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October 28, 2009

Banks Hate Banks, Voters Hate Banks: Hear the People Singing!

We're going to stick with Financial Reform for a while because so much has happened in the last week, and even more importantly, because it's such an important, even critical, issue. In some ways, though not all, Financial Reform is the single most important domestic policy challenge after stimulating the economy. Healthcare Reform as well as Education, Energy and Innovation are probably more important in the long-run but to get there we need to have a healthy, reliable and effective Finance Industry. Setting aside the natural anger that almost all of us feel about the last two years, which should be counter-balanced by the fact that we all rode the gravy train for the last three decades, we've concluded that the policy and business cases for not reforming Finance do NOT hold up, and in fact are completely contradicted by the facts and the economic history. But, like almost every other major policy initiative, we're now having to pay the Piper for that three decades party, before he comes to collect with claymore in hand.

Take a few minutes to listen to this BNN clip from the founder of a Canadian securities firm who sounds about like the rest of us on the banks, but starts with discussing his recent trip to Afghanistan and the level of public dedication displayed as well as the level of progress. Then close the loop....what a compare and contrast between the Financiers and those troops. You might also want to check out Andrew Sorkin on Charlie Rose (go to the site, go to the archives and scroll down) and this recent PBS Special on Brooksley Born and futures regulation. Among other things Sorkin uses a key phrase - "tone deaf". What's happening to the Industry is something that they refused to see coming because they figured it was business as usual. On that topic Ms. Born's history should give you a bit of the history involved.

The Vicious Cycle of Malfeasant Financial Engineering

The last post went into some length on why the business models are broken and why the case(s) for leaving the Industry un-regulated don't hold up as well as pointing to support from an interesting range of commentators, from Greenspan to Volcker to Mervyn King of the Bank of England. In the accompany graphic we've tried to summarize those arguments and put them into the context of the bigger economic picture.

The top box summarizes the key economic policy goals that we must succeed at, no ifs, ands or buts, if we're going to stabilized the economy, get it growing again and re-create a healthy long-term outlook for us all. A healthy and product Financial sector is vital to all of them, but is key to #6 and IS #7!

Continued ...

 

The righthand box summarizes several of the critical arguments we concluded the last post with on what a contributory organization has to do to be a constructive member of society. We are after all a large and complex society that would be unable to function without our large organizations. In other words effective organizations that make a positive contribution, are well-run and, at minimum, do no harm to society, are inescapable to our meeting those goals. How would you grade the Finance Industry on those topics (please feel free to review the last post again)? We'd offer up our grades but there's nothing below an F and somehow that seems inadequate for an Industry that almost collapsed Western Civilization.

It also seems in adequate for an Industry that's taking advantage of public funds and support programs to create giant trading profits to pay bonuses when there's no demonstrable positive contribution. In fact we could even argue that paying those bonuses when, at minimum, they should be used to shore up the capital of the banks is essential. The lefthand box summarizes our findings from the last post, and all the readings excerpted there, on where the Industry has failed us. The bottomline is that an argument for bonuses because it's essential to an efficient and effective industry doesn't hold up very well.

The Economic Outlook

Martin Feldstein was recently interviewed on BNN, the Canadian Financial News network, about his take on the industry and regulation in two parts. Wrapped around his comments in part two are his comments on the state of the economy and the outlook, and he's not very sanguine. In fact he sees a weak recovery with serious downside risks for another downturn without government support. Now as it happens he's NOT as strong on controlling bonuses and risk-taking as we are but we'd argue that he hasn't looked at those issues as carefully as we have, or in much depth. In fact it'd be interesting to have him or his team at the NBER take a look at the issues. You can see Part 1 of his interview by clicking on the highlights.

In fact while you're at it here are some other BNN interviews that are directly and specifically relevant on the state of the economy, the challenges we've still got ahead of us and the Industry reaction to regulatory reform. Rather than leave you entirely in suspense it struck as fascinating and encouraging that the industry business experts also supported reform. The sooner the better, too!

Dallas Fed President Richard Fisher

The president of the U.S. Federal Reserve Bank of Dallas says he sees the beginnings of an "inventory correction" in the U.S. economy. But, Richard Fisher also says a recovery is going to be "tough slog". He spoke with BNN's Howard Green in this exclusive interview. Part 1 and Part 2

Reaction to Fed Statement on Compensation

The Obama administration's pay czar released a report calling for big cuts in executive pay at companies that have yet to repay TARP loans. Paul Bagnell reports and BNN speaks to Scott Talbot, senior VP, government relations, The Financial Services Roundtable.

The Optics of Executive Pay 

BNN investigates executive pay with Christopher Chen, regulatory lead, executive compensation, Hay Group.

 We trust from the opening clip to the Rose and PBS programs to our own arguments plus the BNN interviews and reporting we've made a sufficiently strong case for why this is critically important? Feel free to write your Congressman. In fact, please do!

Just in case we haven't you'll find a rather extensive reading except collection after the jump that is at least worth skimming IOHO, starting with an excellent Jim Jubak column on how badly broken the banks are in their traditional lines of business and where they're making their profits. Plus some stories that back up the "Malfeasant" part of the title, readings on compensation and some more on the need for structural reform. The final section on the readings is on Capitalism and its future - we particularly recommend them here. It turns out we're fighting another Cold War here.

Several years ago a Marine Archeology team explored Kublai Khan's "Divine Wind" fleet that invaded Japan in the 13thC. What they found is that many, if not most, of the ships were built to hugely sub-par standards. Partly because they were rushed but mostly because the Mandarins in charge grafted off the public funds for their own purses. Who says History doesn't repeat itself!

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First Reading

Why big banks hate banking There have been no obituaries. No eulogies. No burial services. But this quarter marks the death of traditional banking at the big money-center banks. Yes, we've seen amazing earnings reports from the likes of Goldman Sachs (GS, news, msgs) and JPMorgan Chase (JPM, news, msgs) this quarter, but their profits came from things like trading. From everything, in fact, but what you and I -- and certainly the preceding generation -- called banking. And it's exactly those huge profits from everything but banking that have put the final nail in the big banks as banks. Goldman Sachs and JPMorgan Chase and maybe Bank of America (BAC, news, msgs) and Citigroup (C, news, msgs), too, will survive as financial institutions. But they won't be banks. The model for what these big financial institutions will be is laid out in the most recent quarterly earnings reports from Goldman Sachs and JPMorgan Chase. Goldman Sachs, for example, blew through Wall Street projections when it announced third-quarter earnings of $5.25 a share, more than a dollar above the Wall Street consensus. Revenue climbed to $12.4 billion for the quarter, more than double Goldman's $6.04 billion in revenue in the third quarter of 2008.Not bad for a recession, eh?

Stories from the Bleeding Edge

If Lenders Say ‘The Dog Ate Your Mortgage’ FOR decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property. On top of that, courts rubber-stamped the array of foreclosure charges that lenders heaped onto borrowers and took banks at their word when the lenders said they owned the mortgage notes underlying troubled properties. In other words, with lenders in the driver’s seat, borrowers were run over, more often than not. Of course, errant borrowers hardly deserve sympathy from bankers or anyone else, and banks are well within their rights to try to protect their financial interests. But if our current financial crisis has taught us anything, it is that many borrowers entered into mortgage agreements without a clear understanding of the debt they were incurring. And banks often lacked a clear understanding of whether all those borrowers could really repay their loans. Even so, banks and borrowers still do battle over foreclosures on an unlevel playing field that exists in far too many courtrooms. But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.

Reckless strategies doomed WaMu On Sept. 10, 2007, Washington Mutual CEO Kerry Killinger stood before an audience of analysts and money managers and assured them the Seattle-based thrift would come out of the housing slump stronger than ever. WaMu, Killinger told the Lehman Brothers conference, had tightened its lending standards, could access plenty of cash, and was "picking and choosing carefully" when it came to making new loans. "This frankly may be one of the best times I have ever seen for taking on new loans into our portfolio," he said. But even as he spoke, WaMu was a dead bank walking. The company had plunged headlong into the business of making exotic, high-risk home loans, selling many of them to investors but holding onto others; now defaults on those loans were rising, and big investors had lost their taste for them. Almost a year to the day after the Lehman conference, Killinger was fired. Two and a half weeks after that, federal regulators seized WaMu's banking units, effectively euthanizing a 119-year-old institution that had survived the Great Depression and the S&L crisis. After its collapse, Killinger and other leading WaMu executives repeatedly deflected responsibility, saying the company fell victim to a housing slump turned global credit crisis that they foresaw but couldn't outrun. But interviews with former WaMu executives and employees, along with government and internal company documents, reveal a far different picture, one of executives charting a reckless course that doomed the bank:

Class Claims Lender Destroyed Records Bank of America and Countrywide Home Loans destroyed mortgage documents, and "recreate" them by "insert(ing) data as they see fit," to cover up their own failure to keep records - or their fraud - according to a federal RICO class action.  "To cover up the servicing mistakes and fraud and misrepresentation in the servicing of a consumer escrow, Defendants 'recreate' letters, insert data as they see fit, and fail to produce the entire HUD complaint form. This way, a consumer is left in the dark about the fraud that occurred to them," the complaint states. Countrywide routinely responded to customers' requests for records by claiming they were "unavailable or destroyed," according to the complaint. Statutory law requires that such records be kept for 5 years, the plaintiffs say.      Mortgage servicers have a "statutory duty to send consumers an annual escrow analysis and statement, advising the consumer of their escrow, monthly payment, and how it is calculated based on taxes," the class claims.      The information is especially important with an escrow addition to a mortgage, which "throws consumers off," as principle and interest tend to fluctuate.     The class is estimated at 10,000. They claim the documents they received from the subprime lender were "incorrect or incomplete." The records allegedly were tailored to cover up misrepresentations, and to "ward off lawsuits such as the instant one."     BAC Home Loans is also named in the complaint.

Compensation

Who cares if 'talent' leaves? Critics warn that reining in pay makes it hard to keep talented employees. Hemmed in, institutions like AIG (AIG, Fortune 500),Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500) could lose their best people. These firms would then perform even more abysmally, if that's possible, leaving them hard pressed to repay tens of billions of dollars of taxpayer-backed loans. Still, we say Godspeed to this "talent." After all, the traders and suits in the corner offices don't exactly have an unblemished track record. In 2008, Citigroup, BofA and Merrill Lynch (since acquired by BofA) posted a grand total of $51 billion in losses. Yet even as they were running themselves into the ground, the firms managed to pay out more than $12 billion in bonuses -- including 1,606 million-dollar-plus bonuses, according to a report from the New York attorney general's office. "Even a cursory examination of the data suggests that in these challenging economic times, compensation for bank employees has become unmoored from the banks' financial performance," the report said. Meanwhile, it's hard to imagine that defection-hit firms would have a lot of trouble finding qualified replacements in the current job market. And Goldman Sachs' (GS, Fortune 500) charm offensive notwithstanding, it looks like the official response to runaway pay is just starting. The Fed's plan to weigh big banks' compensation plans against their potential for undermining the economy could eventually put pressure on pay at all the big banks. "This could be a game changer," said Simon Johnson, an economist at MIT. "There will be a lot of pressure on them in Congress to stick it to the big firms." But maybe the best reason not to fret about talent flight is one familiar to cubicle dwellers everywhere: just because someone has a big, high-paying job doesn't mean they're good at it. Take Bank of America, for instance. The bank's longtime CEO, Ken Lewis, unexpectedly announced his retirement this month, while agreeing to give back his 2009 salary. Lewis didn't say why he was leaving, but it seems that criticism over his empire building, mishandling of the Merrill acquisition and outsize pay got to him. The Charlotte Observer reported he had grown tired of the "mud being thrown on him day by day." Another helping or two of that mud could be just what Wall Street needs.

Bank pay crackdown Washington launched its biggest offensive yet against Wall Street pay practices Thursday, taking aim at everyone from senior executives to high-flying traders of complex securities. Leading the charge was the White House, which outlined a series of drastic pay cuts for 136 top executives at the nation's biggest bailed-out companies, including AIG (AIG, Fortune 500), Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500). Separately, the Federal Reserve proposed a review of pay practices at 28 of the nation's largest banks to make sure employees are not tempted to make the kinds of risky bets that helped sink firms such as Lehman Brothers.

Range of Firms Alter Pay Policies Companies as diverse as Polo Ralph Lauren Corp. and Sysco Corp. are adopting executive-pay plans that echo principles laid out by government regulators, potentially signaling a broad shift in compensation practices. The changes at these non-financial firms aren't a direct response to moves by Treasury pay czar Kenneth Feinberg and the Federal Reserve, which apply to banks and big recipients of government bailout funds. The recession, more than government regulation, is driving some of the moves. But companies for a while have been seeking ways to reward executives' long-term performance and limit excessive risk-taking, according to compensation consultants. "We are at the tipping point" for eliminating big annual bonuses, outsized severance agreements and other traditional pay practices, said James F. Reda, managing director of his pay consultancy in New York. Among the changes: more stock-based compensation, with longer waiting periods before it can be sold; higher performance hurdles for bonuses; and limits on perks, severance and supplemental pensions. The shifts are far from universal. Some experts say bank-pay limits are having little impact elsewhere in corporate America. "I don't see any trend in that direction," said George Paulin, chairman and chief executive of Frederic W. Cook & Co., a pay consultancy.

Why Do Bankers Make So Much Money? A tenet of economics is that in competitive markets there are no economic rents. That is, people get fairly paid for their efforts, their capital input, and for bearing risk. They are not paid any more than is necessary as an incentive for production. In trying to understand the reason for the huge pay scale within the finance industry, we can either try to justify the pay level as being a fair one in terms of the competitive market place, or ask in what ways the financial industry deviates from the competitive economic model in order to allow economic rents. No one expects competitive levels of compensation when there are deviations from a competitive market. In what ways might the banks – and here I mean the largest banks and those banks that morphed over the past year from being investment banks – fall away from the model of pure competition? One way is through creating inefficiencies to keep competitive forces at bay. Banks can do this, for example, by constructing informational asymmetries between themselves and their clients. This gets into those pages of small print that you see in various investment and loan contracts. What we might call gotcha clauses and what the banks call revenue enhancers. And it also gets into the use of complex derivatives and other “innovative products” that are hard for the clients to understand, much less price. Another way is to misprice risk and push it into other parts of the economy. The fair economic payoff increases with the amount of risk taken. If a bank takes on more risk it should get a higher expected payoff. If the bank can get paid as if it is taking on risk while actually pushing the risk onto someone else, then it will start to pull in economic rents. The use of innovative products comes up again in this context.

Structural Reform

Do not ignore the need for financial reform, The philosophy that has helped me both in making money as a hedge fund manager and in spending it as a policy oriented philanthropist is not about money but about the complicated relationship between thinking and reality. The crash of 2008 has convinced me that it provides a valuable insight into the workings of the financial markets. The efficient market hypothesis holds that financial markets tend towards equilibrium and accurately reflect all available information about the future. Deviations from equilibrium are caused by exogenous shocks and occur in a random manner. The crash of 2008 falsified this hypothesis. I contend that financial markets always present a distorted picture of reality. Moreover, the mispricing of financial assets can affect the so-called fundamentals that the price of those assets is supposed to reflect. That is the principle of reflexivity. Instead of a tendency towards equilibrium, financial markets have a tendency to develop bubbles. Bubbles are not irrational: it pays to join the crowd, at least for a while. So regulators cannot count on the market to correct its excesses. The crash of 2008 was caused by the collapse of a super-bubble that has been growing since 1980. This was composed of smaller bubbles. Each time a financial crisis occurred the authorities intervened, took care of the failing institutions, and applied monetary and fiscal stimulus, inflating the super-bubble even further. I believe that my analysis of the super-bubble offers clues to the reform that is needed. First, since markets are bubble-prone, financial authorities must accept responsibility for preventing bubbles from growing too big. Second, to control asset bubbles it is not enough to control the money supply; you must also control credit. The best known means to do so are margin requirements and minimum capital requirements. Currently they are fixed irrespective of the market’s mood because markets are not supposed to have moods. They do, and authorities need to counteract them to prevent asset bubbles growing too large. Third, since markets are unstable, there are systemic risks in addition to the risks affecting individual market participants. Participants may ignore these systemic risks, believing they can always sell their positions, but regulators cannot ignore them because if too many participants are on the same side, positions cannot be liquidated without causing a discontinuity or a collapse. Fourth, financial markets evolve in a one-directional, non-reversible manner. Financial authorities have extended an implicit guarantee to all institutions that are too big to fail. Withdrawing that guarantee is not credible, therefore they must impose regulations to ensure this guarantee will not be invoked.

