We Have Nothing To Fear But Obama! Blood Boils!

Barron's interview with Ray Dalio who sees a long and painful 'depression' and an equally bleak European analysis(See 1 and 1a below.)

Wall Street responds. (See 2 and 2a below.)

It is fairly obvious I have some oft expressed concerns about our youthful president and what he has accomplished in the first 21 or so days.

Under the umbrella of a declining economy he has been able to press for the passage of a liberal agenda that might, otherwise, have taken a much longer period of time, and paraded it under the name stimulus. The only stimulus I get from it is it makes my blood boil.

As I suspected a few Republicans, who are really Democrats, greased the tracks as they jumped ship. Thus, the Stimulus Bill will pass as I also noted in a previous memo.

Its cost is not in question but its effectiveness is. It is a pay off gamble to constituents at taxpayer's expense.

Obama is teflon slick and so far his miscues have not been viewed as anything other than little blips. He promised ethics and his appointments shredded that assertion. He said no lobbyists and over ten no longer sit in the lobby because they are inside his government. He said he would go through the budget line by line and eliminate any 'earmarks' so he changed the definition and claims the stimulus bill has none. He has decided to control the Census out of his office and has taken it away from The Commerce Department and the Republican, Obama nominated to head that deparment. If Sen. Gregg had any self-respect he would refuse the appointment.

Unlike FDR who said "we have nothing to fear but fear itself" I fear, with Obama, we have nothing to fear but Obama.

The Israeli election results highlights how insane their political structure is. Netanyahu is likely to become the next Prime Minister because he will probably be able to secure his seat through backroom deals. More divided and unstable government - an analysis. (See 3, 3a and 3b below.)

Kyle-Anne Shiver reminds us that L.J. Peter: "The Peter Principle," written many years ago, is alive and well and sits in The Oval Office. (See 4 below.)

And, then there is always "Plan B." It comes as a consequence of 'when in doubt do anything!'(See 5 below.)

Further escalation? (See 6 below.)

Bernard-Henri Levy sees 'Hope' in Obama! (See 7 below.)

Dick





1) Recession? No, It's a D-process, and It Will Be Long
By SANDRA WARD

Barron's: I can't think of anyone who was earlier in describing the deleveraging and deflationary process that has been happening around the world.

Dalio: Let's call it a "D-process," which is different than a recession, and the only reason that people really don't understand this process is because it happens rarely. Everybody should, at this point, try to understand the depression process by reading about the Great Depression or the Latin American debt crisis or the Japanese experience so that it becomes part of their frame of reference. Most people didn't live through any of those experiences, and what they have gotten used to is the recession dynamic, and so they are quick to presume the recession dynamic. It is very clear to me that we are in a D-process.

Why are you hesitant to emphasize either the words depression or deflation? Why call it a D-process?

Both of those words have connotations associated with them that can confuse the fact that it is a process that people should try to understand.

You can describe a recession as an economic retraction which occurs when the Federal Reserve tightens monetary policy normally to fight inflation. The cycle continues until the economy weakens enough to bring down the inflation rate, at which time the Federal Reserve eases monetary policy and produces an expansion. We can make it more complicated, but that is a basic simple description of what recessions are and what we have experienced through the post-World War II period. What you also need is a comparable understanding of what a D-process is and why it is different.

You have made the point that only by understanding the process can you combat the problem. Are you confident that we are doing what's essential to combat deflation and a depression?

The D-process is a disease of sorts that is going to run its course.

When I first started seeing the D-process and describing it, it was before it actually started to play out this way. But now you can ask yourself, OK, when was the last time bank stocks went down so much? When was the last time the balance sheet of the Federal Reserve, or any central bank, exploded like it has? When was the last time interest rates went to zero, essentially, making monetary policy as we know it ineffective? When was the last time we had deflation?

The answers to those questions all point to times other than the U.S. post-World War II experience. This was the dynamic that occurred in Japan in the '90s, that occurred in Latin America in the '80s, and that occurred in the Great Depression in the '30s.

Basically what happens is that after a period of time, economies go through a long-term debt cycle -- a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren't adequate to service the debt. The incomes aren't adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.

As goes GM, so goes the nation?

The process of bankruptcy or restructuring is necessary to its viability. One way or another, General Motors has to be restructured so that it is a self-sustaining, economically viable entity that people want to lend to again.

This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes -- the cash flows that are being produced to service them -- or we are going to have to raise incomes by printing a lot of money.

It isn't complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue.

Isn't the process of restructuring under way in households and at corporations?

They are cutting costs to service the debt. But they haven't yet done much restructuring. Last year, 2008, was the year of price declines; 2009 and 2010 will be the years of bankruptcies and restructurings. Loans will be written down and assets will be sold. It will be a very difficult time. It is going to surprise a lot of people because many people figure it is bad but still expect, as in all past post-World War II periods, we will come out of it OK. A lot of difficult questions will be asked of policy makers. The government decision-making mechanism is going to be tested, because different people will have different points of view about what should be done.

What are you suggesting?

An example is the Federal Reserve, which has always been an autonomous institution with the freedom to act as it sees fit. Rep. Barney Frank [a Massachusetts Democrat and chairman of the House Financial Services Committee] is talking about examining the authority of the Federal Reserve, and that raises the specter of the government and Congress trying to run the Federal Reserve. Everybody will be second-guessing everybody else.

So where do things stand in the process of restructuring?

What the Federal Reserve has done and what the Treasury has done, by and large, is to take an existing debt and say they will own it or lend against it. But they haven't said they are going to write down the debt and cut debt payments each month. There has been little in the way of debt relief yet. Very, very few actual mortgages have been restructured. Very little corporate debt has been restructured.

The Federal Reserve, in particular, has done a number of successful things. The Federal Reserve went out and bought or lent against a lot of the debt. That has had the effect of reducing the risk of that debt defaulting, so that is good in a sense. And because the risk of default has gone down, it has forced the interest rate on the debt to go down, and that is good, too.

However, the reason it hasn't actually produced increased credit activity is because the debtors are still too indebted and not able to properly service the debt. Only when those debts are actually written down will we get to the point where we will have credit growth. There is a mortgage debt piece that will need to be restructured. There is a giant financial-sector piece -- banks and investment banks and whatever is left of the financial sector -- that will need to be restructured. There is a corporate piece that will need to be restructured, and then there is a commercial-real-estate piece that will need to be restructured.

