Archives for September 2008

NEWS & VIEWS ROUNDUP: September 30

Asia rides high – for the moment

The great Wall Street meltdown is a huge economic and financial event. But might it also signal a historic shift in global politics – a moment that both marks and accelerates the decline of American power?

I have just spent the past two weeks in China and India – and it is clear that the thought has occurred to many people there. Whatever the long-term economic impact on Asia of America’s financial crisis, a psychological shift is already evident.

The success of the Beijing Olympics in August and the failure of Wall Street in September has been a boost to Chinese self-confidence.

Pan Wei, director of the Center for Chinese and Global Affairs at Beijing university, mused aloud to me that: “My belief is that in 20 years we will look the Americans straight in the eye – as equals. But maybe it will come sooner than that. Their system is in chaos and they need our money to rescue them.” [continued…]

They just don’t get it

Oy vey.

That is the technical economic term that best sums up a day in which the House of Representatives refuses to pass a $700 billion rescue plan pushed by the White House and congressional leaders from both parties, Wachovia is taken over in a deal that will have the government potentially owning 10 percent of Citigroup, a few European banks fail, the Federal Reserve and other central banks are forced to inject an additional $300 billion into the global banking system, the Dow Jones industrial average plunges 778 points, and investors everywhere rush to the safety of gold and short-term Treasury bills.

The basic problem here is that too many people don’t understand the seriousness of the situation.

Americans fail to understand that they are facing the real prospect of a decade of little or no economic growth because of the bursting of a credit bubble that they helped create and that now threatens to bring down the global financial system. [continued…]

Failure written in West Bank stone

The latest phone call came from a journalist in Denmark. Why, he asked, has Israeli settlement in the West Bank continued despite peace negotiations with the Palestinians?

As a historian of settlements, I’m used to this question. Outgoing Prime Minister Ehud Olmert insists that Israel’s future depends on a two-state solution. Building new homes in settlements only makes it more difficult to withdraw. When President Bush convened the Annapolis conference last November, there was media buzz about a settlement freeze. Olmert said that every request to build from within the government required his approval. Yet in the past year, construction has increased — despite Olmert’s talk, despite Bush’s supposed commitment to his 2003 “road map” plan with its freeze on settlement.

Nearly a thousand housing units are being built in Maale Adumim, according to Peace Now’s Settlement Watch project. At Givat Zeev, another of the settlements ringing Jerusalem, a 750-unit project was approved this year. The government has asked for bids on building nearly 350 homes in Beitar Illit, also near Jerusalem. Meanwhile, hundreds of homes have been added at settlements deep in the West Bank, with the government’s acquiescence if not approval. [continued…]

Olmert says Israel should pull out of West Bank

Prime Minister Ehud Olmert said in an interview published on Monday that Israel must withdraw from nearly all of the West Bank as well as East Jerusalem to attain peace with the Palestinians and that any occupied land it held onto would have to be exchanged for the same quantity of Israeli territory.

He also dismissed as “megalomania” any thought that Israel would or should attack Iran on its own to stop it from developing nuclear weapons, saying the international community and not Israel alone was charged with handling the issue.

In an unusually frank and soul-searching interview granted after he resigned to fight corruption charges — he remains interim prime minister until a new government is sworn in — Mr. Olmert discarded longstanding Israeli defense doctrine and called for radical new thinking, in words that are sure to stir controversy as his expected successor, Foreign Minister Tzipi Livni, tries to build a coalition. [continued…]

Bibi: I’ll resume settlement activity

Binyamin Netanyahu will resume building in existing West Bank settlements if he is elected prime minister, the opposition leader told Walla! News on Sunday.

“I don’t understand why there can be natural growth in Arab neighborhoods, but not in Jewish neighborhoods,” he said. “There is a difference between the plans of a family that has more children and wants to close off its balcony and the building of additional neighborhoods. There is no reason why there shouldn’t be development of existing [Jewish] neighborhoods.”

The opposition leader reiterated that there was currently no chance of a peace deal with the Palestinian Authority and therefore, the only option was an economic arrangement. He said that after such an agreement had been kept properly, a peace deal could be examined. [continued…]

American diplomats meet Syrians in sign of thaw

Senior American and Syrian diplomats held a series of meetings over the past week here, a sign of a potential thaw between the U.S. and a country that President George W. Bush has alleged is a principal sponsor of international terrorism.

A State Department official said the U.S. used the talks as an opportunity to list its grievances with Syria. But the diplomats also discussed Washington’s support for peace talks between Syria and Israel over the future of the disputed Golan Heights region, participants in the talks said. The two sides also talked about Damascus’s role in the security situations in Iraq, Lebanon and the Palestinian territories.

“I consider this a good progress in the American position,” Syrian Foreign Minister Walid Moallem said in an interview with The Wall Street Journal in New York Monday. “We agreed to continue this dialogue.” [continued…]

For U.S. and Sunni allies, a turning point

First Lt. Justin John, 6-foot-4 and built like a linebacker, plopped down on a sofa in front of Ibrahim Suleiman al-Zoubaidi, one of the leaders of the mainly Sunni armed groups that have helped the U.S. military quell violence in Iraq since last year.

Zoubaidi, a small man armed with a revolver, had one thing on his mind: This week officials of Iraq’s Shiite-led government will assume authority over the groups, which have been backed by the United States.

“They will kill us,” Zoubaidi declared. “One by one.”

Across Baghdad, leaders of the groups speak about the transition in similarly apocalyptic terms. Some have left Baghdad, saying they fear that the Iraqi government will conduct mass arrests after the handover. Others are obtaining passports and say they will flee to Syria. [continued…]

Know-alls

If a Muslim chemistry graduate takes an ill-paid job at a farm-supplies store what does it signify? Is he just earning extra cash, or getting close to a supply of potassium nitrate (used in fertiliser, and explosives)? What if apparent strangers with Arabic names have wired him money? What if he has taken air flights with one of those men, with separate reservations and different seats, paid in cash? What if his credit-card records show purchases of gadgets such as timing devices?

If the authorities can and do collect such bits of data, piecing them together offers the tantalising prospect of foiling terrorist conspiracies. It also raises the spectre of criminalising or constraining innocent people’s eccentric but legal behaviour.

In November 2002 news reports revealed the existence of a big, secret Pentagon programme called Total Information Awareness. This aimed to identify suspicious patterns of behaviour by “data mining” (also known as “pattern recognition”): computer-driven searches of large quantities of electronic information. After a public outcry it was dubbed, perhaps more palatably, Terrorism Information Awareness. But protests continued, and in September 2003 Congress blocked its funding. [continued…]

The fight goes on, militants tell Pakistan

When United States President George W Bush and British Premier Gordon Brown interacted with their Pakistani and Afghan counterparts on the sidelines of the United Nations General Assembly in New York last week, they expressed satisfaction for the conflict escalation against the Taliban and al-Qaeda in the South Asian War theater. (See Militants shake off Pakistan’s grip Asia Times Online, Sep 29.)

This escalation, particularly in Pakistan’s tribal agencies, is a gamble based on the tactics used by the US’s chief man in Iraq, General David Petraeus, in 2007. Following a “surge” in the war, the US offered an olive branch to the militants. This created a wedge between al-Qaeda and the Iraqi tribal resistance and led to a significant reduction in the intensity of the resistance.

In Pakistan, there is no sign of this happening. Indeed, the reverse is true. [continued…]

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NEWS & VIEWS ROUNDUP: September 29

The revenge of ideas: Karl Polanyi and Susan Strange

Karl Polanyi’s The Great Transformation: The Political and Economic Origins of Our Time (1944)… is a book of imaginative and wide-ranging historical sociology that traces the rise of the modern capitalist market from the industrial revolution in England in the late 18th century (the “great transformation” of the book’s title) to the convulsions of the 1920s and 1930s and the outbreak of the second world war.

Polanyi’s book begins in the unlikely setting of the Pelican Inn – a pub in Dorset, England’s “west country”, where in the 1790s agricultural labourers met to protect their living standards. It goes on to provide a compelling, if wilfully digressive, account of how modern markets work; and in particular of the inbuilt instability, and inexorable swings and oscillations, that they embody. The author challenges the idea that there is anything “natural” or universal about the modern market; Polanyi emphasises the cultural and political underpinnings of markets, and shows how this complex phenomenon – at once generating wealth and provoking instability and poverty – is the particular outcome of modern industrial society.

His conclusion is a product of the broad, social-democratic, and informed liberal opinion of the time – that is, in the aftermath of the great depression in the 1930s and during a global war: that markets are human and contingent entities that have to be regulated, and managed, by states. There is no such thing as a “hidden hand”. A “pure” market unanchored to other social institutions and practices cannot exist. [continued…]

A little problem with capitalism

What’s happening now on Wall Street is seen as a new story. It is not. It is a very old one.

Karl Marx wrote about it; so did John Maynard Keynes. More recently, tycoon George Soros has pronounced on it, as has the redoubtable Economist, a decidedly pro-free market financial magazine.

This old story is quite simple: Capitalism is unstable. It is an economic system that can be ruthlessly productive. But is also one of wheels within wheels – internal contradictions Marx called them – that can, and regularly do, spin out of control.

Marx, a German philosopher suffering from boils, saw these contradictions as opportunities; he figured that capitalism’s self-destruction would lead to a better world.

Keynes, a British economist who liked to speculate in foreign currency over his morning tea and toast, saw them as problems that could destroy a world he rather liked. The welfare state edifice that bears his name was designed in the post-1945 period to, literally, save capitalism from itself. [continued…]

Washington’s waning way: how bail-outs poison a free market recipe for the world

Debating with Al Gore in the presidential election eight years ago, George W. Bush defined a new, humbler attitude towards the rest of the world. “I’m not so sure the role of the United States is to go around the world and say, ‘this is the way it has got to be’,” he said. “I just don’t think it’s the role of the United States to walk into a country and say: ‘we do it this way, so should you’.”

In one area Mr Bush might be about to get his wish, though not perhaps in the way he expected.

The events of the past few weeks on Wall Street have handed ammunition to the opponents of free markets well outside the financial sector and way beyond America’s shores. A model of freewheeling finance the US has pushed around the world, which had already undergone some tactical withdrawals over the past decade, appears in headlong retreat.

For some, the retreat of the Washington model risks turning into a rout. David Rothkopf, a senior Commerce department official during the administration of President Bill Clinton, says the world is at a turning point. “This is a watershed,” he says. “This is the end of 25 years of Reagan-Thatcherism, ‘leave it to the market, less government is better government’. That is over – period.” [continued…]

Bankrupt economics

What we are witnessing, in the broadest sense, is the bankruptcy of modern economics. Its conceit has been that we had solved the problem of stability. Oh, there would be periodic recessions, but the prospects of a major economic collapse were negligible because we knew how the system worked and could take steps to prevent it. What’s been so unsettling about the present crisis is that it has not conformed to the standard model of business cycles and has not submitted to familiar textbook solutions.

A hallmark of the crisis has been the stark contrast between the “real economy” of production and jobs and the tumultuous financial markets of stocks, bonds, banks, money funds and the like. Even with the 60 percent drop in housing construction since early 2006, the real economy has so far suffered only modest setbacks. Yes, there are 605,000 fewer payroll jobs than there were in December; still, 137.5 million jobs remain. Meanwhile, financial markets verge on hysteria. The question is whether this hysteria will drive the real economy into a deep recession or worse — and what we can do to prevent that. [continued…]

Daring to say loans made no sense

Sometimes, if you want the real answer, you have to ask a dumb question.

Alex Blumberg, a producer at “This American Life,” a public radio show that specializes in old-fashioned storytelling about local slices of Americana, has never owned a house or had a mortgage, let alone covered the financial industry. Nonetheless, he was fascinated as he watched the subprime mess unfold.

His dumb question? “Why are they lending money to people who can’t afford to pay it back?”

In 2006, Mr. Blumberg began bothering his friend Adam Davidson, an experienced business reporter at National Public Radio, about subprime loans. Mr. Davidson, who had a broad knowledge of global capital markets, patiently walked him through collateralized debt obligations, yield and risk curves, and the growing amount of international capital in need of a home. But Mr. Blumberg still didn’t get it. How could securities based on lending money to bad risks be good business?

“I was embarrassed for him,” Mr. Davidson said. “I understood how money flowed around the world and I was talking to big-picture thinkers.”

Soon, Mr. Blumberg was madly surfing the Web and torturing his wife and friends with arcane talk about loan syndication and credit-default swaps. “It was a very unhealthy obsession,” he says now. “I just couldn’t understand how they could expect to be paid off when everyone I knew was maxed out on their credit cards. And these were very big loans.”

He decided to do the story for “This American Life,” a show that has a reputation for discussing things like summer camp and inner demons.

“I told him, I don’t know how you’re going to do a story about mortgage securitization for ‘This American Life,’ but good luck,” Mr. Davidson said. But by December of last year, both Mr. Davidson and the broader markets were beginning to have their doubts about whether the fallout from subprime lending had actually been contained.

The more they talked, the more Mr. Davidson realized the education was going both ways. They eventually came up with a one-hour collaboration between NPR News and “This American Life” called “The Giant Pool of Money” that was broadcast last May and became a much downloaded primer on all the mayhem that followed. [continued…]

Analysis: the failure of the bailout bill

The failure of the financial bailout bill in the House is a classic example of an old adage: all politics is local.

Despite the fact that President George W. Bush and the leadership of both parties lined up behind the bill, the rank and file of both parties — particularly on the Republican side — rebelled in light of polling that showed the American public is deeply skeptical about a planned $700 billion bailout for the financial industry.

With just over one month left before the November election, politicians of both partisan stripes are concerned primarily about one thing: their own political futures. [continued…]

Why the bailout bill failed

So how could a major bill described by the president and both parties’ leaders as critical to well-being of the nation’s — and the world’s — economy go down to defeat?

There are no easy answers here, as the House’s stunning defeat moments ago of the financial bailout legislation is putting us into seemingly uncharted territory. But while the final tally, with 133 Republicans and 95 Democrats voting no, was a surprise — all morning, Hill sources were predicting narrow passage — the signs were there that the measure was in trouble: [continued…]

Bailout plan splits free-market backers

A furious family squabble is raging among free-market advocates over the Bush administration’s economic-rescue plan, between those who say let debt-ridden businesses fail and those who warn of a deep recession if government doesn’t bail them out.

The fight has divided conservatives as well their grass-roots supporters, who make up a large part of the Republicans’ political base and threaten to undermine party unity in the middle of a close presidential election. That grass-roots backlash has to a large degree fueled House Republican opposition to the Treasury’s bailout plan.

Lawmakers say they have been inundated by a wave of voter anger to the proposed bailout of troubled banks and other financial institutions. Republican Sen. John Cornyn of Texas says his offices “have received more calls and e-mails on this issue in a short period of time than were logged even on the contentious immigration issue in 2007.” [continued…]

Obama goes to rural Virginia

Barack Obama’s September 9th trip to Lebanon, Virginia, in the southwestern hill country, came at a moment of deep unease among Democrats. John McCain’s selection of Sarah Palin as his running mate, eleven days earlier, had yielded rich results, in Republican enthusiasm and in polling numbers. Several polls showed McCain pulling ahead of Obama, and some Democrats worried that Obama’s slogan of “Change” was a frail substitute for an emphatic message spelling out just what change he hoped to bring about. It seemed that the Obama camp had been knocked off balance by the Palin factor. Some Democrats feared that Obama himself—cool, cerebral, aloof—was a problem, reflected by the campaign’s apparent inability to counter McCain’s bold communications strategy effectively. Most disturbing, polling revealed that voters were increasingly inclined to trust McCain on the economy—an issue on which the Democrat should have the advantage.

If Obama was feeling deflated, he did not show it when he bounded onto the stage that afternoon in the Lebanon High School gymnasium. The crowd of about two thousand had been warmed up by Cecil Roberts, the fire-breathing president of the United Mine Workers of America (who offered the observation, which was making the rounds that week, that “Jesus was a community organizer”). Obama, shedding his suit jacket and rolling up his shirtsleeves, worked the crowd hard for more than an hour. He joked about the hubbub surrounding McCain’s choice of running mate (“I’ve been to forty-nine states now. The only one I haven’t been to is Alaska, and I realize now that maybe I should have gone up there”), and then began a performance that was as populist in theme and as personal in style as a Harvard lawyer could credibly deliver. He portrayed an America that had lost its dream, becoming a nation whose people stood in unemployment lines as their homes were being foreclosed on. He decried C.E.O.s who “give themselves million-dollar bonuses, even as they’re closing down a plant.” And he portrayed John McCain as being hopelessly out of touch.

“I don’t think John McCain is a bad man,” Obama said. “I just think that he doesn’t get it. I just think that he doesn’t understand what the American people are going through right now.” Obama attacked Republicans for their trickle-down economic theories, and McCain for buying into them. “They call it the ownership society in Washington,” he said. “What they really mean is, You’re on your own. Your plant closes up and you lose your job, you’re on your own. You’re sailing along, trying to look after your kids, if you want to go back to college, you’re on your own. You’re a poor kid, lift yourself up by your bootstraps, you’re on your own. . . . Now, I guess if you think that somebody making four million dollars is still middle class, maybe you think it’s worked. But if you’re like an ordinary person, making thirty or forty or fifty thousand dollars, then you realize how tough things are. And that’s why I’m running for President, because that’s what I come from, that’s where I’ve been.” [continued…]

Union leaders confronted by resistance to Obama

When Mike Pyne and other union foot soldiers knock on doors to promote Senator Barack Obama, they often confront a tricky challenge: how to persuade union members to vote on the basis of their wallets rather than on issues like abortion, gun rights and race.

In battleground states like this one, union voters could be vital to the outcome of the election, and the labor movement has mounted a huge push on behalf of Mr. Obama, the Democratic presidential nominee, built largely around the message that with unemployment rising, the financial system reeling and gasoline and food prices soaring, the nation cannot afford to have another Republican in the White House.