Bill in works to let US dissolve failing firms House Democrats and the Obama administration are preparing to introduce major legislation aimed at eliminating the devil's choice the government faced last fall, when officials felt forced to decide between spending billions of dollars to rescue some of the nation's most powerful financial firms or letting their failures sink the economy. The lawmakers and Treasury Department officials labored over the weekend to finish drafting legislation that would empower the government to seize troubled firms other than banks that are deemed "too big to fail." The legislation would set up the Federal Reserve to oversee the largest financial firms, and eliminate the agency that regulates thrifts. The officials said the measure could be unveiled as soon as Tuesday. The proposal comes as debate intensifies over how far the government should go in restructuring the financial system, and it follows House action last week toward creating a consumer protection agency to oversee lending practices. Republicans on the House Financial Services Committee have remained skeptical of granting the government power to wind down or bail out large, non-bank financial institutions. In July, they proposed creating a new chapter in the bankruptcy code to deal with such troubled firms, saying it would make for a smoother, fairer process. Concerns have also deepened in Congress, among Republicans and some Democrats, that the program could amount to a permanent bailout fund and reduce private market discipline by being too generous to creditors of failed firms. Despite such differences, the problem is clear to all sides: Banks got so big that federal officials could not let them fail without risking catastrophic consequences for the economy. During the crisis, the government arranged mergers that pushed troubled banks into the arms of more stable firms. Big firms got even bigger. Senior officials now worry that these financial behemoths could return to the reckless behavior that led to the crisis, reasoning that federal officials will clean up any mess. Frank has made clear that he expects the new proposals will be contentious. Last week, after his committee had voted to create the new consumer financial protection agency, he was asked whether the most difficult and divisive part of regulatory overhaul was behind him. Frank didn't hesitate. "I think the resolution authority is probably the hardest to do," he said.

Re-thinking Markets and Capitalism

Death of “Soul of Capitalism”: Bogle, Faber, Moore Jack Bogle published "The Battle for the Soul of Capitalism" four years ago. The battle's over. The sequel should be titled: "Capitalism Died a Lost Soul." Worse, we've lost "America's Soul." And, worldwide, the consequences will be catastrophic. That's why a man like Hong Kong contrarian economist Marc Faber warns in his Doom, Boom & Gloom Report: "The future will be a total disaster, with a collapse of our capitalistic system as we know it today." Has capitalism lost its soul? Guys like Bogle and Faber sense it. Read more about the soul in physicist Gary Zukav's "The Seat of the Soul," Thomas Moore's "Care of the Soul" and sacred texts. But for Wall Street and American capitalism, use your gut. You know something's very wrong: A year ago, too-greedy-to-fail banks were insolvent, in a near-death experience. Now, magically, they're back to business as usual, arrogant, pocketing outrageous bonuses while Main Street sacrifices, and unemployment and foreclosures continue rising as tight credit, inflation and skyrocketing federal debt are killing taxpayers. Yes, Wall Street has lost its moral compass. It created the mess, but now, like vultures, Wall Streeters are capitalizing on the carcass. They have lost all sense of fiduciary duty, ethical responsibility and public obligation. Here are the Top 20 reasons American capitalism has lost its soul:

Converting the Preachers  "Large swaths of economics are going to have to be rethought on the basis of what's happened." So said Larry Summers, President Obama's chief economic adviser, in an interview in the weeks after the markets crashed a year ago. Yet to a remarkable degree, economic thinking hasn't changed very much at all. Now financier George Soros is announcing a $50 million effort to speed things along. This week Soros is gathering some of the leading practitioners of the market-skeptic school, who were marginalized during the era of "free-market fundamentalism," among them Nobelists Joseph Stiglitz, George Akerlof, Michael Spence, and Sir James Mirrlees. He's also creating an "Institute for New Economic Thinking" to make research grants, convene symposiums, and establish a journal, all in an effort to take back the economics profession from the champions of free-market zealotry who have dominated it for decades, and to correct the failures of decades of market deregulation. Soros hopes matching funds will bring the total endowment up to $200 million. "Economics has failed not only to predict and explain what happened but has also failed to protect society," says Robert Johnson, a former managing director at Soros Fund Management, who will direct the new institute. "That's what the crisis revealed. The paradigm has failed. There is no guidance." It might be tempting to dismiss all this as a war of words among brainiacs. It's not. The critical issues being discussed in Washington about the future regulation and control of the financial industry—the very nature of Wall Street and the health of the economy—depend on this battle of ideas. What led to wholesale deregulation in the '90s and '00s wasn't just Wall Street lobbying money. It was also that key legislators and policymakers, among them Larry Summers, persuaded themselves that deregulation was sound economics and good policy, and that markets and Wall Street institutions could take care of themselves. Many of those views have been discredited by the crisis. But in the absence of a new paradigm of economics, confusion still reigns in Washington. With no new concept of the proper role of government and regulation in the economy, of the proper balance between the markets and their minders, the old school still dominates. Exhibit No. 1: the late Hyman Minsky, a bushy-haired dissident at the University of California, Berkeley, and Washington University who saw into the heart of financial-market mania perhaps more deeply than anyone else. Minsky's "Financial Instability Hypothesis," which he developed in the '60s, held that success in financial markets always breeds its own instability. The longer a boom lasts, the less market players consider failure a possibility; as a result, careful borrowing, lending, and investment inevitably give way to recklessness and speculative euphoria. Margins and capital cushions come to be seen as unnecessary. At a certain watershed point—sometimes called a "Minsky moment"—the foreordained collapse begins. The most speculative bets crash, loans are called in, asset values plunge, and the downward spiral feeds on itself. That's what happened over the last two years. Minsky was in effect filling in many of the intellectual blanks left by John Maynard Keynes on the critical question of how financial markets affect the "real" economy. Nonetheless, an assessment of Minsky in 1997, a year after he died, concluded that his "work has not had a major influence in the macroeconomic discussions of the last thirty years."

October 22, 2009

The Chinese Goldsmith, Finance and the Next Big Fight(Updates)

The last several months have seen partisan fight after partisan fight in Washington, often leaving us average citizens as innocent bystanders or even collateral damage, or so it seems to many people. Now we've been focused on the Healthcare Reform fight and the debate on Afghanistan. On the first there was some amazingly good news, the last committee passed a proposal out of the Baucus Committee to the rest of the Senate, though the day before the Insurance Industry published a report attacking the proposals that was so bad even the consultants who wrote it have disavowed it. On Afghanistan we by stand what we've been saying - it's a mess but if we walk away again it'll be worse. The big fight you may be missing is the one over Finance Industry Reform. It was back-burnered because of the urgency and importance of immediate business, e.g. saving the country from economic collapse, but is moving center stage. Like many of the stakeholders in HC Reform those in Finance have been fighting to water down the bill but in this case with less justification, if possible, more smoldering anger among the public and, with this week's announcements. The Industry argues that the last two quarters of monumental bonuses are right, proper, the way they do business, indicate a return to health and good for the economy and country. The country's mood is probably captured by the cartoon collage but just in case were wondering how angry people are check out this video clip from Dylan Rattigan's Morning Meeting. The question is who's right?

UPDATES: Some recent news and blog posts reinforce the line of inquiry we are pursuing here and we recommend them to your attention.

Post De-regulation: Finance Industry, Debt and the Economy

There's no question that a properly functioning Finance Industry is necessary for a growing economy and contributes to long-run growth and prosperty. Neil Ferguson covers millenia of history in addressing that in his PBS Special "The Ascent of Money". We'll rest the strategic case there and focus instead on the narrower one of is our finance industry functioning properly? In particular has it contributed to our wealth and prosperity at an acceptable cost to society, that is are we getting a return for our money? :)!

The graphic starts to speak directly to that with the top part showing recent changes in debt among several sectors (NB: all this worry about excess government borrowing is mis-placed, btw; right now it's simply absorbing all the excess sloshing around as everybody else de-leverages and is likely to do so for years).

The bottom part of the chart is the really interesting part. On the left you can see ordinary businesses continuing a gradual growth of their borrowing while the Finance Industry, ex-post mid-80s de-regulation, securitzation and financial engineering wizardry, shooting for the money...oops, we mean moon. Similarly consumers got completely carried away as well, again beginning with the widespread availability of cheap consumer and credit card debt.

Judging from these charts the net impact of the last three decades of de-regulation was to load down everybody in the economy with loads and loads of debt. Which sustained the explosion in consumer demand that fueled worldwide economic growth. As the US consumer pulls back, de-leverages and re-builds their balance sheets we're facing a fundamental change in the underlying economic structure we've been dealing with.

Continued .... 


Finance Industry, Debt and Bonuses

So what did the Industry do with all that debt? Well juding by this chart, again from the WSJ, it looks like what it did was pay itself bonuses from the profits from loading up the rest of us with debt.

Just to draw the points home Wall St. compensation before WW2 was significantly higher than compensation in the rest of the economy and then went thru a huge equalizing drop. Then, after de-regulation, it sky-rocketed back to the mooney until it exceeded the relative levels seen during the 20s and 30s! So much for the argument that high bonuses are innate in the Industry or contribute to the overall health and well-being of the economy.

We won't go thru the charts or arguments but will mention that prior to de-regulation and bonuses excesses the US enjoyed both its highest rates of saving and its highest rates of economic growth. We'll also add that the last couple of years have seen an enormous destruction of wealth for the average citizen. In the readings you'll find very extensive links and excerpts to a huge inventory of readings that examine the business performance of the Industry, economic policy and the state of the economy. Let's summarize the findings so far, inclusive of those readings:

1. The Industry argues that bonuses are a natural part of the way it does business but not only is that not true but ALL the profits in the last two quarters were the result of proprietary trading, i.e. speculating on their own account. That'd be o.k. if it were their own money at risk but actually, between bailouts, Fed guarantees and bond purchrases, etc. it's our money and our risk but their profits and bonuses.

2. While efficient and effective finance is important we think we've also shown that an industry built on leverage, securitization and financial engineering has created a situation that has over-loaded the economy with debt and hampered growth. So much for the "social value" argument.

3. The "encumberances" on the rest of us are part of the problem but then again the Industry almost destoyed itself; in other words by blindly and apparantly mindlessly pursuing excess risks they didn't understand they destroyed the last decade's worth of what turned out to be paper profits inside the industry. In other words as businesses they performed abysmally.

4. Finally, and obviously of course, they almost brought down the entire economy and destroyed Western Civilization. Just in case you hadn't noticed! :).

Helmet Laws, Adult Supervision and Re-regulation

Peter Drucker tells us a business has three main purposes - it should 1) create value for society, 2) create an effective work environment that makes people effective and 3) it should contribute to the health of society. He further breaks down the last point into three major points about organizational social responsibility by arguing that any organization should also a) do no harm, b) act to correct harms innate in its activities and c) support the correction of society's problems because no organization can be successful in an un-healthy society.

How would you judge the Finance Industry on those criteria? Based on the points we've summarized above and document extensively in the readings?

People argued that seat belt or helmet laws are an unwarranted interference in private decision-making. We confess to having similar notions ourselves but then we thought about it. When some idiot goes ripping down the road without a helmet and crashes society is put to the problem of cleaning up the mess, treating the idiot and taking care of the innocent victims. This kind of external damage is why we end up with helmet laws.

The President and his administratin have been inviting the Industry since taking office to act responsibly and this last weekend many senior members of the Administration made appearances on the Sunday news shows to repeat and re-iterate the appeal. Not to mention the President's speech to Wall St. several weeks ago. We'd suggest that when you've got the President and many senior members of Congress mad at you you're making a major mistake. When it turns out your case for arguing with them is beyond wrong you're in a world of hurt. Yet the Industry continues to appear tone-deaf where these issue are concerned. If you don't think he's serious we suggest you listen to the CSpan vidclip....not just the words but the tone and body language. For Mr. Cool we'd suggest he's more than a little irate.

The Chinese Goldsmith vs the Special Interests

Mancur Olson in his book The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities about how special interest groups eventually seize control of the levers of power and begin acting in their own narrow interest and sacrificing the good of society tells an interesting story from the end of the last Chinese Imperial Dynasty. In seems an innovative goldsmith tried to introduce modern wire-drawing equipment from the West that would have enormously improved the productivity of his apprentices, let him make a lot more jewelry and sell it at much cheaper prices. The end result? His fellow goldsmiths found this change all together too threatening to their iron ricebowls and put him to death using the "Death of a Thousand Cuts"!

Now in this case who's the innovator and who's protecting their iron rice bowls? An excercise for the reader with, we hope, an obvious answer.

We'll leave you with a final hint...again channeling Herr Drucker. When an Industry refuses to correct a major problem it leaves society no choice but to step in and fix it, even when the fix is not ideal. He further adds that its a fundamental management responsibility to anticipate these problems and fix them before society is forced to. To otherwise is deeply irresponsible.

And your judgment?

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Startup Readings

Obama aides upbraid Wall St. Top Obama administration officials sharply criticized Wall Street firms planning to pay big bonuses, pointedly contrasting the soaring profits some financial companies have recorded in recent days with continuing high jobless rates across the country.The firms are benefiting from government efforts, some initiated by the Obama administration, to stabilize and restore confidence to the capital markets after a global financial crisis that began last year. With their fortunes rebounding, the Wall Street firms plan to pay tens of billions of dollars to executives."The bonuses are offensive," Obama senior adviser David Axelrod said Sunday on ABC's "This Week," adding that banks must do more to support lending across the country and should stop their lobbying efforts aimed at blocking the passage of new financial regulations that are being prepared in Congress."They ought to think through what they are doing, and they ought to understand that a year ago a lot of these institutions were teetering on the brink, and the United States government and taxpayers came to their defense," Axelrod said. "They have responsibilities, and they ought to meet those responsibilities."The Obama administration has defied popular opinion in backing huge government bailouts to try to rescue much of the nation's auto industry and stabilize the financial system, steps it saw as critical to fostering an economic recovery. At the same time, it has attempted to tap into popular anger at corporate America with outspoken criticism of bonuses, perks and other practices that have long been staples of big business.Many banks and other firms have been enjoying fat profits this year in their trading and investment arms. But much of this success has come as a result of new government policies that have kept interest rates low -- on debt and mortgages, for example.The White House has been taking an increasingly confrontational tone against Wall Street bonuses and lobbying efforts to prevent its broad plan for new financial regulations. Obama has given at least two high-profile speeches in recent weeks urging the financial industry to stop lobbying Congress not to pass laws that would, among other things, create a new agency to police credit card and mortgage lending.

The Banks Are Not All Right But it’s not a simple case of flourishing banks versus ailing workers: banks that are actually in the business of lending, as opposed to trading, are still in trouble. Most notably, Citigroup and Bank of America, which silenced talk of nationalization earlier this year by claiming that they had returned to profitability, are now — you guessed it — back to reporting losses.Ask the people at Goldman, and they’ll tell you that it’s nobody’s business but their own how much they earn. But as one critic recently put it: “There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.” Indeed: Goldman has made a lot of money in its trading operations, but it was only able to stay in that game thanks to policies that put vast amounts of public money at risk, from the bailout of A.I.G. to the guarantees extended to many of Goldman’s bonds.So who was this thundering bank critic? None other than Lawrence Summers, the Obama administration’s chief economist — and one of the architects of the administration’s bank policy, which up until now has been to go easy on financial institutions and hope that they mend themselves.Why the change in tone? Administration officials are furious at the way the financial industry, just months after receiving a gigantic taxpayer bailout, is lobbying fiercely against serious reform. But you have to wonder what they expected to happen. They followed a softly, softly policy, providing aid with few strings, back when all of Wall Street was on the ropes; this left them with very little leverage over firms like Goldman that are now, once again, making a lot of money.But there’s an even bigger problem: while the wheeler-dealer side of the financial industry, a k a trading operations, is highly profitable again, the part of banking that really matters — lending, which fuels investment and job creation — is not. Key banks remain financially weak, and their weakness is hurting the economy as a whole.

Windfalls Show That Bonus Tax Makes Sense Government action is logical. There are two legitimate policy objectives: to encourage banks to build capital to support new lending; and to help cut fiscal deficits run up during the crisis. Ideally, governments should act together to avoid damaging competitiveness.One problem is where to levy the tax. Levy it on the banks and the lion's share of the profits already will have been distributed. A better option may be a one-off tax on individual bonuses. True, this won't help recapitalize the banks, but governments will at least recoup some of the cost of their support.Better still would be for governments to adopt a French proposal capping the proportion of revenue banks distribute as bonuses. That would ensure there was a much-larger profit pool to be shared among other stakeholders, including taxpayers and shareholders. If banks can't be trusted to do the right thing and exercise self-restraint, governments shouldn't be afraid to help. 

Finance Industry Performance vs Reform

More Darkside Earnings Tales: Banks,Goldman und Unsinn The last two posts tried to keep hammering what are the underlying realities behind the headlines - first on the economy and then on corporate earnings. Now it's time to go the dark side and talk about bank earnings, particularly Goldman-Sachs. The central message is that you have to look beneath the surface and make a real effort to understand what's going on - in a phrase, 'where's the beef?' !!! On the economic front, despite all the hoopla and hype, all we've done is stop cliff-diving not begin a recovery. Now it's time to talk about banks and their even more badly distorted earnings, particularly GS's. The bottomline is that everything we talked about in our previous assessment of the Industry was born out and the banks made money only on trading. The banks, i.e. GS, that traded more made more. The question is how did they make it besides that ? Other than the obvious strategic implications this matters because a market that was headed down all of sudden boomed on the back of those "amazing" bank earnings.

