Taking hard new look at a Greenspan legacy

“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004

George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”

And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.

Today, with the world caught in an economic tempest that Mr. Greenspan recently described as “the type of wrenching financial crisis that comes along only once in a century,” his faith in derivatives remains unshaken. [continued…]

Globalizing the crisis response

The financial crisis has gone global. Stock indexes have fallen and credit markets are seizing up around the world. In recent days, as most Americans focused on the political drama of the rescue package, a number of European banks have failed or been taken over. Several in Russia and Eastern Europe are teetering on the verge of insolvency. Many Latin American countries are newly vulnerable because foreign banks are big players there. Few nations can escape the financial contagion.

Also looming is an even more virulent form of contagion: decreased levels of economic activity because of contracting trade flows. Japan and several European countries are already in recession. If the United States and the entire European Union sink further, as looks increasingly possible, emerging markets and developing countries will face lower exports and less growth. Even China will experience a sharp slowdown because of its heavy reliance on overseas markets. Unemployment will soar almost everywhere.

Globalization of the crisis requires a globalized response. While the consequences of financial crises are clearly international, the regulation of finance remains almost wholly national. And national efforts, including the U.S. rescue plan and European governments’ remedies for their nations’ bank problems, will continue to be the first responses.

Yet an internationally coordinated strategy, ranging far beyond the heroic efforts of the world’s leading central banks, is essential now that the U.S. rescue plan is in place. When finance ministers convene in Washington this week for the annual International Monetary Fund meeting, they should adopt several initial components of such a strategy. Not doing so would be almost as serious as if Congress had adjourned without passing the rescue legislation. [continued…]

Editor’s Comment — Even though it is a conceit for America to regard itself as an indispensable nation, there are clearly times when American presidential leadership has a vital role to play in galvanizing support for global action.

In attempting to lead the world at a time of crisis, any president when this close to leaving office would be at a serious disadvantage, but none more so than George Bush. Is it conceivable that he can rise above his status as the lamest of lame ducks? Could he not at least announce that he wants to convene a summit of world leaders to meet in Washington in mid-November with the president-elect in attendance?

It’s time to start laying the groundwork for revamping the Bretton Woods system. There is, as Bush would say, hard work to be done — yet no evidence that he is prepared to start doing it.

Afghanistan: the neo-Taliban campaign

The attack on the Marriott Hotel in Islamabad on 20 September, killing some 60 people, was compared to 9/11 in Pakistan and could be a turning point in the conflict in this region. President Bush has authorised ground operations against Taliban bases in Pakistan, which has now become the main theatre in the ‘war on terror’. Meanwhile, the neo-Taliban, operating an al-Qaida franchise there and in Afghanistan, have controlled the escalation of guerrilla resistance in a sophisticated military strategy based on the conduct of the Vietnam war. [continued…]

Editor’s Comment — On September 11, 2001, when President Bush uttered the words, “We will make no distinction between the terrorists who committed these acts and those who harbor them,” Osama bin Laden’s prayers were answered and his strategic assumptions confirmed. Al Qaeda would be provided with a war on terrorism exactly on the terms that it needed.

A few hundred Arabs holed up in caves in Eastern Afghanistan always knew that sooner or later they would outstay their welcome. Their only hope was that in the eyes of their enemies, al Qaeda and the Taliban would be seen as one.

As a prelude to 9/11, the destruction of the Buddha statues in Bamiyan — portrayed in the media as a barbaric act of fanatical Islamic iconoclasm — was in fact a political masterstroke. It cemented the bond between guests — who should have been seen as the enormous liability that they were and still are — and their naive hosts. As Jason Burke reported in May 2002: “Letters found in houses in Kabul show that bin Laden and other senior figures in al Qaeda leant heavily on Mullah Mohammed Omar, the reclusive one-eyed cleric who led the Talibs, to destroy the statues despite, or rather because of, the international outrage at their plans.”

After Western nations first spurned Taliban appeals for humanitarian aid, then vigorously condemned the destruction of a global heritage site, it was easy for Mullah Omar’s Arab friends to claim that the West’s concern for Afghanistan did not extend to its people.