Is a restructuring of the banks a starting point?

If you think that restructuring the banks is going to get lending going again and you don't restructure the other pieces -- the mortgage piece, the corporate piece, the real-estate piece -- you are wrong, because they need financially sound entities to lend to, and that won't happen until there are restructurings.

On the issue of the banks, ultimately we need banks because to produce credit we have to have banks. A lot of the banks aren't going to have money, and yet we can't just let them go to nothing; we have got to do something.

But the future of banking is going to be very, very different. The regulators have to decide how banks will operate. That means they will have to nationalize some in some form, but they are going to also have to decide who they protect: the bondholders or the depositors?

Nationalization is the most likely outcome?

There will be substantial nationalization of banks. It is going on now and it will continue. But the same question will be asked even after nationalization: What will happen to the pile of bad stuff?

Let's say we are going to end up with the good-bank/bad-bank concept. The government is going to put a lot of money in -- say $100 billion -- and going to get all the garbage at a leverage of, let's say, 10 to 1. They will have a trillion dollars, but a trillion dollars' worth of garbage. They still aren't marking it down. Does this give you comfort?

Then we have the remaining banks, many of which will be broke. The government will have to recapitalize them. The government will try to seek private money to go in with them, but I don't think they are going to come up with a lot of private money, not nearly the amount needed.

To the extent we are going to have nationalized banks, we will still have the question of how those banks behave. Does Congress say what they should do? Does Congress demand they lend to bad borrowers? There is a reason they aren't lending. So whose money is it, and who is protecting that money?

The biggest issue is that if you look at the borrowers, you don't want to lend to them. The basic problem is that the borrowers had too much debt when their incomes were higher and their asset values were higher. Now net worths have gone down.

Let me give you an example. Roughly speaking, most of commercial real estate and a good deal of private equity was bought on leverage of 3-to-1. Most of it is down by more than one-third, so therefore they have negative net worth. Most of them couldn't service their debt when the cash flows were up, and now the cash flows are a lot lower. If you shouldn't have lent to them before, how can you possibly lend to them now?

I guess I'm thinking of the examples of people and businesses with solid credit records who can't get banks to lend to them.

Those examples exist, but they aren't, by and large, the big picture. There are too many nonviable entities. Big pieces of the economy have to become somehow more viable. This isn't primarily about a lack of liquidity. There are certainly elements of that, but this is basically a structural issue. The '30s were very similar to this.

By the way, in the bear market from 1929 to the bottom, stocks declined 89%, with six rallies of returns of more than 20% -- and most of them produced renewed optimism. But what happened was that the economy continued to weaken with the debt problem. The Hoover administration had the equivalent of today's TARP [Troubled Asset Relief Program] in the Reconstruction Finance Corp. The stimulus program and tax cuts created more spending, and the budget deficit increased.

At the same time, countries around the world encountered a similar kind of thing. England went through then exactly what it is going through now. Just as now, countries couldn't get dollars because of the slowdown in exports, and there was a dollar shortage, as there is now. Efforts were directed at rekindling lending. But they did not rekindle lending. Eventually there were a lot of bankruptcies, which extinguished debt.

In the U.S., a Democratic administration replaced a Republican one and there was a major devaluation and reflation that marked the bottom of the Depression in March 1933.

Where is the U.S. and the rest of the world going to keep getting money to pay for these stimulus packages?

The Federal Reserve is going to have to print money. The deficits will be greater than the savings. So you will see the Federal Reserve buy long-term Treasury bonds, as it did in the Great Depression. We are in a position where that will eventually create a problem for currencies and drive assets to gold.

Are you a fan of gold?

Yes.

Have you always been?

No. Gold is horrible sometimes and great other times. But like any other asset class, everybody always should have a piece of it in their portfolio.

What about bonds? The conventional wisdom has it that bonds are the most overbought and most dangerous asset class right now.

Everything is timing. You print a lot of money, and then you have currency devaluation. The currency devaluation happens before bonds fall. Not much in the way of inflation is produced, because what you are doing actually is negating deflation. So, the first wave of currency depreciation will be very much like England in 1992, with its currency realignment, or the United States during the Great Depression, when they printed money and devalued the dollar a lot. Gold went up a whole lot and the bond market had a hiccup, and then long-term rates continued to decline because people still needed safety and liquidity. While the dollar is bad, it doesn't mean necessarily that the bond market is bad.

I can easily imagine at some point I'm going to hate bonds and want to be short bonds, but, for now, a portfolio that is a mixture of Treasury bonds and gold is going to be a very good portfolio, because I imagine gold could go up a whole lot and Treasury bonds won't go down a whole lot, at first.

Ideally, creditor countries that don't have dollar-debt problems are the place you want to be, like Japan. The Japanese economy will do horribly, too, but they don't have the problems that we have -- and they have surpluses. They can pull in their assets from abroad, which will support their currency, because they will want to become defensive. Other currencies will decline in relationship to the yen and in relationship to gold.

And China?

Now we have the delicate China question. That is a complicated, touchy question.

The reasons for China to hold dollar-denominated assets no longer exist, for the most part. However, the desire to have a weaker currency is everybody's desire in terms of stimulus. China recognizes that the exchange-rate peg is not as important as it was before, because the idea was to make its goods competitive in the world. Ultimately, they are going to have to go to a domestic-based economy. But they own too much in the way of dollar-denominated assets to get out, and it isn't clear exactly where they would go if they did get out. But they don't have to buy more. They are not going to continue to want to double down.

From the U.S. point of view, we want a devaluation. A devaluation gets your pricing in line. When there is a deflationary environment, you want your currency to go down. When you have a lot of foreign debt denominated in your currency, you want to create relief by having your currency go down. All major currency devaluations have triggered stock-market rallies throughout the world; one of the best ways to trigger a stock-market rally is to devalue your currency.

But there is a basic structural problem with China. Its per capita income is less than 10% of ours. We have to get our prices in line, and we are not going to do it by cutting our incomes to a level of Chinese incomes.

