Tuesday, September 30, 2008

Don't throw capitalism's baby out with the bath water!

Ari Shavit challenged Netanyahu to be a statesman and not another petty politician
like those Netanyahu accuses. Wonder what Shavit would have to say about our politicians and all those Acorns. (See 1 and 1a below.)

Two below was sent to me. It is a "You Tube" expose' of a hearing at which a La. Representative warned about Fannie and Freddie and how his comments were ignored and the cover up began. You hear about 'there is enough blame to go round' and I am sure there is but I wish Democrats, led by Pelosi and Reid etc., could buy into owning some of theirs. (See 1b.)

Just as there are no free lunches there are also no free markets. Government's imprint is everywhere. We face a choice - more government which has spent everything and more capitalism has produced or a freer system left to sort things out combined with heavy jail terms for those guilty of abusing it. I prefer allowing the markets to correct the excesses and the justice department to pursue the crooks - even those in Congress.

We are in a mess but I would suggest much of the mess is due to the fact that executive behaviour has been scoped by Congressional rules, restraints, restrictions etc. That is not to say unbridled markets are not capable of creating serious problems - we know they can. Therefore, before we throw "the capitalism baby" out with the water it would be wise to stop and ponder - what economic system devised by man could ever have funded the stupidity generated by our many Congresses? (See 2 and 2a below.)

What is going on? Are we so in need of money even those in the Pentagon, who distrust Israel, have caved? (See 3 below.)


1) If Netanyahu were a statesman
By Ari Shavit

If Benjamin Netanyahu had any real greatness in him, he would have convened a dramatic press conference this week in which he would have said the following:

"Tzipi Livni and Ehud Barak are petty politicians. They are trying to form a government that is a continuation of the failed Olmert-Peretz government. I hear the things being said by Deputy Chief of Military Intelligence Brig. Gen. Yosi Baidatz. I understand that Iran has accumulated about half the fissionable material it needs to build a nuclear bomb. I understand that Iran has mastered the technology for enriching uranium, and that it is now galloping forward on the way to nuclear capability. I know that in the next 18 months Israel will have to make one of the most difficult decisions in its history. Therefore, like Menachem Begin in 1967, I am setting aside personal considerations and party interests. I prefer the good of the country to my own good. I hereby declare that I am willing to serve for a limited period as Tzipi Livni's deputy in a national emergency government."

If Benjamin Netanyahu had any greatness in him, he would also have said the following at the press conference that he would have convened: "The global economic crisis is only at its beginning, and Israel's economic crisis is around the corner. The Olmert-Hirchson-Bar-On government did nothing to anticipate the problem, and to fight the coming recession. However, I am not a politician, I am a patriot and a professional. I'm not looking to get even. Rather, I am ready to place my abilities and reputation at the disposal of my country. I hereby propose to prime minister-designate Livni that she appoint me, on an emergency basis, finance minister and head of an economic cabinet."

If Benjamin Netanyahu had any greatness in him he would have used the press conference to define the four goals of the proposed emergency government: confronting the Iranian threat, confronting the economic threat, an educational revolution and a change in Israel's system of government. In front of the TV crews, Netanyahu would have admitted that there are profound differences of opinion between Likud and Labor on the Palestinian question, but proposed that for a year and a half these differences of opinion be set aside. The chairman of the opposition would have proposed that the national unity government to be established immediately focuses on the other four topics on the national agenda.

He would have said the following: "After a period of hard work in which we will ensure security and rehabilitate the economy, improve the education system and amend the government system, we will be able to return to the penetrating ideological debate concerning the division of the country, which will be decided in the coming elections. However, until the 2010 elections, we have to do what the Alignment, Rafi and Gahal did on the eve of the Six-Day War. We must overcome personal and sectarian disputes and work together in order to guarantee national survival."

If Benjamin Netanyahu had any greatness in him, such a press conference would also have helped him politically. It would have made him look good. The unexpected move would have shuffled the cards of a miserable and inferior inter-party game. While Livni and Barak would have been seen as pathetic players, he would have posited himself as the true Israeli leader. His purely ethical act would have shattered his dubious image and granted him broad support and sweeping popularity. Bibi would have become the new Sharon. Even the media would have treated him with kid gloves. Although he would have been forced to postpone his move to the Prime Minister's Office in Jerusalem by about a year, he would have guaranteed that transition. And no person and no force would have been able to block his path to power.

But Benjamin Netanyahu has chosen to behave differently. The press conference he convened midweek was that of a politician rather than a statesman. It was a disappointing press conference of the head of a small party rather than the leader of a country. In the face of an historic challenge that Netanyahu understands well, he chose to behave like a petty person who concerns himself with petty matters.

That's a shame. Because there is much more to the son of Benzion Netanyahu. The brother of Yonatan Netanyahu is capable of much more. Bibi is really one of the most talented people among us. He even has a degree of greatness. However, only when the former prime minister knows how to extricate this certain greatness from the considerable number of personal and personality weaknesses he also possesses, will he be a leader of stature. This week he was unable to do so. Will he be able to do so next week?

1a)ACORN, Obama, and the Mortgage Mess
By Mona Charen

The financial markets were teetering on the edge of an abyss last week. The secretary of the Treasury was literally on his knees begging the speaker of the House not to sabotage the bailout bill. The crash of falling banks made the earth tremble. The Republican presidential candidate suspended his campaign to deal with the crisis. And amid all this, the Democrats in Congress managed to find time to slip language into the bailout legislation that would provide a dandy little slush fund for ACORN.

ACORN stands for the Association of Community Organizations for Reform Now, a busy hive of left-wing agitation and "direct action" that claims chapters in 50 cities and 100,000 dues-paying members. ACORN is where Sixties leftovers who couldn't get tenure at universities wound up. That the bill-writing Democrats remembered their pet clients during such an emergency speaks volumes. This attempted gift to ACORN (stripped out of the bill after outraged howls from Republicans) demonstrates how little Democrats understand about what caused the mess we're in.

ACORN does many things under the umbrella of "community organizing." They agitate for higher minimum wages, attempt to thwart school reform, try to unionize welfare workers (that is, those welfare recipients who are obliged to work in exchange for benefits) and organize voter registration efforts (always for Democrats, of course). Because they are on the side of righteousness and justice, they aren't especially fastidious about their methods. In 2006, for example, ACORN registered 1,800 new voters in Washington. The only trouble was, with the exception of six, all of the names submitted were fake. The secretary of state called it the "worst case of election fraud in our state's history." As Fox News reported:

"The ACORN workers told state investigators that they went to the Seattle public library, sat at a table and filled out the voter registration forms. They made up names, addresses, and Social Security numbers and in some cases plucked names from the phone book. One worker said it was a lot of hard work making up all those names and another said he would sit at home, smoke marijuana and fill out the forms."

ACORN explained that this was an "isolated" incident, yet similar stories have been reported in Missouri, Michigan, Ohio, and Colorado -- all swing states, by the way. ACORN members have been prosecuted for voter fraud in a number of states. (See www.rottenacorn.com.) Their philosophy seems to be that everyone deserves the right to vote, whether legal or illegal, living or dead.

ACORN recognized very early the opportunity presented by the Community Reinvestment Act (CRA) of 1977. As Stanley Kurtz has reported, ACORN proudly touted "affirmative action" lending and pressured banks to make subprime loans. Madeline Talbott, a Chicago ACORN leader, boasted of "dragging banks kicking and screaming" into dubious loans. And, as Sol Stern reported in City Journal, ACORN also found a remunerative niche as an "advisor" to banks seeking regulatory approval. "Thus we have J.P. Morgan & Co., the legatee of the man who once symbolized for many all that was supposedly evil about American capitalism, suddenly donating hundreds of thousands of dollars to ACORN." Is this a great country or what? As conservative community activist Robert Woodson put it, "The same corporations that pay ransom to Jesse Jackson and Al Sharpton pay ransom to ACORN."

ACORN attracted Barack Obama in his youthful community organizing days. Madeline Talbott hired him to train her staff -- the very people who would later descend on Chicago's banks as CRA shakedown artists. The Democratic nominee later funneled money to the group through the Woods Fund, on whose board he sat, and through the Chicago Annenberg Challenge, ditto. Obama was not just sympathetic -- he was an ACORN fellow traveler.

Now you could make the case that before 2008, well-intentioned people were simply unaware of what their agitation on behalf of non-credit-worthy borrowers could lead to. But now? With the whole financial world and possibly the world economy trembling and cracking like a cement building in an earthquake, Democrats continue to try to fund their friends at ACORN? And, unashamed, they then trot out to the TV cameras to declare "the party is over" for Wall Street (Nancy Pelosi)? The party should be over for the Democrats who brought us to this pass. If Obama wins, it means hiring an arsonist to fight a fire.

1b) No one's clean in this mess: Democrats and Republicans must share the blame for the failure to pass a $700-billion bailout plan.
By Jonah Goldberg

On Sunday evening, Republican House Minority Leader John A. Boehner explained his considered opinion on the $700-billion Wall Street bailout plan: It's a "crap sandwich," he said, but he was going to eat it.

Well, it turned out he couldn't shove it down his colleagues' throats. The bill failed on a bipartisan basis, but it was the Republicans who failed to deliver the votes they promised. Some complained that Democratic Speaker Nancy Pelosi drove some of them to switch their votes with her needlessly partisan floor speech on the subject. Of course Pelosi's needlessly partisan. This is news?

The Republican complaint is beyond childish. Democratic Rep. Barney Frank, a man saturated with guilt for this crisis, nonetheless was right to ridicule the GOP crybabies on Monday. "I'll make an offer," he added. "Give me [their] names and I will go talk uncharacteristically nicely to them and tell them what wonderful people they are and maybe they'll now think about the country."

Would that Frank had been imbued with such a spirit earlier. Frank, chairman of the House Financial Services Committee, has spent the last few years ridiculing Alan Greenspan, John McCain and others who sought more regulation for Fannie Mae's market-distorting schemes -- the fons et origo of this financial crisis. Now he says "the private sector got us into this mess." His partner in crime, Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), a chief beneficiary of Fannie Mae lobbyists' largesse, claims this mess is the result of poor oversight -- without even hinting at the fact he is in charge of oversight of banks. They sound like pimps complaining about the prevalence of STDs among prostitutes.

And let us not forget that the Democrats, with a 31-seat majority, could not get 95 of their own to vote for the bailout, largely because it didn't provide enough taxpayer money to their left-wing special interests. Would that they thought about the country.

The one man who truly tried to treat this crisis like a crisis -- McCain -- was ridiculed by Senate Majority Leader Harry Reid, who implored him to come to Washington to help in the first place. And the news media, which now treat any Republican action that threatens a Barack Obama victory as inherently dishonorable, uncritically accepted the bald Democratic lie that McCain ruined a bipartisan bailout deal last Friday.

This is not to say that McCain knows what to do. Faced with an unprecedented financial crisis involving frozen global credit markets and a maelstrom of moral hazard, his standard response is to talk about wiping out earmarks and eliminating waste, fraud and abuse. Memo to Mr. McCain: Waste, fraud and abuse are the only things holding the system together at this point.

Obama is no better. The man has spent two weeks irresponsibly excoriating his opponent for saying the fundamentals of the economy are strong -- a perfectly leaderly thing for McCain to have said during a panic. Then, campaigning in Colorado on Monday, the day the market plunged 777.68 points, Obama proclaimed: "We've got the long-term fundamentals that will really make sure this economy grows."

Perhaps after Al Qaeda seizes Baghdad, a President Obama would finally declare, "Hey, we can win this thing!"

Meanwhile, President Bush, his popularity ratings stuck at below-freezing numbers, has decided to cling to Treasury Secretary Hank Paulson for warmth on the grounds that the vaunted former Goldman Sachs chair has the credibility to sell the solution to a problem he's been exacerbating for 18 months. When a reporter for Forbes magazine asked a Treasury spokesman last week why Congress had to lay out $700 billion, the answer came back: "It's not based on any particular data point." Rather: "We just wanted to choose a really large number."

There's a confidence builder.

As for the reputedly free-market firebrands of the congressional GOP, with whom my sympathies generally lie, I cannot let pass without comment the fact that they controlled the legislative branch for most of the last eight years. Only now, when capitalism is in flames, does this fire brigade try to enforce the free-market fire codes without compromise.

I loathe populism. But if there ever has been a moment when reasonable men's hands itch for the pitchfork, this must surely be it. No one is blameless. No one is pure. Two decades of crapulence by the political class has been prologue to the era of coprophagy that is now upon us. It is crap sandwiches for as far as the eye can see.

2) Thought you'd get a kick out of this. All Obama allies involved in the cover up!


2a) The bailout falters: A market alternative

Now that the government-heavy bailout of the financial markets has been thumped by the House, Congress must explore a more market-based approach.

Republicans and Democrats sent a strong message Monday in rejecting the U.S. Treasury's plan to put up, if need be, $700 billion to take bad debt off Wall Street's ledger.

While it was a well-intentioned move to inject some confidence in the American financial system and forestall greater market deterioration, it left the horrible taste of dirigisme -- economic planning and control by the state -- in the mouths of too many.

But in political defeat and financial despair, there is opportunity:

• Cut the growth-killing corporate tax rate, "zero out" the capital gains tax and return a prodigious amount of private capital to the market.

• Repeal Sarbanes-Oxley. The regulations designed to combat fraud only encumbered many thin-margin smaller businesses with millions in compliance costs, damaging job creation where it can be most prolific.

• The "mark-to-market" bank accounting method must be scrapped. It fueled "value uncertainty" that killed confidence.

• Raise the FDIC guarantee on transaction accounts at banks. Without it, the government's deal last week granting an unlimited guarantee on money market funds could cause bank runs.

Government has failed multiple times in the current crisis. It's now time for government to enable the very markets it derides and disrespects to save the day.

3) US approves 25 F-35 fighter aircraft sale to Israel

The Pentagon’s Defense Security Cooperation Agency has approved the $15.2 billion sale of 25 F-35 Strike Fighters for Israel with an option for another 50, saying it is vital to US national security interests to assist Israel develop “a strong and ready self-defense capability.”

Military sources report that President George W, Bush, in mid-financial crisis, fully discharged his promise of a defense package for Israeli before he left office. There was no announcement of the date of supply.

Earlier this month, the Pentagon approved up to $330 million in three separate arms deals for Israel and posted its advanced FBX-band radar system to an Israeli Air Force base in the Negev.

Israel is the first foreign nation to receive the up-to-the-minute Lockheed Martin F-35 Strike Fighter, which will replace the older F-16 fighters and enhance its air-to-air and air-to-ground defenses and by virtue of five exceptional features:

1. An advanced radar for striking ground or air targets long distance while destroying any threat in its immediate environment.

2. An electro-optical targeting system (EOTS).

3. The pilot’s helmet-mounted displays (HMD).

4. It is the first fighter plane in the world with a communications system linked to satellites.

5. The capacity for carrying large quantities of ordnance - from joint direct attack munitions to AIM-120 and AIM-132 air-to-air missiles.

The first consignment of 25 F-35’s has a conventional take-off and landing (CTOL) configuration, while the next 50 are short take-off and vertical landing (STOVL) aircraft. In the event of an armed conflict, the Israel Air Force calculates that its long runways will be in danger of attack by Iran, Syria, Hizballah and Hamas.

The deal was approved after senior Israeli and US officials met in Washington this month and assurances were tendered that sensitive technologies would not be passed to third parties.

Monday, September 29, 2008

Like it or not - Wall and Main Street Are Connected!

President Bush has basically one goal in terms of domestic policy - stop the financial bleeding, apply a tourniquet and unfreeze our financial system. I am not sure he is even thinking about helping elect McCain and the McCain people have certainly relegated GW's participation to one that is less than visible.

Pelosi and Reid, as always, are driven by a desire to increase their ranks in Congress and now get Obama elected. They have said as much and I take them at their word. Their actions suggest nothing otherwise and speak even louder than their words.

McCain has a burning desire to get elected but I am not sure he has gone about it in the most propitious way to accomplish his goal - partly because of circumstances beyond his control and partly because of things he has done or failed to do. There is no love lost between himself and GW either.