The labor effort appears to be making headway. Social issues have moved to the background while the economy is foremost in the minds of many voters, and Mr. Obama appears to be benefiting politically. People like Tom Crooks, an electrician at a paper company’s research center, are telling union canvassers that they are “definitely leaning” toward Mr. Obama because they are worried about their financial well-being. [continued…]

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NEWS & VIEWS ROUNDUP & EDITOR’S COMMENTS: September 28

Revealed: secret Taliban peace bid

The Taliban have been engaged in secret talks about ending the conflict in Afghanistan in a wide-ranging ‘peace process’ sponsored by Saudi Arabia and supported by Britain, The Observer can reveal.

The unprecedented negotiations involve a senior former member of the hardline Islamist movement travelling between Kabul, the bases of the Taliban senior leadership in Pakistan, Saudi Arabia and European capitals. Britain has provided logistic and diplomatic support for the talks – despite official statements that negotiations can be held only with Taliban who are ready to renounce, or have renounced, violence.

Sources in Afghanistan confirmed the controversial talks, though they said that in recent weeks they had ‘lost momentum’. According to Afghan government officials in Kabul, the intensity of the fighting this summer has been one factor. Another is the inconsistency of the Taliban’s demands.

‘They keep changing what they are asking for. One day it is one thing, the next another,’ one Afghan government adviser with knowledge of the negotiations said. One aim of the initiative is to drive a wedge between Osama bin Laden’s al-Qaeda and the Taliban. [continued…]

Editor’s Comment — Had America not been burdened by a bonehead in the White House surrounded by neoconservative handlers, a weak-kneed Congress, and a too easily terrorized populace, serious dialogue with the Taliban could have started in September 2001. With patience and perhaps not even a single shot fired, al Qaeda could have been dismantled and its leadership captured and there would have neither been a war in Afghanistan, nor in Iraq.

Over the intervening seven years who can say with any certainty that either the Taliban or Saddam would have been able to retain power? At the same time, so many ruptures across the region and around the globe could without doubt have been avoided.

A lack of courage forestalled the quiet approach, while an excess of fear drove the recourse to violence.

Why the West thinks it is time to talk to the Taliban

For the past few months an incongruous figure has passed through the airports of the Middle East and Europe: a senior Afghan cleric who defected from the Taliban. Bearded and in traditional dress, he has unsurprisingly needed the help of the Saudi Arabian and British intelligence services – among others – to pass unhindered between capitals.

He has always travelled in great secrecy, his movements known only to a few individuals at the highest levels of the Afghan government, in Riyadh and among certain Western allies. His mission: to talk to the Taliban leadership about a possible peace deal.

The backing given by the West to these talks is a measure of how badly things have gone wrong in Afghanistan, and how far Western governments are prepared to go to stabilise a deteriorating situation which is costing more in men, money and political capital than they ever imagined. The equally worrying situation in Pakistan, where the Taliban are largely based and where a separate but related insurgency has broken out, has given the initiative a new urgency. [continued…]

McCain’s suspension bridge to nowhere

What we learned last week is that the man who always puts his “country first” will take the country down with him if that’s what it takes to get to the White House.

For all the focus on Friday night’s deadlocked debate, it still can’t obscure what preceded it: When John McCain gratuitously parachuted into Washington on Thursday, he didn’t care if his grandstanding might precipitate an even deeper economic collapse. All he cared about was whether he might save his campaign. George Bush put more deliberation into invading Iraq than McCain did into his own reckless invasion of the delicate Congressional negotiations on the bailout plan.

By the time he arrived, there already was a bipartisan agreement in principle. It collapsed hours later at the meeting convened by the president in the Cabinet Room. Rather than help try to resuscitate Wall Street’s bloodied bulls, McCain was determined to be the bull in Washington’s legislative china shop, running around town and playing both sides of his divided party against Congress’s middle. Once others eventually forged a path out of the wreckage, he’d inflate, if not outright fictionalize, his own role in cleaning up the mess his mischief helped make. Or so he hoped, until his ignominious retreat. [continued…]

Palin punching over her weight on foreign policy

In recent days, conservatives have been circulating an e-mail equating Palin’s meager executive experience with that of Theodore Roosevelt, who had been governor of New York for only two years when William McKinley picked him as his running mate in 1900.

Like Palin, the colorful, outspoken patrician was ridiculed by his opponents.

But there the comparison ends. Roosevelt, who traveled widely, had a passionate, omnivorous intellect.

He wrote 35 books on subjects ranging from wildlife to the history of the American West. He had been a combat unit commander — the famous Rough Riders — in Cuba, and an assistant secretary of the Navy.

Equating him to Palin is obscene. But if a comparison be made, it is this: Roosevelt knew what he was talking about.

Palin is a babe in the woods. And the wolves are ready. [continued…]

In search of Sarah Palin

I was struck watching her in St. Paul, where she appeared after five days of relentless media pressure and blew the doubts away, that she had the jauntiness of one who knew her own gifts: knew she could connect to a crowd and raise the roof and stomp her opponent with her sensible high heels. And of course, benefit from her critics’ instinct to underestimate her.

Now that confidence seems gone, replaced by cockiness — which is just insecurity on steroids. With Charlie Gibson the waters were smooth if shallow; with Katie Couric she seemed forever at risk of drowning in her own syntax. But if she’s growing less surefooted with each passing day of cramming, who can blame her, when the highly experienced Republican pols around her don’t seem to trust her to talk past her talking points. Talk about undermining your brand; if she was picked as the Outsider Original Maverick with the experience and courage to help clean up Washington, you can’t argue that she’s not giving interviews because the press is so mean to her. She’s ready for a cage fight with Nancy Pelosi but won’t sit down with Campbell Brown? [continued…]

Editor’s Comment — The fact that Sarah Palin is neither ready nor likely would ever be ready to become vice president of president, does not need to be belabored. And the fact that she has remained shielded from the press merely reveals either that she’s as scared as are her handlers of the risks involved in speaking for herself, or, she can’t stand up for herself.

The most important questions now are not about Palin but about the process that led to her choice. Either McCain didn’t know enough about her — in which case he’s a reckless fool — or he was so cynical, arrogant and contemptuous as to imagine that her appearances could be stage-managed so rigorously that her deficits could sufficiently be concealed for just two months. In other words, he saw her as an expendable commodity. He took a wager on a Palin tactic but had no interest in a Palin strategy.

What a surge can’t solve in Afghanistan

If there was one foreign policy issue on which Barack Obama and John McCain agreed during Friday night’s debate, it was that the United States should send more troops to Afghanistan. The bipartisan enthusiasm for this surge is so strong that there has been relatively little discussion of whether this strategy makes sense.

So here’s a skeptical look at the issue, drawn from conversations during a visit to Afghanistan this month with Defense Secretary Robert Gates. Rather than more troops, the real game-changer in Afghanistan may be Gates’s plan to spend an extra $1.3 billion on surveillance technology to find and destroy the leadership of the insurgency. [continued…]

Taliban revival sets fear swirling through Kabul

Maryam Rahmani was asleep in her parents’ house in Kabul last month when she was woken by loud praying in the street. “Most of us when we heard that thought, ‘This is it, the Taliban have come to the city’,” she said, nervously fingering the orange shawl wrapped round her against the autumn chill.

In fact it was a lunar eclipse and people had come outside to offer special prayers. But Rahmani’s reaction reflects the jumpiness in Kabul as the Taliban move to within 20 minutes’ drive of the Afghan capital.

“Everyone’s nervous, particularly educated women,” said Rahmani, 26, who works at a women’s project and is completing an economics degree at Kabul University. “I’m hurrying to finish my thesis so I can get my diploma in case the Taliban come back. All my friends are applying for Indian visas.” [continued…]

Bush’s third war

President Bush will leave office without concluding either of the two wars he initiated after 9/11. Now, in the waning months of his administration, the president seems intent on expanding his “global war on terror” still farther. To the existing fronts in Afghanistan and Iraq, he is adding a third: Pakistan.

Eclipsed perhaps only by Iraq, Pakistan ranks in the very top tier of the Bush administration’s foreign policy blunders. Even as it vowed following 9/11 to never compromise with evil, the administration wasted no time in forging an alliance with Pakistani President Pervez Musharraf, the army general who seized power in 1999 through a military coup. Although Musharraf was anything but a democrat, Bush proclaimed him a close friend and ally. Washington quickly began funneling military and economic aid toward Islamabad, the total since 2001 exceeding $13 billion.

Unfortunately, Musharraf was not only a dictator, he was incompetent. Two themes defined his presidency: a gradual erosion of domestic legitimacy that paralyzed and then doomed his regime, and a steady erosion of Pakistan’s already shaky control over its frontier provinces bordering Afghanistan. For Taliban and Al Qaeda fighters ousted from their Afghan sanctuaries, the Pakistani Northwest Frontier became a refuge in which to establish training camps and support areas. Although U.S. civilian and military officials pushed and prodded Musharraf to crack down on this Taliban and Al Qaeda presence, little effective action resulted. [continued…]

The long road to chaos in Pakistan

Hours after a truck bomber slew 53 people last weekend at the Marriott Hotel in Islamabad, Pakistan, the country’s interior minister laid responsibility for the attack on Taliban militants holed up in the Federally Administered Tribal Areas, or FATA, the remote, wild region that straddles the border with Afghanistan.

“All roads lead to FATA,” Interior Minister Rehman Malik said.

If the past is any guide, Mr. Malik’s statement is almost certainly correct.

But what Mr. Malik did not say was that those same roads, if he chose to follow them, would very likely loop back to Islamabad itself. [continued…]

Race for president builds characters

This election campaign is about more than its issues, slogans, proposals, strategies, tactics, attacks or counterattacks. Like most presidential elections, it represents a collision of myths. Every four years, various versions of America wrestle with one another, and through this combat, the nation inspects itself, turns itself over and over, striving to choose not only how it wants to be led but what it wants to affirm, how it wants to be known — really, what it wants to be.

Americans, of course, aren’t always focused on these grand stakes; day to day, they see a more down-to-earth campaign — the stump speeches, the barbs and one-liners, the attack ads. Pettiness consumes the attention of journalists and the prurient interest of the jaded. Sometimes the combat rises to the level of issues and policies. Sometimes it even approximates a rational contest as the candidates try to explain what they think is wrong and what they propose to do about it. Petty or substantive, all these are elements of the surface campaign, which may, in the end, determine who wins and loses but also obscures what is really at stake.

The true campaign is the deep campaign, the subsurface campaign, which concerns not just what the candidates say but who they are and what they represent — what they symbolize. [continued…]

Everybody calm down. A government hand in the economy is as old as the republic.

It has become fashionable to fret that the current crisis on Wall Street marks the end of American capitalism as we know it. “This massive bailout is not the solution,” Sen. Jim Bunning (R-Ky.) warned Tuesday. “It is financial socialism, and it is un-American.” It is neither. The near-collapse of the U.S. financial system and Washington’s sudden and massive intervention to try to shore it up certainly mark a major turning point, but a bailout would represent a thoroughly American next step for our economic system — and one that will probably lead to better times.

Americans may assume that the basics of capitalism have been firmly established here since time immemorial, but historical cataclysms such as the Great Depression strongly suggest otherwise. Simply put, capitalism evolves. And we need to understand its trajectory if we are to bring our economic system into greater accord with the other great source of American strength: the best principles of our democracy. [continued…]

The lost tycoons

With breathtaking speed, the world of large Wall Street investment banks has vanished. Fabled firms, some more than a century old, have been merged out of existence (Bear Stearns, Merrill Lynch), gone bankrupt (Lehman Brothers), or sought asylum as commercial bank holding companies (Goldman Sachs, Morgan Stanley). Why on earth did this happen?

The death of Wall Street has been a long-running, slow-motion crisis, barely discernible to participants who had still booked huge profits in recent years. Beneath the razzle-dazzle of trading desks and the wizardry of esoteric finance lay the inescapable fact that these firms had shed their original reason for being: providing capital to American business. [continued…]

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CAMPAIGN 08: The McCain smirk

The smirk: Could McCain’s facial gestures define debate?

As the spin of Friday night’s debate settled in and both sides staked a claim to victory, one media narrative began to take hold: while Obama may have been over-complimentary of McCain, the GOP nominee was grumpy, mean, and downright contemptuous of Obama, much to his detriment.

A clip circulated by Democrats showed the McCain demonstrating all of those traits: smirking when Obama gave his answers, eyes blinking, unwilling to even look at his opponent.

It was a small visual, but one that seemed to be getting traction among the punditry. Charlie Gibson on ABC and David Brooks on PBS both noted that McCain didn’t look at Obama once. The Atlantic’s Marc Ambinder wrote that McCain sounded “angry and passionate”; MSNBC’s Chris Matthews described the GOP nominee as “troll-like” and “grouchy.”

[continued…]

Editor’s Comment — As George Bush has demonstrated, in and of itself, a smirk does not necessarily result in a political handicap. But with McCain what the smirk reveals — in combination with his unwillingness to make eye-contact with his adversary — is his fear of Obama.

The indispensable knack of “looking presidential” absolutely requires that you do not appear to fear your opponent. While some voters are weighing up the issues and making a purely personal judgment about the candidates, many more are engaged in a form of group behavior that hinges on being able to successfully predict who the winner will be – it’s all about the gravitational pull of power and the fear of social isolation.

Obama passed the looking-presidential test; McCain did not. Little else matters… Until Thursday that is, when — barring some dreadful gaffe by Biden — Sarah Palin will merely reinforce the impression that this is not a team that truly believes in its capacity to govern.

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NEWS & VIEWS ROUNDUP & EDITOR’S COMMENT: September 26

McCain decides to participate in debate

Senator John McCain’s campaign said Friday morning that he will attend tonight’s debate with Senator Barack Obama at the University of Mississippi, reversing his earlier call to postpone the debate so he could participate in the Congressional negotiations over the $700 billion bailout plan for financial firms. [continued…]

Editor’s Comment — As John McCain effortlessly polishes his image as a maverick, he seems to have overlooked what should be obvious: the value a maverick serves is in bucking authority and challenging conventions, yet these are not qualities that most people are looking for when they choose a president.

What McCain has accomplished is to invert the equation that would have cast him as the seasoned and more reliable leader by instead cultivating the impression that it is he — not Obama — who is the unknown quantity. Indeed, the more McCain displays his appetite for unpredictability, the more reason there is to believe that this tendency would be accentuated — not tempered — by high office.

Have a passion for rolling dice? Vote McCain!

What the world wants to know

How would you work with America’s allies in the Muslim world to turn around the widely held misperception there, as evidenced in opinion polls, that the global war against terrorism is actually a war against Islam?

— ASIF ALI ZARDARI, the president of Pakistan

***

Many developing countries — mine included — have made sacrifices to carry out tough economic reforms and have sought “trade and not aid.” To succeed, we need to compete on a level playing field with more developed economies. Is the United States ready to shoulder some of the burden by advocating the elimination or tempering of protectionism and subsidies? The United Nations by itself, with its faults and many achievements, does not lead. Nation-states do. American commitment and leadership is a must for effective multilateral cooperation. Will you demonstrate a renewed commitment to multilateralism and the rule of international law? Will you negotiate actively to agree on a post-Kyoto treaty on global warming and seek to join the United Nations Human Rights Council? Lastly, what would you do to regain the trust of your allies who would like to see the United States engaging in respectful dialogue and leading the way in the fight not merely against terrorism — which must be done — but also against world hunger, poverty, inequality and disease?

— MICHELLE BACHELET, the president of Chile [continued…]

McCain resurrects an old stunt

No wonder John McCain “suspended” his presidential campaign Wednesday to focus in a bipartisan manner on a grave national crisis — he’s been pulling the same stunt for nearly a decade now, boosting his poll ratings by pretending not to care about them.

You probably remember his suspension of the Republican National Convention’s first day of business in order to raise funds and awareness for the victims of Hurricane Gustav (a move that, besides allowing umpteen convention speakers to praise McCain’s selfless patriotism, neatly airbrushed the unpopular sitting president and vice president from the proceedings).

But McCain first used the tactic to spectacular effect way back in March 1999, when — even though his White House run had been chugging along for five months — he postponed the “official announcement” of his candidacy so that the nation could focus as one on the week-old war in Kosovo. “It’s not appropriate at this time,” the somber senator said then, “to launch a political campaign.” [continued…]

Where are the grown-ups?

Many people on both the right and the left are outraged at the idea of using taxpayer money to bail out America’s financial system. They’re right to be outraged, but doing nothing isn’t a serious option. Right now, players throughout the system are refusing to lend and hoarding cash — and this collapse of credit reminds many economists of the run on the banks that brought on the Great Depression.

It’s true that we don’t know for sure that the parallel is a fair one. Maybe we can let Wall Street implode and Main Street would escape largely unscathed. But that’s not a chance we want to take.

So the grown-up thing is to do something to rescue the financial system. The big question is, are there any grown-ups around — and will they be able to take charge? [continued…]

Government seizes WaMu and sells some assets

Washington Mutual, the giant lender that came to symbolize the excesses of the mortgage boom, was seized by federal regulators on Thursday night, in what is by far the largest bank failure in American history.

Regulators simultaneously brokered an emergency sale of virtually all of Washington Mutual, the nation’s largest savings and loan, to JPMorgan Chase for $1.9 billion, averting another potentially huge taxpayer bill for the rescue of a failing institution. [continued…]

Palin talks to Couric — and if she’s lucky, few are listening

A global financial crisis and a not-quite-suspended presidential campaign dominated newspaper front pages and television reports over the last couple of days.

Bad news for America. But good news for Sarah Palin.

The economic crisis and John McCain’s surprising response have drawn attention away from the Republican vice presidential nominee just as she has started to answer more pointed questions from the media.

Her third nationally televised interview, with CBS anchor Katie Couric, found Palin rambling, marginally responsive and even more adrift than during her network debut with ABC’s Charles Gibson. [continued…]

An Open Letter to the American People

This year’s presidential election is among the most significant in our nation’s history. The country urgently needs a visionary leader who can ensure the future of our traditional strengths in science and technology and who can harness those strengths to address many of our greatest problems: energy, disease, climate change, security, and economic competitiveness.

We are convinced that Senator Barack Obama is such a leader, and we urge you to join us in supporting him.

