laden).  He sees "graveyard myths"--the ghosts of Britain's mid-19th century defeat and the former Soviet Union's 1980s defeat-- affecting our Afghanistan policy.  He notes that the British returned and won a second Afghan War late in the 19th century, and that the Afghans only defeated the Soviets with Arab money and American weapons.  PB sees opportunity, given generally favorable attitudes among Afghans towards us, and substituting Afghans for Americans on the ground-level firing line:

The Soviet experience in Afghanistan weighed heavily on the minds of Bush administration policymakers, who kept a “light footprint” lest Afghans rebuff American and allied soldiers as hated occupiers. But as it turned out, the Afghans were widely enthusiastic about being liberated from the Taliban. In an ABC/BBC poll conducted in 2005, a full four years after the fall of the Taliban, 8 in 10 Afghans expressed a favorable opinion of the United States — an extraordinary proportion in a Muslim nation — and the same number supported the American-led overthrow of the Taliban in their country.

And just last month, in a new poll by ABC and the BBC, 58 percent of Afghans named the Taliban as the greatest threat to their nation. Only 8 percent said it was the United States. And while only 47 percent of Afghans still had a favorable opinion of America, the Taliban fared far worse, with just 7 percent approval.

What Afghans want is for international forces to do what they should have been doing all along — provide them the security they need to get on with making a living. That means building up the Afghan Army and police, which are only about one-fourth the size of the security services in Iraq. This will not come cheap, but the cost of putting an Afghan soldier in the field is only one-seventieth that of sending an American. President Obama, who will travel to Europe for NATO’s 60th anniversary in early April, can ask those European countries that are reluctant to send additional troops to Afghanistan to instead contribute to a permanent fund to help pay for the expanded Afghan security services.

Author-journalist Robert Kaplan says that saving Afghanistan is achievable.  He concedes that the Karzai government is weak, but so are the Taliban.  He sums up twin historical legacies competing for supremacy in today's 21st century Afghanistan:

There is nothing ancient about Afghanistan. It came into existence only in the early 18th century as a buffer between the civilizations of Persia and the Indian Subcontinent. It soon became a buffer between the Czarist empire in Russia and the British Empire in India. The very situation in Afghanistan today, with different spheres of influence being carved out behind the screen of daily warfare, attests to this history. In the south and east, the radical Islamist insurgency is itself a reassertion of the concept of Pushtunistan on both sides of the Afghanistan-Pakistan border. In particular, Baluchistan in the south is becoming a Wild West area of arms bazaars and opium labs. (In fact, most armed insurgents in Afghanistan were trained not in Pakistan’s tribal areas but in Pakistani Baluchistan, further proof that no solution here is possible without military action inside Pakistan.) In Afghanistan’s northeast, tribes in Kunar and Nuristan will fight any outsider, even those from the next valley. In the north, where it is more peaceful, trade is intensifying the links between ethnic-Tajiks and Uzbeks who straddle the border between Afghanistan and the former Soviet Central Asian republics. Western Afghanistan is coming under the political and economic domination of Iran, which supplies the city of Herat with electricity, even as the Iranian rial is the main currency in circulation. The Iranians are sending arms and military trainers into this part of Afghanistan. While the Shiite Iranians are against a takeover of Afghanistan by the Sunni extremist Taliban, they also want to keep Afghanistan weak, and to bleed the Americans as much as they can. (The Spanish contingent of several hundred NATO troops in western Badghis province—in the heart of Afghani Greater Iran—practically never leaves its base.)

And yet set against this whole legacy is another tendency, equally as compelling. Throughout the mid-part of the 20th century, Afghanistan had a credible central government under King Zahir Shah that boasted many accomplishments from eradicating malaria to overseeing the construction of a ring road uniting the major cities. Following the chaos of the early- and mid-1990s that came with the collapse of the Soviet puppet regime of Mohammed Najibullah, Afghans yearned so much for a central government that they initially welcomed the tyranny of the Taliban. And today, all polls indicate that Afghans want strong national leadership emanating from Kabul. Indeed, there is a hue and cry for roads, wells, culverts, dams, and other infrastructure that can help with farming. The problem is that decades of strife, in which central authority went from monarchy to communism, to anarchy, to theocracy, to enfeebled democracy, have left tribal affiliations as the only constant.

The scale of Afghan military buildup needed will siphon off potential talent for the civilian sector.  It is illusion, the American military informs us, to think we can simply pull out and neutralize terrorists via air-strikes alone.  RK sums up:

“This is not easy shit,” says one American Army colonel. “But what’s the alternative?” That’s why American Brig. Gen. John Nicholson, Jr. says that what is required is “strategic patience.” The U. S. military has already been in Afghanistan half as many years as it was in Vietnam, and with troops pulling out of Iraq and talk of a multi-year hard slog ahead here, Afghanistan is on track to becoming America’s longest war. To that end, significant numbers of American officers and civilian contractors will be embedded in Afghan government ministries for years to come, helping to run things. But does the home front have the stomach for it? Our reaction to the fighting about to unfold this summer will speak volumes.

A fourth expert view (actually from a pair of national security mavens) warns that Pakistan is the true linchpin of an Afghan strategy (agreeing on this point with Ralph Peters).  They write:

Consider a hypothetical. Had the terrorist attacks of 9/11 been planned by al Qaeda from its current headquarters in ungoverned areas of Pakistan, is it conceivable that today the U.S. would find itself with 54,000 troops and $180 billion committed to transforming medieval Afghanistan into a stable, modern nation?

For Afghanistan to become a unitary state ruled from Kabul, and to develop into a modern, prosperous, poppy-free and democratic country would be a worthy and desirable outcome. But it is not vital for American interests.

And add:

The problem in Pakistan is more pressing and direct. There, the U.S. does have larger vital national interests. Top among these is preventing Pakistan's arsenal of nuclear weapons and materials from falling into the hands of terrorists such as Osama bin Laden. This danger is not hypothetical -- the father of Pakistan's nuclear bomb, A.Q. Khan, is now known to have been the world's first nuclear black marketer, providing nuclear weapons technology and materials to Libya, North Korea and Iran.

Protecting Pakistan's nuclear arsenal requires preventing radical Islamic extremists from taking control of the country.

Furthermore, the U.S. rightly remains committed to preventing the next 9/11 attack by eliminating global terrorist threats such as al Qaeda. This means destroying their operating headquarters and training camps, from which they can plan more deadly 9/11s.

A fifth expert gave a briefing on the opium problem in Afghanistan, that I attended recently.  As it was off the record, I cannot reveal the source.  The briefer noted re the drug wars in Afghanistan that al-Qaeda forces many farmers to grow opium (Afghanistan supplies 90 percent of the world total), and that absent security we cannot get farmers to stop growing it.  They would be killed for doing so, as they could not pay the tax imposed upon them by the terrorists.  Buying up the crop would not work, either, because the farmers would be killed for denying al-Qaeda its levy, and because other sections of the country where opium is not grown now would see growth in supply to be sold then to Uncle Sucker.

So who is right in all this?  Frankly, I do not know.  But I do know one thing: Defeat in Afghanistan would, as with defeat in Iraq, be a foreign policy catastrophe for America, and would surely energize jihadi worldwide.  Thus, so long as victory appears achievable, we owe it to ourselves to try.

Bottom Line.  America can sustain participation in the conflict so long as three prerequisites are met: (1) low casualties; (2) tolerable demand on resources--both human and material; (3) an acceptable, clear strategic goal.  Casualties could spike this summer, and if the spike is too high, Team 44 may well exit stage left.  Further deepening of our economic distress could make even a light burden seem heavy, although pulling out would, in the longer run, prove penny-wise and pound-foolish.  As for a goal, denying al-Qaeda the ability to plan and captain attacks from Afghanistan suffices.  If, on top of that, we can get functioning, moderate civil government, that is even better, but such is a desirable, not an absolutely necessary, goal.

Remember above all: We did not lose the Vietnam War on the battlefield.  We lost it in America's living rooms, among the political elites who turned decisively against the war in 1968.  Our soldiers did not fail us; we failed them.  Our soldiers today think that they can prevail in Afghanistan.  So let's give them every chance to do so.

Palin Preoccupied: Governance Calls

This TAS piece on Sarah Palin explains why the lady has been absent from countless events to which she has eagerly been invited, since the campaign ended.  She is a Governor, and is actually governing, by carrying a full load of issues at the present time.  Enjoy a nice article.

Pat Oliphant Sinks into Anti-Semitic Swamp

If this March 25, 2009 Pat Oliphant cartoon is not vicious anti-Semitism, what is?

UN: Free Speech, Hah!

In a spirit Pat Oliphant can appreciate--so long as his cartoons are not affected--the UN Human Wrongs Council passed over Western country objections a resolution protecting Muslims from criticism under the rubric of defaming religion.  We tolerate this outrage because we continue to believe that diplomatic good is done by allowing the world's worst human rights violators to vent at our expense.  It is a theological belief--like that in a Mideast "peace process"--and hence immune to refutation by citation to a massive body of inconvenient fact.  Journalist Claudia Rosett notes that next month President 44 will attend the UN's "Alliance of Civilizations" gabfest in Istanbul, where enough diplomatic hot air will be vented to cover up the UN's ongoing and past (and planned future) outrages.  Let One World Community Follies continue.

Index 3/27/09

8 posts: (1) Bear Stearns: Inside Story of Wall Street Hell's Harbinger--Classic; (2) AIG: Dodd's Spousal Connection--The Home Front; (3) Geithner II: Regulating Wall Street--and Main Street Too?--The Home Front; (4) Geithner Toxic Assets Plan: More Views--The Home Front; (5) Dialing for Depreciating Deficit Dollars: How Will China Answer?--"It's the Earth Stupid!"; (6) Warming Watch: Arctic Ice Thicker, Climate Hawks Iced Thick; A. Gore Gantry--"It's the Earth Stupid!"; (7) Hezbollah Crosses Rio Grande--9/11, 3/11 & N/11; (8) Israel - Palestine: News & Views--Us v. Them.

Bear Stearns: Inside Story of Wall Street Hell's Harbinger

Yesterday The American Spectator published my book review,"Bear Market's First Bagged Bear", of former investment banker William D. Cohan's book, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.

AIG: Dodd's Spousal Connection

Senator Christopher Dodd (D-CT) can't catch a break.  He was nailed a week ago for slipping an amendment into the February stimulus bill that grandfathered AIG bonus contracts (and others) entered into before the bill passed.  Now, it turns out that his wife was once a director of a Bermuda company controlled by AIG.

Geithner II: Regulating Wall Street--and Main Street Too?

Here is Treasury's 3/26 press release (5 pages) on Geithner's financial regulatory reform proposal.  It covers four areas: systemic risk, consumer protection, gaps in regulation & international coordination.  Its key proposals concern systemic risk: (1) a single independent systemic risk regulator; (2) higher capital standards for firms deemed to pose potential systemic risk; (3) registration and supervision over hedge funds over a minimum asset value threshold (not given); (4) regulation of financial derivatives; (5) rules for money market funds to reduce the risk of sudden massive withdrawals.  The entire 5-pager bears close reading.  And here is Geithner's 3/26 Capitol Hill testimony (9 pages) on his plan.

A detailed review--one that can expose any hidden regulatory "land mines" not instantly apparent--must await Monday's posting--I prefer NOT to rely on news articles alone, for something this important.  (Those who prefer the news article summary can see the NY Times piece I discuss below.)  My quick short-term reaction is this:

Does anyone really believe that a federal government that cannot catch a massive decade-plus fraud, that protects monster entities shoveling out bad loans, cannot think to look closer at financial derivatives despite the 1998 Long-Term Capital debacle, has the likes of a novice President, plus Barney, Chris, Nancy & Co., can really devise a workable plan and implement finely-calibrated, comprehensive regulatory reform?

WSJ pundit Dan Henninger sees Democrats kissing off business in their pursuit of a socialist transformation decidedly hostile to private business.  Author Bartle Bull adds detail on the stealth "Trojan Horse" socialization the President is pursuing.  The WSJ editors see federal regulation as very unlikely to succeed in improving market operations.

NY Times columnist Andrew Ross Sorkin asks "Where's the Plan, Wall Street?"  CEOs on the Street have been, he argues, AWOL on coming up with a long-term plan to address the problems of financial regulation.  Also at NYT, columnist Steven M. Davidoff sees proposals to date as short-term solutions to long-term problems.  The latter article has an intricate analysis of AIG and the serial government bailout efforts since September, which I leave to the reader to go through--it is worth the read.