Obama , like McCain has a burning desire to get elected as well and the odds have increased a bit that he will but there is still a lot of time for current patterns to reverse. Obama has not demonstrated any brilliance during the recent financial catharsis that has gripped the nation but I am not sure anyone has an answer or solution. He has, however, tried to score points during his recent post first debate campaign appearances and to the extent that he is a politician seeking a political office that is as one should expect. However, to the extent that much of his rhetoric does not have the ring of truth and goes against the grain of his previous commitment to run a "change" campaign all you can say is why be surprised and if Obama can get away with it so be it.

Half truths are fodder that politicians live off and it is up to a discerning public to decipher and distill. We will find out about that in November.

President Bush did not encourage financial institutions to make bad loans, nor did he incite people to buy homes to flip. Neither did he tell Greenspan to provide cheap money to feed the public's appetite for spending beyond their means. He did engage us in a costly war, he did not stand up to a "porky Congress" inhabited by habitual spenders. GW will surely be blamed for everything because it happened on his watch.

The fact that he inherited a nation burdened by debt his administration did not create, a Social Security System soon to be in deficit and a health system gone wild will be forgotten but he will be blamed for tax relief for the "rich", which actually produced enormous revenues, which Congress (both Democrats and Republicans) spent like water. That is the way the cookie crumbles and that will be a large part of his legacy. (This prescient article was sent to me by a fellow memo reader and appeared in the New York Times, nine years ago. See 1 below.)

When an overweight patient who has smoked, eaten nothing nutricous nor exercised dies in the dentist chair the dentist is blamed. "Fair and Balanced" may be an expression of The Fox Nightly News but that is neither the way it shakes out in the real world nor is that the way partisans will spin it. We love to find blame and pin tails on victims because it gives us comfort and passes the buck over to someone else. Honest and objective reasoning is not a treasured characteristic. Sound bites and garbage has become the fare of the day

In the final analysis though, it is "We The People" who have the ability to change the direction of our country and the best way to do that is how we conduct and educate ourselves and by whom we elect to Congress, not so much the White House. The President is there for 8 years, at best, and Congress persons can be there, and generally are, for much longer terms. This gives Congress a decided advantage except when the president is capable of leading the nation through the bully pulpit and has the guts to protect the Oval Office's Constitutional independence. Reagan and Clinton had the verbal skills, GW does not.

Perhaps Obama will be able to do so because he is a master at empty phraseology. Certainly McCain lacks that soaring but questionable gift. Placing our nation's future in the hands of Pelosi and Reid and then turning the Presidency over to a Democrat President, who like Clinton is Socialistically minded, is a bit unsettling but we have survived worse I guess. (I am reminded of The Fairness Doctrine , The Housing Regulatory Enterprise Act of 2005 among others. See 2 below.)

As for McCain, should he be elected, he will probably be politically blocked in his every move so I suspect any accomplishments will be determined by what Pelosi and Reid choose not to oppose. Compromising with the devil, for the sake of progress, is not the kind I would necessarily favor.

Frankly, I do not understand why anyone would want to be president but we have many who do and eventually we sort it out to two and some lesser mortals. The next four years will prove very interesting regardless of who occupies the Oval Office because they will have to deal with two emerging powers - Russia and China -, renegade Islamic nations, like Iran and Syria, seeking nuclear capability, a N Korea regime that has proven it can break its word and suffer no more than their people already are, a basket case of morality called Europe, a feckless U.N. and a domestic financial structure that is in an ICU on life support. (See 3 and 3a below.)

It might make for dramatic political rhetoric but any politician that does not understand there is a connection between Main Street and Wall Street, does not understand our capitalistic society. Wall Street and Main Street are intertwined for those who do understand how our economy works unless they are more interested in spreading the manure of populist babble. (Again I repeat learn about The Fairness Doctrine , The Housing Regulatory Enterprise Act of 2005 among others. See 2 below.)

We are a resilient nation, we have many strengths and when we are effectively led and act united we can solve most anything. I do not see that in our picture for the foreseeable and that is very sad. (To understand why plug in http://www.youtube.com:8/TheMouthPeace)


1) September 30, 1999 -Fannie Mae Eases Credit To Aid Mortgage Lending

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

2) The Financial Mess: How We Got Here
By Professor Abraham H. Miller

"How can you vote Republican when they so messed up the economy?" a liberal friend screams at me with such vehemence that I had to put the phone a full arms length from my ear. Of course, my friend never heard of the Community Reinvestment Act. He is one of those mindless liberals who thinks that George Bush and the Republicans are responsible for everything from Global Warming to Hurricane Katrina to the attempted genocide of the entire black population of New Orleans.

He claims to be informed but he doesn't remember those dire warnings going back nine years ago that the Community Reinvestment Act would eventually cause a major financial and banking crisis in this country.

The Community Reinvestment Act was pushed hard by Bill Clinton, although it originated under Jimmy Carter. Asked about it the other day on one of the morning TV talk shows, Clinton said times back then were different. Fannie and Freddie had lots of money and he (in his infinite wisdom) decided that the money should not go to share holders or to executive compensation, but should be used to put the poor into homes.

As you can imagine, wonderful things happen when the government strong arms corporations as to how they should spend their money and, better yet, how they should assess the qualifications of home buyers. So the country's biggest buyers of mortgages were pressured into lowering the qualifications of applicants, in order to increase the percentage of poor that got mortgages. By 2006, 30% of all mortgages went to people who in any other circumstances wouldn't qualify.

Now the political left would like you to know that the CRA-controlled institutions did not lend the largest percentage of sub-prime mortgages. But that's information by deception, because the mortgage business is a competitive business. If the government strong arms one part of the business, the other part will respond. And strong arm was what the Clinton administration did, even using the Office of the Comptroller of the Currency to pressure banks to lend more money to the disadvantaged. Caught in the act, a spokesman for the office noted that its abuse of power was "for the best of intentions:" the same inclination used to pave the road to hell.

In the short run, all sorts of money was to be made by lowering standards and processing sub-prime loans for the poor. The Wall Street Journal raised concerns about Fannie's and Freddie's capital requirements. Senator Phil Gramm (R, TX) raised issues about community pressure groups, such as Barack Obama's ACORN, extorting money from banks by holding their feet to the CRA fire, and threatening to militate against mergers and acquisitions unless the banks entered into preferential agreements with community groups.

The Gramm-Leach-Bliley Act cut down on CRA reporting requirements and upped the ante for groups such as ACORN, forcing them to disclose their relationships with local banks.

Fannie and Freddie became big contributors to the Democratic Party. The sub-prime business paid off-at least while the bubble was growing. And the Kerry, Hillary and Obama campaigns have numbered among the leading recipients of the largess of the two mortgage lenders.

Franklin Raines, the Fannie Mae C.E.O. from 1999 to 2004, had been budget director in the Clinton administration. The left would not like you to be reminded that Raines has been a consultant to the Obama campaign, according to the Washington Post, and that Freddie and Fannie number among the top 5 contributors to Obama's run for the presidency. Raines is being sued for the recovery of 50 million in compensation acquired by the alleged manipulation of Fannie's books. Now, that's not change we can believe in. That's Washington as we have come to know and "love" it.

The Bush administration in 2003 tried to change the system, to no avail. Congressman Barney Frank, (D, MA ) was in the forefront of stopping the Bush proposal to take control out of Fannie and Freddie and put it into a third overseeing organization. Frank too has emerged in the current crisis as one of the major critics of the administration.

Former Federal Reserve Chairman Alan Greenspan continued to raise the alarm over Fannie's and Freddie's weak capitalization. His concerns were ignored.

Former Congressman Michael Oxley (R,OH), then chairman of the House Financial Services Committee and co-author of the Sarbanes-Oxley Act, introduced a bill in 2005 in response to the growing problem, but Fannie and Freddie put their lobbyists to work and the bill died.

Democratic Senator Chris Dodd, who is now Chairman of the Banking Committee and who appears along side Majority Leader Harry Reid on television to discuss the current bailout negotiations, has had harsh words for the Bush administration for its alleged role in the crisis.

But the rest of us should have some harsh words for Senator Dodd. After all, the Bush administration in 2003 and Senator Phil Gramm even earlier, in 1999, had been working to change the system. Dodd, like Obama, has been a big recipient of campaign funds from Fannie and Freddie, organizations that Dodd oversees. Dodd has apparently been more consumed with campaign contributions from the mortgage giants than the responsibilities of oversight.

When I point out the long trail of Obama's corruption stretching back to his days in the Illinois legislature, my liberal friends invoke moral equivalence, "They're all corrupt."

There is no shame among the left. When they think Bush is responsible for the collapse of the banking system, they scream at you. When you point out that the Community Reinvestment Act created a pattern of abuse that now threatens the entire financial system, without hesitation liberals say, "They're all corrupt."

The Federal Deposit Insurance Corporation even has a web site so you could see how well your bank is meeting its obligations under the CRA. Those of you who had money in Washington Mutual, which just went belly up, will be happy to know that WaMu, over the five individual reporting periods, had almost exemplary ratings on its commitment to CRA. That should give WaMu depositors great joy, to compensate for the financial mess they may be in. If WaMu had been less responsive to the CRA and more responsive to the market, maybe it wouldn't be insolvent.

I am not suggesting that the CRA by itself led to the current crisis, but the CRA was the first and most important part of the food chain. The CRA caused the expansion in the number of questionable loans that lending institutions made, but Wall Street and insurance underwriters were all to willing to package these loans, enhance their ratings through convenient exercises in fantasy, sell them, and insure them with reserves that were more inadequate than the incomes of the people who got the loans in the first place..

The best thing that can emerge from the current financial crisis is the realization that the government needs to stop directing economic decision making. In a sense, the government is putting out a fire it started when it both created the CRA and assessed lending institutions by how well they were doing in response to the program. When Clinton decided, in his usual arrogance, that he knew better than the market how banks should lend money, the seeds were sown for the current financial disaster.

If you want to blame Bush for the current crisis, it might make you feel good, reinforce your sense of how the world works, enable you to find a meeting of the minds when you next engage your liberal friends over wine and quiche, but like so many things you believe and which make you feel good, it has no correspondence to reality.

3) Teheran: Enrichment will continue

Iran said Monday it will continue its disputed uranium enrichment activity despite a new UN resolution seeking suspension of the process.
Ahmadinejad tours the Natanz...

Iran's foreign ministry spokesman Hasan Qashqavi said in his weekly briefing that enriching uranium was Iran's "right" and that it intended to continue to do so.

He describes as "beyond the law" demands for the suspension of Iran's uranium enrichment.

The US and Russia on Friday sponsored a new UN resolution reaffirming three previous resolutions that imposed sanctions on Iran for refusing to halt its uranium enrichment program.

The US and several European nations say Teheran wants to build nuclear weapons. Iran denies the accusation.

Meanwhile, in a farewell interview with Yediot Aharonot published Monday, Prime Minister Ehud Olmert said talk of a unilateral Israeli strike on Iran was "part of our delusions of grandeur."

Iran was the world's problem, not just Israel's, he said.

"The thought that if America, Russia, China, Britain and Germany cannot deal with the Iranians we Israelis can ... is an example of a loss of perspective," added the outgoing prime minister.

3a) ElBaradei urges Iran to end secrecy

A six-year probe has not ruled out the possibility that Iran may be running clandestine nuclear programs, the chief UN nuclear inspector said Monday, urging Iran to reassure the world by ending its secretive ways.
Director General of the...

Europe also urged Teheran to fully cooperate with a UN probe that is trying to assess all of its past and present nuclear activities. An EU statement on the opening session Monday at the International Atomic Energy Agency's 145-nation conference declared: "The international community cannot accept the prospect of Iran acquiring nuclear weapons."

Iran, along with ally Syria, figures directly at the Vienna conference because they are among four nations seeking their geographic region's nomination for a seat on the IAEA's decision-making 35-nation board.

Iran's bid is strategic. Teheran is running to counteract a US push to have Afghanistan or Kazakhstan elected over Syria, which is under IAEA investigation for allegedly hiding a secret nuclear program, including a nearly completed plutonium producing reactor destroyed last year by Israel.

* Teheran: Enrichment will continue

If the regional group does not agree on a candidate, the conference will be asked to vote on which nation should take the board seat.

In his opening speech, chief UN nuclear inspector Mohamed ElBaradei, the head of the IAEA, focused on Iran's refusal to suspend its uranium enrichment program and alleged past plans to develop the bomb.

The UN Security Council approved a resolution Saturday critical of Teheran's defiance on uranium enrichment, which can create both nuclear fuel and the fissile core of warheads.

Urging Iran to "implement all transparency measures ... required to build confidence in the exclusively peaceful nature of its nuclear program," ElBaradei declared: "This will be good for Iran, good for the Middle East region and good for the world."

He also warned the session that his organization is increasingly stretched in trying to carry out responsibilities that include nonproliferation and preventing terrorists from acquiring the bomb.

"All is not well with the IAEA," ElBaradei declared, appealing for greater financial support and more authority for his agency.

The annual meeting allows the agency's member countries to set policies that range from strengthening nonproliferation to carrying out medical and scientific research. But tensions between Islamic members and the West threaten to hamper decision-making at this session.

The tradition of consensus has normally led all sides to bridge sometimes substantial differences and opt for compromise for most of the conference's 52-year history. A vote on any topic is unusual and considered a huge dent in the meeting's credibility.

But frustration among Muslim countries over Israel's refusal to put its nuclear program under international purview, and resistance from Israel to Muslim pressure on the issue, threatens to force a vote for the third year running.

As in the past two years, Muslim IAEA members were expected to put forward a resolution urging all Middle East nations to refrain from testing or developing nuclear arms and urging nuclear weapons states "to refrain from any action" hindering a Middle East nuclear-free zone.

After losing the vote two consecutive years, Islamic nations are threatening to up the ante this year, warning they will call for a ballot on every item, no matter how uncontroversial, unless they get conference backing on the Israeli nuclear issue.

Arab members - backed by Iran - this year have again asked conference organizers to include an item on Israel - a move being protested by Israel.

Focusing on Israel by name "is substantially unwarranted and flawed," said a letter prepared for review by the conference from Israel Michaeli, the Israel's IAEA representative.

Sponsors of the item should instead "address the most pressing proliferation concerns in the Middle East," the letter said, an allusion to Iran's defiance of UN Security Council sanctions for refusal to stop uranium enrichment.

A draft of the document made available to The Associated Press "expresses concern about the Israeli nuclear capabilities" and urges Israel to throw its atomic activities open to full IAEA view.

Dozens of nuclear organizations are using the meeting to stage events of their own. One of them, the Washington-based Nuclear Threat Initiative, launched a new organization, the World Institute for Nuclear Security, which aims to prevent terrorists from getting the bomb by providing a forum for nuclear specialists.

Sunday, September 28, 2008

Economists - Capable of so much destruction!

The U.S. has been humbled and the piling on and gloating will soon begin. The blame game already has. We are paying for years of under saving, over spending and hubris. It happens to nations as well as families because all must depend upon credit supported by a credit worthy name.

What is so typically ironic is that Sen. Dodd, who benefited from the lobby largesse from Freddie and Fannie and whose committee had oversight, is now being billed as the great "saviour." More hypocrisy! Dodd is an officious blowhard.

Reports from the McCain campaign that they are working on a Palin makeover after her "disastrous"" performance with Couric. I warned and wrote about the fact that before long the pros would destroy Palin. She was not selected because of her knowledge of foreign affairs and understanding the intricacies of finance. She was selected because of her views which were shared by her party's base, because she brought a freshness to politics and had a decent record of governance. The pros, realizing her shortcomings, then began to mold her and moldy she has gotten. Most politicians fear being themselves. Sad.

It is the D.C. pros who, theoretically, understand foreign affairs, and high finance who have brought us to the precipice not the novices. Novices can do damage for sure. This reminds me of the story about the May Day parade when Gorbachev turned to an adviser and asked who were all the many men wearing black coats marching in the parade along with tanks,missiles etc.? The aid responded they are the economists. Gorbachev asked why economists were in a May Day parade? The aid responded: 'because they too are capable of so much destruction.'

Some good will come out of our financial debacle because we will not be able to spend like drunken sailors but, no doubt, the politicians will still find a way to fund their pet supporters and programs and act irresponsibly all the while claiming they are devoting their lives to "we the people." Well "we the people" have every right to send them back a message but I doubt we will because it is always the other guy's elected official who is to blame. We have the best government dirty-laundered money can buy!