BaU vs. NN I: Finance Fumes, Realities and Pecora II In other words, on the whole, we find way too many executives just waiting to be saved by the magical miracle recovery so they can revert to BaU (is there a sad parody of Value at Risk here ?) instead of making the reset adjustments required to cope with a NN. Nowhere is this problem more acute than in the Finance Industry, whose surprise earnings drove the market rally but are actually more vaporware and fumes than anything else. Based on various combinations of government money, guarantees, proprietary trading, reduced competition and so on and so forth. And which do not address the continuing threats of over-valued assets, rising bad loans, and long-term shifts in the industry.

Ask Not For Whom the Siren Shrieks: Let the Finance Wars Begin The title is a play on words of course, taken from John Donne's Meditation VII, which starts, "No man is an island entire of itself; every man is a piece of the continent, a part of the main" and end with "And therefore never send to know for whom the bell tolls; it tolls for thee.". The message being in a society we are all mutually interdependent. Sadly, this is a message which not only seems to have been lost on the Finance Industry but they would appear, judging from last quarter's earnings and their source in proprietary trading profits, to turned on its head. Ask not for whom the bell rings for it rings for me, but never thee. Having been monitoring and analyzing the business performance of the Industry for two years now we were, and are, nonetheless very surprised. Because the other side of that coin is that society requires that it's major organizations and institutions provide a service that creates value. And, especially, does no harm to society. When the opposite is true, and when it looks likely that the behaviors will continue, society has no choice but to act. Well this week is the anniversary of Lehman's fall and it behooves us to ask what lessons have we learned, what have we done to fix the systemic and systematic problems and what will we do. Washington has been focused on saving us from our own and the industry's follies but the President marked the occasion with a speech to Wall St. putting them on notice that the reckless behaviors of the past will no longer be tolerated; and inviting them to constructively contribute to creating new regulatory regimes. An invitation they've had for months and been fighting in every possible way. The week ended with the Fed's announcement that they will start setting compensation policy. Meanwhile Barney Frank on MSNBC provided pretty clear indications of where he sees things going and Pecora II is about to kick off. Now it's a siren rushing to the crime scene and the results could be very ugly.

Pictures for a Prosecution: Wall St. Bonuses vs the Public Good (Add) It's likely our point of view is implicitly clear and if it's not then several of the last posts will make it clearer. One of the bloggers we both admire and have learned a lot from, Barry Ritholz of BigPicture, has defended the bonuses as the way the Street works and if we want it to recover and do its job that's the price. Aside from the moral reactions or the questions of good public relations we thought we'd speak directly to the implied assessment of the contributions of the Street and whether or not they are justified and earned. We have three major problems leading to a major challenge.1) Currently the Street's profits are entirely dependent on public policy ranging from reduction in competition to implicit guarantees of the TBTF banks to low interest rates to various quantitative easing programs, e.g. the Fed's purchase of mortgage-backed securities and the FHA's being the source of 80% of the mortgage market flow. The point being their profits are being made off our capital, not their own.2) There is no evidence that the perverse incentives where all the gains went to the high-earners thru trading gains (read speculation) while all the losses went to us are being corrected. Add to which the perverse structure led to the failure or near-failure (including GS which had a near-death experience and was only saved by government action) of the firms themselves as well as almost collapsing Western Civilization. 3) The really deep argument is that banks and financial institutions are the intermediaries that efficiently and effectively allocate capital to their highest and best use. Well the prior two points tend all on their own to destroy that argument entirely but, since we've been reviewing the record, let's review it. We won't repeat ourselves but will simply cite several graphics we've previously put up and let you pop them yourselves because, taken all together they reach a clear conclusion.

 Bonus Fantasies vs Political Realities: the Reform Firestorm This Time (Update) We've been on this topic for some time (years in fact) but particularly emphasizing it for the last several months and our take is that the Industry by pursuing business as usual and self-interested, narrow and short-sighted lobbying as traditional is building up a backlash that could swamp them. And under-estimating the commitment of the Administration, the magnitude of committed opponents on the Hill and the deep-anger of the American people. Now the Administration held out a hand to the interest groups in Healthcare literally days after taking office, and has slowly been pursuing its goals while continuing to offer them the opportunity to be constructive in helping shape the new legislation. Most of them were smart enough to take it and the Administration is in the process of winning this fight and getting a pretty good bill to boot. The Finance Industry was offered the same opportunity but has deliberately chosen to bite the hand that fed it. Much more so than any of the HC interest groups. The President's speech in early September was a declaration of war but recent administration speeches are a clear outline of intentions (Saddam Hussein are you listening?). The video clip above is a recent short speech by the President on a Consumer Protection Agency and financial reform in general. We urge you, again, to listen to it but not just for the content per se but for the tone and attitude. The President sounded as angry as we've ever heard him, and while much less strident than the folks on Rattigan's show, the language and tone were pretty similar. When you get the President that disturbed with you you are NOT in a good place.

Essays on Finance Industry Performance

The Broken Finance Industry: Credit, Crisis, Collapse and Broken Business Models

The credit crisis of 2007-2008 that metastasized into a collapse and nearly caused Great Depression 2.0 was largely created by broken business models based on bad practices, malfeasance, excess leverage and synthetic, structured investment products. We've all learned the hard way that the Finance Industry is more than just another industry but impacts us all. By looking back, perhaps in anger and certainly in dismay and puzzlement, we can understand more about how this all came to pass. And, as a result, more about what to expect because all of these problems remain with us. If you'd like to get a better understanding of how broke the Industry is and what the consequences are this is a place to start.

The Broken Finance Industry: Credit, Crisis, Collapse and Broken Business Models

The Finance Industry brought itself and us to the brink of disaster thru bad practices and poor management. But effective capital markets are vital to the health of the economy. Now we need to consider what's broke, how to fix and how govern the Industry for its own benefit and the health of society.

Facing the Firestorm: Finance Industry, Popular Anger and Re-regulation

The Finance Industry appears to have returned to profitability on the back of public funds and government support programs. Its refusal to acknowledge that debt is leading to a tidal wave of initiatives for regulatory and legislative reform which will be made worse by a refusal to constructively cooperate. Society needs a productive Finance Industry and will get it either voluntarily or otherwise. The Industry's refusal to see these pressures will make things more difficult than necessary, but are unavoidable without leadership and a sense of social responsibility.

The Corporation vs Society: Performance, Social Responsibility and the Win-Win

 The unfettered free market was supposed to bring enduring prosperity but recent history shows that markets and participants are not self-regulating. In fact markets require an institutional framework to work, publicly responsible behavior by participants and appropriate regulatory frameworks to balance private gain with public welfare. The results are better performing markets that are sustainable.

Economic Crisis vs Policy

Populist Panderings, the Candidates and Real Solutions Well the last of the debates are tonight and THE focal issue, as it should be, is the state of the economy. In our last post (Wobble Wheels Wakeup: Crisis, Response, Policy, Execution) we discussed the situation beyond the various worldwide rescue and re-vitalization efforts. In particular a key point we'll re-iterate is that once we get the wheels bolted back on the wagon we need to keep careening down a rather icy mountain sloped. A serious recession is pretty much in the cards and locked-in. The only real debate is how deep and how long; and this one is likely to be longer and deeper than anything many folks have seen for a long time. One of the "interesting" anecdotes making the rounds in the financial community is that all the advisers aren't getting any phone calls ! It would seem that people are so shell-shocked that they're still trapped in the 1,000-yard stare syndrome. For my own part the contacts from family, friends and network more than reinforces that. We saw a more than generational collapse in the markets all collapsed into basically week. They come by their shock very....very honestly. We had to talk a bunch of folks out of selling their existing portfolios on Mon. open - which meant they would have missed the run up that mostly recovered the worst day from last week. We're far from out of the woods yet. In the readings the first one, finally, puts the emphasis where it needs to be - all these worldwide interventions are NOT quick fixes. Now we've been talking up the economy as THE central issue in this election for months (WRFest 20Jan08(Economics): Oops...Recession Ahead,The Coming Economic Crisis,Standing Corrected: Education 2nd Avoiding Economic Collapse 1rst) and outlined our sketch of a multi-faceted program that moves beyond arresting the immediate problems to looking at what needs to be done next and then beyond that. Which we thought we'd review here a little more.

 First Things: Financial Crisis, Economy and Barry Otto, Furst von Bismarch, was not only a great statesman but an experienced, wise and witty politician; author of the "Sausage Factory" epigram we keep re-using. He had another, actually several but this one sticks, that when a crisis goes by grab its' coattails and ride for all it's worth. In this case we're facing multiple inter-lacing policy crisis that have been accumulating for decades, which nobody was willing to tackle to the can kept getting kicked in the ditch until it put itself back on the road and, worse, we actually knew what to do about all the cans. The thing about a crisis is that it not only represents danger but opportunity since it's likely that the will to change and do what is NOW clearly necessary can be mustered instead of continuing in denials. We're so much in that position that many on the inside of things are actually excited to finally get a chance to do what they've known needed doing for a long time. So much so that my alternative title was Economic Crisis=Opportunity, Danger and Change. While we're in the midst of the worst financial crisis since the '30s and the most serious economic downturn since the early '70s the cartoon is still more black humor than reality; but if we don't seize this opportunity it'll be more truth than anything. Fortunately not only is Barry picking the best economic team since Bretton Woods or the Marshall Plan with outstanding people in the right jobs (Hit the Decks aRunnin...Git 'er Done Barry) but he and they are moving with speed, urgency, accuracy and skill. He's already made more progress that's the right kind than the last three Presidents did in their first 18 months. Amazing and startling but to establish why we're going to have to take rather deep dive on the subject of economic policy by poking at the nature of business cycles and fiscal stimulus.

Miracles on Pennsylvannia Ave: Make it So, No. 1 !The big news from the last couple of weeks, at least domestically, is that we've succeeded in crafting and passing the largest peacetime suite of economics legislation in our history (the Stimulus Package plus the next round of TARP) with more to come as the other two legs of a 4-legged stool. Those being a Housing rescue package and a re-formulation of Financial Industry regulation. We also learned that the ME is not the only place where intransigent adherence to provably wrong shibboleths of policy, position and belief are rampant. Nonetheless the package is un-surpassed for size, scope, force and timeliness and as such gets a B+ on economics, an A- on politics and an A for pragmatic and realistic policy-making craftsmanship, admittedly grading on a curve. What do we mean by all that? First, make absolutely no mistake about it. This package is absolutely essential to saving the economy. We're in a very serious situation where the liklihood of a more pronounced downturn followed by a decade or better of Japanese Malaise is entirely possible. Further, the economy is unlikely to recover on it's own because the normal, organic self-correction mechanisms are broken. People and companies are, were and will be continuing to pull in their horns as the situation deteriorates; government is the ONLY possible source of the spending necessary to salvage things. Second, in a short-term view the notion that OMG it's spending is just utter and absolute nonsense, that in fact is the whole point. It doesn't matter if gov't employees steal everything and go to Vegas - it's still stimulative. Third, there are real tradeoffs between tax cuts (which are fast but don't give you much bang, direct spending which gives you a much better multiplier but is slower and investment, e.g. infrastructure, where you get the most bang but is much slower and complex. For example investment in new energy sources doesn't do much good if you haven't the power grid to move the new power. Fourth, given the spending if you can use some of it to both get high multipliers AND lay the foundations of downpayments in future improvements in the economy that's smart policy-making. Finally, this is a large, very complex under-taking for which the implementation mechanisms are lacking; as a result there's only so much spending you can do in certain timeframes and you need to build up your capabilities. You also need to get support and buyin. Taken all together the package is a very well-crafted balance among all these competing requirements, let alone in the time and with the ideological oppositions it faced. We've gone into some of this before.

To Boldly Go Where We Must: Speech, Budget and Dr. Noes Judging from the readership indicators we can move on to the next discussions but judging from the cartoons, talking heads and agitated feedback from my network we need to stay with the "Political Economy" of the Stimulus/Budget/Rescue efforts, so we will. Just in case you were on vacation last week it was one of the most momentous in post-war American history ioho - particularly for the speed, size and complexities of what was done. Mo saw the signing of a giant stimulus package, Tu a major national "suck-it-up" address that's largely gotten plaudits from almost all sides with the exception of diehard Rips, We saw the Phase 2 announcement of TARP II and Th the tabling of the most ambitious budget proposals we've seen in a very long time. Not to mention Chairman Bernanke's testimony that "yes a recovery was possible if everything went right AND we repaired the financial system". Any one of those things, or actually a subset of line items, would have been as much major news as we've been used to getting in a month in the last 8-12 years. Barry's striking while the iron is hot indeed.

Back in the US: Economic Realities vs Partisan PosturingsWe're going to circle back to the US and take up the state of the economy, economic policy, policy vs. politics and partisan political posturings and try and braid them together into a single rope of investigation. At the same time we are NOT leaving the topic of the state and outlook of the world because, as we argued in the first foreign affairs post in this series the US's role in maintaining and re-developing a new international system is critical and indispensable. And central to that role is the success of economic policy without which both the US and the world will face severe difficulties. In the readings we cover a lot of ground, as usual admittedly, starting with a survey of the state of the economy and real nature of proposed economic policy instead of what the headlines, pundits and partisans are telling you. If you read nothing else click thru and download Paul Kasriel's two essays on what did work in fact in the Great Depression (The Great Depression – Just the Facts, Ma’am) and on what role savings and investment will play in future growth (Paradox Squared). Then we shift to what the real challeng is - IMPLEMENTATION ! Then we segue to the partisan catfights where old shibboleths of the '80s are being revived to counter these policies when the facts on the ground  have changed ("when the facts change I change my mind. what do you do ?"). Finally we finish up with some readings on re-imagining what the new world could/should look and why a return to fundamental values revived in new clothes are essential to making this all work! To summarize our main points however we'd say: 1) the economic situation is very serious but fixable and we have strong historical evidence, 2) the biggest challenges are implementation AND laying future foundations. On the latter the Administration is doing many right things on the former it's early to say. However, 3) partisanship is proving to be a poisonous legacy, 4) the American people still haven't grasped the Administration's direction at a fundamental (gut) level and 5) the biggest danger is the knife-edge balances between impatience for what will take time, effort and perseverance against the all to real risks of backlashes, anger and a radicalization of American politics. Then all bets are off. We take our socio-political stabilities for granted but what happens if they aren't a self-renewing gift from past generations ? Then we're in for the same kinds of troubles that are threatening other nations !

 Re-building On A Rock: Policy, Economy & Values It's time to speak of many things, of kings, and cabbages, said the walrus. And speaking of things unless you've been hiding in the wilderness you've heard about Susan Boyle's stunning performance on the British Idol. Truly wonderful and a revelation. But beyond the singer and her voice one fascinating thing was watching the reactions of the audience and the judges - which we've tried to capture a bit here. But you need to watch the whole carefully as they move from snickers to shock to transformation to sheer joy. Amazing what's out there if only the opportunities are available, ain't it ? What she sang was "I Dreamed a Dream" from Les Mis, about the sundering of hope, ambitions and the cruelties of the world. Personally ironic but in light of the times we're living in more so for all of us. The question becomes what opportunities will we all have, what might be taken away and what do we do about it. One way to sneak up on those questions is to compare potential GDP - what the economy could produce at full employment, and actual GDP - what it produces when it's working at less than full capacity. The chart shows potential and actual real GDP per capita and they look pretty close from 1950-2008. Until you look at the differences between them ! Which is what the faint red line does while the heavy red line shows the trend. Notice that up until the late '90s things moved in a nice gentle cycle and then blipped up a bit. But the recent collapse is already more severe than anything we've seen in almost sixty years. And given that this downturn is going to go on for a while you can imagine where it will end up!