The Sorkin article makes five proposals for long-term reform: (1) Glass-Steagall 2.0--reviving the 1933 law repealed in 1999, that erected a regulatory wall between commercial and investment banking; (2) a countercyclical capitalization rule that would raise capital requirements when the economy heats up and lower them in times of economic distress; (3) revising mark-to-market (MTM) accounting rules, so that assets carried at lower values during times of pressure do not necessarily trigger regulatory action forcing liquidation of depressed assets; (4) limiting purchase of credit default swaps (those nasty derivatives) to purchasers with a legitimate insurable interest in the underlying security--akin to limiting the purchase of fire or life insurance to those with a legal insurable interest--you cannot take out a policy on your neighbor's life or home; (5) restructuring executive bonus compensation so that multi-rather than single-year performance is applied as a yardstick.

The NY Times reported Thursday that the administration seeks enhanced authority to seize troubled firms, if needed to aid regulatory reform.  Though written based upon leaks before Geithner II was floated Friday, the article has lots of interest.  Its main features, as reported by the NYT:

[T]he Obama administration and the Fed would extend that authority to insurance companies like A.I.G., investment banks, hedge funds, private equity firms and any other kind of financial institution considered “systemically” important. That would let the government for the first time take control of private equity firms like Carlyle or industrial finance giants like GE Capital should they falter.

Of which Fed Chairman Ben Bernanke said, as reported by the NYT:

“If a federal agency had had such tools on Sept. 16, they could have been used to put A.I.G. into conservatorship, unwind it slowly, protect policyholders and impose haircuts on creditors and counterparties.”

The NYT sees problems ahead:

But even as they made their case, administration officials left many of the big questions unanswered. Among them: what kinds of companies are “systemically important” and how does that get decided? What should be the government’s ultimate goal — to wind down the troubled company as quickly and smoothly as possible, or to rehabilitate it and return it to health?

Geithner is also looking at a market clearinghouse to enable trading of credit default swaps, the opaquely-valued securities whose opacity compounded uncertainty and proved lethal.  Geithner is also looking at regulating executive pay packages.  The former is essential, the latter dubious.  Executive pay issues should be relegated to shareholder suits filed in the courts, with case-by-case adjudication of what in each instance serves the interests of the corporation.  Federal rules are too blunt an instrument by far.

Geithner Toxic Assets Plan: An Unexploded Financial A-Bomb?

More commentary on Geithner's toxic assets program is in order.  Begin with two finance professors who praise Geithner II as an improvement that just might work.  Now turn to Mark Steyn's NRO posting on a reply to a letter to the NY Times from an angry AIG employee, re the bonus tax (link in posting).  His point is well taken: There is plenty of talent around to replace those AIG guys, and that they will work for less is not necessarily proof of lesser competence.

FT columnist Martin Wulf sees bank revival still far away.  FT writer William Butler details why the toxic assets plan is toxic itself and thus will not work.  Both articles include charts that add a wealth of useful detail.  AEI scholar Vincent Reinhart believes that hounding of private sector financial types may well undermine the Geithner Plan because of fear that if private partners of Uncle Sam cash in big Congress will move in to take away the proceeds, by calling them excessive. Author Hernando de Soto argues that asset transparency is essential, to enable proper regulation and calculation of investment risk.  Blogger James K. Galbraith sees failure in the cards for the GP.  Forbes columnist Rich Karlgaard thinks the GP can work--if discarded short selling rules and misapplied accounting rules are brought into proper line.  Blogger Rick Newman of Flow Chart explains why Goldman Sachs should return its TARP money.  Former hedge fund manager Andy Kessler sees bear raids having accelerated the reckoning with banks; his article paints a complex, but important, picture of how financial machinations worked in deadly fashion.

But, a chilling tale on AIG bonus issues at its Paris unit raises the specter of a $236B financial explosion: If certain designated individuals depart AIG Paris, counterparties holding financial derivative insurance contracts may be entitled to prompt repayment.  Why?  Get this:

In the white paper, AIG said it had legal obligations to make the retention payments, but it also discussed the "significant business ramifications" of failing to pay. AIG said that employees at the financial-products unit are needed to wind down and sell pieces of that business, which has $1.6 trillion in outstanding trades.

Referring to the circumstances at Banque AIG, the company said that at a minimum, the "disruption associated with significant departures related to a failure to honor contractual obligations would require intensive interactions with regulators and other constituents (rating agencies, counterparties, etc.) to assure them of the ongoing viability of AIGFP as well as its commitment to honoring counterparty contracts and claims."

The risk that the Banque AIG transactions would default if managers departed would represent an unexpected problem for what had been one of the AIG Financial Products businesses that hadn't run seriously aground in recent months, according to AIG securities filings.

So there you have it: the ultimate financial A-bomb that protects those who helped give us this monster mess.  It gets more fun every day, as we learn more about the inner workings of the financial world created largely over the past twenty years, doesn't it?

Dialing for Depreciating Deficit Dollars: How Will China Answer?

Karl Rove details the deficit numbers coming out of Team 44:

Last fiscal year, the deficit was $459 billion. For this fiscal year, it was $569 billion when Mr. Obama took office. Under his proposals, another $1.276 trillion will be added to the deficit this year, for a total of $1.845 trillion.

The CBO says deficits will fall for three years to $658 billion, still nearly 50% larger than any past deficit. After that, deficits go back up every year, reaching the trillion-dollar a year mark again in nine years. By 2019, the debt would reach 82.4% of GDP, a level not seen since 1947. With astonishing candor, even Peter Orszag, the president's budget director conceded these levels of deficits and debt are "unsustainable."

Rove adds more long-term debt figures well worth a read.  Meanwhile, China's appetite for dollars is not infinite, the WSJ editors note in a crisp piece, and Geithner's idea of moving away from the dollar as a "reserve currency" (held by central banks globally as a common medium of monetary exchange) is ghastly--and contradicts his own boss at 1600 Pennsylvania..

Warming Watch: Arctic Ice Thicker, Climate Hawks Iced Thick; A. Gore Gantry

The UK Telegraph reports on another climate hawk classic: a quixotic Arctic quest ISO thinning ice cover, that was thwarted by....cold & ice--and, (bonus--one not paid to AIG) a....polar bear.  No sign of Al "We're the (Climate) 300!"--Gore.  But Albert Gore--let us give him a second surname, Gantry--deserves more notice.  He gets it from Ruth King, leads what really is a Green cult.  She writes:

All of this now brings us to Albert Gore, fibber galore, the guru of the latest envirocult…man-made global warming. Gore won the 2007 Nobel Peace Prize, with the UN's Intergovernmental Panel on Climate Change. This award was more akin to the prizes awarded to the fraudulent Rigoberta Menchu and the loathsome Jimmy Carter than to Dr. Borlaug’s well-deserved Nobel.

 

There are now many more reputable scientists disputing man made global warming than the number who still defend the theory, but that won’t sway the Goreonic cult members which include statesmen, legislators, industrialists, writers, journalists, bipartisan climateers and even Presidents past and present. Oops, I almost left out the scientist Meryl Streep, whose efforts on behalf of false assertions against Alar in 1989 almost ruined the apple growing industry in America.

 

Support for Goreonic theories about man-made global warming is truly bipartisan and in January 2009, Gore persuaded the Senate Foreign Relations to work for a binding carbon cap and push for a new global climate pact by the end of this year in order to avert “catastrophic” global warming. That day the temperatures throughout Florida had dropped to unprecedented lows.

 

Gore tells dirty lies about clean coal, totally avoids mention of safe and clean nuclear energy, and will get apoplectic about domestic drilling for oil.

 

Among legislators, only Gov. Sarah Palin and James Inhofe, Republican of Oklahoma, have really challenged Gore’s theory of man made global warming....

Team 44 is pushing what energy maven William Tucker calls Carter II:

So what's wrong with this picture? Well, the problem is that thirty years hasn't changed the laws of physics. Things like the intensity of sunlight or wind power keep intruding. Nuclear power has two million times the energy density of fossil fuels. Fossil fuels are again ten times as dense as wind and solar. Multiply it out and that comes to a factor of twenty million. How does this manifest itself? Well, in the amount of land that will be required to collect all that solar and wind energy before we can begin using it.

All this came home to me again the other night while I was watching a DVD of Thomas Friedman's "Green is the New Red, White and Blue" special, which ran on the Discovery Channel. At one point, Friedman finds a hydrogen car running on fuel cells and producing zero emissions. The cars costs a million dollars to build but don't worry, he says, mass production will improve that. Then he goes to a hydrogen filling station in California, run by Honda and asks them to fill 'er up. "Where do you get the hydrogen," he asks. The Honda officials show him a solar panel about a block long right next to the station. Friedman's enthusiasm wanes, however, when he learns about the flimsiness of solar energy. "These solar panels," he says, "measuring 700 square feet, take a week to generate enough hydrogen to fill one fuel tank."

Anything solar immediately runs into the same problem. There just isn't that much energy there to begin with. In January 2009 three leading solar researchers, writing in Scientific American, proposed that by 2050 American get all its electricity from solar panels in the Southwestern desert. All we would require would be 46,000 square miles -- about one-third of New Mexico, the fifth largest state. Al Gore repeated this proposal before the Senate Energy Committee in February, although he managed to reduce the requirements to 10,000 square miles, based on the untested claims of Ausra, a California company that hasn't yet built anything but in which he is probably investing. Vaporware doesn't just apply to computers, you know.

California is already well on the way to Carter Country.  But Greens are gearing up to fight...NOT a misprint...alternative energy siting:

That's why California Senator Dianne Feinstein announced last week that she is introducing a bill to set 600,000 acres of Bureau of Land Management holdings in the Mojave Desert off-limits to solar projects. "Such development would violate the spirit of what conservationists had intended when they donated much of the land to the public," she said. "It would destroy the entire Mojave Desert ecosystem," added David Myers, executive director of The Wildlands Conservancy, which originally dedicated some of the land to the BLM.

Hmmm…endangered species? Environmental impact? Didn't anybody ever think of these things before? Yet such environmental objections are inevitable. A thermal solar station requires 50 square miles to generate the same 1000 megawatts (MW) you can get from a mile square coal or nuclear plant. And that's only when the sun shines! A photovoltaic plant will require 75 square miles. A wind farm takes 125 square miles and then only generates electricity 30 percent of the times. To be assure of anything near constant output you probably have to cover 500 square miles in diverse locations. The Nature Conservancy -- which is supporting nuclear -- calls this "energy sprawl." It's a great term. I wish I'd thought of it myself.

Just to pile on, though, here's another consideration. One of the biggest problems with solar panels is that they accumulate dust, dirt and sand, which reduce their efficiency by considerable amounts. Existing installations have to be washed down every few weeks with water. Has anybody thought of where in the middle of the desert you're going to find enough water to wash down 10,000 square miles of solar panels?

Team 44 are true believers--but not in nuclear power, writes Manhattan Institute scholar Max Schulz, having scoured the White House website and found two references to nuclear power--a chat with Canada's Prime Minister and a tribute to an Indian anti-nuclear activist.  Yes, I wrote "Indian": There are no native "Americans"--the Indians marched across the Siberian land bridge and thus are perhaps best called, as the late critic William Henry observed, "Siberian-Americans."

Maybe Sarah can explain nuclear energy and Siberian immigrants to Team 44.

Hezbollah Crosses Rio Grande

The Washington Times reports that Hezbollah is smuggling arms, people & drugs into the US to raise cash and prepare for possible operations.  One prospect: smuggling in suicide bombers because, as one official noted, it is not easy to recruit SBs in Kansas City.  Anyone still oppose a security fence and national ID card?  Well, guess again.

Israel - Palestine: News & Views

Begin with news.  First, Labor Party leader Ehud Barak's decision to join a coalition government headed by Binyamin Netanyahu, the Jerusalem Post editors write, is the next best thing to a Likud-Kadima colation headed by Netanyahu & with Tzipi Livni as foreign minister.  Livni sought power-sharing, and got instead an opposition role; Barak, formerly PM who offered the Palestinians everything and more in 2000, will take a prominent portfolio in the new government.  Labor's partnership deprives Israel's enemies abroad of ammunition by making the charge of right-wing anti-pace leanings untenable.  On the defense technology front, Israel successfully tested its "Iron Dome" anti-rocket system.  What is it?  Iron Dome is a kinetic kill "missile hits missile" technology system.