This all bodes well for Obama who, in reality, is a better educated male Palin. Oh well!


1)The Bankruptcy of Modern Economics - Robert Samuelson, Newsweek

Don't Call It a Bailout. Or a Depression - Irwin Kellner, MarketWatch

A Bailout is Just a Start - Larry Summers, Washington Post

Trust Capitalism. It Works - Joseph Calhoun, RealClearMarkets

Main Street Turns Against Wall Street - Nina Easton, Fortune

Forced Political Lending Laid Foundation - Ralph Reiland, Pittsburgh TR


* Unpleasant But Essential - The Economist

* A Main Street Rescue - Wall Street Journal

Thursday, September 25, 2008

To Defeat Your Enemy You Must First Know Him!

George Friedman offers comparable insight into McCain's view of foreign policy. Friedman discusses the distinct two facets of the foundation of Republican foreign policy - realism vs moralism and finds McCain has staked out a semblance of both which makes his job somewhat tougher, assuming he becomes president. Most importantly, Friedman writes, what either candidate says now in their campaign offers only partial insight into what they will do should they win because to win they must disguise some of their intent while campaigning and circumstances, beyond their control, are more likely to shape their response and ultimate policy implementations.

The president of Pakistan makes a prediction that if correct will prove critical for McCain. (See 1 below.)

Whether the debate will occur as scheduled is problematical at this point. If Obama debates an empty chair he might lose. (See 1a below.)

Atlas Shrugs' Publisher defines Hillary's decision not to appear at the Ahmadinejad rally as a shot across Obama's bow and, in Geller's opinion, it proved successful. It would be fascinating were Ayn Rand alive today. She probably would do more than just shrug! (See 2 below.)

Beatle, Sir McCartney, invades Israel. (See 3 below.)

Michael Rubin and Daniel Pipes on containing and/or appeasing Iran. (See 4 and 4a below.)

Ahmadinejad and where he gets his inspiration - from Mahdi! To defeat your enemy you must first come to know and understand him! (See 5 below.)

Rove writes the first debate could be decisive and I agree because it will shape attitudes, early on, about whatever else is subsequently said. In a military sense strike fast, strike early! (See 6 below.)

Sound advice? (See 7 below.)

A take on the Paulson plan has the potential, according to former "hedgee" Kessler, of making the U.S. Treasury rich because buying at a fire sales and having staying power can equal huge profits over time. Perhaps Kessler is correct. Time will tell.

Seems to me the government has the ability to flood the market with money if it so chooses but there is always a price to pay. I have been early and consistent in thinking we are heading towards a recession. This patient is not likely to hop off the intensive care bed and start doing a jig.

It is fascinating watching how many times a dead cat bounces.(See 8 below.)


1) Pakistan will prevail against terrorism
By Asif Ali Zardari

THERE ARE MOMENTS in history that define nations, and also define men. For Pakistan, we have reached a critical crossroad that will determine the nature of our future, or if we will have one. I have the opportunity to help my people secure that future, by implementing the vision of my late martyred wife, Benazir Bhutto. Benazir gave her life fighting the terrorism and fanaticism that haunt the entire civilized world. I fight the terrorist threat in Pakistan not only as an elected democratic leader but also as a grieving husband. No one should doubt my commitment to standing up to the terrorist threat. My commitment is national. My commitment is personal.

Last week's cowardly attack on the Marriott Hotel in Islamabad is another example of the irrational threat against civilization. Striking during the Muslim holy month of Ramadan, the barbarians killed 60 people and injured hundreds more. It was our national 9/11. It once again demonstrated that Pakistan is the great victim in the war on terror. We have lost more soldiers in Afghanistan than all the 37 countries that have forces there. We have watched our children being blown up, our wives cut down. We do not need lectures about terrorism from anyone. We don't read about it or watch it on the evening news. We live it each and every day.

The war on terror is Pakistan's war, and we are its greatest victims. We stand united and in defiance. We are resolved that our future will not be dictated by those who defile the spirit and laws of Islam for their sordid political goals. We may be the targets of international terrorism, but we will never succumb to it.

We are confronting the terrorist threat in our tribal areas as well as in our cities. Soldiers are arrayed in the field against the Taliban and al Qaeda, and last month our fighter jets killed 600 enemy fighters. But terrorism cannot be fought by military means alone. Fighting terrorism requires political will, popular mobilization, and a socioeconomic strategy that wins the hearts and minds of the people, by giving them a concrete stake in our country's emerging democracy and in our economic infrastructure. Toward this end, we need the support of the developed world to not only help us fight terrorism but also its root causes, which lurk in the poverty that breeds hopelessness.

The fight against terrorism will not be won by guns and bombs alone. The fight must be multifaceted. The battleground must be economic and social as well as military. We will win when people are mobilized against the fanatics. To mobilize them we have to give them hope and opportunity for their future. They need jobs. Their children need education. They must be fed. They must have energy. We must demonstrate to them that democracy does perform and that democratic governance can improve their everyday life. In terms of security and national interest, our success will be success for the world as well.

An economically viable Pakistan will be a secure Pakistan, and a secure Pakistan is the greatest asset in the world's fight against terrorism. A stable and economically viable Pakistan will suck the oxygen from the terrorist agenda. Economic justice and political democracy are the terrorists' worst nightmares.

We must fight this epic battle together as allies and as partners. But just as we will not let our territory be used by terrorism for attacks on our people and neighbors, we cannot allow our territory and sovereignty to be violated by friends. Attacks that violate our sovereignty actually serve to empower the forces against which we mutually fight.

I am a democratic president of a democratic nation elected with a two-thirds mandate, and I intend that my country be a model to our region and religion of a vibrant, modern, tolerant, peaceful, moderate democracy committed to economic and social justice. People, including my wife, died for this moment. I do not intend to squander it.

Terrorism took Benazir's life. But the terrorist cannot kill my wife's dream

1a) Below is the third installment of a four-part report from Stratfor founder and Chief Intelligence Officer, George Friedman, on the United States Presidential Debate on Foreign Policy.

Part 1 - The New President and the Global Landscape - September 23
This introductory piece frames the questions that the next president will face. Regardless of a given candidate's policy preferences, there are logistical and geographical constraints that shape US and foreign options. The purpose of this analysis is to describe the geopolitical landscape for the next administration. The analysis concludes with a list of questions for the debate that define the parameters facing both candidates.

Part 3 - McCain's Foreign Policy Stance - September 25
Senator McCain has issued position papers and made statements about his intended foreign policy. Like all Presidents, he would also be getting input from a variety of others, principally from his own party. This second analysis analyzes the foreign policy position of Sen. McCain and the Republican Party.

Part 4 - George Friedman on the Presidential Debate - September 29
The final installment in this series will be produced after the debate. This is NOT an effort to call a "winner" or "loser." That's for pundits, not an intelligence service. This will be an analysis of the candidates' statements and positions.
This is a special four-part report, distinct from the geopolitical analysis that we provide our Members on a daily basis. As such, we encourage you to re-post this special series to your website or to forward this email as you like. We would ask that you provide a link to www.stratfor.com for attribution purposes.

Stratfor on the Presidential Debate

By George Friedman

John McCain is the Republican candidate for president. This means he is embedded in the Republican tradition. That tradition has two roots, which are somewhat at odds with each other: One root is found in Theodore Roosevelt’s variety of internationalism, and the other in Henry Cabot Lodge’s opposition to the League of Nations. Those roots still exist in the Republican Party. But accommodations to the reality the Democrats created after World War II — and that Eisenhower, Nixon and, to some extent, Reagan followed — have overlain them. In many ways, the Republican tradition of foreign policy is therefore more complex than the Democratic tradition.
Roosevelt and the United States as Great Power

More than any other person, Roosevelt introduced the United States to the idea that it had become a great power. During the Spanish-American War, in which he had enthusiastically participated, the United States took control of the remnants of the Spanish empire. During his presidency a few years later, Roosevelt authorized the first global tour by a U.S. fleet, which was designed to announce the arrival of the United States with authority. The fleet was both impressive and surprising to many great powers, which at the time tended to dismiss the United States.

For Roosevelt, having the United States take its place among the great powers served two purposes. First, it protected American maritime interests. The United States was a major trading power, so control of the seas was a practical imperative. But there was also an element of deep pride — to the point of ideology. Roosevelt saw the emergence of the United States as a validation of the American experiment with democracy and a testament to America as an exceptional country and regime. Realistic protection of national interest joined forces with an ideology of entitlement. The Panama Canal, which was begun in Roosevelt’s administration, served both interests.

The Panama Canal highlights the fact that for Roosevelt — heavily influenced by theories of sea power — the Pacific Ocean was at least as important as the Atlantic. The most important imperial U.S. holding at the time was the Pacific territory of the Philippines, which U.S. policy focused on protecting. Also reflecting Roosevelt’s interest in the Pacific, he brokered the peace treaty ending the Russo-Japanese War in 1905 and increased U.S. interests in China. (Overall, the Democratic Party focused on Europe, while the Republican Party showed a greater interest in Asia.)

The second strand of Republicanism emerged after World War I, when Lodge, a Republican senator, defeated President Woodrow Wilson’s plan for U.S. entry into the League of Nations. Lodge had supported the Spanish-American War and U.S. involvement in World War I, but he opposed league membership because he felt it would compel the United States to undertake obligations it should not commit to. Moreover, he had a deep distrust of the Europeans, whom he believed would drag the United States into another war.

The foundations of Republican foreign policy early in the 20th century therefore consisted of three elements:

1. A willingness to engage in foreign policy and foreign wars when this serves U.S. interests.
2. An unwillingness to enter into multilateral organizations or alliances, as this would deprive the United States of the right to act unilaterally and would commit it to fight on behalf of regimes it might have no interest in defending.
3. A deep suspicion of the diplomacy of European states grounded on a sense that they were too duplicitous and unstable to trust and that treaties with them would result in burdens on — but not benefits for — the United States.


This gave rise to what has been called the “isolationist” strand in the Republican Party, although the term “isolation” is not by itself proper. The isolationists opposed involvement in the diplomacy and politics of Europe. In their view, the U.S. intervention in World War I had achieved little. The Europeans needed to achieve some stable outcome on their own, and the United States did not have the power to impose — or an interest in — that outcome. Underlying this was a belief that, as hostile as the Germans and Soviets were, the French and British were not decidedly better.

Opposition to involvement in a European war did not translate to indifference to the outcome in the Pacific. The isolationists regarded Japan with deep suspicion, and saw China as a potential ally and counterweight to Japan. They were prepared to support the Chinese and even have some military force present, just as they were prepared to garrison the Philippines.

There was a consistent position here. First, adherents of this strand believed that waging war on the mainland of Eurasia, either in China or in Europe, was beyond U.S. means and was dangerous. Second, they believed heavily in sea power, and that control of the sea would protect the United States against aggression and protect U.S. maritime trade. This made them suspicious of other maritime powers, including Japan and the United Kingdom. Third, and last, the isolationists deeply opposed alliances that committed the United States to any involvement in war. They felt that the decision to make war should depend on time and place — not a general commitment. Therefore, the broader any proposed alliance involving the United States, the more vigorously the isolationists opposed it.

Republican foreign policy — a product of the realist and isolationist strands — thus rejected the idea that the United States had a moral responsibility to police the world, while accepting the idea that the United States was morally exceptional. It was prepared to engage in global politics but only when it affected the direct interests of the United States. It regarded the primary interest of the United States to be protecting itself from the wars raging in the world and saw naval supremacy as the means toward that end. It regarded alliances as a potential trap and, in particular, saw the Europeans as dangerous and potentially irresponsible after World War I — and wanted to protect the United States from the consequences of European conflict. In foreign policy, Republicans were realists first, moralists a distant second.

Following the Japanese attack on Pearl Harbor and the German declaration of war on the United States in 1941, the realist strand in Republican foreign policy appeared to be replaced with a new strand. World War II, and Franklin D. Roosevelt’s approach to waging it, created a new reality. Republican isolationists were discredited politically; their realism was seen as a failure to grasp global realities. Moreover, the war was fought within an alliance structure. Parts of that alliance structure were retained, and supplemented grandly, after the war. The United States joined the United Nations, and the means chosen to contain the Soviet Union was an alliance system, with NATO — and hence the Europeans — as the centerpiece.
Moralism vs. Realism

The Republicans were torn between two wings after the war. On the one hand, there was Robert Taft, who spoke for the prewar isolationist foreign policy. On the other hand, there was Eisenhower, who had commanded the European coalition and had an utterly different view of alliances and of the Europeans. In the struggle between Taft and Eisenhower for the nomination in 1952, Eisenhower won decisively. The Republican Party reoriented itself fundamentally, or so it appeared.

The Republicans’ move toward alliances and pre-commitments was coupled with a shift in moral emphasis. From the unwillingness to take moral responsibility for the world, the Republicans moved toward a moral opposition to the Soviet Union and communism. Both Republicans and Democrats objected morally to the communists. But for the Republicans, moral revulsion justified a sea change in their core foreign policy; anti-communism became a passion that justified changing lesser principles.

Yet the old Republican realism wasn’t quite dead. At root, Eisenhower was never a moralist. His anti-communism represented a strategic fear of the Soviet Union more than a moral crusade. Indeed, the Republican right condemned him for this. As his presidency progressed, the old realism re-emerged, now in the context of alliance systems.

But there was a key difference in Eisenhower’s approach to alliances and multilateral institutions: He supported them when they enabled the United States to achieve its strategic ends; he did not support them as ends in themselves. Whereas Eleanor Roosevelt, for example, saw the United Nations as a way to avoid war, Eisenhower saw it as a forum for pursuing American interests. Eisenhower didn’t doubt the idea of American exceptionalism, but his obsession was with the national interest. Thus, when the right wanted him to be more aggressive and liberate Eastern Europe, he was content to contain the Soviets and leave the Eastern Europeans to deal with their own problems.

The realist version of Republican foreign policy showed itself even more clearly in the Nixon presidency and in Henry Kissinger’s execution of it. The single act that defined this was Nixon’s decision to visit China, meet Mao Zedong, and form what was, in effect, an alliance with Communist China against the Soviet Union. The Vietnam War weakened the United States and strengthened the Soviet Union; China and the United States shared a common interest in containing the Soviet Union. An alliance was in the interests of both Beijing and Washington, and ideology was irrelevant. (The alliance with China also revived the old Republican interest in Asia.)

With that single action, Nixon and Kissinger reaffirmed the principle that U.S. foreign policy was not about moralism — of keeping the peace or fighting communism — but about pursuing the national interest. Alliances might be necessary, but they did not need to have a moral component.

While the Democrats were torn between the traditionalists and the anti-war movement, the Republicans became divided between realists who traced their tradition back to the beginning of the century and moralists whose passionate anti-communism began in earnest after World War II. Balancing the idea of foreign policy as a moral mission fighting evil and the idea of foreign policy as the pursuit of national interest and security defined the fault line within the Republican Party.

Reagan and the Post-Cold War World

Ronald Reagan tried to straddle this fault line. Very much rooted in the moral tradition of his party, he defined the Soviet Union as an “evil empire.” At the same time, he recognized that moralism was insufficient. Foreign policy ends had to be coupled with extremely flexible means. Thus, Reagan maintained the relationship with China. He also played a complex game of negotiation, manipulation and intimidation with the Soviets. To fund the Contras — guerrillas fighting the Marxist government of Nicaragua — his administration was prepared to sell weapons to Iran, which at that time was fighting a war with Iraq. In other words, Reagan embedded the anti-communism of the Republicans of the 1950s with the realism of Nixon and Kissinger. To this, he added a hearty disdain for Europe, where in return he was reviled as a cowboy. The antecedents of this distrust of the Europeans, particularly the French, went back to the World War I era.

The collapse of communism left the Republicans with a dilemma. The moral mission was gone; realism was all that was left. This was the dilemma that George H. W. Bush had to deal with. Bush was a realist to the core, yet he seemed incapable of articulating that as a principle. Instead, he announced the “New World Order,” which really was a call for multilateral institutions and the transformation of the anti-communist alliance structure into an all-inclusive family of democratic nations. In short, at the close of the Cold War, the first President Bush adopted the essence of Democratic foreign policy. This helps explain Ross Perot’s run for the presidency and Bush’s loss to Bill Clinton. Perot took away the faction of the Republican Party that retained the traditional aversion to multilateralism — in the form of NAFTA, for example.