And they are not going to do it by having their per capita incomes coming in line with our per capita incomes. But they have to come closer together. The Chinese currency and assets are too cheap in dollar terms, so a devaluation of the dollar in relation to China's currency is likely, and will be an important step to our reflation and will make investments in China attractive.

You mentioned, too, that inflation is not as big a worry for you as it is for some. Could you elaborate?

A wave of currency devaluations and strong gold will serve to negate deflationary pressures, bringing inflation to a low, positive number rather than producing unacceptably high inflation -- and that will last for as far as I can see out, roughly about two years.

Given this outlook, what is your view on stocks?

Buying equities and taking on those risks in late 2009, or more likely 2010, will be a great move because equities will be much cheaper than now. It is going to be a buying opportunity of the century.

Thanks, Ray.

1a) Pelosi Stimulus Casts Shadow Over Obama, America, World


In a sign that may reveal much about the current deal-making environment in Washington, House speaker Nancy Pelosi has outmaneuvered the Obama Administration in the design of the massive $827 billion so-called Economic Stimulus Package. With the collusion of three moderate Republican Senators - Collins, Snowe and Specter - Pelosi may succeed in steering President Obama into supporting a package with which he may secretly disagree.

Despite the Presidential rhetoric of change, the Pelosi plan is Washington at its most habitual. Her version is a massive, pork-laden monster. Tilted heavily towards consumption, only 10 percent of the bill is allocated toward the infrastructure spending that the President talked about so frequently during the campaign. President Obama initially favored a middle-way. It was to be based on massive public spending, but specifically on infrastructure.

Far from restoring the economy to health, the 'pork-barrel' Pelosi plan will likely force the U.S. economy into the catastrophe of acute stagflation and decline, with grave long-term repercussions at home and abroad.

It is clear that we are now headed into an abnormally severe recession, and we may be face-to-face with Second Great Depression. Tell-tale symptoms of Depression include competitive currency devaluations and protective trade measures. Of even greater concern is the historic fact that trade wars too often lead to hot wars. The times of peace and unprecedented prosperity that we have enjoyed for decades are now under threat.

With the stakes this high, Pelosi should have restrained her urge to flex political muscle.

Most economists agree that America has enjoyed unprecedented prosperity, based primarily on excessive U.S. dollar liquidity and unmanageable levels of debt. Thus, any healthy correction would necessarily involve serious deleveraging and a severe recession. After a lot of pain, the economy would rebuild with healthier fundamentals. Infrastructure improvement would aid, but not cause, the eventual recovery.

Recession is the natural cure for the politically inspired profligacy that America has enjoyed for almost 40 years. Unfortunately, the side effects of this medicine, namely the rapid reallocation of labor resources and deflationary damage to debtors, are still unpalatable to pandering politicians.

The Washington regime, particularly members of the Democrat persuasion, leans towards a socialist solution of avoiding recession at any cost. After all, the bills are paid by others, such as taxpayers and holders of U.S. dollars. This results in an increasing amount of other peoples' money being spent on 'public' works that would in other times carry the label 'pork barrel.'

Washington is choosing to pursue the policy of continued and ever-increasing false prosperity, financed eventually by hyper-taxation, hyper-debt and hyper-inflation accompanied by a gradually eroded standard of living. The jobs created by the Bill are by and large non-productive, and will divert resources from the private sector and rob consumers of their power to make free choices in the marketplace.

America's infrastructure is in great need of restoration. By some estimates, for every $1 billion spent on infrastructure, some 35,000 real, wealth-creating jobs are born in the private sphere. For 'just' $100 billion, 3.5 million jobs would result. Furthermore, this middle-way of Obama's likely would have commanded much greater bi-partisan support than the lonely Republican trio which attached their names to Pelosi's bill.

Unfortunately for American and international investors, Speaker Pelosi pressured the President into the worst of all plans. It will likely bring on a economic catastrophe, characterized by depression followed by hyper-stagflation and civil unrest. Pelosi's power-play may buy her political status, but the entire world will pay the price.



2) Five Reasons the Markets Don't Like the Bank Bailout
By: Jeff Cox

Wall Street's message to the Obama administration was clear Tuesday, even if the plan to save the banking industry wasn't.

Unhappy with a lack of clarity in Treasury Secretary Timothy Geithner's new financial rescue plan, investors launched a massive stock selloff, raising further questions about when confidence would be restored to the market.


From the squishy rhetoric about how complex the problem is to the lack of a clear time-frame for when specific weaknesses in the financial sector would be addressed, Geithner's speech did nothing to assuage the market's concerns about the nation's future.

For Investors, Geithner Bombed in Debut

Broadly speaking, reaction to the speech broke down into five areas:

1. There Really is No 'Change'

"I'm really underwhelmed by the plan," says David Twibell, president of wealth management for Colorado Capital Bank in Denver. "Maybe there's not much that can be done right now other than let this work itself out."

For someone who ran last year as an agent of change, President Obama's plan for banks seemed to represent more of the same. While investors were looking for some concrete moves on how distressed assets would be taken off banks' books, they instead walked away from Geithner's speech with no indication of how the assets would be priced or who would be buying them.

And as one of Wall Street's oldest maxims goes, the market hates uncertainty.

"I think we need to see exactly how this program is going to work," Twibell says. "Maybe that will give the markets a little more comfort level."

But for many, the plan offered little real guidance for how to invest going forward, save for a promise to help buoy small business.

"Zero has changed," said Michael Cohn, chief market strategist at Atlantis Asset Management in New York. "Everyone knew everything except the issue with doing something positive for small business. There's no clarity on whether they can repeal the mark-to-market (accounting rules). I don't know how they're going to do it."

2. A Far Cry From Finished

If the administration was purposely setting out a general plan with the specifics to be crafted by Wall Street, then it may have accomplished something


With so many details left unsolved, much more work will have to be done, again creating uncertainty for investors.

"It's going to be fine-tuned many times over," predicts Quincy Krosby, chief market strategist at The Hartford. "Given the enormity of the problem it's clear that certain parts will work and certain parts won't work, but it's a start."

The market is clamoring to know how the government will be able to help banks with their toxic assets while also protecting investors and taxpayers from getting blindsided if the fixes don't work.

"The devil's going to be in the details with this stuff," Twibell says. "We're still back to the old problem of how you price that, how you structure that."