During the administration of George W. Bush, vital parts of our country’s scientific enterprise have been damaged by stagnant or declining federal support. The government’s scientific advisory process has been distorted by political considerations. As a result, our once dominant position in the scientific world has been shaken and our prosperity has been placed at risk. We have lost time critical for the development of new ways to provide energy, treat disease, reverse climate change, strengthen our security, and improve our economy.

We have watched Senator Obama’s approach to these issues with admiration. We especially applaud his emphasis during the campaign on the power of science and technology to enhance our nation’s competitiveness. In particular, we support the measures he plans to take – through new initiatives in education and training, expanded research funding, an unbiased process for obtaining scientific advice, and an appropriate balance of basic and applied research – to meet the nation’s and the world’s most urgent needs.

Senator Obama understands that Presidential leadership and federal investments in science and technology are crucial elements in successful governance of the world’s leading country. We hope you will join us as we work together to ensure his election in November.

Signed,

Click here [PDF] to read the original with signers]

Pakistan warns U.S. troops after exchange of fire

Pakistan warned U.S. troops not to intrude on its territory Friday, after the two anti-terror allies traded fire along the volatile border with Afghanistan.

Thursday’s five-minute clash adds to already heightened tensions at a time the United States is stepping up cross-border operations in a region known as a haven for Taliban and al-Qaida militants.

The clash — the first serious exchange with Pakistani forces acknowledged by the U.S. — follows a string of other alleged border incidents and incursions that have angered many here. [continued…]

Pakistan says 1,000 militants killed near Afghan border

Pakistan said Friday that troops have killed 1,000 Islamist militants in a huge offensive, a day after President Asif Ali Zardari lashed out at US forces over a clash on the Afghan border.

Five top Al-Qaeda and Taliban commanders were among those killed in a month-long operation in Bajaur, currently the most troubled of Pakistan’s unstable tribal areas along the porous frontier, a top official said.

But in a further sign of the instability gripping Pakistan since the bombing of the Marriott Hotel in Islamabad last weekend, three suicide bombers blew themselves up in a shootout with police in Karachi. [continued…]

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NEWS & VIEWS ROUNDUP & EDITOR’S COMMENT: September 25 – updated

Israel asked US for green light to bomb nuclear sites in Iran

Israel gave serious thought this spring to launching a military strike on Iran’s nuclear sites but was told by President George W Bush that he would not support it and did not expect to revise that view for the rest of his presidency, senior European diplomatic sources have told the Guardian.

The then prime minister, Ehud Olmert, used the occasion of Bush’s trip to Israel for the 60th anniversary of the state’s founding to raise the issue in a one-on-one meeting on May 14, the sources said. “He took it [the refusal of a US green light] as where they were at the moment, and that the US position was unlikely to change as long as Bush was in office”, they added.

The sources work for a European head of government who met the Israeli leader some time after the Bush visit. Their talks were so sensitive that no note-takers attended, but the European leader subsequently divulged to his officials the highly sensitive contents of what Olmert had told him of Bush’s position. [continued…]

Editor’s Comment — Israel — with the support of many American political leaders — likes to burnish it’s image as a free and unpredictable player in the Middle East but when it comes to its options on confronting Iran the idea that Israel might “go it alone” is a fantasy only given life by those who want to use the idea as a political tool.

Even if Bush’s exchange with Olmert was a closely guarded secret, he actually made it quite clear that the military option — forever present, though well bolted down, on that proverbial table — was not going to be used while he remained in office.

The president told The Jerusalem Post yesterday that before leaving office he wants a structure in place for dealing with Iran.

That was on May 12. Bush has subsequently not been pressed to explain what this structure might look like, but as I’ve previously speculated, if the president wants to salvage some sort of legacy, then it could well take a diplomatic form through an opening to Iran. As an “October surprise” that would undermine McCain, but I wouldn’t discount the possibility that it comes as a November surprise, right after the election.

As the New York Times said a few days ago:

Secretary of State Condoleezza Rice had hoped to salvage at least part of President Bush’s legacy, and her own, by brokering an Israeli-Palestinian peace deal before Mr. Bush leaves office. That’s looking ever less likely. Ms. Rice could still make history if she got on a plane to Tehran to deliver an offer of a grand bargain.

She could prove that she was serious by proposing to immediately open an American interests section in Tehran — an idea her aides floated a few months ago that seems to have disappeared.

We don’t know if any mix of sanctions and rewards can persuade Iran’s leaders to abandon their nuclear program. But without such an effort, we are certain that Tehran will keep pressing ahead, while the voices in the United States and Israel arguing for military action will only get louder.

Stopping a financial crisis, the Swedish way

A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?

It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent.

But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing. [continued…]

A bailout we don’t need

Now that all five big investment banks — Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs and Morgan Stanley — have disappeared or morphed into regular banks, a question arises.

Is this bailout still necessary?

The point of the bailout is to buy assets that are illiquid but not worthless. But regular banks hold assets like that all the time. They’re called “loans.”

With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn’t, the FDIC has the bridge bank facility to take care of that. [continued…]

Save the world? Hank just didn’t have a clue

The Emperor has no clothes. If you want to know why American capitalism is on the brink of disaster, but also want to understand what will save it, then log on to the C-Span congressional website and watch the interrogations of Henry Paulson, the US Treasury Secretary, by the Senate and House banking committees.

Until last week, I was in a minority of one in arguing that Mr Paulson was personally responsible for suddenly turning the painful but manageable credit crunch that had been grinding away 18 months in the background of the US economy into a global catastrophe. Mr Paulson’s appearances on Capitol Hill, marked by the characteristic Bush-era combination of arrogance and incompetence, are turning my once-outlandish view into conventional wisdom: Henry Paulson is to finance what Donald Rumsfeld was to military strategy, Dick Cheney to geopolitics and Michael Chertoff to flood defence.

Mr Paulson may be a former chairman of Goldman Sachs, but as US Treasury Secretary he does not know what he is doing. His recent blunders, starting with the “rescue” of Fannie Mae, have triggered unintended consequences around the world, resulting in the death-spiral of financial values. But last Friday Mr Paulson outdid even these Rumsfeldian achievements, when he demanded $700 billion from Congress for a “comprehensive and fundamental” solution to the global financial crisis, without apparently having any idea of what he would actually do. [continued…]

U.S. appeals abroad fall flat as leaders see no crisis at home

As the world watched Congress struggle yesterday with a plan to bail out the U.S. financial system, foreign leaders balked at similar fixes for their own economies, a few even dismissing the credit meltdown as an American problem. Some foreign investors who had previously provided crucial injections of capital remained on the sidelines.

Senior U.S. officials, notably Treasury Secretary Henry M. Paulson Jr., have in recent days urged the leaders of other industrialized countries to help prop the global financial system. But the appeals have fallen short. While policymakers and economic analysts in Europe and Latin America said yesterday that they recognized the severity of the challenge facing the global financial system, they saw little need at the moment for major rescue packages in their own countries.

“The situation we face here in Europe is less acute, and member states do not at this point consider that a U.S.-style plan is needed,” said Joaquín Almunia, the European Commissioner for Economic and Monetary Policy in Brussels. [continued…]

Bush aides linked to talks on interrogations

Senior White House officials played a central role in deliberations in the spring of 2002 about whether the Central Intelligence Agency could legally use harsh interrogation techniques while questioning an operative of Al Qaeda, Abu Zubaydah, according to newly released documents.

In meetings during that period, the officials debated specific interrogation methods that the C.I.A. had proposed to use on Qaeda operatives held at secret C.I.A. prisons overseas, the documents show. The meetings were led by Condoleezza Rice, then the national security adviser, and attended by Defense Secretary Donald H. Rumsfeld, Attorney General John Ashcroft and other top administration officials.

The documents provide new details about the still-murky early months of the C.I.A.’s detention program, when the agency began using a set of harsh interrogation techniques weeks before the Justice Department issued a written legal opinion in August 2002 authorizing their use. Congressional investigators have long tried to determine exactly who authorized these techniques before the legal opinion was completed. [continued…]

The time has come for a final report on the 43rd president of the US

As the two men who would succeed him train like Olympic athletes for tomorrow’s foreign policy debate, pause for a moment to complete your final report on the 43rd president of the United States. What would you say?

I would sum up his two terms in four words: hubris followed by nemesis.

Remember the mood music of eight years ago. The greatest power the world has ever seen. Rome on steroids. An international system said to be unipolar, and Washington’s unabashed embrace of unilateralism. The US as “Prometheus unbound”, according to the neoconservative commentator Charles Krauthammer. Wall Street investment bankers bestriding the financial globe as Pentagon generals did the military globe and Harvard professors the soft power one. Masters of the universe. Personifying that hubristic moment: George Walker Bush.

And now: nemesis. The irony of the Bush years is that a man who came into office committed to both celebrating and reinforcing sovereign, unbridled national power has presided over the weakening of that power in all three dimensions: military, economic and soft. [continued…]

As crime increases in Kabul, so does nostalgia for Taliban

Mirza Kunduzai, 58, a slight man with a short white goatee, had almost reached his house after a day of trading in the capital’s open-air currency market when his taxi was forced to stop by six heavily armed men dressed in Afghan National Army uniforms.

For the next week, Kunduzai recounted, he endured one horror after another — beaten unconscious, hooded and handcuffed, strung up by his wrists and ankles, dumped in a filthy latrine — while his family frantically tried to raise the kidnappers’ astronomical ransom demand of $2 million.

“I was 95 percent sure I was a dead man,” Kunduzai said last week. “They said if my family went to the police, they would chop off my fingers and send them to my wife. I begged them to be reasonable. I offered them my house and my farmland back home. Finally, they agreed to settle for $500,000 and released me. I am poor again, but I am thankful to be alive.” [continued…]

Iraq passes provincial elections law

After months of negotiation, Iraq’s Parliament passed a crucial election law on Wednesday, but only by setting aside for future debate the most divisive political issues.

The law could clear the way for provincial elections to take place in much of the country early next year. The elections are viewed by many Iraqi and American officials as crucial for the nation to heal its deep-running political and religious fissures and also to shore up the fragile security gains that have been achieved in recent months.

The question of how to settle a fierce dispute over control of the ethnically mixed and oil-rich northern city of Kirkuk, however, was given to a committee for further study. And an article in an earlier version of the law that provided a limited number of provincial council seats for Iraq’s Christians and other minorities was eliminated from the new bill, stirring outrage among the groups. [continued…]

Contact man’s murder delays Syria nuclear probe: IAEA

The UN atomic watchdog’s probe into alleged illicit nuclear work in Syria has been delayed because the agency’s contact man in Syria was murdered, IAEA chief Mohamed ElBaradei revealed Thursday.

“The reason that Syria has been late in providing additional information (is) that our interlocutor has been assassinated in Syria,” ElBaradei told a closed-door session of the International Atomic Energy Agency’s 35-member board. A recording of his remarks was obtained by AFP.

He did not provide any further details about the identity of the man or circumstances of the assassination. [continued…]

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NEWS & VIEWS ROUNDUP: September 24

It’s judgment day for McCain

Last week, Republican presidential candidate John McCain called for a commission to “find out what went wrong” on Wall Street. It was an excellent suggestion: Public inquiries into Wall Street practices served the country well in the 1930s.

And Mr. McCain has a special advantage to bring to any such investigation — many of the relevant witnesses are friends or colleagues of his. In fact, he can probably get to the bottom of the whole mess just by cross-examining the people riding on his campaign bus. So the candidate should take a deep breath, remind himself that the country comes first, pull the Straight Talk Express over at a rest stop, whistle up his media pals, and begin.

Topic A should be deregulation. Financial institutions are dropping everywhere after playing with poorly regulated financial instruments; the last investment banks standing are begging the government for stricter oversight; and some of our nation’s leading champions of laissez faire have ditched that theory in an extraordinary attempt to rescue the collapsing industry.

The philosophy of government that has dominated Washington for almost three decades is now in ruins, and it is up to Mr. McCain to find out exactly why we believed it in the first place. Why did government stand back and permit all the misconduct that generated all this bad debt? What particular ideas led us to believe that government should just keep its hands off and let markets run their course? [continued…]

McCain aide’s firm was paid by Freddie Mac

One of the giant mortgage companies at the heart of the credit crisis paid $15,000 a month from the end of 2005 through last month to a firm owned by Senator John McCain’s campaign manager, according to two people with direct knowledge of the arrangement.

The disclosure undercuts a remark by Mr. McCain on Sunday night that the campaign manager, Rick Davis, had had no involvement with the company for the last several years. [continued…]

The power of negative thinking

Greed — and its crafty sibling, speculation — are the designated culprits for the financial crisis. But another, much admired, habit of mind should get its share of the blame: the delusional optimism of mainstream, all-American, positive thinking.

As promoted by Oprah Winfrey, scores of megachurch pastors and an endless flow of self-help best sellers, the idea is to firmly believe that you will get what you want, not only because it will make you feel better to do so, but because “visualizing” something — ardently and with concentration — actually makes it happen. You will be able to pay that adjustable-rate mortgage or, at the other end of the transaction, turn thousands of bad mortgages into giga-profits if only you believe that you can.

Positive thinking is endemic to American culture — from weight loss programs to cancer support groups — and in the last two decades it has put down deep roots in the corporate world as well. Everyone knows that you won’t get a job paying more than $15 an hour unless you’re a “positive person,” and no one becomes a chief executive by issuing warnings of possible disaster. [continued…]

Editor’s Comment — As people mature, so do cultures. American culture is still in its infancy. It craves instant gratification. It has boundless energy and little sense of caution. It lives through sensation but has yet to master conceptualization.

Barbara Ehrenreich’s remedy of realism for what she sees as an excess of positivity is easy to advocate, but human beings — whether shaped by a culture in its infancy or one that has acquired maturity — are, as living entities, unrealistic. The will to live, is by its nature, death-denying. In perfect realism, we should be reconciled to our non-existence but the thrust of life pushes us elsewhere.

America is not so much burdened by its positivity than it is by the banality of its aspirations. It’s not that we want too much, but that what we want is so lacking in value. We don’t think too big; we don’t think big enough.

The United States of Mind

Certain regional stereotypes have long since become cliches: The stressed-out New Yorker. The laid-back Californian.

But the conscientious Floridian? The neurotic Kentuckian?

You bet — at least, according to new research on the geography of personality. Based on more than 600,000 questionnaires and published in the journal Perspectives on Psychological Science, the study maps regional clusters of personality traits, then overlays state-by-state data on crime, health and economic development in search of correlations. [continued…]

Rebuilding America, rebuilding ourselves

Seventy-five years ago, our country faced an even deeper depression. Millions of men had neither jobs, nor job prospects. Families were struggling to put food on the table. And President Franklin Delano Roosevelt acted. He created the Civilian Conservation Corps, soon widely known as the CCC.

From 1933 to 1942, the CCC enrolled nearly 3.5 million men in roughly 4,500 camps across the country. It helped to build roads, build and repair bridges, clear brush and fight forest fires, create state parks and recreational areas, and otherwise develop and improve our nation’s infrastructure — work no less desperately needed today than it was back then. These young men — women were not included — willingly lived in primitive camps and barracks, sacrificing to support their families who were hurting back home.

My father, who served in the CCC from 1935 to 1937, was among those young men. They earned $30 a month for their labor — a dollar a day — and he sent home $25 of that to support the family. For those modest wages, he and others like him gave liberally to our country in return. The stats are still impressive: 800 state parks developed; 125,000 miles of road built; more than two billion trees planted; 972 million fish stocked. The list goes on and on in jaw-dropping detail. [continued…]

Guantanamo: government says six years is not long eough to prepare evidence

Imagine being seized in Afghanistan or Pakistan, where you were, perhaps, a completely innocent man, sold for a bounty, or a Muslim soldier, fighting other Muslims in a civil war whose roots lay in the resistance to the Soviet occupation of the 1980s, which was partly funded by the United States.

Then imagine that, both during and after being treated with appalling brutality by US forces, you are given no opportunity to establish whether you are an innocent man seized by mistake, a soldier, or the victim of bounty hunters, and you are, instead, flown halfway around the world to an experimental offshore prison, where you are interrogated about your connections to al-Qaeda and Osama bin Laden.

At no point are you offered the protection of the Geneva Conventions (to which your captors are a signatory), which were designed to prevent the “humiliating and degrading treatment” of prisoners seized during wartime, and also to prevent their interrogation (prisoners may be questioned, but any form of “physical or mental coercion” is prohibited). Moreover, if you struggle to answer the questions put to you — perhaps because you know nothing about al-Qaeda or Osama bin Laden — you are not only interrogated relentlessly, you are also subjected to an array of “enhanced interrogation techniques,” which contravene the UN Convention Against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment, to which your captors are also a signatory.

Now imagine that, after six and a half years of this imprisonment — in which, unlike convicted criminals on the US mainland, you have never been charged or tried, and have not been allowed a single visit from your loved ones — the highest court in the United States rules, in Boumediene v. Bush, that you have habeas corpus rights; in other words, the right to know why you are being held. And finally, imagine that, in response to this ruling, when the judges responsible for establishing the reviews have ordered the cases to be addressed “as expeditiously as possible,” and have set a deadline for the government to comply, your captors turn around and say that, after holding you for up to 2,444 days in Guantánamo, they need more time to prepare a case against you. [continued…]

High stakes in Islamabad and Washington

George Bush and Pakistan’s president, Asif Ali Zardari, have more in common than one might think. As younger men, both had reputations as playboy hell-raisers. As the current, more sober leaders of their respective countries, both are deeply unpopular with large numbers of fellow citizens. For his part, Bush is on his way out. And if the Islamists who bombed the Islamabad Marriott at the weekend have their way, Zardari, husband of the murdered Benazir Bhutto, will surely follow him – one way or another.

The stakes for this odd couple are high. Zardari is engaged in an increasingly fraught political and military campaign not only to retain power but, more importantly, hold the country together in the teeth of an existential threat to democratic, secular governance. The war in Afghanistan has taken deep root inside Pakistan and is now spreading beyond the tribal areas and North-West Frontier Province. Afghan Taliban and foreign jihadis from Kunan, in eastern Afghanistan and beyond, temporarily abandoning the fight with Nato, are now reportedly flocking to Bajaur, Kohat and Swat to join battle with the Pakistani army.