It was never clear what form George W. Bush’s foreign policy would have taken without 9/11. After Sept. 11, 2001, Bush tried to re-create Reagan’s foreign policy. Rather than defining the war as a battle against jihadists, he defined it as a battle against terrorism, as if this were the ideological equivalent of communism. He defined an “Axis of Evil” redolent of Reagan’s “Evil Empire.” Within the confines of this moral mission, he attempted to execute a systematic war designed to combat terrorism.

It is important to bear in mind the complexity of George W. Bush’s foreign policy compared to the simplicity of its stated moral mission, which first was defined as fighting terrorism and later as bringing democracy to the Middle East. In the war in Afghanistan, Bush initially sought and received Russian and Iranian assistance. In Iraq, he ultimately reached an agreement with the Sunni insurgents whom he had formerly fought. In between was a complex array of covert operations, alliances and betrayals, and wars large and small throughout the region. Bush faced a far more complex situation than Reagan did — a situation that, in many instances, lacked solutions by available means.

McCain: Moralist or Realist?

Which brings us to McCain and the most important questions he would have to answer in his presidency: To what extent would he adopt an overriding moral mission, and how would he apply available resources to that mission? Would McCain tend toward the Nixon-Kissinger model of a realist Republican president, or to the more moralist Reagan-Bush model?

Though the answers to these questions will not emerge during campaign season, a President McCain would have to answer them almost immediately. For example, in dealing with the Afghan situation, one of the options will be a deal with the Taliban paralleling the U.S. deal with the Iraqi Sunni insurgents. Would McCain be prepared to take this step in the Reagan-Bush tradition, or would he reject it on rigid moral principles? And would McCain be prepared to recognize a sphere of influence for Russia in the former Soviet Union, or would he reject the concept as violating moral principles of national sovereignty and rights?

McCain has said the United States should maintain a presence in Iraq for as long as necessary to stabilize the country, although he clearly believes that, with the situation stabilizing, the draw down of troops can be more rapid. In discussing Afghanistan, it is clear that he sees the need for more troops. But his real focus is on Pakistan, about which he said in July: “We must strengthen local tribes in the border areas who are willing to fight the foreign terrorists there. We must also empower the new civilian government of Pakistan to defeat radicalism with greater support for development, health, and education.”

McCain understands that the key to dealing with Afghanistan lies in Pakistan, and he implies that solving the problem in Pakistan requires forming a closer relationship with tribes in the Afghan-Pakistani border region. What McCain has not said — and what he cannot say for political and strategic reasons — is how far he would go in making agreements with the Pashtun tribes in the area that have been close collaborators with al Qaeda.

A similar question comes up in the context of Russia and its relations with other parts of the former Soviet Union. Shortly after the Russian invasion of Georgia, McCain said, “The implications of Russian actions go beyond their threat to the territorial integrity and independence of a democratic Georgia. Russia is using violence against Georgia, in part, to intimidate other neighbors such as Ukraine for choosing to associate with the West and adhering to Western political and economic values. As such, the fate of Georgia should be of grave concern to Americans and all people who welcomed the end of a divided Europe, and the independence of former Soviet republics. The international response to this crisis will determine how Russia manages its relationships with other neighbors.”

McCain has presented Russia’s actions in moral terms. He also has said international diplomatic action must be taken to deal with Russia, and he has supported NATO expansion. So he has combined a moral approach with a coalition approach built around the Europeans. In short, his public statements draw from moral and multilateral sources. What is not clear is the degree to which he will adhere to realist principles in pursuing these ends. He clearly will not be a Nixon.

Whether he will be like Reagan, or more like George W. Bush — that is, Reagan without Reagan’s craft — or a rigid moralist indifferent to consequences remains in question.

It is difficult to believe McCain would adopt the third option. He takes a strong moral stance, but is capable of calibrating his tactics. This is particularly clear when you consider his position on working with the Europeans. In 1999 — quite a ways back in foreign policy terms — McCain said of NATO, “As we approach the 50th anniversary of NATO, the Atlantic Alliance is in pretty bad shape. Our allies are spending far too little on their own defense to maintain the alliance as an effective military force.”

Since then, Europe’s defense spending has not soared, to say the least. McCain’s August 2008 statement that “NATO’s North Atlantic Council should convene in emergency session to demand a cease-fire and begin discussions on both the deployment of an international peacekeeping force to South Ossetia” must be viewed in this context.

In this statement, McCain called for a NATO peacekeeping force to South Ossetia. A decade before, he was decrying NATO’s lack of military preparedness, which few dispute is still an extremely significant issue.

But remember that presidential campaigns are not where forthright strategic thinking should be expected, and moral goals must be subordinate to the realities of power. While McCain would need to define the mix of moralism and realism in his foreign policy, he made his evaluation of NATO’s weakness clear in 1999. Insofar as he believes this evaluation still holds true, he would not have to face the first issue that Barack Obama likely would — namely, what to do when the Europeans fail to cooperate. McCain already believes that they will not (or cannot).

Instead, McCain would have to answer another question, which ultimately is the same as Obama’s question: Where will the resources come from to keep forces in Iraq, manage the war in Afghanistan, involve Pakistanis in that conflict and contain Russia? In some sense, McCain has created a tougher political position for himself by casting all these issues in a moral light. But, in the Reagan tradition, a moral position has value only if it can be pursued, and pursuing those actions requires both moral commitment and Machiavellian virtue.

Therefore, McCain will be pulled in two directions. First, like Obama, he would not be able to pursue his ends without a substantial budget increase or abandoning one or more theaters of operation. The rubber band just won’t stretch without reinforcements. Second, while those reinforcements are mustered — or in lieu of reinforcements — he will have to execute a complex series of tactical operations. This will involve holding the line in Iraq, creating a political framework for settlement in Afghanistan and scraping enough forces together to provide some pause to the Russians as they pressure their periphery.

McCain’s foreign policy — like Obama’s — would devolve into complex tactics, where the devil is in the details, and the details will require constant attention.

The Global Landscape and the Next President

Ultimately, it is the global landscape that determines a president’s foreign policy choices, and the traditions presidents come from can guide them only so far. Whoever becomes president in January 2009 will face the same landscape and limited choices. The winner will require substantial virtue, and neither candidate should be judged on what he says now, since no one can anticipate either the details the winner will confront or the surprises the world will throw at him.

We can describe the world. We can seek to divine the candidates’ intentions by looking at their political traditions. We can understand the intellectual and moral tensions they face. But in the end, we know no more about the virtue of these two men than anyone else. We do know that, given the current limits of U.S. power and the breadth of U.S. commitments, it will take a very clever and devious president to pursue the national interest, however that is defined.

2) Obama, Hillary and Palin's Disinvite
By Pamela Geller

The notorious dis-inviting of Sarah Palin from an anti-Ahmedinejad rally in New York is a product of the secret war Hillary Clinton is waging against the Obama presidential campaign.

The catalyst that set the disastrous events in motion was Hillary Clinton's withdrawal.

Many weak and nonsensical excuses were made for Clinton's withdrawal. It was said she pulled out because she thought the event was partisan, or because she did not want to appear with Palin. She was unhappy that the organizers did not tell her that Palin also was going to attend.

Palin does not compete with Clinton and Clinton does not compete with Palin in this election cycle. Palin is the quintessential conservative and Clinton, the archetypal European socialist. If you are a Clinton supporter, you are not going to switch to Palin or vice versa. The lines on their ideology, policies and platforms are most clearly drawn.

Caroline Glick wrote,

"Clinton found out that she was to share a stage with Palin, she cancelled her appearance. By cancelling, she signaled to Jewish Democrats -- and Democrats in general -- that opposing Palin and the Republican Party is more important than opposing Ahmadinejad and the genocidal regime he represents."

Actually, what Clinton signaled was her chances of seizing the nomination and the White House in 2012 were more important than presenting a united front against Ahmadinejad.

So what happened to set the ball rolling? Hillary's pull out had nothing to do with Palin. It was an implicit hit at Obama. Hillary did not want to be the one to represent Obama. Obama's position on Iran is sophomoric, idiotic and dangerous. Hillary has been more responsible and she was not going to clean up his mess.

In plain terms, Hillary Clinton was not going to be the face of Obama's Iranian foreign policy. Obama has said he would meet with Ahmedinejad without condition -- essentially rewarding him for his nuclear arsenal and genocidal threats. No way was Hillary going to pave that road for him, so she pulled out forcing Obama to face the jihad music. In withdrawing she forced him send someone in his stead -- but who?

Biden? Joseph Biden is the poster boy for Iran appeasement. His record on Iran is so weak that he could never make the case for a muscular policy on Iran's nukes and Ahmedinejad's genocidal threats. There was talk of Wexler, but he has his own problems (residential fraud), and he has lied about Obama's positions and support of the Jews. Sending a silly Florida representative would have spoken volumes on the importance Obama assigns to a nuclear, Jew-hating Iran. Besides, Wexler would have paled next to Palin.

Hillary's withdrawal was a clear shot at Obama. And while it may have seemed to have backfired because folks were so disappointed with her, I am not so sure it was a failure. Palin, in the speech she would have given, quoted statements that Clinton has made against the Iranian regime. Palin never mentioned Obama, but spoke of Clinton most admiringly. The Jews in America cannot rest easy knowing Obama did not think the existential threat to Israel and the free world important enough to address.

Clinton could not have known that Jewish lay leadership would cave to their left wing activists, but that was of little import to her. Her action was taken to shine the spotlight on Obama's complete failure on Iran, and she accomplished this. Claiming that by inviting Palin (and Clinton, Biden and Wexler), the organizers were in danger of losing their tax-exempt status was ridiculous. It was not a political rally and Hillary attended and spoke in 2006 when she was running for the Senate. Was that political? Those who make that argument insult our intelligence.

I do not forgive Malcolm Hoenlein for caving to the leftist Jews. The buck stops with him and he blew it. Israel is in Iran's nuclear cross hairs. Full weaponization is either here or imminent. American Jews need real leadership and that is why Malcolm Hoinlein must resign. He is tired and gutless. As executive vice chairman of the Conference of Presidents of Major American Jewish Organizations since June 1986, it was his decision to make. Hoenlein has demonstrated he is not capable of leading the Jewish people as the world prepares for a second holocaust. The left wing politics of yesterday cause irreparable harm.

Many American Jews, like me, boycotted the rally. Estimates had this year's rally at two to four thousand while rally attendance in 2007 was reported by CBS to be 25,000 and 2006, roughly 40,000.

Further, no one took the Soros-created J Street Project seriously, until Hoenlein gave them credibility. Hoenlein should have insisted that Palin appear and pushed back. He should have insisted that Obama send someone to represent him or suffer the consequences of an empty chair.

And that was Hillary's objective, to put Obama's feet to the fire on Iran in front of the whole Jewish community and she succeeded. He failed.

The real issue is why Obama didn't send anyone to represent him at the Anti-Ahmedinejad rally? Having no one there for Obama makes it seem he did not want to upset the Hitler wannabe, or that he was pandering to his widespread support in the Muslim world or his 22% lead over McCain among Muslim Americans.

Hillary wanted these question raised in the subconscious of Jewish and other pro-Israel/anti-Iran voters.

In this Presidential race, Hillary is a McCain operative even if he doesn't know it.

Pamela Geller is the editor and publisher of Atlas Shrugs.

3) McCartney warms up in Tel Aviv
By DAVID BRINN and David Horovitz

Former Beatle Sir Paul McCartney gave strollers in Yarkon Park on Thursday a treat when he took to the stage at the site of his Thursday night concert and performed a short sound check.

Paul McCartney alive and well in Israel

While the concert site was closed off, passersby could hear the former Beatle, armed with his acoustic guitar, run through a number of songs including 'Get Back,' 'Let it Be' and 'Here, There and Everywhere.'

As of Thursday morning, 45,000 tickets had been sold to the concert, which begins at 8 p.m.

On Wednesday, during a tour of Bethlehem's the Church of the Nativity, McCartney said he was carrying a message of peace for Israel and the Palestinians, rejecting criticism of his planned concert in Tel Aviv.

The Beatles legend ducked into the fourth-century church through its low, narrow entrance, taking pictures with a small camera on a strap around his neck. He lit two long, tapered white candles in different parts of the church, saying each time that they were "for peace."

After posing for pictures with fans of all ages outside the fortress-like church, McCartney was asked to respond to criticism from some Palestinians that his visit to Israel supports its occupation of the West Bank.
Sir Paul McCartney visits the...

He said his visit Wednesday to the West Bank showed he was not playing favorites. "I'm here to highlight the situation and to say that what we need is peace in this region, a two-state solution," he said, referring to Israel and a Palestinian state.

"I get criticized everywhere I go, but I don't listen to them," McCartney said. "I'm bringing a message of peace, and I think that's what the region needs."

Before touring the church, McCartney visited the Edward Said National Conservatory of Music in Beit Sahour. Together with his American girlfriend, Nancy Sewell, McCartney brought T-shirts as a gift to the students, aged 5-12.

"His team felt that even though there was no sign of a security risk in Ramallah, it wouldn't be the best atmosphere to meet children in," said a British diplomat who accompanied McCartney and Sewell on the visit.

"The visit to the school was wonderful," said the diplomat. "I've dealt with all sorts of VIPs and I've never met someone who was so effortlessly gracious and relaxed.

"When we got to the school, there were 20 children in a music theory class, and he went right in and sang 'do re me' with them. Then next door, there was a girl about 12 years old having a violin lesson. She started off okay and then you could see she was getting nervous and close to crying. Paul took the violin and made some scratching noises with it, and told her, 'See, I'm much worse than you'."

According to his spokesman, Stuart Bell, McCartney's visit to the school lasted an hour and he sat in on music lessons, jammed with the students, and talked to the teachers about the importance of using music as a gateway to tolerance.

In the garden of the school, he entertained the students with a song on the mouth organ. The visit, arranged by the British Consulate in Jerusalem, was originally intended for the school's branch in Ramallah. But evidently, Palestinians who were angry at McCartney for performing in Israel got wind of the visit and began staging a protest outside the school. At the last minute, Consulate officials decided to transfer the visit to the Beit Sahour branch of the conservatory.

Contrary to reports, McCartney did not visit Jerusalem's Old City.

The diplomat didn't read any significance into the fact that McCartney visited Bethlehem and not Jerusalem.

"It was all a matter of time. Both Paul and Nancy asked a lot of questions about Jerusalem and the Old City. They were very interested in what it was like," she said.

Earlier Wednesday, McCartney posed for photographers at the Dan Hotel in Tel Aviv on Wednesday, ahead of the concert at Yarkon Park.

"According to The Jerusalem Post this morning, I may not be the real Paul McCartney, so I just wanted to let you know that it really is me," he said with a smile on his face.

McCartney was referring to the story in Wednesday's Post about the 40-year-old rumor that he died in a car accident in 1966.

McCartney, arrived at 3 a.m. Wednesday on his private jet and he was expected to rehearse at Yarkon Park later Wednesday evening.

He left the hotel and signed autographs for fans waiting outside before heading off in a car, apparently to visit the Church of the Nativity in Bethlehem. He was reportedly also set to travel to Jerusalem and visit the Kotel.

Last week, McCartney was interviewed by The Jerusalem Post. In the interview, the world famous musician spoke about his beliefs, his near-universal fame, the inspiration for some of his songs and about his optimistic outlook on life.

According to the Dan Hotel, McCartney and his entourage will be occupying most of its 21 suites, while the singer himself will be staying on the fifth floor's Presidential Suite.

The hotel has installed a grand piano in the suite's living room, and a private butler will be at McCartney's disposal 24 hours a day for the entire stay.

McCartney will be accompanied by his personal chef/dietitian, who will team up with the hotel's executive chef Ovad Alfia to prepare special meals and drinks.

In preparation for Thursday night's show, police have released a list of traffic adjustments, changes to bus and train routes and a request to the public to help ensure that one of the biggest musical acts ever to hit Israel goes off without a hitch.

"What's important is that people use public transportation as much as possible," Tel Aviv Police spokesman Benny Telles said. "Use trains and buses, and we're also asking that people don't show up en mass at the last minute. Otherwise, we're looking at this much like the Avoda Ivrit show in Tel Aviv a few months ago - we're expecting everything to be fine."