3. Treasury Bubble Still Popping

While Treasurys rallied Tuesday on a further flight to safety, government debt prices are likely to fall as more and more supply comes on line while the government finances the bank rescue.

For Investors

The predicted trend reflects the difficulty the government will face getting a premium on bills it will be in a hurry to unload.

"The idea that you can just borrow and spend, borrow and spend, run ever-larger deficits and essentially print money with no consequences is economically naive," says Mike Larson, analyst for Weiss Research's Money & Markets newsletter. "Yet no one seems to be talking about the unintended consequences until now."'


Larson called the popping of the bond bubble months ago and sees the trend continuing as the government accumulates more and more debt.

Moreover, he said the pressure on Treasurys will cause interest rates to rise and thwart hopes of mortgage rates falling to 4.5 percent or even lower, a prediction made Monday by Bill Gross, co-CEO of Pimco, the world's largest bond fund.

"The longer-term trend is clearly for lower prices and higher rates as a result of this supply issue," Larson says.

4. Money Will Stay on the Sidelines

With the government unable to stem the tide of uncertainty bedeviling stocks, convincing people to buy will prove all the more difficult.

"The poor reception afforded to Mr. Geithner's speech in which little was revealed reminded investors that more turbulent times may be ahead without some sense of resolution to the health of the banks' balance sheets," Andrew Wilkinson, senior strategist at Interactive Brokers, wrote in a research note to clients.

The result is likely a stock market that will continue to be range-bound, and perhaps even retest its November lows.

"Is there a reason to deploy a lot of capital in this market? My view is we still don't know when we can get some stability in this economy, and until we do it's awfully tough to put a lot of money to work," Twibell says. "To actually go in from an investment standpoint at this juncture is tough."

"You must have a functioning, normal financial system, including the securitization market," Krosby adds. "In the market economy, the financial infrastructure is the lifeline."

5. One Hope: 'Buying Begets Buying'


The one bit of solace from the post-Geithner selloff Tuesday was that you could have set your watch by it.

As news spread last week that a rescue plan was in the making, the markets jumped. When the actual plan was unveiled, the market jumped back. Buy-the-rumor and sell-the-news has been one of the few constants in a stunningly volatile market, and the continuing of the trend raised hopes that the selloff Tuesday would be a one-off event.

"This is a trader's selloff, 100 percent pure and simple," Cohn says. "When (the Dow) gets back to 7,900, 7,850, buyers come back. It's nothing."

So when selling begets selling, the one hope is that the corollary can be true and will be one catalyst helping the market get past its banks-induced doldrums. That trend is likelier to come once Wall Street has a better picture of what the White House is going to do to help.

"Buying begets buying, and that's a takeaway that has served me in good stead," Krosby says. "What gives you, the retail investors, hope is when you start to see the hedge funds go back into equities, institutional buying into equities, that pushes the market up for two or three days."

A change in the news cycle away from the negativity of the White House's fumbling of the bank rescue announcement would help make that happen.

"Professional investors would much rather see an organic move in the market, meaning it's not induced by any move from Washington but rather by a company saying revenue looks better than expected, that orders have picked up," Krosby says. "Or they begin to see the news, the macroeconomic data are stabilizing, that's what moves the market ultimately."

"Slowly but surely this thing is going to get better," Cohn adds. "It's just really slow. Until the bad news stops, you're not going to change the world's perception."

2a) Why Markets Dissed the Geithner Plan: Here's how he should handle the banks.
By ANDY KESSLER

One of the cool things about being Treasury Secretary is that you get your signature on dollar bills, giving them authority, defending their honor. Timothy Geithner's plan to save the struggling banking system probably does the opposite, throwing good money after bad to a banking system struggling under the weight of its own mistakes. The markets don't like it. The Dow dropped 382 points while bonds rallied as a port in a continuing storm.

Mr. Geithner announced a three-point plan yesterday to "clean up and strengthen the nation's banks," and made a vague declaration to use "the full resources of the government to help bring down mortgage payments and to help reduce mortgage interest rates." Unfortunately, those are conflicting plans. Hence the markets' skepticism.


The Treasury secretary seems stuck on keeping the banks we have in place. But we don't need zombie banks overstuffed with nonperforming loans -- ask the Japanese.

Mr. Geithner wants to "stress test" banks to see which are worth saving. The market already has. Despite over a trillion in assets, Citigroup is worth a meager $18 billion, Bank of America only $28 billion. The market has already figured out that the banks and their accountants haven't fessed up to bad loans and that their shareholders are toast.

Second, Mr. Geithner wants to use up to $1 trillion to back new car loans, home loans and student loans. That's noble, but incredibly market distorting. Who gets these loans? Will banks be forced to loan to those with bad credit? Who sets loan rates? Doesn't this just set up another credit squeeze when government guarantees are lifted?

What we need are healthy banks with clean balance sheets and enlightened risk assessment to provide consumer and business loans that will generate returns to shareholders. And to this end, Mr. Geithner wants to create a public-private partnership to buy toxic securities off bank balance sheets. This is a truly worthy goal, but I don't think his plan for doing so will work. Banks are more than able to sell these toxic loans today. They just don't like the price.

The first iteration of the Troubled Asset Relief Program (TARP) last year was to buy these bad loans and derivatives. It didn't work. Nothing was bought when it became clear that paying face value was a taxpayer giveaway to banks, but paying market prices for this stuff would cause huge equity write-downs, wiping out banks which would be left with negative equity and effective insolvency.

The next round of TARP injected money onto bank balance sheets first, boosting their equity so they could absorb the write-downs to come when the toxic junk was bought later. It didn't work. The $45 billion to Citi and Bank of America wasn't nearly enough. Instead, $306 billion and $118 billion loan guarantees were extended to cover the bad debt, which unfortunately, the market believes still weighs down banks' balance sheets.

Now with TARP 2.0, renamed a friendly Financial Stability Plan, the idea is to entice private capital to buy these bad loans and derivatives in an effort to set the "market price." But Mr. Geithner hasn't solved the dilemma of banks not wanting to sell and become insolvent. Moreover, no one is going to buy these securities ahead of Mr. Geithner's action with the "full resources of the government" to bring down mortgage payments and reduce mortgage interest rates. Lower mortgage payments means mortgage-backed securities would be worth even less. Six months to a year from now, big banks may still be weak and the ugly "n" word of nationalization will be back.