Seven years later, as Syed Saleem Shahzad indicates, it now appears to be too late to try and drive a wedge between al Qaeda and the Taliban — in the neo-Taliban a fusion of indigenous and foreign forces now appear to be inseparably mixed.

At this point, to suppose that capturing or killing Osama bin Laden would be of any lasting consequence in the “good war” is to ignore that the Afghan-Pakistan war has, as NATO commanders concede, become unwinnable.

The surge that failed

When, decades from now, historians compile the record of this Afghan war, they will date the Afghan version of the surge — the now trendy injection of large numbers of troops to resuscitate a flagging war effort — to sometime in early 2007. Then, a growing insurgency was causing visible problems for U.S. and NATO forces in certain pockets in the southern parts of the country, long a Taliban stronghold. In response, military planners dramatically beefed up the international presence, raising the number of troops over the following 18 months by 20,000, a 45% jump.

During this period, however, the violence also jumped — by 50%. This shouldn’t be surprising. More troops meant more targets for Taliban fighters and suicide bombers. In response, the international forces retaliated with massive aerial bombing campaigns and large-scale house raids. The number of civilians killed in the process skyrocketed. In the fifteen months of this surge, more civilians have been killed than in the previous four years combined.

During the same period, the country descended into a state of utter dereliction — no jobs, very little reconstruction, and ever less security. In turn, the rising civilian death toll and the decaying economy proved a profitable recipe for the Taliban, who recruited significant numbers of new fighters. They also won the sympathy of Afghans who saw them as the lesser of two evils. Once confined to the deep Afghan south, today the insurgents operate openly right at the doorstep of Kabul, the capital. [continued…]

Secret Saudi dinner, Karzai’s brother and the Taliban

The Afghan government of President Hamid Karzai has been involved in secret negotiations with Gulbuddin Hekmatyar, the former Mujaheddin leader now labelled a terrorist by the US and Britain.

The Independent has learned that extensive talks have taken place between President Karzai’s representatives and the Hekmatyar group which has been responsible for a series of bloody attacks in Afghanistan.

The revelation, from senior diplomatic sources, comes alongside a report claiming that the President’s brother, Qayum Karzai, attended a dinner in Saudi Arabia hosted by King Abdullah which was also attended by members of the Taliban insurgency and the former Pakistani Prime Minister Nawaz Sharif. [continued…]

US should talk with its enemies: Petraeus

General David Petraeus said Wednesday that attempts are being made to open talks with the Taliban in Afghanistan and that the United States should be prepared to engage with its enemies.

His comments came a day after US presidential rivals Barack Obama and John McCain tangled over the question of directly engaging Iran in their second one-on-one debate.

“I’m trying to go around minefields these days and not blunder into them,” Petraeus said. “But I do think you have to talk to enemies.” [continued…]

U.S. study is said to warn of crisis in Afghanistan

A draft report by American intelligence agencies concludes that Afghanistan is in a “downward spiral” and casts serious doubt on the ability of the Afghan government to stem the rise in the Taliban’s influence there, according to American officials familiar with the document.

The classified report finds that the breakdown in central authority in Afghanistan has been accelerated by rampant corruption within the government of President Hamid Karzai and by an increase in violence by militants who have launched increasingly sophisticated attacks from havens in Pakistan.

The report, a nearly completed version of a National Intelligence Estimate, is set to be finished after the November elections and will be the most comprehensive American assessment in years on the situation in Afghanistan. Its conclusions represent a harsh verdict on decision-making in the Bush administration, which in the months after the Sept. 11, 2001, attacks made Afghanistan the central focus of a global campaign against terrorism.

Beyond the cross-border attacks launched by militants in neighboring Pakistan, the intelligence report asserts that many of Afghanistan’s most vexing problems are of the country’s own making, the officials said. [continued…]

The Obama surge: will it last?

Obama’s had another advantage in these debates, one that is difficult to quantify but very real: he simply seems more comfortable, and confident, than McCain. Part of this is, sadly, attributable to the physical awkwardness imposed by McCain’s war wounds and his bouts with cancer — the restricted arm movements; the scarred, clenched jaw. But there is also a pent-up anger to McCain. He seems to be concentrating so hard on trying to stay calm that he doesn’t have much energy left over to answer questions in a free and creative way. He is not the sort of person, in the end, that you want to invite into your living room for a four-to-eight-year stay.