Reshet Bet and 88 FM will broadcast portions of the show live on Thursday night.

4) Boxed In: Containing a Nuclear Iran
By Michael Rubin

Containment helped define US foreign policy towards the Soviet Union during the Cold War. Inspired by a view of the USSR as expansionist and intractably opposed to capitalist states, containment was viewed as the most cost-effective method to prevent Soviet extension without resorting to cataclysmic war.

The policy was perhaps best described by George Kennan in his 1947 'X' article, in which he claimed "it is clear that the main element of any United States policy toward the Soviet Union must be that of long-term, patient but firm and vigilant containment of Russian expansive tendencies."

Yet, although the X article was written about the idiosyncracies of the Soviet system, containment is not a policy necessarily specific to the unique characteristics of the Cold War. Many in Washington appear to currently view a similar policy as an option in its dealings with a very different but similarly ideologically opposed rival, namely Iran.

For the present, Washington's commitment to this policy remains partial, as other policies are pursued to prevent Iran gaining a nuclear capability, and hence containment is not a viable option. However, should other policies fail entirely, and Iran become emboldened in its foreign policy by a nuclear status, containment is likely to characterise the US' policy towards the Islamic Republic.
Why contain?

Containment, at present, appears the policy option most likely to be used should all other avenues fail to defuse the international stand-off over the Islamic Republic's uranium enrichment programme. Given the lack of success that has been forthcoming from other policies, including a new incentive package from the five permanent United Nations Security Council members plus Germany and Washington's decision to join direct discussions with Iran, to resolve the disagreements, the possibility of a focus on containment is increasing.

The containment policy would not seek to deter use of nuclear weapons by Iran or its allies. Washington believes itself able to deter Tehran from the use of nuclear weapons with its own advanced, extensive and secure nuclear arsenal. Rather, containment would attempt to prevent an Iran emboldened by nuclear weapons using its proxies or conventional forces in regional operations to extend the country's influence.

The range of possible regional operations is significant, largely owing to the unstable international politics of the Gulf region. Beyond the possible use of Iranian proxies in Iraq and Lebanon, three Persian Gulf islands disputed the United Arab Emirates (UAE) – Abu Musa and Greater and Lesser Tonb islands – remain longstanding flashpoints. Moreover, Hossein Shariatmadari, appointed to the editorship of the hardline Iranian daily Kayhan by Iran's Supreme Leader Ali Khamenei, raised regional anxiety with a 9 July 2007 editorial suggesting that the island nation of Bahrain should, after almost five centuries of separation, return to Iranian control, while the member states of the Gulf Co-operation Council (Kuwait, Oman, UAE, Saudi Arabia, Bahrain, and Qatar), remain concerned about Iranian statements over Tehran's ability to close the Strait of Hormuz.

This does not demonstrate that such conflict is likely, nor that Tehran harbours expansionist tendencies or an irrepressible desire for expeditionary operations, but it does reflect a clear range of possible conflict areas in the region.

Given these scenarios, it is unsurprising that the US might seek to rely on a strategy that underlay US strategy during the Cold War. To succeed in an Iranian context, any containment would necessarily rely on three factors: troop deployments and US basing overseas, weapons sales to countries surrounding Iran, and diplomatic alliances. However, political constraints, regional sensitivities and concern over dealing with some regional regimes are all hindering US preparations for a containment strategy, and hence Washington's ability to enforce containment is currently limited.
Base desires

In terms of US basing, there is already a demonstrable trend towards containment. US forces surround Iran, with a total of approximately 250,000 troops in Iraq, Afghanistan, the six GCC states and Turkey. Although President Bush announced a drawdown of 8,000 troops from Iraq on 9 September, he simultaneously outlined an increase of 4,500 personnel in Afghanistan, demonstrating that even as the Iraq deployment winds down amid domestic pressure, Washington remains militarily committed to the region around Iran.

However, while these operations appear to field a formidable aggregate force, in reality the majority of these troops are already engaged in operations related to the wars in Iraq and Afghanistan.

Moreover, many of the facilities used by the US are both temporary in nature and subject to rigorous political control by regional states. Because the US presence in Saudi Arabia became a rally point for Islamist militants, for example, the Kuwaiti government imposed strict regulations on the movement of US military personnel stationed in their country. US troops, for example, are not allowed to visit tourist sites or markets in Kuwait except on periodic, escorted group tours. The Kuwaiti government also designates portions of Camp Arifjan as temporary and insists that when US forces depart, no trace of their presence should remain. In practice, this means that US officers must spend weeks engaging the Kuwaiti bureaucracy if they wish to do so much as pave a road through their tent city.

Similarly, while the US military and Oman maintain a façade of co-operation, the Omani leadership undermined US confidence in its reliability when, at the beginning of Operation Enduring Freedom, it withheld permission for several days for the US Air Force to conduct operations against the Taliban from airfields on Omani territory because of its desire to preserve the appearance of neutrality in a fight involving co-religionists.

Qatar's importance to the US has grown since the 1995 palace coup that installed Sheikh Hamad bin Khalifa ath-Thani. Al-Ubeid today is perhaps the most important US base in the region, but it alone cannot alone sustain a containment strategy. Nor does any containment mission have the depth provided by active Saudi participation. Most US military departed Prince Sultan Air Base, 80 kilometers south of Riyadh, only five years ago, leaving facility maintenance and upgrade in the hands of Saudi officials whose standards may not be up to US military requirements.

Beyond the GCC, given its extensive frontier, Iraq would be vital in any containment of Iran. However, while many members of US Congress support containment of Iran as an alternative to military action, their opposition to upgrading US facilities inside Iraq — such as the Kirkuk and Tallil Air Bases — has undercut the implementation of the containment policy they claim to support. Protracted US-Iraq negotiations over the Status of Forces Agreement has also hampered any containment strategy and muted most debate among defence planners and within the US Congress with regard to the wisdom of permanent bases inside Iraq. While the US and Iraq are likely to agree ultimately on a continued US presence, at least until 2011, the expected gradual drawdown of troops, likely to be hastened should Barack Obama win the US elections, suggests that the ability to effect containment will also gradually diminish.

Another Iranian neighbour, Turkey, could be another vital lynchpin in any US containment strategy, particularly given its membership of NATO. Yet, few US officials presently consider Turkey as a reliable ally in times of regional conflict, primarily owing to the ruling Justice and Development Party's refusal to join the US-led invasion of Iraq in 2003 and the sensitivity of 2007 negotiations over renewal of the US lease of portions of Incirlik Air Base, near Adana. In the latter example, the key question about renewal regarded Ankara's demand that it could veto missions originating from the facility, especially as they might regard Iraq and Iran. Recent Turkish overtures toward Iran and the Turkish government's unwillingness to join sanctions against the Islamic Republic have further heightened US concern. While the upper reaches of the Turkish General Staff may still be pro-American, no US planner relies on Turkey as a keystone in containment of Iran.

Finally, Pakistan, bordering Iran to the east, while long a nominal US ally will not participate actively in containment of Iran for reasons of its own instability, its orientation to counter perceived threats from India, and its involvement in Afghanistan.
Arms transfers

These various political restrictions to basing rights hinder levels of US troops in the region, and hence any attempts to prepare for containment. Any serious containment strategy will likely require more than the 42,500 US troops currently in the Persian Gulf, many of which only serve support functions. This suggests other policies must be implemented to augment the meager US troops based in the region.

To effectively contain Iran would require upgrading regional facilities to expedite deployment in event of hostility; deploying advanced anti-aircraft weaponry around regional states' economic assets—such as oil fields and industrial infrastructure—which would likely be targets of an Iranian first strike; and perhaps most significantly upgrading regional militaries to wage war independently against Iran for several days until the Pentagon can send reinforcements to the region.

The import of this latter factor is made apparent by an analysis of the strategic balance in the region. At present, US regional allies neither have the troops nor the material to themselves contain Iran. The Islamic Republic has some 540,000 troops spread among the regular military, the Islamic Revolution Guards Corps (IRGC), and the paramilitary Basij (which, in September 2007, was nominally folded into the IRGC proper). Saudi Arabia has approximately 200,000 men, and the other GCC states add another 130,000 combined. Azerbaijan and Turkmenistan bring another 92,000 troops. Turkey has 402,000 active military personnel, but the current Turkish leadership is unlikely to allow these to be used beyond containment of threats – largely from Kurdish militants -- along its own 499 km frontier with Iran. While the US has invested billions in the Iraqi and Afghan militaries, both are inwardly focused and ill-prepared to counter any external threat.

In terms of materiel, Iran is the single leading military power in the Gulf, although largely holds parity in comparison to the other regional powers in aggregate. Saudi Arabia and the smaller GCC states maintain approximately 2,300 main battle tanks versus 1,700 in Iran. Azerbaijan and Turkmenistan add another 900. Iran, meanwhile, maintains the lead in its navy: 260 vessels including a handful of submarine, versus less than 200 vessels for the entire GCC and only six patrol boats for Azerbaijan.

Iran and Saudi Arabia have near parity in combat aircraft numbers — 280 against 290 —although Saudi Arabia has a qualitative edge as its F-15s remains superior to Iran's MiG-29s and Su-24s in an air-to-air capacity. Iran, however, has a superior ballistic missile capability to any immediate neighbours besides Pakistan. Iran's Shahab-3 missile has performed erratically during tests, but now reportedly has a 2,000 km range.

Given this military balance, the US is eager to bolster indigenous GCC military capability and missile defences, improve interoperability and enhance protection of critical infrastructure. In order to achieve this goal, the Bush administration in May 2006 launched a new Gulf Security Dialogue, which includes a series of arms sales to upgrade regional military capabilities, particularly GCC anti-missile capabilities. In December 2007, for example, the Department of Defense notified Congress of the UAE's intention to purchase 288 Patriot Advanced Capability-3 (PAC-3) air defence missiles and 216 PAC-2 Guidance Enhanced missiles and of Kuwait's intention to purchase 80 PAC-3s and kits to upgrade 60 earlier generation PAC-2s. Saudi forces themselves man earlier generation Patriot batteries over the past several months, received advanced medium-range air-to-air AIM-120C5 missiles ordered in 2006. While these may not provide protection from Iranian missiles, they do provide deterrence against any potential Iranian manned or unmanned aerial assault on Saudi oil infrastructure. The US installed missile defence emplacements in Qatar as it built al-Udeid and prepositioned armor and heavy equipment to the peninsular country. Turkey is also considering the PAC-3 along with other anti-missile systems manufactured in Israel and Russia. Turkey's procurement process, however, is slow in comparison to other NATO countries, and more vulnerable to political complications.

However, while such advanced equipment can provide regional militaries with a qualitative edge over the Iranian military, again political restrictions exist that will prevent the sale of sensitive equipment. In particular, a traditional desire for Israel to retain a qualitative edge in technology over any real or potential adversaries hampers any attempt to arm regional states. In practice, determinations over arms sales to moderate Arab states are scattered throughout the US executive branch. The Department of State's Office of Political-Military Affairs supervises weapons sales and exports. The National Disclosure Policy Committee, comprised of the secretaries of state and defence, the secretaries of each armed service and the chairman of the Joint Chiefs of Staff, vets the release of sensitive weapons technology. The intelligence community inputs into both bodies. Lastly, Israeli military officials meet their Pentagon counterparts at the Department of Defense's annual Joint Political Military Group meeting, during which Tel Aviv can voice concern about their adversaries' capabilities.

Even when the executive branch deem weapons sales to moderate Arab states permissible, Congress often intervenes to derail sales of advanced weaponry to Arab states. Most famously, this occurred with the failed attempt to cancel a 1981 sale of advanced airborne early warning and control systems aircraft to Saudi Arabia, but more recently Congress has intervened to sidetrack sale of Joint Direct Attack Munitions technology to Saudi Arabia, even as the Bush administration has approved their sale to the UAE, Oman, and Israel.

As US Army Lt Col William Wunderle and US Air Force Lt Col Andre Briere argue in a Winter 2008 Middle East Quarterly article, any strategy to contain a nuclear Iran will require the US government and Congress to rethink and reformulate calculations on restrictions to arms sales in the region, based on the understanding that the GCC states represent the front line of Israeli defence against a mutual Iranian threat and that no GCC state itself poses a serious threat to Israeli security. While a politically sensitive issue, it is

Beyond the military procurement, training is as important to improve the ability of regional militaries to act autonomously. Here, regional militaries vary in their preparedness. Saudi reluctance to host foreign forces in its territory hampers its contribution to containment and to the protection of its critical infrastructure such as the Jubail, Ras Juaymah, and Ras Tannurah refineries in the Eastern province, and the East-West Crude Oil Pipeline (Petroline), which bisects the country and ends at the Red Sea port of Yanbu. While it is hard to gauge the current ability of the Kuwaiti or Qatari militaries to operate independently, their ability to operate equipment and air defences independently has increased through the current decade with training and exercises.
Unappealing diplomacy

One further constraint on the US' containment strategy is its unwillingeness to engage fully with regional regimes.

President Bush has since 2002 made democratisation a cornerstone of his policy toward the Middle East. His administration's focus on reform and transformational diplomacy complicated relations with longstanding Arab allies such as Egypt and Saudi Arabia, although long-established relationships as well as the desire to win Arab state support for US operations in Iraq muted the democracy agenda within the Department of State's Near East Affairs Bureau.

This has ensured relative continuity in US diplomatic engagement with the Arab states, but has endangered or transformed relations with other states.

Concern over Uzbekistan's human rights violations led the Uzbek government to demand the departure of US forces in 2005 from the air base at Karshi-Khanabad, which had supported the mission in Afghanistan and is well suited to support containment efforts against the Islamic Republic.

Azerbaijan would be on the front line of any containment effort against Iran. It has previously assisted US efforts to hinder Iran's nuclear development. On 29 March 2008, for example, Azeri customs impounded for five weeks ten tons of nuclear equipment trucked from Russia and destined for the Bushehr reactor. Subsequently released, Baku's actions presumably aided intelligence understanding of the shipment and suggested willingness to help US counterproliferation efforts. Concerns over Azerbaijan's commitment to reform and democracy, however, have hampered the military partnership and sales. On 29 July 2008, Assistant Secretary of State David Kramer expressed worries about the state of democracy in Azerbaijan, a concern which will grow ahead of Azerbaijan's October 2008 presidential elections, and linked progress on democratisation to the broad US-Azerbaijan bilateral relationship.
Contain or restrain?
With negotiations over Iran's nuclear enrichment deadlocked and widespread recognition in both Europe and the US over the difficulties and complication of military strikes against Iran, US policy makers increasingly say they are prepared to contain Iran. Implementation of a containment policy, however, remains uneven. While the Gulf Security Dialogue will advance GCC military capabilities, no GCC country with the possible exception of Saudi Arabia appears able to withstand an Iranian attack.

Neither the Bush administration, candidates to succeed him, nor Congress have yet proposed streamlining of the weapons procurement process, augmented deployments of forces, especially air force and navy, to the region, upgrading of existing facilities or establishment of new bases, or re-prioritisation of security and democracy concerns along Iran's northern flank. This suggests that the US currently remains ill prepared for any containment strategy, and is unlikely to be in a position to effectively contain a nuclear Iran in coming years.

4a) Appease Iran?

After Hitler, the policy of appeasing dictators - ridiculed by Winston Churchill as feeding a crocodile, hoping it will eat one last - appeared to be permanently discredited. Yet the policy has enjoyed some successes and remains a live temptation today in dealing with the Islamic Republic of Iran.

Academics have long challenged the facile vilification of appeasement. Already in 1961, A.J.P. Taylor of Oxford justified Neville Chamberlain's efforts, while Christopher Layne of Texas A&M currently argues that Chamberlain "did the best that he could with the cards he was dealt." Daniel Treisman, a political scientist at UCLA, finds the common presumption against appeasement to be "far too strong," while his University of Florida colleague Ralph B.A. Dimuccio calls it "simplistic."