Mr. Geithner should instead use his "stress test" and nationalize the dead banks via the FDIC -- but only for a day or so.

First, strip out all the toxic assets and put them into a holding tank inside the Treasury. Then inject $300 billion in fresh equity for both Citi and Bank of America. Create 10 billion new shares of each of the companies to replace the old ones. The book value of each share could be $30. Very quickly, a new board of directors should be created and a new management team hired. Here's the tricky part: Who owns the shares? Politics will kill a nationalized bank. So spin them out immediately.

Some $6 trillion in income taxes were paid by individuals in 2006, 2007 and 2008. On a pro-forma basis, send out those 10 billion shares of each bank to taxpayers. They paid for the recapitalization.

Each taxpayer would get about $100 worth of stock for each $1,000 of taxes paid. Of course, each taxpayer has the ability to sell these shares on the open market, maybe at $40, maybe $20, maybe $80. It depends on management, their vision, how much additional capital they are willing to raise, the dividend they declare, etc. Meanwhile, the toxic assets sitting inside the Treasury will have residual value and the proceeds from their eventual sale, I believe, will more than offset the capital injected. That would benefit all citizens, not the managements and shareholders who blew up the banking system in the first place.


3)Success of rightist bloc may propel Netanyahu into PM's chair

With a clear advantage to the rightist bloc in Israel's national elections Tuesday, Benjamin Netanyahu could well end up as the next prime minister, regardless of whether his Likud party won the most votes or came second to centrist Kadima and Tzipi Livni.

Late Tuesday night, Netanyahu began contacts with several right-wing parties, including Avigdor Lieberman's Yisrael Beiteinu.

By law, the president must consult with all the parties as to who they prefer as prime minister, and whoever is recommended by more Knesset members is given the nod. Hence if the religious and rightist parties all recommend Netanyahu, he would get first crack at forming a government.


In terms of blocs, all three TV exit polls predicted a rightist bloc of 63 or 64 seats out in the 120-strong Knesset, compared to 57 or 56 for the leftist bloc. And of the leftist bloc, 9 or 10 seats belong to the Arab parties - some of which have already announced that they do not intend to recommend either Netanyahu or Livni for prime minister.

Until recently, the polls had showed Likud leading Kadima by a comfortable margin. Over the past couple of weeks, however, it lost votes steadily to Yisrael Beiteinu, and as the gap in the polls narrowed - putting victory within Kadima leader Tzipi Livni's grasp - many leftist voters who had originally planned to vote for other parties switched to Kadima in the hope of enabling her to become the next premier rather than Netanyahu.

While both Kadima and Likud cautioned that it was necessary to await the final results, both did their best to spin the results in their favor. Kadima insisted that its apparent emergence as the largest party showed that the public wanted Livni as prime minister. Likud countered that the victory for the rightist bloc overall was a clear repudiation of the current Kadima-led government's policies and a vote for a Netanyahu-led government.

Both parties rejected the idea of sharing power via a rotation government.

At Labor Party headquarters, in contrast, the atmosphere was one of unrelieved gloom: The party had been fighting desperately to hang onto third place, and it apparently lost the battle. Before the vote, party chairman Ehud Barak had been angling for the post of defense minister under either Netanyahu or Livni. But Labor officials said Tuesday night that the party's poor showing made it virtually impossible for it to join a Netanyahu government.

3a) Yishai hints Shas might join coalition with Lieberman
By Ronen Medzini

Netanyahu meets Shas leader in bid to garner support for Likud-led coalition. Yishai doesn't rule out sitting in government with old rival Yisrael Beiteinu, saying 'we've seen more extreme combinations in the past'


Shas Chairman Eli Yishai and Likud Chairman Benjamin Netanyahu met on Wednesday at the Likud Knesset offices to discuss Shas' support for Netanyahu in his efforts to form a Likud-led coalition.



Coalition Race


Kadima and Likud fight over who will form coalition. In attempt to thwart rightist bloc being built by Netanyahu, Livni meets with Yisrael Beiteinu chairman in Jerusalem: 'Now is opportunity for unity that can advance issues important to you as well'



According to Yishai, the two exchanged views, analyzed the election results and spoke about the various options for a coalition.


"Clearly Netanyahu wants a wide government based on the national camp," Yishai said. "I hope this will be possible, but as long as the president hasn’t tasked him with forming the government, I cannot go into details or agreements," he added.


Yishai reiterated his belief that the Israeli people have chosen the Right, and his hope that this would be reflected in the coalition's makeup. He rejected the claim that the haredi party diminished in strength and said: "We've kept our power in terms of votes.


"The growing voter turnout subtracted from our strength, but in light of the circumstances and the Likud's rise this is an enormous and impressive achievement. We'll stand for our principles."

Shas' leader also commented on the possibility that his party would share the coalition table with its ideological rival Yisrael Beiteinu. Tensions between the parties skyrocketed recently ahead of the elections, and Shas' spiritual leader Rabbi Ovadia Yosef even said that voting for Lieberman is like supporting Satan.



However, on the day after the elections Yishai spoke in a very different tone, saying that "we've seen much more extreme combinations in the past."


To illustrate his point he mentioned another old political opponent of Shas, Meretz's former leader Yossi Sarid, who in the past vowed not to sit in the same government with the haredi party, but later folded.

3b) Analysis: Election arithmetic puts Bibi in the driving seat
By David Horovitz

For all the confusion prompted by the near parity of Kadima and the Likud in Tuesday's election, and even before final adjustments necessitated by Thursday's release of soldiers' votes and the complex surplus-vote distribution, one of the most critical pieces of arithmetic is straightforward.

And it shows that notwithstanding Kadima's victory claims, and its leader Tzipi Livni's insistence that the people of Israel have given her their backing, Likud leader Binyamin Netanyahu can reasonably hope to build a narrow coalition majority with "natural" allies, and she cannot.


This puts Netanyahu firmly in the driving seat on the road to becoming prime minister. And it places Livni - even though she led her party to far greater success than some of its own optimists had anticipated, and thus cemented her leadership hold - in the back seat. He can probably block her; she probably can't block him.