Existential Crisis in the Agora I: Economy, Policy and US Strategic Outlook If the news over the last few months hasn't made it crystal clear to you last Friday's bankruptcy filing by Chrysler, with GM likely to soon follow, should make it clear that we are in the eye of the biggest economic storms in over sixty years. We're facing fundamental changes in the structure, nature and direction of the US economy which will define the limits of policy and prosperity for decades to come. The good news is that the Administration is doing extremely well in putting the right policies in place quickly and implementing them about as well as could be expected. The bad news is two-fold. First we've got a long way to go before this is over and we reach a growing economy again. The worse news is that longer-term growth prospects are extremely poor and will be potentially lower than at any time in the post-war period. Now that's big picture stuff but presumably you've all heard about growing income inequality, businesses and industries disappearing forever and all the rest of the symptoms of underlying structural flaws that have been accumulating since 1980. If we'd like to return to a modicum of growth we need to get the economy and society on a new footing. The good news is that not only does the administration realize this but it's already putting in place the necessary programs and investments that stand a reasonable chance of making it happen. We just put up a major survey of the structure of the US economy which is complementary background reading for how the economy works. In fact we'd almost say mandatory: We've been covering the economic news for quite a while here, going back to early '08 at least so we won't dive into the details of the cycle, policies and politics as well as budgets. You can check back to skim over all that in the archive and/or we've listed some of the prior postings in the readings excerpts (NB: you'll also find a very extensive collection on the current situation, the long-term prospects for low growth, specific policy areas (Taxes, Regulation, Housing & Autos) and fundamental shifts in strategic policy which represent the biggest shift since 1980. Judging by the most recent poll results (discussed in the last post:Peace in the Public Square: the 100 Days and Re-emergence of Civitas (Updates) ) the public trusts the President and the Administration but still hasn't grasped the implications and is particularly angry about the on-going rescue of the Finance Industry. While the Administration has clearly laid out it's policies and how the pieces all work together the explanations are also still lacking something. We're going to take a shot at framing the discussion using three variations on a conceptual chart to try and read you into the context. No guarantees but let's see what we can do

Current State of the Economy

October 20, 2009

More of the Afghan Debates: Searching for Legitimacy

We were going to pass on from Afghanistan to other things but the news keeps on coming in, fast and furious. As a somewhat mechanical alternative instead of "infinitely" adding to our list of updates from the prior post we're moving all the update to this post (in the section after the break btw) and instead focusing on a couple of the key new findings that highlight some of the key, real issues that are finally beginning to surface. Starting with this excerpt from a Jim Hoagland piece in the WaPo that's one of the best assessments we've run across:

Obama's Afghan Squeeze Play Obama is orchestrating a drawn-out review that is actually a policy instrument itself. That reality is (happily for Obama) obscured by the miasma of leaks, counter-leaks and guesswork that has settled over official Washington. But three things are absolutely clear: First, Hamid Karzai cannot be accepted as the legitimate ruler of Afghanistan on the basis of August's election. He should either accept an immediate runoff ballot or agree to become Afghanistan's ceremonial president and appoint a national unity government to run the country. Only then can the United States and its allies move forward to significantly expand military and civilian aid to Kabul. Second, NATO's European members must greatly increase their involvement (and spending) in civilian reconstruction projects and provide some more manpower. Little noticed in Washington's overheated debate about troop numbers, a new U.S.-European bargain on counterinsurgency is an essential feature of Gen. Stanley McChrystal's bestseller of a secret report to the president.Third, the Obama administration must not slip back into letting Pakistan present itself as an aggrieved party whose delicate national sensibilities are unjustly offended by suggestions that its army and intelligence services might be ripping off U.S. aid and covertly encouraging terrorism.They are doing just that. And they must continue to be told directly that Washington is keeping score. Congress gently did that in passing a $7.5 billion, five-year aid bill that requires assurances that the money will not be stolen -- provoking nationalist outcries in Islamabad.

Continued ...

 

His colleague, Anne Applebaum, points out one of the other elephants in the room, to wit the lack of real support from our supposed allies who have given lip service to their NATO obligations but failed to provide actual resource, support or useful contributions on the whole.

What Afghan alliance? Only very rarely do the casualties of one country make it into the media, the political debates or the prime ministerial speeches of another country. There has been an international coalition operating in Afghanistan since 2001. NATO has been in charge of that coalition since 2003. Yet to read the British press, one would think the British are there almost alone, fighting a war in which they have no national interest. The same is true in France and in the Netherlands. American media outlets hardly note the participation of other countries, even though some -- Britain and Canada -- have endured casualties at a higher rate than that of the U.S. military, relative to the size of their contingents. There is almost no sense anywhere that the war in Afghanistan is an international operation, or that the stakes and goals are international, or that the soldiers on the ground represent anything other than their own national flags and national armed forces: Most of the war's European critics want to know why their boys are fighting "for the Americans," not for NATO. Most of the American critics dismiss the European contribution as useless or ignore it altogether. As Jackson Diehl pointed out Monday, the central debate about future Afghanistan policy is taking place in Washington without any obvious contributions from anybody else. I'm not going to blame the U.S. administration alone for this: It's not as if Europe has put forward a different plan -- and there was certainly a moment, back at the beginning of this administration, when that would have been very welcome.The fact is that the idea of "the West" has been fading for a long time on both sides of the Atlantic, as countless "whither-the-Alliance" seminars have been ritually observing for the past decade. But the consequences are now with us: NATO, though fighting its first war since its foundation, inspires nobody. The members of NATO feel no allegiance to the alliance, or to one another.

Both of these problems were discussed in the previous post, and in prior posts for that matter, and are central to McChrystal's "Initial Assessment" report. The bottom line here is that if we're going to be effective, not we're saying effective not necessarily successful, is that it's going to be more important to fight smarter rather than harder. Because so far we've been fighting just plain 'ol dumb. The really good news about the Administration's careful approach is that serious debates about ends, means and realities is happening for the first time and, finally, deep, informed and accurate debate is beginning to happen. On those lines btw a few other little tidbits:

  • Emanuel: Gov't in Kabul Must Be Credible President Obama's chief advisor denied that the lack of stability in Afghanistan's government, owing to the disputed election, would mean a delay in the president's decision over whether to send more U.S. troops there. But White House Chief of Staff Rahm Emanuel, appearing on CBS' "Face the Nation" today, agreed with an assessment made by Sen. John Kerry that stability in Afghan is vital to the success of the United States' mission there."It's not a matter of delay; the review will continue," Rahm Emanuel said on CBS' "Face the Nation" today. "The review will continue the next week and the following week. Watch the Video

Whatever else happens, and no matter whether or not you agree with the final decision, two things to start keeping in mind. It will not be ill-considered or ill-informed, in contrast to prior ones. And second, no matter what that decision, there will be serious consequences and it will not be easy to deal with them.

A final critical point - if, as we anticipate, we add more troops, dramatically shift strategy, and put more pressure on our allies and on the Kabul and Islamabad governments to hold up their ends of the bargains there will still be a major doctrinal hole. We haven't figured out how to build good governments and that is the sine qua non, that without which there is no other, for long-run success. (Good Government for a Stable World) Yet strangely enough something was managed, over time, with encouraging that emergence and evolution of appropriate governments in Germany, Japan, Taiwan and South Korea!

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Previous Update Emendations:

UPDATE: We've just added another excerpt from the NYT on the status of the civilian re-construction and re-development efforts, particularly on civil institution building, that largely confirms our assessment of the situation: Civilian Goals Largely Unmet in Afghanistan. A longer excerpt is in the readings.

UPDATE2: There was a slew of recent Charlie Rose discussions but the one of particular interest was with David Kilcullen and Brian Glynn Williams, both boots on the grounds, experience experts. Kilcullen discusses the operational challenges for troops, strategic changes and the pressing need for governance reform. Williams, deeply informed on the Taliban and alQ, blows away the assertion that they are seperable or that, if successful, they can be contained. Between the two of them ALL of the talking head punditry dies and you end up roughly in line with our assessment. Which is probably why we highly recommend spending the 20min to watch. Given technical changes you'll have to go to the site and select the proper epidsode from a sidebar howwever. Simply click on the highlighted word. PLEASE do so and then give what we have to say here another thought or three.

UPDATE3: If you haven't yet go read Dexter Filkins' long profile of McChrystal and the challenges in Afghanistan and Pakistan and watch this brief interview on the Rachel Maddow Show. While Dexter doesn't provide a lot of analysis per se he paints an entirely accurate portrait IOHO that's consistent with our take. The interview is fascinating because Rachel, while a die-hard liberal and pushing hard toward her position, is also a fairly honest interviewer and Dexter's take about the complexities wasn't quite what she was looking for.

UPDATE4: Not surprsingly Afghanistan is still generating lots of news coverage, which fortunately is improving in depth. One of the most interesting is this PBS interview with Bruce Riedel. We point toward it since what he says is deeply informed, lines up somewhat withour observations, but most importantly, he's been a central player in formulating administration policy. On the whole we take this as indicating that, whatever the decision, it will not be uninformed or ideologically driven. Here's a brief description of his background by way of encouraging and credability:

Terrorism Expert Riedel Weighs Obama's Options in Afghanistan When President Obama unveiled his first strategy for Afghanistan and Pakistan last March, Bruce Riedel was there. He chaired the high-level review that recommended a broad counterinsurgency campaign in the region against al-Qaida.Riedel spent a lifetime studying that terrorist group and its roots through three decades at the CIA, with postings to top jobs at the Pentagon and the National Security Council. Last year, he released a book, "The Search for Al Qaeda: Its Leadership, Ideology and Future."

One of the shibboleths he demolishes en passant is that Alexander and the Brits got badly beaten there. In fact Alexander conquered the area and his successors ruled it for generations while the British established a fairly long-lasting protectorate. In other words it's NOT different this time as a brief skim of these sources will show:

 

October 11, 2009

Boots On The Ground: Realities, Strategies, Policy & Politics

With the Afghan debate heating up to a talk show pitch, as well as the seriousness of the real issues, we're going to take a more focused dive, building on the last post's broader overview of key ME touchpoints. There's both good news and bad news but on balance we'd judge it good. The bad news is that most of the talking head discussions aren't looking at the real issues (surprise), are mis-representing and mis-emphasizing the key ones while sensationalizing the debates and not helping much.

The good news is twofold. Several of the discussions are more balanced, informed and useful than anything we've heard in months. And the really good news is that the Administration is going back to a zero level reset and asking really tough questions, being inclusive of the different opinions and involving them all in the process and working, carefully, thru the right sequence of questions. We'll refer you to a videoclip from Meet the Press where Bob Woodward is discussing how different this is (NB: in all its history we never did this for Vietnam nor did we do it in '03 on our way into Iraq). But just to flavor things we'll also refer you to an earlier post on adventures in Afghanistan during "Charlie Wilson's War". We wish we had the right clip but go watch that movie - the most heartbreaking moment is toward the end when Congress decides to walk away, with results we know.

Some Ground Truths: What McChrystal Really Said

The press and blogosphere has postured McChrystal's initial assessment as a "must have more troops" statement and mis-represented what he actually said. The gist of it is that a) we've been under-resourcing the war from the beginning and fighting a penny-wise counter-terrorism campaign on the cheap. Then b) the operationally we've been very ineffective because we've been fighting with a force-heavy doctrine focused on killing the enemy and not protecting the population, the recommended strategy of some of the debate participants (NOTE: in other words the failed strategy of the last eight years is being re-urged....gee wonder if that'll work?).

Continued ....

Next we need to c) change our doctrine, beef up the Afghan security forces, work with the Afghan government to improve governance and the rule-of-law and make sure we staff that adequately. Finally, d) we need to fix the poor coordination among the forces and resources of the NATO alliance and make sure that everybody's marching to the same drummer. The readings after the break start with a heart-rending WaPo series on the battle of Wanat and the Waygal Valley where eight Americans lost their lives, for excatly these reasons. But let's let Gen. McChrystal speak for himself (downloadable PDF is here while the WaPo's text version of his report is here).

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The situation in Afghanistan is serious; neither success nor failure can be taken for granted. Although considerable effort and sacrifice have resulted in some progress, many indicators suggest the overall situation is deteriorating. We face not only a resilient and growing insurgency; there is also a crisis of confidence among Afghans -- in both their government and the international community - that undermines our credibility and emboldens the insurgents. Further, a perception that our resolve is uncertain makes Afghans reluctant to align with us against the insurgents. Success is achievable, but it will not be attained simply by trying harder or "doubling down" on the previous strategy. Additional resources are required, but focusing on force or resource requirements misses the point entirely. The key take away from this assessment is the urgent need for a significant change to our strategy and the way that we think and operate. NATO's International Security Assistance Force (lSAF) requires a new strategy that is credible to, and sustainable by, the Afghans. This new strategy must also be properly resourced and executed through an integrated civilian-military counterinsurgency campaign that earns the support of the Afghan people and provides them with a secure environment. To execute the strategy, we must grow and improve the effectiveness of the Afghan National Security Forces (ANSF) and elevate the importance of governance. We must also prioritize resources to those areas where the population is threatened, gain the initiative from the insurgency, and signal unwavering commitment to see it through to success. Finally, we must redefine the nature of the fight, clearly understand the impacts and importance of time, and change our operational culture.

As formidable as the threat may be, we make the problem harder. ISAF is a conventional force that is poorly configured for COIN, inexperienced in local languages and culture, and struggling with challenges inherent to coalition warfare. These intrinsic disadvantages are exacerbated by our current operational culture and how we operate. Pre-occupied with protection of our own forces, we have operated in a manner that distances us -- physically and psychologically -- from the people we seek to protect. In addition, we run the risk of strategic defeat by pursuing tactical wins that cause civilian casualties or unnecessary collateral damage. The insurgents cannot defeat us militarily; but we can defeat ourselves. Accomplishing the mission demands a renewed emphasis on the basics through a dramatic change in how we operate, with specific focus in two principle areas: Change the operational culture to connect with the people. I believe we must interact more closely with the population and focus on operations that bring stability, while shielding them from insurgent violence, corruption, and coercion. Improve unity of effort and command. We must significantly modify organizational structures to achieve better unity of effort. We will continue to realign relationships to improve coordination within ISAF and the international community.

  This assessment prescribes two fundamental changes. First, ISAF must improve execution and the understanding of the basics of COIN -- those essential elements common to any counterinsurgency strategy. Second, ISAF requires a new strategy to counter a growing threat. Both of these reforms are required to reverse the negative trends in Afghanistan and achieve success. ISAF is not adequately executing the basics of counterinsurgency warfare. In particular, there are two fundamental elements where ISAF must improve: change the operational culture of ISAF to focus on protecting the Afghan people, understanding their environment, and building relationships with them, and; transform ISAF processes to be more operationally efficient and effective. creating more coherent unity of command within ISAF, and fostering stronger unity of effort across the international community. Simultaneous to improving on these basic principles, ISAF must also adopt a profoundly new strategy with four fundamental pillars: develop a significantly more effective and larger ANSF with radically expanded coalition force partnering at every echelon; prioritize responsive and accountable governance -- that the Afghan people find acceptable -- to be on par with, and integral to, delivering security; gain the initiative and reverse the insurgency's momentum as the first imperative in a series of temporal stages, and; prioritize available resources to those critical areas where the population is most threatened. 

 The Big Picture and the Decision-making Process

 Now let's, breifly, try and frame that in the decision-making process and refer you to the second set of readings on the wider strategic context, particularly the issues related to Pakistan. Rather than the un-considered approach to Nam or IraqII the process that should be followed is decide on the Policy, develop a Strategy, align Doctrine with strategy, plan Operations against detailed objectives that are built from the strategy, make sure that the appropriate amount and kind of resources are available to Execute the operations, manage the Politics (inside Afghanistan, in the US and among key stakeholders, e.g. Pakistan, Russia, China, Iran, et.al.) and establish a process for managing the key Players in those various arenas. This would appear, according to Woodward, to be the process being followed.

1. Policy - defines the outcomes that we require to protect our national interest. In this case we want a situation where Afghanistan doe not become a safe-haven for extremists and where a wider de-stabilization of the ME, especially a nuclear armed Pakistan. Sadly this means that a technowar ala Rumsfield will not be effective and we must figure out how to support the emergence of a stable government.

2. Strategy - are those major goals, objectives, initiatives and methods that are the major components of translating policy into programs. The spectrum ranges from walk away to tech-based counter-terror to counter-insurgency to nation-building to occupation. The latter is unsupportable the first two are demonstratably unworkable, as we've proven over the last thirty years, which leaves us with some form of COIN+. Our initial strawman is that we need to pursue a combination of COIN plus nation-building lite. Strategically it is almost as important to define and pursue a parallel strategy with regards to Pakistan (where we're making more progress in the last few months than at any time in the last eight years).

3. Operations are the activities that are implemented to Execute the Strategy and must include Security, Development (infrastructure), Economic Development, Governance (rule-of-law, de-corruption, etc.) and encouraging the evolution of an Afghan Civitas, based on Afghan culture, institutions and attitudes. For each of many provinces and regions/localities we need to decide on the appropriate Troop manning levels, the levels of other resources, e.g. agricultural specialists or governance advisers, economic investment resources and civil affairs resources.

4. Planning and Control - it's not possible to establish quantitative metrics to manage the execution of something this complex and fuzzy but we can establish programmatic and judgmental goals, track the resources and status and use informed judgment to evaluate the status against those goals.

5. Politics and Players - at the end of the day we must recognize the key stakeholders, their roles and interests and accomodate them. One strand of that effort has to be to communicate, clearly and convincingly to the American people why we are involved and what the importance is to them. Another is to work with the government of Pakistan to get their whole-hearted commitment to cutting off Taliban support, which in turn means convincing them that we are both serious & committed as well as being willing to work collaboratively with them. Finally there are other stakeholders involved here, e.g. China has a serious interest.