Neville Chamberlain mistakenly declared "peace in our time" on September 30, 1938. In perhaps the most convincing treatment of the pro-appeasement thesis, Paul M. Kennedy, a British historian teaching at Yale University, established that appeasement has a long and credible history. In his 1976 article, "The Tradition of Appeasement in British Foreign Policy, 1865-1939," Kennedy defined appeasement as a method of settling quarrels "by admitting and satisfying grievances through rational negotiation and compromise," thereby avoiding the horrors of warfare. It is, he noted, an optimistic approach, presuming humans to be reasonable and peaceful.

From the prime ministry of William Gladstone until its discrediting in the late 1930s, appeasement was, in Kennedy's description, a "perfectly respectable" term and even "a particularly British form of diplomacy" well suited to the country's character and circumstances. Kennedy found the policy had four quasi-permanent bases, all of which apply especially well to the United States today:

# Moral: After the Evangelical movement swept England in the early 19th century, British foreign policy contained a strong urge to settle disputes fairly and non-violently.

# Economic: As the world's leading trader, the United Kingdom had a vital national interest in avoiding disruptions to commerce, from which it would disproportionately suffer.

# Strategic: Britain's global empire meant it was over-extended (making it, in Joseph Chamberlain's term, a "weary titan"); accordingly, it had to choose its battles sparingly, making compromise an accepted and routine way of dealing with problems.

# Domestic: The extension of the franchise made public opinion a growing factor in decisionmaking, and the public did not care for wars, especially expensive ones.

As a result, for over seven decades, London pursued, with rare exceptions, a foreign policy that was "pragmatic, conciliatory, and reasonable." Again and again, the authorities found that "the peaceful settlement of disputes was much more to Britain's advantage than recourse to war." In particular, appeasement steadily influenced British policy vis-à-vis the United States (in relation to, for example, the Panama Canal, Alaska's borders, Latin America as a US sphere of influence) and Wilhelmine Germany (the "naval holiday" proposal, colonial concessions, restraint in relations with France).

Kennedy judges the policy positively, as serviceably guiding the foreign relations of the world's most powerful state for decades and "encapsulating many of the finer aspects of the British political tradition." If not a brilliant success, appeasement permitted London to accommodate the expanding influence of its non-ideological rivals such as the United States and Imperial Germany, which generally could be counted on to accept concessions without becoming inflamed. It thus slowed the UK's gentle decline.

POST-1917 AND the Bolshevik Revolution, however, concessions failed to mollify the new kind of ideologically-driven enemy - Hitler in the 1930s, Brezhnev in the 1970s, Arafat and Kim Jong-Il in the 1990s, and now, Khamene'i and Ahmadinejad. These ideologues exploit concessions and deceitfully offer a quid pro quo that they do not intend to fulfill. Harboring aspirations to global hegemony, they cannot be appeased. Concessions to them truly amount to feeding the crocodile.

However dysfunctional these days, appeasement abidingly appeals to the modern Western psyche, ineluctably arising when democratic states face aggressive ideological enemies. With reference to Iran, for example, George W. Bush may bravely have denounced "the false comfort of appeasement, which has been repeatedly discredited by history," but Middle East Quarterly editor Michael Rubin rightly discerns in the realities of US policy that "now Bush is appeasing Iran."

Summing up, the policy of appeasement goes back a century and a half, enjoyed some success, and ever remains alive. But with ideological enemies it must consciously be resisted, lest the tragic lessons of the 1930s, 1970s, and 1990s be ignored. And repeated.

5) Ahmadinejad and the Mahdi
By Mohebat Ahdiyyih

Iranian president Mahmoud Ahmadinejad surprised not only many Westerners but also many Iranians when, during his first speech at the United Nations, he prayed for the hasty return of the Hidden Imam, the Mahdi, Shi‘i Islam's messianic figure.[1] Demonstrating his priorities, he repeated the prayer in December 2007 when addressing Arab leaders at the Gulf Cooperation Council meeting in Doha[2] but did not object when they described the Persian Gulf as Arab, a diplomatic swipe at Iran's place in the region. Ahmadinejad's messianism is no ploy; it is very serious indeed.[3] Ayatollah Ahmad Jannati, chairman of the Guardian Council, credits Ahmadinejad with "being inspired by God."[4]

The Mahdi and the Islamic Republic

The inspiration for Ahmadinejad's thinking can be found in traditional Shi‘ism. As with other monotheistic religions, Shi‘i teachings promise the return of a messiah. For Twelver Shi‘a, the messiah will be Muhammad al-Mahdi, the Twelfth Imam, who went into occultation in 874 CE and is expected to return before the Day of Judgment to lead the righteous against the forces of evil.[5] Such ideas pervade Iranian culture, even beyond the Islamic context. The idea of the Mahdi has historical precedence, for example, in ancient Zoroastrian beliefs.[6] Persian literature and poetry are awash with the notion of a promised savior. Abol-Ghasem Ferdowsi (935-1020), the author of Shahnameh (The book of kings), Iran's national epic, wrote that a "noble man" would appear in Iran from "whom will spread the religion of God to the four corners of the world."[7]

After the 1979 revolution, the Islamic Republic incorporated the idea of Mahdism into its complex system of governance. Under Ayatollah Ruhollah Khomeini's concept of velayat-e faqih (guardianship of the jurisprudent), Khomeini became the "guardian of Muslims" and representative of the Mahdi in the "first government of God" on earth. He allowed the election of a parliament, the Majlis, but then commanded the elected deputies in May 1980 to offer their "services to Lord of the Age [the Mahdi], may God speed his blessed appearance."[8]

Khomeini and the framers of the Islamic Republic's constitution established an important precedent: Both rationality and irrationality can be employed in the governance of a nation. This approach explains how the Islamic Republic has survived in the modern world even as it pursues a millennium-old philosophy in the face of a skeptical international community and despite a largely progressive and enlightened Iranian population.

Paying lip service to the Hidden Imam has been, since the time of Khomeini, a standard practice for Iranian officials. For example, shortly after leaving office, former president Mohammad Khatami delivered a philosophical and relatively rational speech about civilizations intended to lessen the adverse international reaction to Ahmadinejad's messianic statements. Nevertheless, during the course of his speech, Khatami asserted that the "Lord of the Age will bring about a world government" even as he claimed that "we have no mission to change the world."[9]

If past Iranian presidents have mentioned Mahdism, Ahmadinejad has made it a focal point of his rhetoric. In September 2005, he sponsored the first annual International Conference of Mahdism Doctrine in Tehran. The conference presented Mahdism as an ideology that could form the basis for world peace and unity across religions. Addressing the conference, Ahmadinejad said that the "Islamic Republic and the system of velayat-e faqih have no other mission but to prepare for the establishment of a world government . . . as the Imam [Mahdi] runs and manages the universe." He repeated the same idea but modified his language at the second conference in 2006, saying the "Mahdavi perception [Mahdism] and view are the perfect method for the administration and direction of the world." In follow-up seminars, speakers defined Mahdism as the "defining strategy of the Islamic Republic," a "comprehensive plan and strategic policy," and a "political regime and world view." Within that context, the conference determined not only that the Mahdi's advent is "inevitable" but also that it can be "accelerated" through human action. Discussants spoke about the Iran-Iraq war as a practical example of the application of Mahdism since "combatants were moved by the love of the Mahdi's representative, Khomeini, to sacrifice their lives." Attendees also spoke of Iran as the "Umm al-Qura" (mother of villages), suggesting that the Islamic Republic had replaced Mecca—which uses that same title—as the rightful center of Islam. [10]
Ahmadinejad's View of the Mahdi

Ahmadinejad's concept of Mahdism derives from the same sources that have inspired other Iranian leaders across the Islamic Republic's political spectrum. Aside from Khomeini's teachings on the subject[11] and the writings of Ayatollah Morteza Mottahari[12] (1920-79), a prominent ideologue of the Islamic Republic, a number of other Iranian authors have been influential. In the nineteenth century, Jamal al-Din al-Afghani (1838-97) sought to unite the Islamic world and demonstrate the utility of Islamic teachings in the modern world. He hid his true identity as a Shi‘i believer under the rubric of taqiyya (dissimulation) and pretended to be a Sunni from Afghanistan. Indeed, he contributed not only to Islamist reform inside Iran but also helped lay the groundwork for the Muslim Brotherhood in Egypt.[13]

Ahmadinejad may also have derived inspiration from Navvab Safavi (1924-55), founder of Fadayan-e Islam, a group that assassinated a number of more liberal Iranian politicians and intellectuals. The writings of both Jalal Al-e Ahmad[14] (1923-69) and Ahmad Fardid[15][16][17]; and he may even have been influenced by such anticlerical writers as Fereydun Adamiyat (1920-2008), the most popular modern historian of Iran and a senior diplomat in the late shah's government, whose decades of work[18] have vastly influenced generations of Iranian intellectuals but are now being scrutinized after the exposure of a number of falsifications,[19] such as his intentional misrepresentation of facts about nineteenth-century religious and political movements and the early twentieth-century Iranian constitutional revolution.[20] Although he was prevented from writing or engaging in political activity after the 1979 revolution, major organs of the Islamic Republic—the Kayhan and Jam-e Jam dailies, for example—continue to amplify parts of Adamiyat's work that support their positions often without citing his name. So, too, does the Majlis Research Center and the Islamic Revolution Documentation Center, whose director is an advisor to Ahmadinejad, as well as major political and religious websites such as Tebyan. (1909-94), popular anti-American writers, may have influenced Ahmadinejad in his formative years, as would have ‘Ali Shariati (1933-77), an Iranian sociologist who helped meld leftist thought with political Islam and popularized the notion of Islamic revolution in the years before Khomeini's return. Ahmadinejad may also have drawn upon Ehsan Tabari (1916-89), the theoretician of Tudeh, the Iranian communist party, who after a lifetime of indoctrinating Iranian leftists confessed to "erroneous" ideas after the 1979 revolution

Further coloring Ahmadinejad's world-view, even if not his Mahdism, has been German philosopher Martin Heidegger. Iranian intellectuals react favorably to Heidegger's real or perceived anti-American sentiments, anti-Semitism, and his criticism of traditional Western thought. His grand theory of existence and his objection to attaching great significance to logical reasoning and intelligibility, as well as his theories of the value of nothingness, are concepts that have made him the darling of many Iranian intellectuals.
The Hojjatieh

But what surely has had the greatest influence on Ahmadinejad and his peers is systematic indoctrination by the Hojjatieh Society. The name Hojjatieh derives from Hojjat (proof), one of the titles of the Mahdi; the society was founded in the mid-twentieth century by clerics to combat the Baha'i faith, founded in the nineteenth century by a prophet whom Muslim clerics have labeled and opposed as a false mahdi. The Hojjatieh grew with the help of prominent clerics and assistance from the late shah, who sought to curry favor with the clerics. It soon became a powerful nationwide organization of fundamentalists trained in Mahdism and proved a menace to the late shah.

The Hojjatieh played an important role in radicalizing Ahmadinejad and other secular Muslim youth, students, teachers, government bureaucrats, and even some members of the armed forces prior to the 1979 revolution. Many Hojjatieh activists participated in the 1979 Islamic Revolution. But in the early 1980s, Khomeini moved against the society, both because it challenged his velayat-e faqih doctrine of leadership and because it was poised to take the reins of power in Iran. The ensuing purge of its members from the Islamic regime forced numerous aspiring advocates of the new Islamic regime, such as Ahmadinejad, to renounce or hide their membership in or sympathy for the Hojjatieh.[21]

As a result, the Hojjatieh went underground. Accusations of membership were enough to taint aspiring politicians with disloyalty to the supreme leader. In recent years, several critics of Ahmadinejad's tenure have suggested that his administration is Hojjatieh-inspired and bent on settling scores with Khomeini's allies.[22] Such charges may not be baseless, as some Ahmadinejad supporters have publicly called for rehabilitation of the Hojjatieh and resumption of its activities against the Baha'i faith. For example, the head of the powerful Islamic Propagation Organization (IPO) in East Azerbaijan called for the "revival and strengthening of Hojjatieh Society."[23]

Here, Ayatollah Mohammad Taqi Mesbah-Yazdi's role is notable as Iranians believe he leads the new Hojjatieh.[24] A member of the Assembly of Experts and director of the Imam Khomeini Institute, Mesbah-Yazdi is a leading proponent of Mahdism and a powerful senior cleric with great influence over Ahmadinejad, his government, the Islamic Revolutionary Guards Corps (IRGC), and security forces.[25] He is also allegedly a trainer of hard-line clerics at the Haqqani theological college in Qom, some of whom have joined Ahmadinejad's cabinet.

Outspoken, Mesbah-Yazdi opens a window into Ahmadinejad's beliefs. He advocates the use of violence to promote the interests of Islam and seeks to purge the republican aspect of the Islamic Republic system in favor of a pure Islamic system, which his publications refer to as the nucleus of a Mahdi-led world. The October 2005 issue of his monthly publication Ma'refat, for example, argued that the "superiority of Islam over other religions is stressed in Qur'an, which calls on believers to wage war against unbelievers and prepare the way for the advent of the Mahdi and conquering the world." According to Pasdare Islam, the monthly publication of the powerful Islamic Propagation Organization, an institution in tune with Mesbah-Yazdi's ideas, Khomeini himself elucidated this idea by saying that the "Mahdi will fill the earth with justice" and that "all institutions in our country and their extensions worldwide must prepare the way to receive the Mahdi upon his advent."[26] Mesbah-Yazdi even attributes Ahmadinejad's election to the presidency to the will of the Mahdi.[27] Mesbah-Yazdi is not the only senior cleric who endorses Ahmadinejad's messianism. Jannati and Ayatollah Mohammad Yazdi, the secretary-general of the Qom Seminary Lecturers' Association, both members of Assembly of Experts, have also endorsed the president's beliefs.[28] Supreme Leader Ali Khamenei himself characterized Ahmadinejad's election to the presidency as the fulfillment of the "prayers of the Lord of the Age."[29]

A close examination of the statements and activities of Ahmadinejad and his supporters point to their intimate knowledge of Shi‘i traditions about the Mahdi's expected appearance in Iran and the fierce opposition and violence against him and his followers by clerics, issues that have been closely guarded and rarely mentioned by the ecclesiastics for obvious reasons. For example, following the establishment of the Islamic Republic, clerics directed the purging and editing of statements in books of the sayings and traditions attributed to Prophet Muhammad and his Shi‘i successors about the circumstances surrounding the future advent of the Mahdi. Media coverage of such statements was also tailored in the same manner. In one case, the redactors did not even exempt the most famous 110-volume book called Biharu'l-Anwar (Oceans of light), a standard textbook compiled by the Safavid-era scholar Muhammad Baqir Majlisi (1616-89). Major portions and traditions were stripped of materials deemed detrimental to the Islamic Republic's interests.
Ahmadinejad's Interpretation

No matter how unorthodox Ahmadinejad's interpretation of Islamic theology and prophecies are, he appears sincere in his beliefs. Ahmadinejad's motto of "justice-nurturing government," together with the often-cited promise of the Qur'an about the righteous inheriting the earth, is meant to evoke the idea of a savior in the name of the Mahdi as Iranians are well-versed in the tradition promising the Mahdi will "fill the earth with justice after it has been filled with oppression." As minority Shi‘i Muslims, Iranians also expect vindication of their beliefs against the "false" Sunni majority belief.[30] Furthermore, Ahmadinejad's characterization of his government as "jihadist" and "basiji" (militia), further inflames emotions in more radical believers about the militancy of his administration in pursuing Mahdism.

Ahmadinejad seeks an Islamic government in Iran that is free from democratic pretenses and devoid of modern concepts of human rights and the equality of the sexes; that seeks the acquisition of nuclear weapons, the elimination of Israel, the destruction of liberal democratic states and Western capitalism, and an end to the United States as a superpower, which is perceived as the greatest threat to the Islamic Republic's survival and the main obstacle to the accomplishment of its objectives. The achievement of these preconditions, Ahmadinejad believes, will enable Shi‘i domination and the establishment of a world government.[31] When Ahmadinejad declares frequently that his government represents a return to Khomeini's revolutionary ideals from which previous governments have allegedly deviated, he is suggesting that he believes it is time to return Mahdism—and the achievement of its precursor steps—to its rightful place among the Islamic Republic's priorities.[32]

It is an attractive idea for the masses, nurtured on more than two decades of state-sponsored incitement. Khomeini, after all, called for the Islamic world to "rise up and destroy Israel,"[33] and said of the United States, "We will fight them with all our might until the last drop of our blood."[34]

Ahmadinejad's acolytes find his lack of inhibition in speech and his fiery populism a fresh breeze of honesty compared to the deceptive discourse of Rafsanjani and the philosophizing of Khatami. While both Rafsanjani and Khatami might pay rhetorical heed to the goal of eliminating Israel or countering U.S. influence,[35] both prefer to finesse their rhetoric not to antagonize outside powers.