That is not to say that Netanyahu has a smooth ride ahead. It may yet be eased a little when those last votes are calculated. Precedent suggests that the soldiers' votes are unlikely to boost the center-left; they might well lift the right, and perhaps Avigdor Lieberman's Israel Beiteinu, with its emphasis on a shared burden of national service. And Kadima foolishly signed a surplus-vote agreement with the Green Party, which failed to clear the Knesset threshold, so it has nothing to gain there.

But Netanyahu was speaking from the heart during the election campaign when he said he wanted to head a wide government, with a range of Zionist parties from across the political spectrum. He doesn't want to have to rely on a narrow coalition, vulnerable to internal pressures and perceived both domestically and abroad as intransigent as regards progress with the Palestinians.

Even forging that narrow coalition will be fraught with complications. As the first meetings of potential coalition allies began on Wednesday, the difficulties of finessing the conflicting demands were manifest.

Chiefly, a narrow Likud-led coalition requires the fierce secularist Lieberman and the Torah-driven Shas to put aside fundamental differences that go to the root of Jewish nationhood.

At the same time, Livni is showing absolutely no sign of being receptive to the notion of a unity partnership with Netanyahu in which Kadima is the junior player; after all, she is claiming to have won the elections. And Ehud Barak - outflanked by the Kadima election strategists who persuaded much of Labor's voting base to switch to Livni in order to thwart Netanyahu - has already announced that Labor is headed for the opposition.

Despite having lifted the Likud from a dismal 12-seat showing in the 2006 elections, therefore, Netanyahu has good cause to lament the votes lost, especially to Lieberman, in the final stages of this campaign.

The advantage is still with him, but building the framework for a viable coalition will be immensely complicated.

Hence, for a start, the selection of the wise, experienced former justice minister Ya'akov Ne'eman to coordinate his coalition negotiations. Ne'eman, it will be recalled, has particular expertise in seeking common ground amid conflicting approaches to the interface between religion and state - precisely the fraught territory where Shas and Israel Beiteinu will have to be reconciled if Netanyahu is to construct his "blocking" coalition.





4) Murphy's Law, the Peter Principle and Barack Obama
By Kyle-Anne Shiver

What happens when everything that can go wrong in a person's character formation does go wrong, and that person continues to be promoted to his level of incompetence?


President Barack Obama happens.


I'm well into my sixth decade of life and have yet to see a more perfect collision of Murphy's Law with the Peter Principle in a single individual.


Proper character development is the overriding aim of good parents in raising their children. Mature parents, especially those Judeo/Christian parents with faith, believe it sinful to raise a child without strong self-constraint, a well-formed conscience, ingrained humility and an ironclad respect for the rights of others. Children raised thusly become self-supporting adults, honest in their dealings with others and prone to be contributing members of the society at large.


The world is purely chock full of bad parents, however. Plum chock full.


Barack Obama was conceived out of wedlock to an eighteen year-old girl, who was herself the product of non-religious, rebellious parents, intent on unraveling the fabric of WASP America. Stanley Ann Dunham met Barack Obama Sr., an already-married African Muslim man, in a Russian language class at the University of Hawaii in her very first year there. According to President Obama's memoir, his biological father married his mother about three months into the pregnancy, even though he already had a wife and children on his home continent. Hence, very shortly, the father abandoned the new mother and her child to seek his own fortune and yet another wife-to-be at Harvard.


Bigamists are not known for fidelity, are they?


The end result of this convoluted beginning of the man who would become President was that his maternal grandparents became his primary caregivers. With the very best of intentions, I'm sure, these white grandparents doted, scraped and groveled to make the little abandoned child's life as picture-perfect as it could possibly be under the awful circumstances of parental abandonment. This is a recipe for disaster in the area of character development.


Believing that the child, Barry, needed lots of attention and as few hard knocks as possible, these grandparents proceeded to spoil the ever-living daylights out of the precocious, charismatic, bi-racial child of their only daughter. Through his grandmother's connections, Barry got a scholarship to the elite Panahou Academy and became one of only five black children in the posh school, where teachers, too, bent over backwards not to offend, not to discipline. For added umph to this already-disastrous formula, Barry's grandfather made sure the child got lots of father-figure mentoring from a self-proclaimed pedophile and avowed communist, Frank Marshall Davis.


As a young teenager, surrounded by opportunities for drug abuse and tomfoolery, Barry bragged that he had a deal with his doting grandparents which entailed his being able to do whatever he wanted while they looked the other way and pretended not to notice.


After all, they surely reasoned, this pitiful little boy had enough pain in his life.


Paying consequences for delinquent behavior would have been entirely too much. Too much. Oh, just too much to bear.


As President Obama's school transcripts (all of them, from start to finish!) remain among his stack of unreleased documents, we have no way of knowing how our current President did in school. However, we do know that he was doing drugs, that he was not involved in any demanding athletic program and that he was not otherwise making a big name for himself on campus. We know also that Obama's first gig on the mainland was at Occidental College, which is a fine school I am sure, but far from Ivy League. I'm fairly certain that those grades at Panahou were nothing to brag about, and there is no evidence whatsoever that there was anything else to brag about either.


At Occidental, however, young Barry Obama discovered the one gift that would eventually make up for all other deficiencies: his oratorical talent. Coupled with natural charisma and an Eddie-Haskell styled ability to guile, Barry Obama had arrived.


This was the story hailed by Axelrod as bedrock, middle-class, Kansan upbringing.


And 52% of the American electorate bought it faster than you can say prime-Florida-swampland-with-a-view-sold-to-dumber-than-dumb-Yankees.


Barry Obama made his entrance into mainland politics by frequenting all the Occidental socialist clubs, rallies and protests, and the first time he took to a podium, his rhetorical talent unveiled itself. Then, it was off to Columbia and a shadow existence, which eventually culminated in President Barack Obama, the first African-American President and the first man to ever assume the highest office in the land without one whit of experience other than running for office and beguiling a public begging to be beguiled.


Along the always-sunny yellow brick road to the White House, Barry was hailed as brilliant-beyond-brilliant, the veritable savior of his people and in the words of his now Vice President, a "clean, articulate and bright" black man. Nowhere, at any time during Barack Obama's near-miraculous rise to power, did he come into contact with anyone that would have demanded a character test.