Now add in views: Jehan Sadat, widow of murdered Egyptian President Anwar Sadat says that lessons of Camp David (the 1979 peace treaty between Israel & Egypt) offer a path for the new Israeli government to make a final settlement with the Palestinians.  The problem with her analysis is that she thinks Israel can make the same kind of land for peace offer to the Palestinians that it made with her late husband.  Except for one small detail: There is, today, on the fair evidence of it, no Palestinian Sadat--even on the West Bank within the Palestinian Authority, let alone in Gaza among Hamas.  Well intentioned, no doubt, the lady is.  But think of it this way: You are in an airliner about to make an emergency landing on the Hudson River.  You need a Chesley Sullenberger to have a chance to survive.  But instead of Sully your pilot is...Michael Moore.  Do you think you would make it?

NY Times pundit Roger Cohen reports that ten prominent foreign policy experts plan to press 44 to lean on Israel--including finding "moderates" within...Hamas--NOT a misprint--after what the group regards as seven years of failure under Team Bush 43.  But who failed?  Bush 43?  Israel?  Or the Palestinians?  The planted axiom in the stance of the ten and those who agree with them is that we and Israel have it within our power to get the Palestinians to make peace.  How many thousands of rockets does it take--fired after unilateral Israeli withdrawals, to refute this?  The Mideast "peace process" mindset is, sadly, a theological position and thus immune to factual refutation.  Any concept that an adversary may be utterly implacable, and thus incapable--barring dramatic change from within the Palestinian polity, that negotiations may not only fail to bring on, but may instead, push farther away by undermining the incentive to change--of making peace, eludes such people, however distinguished their resumes.

There is another issue.  Suppose we find a Palestinian Sadat?  Recall that the original was assassinated in 1981 by Islamists angry at his making peace with Israel in 1977.  Do you think that potential Palestinians Sadats (if any) are not aware of that fact?

Index 3/26/09

8 posts: (1) Iraq: Post-Ethnic Politics--Us v. Them; (2) Iran: Helping Syria, Dissing Us--Us v. Them; (3) Warplanes: The Next 50 Years Belong to the Fifth Generation--Us v. Them; (4) The Next 100 Years--"It's the Earth Stupid!"; (5) Mexico: This Year & Next....--9/11, 3/11 & N/11; (6) Afghanistan: Terror War Bazaar--Us v. Them; (7) Palestinian Verities: The Oslo Scam Repeated--Us v. Them; (8) Team 44's World: Foreign Fantasies, Defense Dreams--Wobble Watch.  On this Foreign Policy/Defense special posting day (more on financial mess Friday), here is an alternate link to my interview last Friday 3/20 on G. Gordon Liddy's radio show (30 mins.), in case the link at right failed for anyone (you will have to scroll down to reach it).

Iraq: Post-Ethnic Politics

A Washington Post front-pager reports that as national elections approach, Iraqi politicains are forming coalitions that transcend ethnic lines:

Negotiations are still under way in most provinces, distrust remains entrenched among nearly all the players and agreements could crumble. But the jockeying after the Jan. 31 elections indicates that politicians are assembling coalitions that cross the sectarian divide ahead of parliamentary elections later this year, a vote that will shape the country as the U.S. military withdraws.

"There is a new political map," said Anwar al-Luheibi, a Sunni adviser to Maliki, who is a Shiite. "And I anticipate this map will be far better than the one we had before."

The negotiations and deal-making mark a departure from politics that have hewed almost exclusively to ethnic and sectarian lines, fomenting the discord that brought Iraq to the precipice of civil war in 2006 and 2007. They represent the first round of a great game that may resolve a question unanswered since Saddam Hussein's fall in 2003: What coalition of interests will find the formula to wield power in Iraq from Baghdad?

This comes a a propitious American moment, too, when election of the nation's first African-American President signals the world that Uncle Sam, too, has transcended ethnic politics once and for all.  it took us 220 years to achieve this; Iraq is headed there after 6.

Iran: Helping Syria, Dissing Us

John Bolton recounts how intelligence bureaucrats and liberal senators (including V-P Biden) refused to believe that Syria even had a nuclear program, let alone that Iran was helping it financially, as now we know is the case.  Especially galling is JB's indictment of the intel bureaucracy:

Key elements of our intelligence community (IC) fought against the idea of a Syrian nuclear program for years. In mid-2003, I had a bitter struggle with several IC agencies -- news of which was leaked to the press -- concerning my testimony before the House Foreign Affairs Committee about the Syrian program. Then Sen. Joe Biden made the Syria testimony an issue in my 2005 confirmation battle to become ambassador to the United Nations, alleging that I had tried to hype concern about Syria's nuclear intentions. (In fact, my testimony, in both its classified and unclassified versions, was far more anodyne than the facts warranted.)

Key IC agencies made two arguments in 2003 against the possibility of a clandestine Syrian nuclear weapons program. First, they argued that Syria lacked the scientific and technological capabilities to sustain such a program. Second, they said that Syria did not have the necessary economic resources to fund a program.

These assertions were not based on highly classified intelligence. Instead, they were personal views that some IC members developed based on public information. The intelligence that did exist -- which I thought warranted close observation of Syria, at a minimum -- the IC discounted as inconsistent with its fixed opinions. In short, theirs was not an intelligence conclusion, but a policy view presented under the guise of intelligence.

Bill Kristol sees Iran having rejected Team 44's "carrots" approach.  Claudia Rosett notes that Iran's mullahs are not the rulers of Finland, a fact President 44 seems not to recognize anymore (he did--or at least said he did, during the 2008 campaign).  The WSJ editors suggest ways to tighten oil sanctions and inflict "pain Iran can believe in".

The following post by consulting firm Stratfor's founder/CEO George Friedman, titled "Iran's View of Obama" and posted online 3/32/09, is reprinted with permission from Stratfor (for ease of reading I did not put everything into italics):

Iran's View of Obama

by George Friedman

March 23, 2009

U.S. President Barack Obama released a video offering Iran congratulations on the occasion of Nowruz, the Persian New Year, on Friday. Israeli President Shimon Peres also offered his best wishes, referring to “the noble Iranian people.” The joint initiative was received coldly in Tehran, however. Iran’s supreme leader, Ayatollah Ali Khamenei, said the video did not show that the United States had shifted its hostile attitude toward Iran.

The video is obviously part of Obama’s broader strategy of demonstrating that his administration has shifted U.S. policy, at least to the extent that it is prepared to open discussions with other regimes (with Iran being the hardest and most controversial case). The U.S. strategy is fairly straightforward: Obama is trying to create a new global perception of the United States. Global opinion was that former U.S. President George W. Bush was unwilling to engage with, and listen to, allies or enemies. Obama’s view is that that perception in itself harmed U.S. foreign policy by increasing suspicion of the United States. For Obama, offering New Year’s greetings to Iran is therefore part of a strategy to change the tone of all aspects of U.S. foreign policy.

Getting Peres to offer parallel greetings was undoubtedly intended to demonstrate to the Iranians that the Israelis would not block U.S. initiatives toward Iran. The Israelis probably were willing to go along with the greetings because they don’t expect them to go very far. They also want to show that they were not responsible for their failure, something critical in their relations with the Obama administration.

The Iranian response is also understandable. The United States has made a series of specific demands on Iran, and has worked to impose economic sanctions on Iran when Tehran has not complied. But Iran also has some fairly specific demands of the United States. It might be useful, therefore, to look at the Iranian view of the United States and the world through its eyes.

From the Iranian point of view, the United States has made two fundamental demands of Iran. The first is that Iran halt its military nuclear program. The second, a much broader demand, is that Iran stop engaging in what the United States calls terrorism. This ranges from support for Hezbollah to support for Shiite factions in Iraq. In return, the United States is prepared to call for a suspension of sanctions against Iran.

For Tehran, however, the suspension of sanctions is much too small a price to pay for major strategic concessions. First, the sanctions don’t work very well. Sanctions only work when most powers are prepared to comply with them. Neither the Russians nor the Chinese are prepared to systematically comply with sanctions, so there is little that Iran can afford that it can’t get. Iran’s problem is that it cannot afford much. Its economy is in shambles due more to internal problems than to sanctions. Therefore, in the Iranian point of view, the United States is asking for strategic concessions, yet offering very little in return

The Nuclear Question

Meanwhile, merely working on a nuclear device — regardless of how close or far Iran really is from having one — provides Iran with a dramatically important strategic lever. The Iranians learned from the North Korean experience that the United States has a nuclear fetish. Having a nuclear program alone was more important to Pyongyang than actually having nuclear weapons. U.S. fears that North Korea might someday have a nuclear device resulted in significant concessions from the United States, Japan and South Korea.

The danger of having such a program is that the United States — or some other country — might attack and destroy the associated facilities. Therefore, the North Koreans created a high level of uncertainty as to just how far along they were on the road to having a nuclear device and as to how urgent the situation was, raising and lowering alarms like a conductor in a symphony. The Iranians are following the same strategy. They are constantly shifting from a conciliatory tone to an aggressive one, keeping the United States and Israel under perpetual psychological pressure. The Iranians are trying to avoid an attack by keeping the intelligence ambiguous. Tehran’s ideal strategy is maintaining maximum ambiguity and anxiety in the West while minimizing the need to strike immediately. Actually obtaining a bomb would increase the danger of an attack in the period between a successful test and the deployment of a deliverable device.

What the Iranians get out of this is exactly what the North Koreans got: disproportionate international attention and a lever on other topics, along with something that could be sacrificed in negotiations. They also have a chance of actually developing a deliverable device in the confusion surrounding its progress. If so, Iran would become invasion- and even harassment-proof thanks to its apparent instability and ideology. From Tehran’s perspective, abandoning its nuclear program without substantial concessions, none of which have materialized as yet, would be irrational. And the Iranians expect a large payoff from all this.

Radical Islamists, Iraq and Afghanistan

This brings us to the Hezbollah/Iraq question, which in fact represents two very different issues. Iraq constitutes the greatest potential strategic threat to Iran. This is as ancient as Babylon and Persia, as modern as the Iran-Iraq war of the 1980s. Iran wants guarantees that Iraq will never threaten it, and that U.S. forces in Iraq will never pose a threat to Iran. Tehran does not want promises alone; it wants a recognized degree of control over the Iraqi government, or at least negative control that would allow it to stop Baghdad from doing things Iran doesn’t want. To achieve this, Iran systematically has built its influence among factions i n Iraq, permitting it to block Iraqi policies that Iran regards as dangerous.

The American demand that Iran stop meddling in Iraqi policies strikes the Iranians as if the United States is planning to use the new Baghdad regime to restore the regional balance of power. In fact, that is very much on Washington’s mind. This is completely unacceptable to Iran, although it might benefit the United States and the region. From the Iranian point of view, a fully neutral Iraq — with its neutrality guaranteed by Iranian influence — is the only acceptable outcome. The Iranians regard the American demand that Iran not meddle in Iraq as directly threatening Iranian national security.

There is then the issue of Iranian support for Hezbollah, Hamas and other radical Islamist groups. Between 1979 and 2001, Iran represented the background of the Islamic challenge to the West: The Shia represented radical Islam. When al Qaeda struck, Iran and the Shia lost this place of honor. Now, al Qaeda has faded and Iran wants to reclaim its place. It can do that by supporting Hezbollah, a radical Shiite group that directly challenges Israel, as well as Hamas — a radical Sunni group — thus showing that Iran speaks for all of Islam, a powerful position in an arena that matters a great deal to Iran and the region. Iran’s support for these groups help s it achieve a very important goal at little risk. Meanwhile, the U.S. demand that Iran end this support is not matched by any meaningful counteroffer or by a significant threat.

Moreover, Tehran dislikes the Obama-Petraeus strategy in Afghanistan. That strategy involves talking with the Taliban, a group that Iran has been hostile toward historically. The chance that the United States might install a Taliban-linked government in Afghanistan represents a threat to Iran second only to the threat posed to it by Iraq.

The Iranians see themselves as having been quite helpful to the United States in both Iraq and Afghanistan, as they helped Washington topple both the Taliban and Saddam Hussein. In 2001, they offered to let U.S. aircraft land in Iran, and assured Washington of the cooperation of pro-Iranian factions in Afghanistan. In Iraq, they provided intelligence and helped keep the Shiite population relatively passive after the invasion in 2003. But Iranians see Washington as having betrayed implicit understandings that in return for these services, the Iranians would enjoy a degree of influence in both countries. And the U.S. opening to the Taliban is the last straw.