At the end of the day we'd make four recommendations:

1. Pursue COIN+.

2. The strategic goal is NOT necessarily a democratic government but a reasonable effective and honest one that is stable and evolving.

3. A corollary strategic goal is getting the involvement of the Afghani's themselves, including negotiating with those portions of the Taliban who are detachable from hardcore extremism.

4. Put the right kinds of resources in place for supporting governance and economic development. None of those are in place, we're having enormous difficulty in finding them and without them a COIN+ strategy fails.

The alternative is withdrawal, however gracefully or not, and being prepared to face up to the consequences. The graphic is based on three recent Rose interviews with Lara Logan, the Pakistani Ambassador and David Ignatious - consider them appropriate background listening for our suggestions as well as assessments of whether we're smoking good stuff or are on a bad trip! And consider two previous posts (Middle East Challenges: Game-changes, ME, Iran, Iraq & Afghanistan,Having Fun, Doing Good, Making Sausage: Goodtime Charlie's War). Finally, this is not the first time we've wrestled with some of these issues so at the end of the readings you'll find the URL's for our collections of prior essays.

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Lessons From Wanat and Waygal

The Battle of Wanat | A Father's Pursuit: Not 'Just Another Casualty' Even before the body of 1st Lt. Jonathan Brostrom reached the United States, his brigade commander was on the phone to the young officer's father in Honolulu. When his son was killed, Brostrom worried that the Army would not thoroughly investigate. With each word he read, Brostrom became angrier. The soldiers repeatedly described equipment shortages and intelligence failures. An Afghan construction firm that was supposed to help the younger Brostrom's platoon build defensive bunkers declined to make the trip to Wanat before the battle. Without the contractor's help, the soldiers quickly ran short of basics such as water. "Every day we filled sandbags and made foxholes, trying to better improve our position," Sgt. Matthew Gobble wrote from a hospital bed in Germany. "However, due to limited supplies . . . we were only able to do so much."Battle of Wanat: Not 'Just Another Casualty' : A Son Killed in Battle and A Father Seeking Answers

The Battle of Wanat | The Valley Today: 'They Feel Like Outsiders and They Don't Want to Be' Within days of the attack on the U.S. outpost in Wanat last year that killed nine soldiers, American troops withdrew from the Afghan village and the surrounding Waygal Valley. Fourteen months later, they have still not returned. Recent events in Wanat indicate that ceding territory to the Taliban is more effective than maintaining small, vulnerable bases in forbidding terrain. In the past several weeks, U.S. commanders, based about six miles outside the village, have detected growing friction between Wanat residents and the Taliban commanders responsible for last year's attack.The first signs of discord emerged this summer when local elders convened a shura, or council, to decide whether to participate in the national elections held in late August. The insurgent leaders showed up as well, carrying guns and threatening to kill anyone who cast a ballot, Afghan officials said. The intimidation worked -- the village and the surrounding Waygal Valley didn't record a single vote -- but residents' desire to participate in the elections offered an opening for U.S. and Afghan officials.

 Right to Speak Gen. Stanley McChrystal, the U.S. commander in Afghanistan, has come under fire for making public comments about the war. While answering questions after an Oct. 1 speech -- in which he avoided taking sides in the policy debate -- McChrystal challenged a popular alternative to the approach that President Obama sent him to Afghanistan to pursue.Certainly, if given a do-over, McChrystal might make different, more nuanced statements; he was indeed too blunt and impolitic. But the criticism goes too far.The Obama/McChrystal plan is classic counterinsurgency and focuses on protecting the Afghan population while strengthening Afghan security forces and government. McChrystal was asked about a "counterterrorism" strategy that would purportedly contain al-Qaeda with much lower numbers of American troops, casualties and other costs. McChrystal did not try to force the president's hand on whether to increase the foreign troop presence in Afghanistan. The general critiqued an option that is at direct odds with Obama's policy and conflicts with the experiences of the U.S. military this decade. That is not fundamentally out of line for a commander.The past eight years have proven that a counterterrorism option for Afghanistan won't hold the country together. This approach, the essence of the Rumsfeld "light footprint" concept that dominated most of the Bush presidency, led us to place most American troops in Afghanistan under a separate command from NATO because the Bush administration generally eschewed NATO's peacekeeping mission. The counterterrorism operation was seen as the critical ongoing role for U.S. forces after the Taliban fell, but by last year its fruits were clear: a resurgent Taliban movement operating effectively in 140 of Afghanistan's 368 districts; a tenfold increase in the rate of NATO casualties; an al-Qaeda leadership in western Pakistan swearing allegiance to the Afghan Taliban and probably hoping to reestablish a sanctuary in Afghanistan. All of this is laid out in a strategic assessment by McChrystal that has drawn no public faulting. Yet the counterterrorism option that gave us this mess is to be taken seriously?

Report Cites Firefight as Lesson on Afghan WarThat firefight, a debacle that cost nine American lives in July 2008, has become the new template for how not to win in Afghanistan. The calamity and its roots have been described in bitter, painstaking detail in an unreleased Army history, a devastating narrative that has begun to circulate in an initial form even as the military opened a formal review this week of decisions made up and down the chain of command.The 248-page draft history, obtained by The New York Times, helps explain why the new commander in Afghanistan, Gen. Stanley A. McChrystal, is pressing so hard for a full-fledged commitment to a style of counterinsurgency that rests on winning over the people of Afghanistan even more than killing militants. The military has already incorporated lessons from the battle in the new doctrine for war in Afghanistan.The history offers stark examples of shortcomings in the unit’s preparation, the style of combat it adopted, its access to intelligence, its disdain for the locals — in short, plenty of blame to go around.Before the soldiers arrived, commanders negotiated for months with Afghan officials of dubious loyalty over where they could dig in, giving militants plenty of time to prepare for an assault.Despite the suspicion that the militants were nearby, there were not enough surveillance aircraft over the lonely outpost — a chronic shortage in Afghanistan that frustrated Defense Secretary Robert M. Gates at the time. Commanders may have been distracted from the risky operation by the bureaucratic complexities of handing over responsibility at the brigade level to replacements — and by their urgent investigation of an episode that had enraged the local population, the killing a week earlier in an airstrike of a local medical clinic’s staff as it fled nearby fighting in two pickup trucks.Above all, the unit and its commanders had an increasingly tense and untrusting relationship with the Afghan people.The history cited the “absence of cultural awareness and understanding of the specific tribal and governance situation” and the emphasis on combat operations over the development of the local economy and other civil affairs, a reversal of the practices of the unit that had just left the area.

LEADERSHIP: The Impossible Dream In Afghanistan  Showing the Afghan security forces how to better handle basic skills like patrolling and combat tactics is being wasted because of corruption and incompetence among the military leadership. The Afghans have some of the same problems as the Iraqis, namely tribalism and a weak sense of nationalism. With four major ethnic groups (Pushtun, Tajik, Uzbek and Hazara), and dozens of powerful tribal organizations, it’s been difficult to get Afghan recruits who are willing to serve in the national interest. Ethnic and tribal loyalties are always stronger.But European colonizers proved in the 19th century that, with good training and good NCOs and officers, you can produce combat and police units from tribal warriors that can match Western ones in effectiveness. The key problem is getting effective NCOs and officers. American and NATO commanders have come to accept that most of the Afghan police and soldiers they have recruited and trained are useless (especially the police) because of the illiteracy, tribalism and corruption. The new goal is to turn out fewer, but higher quality troops and police. This is more of a problem with the police, who have a much more complex job than the army. Another problem is cost. The current army costs about $8 billion a year, which is entirely paid for by NATO countries. That's because the Afghan GDP is less than $15 billion a year. Afghanistan is the poorest country in Eurasia, it is only rich in weapons and violence. And heroin.

Civilian Goals Largely Unmet in Afghanistan Even as President Obama leads an intense debate over whether to send more troops to Afghanistan, administration officials say the United States is falling far short of his goals to fight the country’s endemic corruption, create a functioning government and legal system and train a police force currently riddled with incompetence. Interviews with senior administration and military officials and recent reports assessing Afghanistan’s progress show that nearly seven months after Mr. Obama announced a stepped-up civilian effort to bolster his deployment of 17,000 additional American troops, many civil institutions are deteriorating as much as the country’s security. Afghanistan is now so dangerous, administration officials said, that many aid workers cannot travel outside the capital, Kabul, to advise farmers on crops, a key part of Mr. Obama’s announcement in March that he was deploying hundreds of additional civilians to work in the country. The judiciary is so weak that Afghans increasingly turn to a shadow Taliban court system because, a senior military official said, “a lot of the rural people see the Taliban justice as at least something.”Administration officials describe Mr. Obama as impatient with the civilian progress so far. “The president is not satisfied on any of this,” said a senior administration official, who asked for anonymity so that he could more freely discuss internal deliberations at the White House. The disputed Aug. 20 Afghan election has laid bare the ineffectiveness of the government of President Hamid Karzai, administration officials said, and frozen steps toward reform.The vote was so tainted by evidence of fraud and irregularities that no clear winner emerged.Even before the election, a January Defense Department report assessing progress in Afghanistan concluded that “building a fully competent and independent Afghan government will be a lengthy process that will last, at a minimum, decades.”

The Bigger Debate

In Afghanistan, the Distance Between ‘We Must’ and ‘We Can’The question boils down to this: How grave a price would Americans pay if Afghanistan were lost to the Taliban? Would this be a disaster, or merely, as with Vietnam, a terrible misfortune for which the United States could compensate through a contemporary version of Mr. Kennan’s “intelligent long-range policies”? If the latter, then how can Americans justify the immense cost in money and manpower, and the inevitable loss of life, attendant upon General McChrystal’s plan? How can they gamble so much on the corrupt, enfeebled and barely legitimate government of President Karzai? Why insist on seeking to do that which in all probability can not be done?But what if it’s the former? What if the fall of Kabul would constitute not only an American abandonment of the Afghan people, but a major strategic and psychological triumph for Al Qaeda, and a recruiting tool of unparalleled value? Then the Kennanite calculus would no longer apply, and the fact that nobody can be completely confident that General McChrystal’s counterinsurgency strategy will work would not be reason enough to forsake it.In that case — and perhaps only in that case — Afghanistan really would be a war of necessity.

Dispatch from Afghanistan: A War That Can Be Won But there is also no doubt about the fact that the military's strategy relies on a simple idea that has little to do with the caricature drawn by my country's media: to show that we are, of course, there to wage war, but also that the stakes of this war are the security, peace, and access to care and education of a population for whom the coalition is an ally.... They had just barely set up camp, Captain Vacina tells me, when the elections arrived, as did the Taliban's bombardment of polling places, the response of the Afghan regular forces supported by these troops, and the incredible spectacle of people from the countryside coming to vote in the midst of bombs and machine gun fire. An occupation force, really? Neo-colonialism, like the useful idiots of Islamo-progressivism say? Armies, like people, have an unconscious, and I do not deny that temptation can exist. But what I see there, for the moment, is this: a military force that has come, literally, to allow people to vote.

Holbrooke's Plan to Avoid Another Vietnam The Americans in Wardak showed a sophistication about the fight which had come from repeated tours in Iraq and Afghanistan. Counter-insurgency, which just three years ago was discussed by a handful of dissident Army officers and outside experts, is now the lingua franca of American combat units. They talked about “population security” and “governance” and “economic development,” as if they were experts from an aid agency. They had learned enough to avoid using the term “Taliban,” which oversimplified an enemy composed of disparate elements, including more criminals and unemployed youths than Islamist ideologues. But these lessons had come very late. Sarah Chayes, a former reporter who founded a sustainable-development coöperative in Kandahar, and who is now an adviser to General Stanley McChrystal, the American commander in Afghanistan, told me, “What the Afghans expected of us was to help create a decent government. Instead, we gave them warlords, because we were focussed on counterterrorism.” Zeroing in on killing the enemy, with grossly insufficient troops on the ground, had led directly to the overuse of air strikes and the killing of civilians. Meanwhile, every time an Afghan encountered the government, he was hurt by it—abused, asked for a bribe, hauled off to jail without evidence. At least the Taliban offered justice; they heard disputes and delivered swift, if often brutal, verdicts, such as confinement in a box or death. As a result, the Taliban was regaining prestige. Insurgents collected taxes and even set up a commission to hear grievances against their fighters, something that neither the Afghan government nor NATO had done.

Racing Time and Taliban to Rebuild in Pakistan The fighting is over and the villagers have returned, but life here remains suspended. Villagers’ buffaloes are gone, and their harvests are spoiled. Power is still out in many areas. Schools, blown up by the Taliban, lay in heaps. Even the bricks have been sold.This is the upper Swat Valley, ground zero for the Taliban in northern Pakistan. While urban areas farther south are bustling and back to life, the real test of Pakistan’s fight against the Taliban in Swat will take place here, in the impoverished villages where the militant movement began.But more than two months after the end of active combat, with winter fast approaching, reconstruction has yet to begin, and little has been accomplished on the ground to win back people’s trust, villagers and local officials say.The lag, they argue, is risky: It was a sense of near-total abandonment by the government that opened people to the Taliban to begin with, they say, and the longer people are left to fend for themselves, the greater the chance of a relapse.That pattern has been borne out for much of Pakistan’s troubled 62-year history, and is particularly severe here.Even before the war, things in Nazarabad were broken. Villagers made donations to replace a coil in the town’s aging electric transformer. There was no running water or indoor plumbing, and teachers chipped in for a water pump for the school. With no one important to lobby for it, the village was left to fend for itself.So when the Taliban first surfaced, in the form of FM radio broadcasts by a cleric who talked about how people’s needs had been ignored, many here saw salvation.“The level of deprivation was unbearable,” said Muhammad Shah Hussein, a teacher in Nazarabad. “When the Taliban came, there was a sense of hope.”But as time went on, the Taliban’s tactics became more coercive, and sympathy evaporated when the group blew up the village’s schools.The military offensive here did not cause mass destruction or large numbers of civilian deaths, as it had in past campaigns, and the army now has bases all over the valley. The military presence has been welcomed by an overwhelming majority in Mingora, who felt before that they had been abandoned to the militants.But in the villages where militants were strong as early as 2003, people have now come to fear the military, too, making getting back to normal even harder.

Legislation to Needlessly Stir Up Pakistan It's a classic example of the law of unintended consequences: Congress triples its assistance to Pakistan as part of a deepening strategic relationship. But members of Congress, always eager to tell other countries what to do, insert conditions that Pakistanis find insulting. As a result, rather than welcoming American aid and friendship, Pakistanis are indignant at U.S. meddling.Some of the popular anger in Islamabad is being manipulated by the Pakistani military, which should know better than to toss a match in the dry tinder of the U.S.-Pakistani relationship. And some of it, frankly, is a sign of Pakistani political immaturity. But the larger point is that this hiccup in the relationship is unnecessary. It's a product of gratuitous language that was written into the legislation despite warnings that it would trigger just this sort of reaction.The finger-wagging conditions in the bill illustrate a special form of American hubris. U.S. politicians become so accustomed to lecturing others that they lose sight of how their words will be read in foreign capitals and how legislative boilerplate will play on foreign insecurities and anxieties. That's the foreigners' problem, you might say. But when a few gratuitous phrases can destabilize relations with our most important ally against al-Qaeda, then it's our problem, too.

Background Readings: PtW Essay Collections

 Iraq Lessons: Looking Back to Look Forward Iraq offers us several lessons on how to deal with a complex world and difficult environments. Here we look at the tools and mental attitudes needed to move forward, apply as lessons and also suggest that policy should proceed from reason and not ideology.

Middle East Solutions: Issues, Relationships, Frameworks and Approaches  The Middle East has gotten more attention since 911 but was the victim of not-so-benign neglect for five decades before that as long as the oil flowed. Now we're realizing that the world is dependent on ME progress and stability and need to find ways to frame and analyze the complexities that lead to workable and sustainable solutions to the challenges. The ME is perhaps the most important and urgent problem in international affairs and one which we can no longer defer. Finding paths forward is in all our vital interests. The question is what paths and can we walk them.

Good Government for a Stable World Good government is essential to a healthy society and one of the most difficult problems. In history eras of prosperity exist when there is the rule of law, justice and honest public decision-making. Now we face the problem of understanding what good government is, how to develop it consciously and how to support its evolution on a worldwide basis because, as 911 showed us, it is in everyone's interests that we have a prosperous, peaceful, stable world composed of a plurality of responsible stakeholders.