The characters in this President's closet are too strange for fiction -- Jeremiah Wright, Tony Rezko, the New Party, Billy Ayers, Bernadine Dohrn, Louis Farrakhan, Mayor Daly, Rod Blagojevich, George Soros, assorted tax cheats and pay-to-play schemers of every variety. When any sentient person adds it up, he gets a man without principle, someone so enabled in his avoidance of reality about himself that one can only call it Murphy's Law applied to character development.


Every single thing that could go wrong has indeed gone wrong.


Enter a mainstream media so swept off its feet with tingles and its own utter lack of religiosity -- a group purely primed for false-savior seeking -- and what one could call the Murphy's Law of picking a President is perfectly, positively, poignantly complete.


From Stage right and Stage left, and from below and above, we see the Peter Principle in all its inglorious dimensions set to wreak havoc upon this entire Country.


In only three weeks' time, this President has signaled to every terrorist on the planet that we are a sorry, groveling, ashamed Nation ready to come to the diplomatic confessional. He is closing Gitmo within one year, has suspended trials there, and dismissed the charges against the U.S.S. Cole plotter. American penance is coming and it's coming fast and feebly on its knees.


President Obama has just put our money where his mouth is and is using $20.3 million to bring in Palestinian refugees from Gaza, the Hamas-controlled region where folks prefer bomb-making to bread-baking. Instead of helping Israel defeat them, this President brings them here.


As if we did not have enough home-grown terrorists.


The new politics of "hope & change" is looking like a Hollywood remake of "Larger-than-life Dopes and Same-ole-same-ole Corruptocrats" with tax cheats flanking the new Cabinet, an Attorney General who never saw a pardon he didn't like or a terrorist he couldn't love, a porn-protection guru as his Deputy, and a man without an ounce of intelligence knowledge or experience now the wartime head of the CIA. Add to this mess a Secretary of State whose husband owes far more than any other American alive to foreigners. The new Secretary of Education was in charge of Chicago schools, where more than 500 verified acts of child battering by teachers went unpunished and teacher unions trumped student rights. This Cabinet is shaping up to be worse than Bill Clinton's and Jimmy Carter's combined, while President Obama throws cocktail parties with $100/pound steak.


President Obama's definition of bipartisanship: "I won."


President Obama's definition of leadership: "Nancy can handle the details."


Our new President had the gall to pronounce the so-called economic stimulus bill absolutely free of "earmarks" and "make-do work," while spinning his prosaic campaign rhetoric before an international audience in a prime-time "press conference." This bill has close to a trillion-dollar price tag, but according to the Congressional Budget Office will do worse to our overall economy than no government action whatsoever. So, if this bill has no pork or earmarks in it, then it is pure socialist folderol run amok before it even gets implemented - in the face of the "worst economic crisis since the Great Depression."


The Peter Principle has reached its pinnacle in President Barack Obama.


If one wants a hawks-eye view into the minds of Obama voters, all one need do is read this piece published by the New York Times last week, detailing the fantasies, dreams and drooling-envy delusions of his followers. Their celebrity is now their President.


The perfect collision of Murphy's Law with the Peter Principle has arrived to explode in our faces.


In the words of Britain's most eloquent commentator, "America, what have you done?"

5) What is Plan B?
By Tom Bruner

It seems certain at this point that the Economic Stimulus plan will be implemented at some point in the near future. It may be completely successful, it may be a total failure, or it may hit somewhere in between.


Rational people hope for the best, but what if it goes sour? When a prudent investor buys a stock he or she knows before submitting the order where the take-profit and the stop-loss points are. When an entrepreneur embarks on a new enterprise, he or she knows what level of sales will be needed to stay in business at several milestones in the near term. In either case this is prudent management of precious capital. There is a hope for success, but a defined point where total catastrophe can be avoided. They have a Plan B.


So what is Plan B for the Stimulus Plan? It is not difficult to picture stunning success: a chicken in every pot and a car in every garage perhaps, or a low misery index. In any case if the general perception is that prosperity has returned, then Plan A worked; no need for Plan B. Likewise a total cataclysm should be obvious to all but the most irredeemably optimistic supporter of the Plan, in which case Plan B will emerge whether anyone knew what it was or not.


In any enterprise as huge as this plan there will inevitably be waste, fraud, and abuse. What percentage is not possible to predict, but even 1% of a trillion dollars is serious money. According to some estimates about a third of the TARP was wasted.


Then there's the part that is not wasted. It is unlikely that every non-wasted or stolen dollar will be spent in the best way. That is, opportunity cost analysis will be flawed and funds will be expended for less effect than could have been enjoyed.


The net effect of waste and suboptimal asset allocation is a considerable risk of failure. Failure does not necessarily mean utter failure, just as a failing grade on a test does not necessarily mean that the student missed every question. So what does constitute a failed policy of the future? Four million jobs created or saved is one metric, but a troublesome one because it relies on a value (saved jobs) that is hypothetical, unless four million jobs are actually created. Another problem is there doesn't seem to be a timeline with that metric. Creating four million jobs in eight years is probably not a passing grade.


And what constitutes a job? If one hundred workers are employed to dig a ditch on Monday and another hundred workers are employed to fill in the ditch on Tuesday, how many jobs were created? Answer: none because nothing of value was produced so the "jobs" were just excuses to distribute wealth that was produced by someone who actually did something useful. Similarly if one hundred workers are employed to build a road that never carries any traffic, how many jobs were created? Apart from positions in the archeology department at some future university, none or close to it.


But what if it clearly and unambiguously does not work? Since success has not been clearly defined, and failure has not been defined at all, this may be difficult to recognize, but if it happens then Plan B will need to be implemented. What is Plan B?


There's another name for Plan B. Some call it an "Exit Strategy."

6)Syria poised to transfer Iranian mobile anti-air missiles to Lebanese Hizballah



New anti-air missile destined for Hizballah
Israel's government changeover catches its armed forces on a high war alert on two fronts – its southern border with the Gaza Strip and its northern borders with Lebanon and Syria. Iran is deeply involved in both. The northern borders may be the more flammable, our military sources report, after Israel warned Damascus, through US, Egyptian and Turkish channels, that its delivery of scores of mobile anti-air missile systems to Hizballah in Lebanon would cross a red line.