Obama’s Greetings in Context

Iran views Obama’s New Year greetings within this context. To them, Obama has not addressed the core issues between the two countries. In fact, apart from videos, Obama’s position on Iran does not appear different from the Bush position. The Iranian leadership does not see why it should respond more favorably to the Obama administration than it did to the Bush administration. Tehran wants to be very sure that Obama understands that the willingness alone to talk is insufficient; some indications of what is to be discussed and what might be offered are necessary.

Many in the U.S. administration believe that the weak Iranian economy might shape the upcoming Iranian presidential election. Undoubtedly, the U.S. greetings were timed to influence the election. Washington has tried to influence internal Iranian politics for decades, constantly searching for reformist elements. The U.S. hope is that someone might be elected in Iran who is so obsessed with the economy that he would trade away strategic and geopolitical interests in return for some sort of economic aid. There are undoubtedly candidates who would be interested in economic aid, but none who are prepared to trade away strategic interests. Nor could they even if they wanted to. The Iran-Iraq war is burned into the popular Iranian consciousness; any candidate who appeared willing to see a strong Iraq would lose the election. American analysts are constantly confusing an Iranian interest in economic aid with a willingness to abandon core interests. But this hasn’t happened, and isn’t happening now.

This is not to say that the Iranians won’t bargain. Beneath the rhetoric, they are practical to the extreme. Indeed, the rhetoric is part of the bargaining. What is not clear is whether Obama is prepared to bargain. What will he give for the things he wants? Economic aid is not enough for Iran, and in any event, the idea of U.S. economic aid for Iran during a time of recession is a non-starter. Is Obama prepared to offer Iran a dominant voice in Iraq and Afghanistan? How insistent is Obama on the Hezbollah and Hamas issue? What will he give if Iran shuts down its nuclear program? It is not clear that Obama has answers to these questions.

Rebuilding the U.S. public image is a reasonable goal for the first 100 days of a presidency. But soon it will be summer, and the openings Obama has made will have to be walked through, with tough bargaining. In the case of Iran — one of the toughest cases of all — it is hard to see how Washington can give Tehran the things it wants because that would make Iran a major regional power. And it is hard to see how Iran could give away the things the Americans are demanding.

Obama indicated that it would take time for his message to generate a positive response from the Iranians. It is more likely that unless the message starts to take on more substance that pleases the Iranians, the response will remain unchanged. The problem wasn’t Bush or Clinton or Reagan, the problem was the reality of Iran and the United States. Only if a third power frightened the Iranians sufficiently — a third power that also threatened the United States — would U.S.-Iranian interests be brought together. But Russia, at least for now, is working very hard to be friendly with Iran.

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Warplanes: The Next 50 Years Belong to the Fifth Generation

This Lockheed Martin 5th Generation Fighter video (5:24) shows footage of the F-22 and F-35.  The former is the world's best air superiority fighter, that has also a great ground attack capability; the latter is an all-purpose high-performance fighter/bomber with vertical take-off capability.  The F-22 is already operational, but Team 44 wants to end the production line.  The F-35 has flown in prototype.  These systems will ensure air dominance for what likely is the final generation of manned aircraft.  They are way, way ahead of competition--the F-22 can defeat 8 (yes, that is an 8) F-15s or F-16s head to head--while our aging F-15 and F-16 airframes are increasingly fragile (wear & tear after thirty years) and vulnerable (growing vulnerability to newer combat aircraft and ground-based anti-aircraft missiles).

Soldier-security consultant Tim Wilson adds that defense procurement is an ideal form of stimulus for the economy.  Read Tim's excellent summary of the benefits, which include 1.5M direct jobs and also preservation of the vital defense industrial base.

The Next 100 Years

Founder/CEO of consulting firm Stratfor, George Friedman, has written a bold book with the presumptuous title, The Next 100 Years: A Forecast for the 21st Century.  Coming from someone less astute than Friedman, it would merit a chuckle.  But there is much good in it.  GF sees Russia, not China, as America's toughest adversary over the next 20 years, with Islamist terrorism winding down, a spent force.  The rise of three key countries will mark the century: Turkey, Poland & Mexico.  Japan will play a key role, too, becoming Asia's greatest power as internal convulsions sap China's vitality.  But, writes GF, the 21st century will be another American Century.

Russia.  A second Cold War will come to full flower this decade, but at the end America will prevail.

China.  The historic tendencies of fragmentation will swamp the central government, and warring provinces will prevent China's rise to Asian, let alone global, leadership.

Turkey.  Straddling the choke-points between Europe and Asia, Turkey will be the chief power in the area, surpassing Iran.

Poland.  Strongest of the former captive nations of the former Soviet Union, Poland will lead the rise of an Eastern Europe as France & Germany are eclipsed.

Mid-Century Space War.  Extrapolating technological progress to date, Friedman presents a riveting scenario pitting a  neo-imperialist Japan, allied with a revanchist Turkey, against America and Poland.

Mexico.  Friedman sees Mexico (already the world's 13th ranking economy) joining the top ten economies in the world by mid-century.  Then Mexico uses the leverage it enjoys as a border state with mixed demographics on both sides--much like the Alsace-Lorraine region that mixes French and German populations--to engage in a rolling reconquista of the territories of the Mexican Cession.  Acquired by America in 1848 after a war that was imperialist on both sides--pitting Mexico's drive north to retain the territories it inherited from the Spanish conquistadores--against America's drive to the Western frontier that made it a Pacific power.  (Imagine a twentieth century with America relegated to being solely an Atlantic power, leaving Spain or Mexico to fend off Japanese imperialism....)  Mexican-Americans will become a powerful enough political force in the late 21st century to paralyze America's response.  Now turn to current events.

A recent TAS Mexico fence piece by national security maven George Wittman discusses the seeds of Friedman's gloomy forecast.  Homeland Security Secretary Janet Napolitano, formerly Governor of Arizona, is waffling on building a high-tech security fence at the southwest border, citing lack of proven need, but in reality, facing intense rising pressure from Hispanics resident in America, whose ethnic resentments are inflamed by the very thought of the fence.  The Justice Department, to add insult to injury, is investigating the high-profile Sheriff Joe of Arizona's Maricopa County at the request of several liberal Members of Congress.  The JD's letter to Sheriff Joe reads, in part:

"The investigation will focus on alleged patterns or practices of discriminatory police practices and unconstitutional searches and seizures conducted by the MCSO, and on allegations of national origin discrimination, including failure to provide meaningful access to MCSO services for limited English proficient (LEP) individuals."

See a problem here?  Friedman is looking at long-term security threats, while our Government frets about alleged racial profiling.

Bottom Line.  What use are scenarios purporting to show how a century will play out, when so much that has transpired in the past 20 years was not foreseen?  And why is Friedman confident that his view is a plausible one?  He relies on an historical perspective rooted in geopolitics, in which permanent features such as geography, generational trends in demography and deeply-ingrained cultural tendencies are integrated with traditional political and economic factors to offer a glimpse of future prospects.

Thus, Turkey's geographical pivot-point location makes it inevitably a central player; China's vast population and diverse demographics make it a major player, but contain the seeds of its vulnerability.  Russia's awesome geographic expanse and its vast mineral resources make it inevitably a major player when its leaders can hold it together.  Poland's position as a plains state with no natural geographic barriers make it permanently vulnerable to invaders from east (Russia) and West (France, Germany).  Japan, England and America are isolated by water, and thus seek maritime supremacy when in search of ascendancy.  The high-tech skills of America and Japan give the two countries an edge in exploiting the frontier of space for both military and commercial purposes.  The contiguity of Mexico's huge landmass with America's southwest make America inherently vulnerable to problems inside Mexico whose consequences can be exported northward (just as Mexico is vulnerable to problems in America being exported southward).  And so on.

Friedman's view may, of course, be completely off in details.  Or a vast global plague may wipe out humanity.  But reading his excellent book forces the readers--and would force serious leaders--to think in a serious way about the complex forces at play in the world.  Strategic thinking is rare in Washington, where tactical expediency and domestic politics often compress strategic horizons to the next election.

And we pay the price of failing to think strategically, seriatim--Pearl Harbor, 9/11, financial meltdown.  And when we are hit, we improvise on the fly, because strategic contingency planning is often slighted.  No, we cannot predict what will come to pass, but we can prepare for a variety of contingencies so that if they come to pass we will have some ideas already in the pipeline, instead of having to improvise from scratch.

Friedman's book is well worth a read.

Mexico: This Year & Next....

This MEMRI Islamist WMD via Mexico video (8:57) shows a cleric suggesting that 4 pounds of anthrax smuggled via Mexico into the US can enable the slaughter of 330,000 Americans--more than 100 9/11s.  the speaker is knowledgeable enough to know that there are 300,000 white militants in the US--he calls them racist rednecks--whom he wishes success in bombing nuclear plants.  Sound like something Americans should be worried about?

Now read what Nancy Pelosi said last week on Arizona's crackdown on illegal Mexican immigrants.  Highlights: "It must be stopped....What value system is that? I think it's un-American. I think it's un-American....."We have to have a change in policy and practice and again ... I can't say enough, the raids must end. The raids must end."  Then, watch the embedded video clip (1:24).

Then go to Sheriff Joe Arpaio's website--he is the Maricopa County, Arizona sheriff whose tough immigration enforcement measures have brought the wrath of Washington and Team 44 and Nancy upon him.  In the Media Releases sub-page are numerous items.  Enjoy this gem of a letter recently sent to the Secret Service about a Team 44 appointee facing indictment!  Sheriff Joe's February 24 fax to House Judiciary Committee Chairman John Conyers (D-MI)--a far-left House member for 54 years!--invites critics in Congress to visit Maricopa County and see for themselves what is going on.  He also sent on the same day a second letter suggesting the Congress should rely on actual fact-finding and not on media reports loaded with misinformation.

What is Sheriff Joe dealing with?  George Will recounts how Mexican drug lords have unleashed a wave of kidnappings in Phoenix.  (A second Will column details law enforcement efforts in Phoenix.)  GW notes that last year over 6,000 killings were recorded in the Mexican drug wars, an increase of over 2,000 versus 2007--and more than the 6-year total of 4,249 Americans killed in Iraq.  (Given that America's population of about 305M is 2-3/4ths times Mexico's about 110M, the American Iraq dead number would have been 11,685 to be a per capita equivalent to Mexico's 2008 toll alone.)  With a 370-mile border abutting Mexico, Arizona is a "transit state" for shipment of illegal drugs to 230 American cities located in "destination states."  GW quotes Arizona Attorney-General Terry Goddard on the drug trade:

Each commodity is stashed in different "drop houses." The people are kept in what Goddard calls "cattle-car conditions." He says that although a million people a year are moving north through Arizona, it is still a seller's market for traffickers in human beings.

Extrapolating from wire transfers of hundreds of millions of dollars from customers in dozens of U.S. states to smugglers operating in Arizona, Goddard believes that the "coyotes" who bring in the human contraband are extremely violent extensions of the cartels. One gang will swoop down on a "drop house" holding smuggled persons, or on a truck carrying such persons on the interstate from Tucson, and then "negotiate" their own deals with people who thought they had already paid for the smuggling. Some who object are shot in the head, which is, Goddard says, "a pretty good technique" for encouraging payments from the others. He estimates that half of Phoenix's 169 murders last year were related to human and drug smuggling.

Mexico, he says, is no longer importing up to four times more pseudoephedrine than its pharmaceutical industry requires. This ingredient was used to make methamphetamines destined for the U.S. market. Today, measured by volume (millions of pounds) and profit (up to 70 percent of the cartels' earnings), the biggest business is still marijuana. It is shipped in two-ton lots, in trucks that cross over the border fence without touching it, using "bridges" that can be assembled in 90 seconds at places identified by spotters who are equipped to live in the desert for weeks at a time. They can report where U.S. border patrols are at any moment.

