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"WHAT MIDDLE CLASS"?Global Distribution of Net Financial Wealth (2007-08 Average)James S. Henry and Brent Blackwelder(Click chart)

Res Ipsa Loquitur.

Pittsburgh's Litte State of Siege

You didn't hear much about it from any major US  news organizations, but  there was a very disturbing case of gratuitous police intimidation and violence at the G20 Summit in Pittsburgh last week. 

At least those of us who went to Pittsburgh managed to get a close look at the latest cutting-edge technology in anti-democratic crowd control -- one of the few remaining growth industries where the US is still the undisputed world leader. 

TWO MEMORABLE SEPTEMBER 11ths James S. Henry

Many of us have our own strong private recollections of September 11, 2001.  I happened to have been at  Boston's Logan Airport that morning, boarding a prop plane for an American Eagle flight to Long Island's Islip Airport. It was leaving around 8 am from Gate 22,  at roughly the same time that Mohammed Atta and four other reputed Saudi hijackers of Flight 11 were taking off from Gate 26 at the very same terminal, along with 86 other passengers and crew.  We must have passed each other, but I didn't notice them. I do have a distinct recollection that security at the check-in  that morning was very lax, but other than that, my own flight was uneventful -- until we landed in Islip and heard the shocking news that two planes had just hit the twin towers. So "death  reached by and took another....." 

My heart goes out to all who lost loved ones on that awful morning. May we redouble our efforts to establish a Truth Commission, and determine the full story, yet untold. 

***

But it is important to put our 9/11 in context. This was not the only September 11th that is etched indelibly in my memory -- let alone the most important case of international terrorism.   

I also distinctly recall the Chilean coup of September 11,  1973  very clearly.  I was at tend ing a graduate economics course at Harvard  taught by a protégé  of  Chicago Professor Milton Friedman. One of my fellow  students was Sebastian Pinera, a member of one of Chile's oldest fami lies, the future owner of the airline LanChile,  and right now the leading conservative candidate  in Chile's upcoming December 2009  Presidential elections.  

Sebastian had somehow  gotten word  halfway through  the class that Allende  had been ousted.  He was  absolutely jubilant -- “We won!,”  he cheered.                                                        

The profes sor, a prominent econometrician from the University of Chicago,  shared Sebastian's de light.Like   many other American  economists, he saw the overthrow as a victory for the neoliberal doctrines preached  by leading Chicago economists like Friedman and Arnold Harberger,  who both later consulted directly for Pinochet’s  junta. 

Over  the next twenty years, these “Los Chicago Boys” came to      exert  a strong influence on Chilean  economic policy.   The label was  perhaps a little  un fair to Chicago -- there was certainly no shortage of Harvard  disciples of  brutilitarian free-market doctrines.

  For example,   Jose Pinera,   my classmate’s brother,  was also  Harvard- trained.  He eventually became one of the main architects  of Pinochet's labor policies, which included a  ban on strikes and  closed shops,  the privati zation of all pension funds, and sharp cuts in  real wages, jobs, and  unemploy ment benefits.   

In hindsight,  Pinochet’s little laboratory conducted the first in a series of   experiments by the New Right  that culminated in the neoliberal programs of Margaret Thatcher  and  Ronald Reagan  in the First World,and a lengthy list of Third World imitators.  Among  First World democracies, their programs were  mod er ated  somewhat by the need for popular support. But in countries like  Chile, Brazil, Mexico,  and Argentina,  where the lines between rich and poor were starker  and the political systems were basically rigged, much less time was wasted on democratic  niceties.   

To their credit, a few principled  conservatives were bothered by  the resulting dirty little al liance between dic tatorship and  liberal economic reform. But  many others -- including Sebastian, who opposed  holding plebiscites on Pinochet  in 1980 and 1988 --   got lost in the thorny thicket of distinctions between “authoritarian” and “totalitarian”  regimes. 

In Chile’s case,  the resulting repression produced at least 3197 murders, disappearances and extra-judicial killings (about the same number as 9/11 in this country). [i] There were also thou sands of secret arrests and tortures (including 35,000 identified victims of torture and abuse ). All told, Chile spent six teen long  years without free elec tions, in what  had previously been  one of Latin America’s most  democratic coun tries. 

Of course we now know that all this state terrorism was tolerated, supported and indeed encouraged by the Nixon Administration and its dictator friends elswhere in Latin America -- presumably on thecocka-mamie theory that othewise we'd have Fidel running Santiago.  In fact the narrowly-elected Allende would have held elections when his term was up, and he probably would have lost. 