October 02, 2009

Middle East Challenges: Game-changes, ME, Iran, Iraq & Afghanistan

We've been meaning to get back to foreign policy for a while now but this last week's news gives it a certain sense of urgency, though HC Reform continues to be a (if not THE) major domestic agenda item. Specifically the recent news out of Afghanistan and Iran is going to cause us to shift gears and focus on the ME in general and the hot spots in particular. As to why we should care, since it seems to be off the table yet again, let's reiterate something we've said before: a stable and progressive ME is the most urgent, and perhaps the most important, foreign policy problem we have for the next decade. Aside from the obvious that we don't want any more 911s the chart, without a lot of further explanation, pretty well sums it up. Without a stable ME that becomes a reliable energy supplier in the face of mounting demographic and socionomic challenges the world economy would be in danger. When you add in the number of major flashpoints, particularly a nuclear armed Pakistan that's fragile and unstable, benign neglect is no longer feasible.

Let's Start With Iran

We've talked about Iran before and suggested that a policy of constructive engagement combined with containment is our best bet. Unfortunately that's not when the typical voter or talking head wants. They want something dramatic, quick, effective, that suits our prejudices and they can then forget about. The problems with that are manifold - it won't work, there aren't simple, short, quick or cheap answers. On top of which each of these countries and regions are their own things. All the alternatives among the chattering classes are, sadly, being frame that way and will cause more trouble than they'd fix. Take the case of Iran - the alternatives as presented are either get more stringent sanctions or mount a military attack. That was preceded of course by what appear to be fraudulent elections and protests and continued civil opposition. Of course the talking heads immediately wanted the President to come out decisively in support of the opposition, speak forcefully for democray and de-legitimize the regime. 

Continued ... 


There are several problems with that. On the one hand sanctions won't work - they are too porous, won't have the support of key world powers (particularly Russia and China). China is especially and legitimately sensitive, btw. They just celebrated the 60th anniversary of their Revol

ution (remember about eighty years after ours we were fighting the Civil War) and started with a historical play that traced their history from the Boxer Rebellion to now. The Chinese have very fresh memories of foreign powers interfering in their domestic affaris and aren't about to support any such thing. On top of which they need Iranian energy resources to keep the wheels on their wagon.

The other side of that coin is that a military strike is not likely to work either - their sites and resources are too dispersed, too well protected and they could cause too much trouble. Since neither extreme approach is workable we're left with something hard, long and challenging. Figure out how to work with what we've got - which means establishing working relations, sustaining them over a long period of time while keeping the pressure for good behavior on, evolving some measure of trust by finding those things we can work on (Iranian support for the Shia in Iraq, terrorists in Afghanistan to start and maybe working up to Hezbollah and Hamas in Palestine). Step by step is our only feasible alternative. Our biggest problem though is ourselves - we've got to stop seeing these countries strictly on the basis of what they can do for us by sacrificing their own interests and beginning to work with them on the basis of what mutual advantages can be established. The only discussion we've seen that attempts to take such a balanced view is a recent Kennedy School forum on Iran: War or Peace.

But we're actually in a good position and it's not an accident for several reasons. First off, the Iranian economy is coming apart about the seams, largely because the skills of its people and its vast resources are being squandered by a corrupt, ineffective theocratic kleptocracy that's turning itself into a police state. The recent protests and continued opposition would have led one to suspect that but the careful approach the US has been taking, culminating the Cairo speech, goes a long way toward changing the climate of discussion. Top that off with a major change in our European missile defense that makes it easier for Russia to work with us while at the same time mounting a better defense against Iranian weapons and voila'. The final straw is that for the Iranians to get nuclear weapons they have to process the uranium, design and build a bomb, create a reliable weapon and then get delivery systems. We have about ten years to arrest them on that path which is likely to be enough time to pursue a containment policy.

Iraq, Afghanistan and Pakistan

 We're going to look back at an old diagnostic for Iraq to make several key points. First off this dates from Dec07 but the first version was published in Apr07, long before the Surge got rolling or it was even clear what the new doctrine and strategies would be. In the intervening time we'd have to change all the rankings considerably, as we all probably know by now.

In fact the last row, which is the one we'd really like to be talking about (long-term strategic development issues) is the critical one. As of right now it's not going well there but all things are relative - in other words it's probably a straight C across the board. The real point is the implied framework. If our strategic goal in each of these three places is to promote stability, durability and effectiveness then we have to talk about security, governance, socionomic development and long-term direction setting in each of the component parts.

The current set of alternatives being debated with regard to Afghanistan are either withdraw, go all in on a full-bore counter-insurgency or minimize commitments and use kinetic forces for a counter-terror operation. The last is unworkable and would simply boil the cauldron. Withdrawl would be even worse and would shortly see Afghanistan de-stabilize followed not too long afterward by Pakistan. Which means we're really debating the only workable alternative we have left, counter-insurgency. With all due respect to Gen. McChrystal however it's not entirely clear that his is the best alternative - though what you read in the headlines and what he actually said and means are two different things. We highly recommend you watch his recent interview on Sixty Minutes to get a blunt, straight-ahead and honest assessment. In that interview he's very candid about several key and important things that didn't get enough attention: the US military is still wedded to a force on force approach because that's its cultural DNA. Command and control coordination among all the parties, i.e. the other NATO forces, is abysmal and discombobulated. The recent elections were not satisfactory and indict the legitimacy of the Karzai government. That said, all things are indeed relative, and the improvements in governance are not too bad. However, the real key is economic and socio-political development.

Which means what we really need in Afghanistan is something like the Iraq framework broken down to the provincial and locality levels, staffing economic development with the right kind of skills and resources - which we definitely haven't done by any stretch of the imagination, putting an integrate operating plan in place and executing it and making up our minds whether we want to consider romantically pursuing some Jeffersonian ideal or do something practical. If the latter then we need to add two key strategies to our portfolio. One is to work with the local authorities to build what governance we can that is appropriate to the locale AND to create a modern clone of the old Macedonian local efforts by dividing out the "Taliban" we can work with and reconcile from the die-hard irreconcilables.

Again this is a situation where we need to re-think our strategies, devise new ones, adequately resource them (which we haven't done) and take our time and do it right. The thing everybody is forgetting is that we're where we're at beause the Administration intended to get here. Everybody expected the March decision to be magic answers but what Gen. McChrystal was tasked with was taking a prototype strategy over and evaluating it against conditions on the ground. The President is doing exactly what one would hope a good and capable leader would do - listening to all the parties, working thru to a committed resolution and then proceeding to establish and sustain a total operating plan. Which will then have to be sold to the American people, our allies and the regional stakeholders.

Pakistan, the ME and Beyond

Pakistan is incredibly central to these efforts but has its own challenges; in fact it almost came apart about the seems earlier this year. While it's a more stable and centralized state in this case that's not actually saying much. We need to apply the same framework that we've been discussing with regard to Iran, Iraq and Afghanistan to Pakistan. And add the other major component - we have to negotiate from understanding their positions and interests. Which we haven't been doing. Pakistan can be incredibly helpful to us, not just critically important, if we respect their interests and find a way to work with them. But if they are convinced we aren't long for that part of the world and/or will make the situation worse they'll pursue the rational course for their own self-interest of lukewarm lip service while hedging their bets.

We are either committed to the ME or we are not; and if we are not then Katie bar the door because all hexx will break loose. In each and very instance we need to have an integrated framework that's adapted to the local circumstances and then supported. A ksketch of such a framework is illustrated - to be populated as a take-home test with the stakes we've already highlighted!

Are we up to it? One wonders. On the other hand we're as well positioned as we've been in decades and it's not by accident. Meanwhile if you'd like to see all our previous writings that go into more detail on the background for the ME as a whole and use Iraq as exemplar and test case may we recommend the following (we've loaded the complete essay/posting collections on Scribd).

Both of which are built around and from the following framework:

Good Government for a Stable World

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Middle East and Islamic Countries

After Cairo, It’s Clinton Time It’s hard to know whether to laugh or cry after reading the reactions of analysts and officials in the Middle East to President Obama’s Cairo speech. “It’s not what he says, but what he does,” many said. No, ladies and gentlemen of the Middle East, it is what he says and what you do and what we do. We must help, but we can’t want democracy or peace more than you do. What should we be doing? The follow-up to the president’s speech will have to be led by Secretary of State Hillary Clinton. This will be her first big test, and, for me, there is no question as to where she should be putting all her energy: on the peace process. No, not that peace process — not the one between Israelis and Palestinians. That one’s probably beyond diplomacy. No, I’m talking about the peace process that is much more strategically important — the one inside Iraq. The most valuable thing that Mrs. Clinton could do right now is to spearhead a sustained effort — along with the U.N., the European Union and Iraq’s neighbors — to resolve the lingering disputes between Iraqi factions before we complete our withdrawal. (We’ll be out of Iraq’s cities by June 30 and the whole country by the close of 2011.)  Why? Because if Iraq unravels as we draw down, the Obama team will be blamed, and it will be a huge mess. By contrast, if a decent and stable political order can take hold in Iraq, it could have an extremely positive impact on the future of the Arab world and on America’s reputation. I have never bought the argument that Iraq was the bad war, Afghanistan the good war and Pakistan the necessary war. Folks, they’re all one war with different fronts. It’s a war within the Arab-Muslim world between progressive and anti-modernist forces over how this faith community is going to adapt to modernity — modern education, consensual politics, the balance between religion and state and the rights of women. Any decent outcome in Iraq would bolster all the progressive forces by creating an example of something that does not exist in the Middle East today — an independent, democratizing Arab-Muslim state. “The reason there are no successful Arab democracies today is because there is no successful Arab democracy today,” said Stanford’s Larry Diamond, the author of “The Spirit of Democracy.” “When there is no model, it is hard for an idea to diffuse in a region.” Rightly or wrongly, we stepped into the middle of this war of ideas in the Arab-Muslim world in 2003 when we decapitated the Iraqi regime, wiped away its authoritarian political structure and went about clumsily midwifing something that the modern Arab world has never seen before — a horizontal dialogue between the constituent communities of an Arab state. In Iraq’s case, that is primarily Sunnis, Shiites and Kurds.

Winds of Change? . No, something is going on in the Middle East today that is very new. Pull up a chair; this is going to be interesting.What we saw in the Lebanese elections, where the pro-Western March 14 movement won a surprise victory over the pro-Iranian Hezbollah coalition, what we saw in the ferment for change exposed by the election campaign in Iran, and what we saw in the provincial elections in Iraq, where the big pro-Iranian party got trounced, is the product of four historical forces that have come together to crack open this ossified region. First is the diffusion of technology. Second, for real politics to happen you need space. There are a million things to hate about President Bush’s costly and wrenching wars. But the fact is, in ousting Saddam in Iraq in 2003 and mobilizing the U.N. to push Syria out of Lebanon in 2005, he opened space for real democratic politics that had not existed in Iraq or Lebanon for decades. Third, the Bush team opened a hole in the wall of Arab autocracy but did a poor job following through. In the vacuum, the parties most organized to seize power were the Islamists — Hezbollah in Lebanon; pro-Al Qaeda forces among Iraqi Sunnis, and the pro-Iranian Islamic Supreme Council of Iraq and Mahdi Army among Iraqi Shiites; the Taliban in Pakistan and Afghanistan; Hamas in Gaza. Fortunately, each one of these Islamist groups overplayed their hand by imposing religious lifestyles or by dragging their societies into confrontations the people didn’t want. This alienated and frightened more secular, mainstream Arabs and Muslims and has triggered an “awakening” backlash among moderates from Lebanon to Pakistan to Iran. Finally, along came President Barack Hussein Obama. Arab and Muslim regimes found it very useful to run against George Bush. The Bush team demonized them, and they demonized the Bush team. Autocratic regimes, like Iran’s, drew energy and legitimacy from that confrontation, and it made it very easy for them to discredit anyone associated with America. Mr. Obama’s soft power has defused a lot of that. As result, “pro-American” is not such an insult anymore. I don’t know how all this shakes out; the forces against change in this region are very powerful — see Iran — and ruthless. But for the first time in a long time, the forces for decency, democracy and pluralism have a little wind at their backs. Good for them.

Ballots Over Bullets I confess. I’m a sucker for free and fair elections. It warms my heart to watch people drop ballots in a box to express their will, especially in a region where that so rarely happens. So I came to Lebanon on Sunday to watch the Lebanese hold their national election. It was indeed free and fair — not like the pretend election you are about to see in Iran, where only candidates approved by the Supreme Leader can run. No, in Lebanon it was the real deal, and the results were fascinating: President Barack Obama defeated President Mahmoud Ahmadinejad of Iran. O.K., I know. Neither man was on the ballot, but there’s no question whose vision won here. First, a solid majority of Lebanese Christians voted against the list of Michel Aoun, who wanted to align their community with the Shiite Hezbollah party, and tacitly Iran, because he viewed them as being best able to protect Christian interests — not the West. The Christian majority voted instead for those who wanted to preserve Lebanon’s sovereignty and independence from any regional power. Second, a solid majority of all Lebanese — Muslims, Christians and Druse — voted for the March 14 coalition led by Saad Hariri, the son of the slain Lebanese prime minister, Rafik Hariri. This U.S.-supported coalition sees Lebanon’s future as a state independent of Syrian and Iranian influence and committed to its pluralism, modern education, a modern economy and a progressive outlook.

The Death of Radical Islam Is history ending yet again?  Much as the hammers that leveled the Berlin Wall in 1989 marked the end of the Cold War, so might the protests rocking Iran signal the death of radical Islam and the challenges it poses to the West. No, that doesn't mean we'll be removing the metal detectors from our airports anytime soon. Al-Qaeda and its ilk, even diminished in strength, will retain the ability to stage terrorist strikes. But the danger brought home on Sept. 11, 2001, was always greater than the possibility of murderous attacks. It was the threat that a hostile ideology might come to dominate large swaths of the Muslim world. Not all versions of this ideology -- variously called Islamism or radical Islam -- are violent. But at the core of even the peaceful ones, such as that espoused by Egypt's Muslim Brotherhood, is the idea that the Islamic world has been victimized by the West and must defend itself. Even before the United States invaded Iraq, stoking rage, polls in Muslim countries revealed support for Osama bin Laden and for al-Qaeda's aims, if not its methods. If such thinking were to triumph in major Muslim countries beyond Iran -- say, Pakistan, Egypt and Saudi Arabia -- violent extremists would command vast new stores of personnel, explosives and funds. This is precisely the nightmare scenario that is now receding. Even if the Iranian regime succeeds in suppressing the protests and imposes the reelection of President Mahmoud Ahmadinejad by force of bullets, mass arrests and hired thugs, it will have forfeited its legitimacy, which has always rested on an element of consent as well as coercion. Most Iranians revered Ayatollah Khomeini, but when his successor, Ayatollah Khamenei, declared the election results settled, hundreds of thousands of Iranians took to the streets, deriding his anointed candidate with chants of "Death to the dictator!" "Even if they manage to hang on for a month or a couple of years, they've shed the blood of their people," says Egyptian publisher and columnist Hisham Kassem. "It's over." The downfall or discrediting of the regime in Tehran would deal a body blow to global Islamism which, despite its deep intellectual roots, first achieved real influence politically with the Iranian revolution of 1979. And it would also represent just the most recent -- and most dramatic -- in a string of setbacks for radical Islam. Election outcomes over the past two years have completely undone the momentum that Islamists had achieved with their strong showing at the polls in Egypt in 2005 and Palestine in 2006.

The Arab world: Waking from its sleep WHAT ails the Arabs? The United Nations Development Programme (UNDP) this week published the fifth in a series of hard-hitting reports on the state of the Arab world. It makes depressing reading. The Arabs are a dynamic and inventive people whose long and proud history includes fabulous contributions to art, culture, science and, of course, religion. The score of modern Arab states, on the other hand, have been impressive mainly for their consistent record of failure. They have, for a start, failed to make their people free: six Arab countries have an outright ban on political parties and the rest restrict them slyly. They have failed to make their people rich: despite their oil, the UN reports that about two out of five people in the Arab world live on $2 or less a day. They have failed to keep their people safe: the report argues that overpowerful internal security forces often turn the Arab state into a menace to its own people. And they are about to fail their young people. The UNDP reckons the Arab world must create 50m new jobs by 2020 to accommodate a growing, youthful workforce—virtually impossible on present trends. In almost every Arab country, fertility is in decline, more people, especially women, are becoming educated, and businessmen want a bigger say in economies dominated by the state. Above all, a revolution in satellite television has broken the spell of the state-run media and created a public that wants the rulers to explain and justify themselves as never before. On their own, none of these changes seems big enough to prompt a revolution. But taken together they are creating a great agitation under the surface. The old pattern of Arab government—corrupt, opaque and authoritarian—has failed on every level and does not deserve to survive. At some point it will almost certainly collapse. The great unknown is when.