Ex-CIA operative Gary Berntsen writes that the Drug Enforcement Administration (DEA) is fighting hard against the drug cartel activity inside the USA.  He cites as a key program the Merida Initiative, a multi-nation effort set up in October 2007 by the Bush administration and Mexico (governed by the pro-reform President Felipe Calderon) to combat the drug trade in Mexico, Central America and the Caribbean.  (Merida is the capital of the Mexican province of Yucatan.)  An LA Times front-pager reports that Mexican drug gangs are taking over the independent retail smuggling operations, often by violence.  The NY Times reports that Mexican drug cartel violence has spilled over into the US.  President Calderon's government has put a $2M bounty on the heads of 24 drug lords.  A Mexican magazine editor adds detail on how Mexico is not a failed state, and is working hard to address the drug lord challenge.  Another NY Times report details rising tensions between America and its southern neighbor.

So what is Congress doing about all this?  Charles Krauthammer cites an amendment to the recent $410B budget bill aimed at a serious security threat that should keep Americans awake at night:

That bill, we now discover, contains, among other depth charges, a Teamster-supported provision inserted by Sen. Byron Dorgan that terminates a Bush-era demonstration project to allow some Mexican trucks onto American highways, as required under NAFTA.

....[C]onsider this: There are more than 6.5 million trucks in the United States. The program Congress terminated allowed 97 Mexican trucks to roam among them. Ninety-seven! Shutting them out not only undermines NAFTA. It caused Mexico to retaliate with tariffs on 90 goods affecting $2.4 billion in U.S. trade coming out of 40 states.

Quite apart from A Congress recklessly indifferent to the trade war that protectionist measures are certain to ignite, think of this: Congress is targeting not a possible 4 pounds of anthrax, not catching illegals in Phoenix, but Sheriff Joe...and 97 trucks out of 6.5 million roaming American highways.

Is it any wonder that the Islamists are optimistic about eventually carrying out a WMD strike on American soil?

And what of President Obama?  One way, without spending money on defense (not a priority budget area for him), would be for the President to launch a new, hipper version of Nancy Reagan's anti-drug campaign, using his iconic stature within not only the minority communities, but among white youths as well.  For at the root of Mexico's drug lord problem is the immense demand for drugs inside America.  No buyer, no market for the supplier, and the drug problem is largely removed, as profits are taken out of it.  If 44 is doing anything about this, I have not seen it.

Afghanistan: Terror War Bazaar

The consulting firm Stratfor details how the Karzai government is bargaining with an Islamist faction.  It is a tale emblematic of the complex, "long, hard slog" (Donald Runsfeld's phrase) war we face there.

Palestinian Verities: The Oslo Scam Repeated

Caroline Glick catches a top Palestinian leader admitting how America was fooled by the late Yasir Arafat, as to recognition of Israel:

In an interview on PA television, Dahlan became the first senior Fatah official to openly admit that Fatah has never accepted Israel's right to exist. Dahlan denied reports that in the negotiations toward a Hamas-Fatah government, Fatah representatives are pressuring Hamas to recognize Israel. In his words, "I want to say in my own name and in the name of all my fellow members of the Fatah movement, we are not asking Hamas to recognize Israel's right to exist. Rather, we are asking Hamas not to do so because Fatah never recognized Israel's right to exist."

Dahlan went on to explain how the fiction worked. Arafat was the head of the PLO but also the head of Fatah. While as chairman of the PLO he recognized Israel and pledged to end terrorism and live at peace with the Jewish state, as head of Fatah he continued his war against Israel. Dahlan even bragged that to date, Fatah has killed 10 times more Palestinians suspected of cooperating with Israel's counterterror operations (the same operations the PLO committed to assisting) than Hamas has.

Dahlan explained that all Hamas needs to do is to follow in Fatah's footsteps. It should say that the PA government accepts the West's terms, but in the meantime, those terms will remain inapplicable to Hamas as a "resistance group." In that way, Dahlan explained, Hamas will be able to receive all the West's billions in financial assistance.

Syrian thug-dictator Bashir Assad is, Glick writes, following the same recipe:

Syrian President Bashar Assad this week told Italy's La Repubblica newspaper that he and outgoing Prime Minister Ehud Olmert were just a stone's throw away from a peace deal last year. Last week Assad participated in what was supposed to be an anti-Iranian conference in Saudi Arabia.

Both of Assad's gestures were meant to make the Americans feel comfortable as they renew their diplomatic relations with Syria, cast aside their backing for the UN tribunal set up to investigate Syria's assassination of former Lebanese prime minister Rafik Hariri, begin pressuring Israel to surrender the Golan Heights, and recognize Hamas.

And just as Arafat understood that after he said the magic words the West would ignore his bad behavior, so Assad knew that Washington and Paris would pay no attention when upon returning from Riyadh he announced that Syria's relations with Iran will never be weakened. He knew they will never question his false account of his indirect negotiations with Israel. He and Olmert couldn't have been a stone's throw away from a peace accord, because Assad refused to have any direct contact with Israel.

In the same vein, here is an article by Mideast maven Rachel Neuwirth on how Hamas lied re Gaza and got away with it.

How long will it take Team 44 to catch on to the act--if ever they do?

Team 44's World: Foreign Fantasies, Defense Dreams

Wesley Pruden writes trenchantly on the impending diplomatic offensive President Obama plans to launch, seemingly oblivious to the insuperable obstacles facing such a quixotic effort.  Ralph Peters offers a two-month foreign affairs scorecard for Team 44 and sees failure all over, save for Iraq.  A blogger posted by the Weekly Standard online folks notes that by 2016 US defense spending will be at "European levels"--as the label implies, grossly inadequate to address security challenges, which have a nasty habit of not going away simply because Western democracies decline to prepare to face them.

US News & World Report publisher Mortimer Zuckerman writes that the world cannot live with a nuclear Iran, something Team 44 appears to think can be stopped with talk, despite thirty years of consistent failure of talk to achieve positive results with the mullahs, of whom MZ writes:

The Iranian leaders' judgment is that the current administration is ready to let diplomacy run on and on and on...and will anyway be incapable of making a military move while wrestling with the fallout from our domestic financial collapse. For this reason, many in Iran believe that the United States may be reconciling itself to the idea of living with an Iranian nuclear missile—even though it would be in the hands of an expressly genocidal regime.

Author-columnist Anne Applebaum neatly captures the administration's illusions in a superb column, addressing Team 44's promiscuous use of the "re-set" metaphor:

I do realize that these are early days. The traditional, deadly struggle between the State Department and the National Security Council for influence is only just getting underway, and the president has other things on his mind. But the gift of a "reset button," however translated, was a not a good beginning. If this administration thinks it can transform America's relationships with Russia or anyone else with the flick of a switch and a change of rhetoric, it is living in a virtual reality, not a real one.

A precursor in the illusions department was Nancy Pelosi's 2007 visit to Damascus, when she ignored warnings from Team 43 that her trip would serve Syria's interests and not America's.  Saith Nancy then: "The road to Damascus is the road to peace."  She would make a perfect Secretary of State for Team 44.  Like Team 44, Nancy of Damascus has apparently not heard of the maxim of Frederick the Great's that Lady Thatcher often quoted: "Diplomacy without force is like music without instruments."  Put in a gentler way, the two are not mutually exclusive options, but complementary tools of national power.  Team 44 will learn the hard way, if at all, and America likely will pay the piper for 44's feckless fantasies and daffy defense dreams.

Index 3/25/09

5 posts: (1) AIG: NY Post Great Headline Comeback!--The Home Font; (2) Toxic Liabilities: Majority Party Misrule--The Home Front; (3) Team 44's Toxic Assets Plan + AIG: Perspectives--The Home Front; (4) Money Matters: Inflation Matters Too--"It's the Earth Stupid!"; (5) 2010: Another 1966?--The Home Front.  Extra Item: Watch a video clip (45 sec.) showing the President reading not from Teleprompters at the podium, but a giant TV screen placed in the center of the audience.)

AIG: NY Post Great Headliner Comeback!

Begin today with a chuckle, much needed during down times.  I hope the link to yesterday's NYP headline article is still live this AM, as it should be seen in its beauty.  if not, the headline reads: Half and Half Not.  The front-page headline will be long gone, but Story 3 was headed: Half A$$!!!  Consider these a throwback to the heyday, some 20 years ago, of great NYP headlines.  My personal favorites: Headless Body in Topless Bar, after a killing; Ito Finito?, when during the O.J. trial it looked as if Judge Lance Ito might have to recuse himself because his wife was with LAPD (he didn't, and the rest is history, as Lance favored the defense consistently); F. Lee Jailey, when famed defense lawyer F. Lee Bailey was jailed for refusing to return a legal fee paid by a drug lord; and a pair from the Trump divorce from Ivana: The Trump Scuttle (at the time The Donald owned what is now the US Air Shuttle) and best of all, when Ivan tried to break her $25M pre-nuptial agreement, along with a picture of a pouting Ivana was this gem of gems: Ivana Better Deal.

Toxic Liabilities: Majority Party Misrule

George Will brilliantly shreds Democrat pretensions and makes a case that Team 44 & its narrow-majority Congress are toxic political assets indeed.  GW is almost right: toxic liabilities is more apt;  Here are three paragraphs from a must read column:

The Federal Reserve, by long practice rather than law, has been insulated from politics in performing its fundamental function of preserving the currency as a store of value -- preventing inflation. Now, however, by undertaking hitherto uncontemplated functions, it has become an appendage of the executive branch. The coming costs, in political manipulation of the money supply, of this forfeiture of independence could be steep.

Jefferson warned that "great innovations should not be forced on slender majorities." But Democrats, who trace their party's pedigree to Jefferson, are contemplating using "reconciliation" -- a legislative maneuver abused by both parties to severely truncate debate and limit the minority's right to resist -- to impose vast and controversial changes on the 17 percent of the economy that is health care. When the Congressional Budget Office announced that the president's budget underestimates by $2.3 trillion the likely deficits over the next decade, his budget director, Peter Orszag, said: All long-range budget forecasts are notoriously unreliable -- so rely on ours.

This is but a partial list of recent lawlessness, situational constitutionalism and institutional derangement. Such political malfeasance is pertinent to the financial meltdown as the administration, desperately seeking confidence, tries to stabilize the economy by vastly enlarging government's role in it.

Team 44's Toxic Asset Plan + AIG: Perspectives

An Elder Speaks.  The Washington Times posted an interview with former NYSE & SEC chief Arthur Levitt on the toxic assets plan.  Three key points Levitt made: (1) Video 1 (1:01) - Fed Chairman Ben Bernanke has been "one of the heroes" in this crisis, reaching out to the people "in plain English", unlike previous Fed Chairman (who, Levitt implies, spoke Fed-speak only); (2) Video 2 (3:08) - private interests array "awesome power" against regulatory efforts, using Congress to run interference, and this only stops when there is a disaster like Enron or the financial meltdown, at which time Congress overreacts; (3) Video 3 (1;21) - the Fed's taking away from the SEC regulatory responsibilities can separate authority from regulatory design and enforcement.

Geithner Toxic Assets Plan.  Begin with National Economic Council Chairman Lawrence Summers, appearing Tuesday evening on MacNeil Lehrer.  Add Federal Reserve Chairman Ben Bernanke's Tuesday testimony before the House Committee on Financial Services (chaired by Barney Frank).

AEI financial regulation maven Peter Wallison sees New Plan, Old Fears in the Geithner Plan:

Market prices are low to nonexistent today primarily because potential buyers have no confidence that they will be able to resell the assets without the development of a normal trading market, and the risk of losing financing for a portfolio of assets that cannot be resold is too great for most private-sector buyers to bear. A normal market, in which mortgage-backed securities and other asset-back instruments could be readily sold, has not existed for well over a year.

The Geithner plan goes halfway toward a solution for this problem. It provides several ways for buyers to finance their purchases. Assuming that the government financing made available under the plan will not be limited in time (so that the buyers will not be required to go out and find new private-sector financing), the plan will enable private-sector buyers to acquire and hold the assets, earning profits from the difference between the costs of financing and the assets’ cash flows—in other words, exactly what the banks are doing now. In effect, the banks are being asked to give up significant cash flows at a price that is low enough to attract investors who are not usually in the business of holding assets for their cash returns.

The plan contemplates that the private investors will bid for assets offered by the banks. In this case, the investors’ profits will depend on getting a price that is low enough to compensate for the risks they will be taking, which include the possibility of declines in the assets’ cash flows (coming, perhaps, from more mortgage defaults) and that they may be required to hold the assets for an extended period without the possibility of resale. The banks themselves are willing to do this—that is their business—but others are not set up to manage portfolios of mortgages over many years. The question, then, is whether the banks will be prepared to sell these assets at prices low enough to produce profit levels that will compensate private investor groups not only for their risks but also for alternative uses of their expensive equity capital over what could be several years.