Their possession would make Hizballah the first terrorist group in the world to be armed with an independent air defense weapon system.

In Hizballah's hands, this air defense system would seriously endanger Israeli air movements over Galilee and the Mediterranean, impede US Sixth Fleet flights and endow the Lebanese Shiite group with total military superiority over the Lebanese army and the UNIFIL peacekeepers in the south.

According to military sources, scores of missile carriers painted in Hizballah's colors stand ready at four Syrian military depots ready to cross the Lebanese border. In the last six months, hundreds of operatives trained in their operation in Iran and Syria. Iranian and Syrian missile officers have picked Lebanese sites for their deployment. Hizballah has placed them off-limits to civilians.

The highly-mobile, low-altitude, single-stage surface-to-air missile has a radar system that can detect, track and engage aircraft independently, picking up targets at 30 km and begin tracking them at 20-25 km.

Two separate missile guidance radars are used (with offset frequencies to reduce the effectiveness of Electronic Counter Measures (ECM), so that if one is jammed or shut down, the new missiles can track targets optically. It is armed with a 19-kilo fragmentation warhead with contact and proximity detonation capability.

A battery consists of two launch vehicles, each armed with 6 missiles and two transload vehicles with 18 missile reloads. The lethal radius at low altitude is 5 meters.

It is highly mobile, fully amphibious, air transportable and can be relocated to a new site within four minutes from system shutdown.

7) Barack Obama: A Primer For Foreigners
By Bernard-Henri Levy

Don't expect him to be the president of the 'decline of the American empire.'

The major news, of the inauguration and of every day since then, is that Barack Obama is no longer black. Yes, indeed. And so goes the United States. Some people voted for him because he was black and because his election would be the crowning achievement of the long march that began with Martin Luther King Jr.'s "dream" two years after Obama's birth. Some voted against him because he was black and because there remained, despite the unparalleled Cultural Revolution the nation had accomplished in a half-century, reserves of segregationism and racism.

The battle has been won. The age of State segregation has been relegated to the past. And Barack Obama is, just like the slogan he launched at the 2004 Democratic National Convention in Boston, on the occasion of his first "big" speech the 44th president, not of this America, or of that America, but of the United States of America. The restructuring of the field of the visible. The end of politics conceived as the domain of pigmentology. Neither black, nor white, nor biracial: Obama.

The second thing that we Europeans need to quickly get into our heads is that Barack Obama is not on the "left." There is indeed, contrary to the belief popular on this side of the Atlantic, an American left. There is the fringe left of the Democratic Party that in fact never rallied without reticence or resistance to Obama, who was at the time of that speech only the charismatic young senator from Illinois. Barack Obama is not a leftist. Barack Obama has named to key posts Republicans (Robert Gates, kept in his post as defense secretary; former Illinois Rep. Ray LaHood as transportation secretary) and ultrapragmatic technocrats (Timothy Geithner as Treasury secretary; Lawrence Summers as director of the National Economic Council; Peter R. Orszag as director of the Office of Management and Budget) who, frankly, do not have a lot to do with what we in Europe call the left.

Barack Obama is not Che Guevara. Barack Obama is not an honorary member of the French Socialist Party. Barack Obama is the meeting in the same body, on the dissection table of American iconology, of the souls of King and John F. Kennedy.

The third inanity from which one would hope to be spared during this initial avalanche of commentary: Barack Obama is not, will not be, the president of the "decline of the American empire." He has ordered the closing of the Guantanamo Bay detention camp, naturally. He will leave Iraq before the end of 2011 as he has promised. He will break with the Bush administration's "messianic" and "inevitable" ideology regarding the exportation of democratic ideals, it is likely. And he will use, in his relations with his allies, a rhetoric inflected with the multilateralism so sorely lacking in his predecessor. But Europeans should not count on him to either admit America's guilt or capitulate to Chavez or Ahmadinejad, or even to hurry along the advent of the multipolar world that the Russians and the Chinese dream of.

The United States will remain the United States. The United States will not provide planetary anti-Americanism with new switches for administering beatings. Whether we like it to or not, a United States lead by Obama will do what it can to remain the premier economic, political and military power in the world.

The change, then? In domestic politics, it will be deployed on three main grounds. The overhaul of a health insurance system that excludes 46 million Americans and with which all of the presidents of the United States up until Obama (including, alas, Bill Clinton) grappled and then gave up. A neo-Keynesian New Deal aimed at reconstructing the nation's infrastructure (roads, bridges, levees in New Orleans, neglected neighborhoods in Detroit, Cleveland, Los Angeles and Buffalo, N.Y.) which is in some areas comparable to that of the most cast-off countries of the Third World. And then the reform of the financial system: Before this crisis its most acute observers _ Nouriel Roubini, professor of economics at New York University; Harry Markopolos, a former investment officer who tried to alert the Securities and Exchange Commission that Bernard Madoff was a fraud; Nassim Nicholas Taleb, the premonitory author of "The Black Swan: The Impact of the Highly Improbable" _ howled that the world was being lead to catastrophe, but the prevailing deregulatory ideology drowned them out. That Obama gets down to these three tasks, that he opens this triple work site without delay; that is, in the America of today, more than a change of course. It is a revolution.

And as for foreign politics: Finally, what is known about the new president's convictions, declarations, and even ulterior motives leads me to believe that his administration's foreign policy includes, in addition to Iraq, two major points of reorientation. Already in the case of the Middle East, he is not waiting until the end of his second term, like Clinton and Bush, to become informed about the urgency of the Palestinian-Israeli conflict and then throwing himself into a final and pathetic sprint to obtain an impossible accord between the two parties.

The question of the relations with Pakistan: He will maintain the alliance, perhaps he will even strengthen it, but he will break with the unconditionality that was custom under the last three administrations, and that made the "land of the pure" the most dangerous country on the planet. In other words, he will put forth conditions that are linked to the sincerity of the Pakistani government's fight against the al-Qaida agents who have infiltrated the country's secret services, conditions that are based on the government's control of its nuclear arsenal, which no one can guarantee will be kept out of the hands of the jihadists. And for these two reasons, too, Obama's presidency is a chance for the world.


Bernard-Henri Levy's new book, Left in Dark Times: A Stand Against The New Barbarism, was published in September by Random House.