Pakistani military analysts and commentators warn that the challenge to the country’s integrity, though seemingly familiar, is growing more formidable with each passing week. Suicide bombings, almost unknown five years ago, have claimed over 300 lives this year. Recent days have seen heavy fighting, with the army claiming to have killed 60 insurgents. The economy is in deep, destabilising trouble. The UN meanwhile launched an emergency appeal today for $17m to assist more than a quarter of a million internally displaced people in the western border areas. [continued…]

Gates is pessimistic on Pakistani support

Pakistan’s leaders and military cannot publicly support U.S. cross-border operations against militant groups in Pakistan’s western tribal areas, but such strikes are needed to protect American troops in Afghanistan and defend the United States against its gravest terrorist threat, Defense Secretary Robert M. Gates said yesterday.

“We will do what is necessary to protect our troops,” Gates told the Senate Armed Services Committee. Asked whether Pakistan’s government would back unilateral U.S. military operations into Pakistan, he said: “I don’t think they can do that.”

Gates said that despite a growing insurgency in Afghanistan, fueled by fighters from Pakistan, the spring of 2009 is the earliest the Pentagon would be able to send as many as three more U.S. combat brigades there to meet a request of American commanders for about 10,000 more troops. [continued…]

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NEWS & VIEWS ROUNDUP: September 23

FBI investigating companies at heart of meltdown

The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration, The Associated Press has learned.

Two law enforcement officials said Tuesday the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, and insurer American International Group Inc. Additionally, a senior law enforcement official said Lehman Brothers Holdings Inc. also is under investigation.

The inquiries will focus on the financial institutions and the individuals that ran them, the senior law enforcement official said. [continued…]

Buyout plan for Wall Street is a hard sell on Capitol Hill

Treasury Secretary Henry M. Paulson Jr. received an angry and skeptical reception on Tuesday when he appeared before the Senate Banking Committee to ask Congress to promptly give him wide authority to rescue the nation’s financial system.

Mr. Paulson urged lawmakers “to enact this bill quickly and cleanly, and avoid slowing it down with other provisions that are unrelated or don’t have broad support.”

The Federal Reserve chairman, Ben S. Bernanke, who appeared with Mr. Paulson, said the financial system “continues to be very unpredictable, and very worrisome,” and that inaction could lead to a recession. [continued…]

House GOP rises up against Cheney

There was a time when Dick Cheney could turn back a Republican revolt on Capitol Hill.

That time is gone.

House Republicans rose up en masse against their vice president on Tuesday morning to blast an administration proposal that would grant Treasury historic authority to start buying hundreds of billions of dollars in devalued mortgage-related assets, according to members present.

The lines to speak were long, the questions many and sentiment in the Cannon Caucus Room Tuesday swayed heavily against the Treasury proposal. [continued…]

Getting real — and letting the cat out of the bag

Whoa — it seems that Ben Bernanke ditched his prepared testimony and, instead, let the cat at least partly out of the bag.

I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.

First, banks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down …

As I wrote earlier this morning, the whole “take these assets off the balance sheets” line is fundamentally disingenuous; the key question is what price Treasury pays for the assets. And here we have Bernanke effectively saying that it’s going to pay above-market prices — prices that allegedly reflect “hold-to-maturity” value, but still more than private investors are willing to pay. [continued…]

Abrams as McCain’s top foreign policy aide?

Not terribly surprising, but I have it from a reliable source that Elliott Abrams, currently Deputy National Security Adviser for Global Democracy Strategy who also heads the NSC’s Near East office, is regularly briefing the McCain campaign — Randy Scheunemann appears to be the main contact — and has told friends and colleagues that he is confident that he will get a top post in a McCain administration. Now, assuming Abrams is not talking through his hat, I very much doubt that a Democratic-majority Senate would confirm Abrams, who pleaded guilty to essentially lying to Congress during the Iran-Contra affair, to any position that required confirmation (especially as long as Chris Dodd, who clashed frequently and bitterly with Abrams when the latter served as Assistant Secretary of State for Inter-American Affairs under Reagan, remains alive). That would leave his current abode — the NSC — as his most likely destination. But he is already a deputy national security adviser. Does that mean that he thinks he will be THE Deputy National Security Adviser — in charge of the day-to-day operations of the NSC — or even THE National Security Adviser in the McCain White House? [continued…]

Obama’s foreign policy advantage

A funny thing happened on the morning of July 19 — Prime Minister Nouri al-Maliki of Iraq endorsed Barack Obama’s plan for a 16-month withdrawal timeline from Iraq in an interview with Der Spiegel magazine. In a stroke, the entire conservative argument on Iraq was demolished. Withdrawal, they’d been telling us, was abject surrender and the abandonment of our Iraqi allies. The conservative counter that this was merely political posturing by Maliki made no sense — if the reason Maliki was calling for withdrawal was the overwhelming demand for withdrawal on the part of the Iraqi public, that was all the more reason for us to leave. And, of course, looking backward John McCain was (and is) still committed to the idea that, even in retrospect, invading Iraq was a good idea. It looked to me like the election was in the bag. Democrats were going to win the national-security argument, and hence, the election. [continued…]

Ten national security myths

The Iraq War is a testament to the great damage a foreign policy based on myths, lies and distortions can do to our nation’s security and well-being. As the election draws near, a new set of myths and fallacies as misleading as those that led the Senate to support George W. Bush’s invasion of Iraq have become embedded in our foreign policy discourse. Many of them are being perpetuated by the very same political forces that peddled the myth of mushroom clouds coming from Saddam Hussein’s Iraq. Others are the product of muddled thinking on the part of both Republicans and Democrats. If left unchallenged, these myths and fallacies could influence the outcome of the election and shape policy in the next administration. In this special feature, put together by Nation editors with Sherle Schwenninger, a frequent Nation contributor and director of the Global Economic Policy Program at the New America Foundation, we dissect ten of them and offer what we believe is a more accurate depiction of what is at stake for the United States and the world. [continued…]

Poll: Most Americans think U.S. is losing war on terrorism

A majority of Americans think the United States isn’t winning the war on terrorism, a perception that could undermine a key Republican strength just as John McCain and Barack Obama head into their first debate Friday night, a clash over foreign policy and national security. A new Ipsos/McClatchy online poll finds a solid majority of 57 percent thinking that the country can win the war on terrorism but a similar majority of 54 percent saying that the country is NOT winning it.

The poll came just days before the two major-party candidates meet for the first of three debates, a 90-minute showdown Friday on foreign policy and national security at the University of Mississippi.

Jim Lehrer of PBS will moderate the debate between Republican McCain and Democrat Obama, which will be televised nationally starting at 9 pm EDT. [continued…]

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NEWS & VIEWS ROUNDUP & EDITOR’S COMMENTS: September 23

CEO pay emerges as bailout barrier

Flying in the face of Congress and both presidential campaigns, Treasury is resisting efforts to impose pay limits on Wall Street executives and bankers whose companies stand to be helped by the government’s $700 billion rescue plan for the financial markets.

As markets reopen Monday, the issue is a surprising flash point between Treasury Secretary Henry Paulson and House Democrats, who have drafted a bill giving Paulson much of what he wants but requiring that Treasury also demand “appropriate standards for executive compensation.”

Treasury argues that such requirements would make it harder to persuade companies to sell their troubled assets to the government. But Democrats, who otherwise admire Paulson, say that the former Goldman Sachs chairman is blind to the politics of the situation and the huge divide between the average taxpayer and the financial world now seeking relief from bad debts that have clogged the credit system — and that threaten the entire economy. [continued…]

Editor’s Comment — Here we are, supposedly, on the brink of global economic catastrophe, but the government’s rescue plan might fail if a few fat cats on Wall Street are forced to take a pay cut. Are they so well insulated from the impending calamity that the worst that could happen to them is that they could lose a multimillion dollar bonus?

The idea that constraints on excessive executive compensation in return for public funding could be described as “punitive” is absurd and obscene. What seems called for here is a new criminal designation: crimes against society.

This is a label that would apply to those offenses less egregious than genocide; crimes which might seem mundane in as much as they are far more commonplace but which involve harm to thousands or millions of people as the result of the ruthless pursuit of self-interest by those who wield immense economic or political power.

For those CEOs who would regard a pay cut as punitive, I would propose that the alternative would be that they be charged with the above described crimes against society and that they face the possibility of neither imprisonment nor fines but of destitution (through losing the right to own property) and public humiliation (through a 21st century equivalent of being placed in the stocks).

These parasitic CEOs should be grovelling in gratitude at the idea they might suffer something so minor as a pay cut. What sort of hyper-inflated vanity could regard such a thing as punitive?

A TIMELY REMINDER: How the Bush Administration stopped the states from stepping in to help consumers

Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers’ ability to repay, making loans with deceptive “teaser” rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.

Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York’s, enacted laws aimed at curbing such practices.

What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no. [continued…]

Loan titans paid McCain adviser nearly $2 million

Senator John McCain’s campaign manager was paid more than $30,000 a month for five years as president of an advocacy group set up by the mortgage giants Fannie Mae and Freddie Mac to defend them against stricter regulations, current and former officials say.

Mr. McCain, the Republican candidate for president, has recently begun campaigning as a critic of the two companies and the lobbying army that helped them evade greater regulation as they began buying riskier mortgages with implicit federal backing. He and his Democratic rival, Senator Barack Obama, have donors and advisers who are tied to the companies.

But last week the McCain campaign stepped up a running battle of guilt by association when it began broadcasting commercials trying to link Mr. Obama directly to the government bailout of the mortgage giants this month by charging that he takes advice from Fannie Mae’s former chief executive, Franklin Raines, an assertion both Mr. Raines and the Obama campaign dispute.

Incensed by the advertisements, several current and former executives of the companies came forward to discuss the role that Rick Davis, Mr. McCain’s campaign manager and longtime adviser, played in helping Fannie Mae and Freddie Mac beat back regulatory challenges when he served as president of their advocacy group, the Homeownership Alliance, formed in the summer of 2000. Some who came forward were Democrats, but Republicans, speaking on the condition of anonymity, confirmed their descriptions. [continued…]

Editor’s Comment — A major campaign story — one would think. But apparently not in the eyes of the editors of the NYT — it didn’t merit a place on the front page!

Cash for trash

Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense. [continued…]

Visible hands

When Hank Paulson, a successful investment banker turned Republican treasury secretary, caps his career by nationalizing two financial institutions so large that even Norman Thomas in his socialist heyday would have paused before taking them onto the government’s balance sheet, and a conservative central banker agrees to bail out an insurance company to the tune of $85 billion, you know that a fundamental change is underway. The day when that engine of capitalism, the financial market, was allowed to operate more or less unimpeded by government has passed. We are entering an era in which a high tolerance for risk is being replaced by the eager embrace of regulation, and where the overriding imperative, efficiency, has been replaced by an increasing desire for equity. [continued…]

A prescription for recovery

This week, Congress is expected to commit hundreds of billions of taxpayer funds to a revitalization program to halt our financial hemorrhaging. Twenty years ago, in the midst of another financial crisis, I was part of a banking industry effort to solve the savings and loan problem. The result of that effort was the Resolution Trust Corporation, which, under Bill Seidman’s masterful leadership, cleaned up the S&L mess in 48 months.

The situation then was very different. The S&L problem involved only one sector of the economy and was just 3 percent of gross domestic product. We were not so dependent on foreign savings, and the crushing pressure on our federal budget from tax policies and entitlements was far off. This crisis is many times larger than that created by the S&Ls. We are deeply dependent on savings from other countries, and our fiscal resources are limited and shrinking.

One lesson is clear: If Congress commits money without firm principles to guide its use, the cost to taxpayers will be far higher and the economy will remain weaker longer. Before the 1989 legislation, efforts to stem losses growing inside the S&L industry lacked firm principles; as a result, they did not remove the swelling tumor of losses and in some instances actually helped it grow. [continued…]

Paulson’s folly

The deal proposed by Paulson is nothing short of outrageous. It includes no oversight of his own closed-door operations. It merely gives congressional blessing and funding to what he has already been doing, ad hoc. He plans to retain Wall Street firms as advisers to decide just how to cut deals to value and mop up Wall Street’s dubious paper. There are to be no limits on executive compensation for the firms that get relief, and no equity share for the government in exchange for this massive infusion of capital. Both Obama and McCain have opposed the provision denying any judicial review of decisions made by Paulson — a provision that evokes the Bush administration’s suspension of normal constitutional safeguards in its conduct of foreign policy and national security.

Though the administration’s line is that these securities are not trading because of a crisis of confidence, so many are ultimately backed by loans that will not be paid back that they will eventually be sold for a fraction of their face value. Firms that have marked these securities down or have otherwise gotten them off their books have valued them at around 30 cents on the dollar or less. If Paulson had proposed such a deal in his old job as CEO of Goldman Sachs — putting $700 billion of the firm’s capital at risk in exchange for junk bonds of unknown value — he would have been fired in short order. But this is merely taxpayer money. [continued…]

Big financiers start lobbying for wider aid

Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.

Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.

At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees.

Nobody wants to be left out of Treasury’s proposal to buy up bad assets of financial institutions. [continued…]

When atheists attack

The problem, as far as our political process is concerned, is that half the electorate revels in Palin’s lack of intellectual qualifications. When it comes to politics, there is a mad love of mediocrity in this country. “They think they’re better than you!” is the refrain that (highly competent and cynical) Republican strategists have set loose among the crowd, and the crowd has grown drunk on it once again. “Sarah Palin is an ordinary person!” Yes, all too ordinary.

We have all now witnessed apparently sentient human beings, once provoked by a reporter’s microphone, saying things like, “I’m voting for Sarah because she’s a mom. She knows what it’s like to be a mom.” Such sentiments suggest an uncanny (and, one fears, especially American) detachment from the real problems of today. The next administration must immediately confront issues like nuclear proliferation, ongoing wars in Iraq and Afghanistan (and covert wars elsewhere), global climate change, a convulsing economy, Russian belligerence, the rise of China, emerging epidemics, Islamism on a hundred fronts, a defunct United Nations, the deterioration of American schools, failures of energy, infrastructure and Internet security … the list is long, and Sarah Palin does not seem competent even to rank these items in order of importance, much less address any one of them. [continued…]

The evolution of John McCain

Despite the media feeding frenzy, we still may be asking ourselves, “Just who exactly is Sarah Palin?” Mixed in with the Davy-Crockett-meets-SuperMom vignettes — all those moose hunting, ice fishing, snowmobiling, baby-juggling, and hockey-momming moments — we’ve also learned that she doesn’t care much for her former brother-in-law and wasn’t afraid to use her office to go after his job as a state trooper; that she was for the “bridge to nowhere” before she was against it; that she’s against earmarks unless they benefit her constituents; that she can deliver a snappy wisecracking speech, thinks banning books in libraries is okay, considers herself a pit bull with lipstick, and above all else, wants to drill the ever-lovin’ daylights out of every corner of her home state (which John McCain’s handlers have somehow translated into being against Big Oil, since she insisted on a marginally bigger cut of the profits for Alaskans).

Oh, and — not that this is very important to Americans or the planet — she now thinks that global warming might possibly be human-made… sorta… though she didn’t before, despite the fact that the state she governs is on the frontline of climate change. And, of course, she’s a classic right-wing, fundamentalist Christian: against abortion — check; against same-sex marriage — check; against stem-cell research — check; favors teaching Creationism in public schools — check.

It’s that last item, her willingness to put Creationism up against the teaching of evolutionary science in the classroom on a he-says-she-says basis, that’s far more revealing of just who our new Republican vice presidential candidate is than we generally assume. It deserves the long, hard look that it hasn’t yet gotten. Most Democrats and progressives tend to think of the teaching of Creationism as a mere sidebar item on their agenda of political don’t-likes, but it’s not. Sarah Palin’s bias towards Creationism is a window into her political soul and a measure of John McCain’s hypocrisy. [continued…]

Steering the McCain campaign, a lot of old Bush hands

When Gov. Sarah Palin flew home to Alaska for the first time since being named the Republican vice presidential nominee, she brought along at least half a dozen new advisers to conduct briefings, stage-manage her first television interview and help her prepare for a critical debate next month.

And virtually every member of the team shared a common credential: years of service to President Bush.

From Mark Wallace, a Bush appointee to the United Nations, to Tucker Eskew, who ran strategic communications for the Bush White House, to Greg Jenkins, who served as the deputy assistant to Bush in his first term and was executive director of the 2004 inauguration, Palin was surrounded on the trip home by operatives deeply rooted in the Bush administration.

The clutch of Bush veterans helping to coach Palin reflects a larger reality about Sen. John McCain’s presidential campaign: Far from being a group of outsiders to the Republican Party power structure, it is now run largely by skilled operatives who learned their crafts in successive Bush campaigns and various jobs across the Bush government over the past eight years. [continued…]

Pakistani Taliban suspected in Marriott Hotel blast

The massive explosion that devastated the Marriott Hotel in Pakistan’s capital, Islamabad, Saturday – killing at least 53 people and wounding hundreds – is being seen as a warning from Islamist militants over the Pakistani government’s cooperation with the United States.

The hotel, which is popular with both diplomats and other foreigners, was struck by at least one truck filled with more than a ton of explosives in one of the country’s worst acts of terrorism. The Czech ambassador and two Americans and about a dozen foreigners were among the dead.

“This was definitely a clear signal that this is no longer a safe place for foreigners, especially Americans,” says Ayesha Siddiqa, an independent security analyst based in the city. “And it’s a message to the Pakistani government: ‘Can you handle us?’ ” [continued…]

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ANALYSIS: The week the free-market bubble burst

In turmoil, capitalism in U.S. sets new course

This past week marks a decisive turn in the evolution of American capitalism.

Black September, the biggest financial shock since the Great Depression, is prompting a Republican Treasury secretary and Federal Reserve chairman to devise the most muscular government intervention in the economy since the Great Depression in an effort to prevent the economic devastation of the Great Depression.