Mesbah-Yazdi's role as a central figure in promoting Mahdism is important because both he and at least one influential disciple, Hojjatu'l-Islam Mohsen Gharavian, openly endorse the Islamic Republic's acquisition of nuclear weapons. In September 2005, for example, Ma'refat declared that "deterrence does not belong just to a few superpowers but also to other countries," and argued that "The Qur'an calls on the faithful and the Muslim nation to acquire maximum power to be able to deter the enemies of religion and humanity: ‘Against them make ready your strength to the utmost of your power, including steeds of war, to strike terror into the hearts of enemies of God and your enemies.'"[36] In February 2006, Gharavian reiterated this position, as reported by the international media and a number of news agencies in Iran, by stressing the "necessity of using nuclear weapons as a means to retaliate," adding that "there is no religious constraint in using nuclear weapons to retaliate."[37] Although he later denied his statement, his original argument is consistent with those made by others.[38] For example, Hojjat ul-Islam Saidi, Khamenei's representative to the Islamic Revolutionary Guard Corps, a powerful supporter of Mesbah-Yazdi, is often cited in the Revolutionary Guards' Sobh-e Sadegh weekly arguing that the nuclear program "transforms Iran into the dominant regional power."[39]

Mesbah-Yazdi's views and influence over Ahmadinejad and other spiritual pupils grows in importance because his religious edicts are obligatory for his followers. Even if Khamenei has indeed issued a fatwa (as some have argued despite its lack of publication) declaring that making nuclear weapons are contrary to Islamic teachings, Mesbah-Yazdi is theologically permitted to issue a contrary fatwa binding on his followers. As for the Mahdism context of these developments, Khamenei's own words as commander in chief as cited on his website are a sufficient guide: "Becoming equipped with power is a lesson derived from belief in Mahdi. The expected justice, justice of Mahdi for the whole world, is not attained through admonition and preaching … achieving justice requires that just and righteous people have the power to confront the bullies … messengers of God preach to the people, but they are also equipped with weapons."[40] An editorial in Hemayat, a daily publication close to Iran's judiciary, went further and declared that "we need to prepare for ruling the world" and "carrying the flag of Islam to the hands of the Mahdi."[41] Such statements are often repeated in the government-sponsored press. Referring to a "great event leading to mankind's salvation," Ahmadinejad presented his vision again in November 2005 by saying, "Iran must become the platform for the appearance of the Lord of the Age."[42]
Can Ahmadinejad Win a Second Term?

Ahmadinejad's comprehensive and literal application of Mahdism has led him to call openly for the "elimination of Israel"[43] and otherwise assume a posture of intense confrontation toward Israel and the United States. Domestic opponents argue that Ahmadinejad has committed the cardinal sin of revealing the Islamic Republic's intentions, that he has broken with Iran's traditional enigmatic approach and Shi‘i dissimulation (taqiyya). The influential Ayatollah Mohammad Reza Tavassoli, former member of the Expediency Discernment Council and a chief of staff of Khomeini's office, for example, censured Ahmadinejad for openly calling for the destruction of Israel and added that "we all believe in that but there is no need to reveal it." Khatami admonished Ahmadinejad not to "speak of matters that cause economic and political problems for us."[44]

The Islamic Republic has survived because the elected branches of government live alongside those institutions that are not popularly elected and fall under the supervision of the supreme leader—bodies such as the Supreme National Security Council, Islamic Revolutionary Guard Corps, armed forces, security forces, judiciary, Council of Guardians, Expediency Council, state media, and economic foundations (bonyads). The supreme leader may technically claim divine power incumbent in his representation of the Mahdi, but, in practice, he governs by balancing institutional interests and ever shifting alliances with other powerful personalities and factional interests.

Ahmadinejad has upset that balance by exceeding the limits allowed for a transient, elected official. His exclusion of some powerful figures from government, recourse to outright Mahdism, and reliance on a band of like-minded advisers have cracked the semblance of unity that had emerged among the "principle-ists," as pro-theocracy Iranian fundamentalists prefer to call themselves.

Some former supporters of Ahmadinejad have now turned on him. For example, Mohammad Reza Bahonar, the deputy speaker in the last parliament and long one of Ahmadinejad's staunchest defenders, criticized the president for suggesting that the Islamic Republic is "bent upon destroying the prevailing global management"[45] Others, such as former parliamentary speaker Ali Akbar Nateq-Nouri, himself a hard-line fundamentalist and someone who often praises the Mahdi, expressed anxiety that Ahmadinejad's "promotion of such superstitions in recent years" might endanger the nation.[46] Hassan Rowhani, a member of the Supreme National Security Council and former chief nuclear negotiator, characterized Ahmadinejad's views on the Hidden Imam as "superstitious" and "charlatanistic" and called his circle of close allies a "bunch of misguided children."[47] Rumors abound that Ahmadinejad has even dismissed Khamenei's legitimacy. On July 1, 2008, Etemad-e Melli cited Ahmadinejad as having said at the start of his presidency that Khamenei chastised him for claiming that the "Lord of the Age will appear in two years." Ahmadinejad responded by chiding Khamenei: "[He] thinks I am appointed president by him while I am the president appointed by the Lord of the Age."[48]

This has left Ahmadinejad only the support of the Islamic Republic's most hard-line factions—a core group of supporters calling themselves the Pleasant Scent of Servitude (Rayehe-ye Khosh-e Khedmat), followers of Mesbah-Yazdi, and some IRGC elements[49]—a position not conducive to long-term political survival in Iran.

For that reason, Ahmadinejad's tenure beyond the 2009 presidential election is in doubt, as it is opposed not only by longtime rival and newly-elected parliamentary speaker Ali Larijani but also by Mohammad Baqer Qalibaf, the mayor of Tehran and presidential aspirant, and an emerging alliance between Rafsanjani, who represents traditional clerics and technocrats, and Khatami, who represents the business community and reformists. Galvanized by Ahmadinejad's excesses, this pragmatist-reformist alliance made gains in 2007 city council and Assembly of Experts elections. They will face challenges, however, should the Guardian Council and Interior Ministry manipulate candidacies and balloting in the 2009 presidential election.

But elections may not even be necessary to oust Ahmadinejad: By implicitly challenging the supreme leader's authority by channeling the Hidden Imam, Ahmadinejad may have sealed his fate. In theory, Iranians elect their president, but in reality, the supreme leader uses his control over the Islamic Republic's various institutions to manipulate results. The Guardian Council, for example, vets candidates, sometimes disqualifying more than 90 percent of challengers before a single vote is cast. Ahmadinejad's election surprised Iranians almost as much as it surprised the international community. After all, when Mehdi Karrubi went to sleep on election night, he was well ahead in the vote count. When he awoke, he had lost. He openly accused authorities of fraud.[50] Such incidents should not surprise observers. The supreme leader calculates the domestic and international needs of the Islamic Republic and plans the general composition of factional representations in elected offices accordingly.

Alternatively, Ahmadinejad's allies among hard-line fundamentalists may try to retain power, a tactic that could risk the existence of the Islamic Republic's system. Ahmadinejad and his allies showed their intolerance for any dissent when they forced the replacement of ‘Ali Larijani, at the time Iran's relatively pragmatic though still hard-line nuclear negotiator and secretary of the Supreme National Security Council, with Said Jalili, a devout believer in Mahdism whose lifetime interest has been the application of principles derived from millennium-old Islamic traditions to Iran's foreign policy.[51]
Ahmadinejad versus the Clergy?

While Ahmadinejad enjoys the support of Mesbah-Yazdi and his circle, the president's Mahdism has severe repercussions for the clerical basis of the Islamic Republic. Incumbent in the belief in the Mahdi's return is the notion that he will be opposed by the clergy. Says one such prophesy, the "religious leaders of that day will be the most evil religious leaders under the heavens as sedition and dissension will go out from them and to them will it return."[52]

Ahmadinejad may see competitors such as Rafsanjani as among these "most evil religious leaders" who must be neutralized. Another prophecy characterizes the clerics as "faithless" and points to the great suffering of the Mahdi at their hands.[53] Referring to such traditions, one Ahmadinejad adviser asserted that the Mahdi would slaughter such clerics, who are destined to rise against him. The issue is serious enough that some critics accuse Ahmadinejad of trying to eliminate the clergy.[54] A number of prominent clerics have expressed dismay and anger at Ahmadinejad's treatment of them. Former prime minister Ayatollah Mohammad Reza Mahdavi-Kani, secretary general of the Militant Clergy Association, for example, has "warned the president not to take the clergy for granted" as "we have been combatants for the revolution and against corruption."[55] Many Iranians suspect that the traditional clergy's decline after Ahmadinejad's election and the rise of an extremist faction was deliberate IRGC strategy. Statements such as those of Joint Chiefs Commander Hasan Firuzabadi, who warned Ahmadinejad's critics to cease their opposition lest the "enemy … take advantage of them,"[56] underscore suspicions of the IRGC role.

Already, a conflict is occurring. Ahmadinejad has encouraged a class of lay clerics (maddah) much more in tune with his folk belief than formal Shi‘i theology. They staunchly support Ahmadinejad and promote Mahdism, recalling dreams about and sightings of the Mahdi.[57][58] Such developments have fueled widespread rumors of Ahmadinejad's campaign against "corrupt" official clerics and his attempt to strengthen the hand of non-clerical hard-liners. The most conspicuous example of such attempts were the May 3, 2008 revelations by Abbas Palizdar, an Ahmadinejad supporter, who, while addressing students at the University of Hamadan, listed corrupt clerics by name, raising suspicion in one newspaper's assessment that "Ahmadinejad and his military base are bent on eliminating, or at least weakening, the clergy."

The proliferation of hundreds of websites and weblogs that support Ahmadinejad's Mahdism doctrine has become a Pandora's box for the traditional clerics and the Islamic Republic as an increasing number of people learn about the issue. For example, among the traditions repeatedly cited on the web in Persian is the story of Prophet Muhammad's sobbing grief at the fate of the Mahdi and his followers. According to accounts on such sites, Muhammad identified the Mahdi's future followers as "brothers"[59] and differentiated them from his disciples whom he only labeled "companions." Asked by his disciples from among which people the Mahdi's followers will appear, he pointed to his only Iranian disciple, Salman, the Persian (Salman al-Farsi).[60]

Ahmadinejad's opposition to traditional clerics, who are circumscribed in their statements about the Mahdi with a view to concealing from the public the implications of such beliefs, fits perfectly with the tenets of Mahdism that identify Iran as the battleground where the Mahdi appears.

The Iranian nation's fascination with its glorious ancient civilization was the subject of exploitation by the Pahlavi monarchs preceding the Islamic Republic. They sought to project Iran's glorious past into the present and future. Ahmadinejad has perfected the shah's art by relying on a religious version of the same concept. The path is fraught with risks, though. Ahmadinejad has integrated practically all the revolutionary ideals of the regime, open and secret, and their supposed Islamic and historical roots, real and imaginary, into one school of thought and strategy for action; it is inspired by his messianic zeal, and he has proudly and publicly revealed its details. For the Islamic Republic of Iran, the genie is out of the bottle.

Mohebat Ahdiyyih is the senior Iran analyst at the Open Source Center, a U.S. government agency, where he focuses on Iran and the implications of Shi‘i doctrine.

[1] Emrooz (Tehran), Dec.14, 2005; Entekhab (Tehran), Sept. 17, 2006; Jomhuri-ye Eslami (Tehran), Oct. 14, 2006.
[2] Rooz Online (Tehran), Dec. 5, 2007.
[3] Fars News Agency (Tehran), June 30, 2008; Etemad (Tehran), June 18, 2008.
[4] Emrooz, Sept. 17, 2006.
[5] Moojan Momen, An Introduction to Shi'i Islam (New Haven: Yale University Press, 1987), p. 166.
[6] Abbas Amanat, Resurrection and Renewal (Ithaca: Cornel University Press, 1989), p. 2; "Comparative Study of Islamic-Zoroastrian Eschatology," Haft Aseman, University of Religions, Qom, Fall 2007; Shoghi Effendi, God Passes By (Wilmette, Ill.: Baha'i Publishing Trust, 1987), pp. 57-8.
[7] Rooholah Mehrabkhani, Elhame Shoara (Darmestadt, Ger.: Asre Jadid Publishers, 2004), p. 75.
[8] "Declaration of the Islamic Republic by Imam Khomeini" and "Imam Khomeini's Message on the Occasion of the Inauguration of the Majlis," The Dawn of the Islamic Revolution (Tehran: The Ministry of Islamic Guidance, Apr. 1, 1979, May 28, 1980), p. 51, 113.
[9] Sharif News (Tehran), Oct. 30, 2005.
[10] Mahmoud Ahmadinejad, "President Ahmadi Nejad: Turning to Mahdism is the only way for the survival of humanity," accessed July 24, 2008. His first speech and the follow-up seminar presentations were recently removed from the permanent website of the annual conference.
[11] Ayandeh-ye Roshan news agency (Qom), Jan. 31, 2006.
[12] Ayatollah Morteza Mottahari, The Awaited Savior, Rise and Revolution of the Mahdi, and Qa'miyat.
[13] Nikki Keddie, Sayyid Jamāl ad-Din "al-Afghani": A Political Biography (Berkeley: University of California Press, 1972).
[14] Roy Mottahedeh, Mantle of the Prophet (Oxford: Oneworld Publications, 2000), p. 287-336.
[15] Kasra Naji, Ahmadinejad: The Secret History of Iran's Radical Leader (Berkeley: University of California Press, 2008), p. 106-9.
[16] Ervand Abrahimian, Iran between Two Revolutions (Princeton: Princeton University Press, 1982), p. 296.
[17] Ervand Abrahimian, Tortured Confessions: Prisons and Public Recantations in Modern Iran (Berkeley: University of California Press, 1999), p. 204.
[18] Andisheha-ye Mirza Aqa Khan Kermani [Ideas of Mirza Aqa Khan Kermani] and Amirkabir va Iran [Amirkabir and Iran] (Tehran: Kharazmi Publications, 1976).
[19] Masha'allah Ajodani, interviews on Radio Farda, Mar. 30, 2008, and Radio Deutsche Welle, Apr. 1, 2008; "Fereydun Adamiyat: Movarrekhe Khanehneshin" [Fereydun Adamiyat: historian under house arrest], BBCPersian.com, Mar. 4, 2008.
[20] Fereydun Adamiyat at va Bahaian, Goftman Iran, Nov. 24, 2006, accessed July 29, 2008; Masha'allah Ajodani, Mashrutih Irani va Pishzamineh-haye Nazariyeh Velayat-e Faqih (London: Entesharate Fasle Ketab, 1997).
[21] Naji, Ahmadinejad: The Secret History of Iran's Radical Leader, p. 15.
[22] See, for example, Hojjat ul-Islam Ali Akbar Motashamipur, former Majlis majority leader, Iranian Students' News Agency (ISNA, Tehran), Feb. 18, 2008.
[23] Entekhab News (Tehran), Oct. 29, 2007.
[24] Entekhab News, Jan. 11, 2006.
[25] Entekhab News, June 4, 2008.
[26] Pasdare Islam (Qom), Oct. 12, 1981.
[27] Partow Sokhan (Qom), June 8, Nov. 9, 2005.
[28] Emrooz, Sept. 17, 2006; Noandishnews.com, Apr. 13, 2008.
[29] Emrooz, Sept. 17, 2006; Noandishnews.com, Apr. 13, 2008.
[30] H. M. Balyuzi, Muhammad and the Course of Islam (Oxford: George Ronald Publisher, 1976), pp. 165-7.
[31] Mehr News Agency (Tehran), Oct. 26, 2005; "Text of Iranian President Ahmadinejad's Letter to President George W. Bush," Islamic Republic News Agency (IRNA), May 9, 2006; Mehr News Agency, May 9, 2006.
[32] "Mahmoud Ahmadinejad Personal Memos," June 11, 2008.
[33] The Dawn of the Islamic Revolution (Tehran: Islamic Republic Ministry of Guidance, Feb. 11, 1980), p. 25.
[34] Ibid.
[35] Rafsanjani, quoted in Iran (Tehran), Dec. 13, 2005 and Islamic Republic of Iran Radio, Nov. 23, 2001; Khatami, quoted in BBC Persian, Sept. 11, 2006.
[36] Qur. 8:60.
[37] IRNA, Feb. 14, 2006; Rooz, Feb. 14, 2006.
[38] Ayatollah Morteza Mottahari, quoted in Kayhan (Tehran), July 11, 2004.
[39] Sobh-e Sadegh (Tehran), Apr. 16, 2007; Islamic Republic of Iran Radio, Dec. 14, 2001.
[40] Sayyid Ali Khamenei website (Tehran), Jan. 30, 2006.
[41] Hemayat (Tehran), Jan. 7, 2006.
[42] Shargh (Tehran), Nov. 12, 2005.
[43] Financial Times (London), May 30, 2008.
[44] Shargh, Oct. 31, 2005.
[45] Aftab (Tehran), May 25, 2008.
[46] ISNA, Dec. 10. 2007.
[47] Farda News (Tehran), Feb. 19, 2008.
[48] Etemad-e Melli (Tehran), July 1, 2008.
[49] Kargozaran (Tehran), July 1, 2008.
[50] Gooya News Online, June 19, 2005.
[51] Farda News, Oct. 25, 2007; Ansar News (Tehran), Oct. 25, 2007; Iran Diplomacy (Tehran), Oct. 23, 2007.
[52] Muhammad Baqir Majlisi, Bihar al-Anwar, cited in Momen, An Introduction to Shi‘i Islam, p. 168.
[53] Momen, An Introduction to Shi‘i Islam, p. 167.
[54] Sharif News, Apr. 29, 2006.
[55] Kargozaran, Apr. 19, 2008.
[56] Rooz, Aug. 26, 2007.
[57] Etemad, Dec. 31, 2007.
[58] Mosharekat (Tehran), July 2, 2008.
[59] Biharu'l-Anwar, vol. 52, p. 132, vol. 13, p. 1011, 1128; Usul al-Kafi, vol. 2, p. 487.
[60] Nuru ath-Thaqalayn, Vol1 p. 642.