Government financing arrangements can make the purchase of bank assets very attractive. Sufficient low-cost leverage makes small margins highly profitable. But that will mean that the division of the profits, if any, between the private groups and the government will have to heavily favor the private investors. The government will be taking the risk not only of a decline in the value of the assets’ cash flows, but also the interest-rate risk associated with making favorably priced loans to the private groups.

Wallison preferred the original TARP direct asset purchase plan, to which the government can return if Geithner's plan fails:

If the punitive congressional action on bonuses causes the private sector to shy away, there is still one plan that could work—the purchase of assets directly by the government, without private-sector involvement. Sheila Bair, chair of the Federal Deposit Insurance Corporation, noted in a recent interview that “we’re pretty familiar with the market right now. So we think that [it’s] absolutely true that assets are worth more than the current market conditions assign them.” This suggests that the government can complete the purchase of the banks’ troubled assets quickly, if it is willing to acknowledge that market prices should not determine their value.

Using bank’s own cash flow valuations, the so-called “toxic assets” can be purchased at a price that is fair both to the taxpayers and the banks. The banks have priced the assets at their cash-flow values today, discounting for expected future losses. Although private-sector buyers have been unwilling to purchase these assets at the banks’ prices—because they could not be assured of long-term financing—this is not a problem for the government. Under these circumstances, even if the government were to purchase the assets at prices close to the banks’ prices, the taxpayers could profit immediately from the difference between current government borrowing costs and the cash flows the government will receive; and the government can wait indefinitely—until the market returns to normal—before selling the assets. A sale into a normal market, when the requisite private liquidity exists, could enable the government to recover all or most of what it spent to acquire the assets.

The Wall Street Journal editors sees risk in the Geithner approach and would have preferred a Resolution Trust Corporation windup, as happened with the S&Ls twenty years ago:

On the other hand, none of this will be easy to execute. Start with the problem of attracting private investors, who will have to accept Uncle Sam as a 50-50 business partner. Mr. Geithner says investors won't be subject to the same compensation limits as TARP recipients, but what happens if their asset purchases pay off in big profits? Will Congress settle for only half the upside -- especially as it faces epic deficits in the years ahead? Most likely, cries will go up that the buyers were allowed to underpay for the assets and thus make a killing.

Especially after last week, every investor has to ask whether the potential payoff is worth the risk of appearing in the future before a Congressional committee, saying "I do solemnly swear . . ." Maybe Treasury should also sell investors some Nancy Pelosi-political risk insurance.

Then there is the question of whether the banks will sell enough of those assets to make a difference. Mr. Geithner's bet is that the banks will judge that they are better off disposing of their bad assets, even if it means taking losses. With a cleaner balance sheet, they would then have an easier time raising more private capital and repaying their TARP money to Treasury more quickly. The stronger banks may well find this attractive, since they'd emerge faster from asset purgatory and get a competitive jump on the laggards.

The harder call is the weaker banks, such as Citigroup, which fear that taking big losses will weaken them further. Citigroup CEO Vikram Pandit has publicly said that he'd be violating his fiduciary duty to shareholders to take such losses when he thinks the market value of its assets is artificially low. Citi and Bank of America already have federal guarantees against tens of billions in future losses, so they have even less incentive than most to sell and write them down. Much will depend on how much Treasury can raise asset prices with this new liquidity play. Some banks -- some of them big -- will undoubtedly fail anyway.

University of Illinois professor Larry Ribstein calls Geithner's plan a shell game that will enrich private investors at low risk while shafting taxpayers.  Slate's "Moneybox" columnist, Daniel Gross, sees Treasury bribing investors to buy securities that have real profit potential; he sees what he calls a "FUBAR market" as the possible plausible reason.  (FUBAR is a famous military acronym which translates as F#$%^d Up Beyond All Recognition.)

A DC Examiner editorial calls Goldman Sachs "Masters of the Bailout" for their dominance in setting bailout & earlier Wall Street policy.  The NY Times reports that Goldman, for its part, hopes to repay the TARP funds it took last fall within the month, freeing itself to pay bonuses and be free in the marketplace to trade as its discretion dictates.  But this seemingly grand good deed could spell trouble ahead:

If this plays out as Goldman hopes, the good news for taxpayers, of course, is that we will be made whole.

But here’s the asterisk, and it’s a big one. If Goldman succeeds in returning our money, it could put pressure on other banks to give their money back, too, lest they appear weak.

This, you’ll recall, was the logic used by the former Treasury secretary, Henry M. Paulson, last October when he strong-armed some of the chief executives of the nine largest banks to participate in the Treasury plan to inject $165 billion of capital into the banking system, even though some felt they didn’t need it.

The problem now is that many of them may still need the money. And yet they may try to follow Goldman’s lead. (Goldman envy can be costly — we saw what happened to Merrill Lynch when it tried to play catch-up by making riskier bets).

So what will the public think when hedge fund investors snap up assets (Blackstone, Kohlberg Kravis Roberts, Apollo Management) at bargain prices and enrich themselves on the way back up as they did on the way down?

More AIG.  George Soros fingers naked short sales of opaque, arcane credit default swap insurance contracts as the culprit in AIG's implosion, when short sellers mounted a "bear raid."  Partly true, in that AIG's failure to hedge its derivative bet was stupefyingly reckless.  Bu bear raids, in the classic sense, involve market manipulation by unsrcupulous sellers who start a scare, then sell short, then give out good news just after they cover their shorts sales at a lower price.  The bad news about AIG was public, for those who would look, and not phony.  Thus it was not a classic bear raid of the kind that figured prominently in the 1920s and early 1930s stock market.

Manhattan Institute scholar Nicole Gelinas says that public outcry over AIG is now worse than bankruptcy would have been:

A year ago last week, the United States government saved Bear Stearns from bankruptcy, enticing JPMorgan Chase to buy the insolvent company with government guarantees. Fed and Treasury officials—and almost everyone else—argued that the step was necessary to prevent a systemic financial meltdown. We got our systemic financial meltdown anyway. And smashing our core free-market principles to save failing financial firms got us something worse still: a poisonous mob mentality seeping into the American spirit. AIG, the immediate catalyst for the mob, isn’t even a company now. It’s a three-letter shorthand for everything that’s gone wrong in an arduous year of random bailout after random bailout.

She concedes that a bankruptcy route for AIG could have led to devastating consequences:

The government seems never to have considered the prospect of allowing AIG to go through the normal bankruptcy process. True, an AIG bankruptcy would have been a breathtaking event. It could have caused cascading losses for Europe’s banks, necessitating more government bailouts there, and a (bigger) international crisis; it could have caused insurance policyholders to cancel their contracts around the world, straining reserve funds for failed insurance companies; and it could have caused fright in Asia, where AIG insurance has always been a trusted product. Further, in a bankruptcy, AIG’s short-term lenders could have seized their collateral from the firm and sold it instantaneously, further depressing stock and bond markets. So, yes, there’s no question that an AIG bankruptcy would have been terrible—even cataclysmic.

Yet NG argues that the choices made were even worse, and concludes--in an article well worth a full read:

In place of a wrenching but consistent and well-tested process of winding down a failed company, what have we chosen? A world of investors who can never be sure, in the future, that if they put their money into a company that fails, they can depend on a reliable process to recoup some of their funds. Instead, they may find themselves at the mercy of a government veering from whim to whim as it reads the mood of a volatile public.

Even worse, we’ve got a broader public that suspects that its government will not commit to any core principles of fairness. Because the public has utterly lost faith that the government will allow failed executives to take financial losses or failed companies to die, the public is trying, bluntly, to do this job itself—and it’s an ugly, dangerous, and scary spectacle. AIG has now taken its logo off one of its Manhattan buildings, and it is instructing its workers not to put their personal safety at risk by leaving the building wearing anything with the corporate insignia. AIG executives are paying private security guards to stand outside their mansions and protect them from angry trespassers. Worst of all, we’ve got a Congress happy to stir up the mob to deflect its own responsibility for the debacle, as well as a president transparently unsure about what to do: he’s smart enough to realize that an angry mob can quickly turn on its hero.

It’s true that an AIG bankruptcy would have been extraordinarily destabilizing; it’s also true that not all cataclysms are created equal. The current outbreak of mass anger and resentment stands as a good example. In saving the remnants of failed companies from free-market failures, Washington may be sacrificing the public’s confidence that the government can ensure that free markets are reasonably fair and impartial. One year into an era of exhausting and arbitrary bailouts, it’s not clear that our policy of destroying the system in order to save it is going to work.

Here is another blogger with seven reasons why AIG should be allowed to go belly up.  Much in the same vein as the above items, still it is a single web-page worth a look.  AIG, for its part, took its corporate name off its NYC office building, with good reason--protecting its employees from threats & violence.

Economist Thomas Sowell captures what should worry all of us in this mess: more power going to politicians in Washington whose own actions were central to creating the mess in the first place:

The politicians claim to be protecting the taxpayers' money. But having politicians trying to micro-manage any business is far more likely to make those businesses lose more money, including the taxpayers' money.

Securities based on risky mortgages are what toppled financial institutions but it was the government that made the mortgages risky in the first place, by making home-ownership statistics the holy grail, for which everything else was to be sacrificed, including commonsense standards for making home loans.

Politicians and bureaucrats micro-managing the mortgage sector of the economy is precisely how today's economic disaster began. Why anyone would think that their micro-managing the automobile industry, or executive pay across a wide sweep of other industries, is likely to make things better in the economy is a mystery.

Fun for the family, eh?

Money Matters: Inflation Matters Too

The Naked Capitalism blog sees Team 44 repeating Japan's mistakes in the 1990s--pumping out enough liquidity to trigger a short-term recovery, followed by long-term economic funk.  Forbes economist-columnists Brian Wesbury & Robert Stein see inflation rearing its ugly head.  John Taylor, A Stanford economist, writes in the Financial Times in the same vein, and offers more figures on Federal Reserve actions that will likely eventually drive a new round of inflation.  Both articles merit a close read.

The explanation and supporting numbers Taylor presents are quite daunting:

First consider the monetary effects. When the Fed purchases public or private securities or makes loans to banks or to other private firms, it must finance them. The Fed can borrow the funds, or it can ask the Treasury to borrow the funds, or it can do it the old-fashioned way: create money. The Fed creates money in part by printing it but mostly by crediting banks with deposits at the Fed. Those deposits are called reserve balances and are the key component – along with currency – of base money or central bank money which ultimately brings about changes in broader money supply measures.

These deposits or reserves have been exploding as the Fed has made loans and purchased securities. Six months ago reserves were $8bn, in a range appropriate for its interest rate target at the time. As of last week, reserves were nearly 100 times larger at $778bn, the result of creating money to finance loans to banks, investment banks, AIG, central banks and purchases of private securities. Before last week’s federal open market committee meeting, I projected these would increase to $2,215bn by the end of this year if the new Consumer and Business Loan Initiative of the Treasury were to be financed by money creation. With last week’s dramatic announcement, the Fed will have to increase reserves by another $1,150bn to $3,365bn by the end of the year if the securities purchases are financed by money creation. Quantitative easing or credit easing means that the growth rate of the quantity of money increases, but there is no monetary principle or empirical evidence supporting such an explosion.

In other words, the Fed has pumped out $3 trillion in new money to shore up the flagging economy.  We come back, yet again, to the classic money - GDP equation, MV = PT.  Money x Velocity (how often within a given period a typical dollar changes hands) = Price x Transactions.  The right side, PT, is GDP.  When Velocity--V--plummets, as happened late last year, Transactions--T--plummet.  Merchants slash Prices--P--to maintain cash flow.  To shore up the GDP (PT) side, and avoid deflation, monetary authorities pump out M to counteract the fall in V.

As V collapsed in 4Q08. the Federal Reserve doubled the monetary base, from $890B to $1.740TR.  But when V picks up, as the economy recovers, the authorities had (a) better stop pumping out M and (b) begin soaking up excess M as V increases, lest inflation be triggered.  A more in-depth but easily understandable discussion of money velocity in the above MV = PT monetary equation, by superb investment banker and blogger John Mauldin lends more weight than I can alone provide.  (JM's "Outside the Box" is an invaluable free online subscriptions weekly on financial matters.)