Abandoning its one-rescue-at-a-time strategy of recent months, the government suddenly has shifted to a broad attack on what Treasury Secretary Henry Paulson calls “the root cause of our financial system’s stresses,” the rot on the balance sheets of America’s financial system.

Gone is the faith, shared by the nation’s leadership with varying degrees of enthusiasm, that the best road to prosperity is to unleash financial markets to allocate capital, take risks, enjoy profits, absorb losses. Erased is the hope that markets correct themselves when they overshoot.

Also scrapped is the notion that government’s role is to get out of the way, limiting itself to protecting consumers and small investors, setting the rules of the game and stepping in — only rarely — to cushion the economy from shocks like the 1987 stock-market crash or the 1998 collapse of hedge fund Long-Term Capital Management. Both of those episodes involved government jawboning and flooding the markets with money. In contrast to today, neither time did the U.S. take significant amounts of taxpayer money or anything approaching the nationalization of a major firm.

As recently as Spring 2007, Mr. Paulson, among others, was arguing that onerous regulations were crippling American finance in intensifying global competition. Those cries are silenced.

“The last 20 years saw people actually mouthing the idea that government should keep hands off,” says Richard Sylla, a financial historian at New York University. “We had this free market ethos: Reagan’s ‘government isn’t a solution, government is the problem.’ Now people are saying, ‘The market is the problem. The government is the solution.’ ”

The Depression triggered, among other things, sweeping new rules governing the financial system — including the 1933 Glass Steagall law that separated commercial and investment banking until its repeal in 1999. The inevitable result of this crisis, once it ends, will be more government control of the financial system. The only questions now are how much tougher the new oversight will be, what form it will take and how long until the restrictions are loosened or evaded?

In March, the Federal Reserve shattered a half-century of tradition in which it had lent money only to banks whose deposits were insured by the government. Declaring circumstances to be “unusual and exigent,” as required by a little-used statute, it lent to investment bank Bear Stearns and eventually risked $29 billion of taxpayer money to induce J.P. Morgan Chase to buy Bear. It seemed a very big deal at the time.

But in the past two weeks, the U.S. government, keeper of the flame of free markets and private enterprise, has:

    — nationalized the two engines of the U.S. mortgage industry, Fannie Mae and Freddie Mac, and flooded the mortgage market with taxpayer funds to keep it going;
    — crafted a deal to seize the nation’s largest insurer, American International Group Inc., fired its chief executive and moved to sell it off in pieces.
    — extended government insurance beyond bank deposits to $3.4 trillion in money-market mutual funds for a year;
    — banned, for 799 financial stocks, a practice at the heart of stock trading, the short-selling in which investors seek to profit from falling stock prices.
    — allowed or encouraged the collapse or sale of two of the four remaining, free-standing investment banks, Lehman Brothers and Merrill Lynch;
    — asked Congress by next week to agree to stick taxpayers with hundreds of billions of dollars of illiquid assets from financial institutions so those institutions can raise capital and resume lending.

It was less than a week ago that Mr. Paulson appeared to draw a line at government bailouts, rebuffing Lehman’s plea for a Bear Stearns-like rescue and allowing the investment bank to collapse into bankruptcy. “The national commitment to the free market lasted one day,” Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, quipped earlier this week. That one day was Monday, Sept. 15. The day before the government rejected Lehman’s cry for help; the day after it seized AIG.

The shift in strategy reflects the realization by Mr. Paulson and Federal Reserve Chairman Ben Bernanke that the financial crisis was intensifying in recent days, endangering the entire economy. Confidence deteriorated markedly. Distrust spread. Credit markets weren’t functioning and lending dried up. Normal business wasn’t getting done. The two remaining free-standing investment banks were under severe pressure. The panic was spreading to ordinary Americans, who were beginning to pull money out of money-market mutual funds.

“This convulsion that we’ve had in the past two weeks? I don’t think there’s anything like it in history. I want to go back and check the week in 1933, when all the banks were closed,” says Robert Aliber, a University of Chicago economic historian who updated Charles Kindleberger’s 1978 classic and newly relevant book, “Manias, Panics and Crashes.”

But there is a big difference between then and now. The authorities moved quicker this time. “In the ’30s, the intervention that mattered came after the disaster,” Mr. Sylla says. “Now the interventions are designed to prevent the disaster we had in the ’30s.” About the only pleasant surprise of the past year is that the U.S. economy hasn’t done worse.

It is too early to say whether Mr. Bernanke and Mr. Paulson have made the right call and will bring the crisis to a close, despite global stock markets’ ebullient reaction Friday. If the fear does subside, then talk will turn to writing new rules for a financial system that has changed more in the past six months than in the previous decade. The government has bailed out financial institutions — and particularly their creditors — and taxpayers will pick up the tab for many of the institutions’ bad decisions. That could encourage bad behavior in the future. So, the government needs to craft a new regulatory regime to reduce those incentives.

Some observers look to history, and predict the government will overdo the regulatory remedy. Bubbles often begin with products created to get around regulations, says Stephen Quinn, an economic historian at Texas Christian University in Fort Worth, Texas. “Smart regulation looks forward to prevent the next regulation-circumventing … idea from turning into a bubble without stymieing the flow of new ideas. Dumb regulation looks backward. You can guess which kind of regulation most crises produce.”

But Frederic Mishkin, who recently left the Fed to return to teaching at Columbia University’s business school, takes hope in the resolution of the savings and loan episode of the 1980s. “It was handled disastrously at first,” he says. Regulators and politicians were slow to respond, allowing thrifts to make more and more bad loans instead of shutting them down. Then, in 1989, the first Bush administration swallowed hard, closed thrifts, paid off depositors and sold the thrifts’ assets at fire-sale prices. The cost to the taxpayers came to about $124 billion.

Congress and the president moved to reduce the chances of a repeat, enacting a 1991 law that, among other things, increased the minimum amount of capital banks were required to hold. As a result, Mr. Mishkin says, big banks entered the current crisis with far more capital than they had in the early 1990s. “That’s one reason this crisis hasn’t led to a complete disaster. It put banks on a stronger footing so they had a larger cushion when they blew it,” he says. The other reason, he says, is the Fed’s rapid response to the current crisis.

The rub: The 1991 law didn’t apply to institutions other than banks — the investment banks, mortgage companies and even insurance companies that have been central to this episode. That puts writing new rules for them high on the agenda for the new president and the next Congress.

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NEWS & VIEWS ROUNDUP: September 21

Obama: Bailout is ‘price tag, not a plan’

In his first critical remarks about the government response to the financial market crisis, Barack Obama said Sunday that the Bush administration has “offered a concept with a staggering price tag, not a plan.”

“We must work quickly in a bipartisan fashion to resolve this crisis to avert an even broader economic catastrophe,” Obama said at a rally here. “But Washington also has to recognize that economic recovery requires that we act, not just to address the crisis on Wall Street, but also the crisis on Main Street and around kitchen tables across America.”

Obama took aim at the three-page bailout plan from Treasury Secretary Henry Paulson, saying the “American people must be assured that the deal reflects the basic principles of transparency, fairness and reform.” [continued…]

On economy, Obama offers ideas, McCain blames rival

As officials in Washington raced to put together a bailout plan for the nation’s teetering financial system, Sen. John McCain hammered Sen. Barack Obama as part of the problem while Obama said any rescue should include a new stimulus package for working families.

Gyrating stock markets and the intensity of the discussions in Washington overshadowed the two presidential candidates on Friday. But the winner probably will find that his administration will be deeply affected by the results of what happens over the next few weeks.

Efforts to stabilize the financial system not only could affect the size of the federal budget deficit, but will add another large problem on top of the wars in Iraq and Afghanistan and make it more difficult for Obama and McCain to make their mark with a big domestic initiative. [continued…]

Frank says rescue plan may make companies limit executive pay

House Financial Services Committee Chairman Barney Frank said the federal government may require companies participating in a proposed financial rescue plan to agree to curtail their executives’ compensation.

“We will again be talking about compensation packages,” Frank said in a speech today before the Washington-based advocacy group AARP. “If you want to participate in this, we want you to show us that you’ve got rules that don’t allow'” the “excessive golden parachutes.”

He scoffed at suggestions such restrictions may dampen companies’ enthusiasm for the bailout.

“Are they telling us that the financial leaders of this country who clearly welcome this” bailout program, “who understand why it’s necessary and who would get some near-term benefit for their own institutions” would “boycott it if it’s going to cost them a few million of the many millions they have?” he said. “I would be hesitant to impute that degree of lack of public-spiritedness to them.” [continued…]

A bad bank rescue

With truly extraordinary speed, opinion has swung behind the radical idea that the government should commit hundreds of billions in taxpayer money to purchasing dud loans from banks that aren’t actually insolvent. As recently as a week ago, no public official had even mentioned this option. Now the Treasury, the Fed and congressional leaders are promising its enactment within days. The scheme has gone from invisibility to inevitability in the blink of an eye. This is extremely dangerous.

The plan is being marketed under false pretenses. Supporters have invoked the shining success of the Resolution Trust Corporation as justification and precedent. But the RTC, which was created in 1989 to clean up the wreckage of the savings-and-loan crisis, bears little resemblance to what is being contemplated now. The RTC collected and eventually sold off loans made by thrifts that had gone bust. The administration proposes to buy up bad loans before the lenders go bust. This difference raises several questions.

The first is whether the bailout is necessary. In 1989, there was no choice. The federal government insured the thrifts, so when they failed, the feds were left holding their loans; the RTC’s job was simply to get rid of them. But in buying bad loans before banks fail, the Bush administration would be signing up for a financial war of choice. It would spend billions of dollars on the theory that preemption will avert the mass destruction of banks. There are cheaper ways to stabilize the system. [continued…]

Truthiness stages a comeback

Not until 2004 could the 9/11 commission at last reveal the title of the intelligence briefing President Bush ignored on Aug. 6, 2001, in Crawford: “Bin Laden Determined to Strike in U.S.” No wonder John McCain called for a new “9/11 commission” to “get to the bottom” of 9/14, when the collapse of Lehman Brothers set off another kind of blood bath in Lower Manhattan. Put a slo-mo Beltway panel in charge, and Election Day will be ancient history before we get to the bottom of just how little he and the president did to defend America against a devastating new threat on their watch.

For better or worse, the candidacy of Barack Obama, a senator-come-lately, must be evaluated on his judgment, ideas and potential to lead. McCain, by contrast, has been chairman of the Senate Commerce Committee, where he claims to have overseen “every part of our economy.” He didn’t, thank heavens, but he does have a long and relevant economic record that begins with the Keating Five scandal of 1989 and extends to this campaign, where his fiscal policies bear the fingerprints of Phil Gramm and Carly Fiorina. It’s not the résumé that a presidential candidate wants to advertise as America faces its worst financial crisis since the Great Depression. That’s why the main thrust of the McCain campaign has been to cover up his history of economic malpractice. [continued…]

Hey U.S., welcome to the Third World!

Dear United States, Welcome to the Third World!

It’s not every day that a superpower makes a bid to transform itself into a Third World nation, and we here at the World Bank and the International Monetary Fund want to be among the first to welcome you to the community of states in desperate need of international economic assistance. As you spiral into a catastrophic financial meltdown, we are delighted to respond to your Treasury Department’s request that we undertake a joint stability assessment of your financial sector. In these turbulent times, we can provide services ranging from subsidized loans to expert advisors willing to perform an emergency overhaul of your entire government.

As you know, some outside intervention in your economy is overdue. Last week — even before Wall Street’s latest collapse — 13 former finance ministers convened at the University of Virginia and agreed that you must fix your “broken financial system.” Australia’s Peter Costello noted that lately you’ve been “exporting instability” in world markets, and Yashwant Sinha, former finance minister of India, concluded, “The time has come. The U.S. should accept some monitoring by the IMF.” [continued…]

Rough week, but America’s era goes on

Does Wall Street’s meltdown presage the end of the American century? Many commentators have warned that the past week’s financial mayhem signaled a major political setback for the United States as well as an economic one. “Why should the rest of the world ever again take seriously the American free-market model after this debacle?” a leading British journalist asked me last Thursday. This crisis, he argued, was to economics what the Iraq war was to U.S. foreign policy: a fatal blow to the credibility of American claims to global primacy.

Certainly, if the talk of a “unipolar moment” after the collapse of the Soviet empire was hubris, then the credit crunch has been a very American nemesis. Ten years ago, there was a strange competition in the United States to see who could be more arrogant. Neoconservatives argued that the rest of the world should hurry up and embrace the American political way or prepare to be bombed into the democratic age. But equally smug were the neoliberal economists, who argued that the rest of the world should hurry up and embrace the so-called Washington consensus of expanding trade, attacking inflation and encouraging foreign investment, or prepare to be sold short. One lot derided the political failure of the Muslim world; the other lot heaped scorn on Asian “crony capitalism,” supposedly the root cause of the 1997-98 Asian financial crisis.

The neocons got their comeuppance in Iraq, where American forces were not, after all, ultimately embraced as liberators. The neolibs got theirs this month, as a Republican Treasury Department, headed by the former CEO of Goldman Sachs, effectively nationalized first the country’s biggest mortgage lenders and then its biggest insurance company. As the presidential candidates, in rare unison, heap opprobrium on Wall Street gamblers and slumbering regulators, the stage seems set for the demise of “market fundamentalism,” in George Soros’s phrase. [continued…]

Pakistan on the brink

For the past seven years, the Bush administration studiously ignored the Afghan Taliban and Al Qaeda leadership gathering in the tribal areas of Pakistan, and now scrambles to make up for lost time. US elections are looming, and facing the humiliating prospect of Osama bin Laden outlasting a two-term presidency and even expanding his reach, President Bush has pushed the Pentagon into a do-or die-hunt for bin Laden. Whether the search for an “October surprise” for the election succeeds or not, the radical threat is now beyond easy military solution.

It’s a sign of desperation that on September 16, the Chairman of the US Joint Chiefs of Staff Admiral Mike Mullen was in Islamabad meeting the Pakistan army chief General Ashfaq Kayani, his boss Secretary of Defence Bob Gates was in Kabul, while Pakistan’s newly elected President Asif Ali Zardari was in London begging Prime Minister Gordon Brown to get the Americans off his back and deliver aid to a beleaguered country rather than angry ripostes.

Pakistan is at the centre of a gathering firestorm engulfing south and central Asia in the most volatile confrontation since 9/11. Pakistan, Afghanistan, the US and NATO all bear heavy responsibility for the crisis. President Bush had neither the inclination nor urge to do right by Afghanistan, despite pleas by President Hamid Karzai to eliminate cross-border terrorist strikes from Pakistan and effectively rebuild the country. Senior US officers serving in Afghanistan say they begged the White House and the State Department for action in 2006, but Bush was cosy with Pakistan’s former President Pervez Musharraf and Iraq occupied US attention. Meanwhile, veteran John McCain flails in effectively playing the national security card against Barack Obama because Republican policies failed to secure the homeland against future Al Qaeda attacks. [continued…]

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CAMPAIGN 08: Reforming the regulatory system for America’s financial markets

Regulation vs. deregulation

John (“I am a deregulator“) McCain can’t completely turn his back on the bedrock of his faith (“I believe in deregulation”) so instead of denouncing deregulation, he’s opting to blame the regulators — hence his silver bullet for dealing with the financial crisis would be to fire Bush-appointee Christopher Cox from his position as SEC chairman.

The financial crisis has forced the economy into the center of the presidential campaign. But as the candidates currently joust through the simplistic and emotive language of TV ads, there’s no better way of contrasting where McCain and Obama actually stand than to look back to March this year and see how they responded to the collapse of Bear Stearns.

This is what McCain had to say on the issue of regulating the financial markets:

Our financial market approach should include encouraging increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital.

That comes from a speech McCain gave on March 25 addressing the housing crisis. In that speech he made no other reference to regulation or deregulation.

Two days later at Cooper Union in New York, Obama spoke on “Renewing the American economy.” Much of the speech was on reforming the regulatory system, but the following is a key passage:

…the American experiment has worked in large part because we guided the market’s invisible hand with a higher principle. A free market was never meant to be a free license to take whatever you can get, however you can get it. That’s why we’ve put in place rules of the road: to make competition fair and open, and honest. We’ve done this not to stifle but rather to advance prosperity and liberty. As I said at Nasdaq last September, the core of our economic success is the fundamental truth that each American does better when all Americans do better; that the well-being of American business, its capital markets and its American people are aligned. I think that all of us here today would acknowledge that we’ve lost some of that sense of shared prosperity. Now, this loss has not happened by accident. It’s because of decisions made in board rooms, on trading floors and in Washington. Under Republican and Democratic administrations, we’ve failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practice. We let the special interests put their thumbs on the economic scales. The result has been a distorted market that creates bubbles instead of steady, sustainable growth; a market that favors Wall Street over Main Street, but ends up hurting both. Nor is this trend new. The concentrations of economic power and the failures of our political system to protect the American economy and American consumers from its worst excesses have been a staple of our past: most famously in the 1920s, when such excesses ultimately plunged the country into the Great Depression. That is when government stepped in to create a series of regulatory structures, from FDIC to the Glass-Steagall Act, to serve as a corrective, to protect the American people and American business.

Ironically, it was in reaction to the high taxes and some of the outmoded structures of the New Deal that both individuals and institutions in the ’80s and ’90s began pushing for changes to this regulatory structure. But instead of sensible reform that rewarded success and freed the creative forces of the market, too often we’ve excused and even embraced an ethic of greed, corner cutting, insider dealing, things that have always threatened the long-term stability of our economic system. Too often we’ve lost that common stake in each other’s prosperity. Now, let me be clear. The American economy does not stand still and neither should the rules that govern it. The evolution of industries often warrants regulatory reform to foster competition, lower prices or replace outdated oversight structures. Old institutions cannot adequately oversee new practices. Old rules may not fit the roads where our economy is leading. So there were good arguments for changing the rules of the road in the 1990s. Our economy was undergoing a fundamental shift, carried along by the swift currents of technological change and globalization. For the sake of our common prosperity, we needed to adapt to keep markets competitive and fair. Unfortunately, instead of establishing a 21st century regulatory framework, we simply dismantled the old one, aided by a legal but corrupt bargain in which campaign money all too often shaped policy and watered down oversight. In doing so we encouraged a winner take all, anything goes environment that helped foster devastating dislocations in our economy. Deregulation of the telecommunications sector, for example, fostered competition, but also contributed to massive over-investment.