6) The First Debate Could Be Decisive

Presidential debates are important -- and the first debate is the most important of all, establishing an arc of opinion that persists unless jarred loose by big mistakes or dramatic events.

So whether this year's first presidential debate between Sens. Barack Obama and John McCain is Friday night or postponed a few days, it may be the fall's most critical event. In the nine first debates since 1960, the perceived winner of the debate averaged a 4.2 point net swing in the Gallup poll.
[The First Debate Could Be Decisive] Martin Kozlowski

Mr. Obama fought hard to have the first clash devoted to foreign policy and the last on the economy. It may be smart to end the series on his strongest turf. But that means the debates start on ground where Mr. McCain is more comfortable, having a sizable poll lead on who'd be a better commander in chief.

Here's the advice some experts I consulted offered the candidates:

First, do no harm. Persistent proficiency is better than big mistakes. Remember Al Gore's sighs in 2000? President George H.W. Bush glancing at his watch in 1992? Michael Dukakis's botched answer to Bernie Shaw's death-penalty question in 1988?

Know what you want to achieve and have that narrative down cold, for yourself and for your opponent. How do you want potential defectors and converts to see and feel about you and your opponent when it's over? How do you accentuate your strengths and his weaknesses?

Answer the questions. Voters don't like it when candidates are not responsive. Mr. McCain shone so much brighter at Rev. Rick Warren's Saddleback conversation because he answered with plain talk and simple declarative statements.
About Karl Rove

Karl Rove served as Senior Advisor to President George W. Bush from 2000–2007 and Deputy Chief of Staff from 2004–2007. At the White House he oversaw the Offices of Strategic Initiatives, Political Affairs, Public Liaison, and Intergovernmental Affairs and was Deputy Chief of Staff for Policy, coordinating the White House policy making process.

Before Karl became known as "The Architect" of President Bush's 2000 and 2004 campaigns, he was president of Karl Rove + Company, an Austin-based public affairs firm that worked for Republican candidates, nonpartisan causes, and nonprofit groups. His clients included over 75 Republican U.S. Senate, Congressional and gubernatorial candidates in 24 states, as well as the Moderate Party of Sweden.

Karl writes a weekly op-ed for The Wall Street Journal, is a Newsweek columnist and is now writing a book to be published by Simon & Schuster. Email the author at Karl@Rove.com or visit him on the web at Rove.com.

People want to see candidates operating without a script. They are clamoring for spontaneity. So avoid hyper-repetition. For example, Mr. Gore's repeated robotic invocation of the phrase "risky scheme" backfired.

Spend time describing problems. In the '92 debates, Bill Clinton and Ross Perot established personal links with voters as much from how they portrayed the nation's challenges as from their proposals to address them.

Humor is a powerful weapon, but only if it is not canned or forced. Ronald Reagan demolished Walter Mondale with this self-deprecating line: "I want you to know that also I will not make age an issue of this campaign. I am not going to exploit, for political purposes, my opponent's youth and inexperience."

The counterpunch is better than the punch. The first person to attack generally suffers, especially if the attack comes across as exaggerated or unfair. Attack sparingly and then by inference and obliquely. Rather than a frontal assault on Mr. Obama's inexperience, Mr. McCain could say America's adversaries will test any new president, and only he has the skill and leadership the country will need in that crisis.

Mr. McCain needs to come across as optimistic, loose and likable. He must guard against revealing his lack of respect for Mr. Obama. And he must grab the "change" banner from Mr. Obama by describing a few things he'll do internationally that are new and different.

Mr. McCain should remind voters the surge in Iraq was the most vital decision in the War on Terror. Mr. Obama opposed it and even continued to oppose it after it was an undeniable success. And Mr. McCain should frame energy as a security issue with large implications for jobs and our economy.

Mr. Obama's task is to look like a credible commander in chief. Right now, too many people lack confidence that he's up to the most important of presidential responsibilities.

Mr. Obama must avoid the pervasive sense of nuance that weakened his performance at the Saddleback Forum. He should attack less. If Mr. McCain is condescending, Mr. Obama should call him on it. If Mr. McCain launches a full-out assault, Mr. Obama should rebut it. Otherwise, he should aim for firmness, seriousness of purpose and clarity in his views.

In criticizing President Bush's foreign policy, Mr. Obama must be careful not to sound like he's running down America. Breaking with someone in his party on a vital issue would show leadership and independence.

The story line of the coverage afterward can do almost as much to shape perception as much as the debate itself. Mr. Gore was on defense for weeks after his '00 sighing fit.

Mr. Obama has more recent debate experience, and he's wise to have spent three days in Florida resting. Mr. McCain, by contrast, has campaigned with little rest and rehearsal. This is dangerous. Mood and countenance matter as much as command of issues.

A debate tie goes to the frontrunner. With that now being Mr. Obama by a slim margin, Mr. McCain must emerge the clear winner, or his prospects of being the next president will dim.

7) Summoning the Courage to Continue Investing
By James B. Stewart

As president, Franklin Roosevelt confronted far more dire circumstances than anything we've experienced in my lifetime, let alone last week, and yet he never succumbed to panic, desperation, greed or, most famously, fear.

In 1932, in the depths of the Depression, Roosevelt gave the commencement address at Oglethorpe University in Atlanta: "The country demands bold, persistent experimentation. It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something."

The proximate cause of last week's crisis in the financial markets, which evidently brought us to the brink of economic catastrophe, was paralysis: the refusal of banks to lend virtually anything, even overnight loans to their fellow bankers; the immediate demands for repayment of collateral and the refusal of investors to trust counterparties; the aversion to all forms of risk, real or perceived.

As paralysis seemed to grip our major financial institutions, I felt some of this myself. One day last week I returned to my desk to find Morgan Stanley (MS) trading at $18 as rumors swirled that it would be forced into a merger by week's end. Goldman Sachs (GS) (whose shares I own) had plunged to $100 as speculation mounted that it, too, couldn't survive as an independent institution. Had anyone told me even a week ago that two of the most venerable and respected names not just on Wall Street but throughout the world stood on the brink of extinction I would have said he or she was delusional.

I told a colleague that this was irrational; Goldman had just reported healthy earnings even under dire circumstances and was worth far more than $100 a share. At the same time, I said I couldn't bring myself to buy. "Who am I, one small investor, to stand before this tsunami?" I felt helpless in the face of forces far greater than myself.

Details of the Bush administration’s bold and costly plan to break this market psychology by providing up to $700 billion to buy the mountains of mortgage-backed debt and other toxic securities which are crushing the balance sheets of financial institutions remain unclear, perhaps by design. Congress can and should debate issues like excessive executive compensation and foreclosure relief, but these are not the issues that have caused today’s crisis. The government needs a bold, simple plan that offers maximum flexibility and jolts the financial heart into beating again.

So I am not going to dwell on the uncertainties and details, important though they are. There have been times in history when we as individuals have been summoned to a higher purpose than partisan ideology or what may seem to be our immediate self interest. This is one of those times.

In times of financial crisis, collective action can achieve what would be unacceptably hazardous for any one individual, J.P. Morgan's 1907 summoning of the country's major bankers to share information on the ongoing financial crisis being one famous example. Deploying principles of Keynesian economics for the first time, Roosevelt borrowed against the future productivity (and tax payments) of American workers to intervene massively in markets and the economy. This past week, we, as taxpayers, have again been asked to stand together in the face of crisis, to the tune of $2,000 for every man, woman and child in the country, the New York Times reported.

Put that way, $700 billion strikes me as a not unreasonable price to pay for the stability of the financial system on which our entire economy and collective well-being rest. I happened to speak late last week with high-ranking executives from three major industrial companies, Eli Lilly (LLY), Cummins (CMI), and General Mills (GIS). All said that thus far, the turmoil on Wall Street has not impaired their ability to finance their operations. At the same time they left little doubt that left unchecked, the contagion could have dire consequences for the broad economy, as opposed to the financial sector where thus far it has been contained.

The administration's proposal has not been accompanied by much high-minded rhetoric aimed at the American people. That is unfortunate. The plan, no matter how expensive or sweeping, will fail if all of us continue to be gripped by fear and risk aversion. Even if you managed to shift all your assets into gold and short-term Treasurys, it would surely be small consolation if nearly everyone else lost their life savings in collapsed money-market funds and bank failures and we faced another depression. It is time for all of us to summon the courage to invest calmly and rationally and in doing so demonstrate our confidence in the potential of the global economy and in our fellow man.

What, in practice, does this mean?

It means continuing to accept and even embrace a prudent degree of risk. No investment is entirely risk-free and the mindless quest for safety is damaging not only to your likely returns but the system as a whole.

It means to continue following a disciplined approach to asset allocation and investments such as the one I have long advocated in this column. Despite last week's wild swings, the market did not reach one of my buying thresholds, which is to buy on 10% dips. Had it done so, (2025 on the Nasdaq) I can assure you I would be buying.

It means to continue rebalancing your portfolio, taking profits when positions become overweighted, and adding to those that have fallen below your targets. I expect to continue my gradual additions of financial stocks in the belief that we will weather this crisis.

It means considering investment alternatives. I found myself this weekend looking at real estate listings. During the real estate crisis of the eary 1990s, I bought a Manhattan apartment which I rented to a sushi chef fromJapan. People thought I was crazy. Not only did I eventually sell it at a handsome profit, but I received a Christmas card every year thanking me for the privilege of being my tenant. Based on my perusal this weekend, in some parts of the country we have reached the kind of opportunity to buy real estate that only comes along once a decade, if then.

I wish I had bought Goldman Sachs at $100 a share, not because with benefit of hindsight I know it is trading higher, but because my small action, magnified many times by countless other investors willing to act with the courage of their convictions, will withstand the force of a tsunami.

8)The Paulson Plan
Will Make Money
For Taxpayers

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In 1992, hedge-fund manager George Soros made $1 billion betting against the British pound. In 2007, John Paulson's Credit Opportunities fund correctly bet against subprime mortgages, clearing $15 billion for the year and $3.7 billion for him. Warren Buffett is now hoping to make big money on Goldman Sachs.
[Chad Crowe] Chad Crowe

But these are small-time deals. My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury.

Here's what's happened so far. New technology like electronic trading meant that Wall Street's bread-and-butter business of investment banking and trading stocks stopped making much money years ago. So investment banks took their enormous capital and at first packaged yield-enhanced, subprime mortgage loans into complex derivatives such as collateralized debt obligations (CDOs). Eventually and stupidly, these institutions owned them for themselves -- lots of them, often at 30-to-1 leverage. The financial products were made "safe" by insurance products known as credit default swaps, a credit derivative from companies such as AIG. When housing turned down, the mortgages and derivatives were worth a lot less and no one would lend Wall Street money anymore.

Then the piling on started. Hedge funds could short financial stocks and then bid down the prices of CDOs stuck on Wall Street's balance sheets. This was pretty easy to do in an illiquid market. Because of the Federal Accounting Standards Board's mark-to-market 157 rule, Wall Street had to write off the lower value of these securities and raise more capital, diluting shareholders. So the stock prices would drop, which is what the shorts wanted in the first place. It was all legit.

There is a saying on Wall Street that goes, "The market can stay irrational longer than you can stay solvent." Long Term Capital Management learned this lesson 10 years ago when it got its portfolio picked off by Wall Street as its short-term financing dried up. I had thought the opposite -- hedge funds picking off Wall Street -- would happen today. But in a weird twist, it's the government that is set up to win the prize.

Here's how: As short-term financing dried up, Fannie Mae and Freddie Mac's deteriorating financials threatened to trigger some $1.4 trillion in credit default swap payments that no one, including giant insurer AIG, had the capital to make good on. So Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship. This removed any short-term financing hassle. He also put up $85 billion in loan guarantees to AIG in exchange for 80% of the company.

Taxpayers will get their money back on AIG. My models suggest that Fannie and Freddie, on the other hand, are a gold mine. For $2 billion in cash up front and some $200 billion in loan guarantees so far, the U.S. government now controls $5.4 trillion in mortgages and mortgage guarantees.

Fannie and Freddie each own around $800 million in mortgage loans, some of them already at discounted values. They also guarantee the credit-worthiness of another $2.2 trillion and $1.6 trillion in mortgage-backed securities. Held to maturity, they may be worth a lot more than Mr. Paulson paid for them. They're called distressed securities for a reason.

Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest.

Firms will haggle, but eventually cave -- they need the cash. I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for his $700 billion.

So the U.S. will be stuck with a portfolio in the trillions of dollars in bad loans and last-to-be-paid derivatives. Where is the trade in that?

Well, unlike Mr. Buffett or any hedge fund, the Treasury and the Federal Reserve get to cheat. It's not without risk, but the Feds, with lots of levers, can and will pump capital into the U.S. economy to get it moving again. Future heads of Treasury and the Federal Reserve will be growth advocates -- in effect, "talking their book." While normally this creates a threat of inflation and a run on the dollar, and we may see dollar exchange rates turn south near term, don't expect it to last.

First, with Goldman Sachs and Morgan Stanley now operating as low-leverage bank holding companies, a dollar injected into the economy will most likely turn into $10 in capital (instead of $30 when they were investment banks). This is a huge change. Plus, a stronger U.S. economy, with its financial players having clean balance sheets, will become a safe haven for capital.

Europe is threatened by an angry Russian bear. The Far East, especially China, has its own post-Olympic banking house of cards of non-performing loans to deal with. Interest rates will tick up as the economy expands -- a plus for the dollar. Finally, a stronger economy driven by industry instead of financials means more jobs, less foreclosures and higher held-to-maturity payouts on this Fed loan portfolio.

You can slice the numbers a lot of different ways. My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion -- the greatest trade ever. Every hedge-fund manager will be jealous. Mr. Buffett is buying a small piece of the trade via his Goldman Sachs investment.

Over 10 years this could change the budget scenario in D.C., which can also strengthen the dollar. The next president gets a heck of a windfall. In the spirit of Secretary of State William Seward's purchase of Alaska for $7 million in 1867, this week may be remembered as Paulson's Folly.