 However, these points are pretty general -- repression is very concrete. As Herr Friedman reportedly told General Pinochet at a Santiago audience in l975,  “When you cut the tail off a dog you don't cut it off inch by inch. You cut it off at the root.”  I   remember a 1974 lecture by another Chilean economist, Orlando Letelier, who was killed  in l976 by a car bomb  planted by the DINA, Pinochet’s secret police, in Washington D.C.  And I remember  Victor Jara, a  talented Chilean guitarist whose music I greatly admired.   When the junta seized power he was arrested and transported  to a soccer stadium in Santiago where “political”  prisoners were held. The police took him out in front of the crowd  and they cut off his hands......... 

***

 The overthrow of Salvador Allende'selected Popular Unity government in September  1973  was greeted with jubilation by Chile's propertied classes.  He’d been elected with a 36 percent plurality  in l970, and  the Popular Unity coalition’s  support in­creased to 44 per cent in the March 1973 Congressional elections. But  the  elite  was  eager for a change by any means.  From l968 to l973, at first under the Christian Democrat  Eduardo Frei Montalva and then Salvador Allende,   government spending as a share of GNP had in creased from fifteen  to forty percent.  A third of  large farms and many  pri vate companies had been nationalized at  low prices;   there was   700 percent infla tion and frequent shortages of consumer goods; Chile’s foreign debt  had reached the un precedented level of $2.5 billion. Foreign investment dried up and  flight capital was pouring into  accounts at Bankers Trust, Chase and JPMorgan, Chile’s leading creditors.

The good old CIA, multinationals like ITT, and the USG certainly played a prominent role in 1970-73 coup activity that followed -- with a hefty dose of financial chicanery, in order to, in Nixon’s words’ “make the economy scream.” But intervention had not started there. 

For example, according to former CIA agent Philip Agee, who had been stationed in Uruguay in the early 1960s, future Bush Pioneer and Presidential Library trustee John M. Hennessy, Chairman of Credit Suisse First Boston (CSFB) from 1989 to 1996, had been the Assistant Manager at Citibank’s Montevideo branch in 1964, and reportedly helped to transfer substantial funding to the campaign of Eduardo Frei Montalva,  who was running for President against Allende that year. Frei won the election, and served as President from 1964 to 1970.  In the early 1970s, Hennessy later became Assistant Secretary of the Treasury for International Affairs in the Nixon Administration, reportedly coordinating economic pressures against Allende’s government.[ii] In 1974, having succeeded at that Hennessy returned to Wall Street, where he became Managing Director of First Boston Corp., which was later acquired by Credit Suisse.    

In any case, despite the CIA’s involvement, the sufficient conditions for the 1973 coup against Allende were provided by a “Francoist” alliance of military officers, the Catholic Church’s hierar chy, the top ten percent of landowners and industrialists, and the next twenty per cent of the income distribution, the so-called “middle class.”  Immediately after the coup  these folks began to get what they thought  they wanted.

LOS CHICAGO BOYS

The junta turned to a small band of inexperienced but supremely self-righteous  economists, “los Chicago boys,” so named because their mentors University of Chicago economist and future Nobel laureate Professors Milton Friedman and Arnold Harberger. 

After Pinochet took power, there was actually a prolonged period when several different economic camps competed for the junta’s favor. But Friedman and Harberger,  who was Dean of the Chicago Economics Faculty,  seem to have tipped the balance when they visited Chile in March 1975. Since the 1950s, with the support of the Rockefeller and Ford Foundations, Harberger had developed a close relationship between the University of Chicago  and Chile’s Catholic University, where he had taught as a Visiting Professor.  With support from the Rockefeller and Ford Foundations, scholarships were provided for bright young Chileans who wanted to study economics.  Many of these Chicago-trained economists returned to Catholic University to teach, and later served in Pinochet’s government.

 Their trip was sponsored by the Chilean businessman Javier Vial, head of the business group BHC, one of the country’s largest conglomerates, the eventual owner of Banco de Chile, the country’s largest private bank at that time, and 60 other companies. He was also a very strong supporter of Pinochet’s dictatorship, on personal terms with the General.[iii]  Friedman reportedly got $30,000 for the three-day trip. His wife Rose  reportedly objected to the visit because Pinochet’s hard right regime and the goose-stepping Chilean military  reminded her of Nazi Germany.  But Professor Friedman tried to assuage her guilt by requesting the release of two Jewish political prisoners who were supposed in the custody of Pinochet’s police.

 Just one month after the visit, in April 1975,  the junta introduced an orthodox monetarist “shock plan,” along the lines that Friedman and Harberger had recommended.  And Professor Friedman’s  Chicago-trained protégé Sergio de Castro replaced Fernando Leniz as Minister of the Economy. Other key neoliberals  on Pinochet’s economic team included Pablo Baraona, President of the Central Bank, Alvaro Bardon and Jorge Cauas Lama at Treasury, Rolf Lüders as Treasury Minister and Minister of the Economy, and Juan Carlos Mendez as Director of the Budget. Unfortunately the two Jewish prisoners were never located.