Partial deregulation of the electricity sector enabled (inaudible). Companies like Enron and WorldCom took advantage of the new regulatory environment to push the envelope, pump up earnings, disguise losses and otherwise engage in accounting fraud to make their profits look better, a practice that led investors to question the balance sheets of all companies and severely damaged public trust in capital markets. This was not the invisible hand at work. Instead, it was the hand of industry lobbyists tilting the playing field in Washington as well as an accounting industry that had developed powerful conflicts of interest and a financial sector that had fueled over-investment. A decade later we have deregulated the financial sector and we face another crisis. A regulatory structure set up for banks in the 1930s needed to change, because the nature of business had changed. But by the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework. And since then we’ve overseen 21st century innovation, including the aggressive introduction of new and complex financial instruments like hedge funds and non-bank financial companies, with outdated 20th century regulatory tools. New conflicts of interest recalled the worst excesses of the past, like the outrageous news that we learned just yesterday of KPMG allowing a lender to report profits instead of losses so that both parties could make a quick buck. Not surprisingly, the regulatory environment failed to keep pace. When subprime mortgage lending took a reckless and unsustainable turn, a patchwork of regulators were unable or unwilling to protect the American people. Now, the policies of the Bush administration threw the economy further out of balance. Tax cuts without end for the wealthiest Americans. A trillion dollar war in Iraq that didn’t need to be fought, paid for with deficit spending and borrowing from foreign creditors like China. A complete…

(APPLAUSE)

A complete disdain for pay-as-you-go budgeting, coupled with a generally scornful attitude toward oversight and enforcement, allowed far too many to put short-term gain ahead of long-term consequences. The American economy was bound to suffer a painful correction, and policy-makers found themselves with fewer resources to deal with the consequences. Today those consequences are clear. I see them in every corner of our great country as families face foreclosure and rising costs. I see them in towns across America, where a credit crisis threatens the ability of students to get loans and states can’t finance infrastructure projects. I see them here in Manhattan, where one of our biggest investment banks had to be bailed out and the Fed opened its discount window to a host of new institutions with unprecedented implications that we have yet to appreciate. When all is said and done, losses will be in the many hundreds of billions. What was bad for Main Street turned out to be bad for Wall Street. Pain trickled up. And that…

(APPLAUSE)

… and that’s why — that’s why the principle that I spoke about at NASDAQ last September is even more urgently true today. In our 21st century economy, there is no dividing line between Main Street and Wall Street.

The decisions made in New York’s high rises have consequences for Americans across the country. And whether those Americans can make their house payments, whether they keep their jobs or spend confidentially without falling into debt, that has consequences for the entire market. The future cannot be shaped by the best-connected lobbyists with the best record of raising money for campaigns. This…

(APPLAUSE)

This thinking is wrong for the financial sector and it’s wrong for our country. I do not believe the government should stand in the way of innovation or turn back the clock on an older era of regulation. But I do believe that government has a role to play in advancing our common prosperity, by providing stable macroeconomic and financial conditions for sustained growth, by demanding transparency and by ensuring fair competition in the marketplace. Our history should give us confidence that we don’t have to choose between an oppressive government-run economy and a chaotic, unforgiving capitalism. It tells us we can emerge from great economic upheavals stronger, not weaker. But we can only do so if we restore confidence in our markets, only if we rebuild trust between investors and lenders, and only if we renew that common interest between Wall Street and Main street that is the key to our long-term success. Now, as most experts agree, our economy is in a recession. To renew our economy and to ensure that we are not doomed to repeat a cycle of bubble and bust again and again and again, we need to address not only the immediate crisis in the housing market, we also need to create a 21st-century regulatory framework and we need to pursue a bold opportunity agenda for the American people.

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OPINION: The cost of the financial crisis – UPDATED

Update: The commentary below from Harvard professor of economics and former IMF chief economist, Kenneth Rogoff, was published before there was any reporting on the “comprehensive plan” that is being announced by Treasury Secretary Paulson this morning. The anticipated cost of that plan according to a report in Politico will indeed be as much as $1 trillion.

America will need a $1,000bn bail-out

One of the most extraordinary features of the past month is the extent to which the dollar has remained immune to a once-in-a-lifetime financial crisis. If the US were an emerging market country, its exchange rate would be plummeting and interest rates on government debt would be soaring. Instead, the dollar has actually strengthened modestly, while interest rates on three- month US Treasury Bills have now reached 54-year lows. It is almost as if the more the US messes up, the more the world loves it.

But can this extraordinary vote of confidence in the dollar last? Perhaps, but as investors step back and look at the deep wounds of America’s flagship financial sector, the public and private sector’s massive borrowing needs, and the looming uncertainty of the November presidential elections, it is hard to believe that the dollar will continue to stand its ground as the crisis continues to deepen and unfold.

It is true that the US government has very deep pockets. Privately held US government debt was under $4,400bn at the end of 2007, representing less than 32 per cent of gross domestic product. This is roughly half the debt burden carried by most European countries, and an even smaller fraction of Japan’s debt levels. It is also true that despite the increasingly tough stance of US regulators, the financial crisis has probably already added at most $200bn-$300bn to net debt, taking into account the likely losses on nationalising the mortgage giants Freddie Mac and Fannie Mae, the costs of the $29bn March bail-out of investment bank Bear Stearns, the potential fallout from the various junk collateral the Federal Reserve has taken on to its balance sheet in the last few months, and finally, yesterday’s $85bn bail-out of the insurance giant AIG.

Were the financial crisis to end today, the costs would be painful but manageable, roughly equivalent to the cost of another year in Iraq. Unfortunately, however, the financial crisis is far from over, and it is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already, that is, an amount closer to $1,000bn to $2,000bn.

True, the US Treasury and the Federal Reserve have done an admirable job over the past week in forcing the private sector to bear a share of the burden. By forcing the fourth largest investment bank, Lehman Brothers, into bankruptcy and Merrill Lynch into a distressed sale to Bank of America, they helped to facilitate a badly needed consolidation in the financial services sector. However, at this juncture, there is every possibility that the credit crisis will radiate out into corporate, consumer and municipal debt. Regardless of the Fed and Treasury’s most determined efforts, the political pressures for a much larger bail-out, and pressures from the continued volatility in financial markets, are going to be irresistible.

It is hard to predict exactly how and when the mega-bail-out will evolve. At some point, we are likely to see a broadening and deepening of deposit insurance, much as the UK did in the case of Northern Rock. Probably, at some point, the government will aim to have a better established algorithm for making bridge loans and for triggering the effective liquidation of troubled firms and assets, although the task is far more difficult than was the case in the 1980s, when the Resolution Trust Corporation was formed to help clean up the saving and loan mess.

Of course, there also needs to be better regulation. It is incredible that the transparency-challenged credit default swap market was allowed to swell to a notional value of $6,200bn during 2008 even as it became obvious that any collapse of this market could lead to an even bigger mess than the fallout from subprime mortgage debt.

It may prove to be possible to fix the system for far less than $1,000bn- $2,000bn. The tough stance taken by regulators this past weekend with the investment banks Lehman and Merrill Lynch certainly helps.

Yet I fear that the American political system will ultimately drive the cost of saving the financial system well up into that higher territory.

A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.

The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.

It is a very good thing that the rest of the world retains such confidence in America’s ability to manage its problems, otherwise the financial crisis would be far worse.

Let us hope the US political and regulatory response continues to inspire this optimism. Otherwise, sharply rising interest rates and a rapidly declining dollar could put the US in a bind that many emerging markets are all too familiar with.

*The writer is professor of economics at Harvard University and former chief economist of the International Monetary Fund

http://www.ft.com/cms/s/0/dd9aa390-84d6-11dd-b148-0000779fd18c.html

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NEWS & VIEWS ROUNDUP: September 19

The worst is yet to come

In the deteriorating climate he sees unfolding, Gundlach said, the Standard & Poor’s 500 Index could fall another 30%, giant Citigroup could become an “AIG-sized debacle,” Morgan Stanley would merge with a banking company, Wachovia won’t be able to stand alone, default rates on even prime mortgages could soar, and European banks’ woes are just beginning.

“This is no market for old men,” said Gundlach, who also manages TCW’s flagship Total Return Bond Fund. “This is no market for old-school thinking.”

Gundlach based his assessment on a belief that housing prices still face several more years of decline, a protracted slump, he said, not seen since the Great Depression. Moreover, Gundlach said it’s possible that home prices could be sluggish until 2022.

“If it’s like the Depression experience — and it sure is shaping up that way — it could take several years. Maybe we won’t see a bottom in home prices until 2014,” he said. [continued…]

Do central banks have an exit strategy?

A year into the global financial crisis, several key central banks remain extraordinarily exposed to their countries’ shaky private financial sectors. So far, the strategy of maintaining banking systems on feeding tubes of taxpayer-guaranteed short-term credit has made sense. But eventually central banks must pull the plug. Otherwise they will end up in intensive care themselves as credit losses overwhelm their balance sheets.

The idea that the world’s largest economies are merely facing a short-term panic looks increasingly strained. Instead, it is becoming apparent that, after a period of epic profits and growth, the financial industry now needs to undergo a period of consolidation and pruning. Weak banks must be allowed to fail or merge (with ordinary depositors being paid off by government insurance funds), so that strong banks can emerge with renewed vigor. [continued…]

Wall Street’s just deserts

At the risk of speaking ill of the dead, what good was Lehman Brothers, anyway? And if Merrill Lynch was so bullish on America, why is it that, despite the torrent of foreign investment that flowed in to Lehman, Merrill and their Wall Street peers over the past half-decade, so few jobs were created in America during that period of “recovery”?

During the late, lamented Wall Street boom, America’s leading investment institutions were plenty bullish on China’s economy, on exotic financial devices built atop millions of bad loans, and, above all — judging by the unprecedented amount of wealth they showered on the Street — on themselves. The last thing our financial community was bullish on was America — that is, the America where the vast majority of Americans live and work. [continued…]

How financial madness overtook Wall Street

Fear is so pervasive today because for years the financial markets — and many borrowers — showed no fear at all. Wall Streeters didn’t have to worry about regulation, which was in disrepute, and they didn’t worry about risk, which had supposedly been magically whisked away by all sorts of spiffy nouveau products — derivatives like credit-default swaps. (More on those later.) This lack of fear became a hothouse of greed and ignorance on Wall Street — and on Main Street as well. When greed exceeds fear, trouble follows. Wall Street has always been a greedy place and every decade or so it suffers a blow resulting in a bout of hand-wringing and regret, which always seems to be quickly forgotten.

This latest go-round featured hedge-fund operators, leveraged-buyout boys (who took to calling themselves “private-equity firms”) and whiz-kid quants who devised and plugged in those new financial instruments, creating a financial Frankenstein the likes of which we had never seen. Great new fortunes were made, and with them came great new hubris. The newly minted masters of the universe even had the nerve to defend their ridiculous income tax break — much of the private-equity managers’ piece of their investors’ profits is taxed at the 15% capital-gains rate rather than at the normal top federal income tax rate of 35% — as being good for society. (“Hey, we’re creating wealth — cut us some slack.”)

Warren Buffett, the nation’s most successful investor, back in 2003 called these derivatives — which it turned out almost no one understood — “weapons of financial mass destruction.” But what did he know? He was a 70-something alarmist fuddy-duddy who had cried wolf for years. No reason to worry about wolves until you hear them howling at your door, right? [continued…]

Wall Street and Washington

What is Washington to do as the financial system collapses? Clearly, stark differences in approach as well as in public policy have already emerged. Bail-out Bear Stearns and pump up the brokerage and investment business with new lines of credit. Nationalize Fannie Mae and Freddie Mac on the backs of the taxpayer — but let Lehman drown. Tell the financial community to save itself, after which Bank of America salutes and buys Merrill Lynch. Then, the Fed gets cold feet and decides it can’t let an institution the size of the insurance giant AIG go under as well. Washington is left staring into the abyss. The old rules no longer apply.

And that’s the point. At moments of crisis since the mid-1980s, the relationship between Washington and Wall Street has changed fundamentally, at least when compared to anything that would have been recognizable in the previous century. As a result, the road ahead is dark and unknown.

During the nineteenth century, Washington was generally happy to do favors for Wall Street financiers. Railroad tycoons, who often used those railroads as vehicles of extravagant speculation, enjoyed subsidies, tax exemptions, loans, and a whole smorgasbord of financial fringe benefits supplied by pliable Congressmen and Senators (not to mention armadas of state and local officials). [continued…]

Tutu says West complicit in Palestinian suffering

South African Nobel Peace laureate Desmond Tutu on Thursday accused the West of complicity in Palestinian suffering by its silence, suggesting it did not want to criticise Israel because of the Holocaust.

Archbishop Tutu spoke after delivering a report to the United Nations about Israel’s deadly shelling of the town of Beit Hanoun in Gaza in November 2006, which he said may constitute a war crime.

He criticised the international community for failing to speak out against the suffering in Gaza, home to 1.5 million Palestinians, under an Israeli blockade. [continued…]

U.S. strike reported as Mullen consults Pakistanis

A new reported U.S. missile strike inside Pakistan on Wednesday threatened to undermine American efforts to defuse a growing confrontation with Pakistan over aggressive U.S. military actions against Islamist extremists in the country’s turbulent northwest border region.

The strike in the South Waziristan tribal area, which officials said killed six people, came as the United States’ top military officer pledged during a hastily arranged visit to Islamabad, the capital of Pakistan, that Washington would respect that nation’s sovereignty. He did not specifically rule out further raids, however.

According to a statement from the U.S. Embassy in Islamabad, Adm. Michael Mullen, chairman of the Joint Chiefs of Staff, told Pakistani officials that he “appreciated the positive role Pakistan is playing in the war on terror” and “reiterated the U.S. commitment to respect Pakistan’s sovereignty” and to develop further bilateral cooperation on critical security issues. [continued…]

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NEWS & VIEWS ROUNDUP & EDITOR’S COMMENTS: September 18

Get your class war on

There is simply no way to blame this disaster, as Republicans used to do, on labor unions or over-regulation. No, this is the conservatives’ beloved financial system doing what comes naturally. Freed from the intrusive meddling of government, just as generations of supply-siders and entrepreneurial exuberants demanded it be, the American financial establishment has proceeded to cheat and deceive and beggar itself — and us — to the edge of Armageddon. It is as though Wall Street was run by a troupe of historical re-enactors determined to stage all the classic panics of the 19th century.

By the way, this is the same system the Republicans would still apparently like to put in charge of Social Security. The same system that is minting millionaire CEOs, that is holding the line on wages, and that we will be bailing out for years.

On Monday, John McCain blamed the disaster on “greed by some based in Wall Street.” It’s a personal failing of some evil few, in other words, and presumably capitalism will start working again once we squeeze the self-interest out of it. In the weeks to come, maybe Sen. McCain will also take a bold stand against covetousness and sloth.

But the structural changes of the past 28 years that have made all this possible — the waves of deregulation, the takeover of government itself by business interests — these haven’t made too much of an impression on him. In March Mr. McCain actually called for more deregulation in response to the crisis, and at the Republican convention two weeks ago an ebullient Mitt Romney promised that Mr. McCain would take “a weed-whacker to excessive regulation.” [continued…]

Editor’s Comment — Since now’s a good time to trash capitalism and dream about a few judicious regulations that might improve the economy, here’s an idea that sure not to catch on – but I’ll toss it out anyway.

Since it’s widely accepted that a minimum wage serves the common good, why shouldn’t there (at least in publicly-owned companies) be a maximum wage?

Supposedly, placing a cap on how much executives can make would stifle talent. Talent and the desire to become obscenely wealthy apparently go hand-in-hand – or so the argument implicitly seems to go.

But Wall Street seems to have demonstrated otherwise. In fact, greed and the lust for power would seem to be countervailing forces that constrain the expression of talent.

Rewarding greed, feeds greed and greed is inherently short-sighted. On the other hand, talent — well-employed — is its own reward. Sure, it should be well “compensated” (a term that would better only be applied to the millions whose work provides no other reward), but the reward should not be allowed to metastasize into an economic perversion.

The end of American capitalism (as we knew it)

The proximate cause of the demise of AIG as a private firm was its “monoline” activities, its exposure to massive amounts of credit-risk derivatives like CDS, many of them linked to the United States real-estate sector.

The largest insurance supermarket in the world, with a balance sheet in excess of $1 trillion nationalised because it was deemed too big and too globally interconnected to fail! The fear that drove this extraordinary decision is that AIG’s failure would increase counterparty risk – actual and perceived, throughout the financial system of the US and the rest of the world alike – to such an extent that no financial institution would have been willing to extend credit to any other financial institution. Credit to households and non-financial enterprises would have been the next domino to fall – and, voilà!, financial Armageddon.

I cannot judge the likelihood of the disaster scenario, but if there ever was a case for applying the precautionary principle in economic analysis, then this is it. It was also done in the right way, by insisting on controlling public ownership, i.e. nationalisation, of the company. [continued…]

Free market lions on Wall Street are all comrades now

It is a measure of the existential nature of the crisis we are witnessing that, over just the past two weeks, that the US government has invested something like more than $US285 billion in what can only be characterised as the nationalisation of three major financial institutions.

On September 7, US taxpayers stumped up $US200 billion to re-float, and take control of, the near-terminal mortgage twins Fannie Mac and Freddie Mac.

Now they have bailed out the world’s biggest insurer.

Suddenly the great advocates of markets unfettered by government intervention are not so convinced by the old theory of moral hazard, that in free markets corporations should be allowed to fail. [continued…]

Europe and Asia see U.S. as no longer practicing what it preaches

Is the United States no longer the global beacon of unfettered, free-market capitalism?