Marrakesh Express If you want an antidote to the photographs of police officers beating demonstrators and girls dying on the streets of the Iranian capital, take a drive through the streets of the Moroccan capital. You might see demonstrators, but not under attack: On the day I visited, a group of people politely waving signs stood outside the parliament. You might see girls, but they will not be sniper targets, and they will not all look like their Iranian counterparts: Though there is clearly a fashion for long, flowing headscarves and blue jeans, many women would not look out of place in New York or Paris. Welcome to the kingdom of Morocco, a place which, in the light of the past two week's events in Iran, merits a few minutes of reflection. Unlike Turkey, Morocco is not a secular state: The king claims direct descent from the prophet Mohammed. Nor does Morocco aspire to be European: Though French is still the language of business and higher education, the country is linguistically and culturally part of the Arabic-speaking world. But unlike most of its Arab neighbors, the country has over the past decade undergone a slow but profound transformation from traditional monarchy to constitutional monarchy, acquiring along the way real political parties, a relatively free press, new political leaders -- the mayor of Marrakesh is a 33-year-old woman -- and a set of family laws that strive to be compatible both with sharia and international conventions on human rights.The result is not what anyone would call a liberal democratic paradise.

  • The king’s friend A NEW political force is emerging in Moroccan politics. The Authenticity and Modernity Party, known by its French acronym, PAM, with a centrist non-ideological platform open to all comers, has been in existence for less than a year. Yet it already seems destined to win the general election in 2012. In its electoral debut in last month’s municipal poll, PAM won the ballot with 22% of the vote. Yet for all its success, the ascent towards the prime ministership of its founder, Fouad Ali El Himma (pictured), is the chronicle of a political elevation foretold.

Obama's Move: Iran and Afghanistan During the 2008 U.S. presidential campaign, now-U.S. Vice President Joe Biden said that like all U.S. presidents, Barack Obama would face a foreign policy test early in his presidency if elected. That test is now here.His test comprises two apparently distinct challenges, one in Afghanistan and one in Iran. While different problems, they have three elements in common. First, they involve the question of his administration’s overarching strategy in the Islamic world. Second, the problems are approaching decision points (and making no decision represents a decision here). And third, they are playing out very differently than Obama expected during the 2008 campaign.

Best place for Muslims to live? America This summer Muslims were murdered in Holland, Germany, and Belgium – four victims of hate crimes.These murders are just the latest examples of Islamaphobia coming out of Europe. But Europe is not the only place intolerant of its Muslim citizens. Even in some Muslim countries, expression of religion is often perceived as a threat to the secular state.One of the best places for a Muslim to live is the United States. In a lot of ways, conditions are better here than almost anywhere. As a Muslim not permitted to wear my head covering as a politician in my home country, Turkey, I know.Think about it: In Turkey, where the vast majority of the population is Muslim, you will not find a lawyer with a beard or a student at a university wearing a head scarf, but you can find plenty in New York City. In Tunisia, you won't see a religiously dressed physician at university hospitals – but you can in Alabama.In the majority of Muslim countries the government is an intrusive enterprise with eyes and ears everywhere. The result is bleak. Countries reward only sycophants of the "divine" state. Muslims feel stifled by the encroachments of the establishment and lack of religious tolerance. If a man or a woman wanted to organize a protest against the government to gain the right to practice their religion more openly or be politically active against the status quo, may God help him to escape from the wrath of the state.Many Muslim countries promote homogeneity while their citizens yearn for a right to diversity, which will give them the ability to practice their religious rituals freely.In America, on the other hand, doors open to accommodate people's religious beliefs. And that, along with citizenship rights and the opportunity to exercise the freedom to practice Islam day in and day out, is what makes the US so good for the millions of Muslims here.

Iran: Pressures, Instabilities and De-stabilization ?

Iran on a Razor’s Edge To witness these passions is to witness an Iran close to the brink — a place where it has been on other occasions since the 1979 revolution, but without finding any resolution of its long quest for a form of governance reflecting the country’s democratic yearning, Islamic faith and proud independence. It’s one thing to steal an election, another to steal it with the effrontery and ruthlessness apparent here in recent days. Ayatollah Ali Khamenei, the supreme leader, said “the miraculous hand of God” was evident in the “great epic” of the election. I guess that’s one way of explaining results of an implausible strangeness. Later, perhaps playing for time, Khamenei said the Guardian Council, which oversees elections, should seriously investigate claims of irregularities. Certainly, millions of Iranians are questioning the result. Rather than the hand of God, they see the hand of a regime that perceived its most dreaded specter — “velvet revolution” — in the green banners of the opposition and opted for fraud and force. But Iranians have not been cowed. When Alizadeh and Yassamin confronted each other before me on the street Sunday, as tens of thousands of Ahmadinejad supporters streamed by, the argument quickly escalated, watched by a growing cluster of people. The real violence, Alizadeh declared, was America’s, invading Iraq and Afghanistan. The only way to talk to people like him, Yassamim retorted was to agree, because otherwise you get beaten. Now Alizadeh’s mother started screaming: “You are blind! Let God and light come into your life.” Yassamin, a documentary movie maker, turned away. “We need a Gandhi,” she said to me. “We need Moussavi to risk his life and stand there.” I received this note from an Iranian-American with family here: “The bottom line right now is whose violence threshold is higher? How much are the hard-liners willing to inflict to suppress the population and tell yet another generation to shut up? And how much are Moussavi and his supporters willing to stand to fulfill their dreams? It sounds so inhuman, but that’s what it comes down to. It’s very scary.” Many women are trying quietly to bridge the chasm and avoid the worst. I’ve heard them whispering to the Basij and the police that “We are all Iranians,” urging them to hold back. They remind me of those who placed flowers in the barrels of soldiers’ guns during the 1979 revolution.

Iran Jumps 11 Spots in the Failed States List When the U.N. Security Council slapped a third round of sanctions on Iran for its nuclear program in March 2008, the country's economy, bolstered by record crude prices, still looked set to roar. Oil revenues had helped Iran grow at a healthy 6.9 percent clip during the previous year. Even poverty levels were down, according to the World Bank. So how could the country jump 11 ranks in the Failed States Index this year? The index correctly penalizes Iran for macroeconomic mismanagement. Inflation doubled in annual terms from 15 to 30 percent in 2008 after President Mahmoud Ahmadinejad boosted social spending to "bring the oil money to people's dinner tables." As demand expanded, prices for nontraded goods such as housing rose sharply, squeezing the poor and the middle class. A flood of cheap imports kept inflation from going even higher, but jobs were lost as imports undercut local industries. The central bank restricted credit sharply to reduce inflation, hurting businesses further and putting more people out of work. Inflation did come down to below 20 percent by December, but unemployment probably increased. Iran's jobless rate hovers around 12 percent, with three out of four unemployed Iranians under age 30. Festering discontent about inequality helped inspire Ahmadinejad's drive to redistribute the oil cash. But on this score, the results were also disappointing. Between 2005 and 2007, the income of the top 20 percent rose more than four times as fast as that of the bottom quintile. The influx of oil revenues, which trickle down Iran's unequal structure of access to power and position, always seems to worsen the distribution of income. But Iran's economic weakness should not be exaggerated. The Failed States Index, for instance, too harshly critiques Iran for deficit spending and price controls. The government's 2008 budget was tied to a predicted oil price of $39.70 a barrel, far lower than the actual price for much of the year—meaning that "deficit spending" was probably well paid for. And though Iran began to limit purchases of subsidized gasoline, plenty of fuel was available at a higher—but still well below market—price. Finally, any rise in poverty will be cushioned by Iran's free education system, universal basic health insurance, and income assistance. What the index claims happened in 2008, however, may already be occurring in 2009. Much lower oil prices will cause a massive deficit. If the government tries to keep up its expenditures, inflation will return with near certainty. If the government gives in to the temptation to control key prices, the exchange rate, or interest rates, it would hurt exports. Unless a new administration reverses some of the worst policies of recent years, it is unlikely that the private sector will revive in time to help the economy this year.

Which State Security Branch Rules Tehran's Streets? Two weeks after the contested results of Iran's Presidential elections led to widespread street riots and demonstrations across the country, the Islamic Republic pronounced its harshest threat yet to protesters. At the official ceremony for Friday prayers, Ayatollah Ahmad Khatami, a hard-line cleric who often delivers the sermon, said those who agitate on the streets were "waging war against God," a crime that carries the death sentence. It was the latest example in which government forces have tightened their control over and heightened their rhetoric against opposition supporters of the defeated presidential candidate Mir-Hossein Mousavi. Demonstrations and rallies have ground to a halt as the heavy presence of police, Revolutionary Guards officers, plainclothes intelligence and paramilitary volunteer members in the streets have made it impossible for protesters to congregate. The government also began a propaganda campaign aimed at shifting responsibility for the violence meted out by the state onto foreign powers and the protesters themselves. State television aired a program in which witnesses and experts all agreed that Neda Agha-Soltan — the 27-year-old bystander whose death was captured on YouTube, sparking sympathy worldwide and turning Neda into a martyr — was shot by foreign agents in order to intensify people's rage. State television also broadcast another program mourning the purported deaths of eight Basijis killed by bullet wounds. The Basij, or Basijis — the paramilitary volunteer force developed by the Islamic Republic to protect the "Islamic Revolution" from civil disturbances such as the kind that have occurred these past weeks — have had an overwhelming presence on Tehran's streets, often setting up roadblocks to check cars and detain people they consider suspect. They have also been brought in as reinforcement for the police in dealing with demonstrators. Although they are an official subdivision of the Islamic Republic Revolutionary Guards Corps, and decked out with crowd control gear as well as small weapons in some cases, they are barely held accountable for their deeds and freer in meting out violence. The majority of recent deaths of protesters are thought to have been carried out by Basijis. But now the question is being raise: what branch of state security is behind the violence against protesters?

'Historic Cracks' And Hard-Liners In Iran  The Islamic Republic of Iran has only had two supreme leaders in its 30-year history. For the first 10 years, the Islamic Revolution's founder, Grand Ayatollah Ruhollah Khomeini, was the supreme leader and was unquestionably accepted as such by the ruling clerical establishment. For the last 20 years, the supreme leader has been Ali Khamenei, a man who has never enjoyed such unquestioned status. Khamenei's problems stem from the fact that he was an unlikely choice from the beginning. He did not have the religious preeminence that underpinned Khomeini's central concept for an Islamic state: that it be led by the country's most learned Islamic jurist. His announcement as successor came only after the Khomeini's death, making him appear to be a last-minute choice. Now, with Khamenei ailing, the succession question looms again. But there is no charismatic revolutionary founder to tell the electoral body -- the Assembly of Experts -- what to do, and the assembly itself is riven by factional divides. The greatest divide is over how much of a republic the Islamic republic should be. Or, in other words: How much of a voice should the people have in a country that officially is a constitutional theocracy? In Qom, the heart of the clerical establishment, there is considerable sentiment that the theocracy should be subordinate to the constitution and sovereignty of the people. For this reason, some prominent clerics have defended the right of opposition supporters to challenge the June 12 presidential results even though the supreme leader endorsed Mahmud Ahmadinejad as president-elect the moment the Interior Ministry announced the results. On July 4, what is arguably the most important organization of religious leaders in Iran, the Association of Researchers and Teachers of Qom, took the defense of the opposition's rights much further. In a statement posted on the association's website, the group called both the disputed presidential election and the new government illegitimate because of the concerns over voting fraud. The divide in Qom over the delicate balance between theocracy and constitutional rule makes the next choice of a supreme leader an extremely threatening one for Iran's hard-liners now in power. It means there is no guarantee the next elected supreme leader will be in the same mold as Khamenei. Potentially worse still for some hard-line leaders, there are strong personality clashes that could work against their interests.

In Iran, a Struggle Beyond the Streets The streets of Iran have been largely silenced, but a power struggle grinds on behind the scenes, this time over the very nature of the state itself. It is a battle that transcends the immediate conflict over the presidential election, one that began 30 years ago as the Islamic Revolution established a new form of government that sought to blend theocracy and a measure of democracy. From the beginning, both have vied for an upper hand, and today both are tarnished. In postelection Iran, there is growing unease among many of the nation’s political and clerical elite that the very system of governance they rely on for power and privilege has been stripped of its religious and electoral legitimacy, creating a virtual dictatorship enforced by an emboldened security apparatus, analysts said. Among the Iranian president’s allies are those who question whether the nation needs elected institutions at all. Most telling, and arguably most damning, is that many influential religious leaders have not spoken out in support of the beleaguered president, Mahmoud Ahmadinejad, or the supreme leader, Ayatollah Ali Khamenei. Indeed, even among those who traditionally have supported the government, many have remained quiet or even offered faint but unmistakable criticisms. According to Iranian news reports, only two of the most senior clerics have congratulated Mr. Ahmadinejad on his re-election, which amounts to a public rebuke in a state based on religion. A conservative prayer leader in the holy city of Qum, Ayatollah Ibrahim Amini, referred to demonstrators as “people” instead of rioters, and a hard-line cleric, Grand Ayatollah Nasser Makarem-Shirazi, called for national reconciliation. Some of Iran’s most influential grand ayatollahs, clerics at the very top of the Shiite faith’s hierarchy who have become identified with the reformists, have condemned the results as a fraud and the government’s handling of the protests as brutal. On Saturday, an influential Qum-based clerical association called the new government illegitimate. Yet Ayatollah Khamenei, Mr. Ahmadinejad and their allies still have a monopoly over the most powerful levers of state.

Senior Cleric Says Leaders of Iran Are Unfit to Rule One of Iran’s most senior clerics issued an unusual decree on Saturday calling the country’s rulers “usurpers and transgressors” for their treatment of opposition protesters in recent weeks, in the strongest condemnation by a religious figure since the contested presidential election a month ago. The decree by Grand Ayatollah Hossein Ali Montazeri, a dissident who has often criticized Iran’s ruling clerics, did not mention by name Iran’s supreme leader, Ayatollah Ali Khamenei, but was clearly aimed at the clerical leadership. Posted on the Web site of Mohsen Kadivar, a dissident cleric and former student of Ayatollah Montazeri, the ruling said the recent arrests and shootings of protesters were proof that Iran’s leaders are unqualified to rule the community of Muslims.  It is unlikely that the decree, or fatwa, will have any immediate effect in Iran, where opposition figures have already made their positions clear. Some prominent clerics, including Ayatollah Montazeri, have joined political figures in criticizing the government crackdown on street protests in recent weeks, and have said that they believed the election was rigged. But mostly they have done so in cautious terms. None have made sweeping attacks on the government’s credentials like the one issued Saturday. Although Ayatollah Montazeri has long been known as a critic of the government, his opinions have weight because of his seniority in Iran’s religious establishment, and because he was a key proponent of wilayat faqih, or rule by clerics — the theoretical underpinning of Iran’s theocracy. Ayatollah Montazeri, 87, was a leader of the 1979 Islamic Revolution in Iran and was once designated the successor to Ayatollah Ruhollah Khomeini. But he fell out with Ayatollah Khomeini in 1989 over the execution of a large group of prisoners and other policies he deemed unjust. The ruling came as news agencies reported that Iran’s foreign minister announced that the government was preparing a new package of “political, security and international” issues to put to the West. The minister, Manouchehr Mottaki, said at a news conference that “the package can be a good basis for talks with the West,” Reuters reported. Mr. Mottaki’s statement was Iran’s first response to comments on Wednesday by President Nicolas Sarkozy of France at the Group of 8 summit meeting in Italy, where he said the major powers would give Iran until September to accept negotiations over its nuclear program or face tougher sanctions. President Obama echoed that warning on Friday.

'It Is A Gut Feeling That All Of Us Have'  A young university student next to me started the conversation, in between screams of “God is great" and “Russia, shame on you, leave our country." “It is not Islam versus Islam. It is not Shiism versus Sunnism. It is not modernism versus traditionalism. In fact, although it is based on tradition, culture, Shiism, Islam, and Iranian pre- and post-Islam ideologies, it is not limited by any of them individually but all of them collectively. It is Rumi, Saadi, Ferdowsi, Zarathushtra (peace be upon him), Muhammad (peace be upon him), Cyrus the Great, and Omar Khayyam combined. "It is an Iranian civil rights movement. It is a gut feeling that all of us have in Iran. It is a need to establish, mold, purify, imply, uphold, and protect what we call as 'citizen's rights,' which is similar to the American Bill of Rights.”

Russia, Ahmadinejad and Iran Reconsidered Moscow openly claimed that Western intelligence agencies, particularly the CIA, organized and funded the 2004-2005 Orange Revolution in Ukraine. These agencies allegedly used nongovernmental organizations (human rights groups, pro-democracy groups, etc.) to delegitimize the existing regime, repudiate the outcome of the election regardless of its validity and impose what the Russians regarded as a pro-American puppet regime. The Russians saw Ukraine's Orange Revolution as the break point in their relationship with the West, with the creation of a pro-American, pro-NATO regime in Ukraine representing a direct attack on Russian national security. The Americans argued that to the contrary, they had done nothing but facilitate a democratic movement that opposed the existing regime for its own reasons, demanding that rigged elections be repudiated.In warning that the United States was planning a color revolution in Iran, Ahmadinejad took the Russian position. Namely, he was arguing that behind the cover of national self-determination, human rights and commitment to democratic institutions, the United States was funding an Iranian opposition movement on the order of those active in the former Soviet Union.