Bottom Line.  In sum, I think of it this way: In the MV = PT equation, V drives T & M drives P.  If V falls, T falls; if V rises, T rises.  If M rises (i.e., the money supply expands), P rises--or, at least, a downward (deflationary) price move is checked.  If M falls (i.e., the money supply contracts), there is less money to chase goods; unless V increases, T falls.  When M rises to offset a fall in V, it props up T without pushing up P.  But when V is level or rising, M also rising pushes P up--the classic plain-English definition of inflation as too much money chasing too few goods.

So as the economy recovers, the Fed is supposed to dampen the pace of recovery to mop up inflation.  It is hard--VERY hard--for the Fed to detect in timely fashion such a move and to calibrate a response that tamps down inflationary pressure without pulling the plug on economic recovery.  If the Fed tamps down too hard, how do you think Congress will like that?  Stay tuned for a rocky ride.

2010: Another 1966?

Jeffrey Lord gives an intriguing history lesson on the 1966 election, which saw big gains for the GOP in the first election since LBJ's mega-landslide victory in 1964.  It started with a grassroots housewives revolt, spread like wild fire, and involved campaign efforts by all 7 future Oval Office occupants to date.  Well worth a read.

Index 3/24/09

4 posts: (1) Treasury's Plan, S&L Redux, Schumpeter Vindicated?--The Home Front; (2) Advice for 44 from Sweden (Nationalize), Shelton (De-Monetize) & Becker (Re-Monetize)--"It's the Earth Stupid!"; (3) Federal Reserve: Bernanke's Play, We Pay--The Home Front; (4) States & Stimulus: Sanford, Sarah Soar--The Home Front.

Treasury's Plan: S&L Redux, Schumpeter Vindicated?

Treasury's 5-fact sheet for the Geithner Plan takes a while to digest.  For the immediate poll, the Dow Jones Industrial average soared nearly 500 points, the fifth biggest point gain ever.  Unlike last fall's Paulson Plan, which envisioned the government directly purchasing, at a premium no less, toxic assets and trying to sell them at a profit, Geithner's Plan makes the government an insurer and lender, rather than a direct investor.  This is an improvement the markets clearly liked.

The plan has three parts: (1) legacy loans; (2) legacy securities; (3) TALF assistance.  Here are examples provided by Treasury (note also the block diagram that precedes these, in the Treasury document:

Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

Sample Investment Under the Legacy Securities Program

Step 1: Treasury will launch the application process for managers interested in the Legacy Securities Program.
Step 2: A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury.
Step 3: The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund.
Step 4: The fund manager commences the sales process for the investment fund and is able to raise $100 of private capital for the fund. Treasury provides $100 equity co-investment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund.
Step 5: As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities.
Step 6: The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is launched.

Key is that in addition to an insurance guarantee there is 6:1 leverage in the legacy loan program.  Investors thus face much lessened risk and get lots of protection.

But here's the Bard's "rub": Investors pocket the profits if they win, but the taxpayers eat the losses if investors wager wrong.  This is exactly the mismatch of privatizing reward and socializing risk that was created for benefit of the Savings & Loan industry in the 1980s, leading to a $250B disaster: When you subsidize risky behavior, you get more of it.  Insurers call this "moral hazard."

Schumpeter's Prophecy. Newsweek columnist Rovert Samuleson writes that capitalism itself is endangered by massive government intervention at a time when business has been discredited.  He notes the 1942 prophecy of the great Austrian economist Joseph Schumpeter: "Can capitalism survive?  No, I do not think it can."  Stay tuned.

Advice for 44 from Sweden (Nationalize), Shelton (De-Monetize) & Becker (Re-Marketize)

Team 44 has called in Bo Lundgren, architect of Sweden's 1990s nationalization of failed banks, using "bad banks" to cordon off toxic assets; Sweden recouped half its initial monetary outlay when the program ended.  Finance maven Judy Shelton worries that inflation is "baked into" Team 44's budget plan.  Nobel laureate economist Gary Becker calls on Team 44 to resort more to markets and less to government in addressing economic problems.  A WSJ editorial details the soaring budget projections.  The private debt as a share of GDP, now around 40 percent, will double to 80 percent in the next decade--that is, assuming the economic numbers hold in the meantime.  Care to bet the family farm?

Federal Reserve: Bernanke's Play; We Pay

The WSJ sees Federal Reserve Chairman Ben Bernanke taking over fiscal policy.  For his part, Chairman Bernanke explained Fed policy in a speech last week.  Economist Irwin Stelzer of the Hudson Institute sees inlation following recovery, due to Fed monetary policy.

States & Stimulus: Sanford, Sarah Soar

South Carolina Governor Mark Sanford joined several GOP colleagues in rejecting federal stimulus funding.  He explains why he will only wants to accept federal funds to pay down state debt:

If we're going to spend money we don't have at the federal level, it becomes all the more important that our state balance sheet is in good order -- particularly if this is a protracted downturn. But many people do not realize that the stimulus money runs out in 24 months -- at which point South Carolina will be forced to find a new source of funding to sustain the new level of spending, or to make sharp cuts. Sure, I could kick the can down the road; in two years, I'll be safely out of office. But it would be irresponsible.

If South Carolina could use stimulus money to pay down debt, in two years we will be able to spend, cut taxes or invest even if the federal government can no longer provide more money -- not a remote possibility. In fact, paying debt related to education would free up over $162 million in debt service in the first two years and save roughly $125 million in interest payments over the next 13 years -- just as paying off a family's mortgage early frees up money for other uses.

When you're in a hole, the first order of business is stop digging. South Carolina is in a hole, and it's not a shallow one. Spending stimulus money on ongoing programs would mean 10% of our entire state budget would be paid for with one-time federal funds -- the largest recorded level in state history.

Also, spending stimulus money will delay needed state restructuring. General Motors recently found itself in a similar spot. It needs to be restructured if it is to prosper, but a federal bailout enabled it to put off hard decisions. Likewise, taking federal stimulus money will only postpone changes essential to South Carolina's prosperity. Though well-intended, it forestalls hard choices we must make.

Meanwhile, Alaska Governor Sarah Palin rejected 31 percent of stimulus funds.  Her reason is the same as that given by other GOP Governors: Stimulus funding ends after two years, after creating programs that will have newly-minted political constituencies requiring the state either to continue to fund out of the state budget or fight a nasty political battle to end the programs.

Index 3/23/09

6 posts: (1) Obamamania: Crashing to Political Earth?--The Home Front; (2) Treasury & Fed Plans on Deck--The Home Front; (3) AIG: The Financial Elephant in the Public Room--The Home Front; (4) NY State & Treasury Weighed AIG Bonuses--The Home Front; (5) AIG Bonus: Constitution & Congress--The Home Front; (3) Barney & Chris--OOPS!

Obamamania: Crashing to Political Earth?

Witty Wesley Pruden in his "Pruden on Politics" Washington Times column sees President Obama losing his magic touch with the public, contrasting 44 with President 42:

Bill Clinton kept us entertained with the permanent campaign, enlivened by his permanent stalking of women that rendered his administration a comic-opera interregnum of sex between the Bushes. But that was then, when we could forgive a bubba for being Bubba because the times, they were good and hardly a-changing.

This time around the singing was enthusiastic and the praying, such as it was, was loud and the faith healer was powerful, persuasive and smooth, as only a big noise from the South Side of Chicago could be. Voters who had never heard a faith healer in full voice were easy marks. Who knew the new president and all his men wouldn't have a clue about what to do about trouble? This is the kind of ambush of events that breaks presidents and endows them with a permanent legacy of criminal incompetence. The sight of Jimmy Carter emerging from a White House visit this week set hearts ashudder.

The Keystone Kops confusion distracts public attention from the Islamic bomb in Iran, the war in Afghanistan, the confiscatory tax increases required to pay for the spending spree, renegade Muslim terrorism and the perennial question about what to do to buck up milkleg European "allies." When "trouble" is about what's no longer in Stupid's pocket, he pays attention to the outrage at hand. Money is divided by a decimal system that everybody understands. Pretty speeches, like the platform performance of a faith healer, won't cut it.

Last week, 44's off-key bowling as akin to the Special Olympics joke with Jay Leno backfired badly.  The WSJ editors came to 44's defense, accusing critics of the bowling score crack--which they concede was in poor taste--of using the P.C. club to score points.  Some critics indeed did so, as noted by the WSJ (and would have fired longer & harder had any Republican said the same thing).  But still, it has for so long been viewed as obvious poor taste to make cracks about the disabled--long before P.C. came along--that 44 can be criticized for poor judgment and taste.  Humor requires a finesse 44 evidently lacks.

Peggy Noonan sees a weightless administration flitting about from issue to issue instead of focusing on the economy & national security, and thus dangerously distracted.  Writes PN: "He is willowy when people yearn for solid, reed-like where they hope for substantial, a bright older brother when they want Papa, cool where they probably prefer warmth."  His lack of focus gives impetus to his teleprompter addiction, already the subject of jokes:

This in part is why the teleprompter trope is taking off. Mr. Obama uses it more than previous presidents. No one would care about this or much notice it as long as he showed competence, and the promise of success. Reagan, if memory serves, once took his cards out of his suit and began to read them at a welcoming ceremony, only to realize a minute or so in that they were last week's cards from last week's ceremony. He caught himself and made a joke of it. One was reminded of this the other day when Mr. Obama's speech got mixed up with the Irish prime minister's. Things happen. But the teleprompter trope has taken off: Why does he always have to depend on that thing?

There is a new Web site where the teleprompter shares its thoughts in a breathless White House diary. It's bummed that it has to work a news conference next week instead of watching "American Idol," it resents being dragged to L.A. in Air Force One's cargo hold "with the more common electronic equipment." It also Twitters: "We are in California! One of the interns gave my panels a quick scrub and I'm ready to prompt for the day." And: "Waiting for my boss's jokes to get loaded for Leno!"

Indicative of sheer weightlessness is that Duke's basketball coach told off 44, advising him to worry about the economy and not the college Final Four teams.  President 44 may find that 2009's "March Madness" is a public whose 401(k)s are now 201(f)s and may become 101(c)s.

Liberal stalwart Frank Rich, in his Sunday NY Times column, fears that Team 44 faces a "Katrina Moment" with last week's debacles.  60 Minutes interviewer Steve Kroft asked if 44 were "punch-drunk" last night.  Here is the money material:

“You're sitting here. And you're— you are laughing. You are laughing about some of these problems. Are people going to look at this and say, ‘I mean, he's sitting there just making jokes about money—’ How do you deal with— I mean: explain. . .” Kroft asks at one point.

“Are you punch-drunk?” Kroft says.

“No, no. There's gotta be a little gallows humor to get you through the day,” Obama says, with a laugh.

Fred Barnes identifies five signs of a flailing Presidency: (1) aides protect the Prez; (2) Prez travels to escape DC furor; (3) aides dismiss furor as distraction; (4) aides cannot get their stories straight; (5) Prez resorts to hyperbole in taking on critics.

A UK Daily Telegraph columnist has posted a Top Ten Gaffes for Obama & Biden, with video clips for each.  Ridicule is, as we all know, a powerful weapon.  In good times it is less so, because people are more likely to laugh with the presidential target (as Wesley Pruden noted above)--as with Bill Clinton's legendary loquacity.  But in bad times people are angry, scared and in no mood to be gentle.  In such times people are more likely to laugh at than with the President.

Politico.com printed what V-P Joe Biden said of 44 in his Saturday night speech at the Gridiron Dinner, a Washington power journalist affair.  44 became the first President since to skip his first-year invitation since President Grover Cleveland did in 1885, the very year that the dinner was inaugurated by the Gridiron Club.  Said the Veep:

"Axelrod really wanted me to do this on teleprompter -- but I told him I’m much better when I wing it. … I know these evenings run long, so I’m going to be brief. Talk about the audacity of hope. … President Obama does send his greetings, though. He can’t be here tonight -- because he’s busy getting ready for Easter. (Whisper) He thinks it’s about him. …

“I know that no president has missed his first Gridiron since Grover Cleveland. Of course, President Cleveland really did have better things to do on a Saturday night. When he was in the White House -- he was married to a 21 year old woman. … I understand these are dark days for the newspaper business, but I hate it when people say that newspapers are obsolete. That’s totally untrue. I know from firsthand experience. I recently got a puppy, and you can’t housebreak a puppy on the Internet.