In extending a last-minute $85 billion lifeline to AIG, the troubled insurer, Washington has not only turned away from decades of rhetoric about the virtues of the free market and the dangers of government intervention, it has also likely undercut future American efforts to promote such policies abroad.

“I fear the government has passed the point of no return,” says Ron Chernow, a leading American financial historian. “We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams.” [continued…]

Editor’s Comment — “It’s pure crisis management,” Chernow said. “It’s the Treasury and the Federal Reserve lurching from crisis to crisis without a clear statement on how financial failures will be handled in the future. They’re afraid to articulate such a policy. The safety net they are spreading seems to widen every day with no end in sight.”

There is of course another dimension to the policy vacuum. The POTUS is AWOL – Bush is in his bunker. The ship of state has no one at the helm. Whether his presence or absence best serves the crisis is open to debate, but the idea that this is a moment where presidential leadership is called for seems beyond question.

Wall Street’s unraveling

Wall Street as we know it is kaput. It is not just that Merrill Lynch agreed to be purchased by Bank of America or that the legendary investment bank Lehman Brothers filed for bankruptcy or that the insurance giant AIG is floundering. It is not even that these events followed the failure of the investment bank Bear Stearns or the government’s takeover of Fannie Mae and Freddie Mac, the largest mortgage lenders. What’s really happened is that Wall Street’s business model has collapsed.

Greed and fear, which routinely govern financial markets, have seeded this global crisis. Just when it will end isn’t clear. What is clear is that its origins lie in the ways that Wall Street — the giant investment houses, brokerage firms, hedge funds and “private equity” firms — has changed since 1980. Its present business model has three basic components. [continued…]

Suspected US missile strike kills 6 in Pakistan

A suspected U.S. missile strike killed at least six people Wednesday, hours after the top U.S. military officer told Pakistani leaders that America respected Pakistan’s sovereignty amid a furor over American strikes into Pakistan’s northwest. [continued…]

Washington risking war with Pakistan

As Wall Street collapsed with a bang, almost no one noticed that we’re on the brink of war with Pakistan. And, unfortunately, that’s not too much of an exaggeration. On Tuesday, the Pakistan’s military ordered its forces along the Afghan border to repulse all future American military incursions into Pakistan. The story has been subsequently downplayed, and the chairman of the joint chiefs of staff, Mike Mullen, flew to Islamabad, Pakistan’s capital, to try to ease tensions. But the fact remains that American forces have and are violating Pakistani sovereignty. [continued…]

Pakistan tribal chiefs warn US on raids

Leaders of an estimated 500,000 tribesmen who have so far remained largely neutral over the conflict in Afghanistan warned last night they were poised to support al-Qa’ida and the Taliban unless US forces retreated from their strategy of attacking targets inside Pakistan.

In a major jolt to Washington’s new policy of allowing cross-border raids in defiance of the Government in Islamabad, key tribal elders were reported to have met and warned that they were also prepared to raise an army to fight coalition forces in Afghanistan.

“If America doesn’t stop attacks in the tribal areas, we will prepare a lashkar (army) to attack US forces in Afghanistan,” Pashtun tribal chief Malik Nasrullah Khan was reported as saying in Miranshah, the largest town in North Waziristan, which has been the target of repeated US attacks in the past week. [continued…]

Timidity abroad, feudal ferocity at home

It would appear that the wimpish political leadership, in the wake of the no-nonsense statements of the army and air chiefs, has finally reconciled to the fact that the nation could not continue to accept the expanding US military intrusions into Pakistan. Of course, Prime Minister Gilani continued to show his timidity in the face of the US by declaring that we could only deal with the US diplomatically, and Zardari has yet to make a comment on the issue, but eventually the Pakistani security forces took action against US forces seeking intrusion into Pakistan and their non-lethal firing sent the proper message to the would-be invaders. Equally comforting was the fact that the Wazir tribesmen actively supported the security forces – showing once again that when the state is in consonance with its people rather than with hostile external players, the people will show their support.

This is just the beginning of a new threat Pakistani is now going to face, given the noises coming out of the US – especially from its aspiring leadership. The Republicans have now got a religious extremist as their vice-presidential candidate so God help the Muslim world if the McCain-Palin ticket is successful. After all, if Palin sees Iraq as “God’s War”, one can rest assured she will see other US invasions in a similar vein. As for Obama, he has been itching to have the US forces enter Pakistan since the time he began his campaign. So for Pakistan specifically, and for the Muslim world in general, the new US administration will offer no respite from the bigotry and extremism that dominates the American polity today.

Therefore, Pakistan has to be prepared to fight a dual terrorist threat – from the militants within our own polity and the state terrorism of the US that is now directly threatening Pakistan. That is why there has to be complete clarity and resoluteness on a rational national policy to combat these threats. [continued…]

Plans for Palin shed some light on ticket

Although she’s been a candidate for the second-highest office in the country for more than two weeks, there is still a lot Americans don’t know about Sarah Palin. But now we have a better sense of what John McCain knows about her, and how he plans to use her in the White House.

Surprising many at a rally in Golden, Colo., on Monday, Palin laid out the role she would play in a McCain administration. “John and I have worked out a plan, what I want to concentrate on and what he would like to kind of tap into me to help with,” she told the crowd. “My mission is going to be energy security and government reform. And — another thing near and dear to my heart — it’s going to be helping families who have special needs and children with special needs.”

Lost in the breaking news of the financial crisis and the aftermath of Hurricane Ike, the announcement made an important implicit statement about how active Palin would be if McCain were to win the White House. [continued…]

GOP group behind negative Obama poll

A Republican group is taking responsibility for a poll that has roiled the Jewish community by asking sharply negative questions about Senator Barack Obama.

The Republican Jewish Coalition, which is launching a campaign against Obama on behalf of Senator John McCain, sponsored the poll to “understand why Barack Obama continues to have a problem among Jewish voters,” the group’s executive director, Matt Brooks, told Politico.

The poll asked voters their response to negative statements about Obama, including reported praise for him from a leader of the Palestinian terror group Hamas and a friendship early in his career with a pro-Palestinian university professor. Some Jewish Democrats who received the poll – including a New Republic writer who lives in Michigan – were outraged by the poll, describing it in interviews as “ugly” and disturbing. A group that supports Obama, the Jewish Council for Education and Research even staged a protest outside the Manhattan call center from which the calls originated Tuesday. [continued…]

Another country

In the mid-1990s, polling that my firm conducted showed that more than 60 percent of voters were more concerned that “the federal government will try to do too much, not do it well and raise taxes.” This year, 60 percent chose the survey’s other option, expressing greater worry that “the federal government will not do enough to help ordinary people deal with the problems they face.” Americans who used to be wary of government involvement are now calling for it.

We have documented a similar, if less drastic, shift in public views of morality. Just three years ago, a majority of those we surveyed said that “there are absolute standards of right and wrong that apply to everyone in almost every situation.” Today, however, respondents by a narrow margin say they believe that “everyone has to decide for themselves what is right and wrong in particular situations.”

Surveys by the Pew Research Center reveal a concomitant change in foreign policy values. Well before 9/11, in the mid-1980s, Americans supported the concept of peace through military strength by a 14-point margin. By 2007, despite the intervening attack on the United States, that margin fell to just two points. [continued…]

Counties with minorities in the majority grow in rural America

A quarter of the people living in rural America make their homes in counties where the majority of the population is made up of racial/ethnic minorities — Hispanic, African American or Native American. And more than half of the rural and exurban population in the United States lives in counties with minority populations that will likely become majorities by mid-century, according to an analysis of recent U.S. Census reports.

Rural America continues to grow more diverse as minorities, particularly Hispanics, have moved out of large urban areas and into smaller cities and rural communities. From July 2006, to July 2007, for example, St. Joseph, Missouri, an hour north of Kansas City, had a 21 percent increase in its Hispanic population. That was the largest increase in the country. [continued…]

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NEWS & VIEWS ROUNDUP: September 17

Politicians lie, numbers don’t

If you’re wondering why a formerly honorable man like John McCain would build his presidential campaign around issues that are simultaneously beside-the-point, trivial, and dishonest (sex education for kindergartners, lipstick on pigs), the numbers presented here may help to solve that mystery. Since the conventions ended, McCain has mired the presidential race in dishonest trivia because he doesn’t want it to focus on what voters say is the most important issue this year: the economy.

There is no secret about any of this. The figures below are all from the annual Economic Report of the President, and the analysis is primitive. Nevertheless, what these numbers show almost beyond doubt is that Democrats are better at virtually every economic task that is important to Republicans. [continued…]

The power of political misinformation

Have you seen the photo of Republican vice presidential nominee Sarah Palin brandishing a rifle while wearing a U.S. flag bikini? Have you read the e-mail saying Democratic presidential nominee Barack Obama was sworn into the U.S. Senate with his hand placed on the Koran? Both are fabricated — and are among the hottest pieces of misinformation in circulation.

As the presidential campaign heats up, intense efforts are underway to debunk rumors and misinformation. Nearly all these efforts rest on the assumption that good information is the antidote to misinformation.

But a series of new experiments show that misinformation can exercise a ghostly influence on people’s minds after it has been debunked — even among people who recognize it as misinformation. In some cases, correcting misinformation serves to increase the power of bad information. [continued…]

The fruit of hypocrisy

Houses of cards, chickens coming home to roost – pick your cliche. The new low in the financial crisis, which has prompted comparisons with the 1929 Wall Street crash, is the fruit of a pattern of dishonesty on the part of financial institutions, and incompetence on the part of policymakers.

We had become accustomed to the hypocrisy. The banks reject any suggestion they should face regulation, rebuff any move towards anti-trust measures – yet when trouble strikes, all of a sudden they demand state intervention: they must be bailed out; they are too big, too important to be allowed to fail.

Eventually, however, we were always going to learn how big the safety net was. And a sign of the limits of the US Federal Reserve and treasury’s willingness to rescue comes with the collapse of the investment bank Lehman Brothers, one of the most famous Wall Street names. [continued…]

Why experience matters

Philosophical debates arise at the oddest times, and in the heat of this election season, one is now rising in Republican ranks. The narrow question is this: Is Sarah Palin qualified to be vice president? Most conservatives say yes, on the grounds that something that feels so good could not possibly be wrong. But a few commentators, like George Will, Charles Krauthammer, David Frum and Ross Douthat demur, suggesting in different ways that she is unready.

The issue starts with an evaluation of Palin, but does not end there. This argument also is over what qualities the country needs in a leader and what are the ultimate sources of wisdom. [continued…]

The American war moves to Pakistan

The decision to make public a presidential order of last July authorizing American strikes inside Pakistan without seeking the approval of the Pakistani government ends a long debate within, and on the periphery of, the Bush administration. Senator Barack Obama, aware of this ongoing debate during his own long battle with Hillary Clinton, tried to outflank her by supporting a policy of U.S. strikes into Pakistan. Senator John McCain and Vice Presidential candidate Sarah Palin have now echoed this view and so it has become, by consensus, official U.S. policy.

Its effects on Pakistan could be catastrophic, creating a severe crisis within the army and in the country at large. The overwhelming majority of Pakistanis are opposed to the U.S. presence in the region, viewing it as the most serious threat to peace.

Why, then, has the U.S. decided to destabilize a crucial ally? Within Pakistan, some analysts argue that this is a carefully coordinated move to weaken the Pakistani state yet further by creating a crisis that extends way beyond the badlands on the frontier with Afghanistan. Its ultimate aim, they claim, would be the extraction of the Pakistani military’s nuclear fangs. If this were the case, it would imply that Washington was indeed determined to break up the Pakistani state, since the country would very simply not survive a disaster on that scale.

In my view, however, the expansion of the war relates far more to the Bush administration’s disastrous occupation in Afghanistan. It is hardly a secret that the regime of President Hamid Karzai is becoming more isolated with each passing day, as Taliban guerrillas move ever closer to Kabul. [continued…]

Tariq Ali’s brief message for Barack Obama:

Top Pentagon official in surprise visit to Pakistan

The chairman of the Joint Chiefs of Staff, America’s top military official, made a hastily arranged visit to Pakistan on Tuesday for talks about a recent incursion by American commandos based in neighboring Afghanistan.

The visit by the chairman, Adm. Mike Mullen, came as an uproar continued to grow in Pakistan about the incursion on Sept. 3, which severely strained relations between the United States and Pakistan, its top Muslim ally in the war against terrorism. The visit also coincided with conflicting accounts about a possible second American raid on Monday, as well as a warning by the Pakistan military that it would shoot at any foreign forces who crossed the border.

A Pakistani military spokesman, Maj. Gen. Athar Abbas, said the army reserved the right to use force to defend the country and its people, but he said there was “no change in policy.” [continued…]

The West begins to doubt Georgian leader

Last week German Foreign Minister Frank-Walter Steinmeier publicly called for clarification on the question of who is to blame for the Caucasus war. “We do need to know more about who bears what portion of the responsibility for the military escalation and to what extent,” Steinmeier told a meeting of Germany’s more than 200 ambassadors in Berlin. The European Union, he said, must now “define our relations with the parties to the conflict for the medium and long term,” and that the time has come to have concrete information.

Much depends on the clarification of this question of blame. After this war, the West must ask itself whether it truly wants to accept a country like Georgia into NATO, especially if this means having to intervene militarily in the Caucasus if a similar conflict arises. And what sort of partnership should it seek in the future with Russia, which, for the first time, has now become as insistent as the United States on protecting its spheres of influence?

The attempt to reconstruct the five-day war in August continues to revolve around one key question: Which side was the first to launch military strikes? Information coming from NATO and the Organization for Security and Cooperation in Europe (OSCE) now paints a different picture than the one that prevailed during the first days of the battle for the South Ossetian capital Tskhinvali — and is fueling the doubts of Western politicians. [continued…]

Big-bang report blasts Iran

One week ahead of the annual gathering of world leaders at the United Nations in New York, the International Atomic Energy Agency (IAEA) has issued a new report that while confirming the agency’s full-scope inspection and verification of Iran’s nuclear activities, discovering no evidence of any military diversion, is permeated with “serious concerns” and “outstanding questions”.

These questions relate to certain “alleged studies” and the overall effect could be a shot in the arm for the flagging “Iran Six” multilateral diplomacy on Iran involving the United States, Britain, France, Russia and China plus Germany. This could lead to even more sanctions on Iran, or worse, an Israeli or American strike against Iran’s nuclear infrastructure.

The IAEA describes a collection of weaponization designs and documents that suggest Iran has tried to develop a nuclear warhead as “alleged studies” and wants Tehran to identify the factually corrects parts of the documents and those it considers fabricated. [continued…]

Five ex-secretaries of state urge talks with Iran

Five former secretaries of state, gathering to give their best advice to the next president, agreed Monday that the United States should talk to Iran.

The wide-ranging, 90-minute session in a packed auditorium at The George Washington University, produced exceptional unity among Madeleine Albright, Colin Powell, Warren Christopher, Henry A. Kissinger and James A. Baker III.

But they didn’t agree on who should move into the Oval Office next January. [continued…]

Iraq’s Nouri Maliki breaking free of U.S.

Once dependent on American support to keep his job, Prime Minister Nouri Maliki has consolidated power and is asserting his independence, sharply reducing Washington’s influence over the future of Iraq.

Iraq’s police and army now operate virtually on their own, and with Washington’s mandate from the United Nations to provide security here expiring in less than four months, Maliki is insisting on imposing severe limits on the long-term U.S. military role, including the withdrawal of American forces from all cities by June.

America’s eroded leverage has left Iran, with its burgeoning trade and political ties, in a better position to affect Iraqi government policies. [continued…]

Arrests of Sunni tribal leaders risk giving al-Qaida a way back, says Iraqi vice-president

The Iraqi government is in danger of pushing Sunni tribal leaders back into the arms of al-Qaida and re-igniting major violence across Iraq if it fails to take more Sunnis into the security forces, the country’s leading Sunni politician has warned.

Many tribal leaders who opposed the US occupation switched sides on promises of jobs in the previously Shia-dominated army and police. In a sign of the success of the so-called Awakening movement (al Sahwa), which is also known as the “Sons of Iraq”, the US recently handed Anbar province – once a centre of the insurgency – back to Iraqi control.

But in Diyala province, north of the capital, as well as in Baghdad suburbs, the Iraqi army and police have arrested dozens of al-Sahwa leaders in recent weeks because of their previous anti-American and anti-government activity. The government is dragging its feet on a pledge to take a fifth of the estimated 100,000 al-Sahwa members into the security forces. [continued…]

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NEWS & VIEWS ROUNDUP: September 16

More radical than Bush

John Goodman is a conservative economist who thinks all the fuss over people without health insurance is just hooey. As Goodman explained to a reporter from The Dallas Morning News last week, everybody can get medical care from an emergency room, so why not just stop tallying the uninsured altogether? “Voil à,” Goodman quipped. “Problem solved.” Like many far-right policy experts, Goodman had said such things before. But, unlike many far-right policy experts, Goodman isn’t just some random wonk. As the Morning News noted, Goodman had helped craft McCain’s health care plan. In other words, he is a McCain adviser.

Or, at least, he used to be. When Goodman’s quote got the attention of reporters, a McCain spokesman issued a terse statement: “John Goodman is not an adviser to this campaign.” When that position became untenable–it turns out Goodman had identified himself as an adviser not only to the Morning News but also in a recent Wall Street Journal op-ed, to which the McCain campaign never objected–the official story changed. Yes, Goodman had offered advice to McCain. But it was on an unpaid, voluntary basis, and McCain had since made clear that Goodman’s input was not necessary. “John McCain could not disagree more strongly with Mr. Goodman,” a spokesman said. “John McCain believes that addressing the problem of the nation’s uninsured is one of our most pressing national priorities.” (Goodman has been traveling and unavailable for comment.)