From Power to Chaos — Tracking Iran's Four-Month Slide What a difference a few months can make. In early June, Iran was at the apex of its power on the world stage. Aid to insurgents in Iraq, Afghanistan and Lebanon had helped convert Tehran into a regional superpower rivaled only by Israel. At home, hard-liners led by President Mahmoud Ahmadinejad had consolidated control of parliament, the judiciary and the military and marginalized reform parties. This week, however, Iran heads into talks in Geneva with the U.S. and five other world powers more vulnerable at home and abroad than at any time since the revolution's chaotic early days. Despite defiant talk and a weekend display of military force, the world's only theocracy begins its most important diplomatic engagement in three decades in real trouble. Over the past four months, the Islamic Republic has faced two game changers. First, the June 12 presidential election spawned a vibrant new opposition movement, a political schism among the theocrats and popular protests that deeply undermined the hard-line regime's legitimacy among its constituents. Second, the gotcha revelation on Sept. 25 about a secret nuclear plant put Tehran on the defensive with both its enemies and allies — and undermined Ahmadinejad's U.N. media blitz, which had been designed to boost his post-election image. Now those challenges are converging, tightening the squeeze on the regime. Over the weekend, Iran's new opposition chose sides in the nuclear debate — and sided with the world. "The Iranian Green Movement does not want a nuclear bomb, but instead desires peace for the world and democracy for Iran," said a statement issued by filmmaker and opposition spokesman Mohsen Makhmalbouf. "The Green Movement in Iran furthermore understands the world's concerns and in fact has similar concerns itself." Thumbing its nose at the world may not help, since even the skeptical Russians suggested last week that further sanctions may be in order if Iran does not come clean about the secret facility and other older questions about Tehran's nuclear program. "The Iranians are in a very bad spot now because of this deception, in terms of all of the great powers," Defense Secretary Robert Gates told ABC News on Sunday.

Iraq and Afghanistan

Goodbye Iraq, and Good Luck And that is my take-away from this visit: Iraqis know who they were, and they don’t always like it, but they still have not figured out whom they want to be as a country. They are exhausted from years of civil strife and really don’t want to go there again. Yet on the big unresolved issues — how will power be shared in Kirkuk, how will the Sunnis who joined the “awakening” be absorbed into the government, how will oil wealth and power be shared between provinces and the central government — the different ethnic communities still don’t want to compromise much either. I am amazed in talking to U.S. Army officers here as to how much they’ve learned from and about Iraqis. It has taken way too long, but our soldiers understand this place. But what about Iraqis? There are now many Iraqis embedded with U.S. forces in Kirkuk. In the dining hall on the main base, I like to watch the Iraqi officers watching the melting pot of U.S. soldiers around them — men, women, blacks, whites, Asians, Hispanics — and wonder: What have they learned from us? We left some shameful legacies here of torture and Abu Ghraib, but we also left a million acts of kindness and a profound example of how much people of different backgrounds can accomplish when they work together. We are going to find out just what Iraqis have learned soon. That’s an important message — otherwise Iraqis will delay forever resolving their big, nation-shaping disputes. We can’t do it for them — but our diplomats could do more to help them forge those compromises. We have special envoys for Iran, Afghanistan, Pakistan and Arab-Israeli affairs, but for Iraq — a country key to the Middle East in which we have lost so many lives and are spending a trillion dollars — there is no special envoy, or secretary of state, totally focused on securing a decent outcome here. Vice President Joe Biden is overseeing Iraq policy, but he has too many other things to do. Iraq needs a big, tough, full-time mediator. Senior Iraqi officials are too proud to ask for our help and would probably publicly resist it, but privately Iraqis will tell you that they want it and need it. We are the only trusted player here — even by those who hate us. They need a U.S. mediator so they can each go back to their respective communities and say: “I never would have made these concessions, but those terrible Americans made me do it.” After we invaded and stabilized Bosnia, we didn’t just toss their competing factions the keys. President Bill Clinton organized the Dayton peace talks and Richard Holbrooke brokered a deal that has lasted to this day. Why are we not doing in Iraq what we did in Bosnia — when the outcome here is 100 times more important?

Many Investors Still Avoid Risks of Iraq Next month the United States and Iraq will gather hundreds of officials and company executives for a two-day conference in Washington intended to send a message that after six years of war, Iraq is open for business, and not just in oil. Now more than ever before, Iraqi officials boast that a trickle of foreign investment — including the first new hotel in Baghdad since Saddam Hussein’s government fell — is at last poised to be a flood.The experience of the company here, though, shows that economic development and foreign investment face more obstacles than security alone.The state-owned industries that dominate the country’s economy — from oil fields to dairies to textile factories — are as bloated and inefficient as they were in Mr. Hussein’s time, arguably more so. They are hobbled by corruption, still sporadic electricity and poor roads and bound by bureaucracy and central planning that leave them unable to compete with a flood of cheap imports from Iran, Turkey and beyond.New legislation intended to regulate investments, land rights, taxes, financial services and consumer protections remains stalled in Parliament. The mere mention of the sort of privatization that swept Eastern Europe and the former Soviet Union after the collapse of Communism is anathema to officials here.

Targeting Terrorists Not since 1975 when the Church Commission investigated Nixon-era abuses in intelligence agencies, have such unusual things occurred in the world of Washington intelligence agencies as in these past few weeks. The Democratic House of Representatives threatened to pass an intelligence authorization bill which the Democratic White House has promised to veto. The former Democratic congressman who now heads the Central Intelligence Agency has been having a public disagreement with leading House Democrats about whether the CIA lies to Congress. There is a controversy about a secret CIA program to do something most Americans presumably want the CIA to do, to kill al Qaeda terrorists. The attorney general is rumored to be looking for a special prosecutor to investigate CIA interrogators, even though the president seemed to have earlier told CIA employees that there would be no prosecutions about alleged torture. Former CIA employees are publicly trotting out the claim that all of this attention “hurts the Agency’s morale” and that damage could result in another successful terrorist attack on the U.S. Even seasoned Washington policy wonks are finding it hard to navigate their way through all of those stories and make some sense of what has been going on. Unless we understand what all of this drama is really about, we will not get the delicate balance right between the needs of a democracy and the rule of law on one side and the requirements of a secret intelligence service on the other. And this democracy needs a functioning secret intelligence service to protect it against the current genres of threat. All of this recent Washington activity about intelligence is perhaps best understood as three distinct, but related stories playing out against a backdrop of suspicion about what the previous administration may have done in reaction to the 9-11 attacks. It is also part of a 60-year historical pattern of manic swings of opinion in Washington about the efficacy of covert action.

Mathematical Model Shows Why Defeating Insurgent Groups Like Taliban Is So Difficult Insurgent groups like the Taliban can only be effectively engaged with timely and accurate military intelligence, and even good intelligence may only succeed in containing the insurgency, not defeating it, according to a new study in the current issue of Operations Research, a flagship journal of the Institute for Operations Research and the Management Sciences (INFORMS®). The study is the first of its kind to combine military intelligence, attrition and civilian population behavior in a unified model of counterinsurgency dynamics. The authors stress the role of obtaining intelligence about the insurgency. Absent intelligence, they write, not only can the insurgents escape unharmed and continue their violent attacks; but resultant poor government targeting causes innocent civilian deaths, which increases popular support for the insurgents and thus generates more recruits to the insurgency. Recent attacks on Taliban strongholds by U.S. drones have shown that deaths among civilians may end up hindering American lead efforts, Kress notes. Ill-targeted actions taken by Israel and Colombia, for example, also have shown that unintended deaths among civilians have led to increased support for insurgents. In their paper, the authors model the dynamic relations among intelligence, collateral casualties in the population, attrition, recruitment to the insurgency, and reinforcement to the government force. Even under best-case assumptions regarding the government actions, they show that the government cannot totally eradicate an insurgency by force. The best it can do is containing it at a certain fixed level. The containment or stalemate points may be either fragile or stable. If the violence level is low, the containment point is fragile, in which case the insurgents can "break away" and eventually win. If the government commits large forces and applies a heavy hand (for example, the "surge" of United States forces in Iraq) then the stalemate point is stable. The model and analysis, they write, represent a best case situation from the government perspective under the parameters put forward where (a) government force is steadily reinforced by new units, (b) it has unlimited endurance (it surrenders to the insurgents only when it is totally annihilated) and (c) the only recruitment to the insurgency is due to collateral casualties in the general population that generate resentment to the government, and therefore more recruits to the insurgency.

Preventing Another Iraq: Key in Afghanistan: Economy, Not Military National security adviser James L. Jones told U.S. military commanders here last week that the Obama administration wants to hold troop levels here flat for now, and focus instead on carrying out the previously approved strategy of increased economic development, improved governance and participation by the Afghan military and civilians in the conflict. The message seems designed to cap expectations that more troops might be coming, though the administration has not ruled out additional deployments in the future. Jones was carrying out directions from President Obama, who said recently, "My strong view is that we are not going to succeed simply by piling on more and more troops." "This will not be won by the military alone," Jones said in an interview during his trip. "We tried that for six years." He also said: "The piece of the strategy that has to work in the next year is economic development. If that is not done right, there are not enough troops in the world to succeed." Jones said repeatedly on this trip that the new strategy has three legs, all of which he said had to be dramatically improved: security; economic development and reconstruction; and governance by the Afghans under the rule of law. "The president realizes it's on the razor's edge," Jones said, suggesting not only a difficult, dangerous time but also a situation that could cut either way. "And he's worried that others don't." The National Security Council is developing a series of measurements to assess the effectiveness of the strategy and the capability of the Afghan government and Afghan security forces. This is expected to be presented to Congress soon.Jones made it clear in his visit to Afghanistan that it is a new era and that Obama will not automatically give the military commanders whatever force levels they request -- the frequent practice of President George W. Bush in the Iraq war. "This is a decisive moment," Jones told U.S. military leaders, diplomats and the presidents of Afghanistan and Pakistan, "a strategic moment, and we better get it right."

  • WINNING: Victory In Afghanistan  Having trouble sorting out who is trying to do what in Afghanistan? Wars can best be understood by examining the objectives of the various participants. In short, what does each side consider a victory. This is complicated by the fact that, as the fighting goes on, these definitions of victory tend to change.

AFGHANISTAN: Not A Good Time To Be A Pushy Pushtun The Western media reported numerous problems and much violence associated with the Afghan vote. But for those in touch with people in Afghanistan (email and blogs makes this pretty easy), the reports were far different. The Taliban huffed and puffed (mainly for the benefit of the foreign media) and generally did not deliver the violence and terror they promised. A lot of the reported "Taliban violence" in the south was the usual Pushtun tribal politics (which tends to be murderous even in the best of times). In most of the country, the only violence is the normal banditry and tribal type long typical of the region. The "vote fraud" was more common than in the West, but was mostly carried out by major politicians, not the Taliban. This form of corruption is endemic to Afghanistan and the region. That is not news, so it is not reported as it is, but embellished with tenuous Taliban connections. Makes for great headlines, but a false description of what is actually happening.

Eight Years On  Americans tend to want to identify a problem, fix it, and then move on. Sometimes this works. Often it does not. Of course, imposing ourselves on hostile or chaotic societies is no solution either. The perceived arrogance and ignorance of overbearing powers can create new narratives of humiliation that will feed calls for vengeance centuries from now. What's needed in dealing with this world is a combination of understanding, persistence, and strategic patience to a degree that Americans, traditionally, have found hard to muster. We have learned much since September 11, 2001, but we are still learning this lesson. As the war in Afghanistan enters its ninth year, with U.S. casualties rising and the Taliban revived, public opinion is turning against what was always, compared with Iraq, our "good war." No one, least of all me, has an easy fix to propose. But over the last eight years I was intimately involved with our country's effort to manage its relationship with the Middle East and South Asia. I know that success only comes from a solid, sustained commitment of resources and attention.

McChrystal's Frank Talk on Afghanistan President Obama is rethinking his entire strategy in Afghanistan after the new commander there stunned the White House with a warning the war could be lost if he doesn't get more troops in the next 12 months. General Stanley McChrystal is up against an enemy that holds the initiative, and he's working with an Afghan government shot through with corruption. Even with more troops, he warns, there has to be "a dramatic change in how we operate." That stark assessment comes from a man who is perhaps this country's most battle-hardened general and, according to those who have served with him, a one-of-a-kind commander. Asked if things are better or worse than he expected, General McChrystal told Martin, "They are probably a little worse." "What's worse than you thought?" Martin asked. "Well, I think that in some areas that the breadth of violence, the geographic spread of violence, places to the north and to the west, are a little more than I would have gathered," McChrystal replied. McChrystal's new strategy says conventional military operations designed to kill the enemy can never win this war. Destroying homes and accidentally killing civilians in the process only create more insurgents and alienates the population. In other words, for much of the past eight years, the U.S. has been sowing the seeds of its own demise. He also wants American convoys to stop their aggressive driving on Afghan streets. "It's perceived by the people as arrogance. It's perceived by the people as not caring about, you know their right to use the road. And at the end of the day, it's their roads," he said. "It sounds like you're trying to deprogram eight years of bad habits," Martin noted.
"Exactly," McChrystal agreed. "There's an awful lot of bad habits we've got to deprogram."

Report Cites Firefight as Lesson on Afghan War That firefight, a debacle that cost nine American lives in July 2008, has become the new template for how not to win in Afghanistan. The calamity and its roots have been described in bitter, painstaking detail in an unreleased Army history, a devastating narrative that has begun to circulate in an initial form even as the military opened a formal review this week of decisions made up and down the chain of command.The 248-page draft history, obtained by The New York Times, helps explain why the new commander in Afghanistan, Gen. Stanley A. McChrystal, is pressing so hard for a full-fledged commitment to a style of counterinsurgency that rests on winning over the people of Afghanistan even more than killing militants. The military has already incorporated lessons from the battle in the new doctrine for war in Afghanistan.The history offers stark examples of shortcomings in the unit’s preparation, the style of combat it adopted, its access to intelligence, its disdain for the locals — in short, plenty of blame to go around.

Pakistan's Spies At an operational level, the ISI is a close partner of the CIA. Officers of the two services work together nearly every night on joint operations against al-Qaeda in Pakistan's tribal areas, perhaps the most dangerous region in the world. Information from the ISI has helped the CIA plan its Predator drone attacks, which have killed 14 of the top 20 targets over the past several years.But on the political level, there is mistrust on both sides. The United States worries that the ISI isn't sharing all it knows about Taliban insurgents in Afghanistan. The Pakistanis, meanwhile, view the United States as an unreliable ally that starts fights it doesn't know how to finish.ISI officials believe Washington should be realistic about its war objectives. If victory is defined as obliteration of the Taliban, the United States will never win. But the United States can achieve the more limited aim of rough political stability, if it is patient.In the ISI's view, America makes a mistake in thinking it must solve every problem on its own. In Afghanistan, it should work with President Hamid Karzai, who, for all his imperfections, has one essential quality that American strategists lack -- he's an Afghan. ISI officials suggest that Karzai should capitalize on the post-election ferment by calling for a cease-fire so that he can form a broadly based government that includes some Taliban representatives.ISI officials say they want to help America with political reconciliation in Afghanistan. But they argue that to achieve this goal, the U.S. must change its posture -- moving from "ruler mode" to "support mode" -- so that Afghan voices can be heard.Talking with ISI leaders, I am reminded of something you see around the world these days. People want to help America more than we sometimes think. But they want to be treated with respect -- as full partners, not as useful CIA assets.Trust is always a conditional word when you are talking about intelligence activities, which are built around deception. But in this case, where America and Pakistan share common interests, the opportunities are real.

 U.S. Says Taliban Has a New Haven in Pakistan As American troops move deeper into southern Afghanistan to fight Taliban insurgents, U.S. officials are expressing new concerns about the role of fugitive Taliban leader Mohammad Omar and his council of lieutenants, who reportedly plan and launch cross-border strikes from safe havens around the southwestern Pakistani city of Quetta.But U.S. officials acknowledge they know relatively little about the remote and arid Pakistani border region, have no capacity to strike there, and have few windows into the turbulent mix of Pashtun tribal and religious politics that has turned the area into a sanctuary for the Taliban leaders, who are known collectively as the Quetta Shura.Pakistani officials, in turn, have been accused of allowing the Taliban movement to regroup in the Quetta area, viewing it as a strategic asset rather than a domestic threat, while the army has been heavily focused on curbing violent Islamist extremists in the northwest border region hundreds of miles away.As a result, Pakistani and foreign analysts here said, Quetta, the capital of Baluchistan province, has suddenly emerged as an urgent but elusive new target as Washington grapples with the Taliban's rapidly spreading arc of influence and terror across Afghanistan.