Barack Obama is. We are witnessing something remarkable here: Obama’s race is receding as he becomes more familiar. His steadiness has trumped his skin color; he is being judged on the content of his character. But there is a real challenge — and opportunity — inherent in his success. Obama has taken some inspired risks in this campaign. His willingness to propose more governmental control of the health-care market is a prime example. But he has also been very cautious, a typical politician in many ways. The most obvious is in his resolute unwillingness to deliver bad news or make any significant demands on the public. Neither he nor McCain had anything but platitudes to offer when asked what sacrifices they would ask of the American people. Worse, when Brokaw asked if he thought the economy was going to get worse before it gets better, Obama flatly said, “No. I’m confident about the economy.”

That was, no doubt, the politic answer. But not the correct one. Obama was underestimating the public’s capacity to hear the truth — which is odd, since the national desire for substance, the unwillingness to be diverted by “lipstick on a pig” trivialities, has been so striking in this campaign. Everyone knows this recession is going to hurt, that there will be a price for our profligacy and that some hard shoveling will be necessary to get out of this hole. Indeed, that knowledge is what has made Obama’s success possible. But if he wants to do more than merely succeed, if he wants to govern successfully, he is going to have to trust the people as much as they are beginning to trust him. After years of happy talk from politicians, that is the change we really need. [continued…]

Obama in the corner

American voters are staggering under the worst financial crisis since at least 1982. Asset values are tumbling, consumer spending is contracting, and a recession is visibly on the way. This crisis follows upon seven years in which middle-class incomes have stagnated and Republican economic management has been badly tarnished. Anybody who imagines that an election can be won under these circumstances by banging on about William Ayers and Jeremiah Wright is … to put it mildly … severely under-estimating the electoral importance of pocketbook issues.

We conservatives are sending a powerful, inadvertent message with this negative campaign against Barack Obama’s associations and former associations: that we lack a positive agenda of our own and that we don’t care about the economic issues that are worrying American voters.

Republicans used negative campaigning successfully against Michael Dukakis and John Kerry, it’s true. But 1988 and 2004 were both years of economic expansion, pro-incumbent years. 2008 is like 1992, only worse. If we couldn’t beat Clinton in 1992 by pointing to his own personal draft-dodging and his own personal womanizing, how do we expect to defeat Obama in a much more anti-incumbent year by attacking the misconduct of people with whom he once kept company (but doesn’t any more)? [continued…]

Does Sarah Palin have a Pentecostal problem?

If conservative columnist William Kristol is to be believed, Sarah Palin is surprised that her own campaign hasn’t made a bigger deal out of the controversial remarks of Barack Obama’s former pastor. The relationship between Obama and Jeremiah Wright is, according to Palin, fair game in the presidential campaign because it speaks to the question of the Democratic candidate’s character. “I don’t know why that association isn’t discussed more,” Kristol, writing in the New York Times, quoted Palin as telling him.

John McCain’s campaign aides could probably answer that question for Palin. The ink on Kristol’s column had barely dried before they were on the phone to political reporters declaring that the GOP nominee had long believed it would be inappropriate to raise the Wright issue. But McCain’s current sensitivity is much more related to his running mate’s own pastor problems than to any newfound campaign honor code.

Palin’s religious background must initially have been seen as a positive to McCain campaign vetters, who assumed that her faith would appeal to the conservative base of the party that has always been suspicious of McCain. But ever since she joined the ticket in late August, the Alaska governor’s various religious affiliations have caused headaches. First came reports that her pastor at the nondenominational Wasilla Bible Church was connected to Jews for Jesus, an organization that seeks to convert Jews to Christianity. Prominent Jewish leaders, including the co-chair of McCain’s Jewish outreach effort, have since demanded to know whether Palin also believes that Jews must be converted. The Bible Church became an issue again when Katie Couric asked Palin about the church’s promotion of a program to help gays “overcome” their homosexuality. [continued…]

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