It wasn’t the first time this campaign season that McCain distanced himself from a conservative adviser over controversial statements. Former Texas senator Phil Gramm, as a top economic adviser, had far more influence than Goodman. Fortune magazine actually called him “McCain’s econ brain.” But, in June, Gramm told a Washington Times reporter that the economy was stronger than most Americans realized. The real problem, he suggested, was a “mental recession”–that “we have sort of become a nation of whiners.” Again, Gramm was offering a refrain common among conservatives, who think the press constantly dwells on bad economic news. But did McCain believe it, too? This time, McCain himself issued a denial. “Phil Gramm does not speak for me,” he said. “America is in great difficulty. And we are experiencing enormous challenges.” Soon Gramm was told his services, too, were no longer required. [continued…]

McCain blasts Wall street failure, neglects to mention his adviser helped cause it

As the news broke of the Lehman Brothers meltdown and the rest of the latest financial crisis, John McCain, speaking at a campaign rally in Florida on Monday, angrily declared,

We will never put America in this position again. We will clean up Wall Street. This is a failure.

And in a statement released by his campaign, McCain called for greater “transparency and accountability” on Wall Street.

If McCain wants to hold someone accountable for the failure in transparency and accountability that led to the current calamity, he should turn to his good friend and adviser, Phil Gramm.

As Mother Jones reported in June, eight years ago, Gramm, then a Republican senator chairing the Senate banking committee, slipped a 262-page bill into a gargantuan, must-pass spending measure. Gramm’s legislation, written with the help of financial industry lobbyists, essentially removed newfangled financial products called swaps from any regulation. Credit default swaps are basically insurance policies that cover the losses on investments, and they have been at the heart of the subprime meltdown because they have enabled large financial institutions to turn risky loans into risky securities that could be packaged and sold to other institutions. [continued…]

Financial Russian roulette

Will the U.S. financial system collapse today, or maybe over the next few days? I don’t think so — but I’m nowhere near certain. You see, Lehman Brothers, a major investment bank, is apparently about to go under. And nobody knows what will happen next.

To understand the problem, you need to know that the old world of banking, in which institutions housed in big marble buildings accepted deposits and lent the money out to long-term clients, has largely vanished, replaced by what is widely called the “shadow banking system.” Depository banks, the guys in the marble buildings, now play only a minor role in channeling funds from savers to borrowers; most of the business of finance is carried out through complex deals arranged by “nondepository” institutions, institutions like the late lamented Bear Stearns — and Lehman.

The new system was supposed to do a better job of spreading and reducing risk. But in the aftermath of the housing bust and the resulting mortgage crisis, it seems apparent that risk wasn’t so much reduced as hidden: all too many investors had no idea how exposed they were. [continued…]

On the stump, Obama moves past hope

The poetic defenses of hope, the playful jokes about being a distant relative of Vice President Cheney and the glancing attention to policy have been replaced by an emphasis on economic fears — an issue-by-issue argument of why the American dream is slipping away and the Republican ticket has no plan to rescue it. He furrows his brow, wags his finger and broadcasts exasperation at the idea that a 26-year veteran of Washington is co-opting his mantra of change.

The Obama campaign has even replaced the wistful slogan, “Change We Can Believe In,” with the more imperative “Change We Need.” [continued…]

Outrage at McCain’s “lies” is a total loser strategy

Mark Halperin’s three pieces of advice for Obama seem sound. (They are 1. Ignore Palin; 2. Get in McCain’s head the way McCain’s getting in Obama’s; and 3. Refocus on the economy in an accessible way.) … To which I’d add:

4. It’s a good week for point 3!

5. The current lib blog-MSM-campaign tack–getting outraged by McCain’s “lies”–is a total loser strategy. Why? [continued…]

Even before VP nomination, Palin’s e-mail use questioned

Moments after Gov. Sarah Palin’s first speech as Republican John McCain’s running mate, she sat with her kids backstage, thumbing one of the two BlackBerrys that are always with her. You can see them in photographs from that day on the campaign blog of one of McCain’s daughters.

The tech-savvy governor has one of the devices (which allow users to read and send e-mails) for state business and another for personal matters, but those worlds intertwine.

Palin routinely uses a private Yahoo e-mail account to conduct state business. Others in the governor’s office sometimes use personal e-mail accounts, too.

The practice raises questions about backdoor secrecy in an administration that vowed during the 2006 campaign to be “open and transparent.” [continued…]

Afghanistan is in its worst shape since 2001, European diplomat says

One of the most experienced Western envoys in Afghanistan said Sunday that conditions there had become the worst since 2001. He urged a concerted American and foreign response, even before a new American administration took office, to avoid “a very hot winter for all of us.”

The envoy, Francesc Vendrell, a Spanish diplomat with eight years’ experience in Afghanistan, especially criticized the growing number of civilian deaths in attacks by American and international forces.

Those deaths have created “a great deal of antipathy” and widened the distance between the Afghan government and citizens, he said here at an annual review of global strategy organized by the London-based International Institute for Strategic Studies. Mr. Vendrell recently stepped down as the European Union envoy in Kabul. [continued…]

Confusion over Afghan border clash

Confusion swirled over a possible incursion by United States forces into Pakistani territory in South Waziristan on Monday.

Local residents and a Pakistani government official said two American helicopters were repulsed when Pakistani soldiers fired at them, but the Pakistani and United States military publicly denied any such incident, and a Pakistani intelligence official said that an American helicopter had mistakenly crossed the border briefly, leading Pakistani ground forces to fired into the air.

The Pakistani official, a senior official who deals with the tribal areas and who spoke on condition of anonymity, said that American troops had tried to land in South Waziristan at a town called Angoor Adda, in a mountainous region with thick forest on the border with Afghanistan. [continued…]

Iraq: Al-Qaida intensifies its stranglehold in the world’s most dangerous city

It is the most dangerous city in the world’s most dangerous country, a sad, half-empty relic whose rich and middle classes have long since fled. To reach it, one has to travel incognito in convoys of rundown small cars whose drivers conceal their walkie-talkies and weapons under the seats. Their bodyguards sometimes switch to dented taxis with shattered windshields as an extra disguise.

Mosul – the de facto capital of northern Iraq – should have been as safe as Basra and Baghdad if a massive military offensive by Iraqi and US forces, which was launched in May, had succeeded. But most al-Qaida insurgents slipped away before it began – and they are now slipping back. “They use car bombs and roadside bombs, and target areas which used to be very safe. Now they are assassinating people with pistols that have silencers. The offensive was not as successful as expected,” said Doraid Kashmoula, the provincial governor.

In June, the Americans trumpeted the killing of Abu Khalaf, who they described as al-Qaida’s local kingpin, and the “emir of Mosul”. “Killing this man didn’t help. When the security forces kill one emir, they have 10 others to replace him,” the governor added. [continued…]

Israel outraged after settler rampage in West Bank

Israel expressed outrage on Sunday after a mob of Jewish settlers rampaged through a Palestinian village in the West Bank to avenge the stabbing of a nine-year-old boy in a nearby settlement.

Israeli Prime Minister Ehud Olmert condemned Saturday’s settler attack on the village, during which four Palestinians were shot and wounded, and vowed to halt settler “pogroms” in the occupied territory.

“This phenomenon of taking the law into their own hands and of brutal and violent attacks is intolerable and will receive the strictest and most severe treatment,” Olmert told reporters ahead of a weekly cabinet meeting. [continued…]

Danger of Jewish terror

The violent revenge attack staged by dozens of settlers from Yitzhar at the nearby Palestinian village Asira al-Kabaliya is the tip of the iceberg: The iceberg of Jewish terror whose edges are exposed to the Israeli public on occasion.

In the week before this attack, we saw two more cases attesting to this reality. Civilian Administration representatives who sought to confiscate construction equipment at the illegal outpost Yair were attacked because they arrived “on short notice” according to the settlers. Later that day, dozens of settlers attacked a nearby IDF base, clashed with the soldiers there to guard them, and set a dog on a company commander. The deputy regiment commander broke his finger in the attack.

Yet despite the incident in Asira al-Kabaliya, while the police and army shirk their responsibility for maintaining law and order, the prime minister and defense minister made statements such as “we won’t let pogroms take place in Israel.” The wild riot by settlers during Shabbat was condemned by many, including the Yesha Council. However, there are those who can make do with a condemnation and those whose job it is to do something. The defense minister and prime minister are responsible for enforcing the law in the West Bank. However, so far they have condemned, but did nothing. [continued…]

As peace talks sputter, Israelis and Palestinians eye Plan B

Over the past two decades of Israeli-Palestinian negotiations, deadlines for peace agreements have come and gone with precious few treaties.

Now, amid low expectations for an agreement before the expiration of the Bush administration’s target for an accord by the end of 2008, voices are growing on both sides advocating abandoning talks on Palestinian statehood if they miss the mark yet again.

“We certainly need to think outside the box,” says Hanan Ashrawi, a Palestinian legislator and longtime supporter of peace talks. “The business-as-usual approach hasn’t worked.” [continued…]

The Army’s totally serious mind-control project

Soldiers barking orders at each other is so 20th Century. That’s why the U.S. Army has just awarded a $4 million contract to begin developing “thought helmets” that would harness silent brain waves for secure communication among troops. Ultimately, the Army hopes the project will “lead to direct mental control of military systems by thought alone.”

If this sounds insane, it would have been as recently as a few years ago. But improvements in computing power and a better understanding of how the brain works have scientists busy hunting for the distinctive neural fingerprints that flash through a brain when a person is talking to himself. The Army’s initial goal is to capture those brain waves with incredibly sophisticated software that then translates the waves into audible radio messages for other troops in the field. “It’d be radio without a microphone, ” says Dr. Elmar Schmeisser, the Army neuroscientist overseeing the program. “Because soldiers are already trained to talk in clean, clear and formulaic ways, it would be a very small step to have them think that way.”

B-movie buffs may recall that Clint Eastwood used similar “brain-computer interface” technology in 1982’s Firefox, named for the Soviet fighter plane whose weapons were controlled by the pilot’s thoughts. (Clint was sent to steal the plane, natch.) Yet it’s not as far-fetched as you might think: video gamers are eagerly awaiting a crude commercial version of brain wave technology — a $299 headset from San Francisco-based Emotiv Systems — in summer 2009. [continued…]

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NEWS & VIEWS ROUNDUP & EDITOR’S COMMENT: September 14

How does President Palin sound?

For first time in modern history, a presidential race is actually going to be decided by the vice presidential pick.

Thanks to Sarah Palin, this is no longer a contest between Barack Obama and John McCain – it’s between Brother Barack and Sistah Sarah.

Rock star vs. rock star. Inexperienced vs. inexperienced. Newcomer vs. newcomer. Change vs. change. [continued…]

Editor’s Comment — Willie Brown isn’t profound, but depth isn’t what’s called for here. Instead of being cry-babies who complain about McCain’s lack of integrity, and instead of hysterically endlessly pointing out Palin’s lack of experience (as though we all just got religion and decided that the candidate’s level of experience is the thing), Democrats need to focus on McCain by focusing on Palin. What’s that mean?

Sarah Palin is de facto the top of the Republican ticket. It’s a contest between Palin and Obama. Obama doesn’t need to pull Palin down; he needs to hold her up to the point where McCain has to reclaim his own candidacy.

Indeed, if Obama wants to shake things up some more, he could try this for a game changer:

In acknowledging that McCain’s choice of running mate has so radically shaken up the race, let’s have two additional debates: McCain against Biden and Palin against Obama.

Believe me, that would take guts on Obama’s part because I honestly don’t know how he’d fair.

But the main point is to get voters to earnestly focus on the real choice at hand:

Do we want to see President Obama in the Oval Office or President Palin?

The Sixty-Day War

At 37, with a 225-pound frame, a Kojak-bald head, wraparound shades, and a Bluetooth headset invariably jacked into his ear, [Steve] Schmidt cuts an imposing figure. His affect, which alternates between steely, monotonal stoicism and fierce combativeness, is cultivated, designed to be intimidating. His cardinal professional virtues are relentlessness, focus, and a capacity for nearly infinite repetition. The GOP consultant Alex Castellanos says Schmidt is more purely pragmatic than Rove, less ideological, and hence even more lethal—“the perfect political killing machine.” His former boss accordingly nicknamed him The Bullet. His current one ritually refers to him as Sergeant Schmidt.

The bond between Schmidt and McCain was formed a year ago, in the wake of the near immolation of the McCain campaign in a bonfire of chaos, indiscipline, and mismanagement. Schmidt and his family lived in California, where he’d helped engineer Arnold Schwarzenegger’s landslide reelection in 2006. Even as McCain’s campaign faltered, he stuck loyally by his side. “He earned his stripes in the foxhole,” recalls McCain’s former media adviser Mark McKinnon. “He talked to McCain when no one was returning his phone calls.”

But it wasn’t until June that Schmidt assumed near-total control over McCain-land, after confronting the candidate over what he perceived as an incipient crisis similar to the one in 2007. The lack of focus. The internecine strife. The sloppy, listing message. Schmidt informed McCain bluntly that if he didn’t make significant changes in his operation, he was going to lose. [continued…]

The Palin-whatshisname ticket

Karl Rove for once gave the Democrats a real tip rather than a bum steer when he wrote last week that if Obama wants to win, “he needs to remember he’s running against John McCain for president,” not Palin for vice president. Obama should keep stepping up the blitz on McCain’s flip-flops, confusion, ignorance and blurriness on major issues (from education to an exit date from Iraq), rather than her gaffes and résumé. If he focuses voters on the 2008 McCain, the Palin question will take care of itself.

Obama’s one break last week was the McCain camp’s indication that it’s likely to minimize its candidate’s solo appearances by joining him at the hip with Palin. There’s a political price to be paid for this blatant admission that he needs her to draw crowds. McCain’s conspicuous subservience to his younger running mate’s hard-right ideology and his dependence on her electioneering energy raise the question of who has the power in this relationship and who is in charge. A strong and independent woman or the older ward who would be bobbing in a golf cart without her? The more voters see that McCain will be the figurehead for a Palin presidency, the more they are likely to demand stepped-up vetting of the rigidly scripted heir apparent. [continued…]

With White House push, U.S. arms sales jump

The Bush administration is pushing through a broad array of foreign weapons deals as it seeks to rearm Iraq and Afghanistan, contain North Korea and Iran, and solidify ties with onetime Russian allies.

From tanks, helicopters and fighter jets to missiles, remotely piloted aircraft and even warships, the Department of Defense has agreed so far this fiscal year to sell or transfer more than $32 billion in weapons and other military equipment to foreign governments, compared with $12 billion in 2005.

The trend, which started in 2006, is most pronounced in the Middle East, but it reaches into northern Africa, Asia, Latin America, Europe and even Canada, through dozens of deals that senior Bush administration officials say they are confident will both tighten military alliances and combat terrorism.

“This is not about being gunrunners,” said Bruce S. Lemkin, the Air Force deputy under secretary who is helping to coordinate many of the biggest sales. “This is about building a more secure world.”

The surging American arms sales reflect the foreign policy tides, including the wars in Iraq and Afghanistan and the broader campaign against international terrorism, that have dominated the Bush administration. Deliveries on orders now being placed will continue for several years, perhaps as one of President Bush’s most lasting legacies. [continued…]

Shadow of Guantanamo follows freed inmates back to their homes

They call them the Bandi Guantánamo, the Guantánamo returnees, and their welcome home is far from warm. All across Afghanistan in recent months, scores of men have been coming back from a long journey halfway around the world. About 100 have been released from Guantánamo Bay by United States authorities in the last 12 months as Washington, under mounting pressure from governments around the world, attempts to moderate the damage done to America’s image by the Cuba-based detention centre. A third are Afghan and more are due to return in the coming weeks.

After more than five years in detention thousands of miles away, often traumatised, often angry, or just broken and poor, the Bandi Guantánamo try to build new lives, with limited success. Most claim innocence. Others are unashamed of their acts of violence. Interviewed in Kabul last month, Mohammed Umr described how he had trained in terrorist techniques, met Osama bin Laden and fought at the battle of Tora Bora in 2001. Released 10 weeks ago, he spoke of how angry the presence of his former jailers in his homeland made him. ‘If they have come here to help us, why do they kill civilians and why can’t they even provide electricity to Kabul seven years after invading?’, asked the 30-year-old former footballer, arrested in Pakistan during the closing days of the war of 2001. [continued…]

Iraq: Violence is down – but not because of America’s ‘surge’

The perception in the US that the tide has turned in Iraq is in part because of a change in the attitude of the foreign, largely American, media. The war in Iraq has now been going on for five years, longer than the First World War, and the world is bored with it. US television networks maintain expensive bureaux in Baghdad, but little of what they produce gets on the air. When it does, viewers turn off. US newspaper bureaux are being cut in size. The result of all this is that the American voter hears less of violence in Iraq and can suppose that America’s military adventure there is finally coming good.

An important reason for this optimism is the fall in the number of American soldiers killed. (The 30,000 US soldiers wounded in Iraq are seldom mentioned.) This has happened because the war that was being waged against the American occupation by the Sunni community, the 20 per cent of Iraqis who were in control under Saddam Hussein, has largely ended. It did so because the Sunni were being defeated, not so much by the US army as by the Shia government and the Shia militias.

Sunni insurgent leaders who were nationalists or Baathists realised that they had too many enemies. Not only was al-Qa’ida trying to take over from traditional tribal leaders, it was also killing Sunni who took minor jobs with the government. The Awakening, or al-Sahwa, movement of Sunni fighters was first formed in Anbar province at the end of 2006, but it was allied to the US, not the Iraqi government. This is why, despite pressure from General Petraeus, the government is so determined not to give the 99,000 al-Sahwa members significant jobs in the security forces when it takes control of – and supposedly begins to pay – these Sunni militiamen from 1 October. The Shia government may be prepared to accommodate the Sunni, but not at the cost of diluting Shia dominance.

If McCain wins the presidential election in November, his lack of understanding of what is happening in Iraq could ignite a fresh conflict. In so far as the surge has achieved military success, it is because it implicitly recognises America’s political defeat in Iraq. Whatever the reason for President George Bush’s decision to invade Iraq and overthrow Saddam Hussein in 2003, it was not to place the Shia Islamic parties in power and increase the influence of Iran in the country; yet that is exactly what has happened. [continued…]

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