“Now let’s see: we have a Republican speaker who was born in Austria, and tonight’s Democratic speaker was born in Canada. Folks, this is Lou Dobbs’ worst nightmare. … We are now two months into the Obama-Biden administration and the President and I have become extremely close. To give you an idea of how close we are, he told me that next year -- maybe, just maybe -- he’s going to give me his blackberry email address. … But the Obama Administration really is a good team. I am the experienced veteran. Rahm can be an enforcer. And Tim Geithner is always there when you need to borrow money. And no questions asked.

“You know, I never realized just how much power Dick Cheney had until my first day on the job. I walked into my office, and you know how the outgoing president always leaves the incoming president a note in his desk? I opened my drawer and Dick Cheney had left me Barack Obama’s birth certificate. … I now realize that we have to be extra careful when we annunciate new policy ideas to make sure they don’t look like they’re personally motivated. For example, the other day there were a whole bunch of stories about the President’s hair going gray; the next day there’s a story about a Vice President who’s trying to grow new hair, and then the day after that, the two of us come out in favor of stem cell research. That looked bad."

Anyone think those salvos helped the President?

President 44 and Vice-President Biden need to be careful with jokes and stay focused, or the joke--and a very unfunny one--will be, sooner or later, on the Obama administration.

Treasury & Fed Plans On Deck

The WSJ printed Treasury Secretary Timothy Geithner's summary of his Public-Private Investment Plan that will be unveiled today:

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

A Sunday Washington Post front-pager details the Treasury toxic asset plan to be unveiled today.  Its main features, as given by examples:

To deal with the troubled loans, the administration would combine resources from the FDIC and the Public Investment Corp. to create several investment funds that could ultimately buy $500 billion to $750 billion worth of loans.

Here's how the program could work: If a lender wants to dispose of about $10 million worth of residential mortgages, it would approach the FDIC, which would run an auction for interested private investors. If the winning bid ended up fetching an $8 million price tag, the FDIC would provide most of the financing and guarantee losses for as much as $6 million. The Treasury would contribute as much as 80 percent of the rest of the cost of the pool of loans. Private investors would contribute only the remaining amount, yet would be in charge of managing the portfolio of loans. Government officials said they would maintain strict oversight on who will run the funds and how the funds will be managed.

To deal with toxic securities, the government has developed two separate initiatives.

One would expand an existing Fed program, known as the Term Asset-Backed Securities Loan Facility, or TALF, that is aimed at reviving non-traditional lending markets. These markets, which some call the "shadow banking system," provide nearly half of all U.S. consumer loans. The program would be expanded to buy some residential and commercial mortgage-backed securities that have high credit ratings using money from the Public Investment Corp. Although details have not been worked out, the plan would require the Fed to offer loans to private investors for a much longer period than the central bank does under TALF, possibly as long as seven years, sources said.

The administration will also launch public-private investment funds to buy toxic assets that back mortgages and other troubled loans. In this case, the Treasury would provide financing that would match, dollar-for-dollar, money from private investors who participate. In addition, the department would provide a loan to increase the newly formed investment funds' purchasing power. The details of these financing terms, however, have not been worked out, the sources said.

A Sunday NY Times front-pager details Team 44 plans to have the Federal Reserve exercise closer supervision over executive pay; this plan is due to be floated before the April 2 meeting of the G-20, and details are still being hashed out.  The NYT reports:

Officials said the proposal would seek a broad new role for the Federal Reserve to oversee large companies, including major hedge funds, whose problems could pose risks to the entire financial system.

It will propose that many kinds of derivatives and other exotic financial instruments that contributed to the crisis be traded on exchanges or through clearinghouses so they are more transparent and can be more tightly regulated. And to protect consumers, it will call for federal standards for mortgage lenders beyond what the Federal Reserve adopted last year, as well as more aggressive enforcement of the mortgage rules.

The administration has been considering increased oversight of executive pay for some time, but the issue was heightened in recent days as public fury over bonuses spilled into the regulatory effort.

Jed Babbin at Human Events sees the Fed's injection last week of another trillion dollars as a tacit repudiation of the Obama-Geithner policies that Wall Street scorns.  NY Times columnist & Nobel economist Paul Krugman sees Geithner's bad bank plan as a recycling of the original Paulson Plan, substituting loans to private investors for direct government purchase of toxic assets.  It fails, writes PK, to address the problem of insolvent banks (what others call "zombie banks"):

But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

In other words, some big banks will remain underwater even after the toxic stuff is quarantined.  Until a plan to address this passes muster with Wall Street, investor funk likely will persist.

The world indeed awaits....

AIG: The Financial Elephant in the Public Room

Financial writer Michael Lewis dismisses the bonus payment issue as a distraction, pointing to payments to counterparties as a far bigger issue.  Huge firms got bailout money.  Goldman Sachs reaped $13B despite, Lewis writes, having hedged against AIG's collapse, thus anticipating the prospect coming to pass:

I doubt seriously we will ever understand the morality of the $173 billion payment that is the far more serious issue. For instance, Goldman Sachs, which received about 8 percent of the pile, or $13 billion, has claimed publicly that the money was, to them, a matter of indifference, as Goldman had hedged itself against a possible collapse of AIG -- by making bets against AIG.

Lewis chastises the public:

From this episode we can observe several general truths about the financial crisis, and the attempt to end it:

1) To the political process all big numbers look alike; above a certain number the money becomes purely symbolic. The general public has no ability to feel the relative weight of 173 billion and 165 million. You can generate as much political action and public anger over millions as you can over billions. Maybe more: the larger the number the more abstract it becomes and, therefore, the easier to ignore. (The trillions we owe foreigners, for example.)

2) As the financial crisis has evolved its moral has been simplified, grotesquely. In the beginning this crisis was messy. Wall Street financiers behaved horribly but so did ordinary Americans. Millions of people borrowed money they shouldn’t have borrowed and, not, typically, because they were duped or defrauded but because they were covetous and greedy: they wanted to own stuff they hadn’t earned the right to buy.

Is that fair?  Partially.  Investors should indeed have taken on less risk: Housing values do not always go up, neither do stocks; Investors never realized how dangerously leveraged financial firms were, and that the global economy had been placed at grave risk.

But the public is rightly outraged at the thought of their government paying mega-bonuses with their tax dollars.

NY State & Treasury Officials Weighed AIG Bonuses

Last September papers filed by AIG included disclosure of bonus payments.  In October NY State Attorney-General Andrew Cuomo called for no bonus payments to be made.  And in November an exchange of e-mails at Treasury shows that officials there weighed pros & cons of the bonus issue.  Appalling comments by Barney Frank at last week's House Banking, Housing & Urban Affairs show trial of AIG CEO Edward Liddy (hired at $1 per year last fall, having been recruited by the Bush administration) show how Hill politicos are scrambling to get on the right side of public outrage.  Not so top chieftains at three huge banks (BOA, JP Morgan Chase & Citi), who assailed efforts to tax bonuses as unfair and likely to cause talent to flee.  One Wall Streeter at Citi says taxing his pay above $250k income will make him ask for a sabbatical, to keep his income down. Perhaps, but reading the op-ed gives a sense of how far removed from the rest of America Wall Street types are--the mind reels.  Suzanne Garment, longtime Washington hand, believes that the President failed to take steps to contain populist anger.  SG is a sharp analyst of things Beltway, but in this case I find her expectation unrealistic.  Intense populist anger is inevitable given huge bonuses paid by ordinary taxpayers to institutions whose reckless investing nearly destroyed the global financial system--and may, given more government policy blunders, yet help to do so.

On Fox's The Cost of Freedom (essentially the Forbes gang + friends), Forbes columnist & Fox Business Network pundit Elizabeth MacDonald had the best answer.  "E-Mac" said that the stars of the financial unit, which lost $40.5B, should be given bonuses in AIG stock, detention rather than retention bonuses, and that there are plenty of laid-off Wall Streeters who have the talent and would work for less.  E-Mac called AIG the American Insatiable Group.

AIG Bonus: Constitution & Congress

Add United States v. Fuller (1973) to your Supreme Court case file.  Justice Rehnquist (then an Associate Justice--he did not become Chief Justice until 1986) explained an exception to the just compensation rule, one which can by analogy be applied (see below) to the AIG bonus nullification by Congress:

These cases go far toward establishing the general principle that the Government, as condemnor, may not be required to compensate a condemnee for elements of value that the Government has created, or that it might have destroyed under the exercise of governmental authority other than the power of eminent domain. If, as in Rands, the Government need not pay for value that it could have acquired by exercise of a servitude arising under the commerce power, it would seem a fortiori that it need not compensate for value that it could remove by revocation of a permit for the use of lands that it owned outright.

We do not suggest that such a general principle can be pushed to its ultimate logical conclusion. In United States v. Miller, supra, the Court held that "just compensation" did include the increment of value resulting from the completed project to neighboring lands originally outside the project limits, but later brought within them. Nor may the United States "be excused from paying just compensation measured by the value of the property at the time of the taking" because the State in which the property is located might, through the exercise of its lease power, have diminished that value without paying compensation.

Equally, argues legal scholar Bruce Fein (on Fox News, not posted online), this can be applied to wealth created by bailout funding.  AIG was bankrupt, its assets subject to claims by creditors that exceeded their value.  In comes Uncle Sucker, he ponies up gazillions, thus creating the very wealth that payment of bonus money would tap.  Hence, taxpayers can decline to pay the bonuses.

Bloomberg New reports that the House bill that passed last week was carefully crafted so that courts are likely to uphold the law.  It is cast in general language to avoid being tagged as a bill of attainder; its exemption provision enabling qualifying companies to escape the bonus rule disposes of ex post facto arguments.  According to constitutional scholar Lawrence Tribe, as quoted in the BN report:

The measure doesn’t single out employees at AIG and instead uses general language affecting all companies receiving more than $5 billion in federal bailout money. Bonuses for employees at Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley would be affected.

Tribe also pointed to a provision in the measure exempting executives at companies that repay enough bailout funds to reduce the government’s investment below $5 billion.

That provision “makes it clear that the goal is not to punish corporate executives generally, but is simply to ensure the appropriate use of government funds,” Tribe said in an e- mail.

Finally, courts historically have been reluctant to intercede and overturn tax legislation (much to the distress of taxpayers galore).

This does not, however, mean that there are no adverse consequences to the government's action, even should it be upheld in court.  The NY Times reports today that high-octane private investors are shying away from joining a trillion-dollar partnership with the government, even given a 95 percent subsidy, for fear that the government will abuse its position:

Three chiefs of investment firms said in interviews that they were impressed with the terms of the program — which would have the government lend nearly 95 percent of the money for any investment — but remained reluctant to participate because of the potential for future regulation.

“The deal is good, but it’s not worth it if I’m buying myself into a retroactive tax or a Congressional hearing,” the chief executive of a major investment firm said, insisting on anonymity because he did not want to seem at odds with the Treasury Department in the event that his firm ends up participating.

Which reveals a fundamental real-world truism that Wall Street is painfully discovering anew: If you accept the government as your financial partner in a joint venture, even with a minority stake the government is always senior partner, with plenary managerial authority over the terms and direction of the venture.

Barney & Chris

In prior LFTC postings I have referred to Rep. Barney Frank (D-MA) & Sen. Christopher Dodd (D-CT) as finance chairmen.  LFTC readers deserve more precise terminology re Dodd, and a correction re Frank.  Dodd is actually Chairman of the Senate Committee on Banking, Housing & Urban Affairs.  (In the Senate, the Committee on Finance writes tax laws, a task undertaken in the House by the Committee on Ways & Means.)  Frank is Chairman of the House Committee on Financial Services.  I apologize for any inconvenience caused LFTC readers.

Index 3/20/09

7 posts: (1) AIG: Gordon Gekko Greed Update; Citi's Coda-The Home Front; (2) Kudlow: It's the Yield, Stupid!"; Friedman: "It's the Fed, Stupid!"; Whitney: "It's the Risk, Stupid!"--"It's the Earth Stupid!"; (3) Russian Bombers: Coming to a Hemisphere Near You?--Us v. Them; (4) Seven Nightmares for America--The Home Front; (5) An Eighth Nightmare--Right in DC--The Home Front; (6) One Nightmare Narrowly Missed?--The Home Front; (7) Lyricist Lawrence Passes on to the Sea Beyond--Class & Crass.