 This tiny band’s shared vision of Chile’s future was one that later became common among neoliberal Third World governments -- sort of a low-wage, export-oriented  Asian tiger, complete with weak unions, low inflation, privatized pension funds, and a minimal state --  apart from the police, the military, and the national copper company, of course, whose income went to the military. 

To pursue this anti-Marxist utopia they started out with a sharp recessionary  shock. They banned strikes, abolished price con trols for  food and housing, and slashed tariffs from 100 percent to 10 percent in just two years. The  junta also intro duced Latin America’s most radi cal  privatization program ever. In l973-74, more than  250 nationalized companies were re turned to  their former owners and 200 more were sold off at bargain prices.  These were not the  mid dle-class privatiza tions  of France, Japan, or  the UK, where the buyers  included  millions of small investors.  Like other developing countries,  Chile had a very  thin capital market, and hard times had  made it even thinner. So the big buyers at this fire sale were a handful of closely-held   grupos  like  Javier Vial and Cruzat-Larrain, which owned most of the local banks,  and also had very strong ties to foreign  banks.[iv]

All these changes set the stage for the dictatorship’s 1977-81 phase,  which was de scribed at the time by the Wall Street Journal’s neoconservative editorial page in even more glowing terms than it reserved for the Argentine junta --   as “the Chilean economic mira cle.” Indeed, during this brief period, when the economy was recovering from the sharp recession that los Chicago Boys had engineered, growth averaged  5-8 percent a year. 

 But what was perhaps most miraculous was the regime’s inability to foresee  that its  economic policies -- in addition to increasing poverty and inequality --  were about to cave in on each other, completely bankrupting the country and forcing  the national iza tion of the entire private sector.  

THE CHICAGO ROAD TO SOCIALISM -- AND BACK

By l977,  the junta had wiped out  any organized political opposition  and achieved most of its early economic goals. But the neoliberal  ideologues  pushed  it on to new extremes.  Under José Pinera’s 1979 radical right “Plan Laboral,” the government abolished closed shops for unions and tried to privatize everything from  health care and pensions to education. The 1980-81 pension fund privatization, which substituted a “fully funded” system administered by privately-managed pension funds – managed by institutions like Citigroup and Aetna, which came to dominate the highly-concentrated private system - for the old “pay-as-you-go” government system,   was probably the most successful of these reforms. [v] Many others succeeded only  in cutting social spending, while sacred cows like mili tary spending and the nationalized copper company were  spared.  

The copper company was fa mous because of the uproar provoked when Allende seized it from Anaconda in 1971. But Pinochet kept it nationalized --  a secret law  gave the military  ten percent of its profits.  So even under the junta, Chile’s largest  enterprise and exporter remained “socialist.”

In any case, the junta’s most important  neoliberal experiments -- and worst mistakes -- concerned macroe conomic policy.  Here the point man was  Sergio  de Castro,  the los Chicago Boy who became Pinochet’s second Finance Minister in l979. Like Argentina’s “Wizard”  de Hoz,  De Castro was a strict believer in the monetarist view that the best way  to fight inflation in “small” economies like Chile  was  by  eliminat ing tar iffs, deregulating capital and trade, and maintaining a fixed exchange rate.[vi]   So he fixed Chile’s peso at 39 pesos to the dollar and held it there  from July l979 until June l982.   With copper prices in a slump and the size of the state sec tor shrinking,  this was only possible be cause foreign banks were willing to lend money hand-over-fist to Chile’s private sector. Foreign  banks were sympathetic to  Pinochet’s conservative economists, much as they had been to the Argentine junta’s de Hoz;  they were also flush with cash and  very compet itive, given Chile’s high real domestic interest rates.  

So, just as in Argentina,  many domestic borrowers took advantage of  fixed exchange rates and the temporary generosity of their foreign bankers to make lucrative  back-to-back deals.  For example,  Javier Vial, the sponsor of Friedman’s 1975 visit, and Chile’s richest man by 1978, acquired control over Banco de Chile in the late l970s and used it as a front to borrow heavily from foreign banks like Bankers Trust and  Chase. When he was its President,  Banco de Chile, in turn, reloaned the dollars to Vial’s many other private companies, including sev eral that were based in Panama, like Banco Andino.  All these shenanigans be came public af ter Vial’s empire cracked in 1983.  In 1997, after a 14 year investigation, he was sentenced to 4.5 years in jail for bank fraud, and former Economy and Treasury Minister  Rolf Lüders, who’d owed 10 percent of BHC, was sentenced to four years.[vii]  Chile had gotten  stuck with his debts when the bank failed and was nationalized.   All this was no surprise to his foreign bankers -- as one former Bankers Trust officer who had personally  handled Vial’s Panama accounts told me, “We knew he was lending to himself, but  no one wanted to pull the plug.” [viii]  

As a result of de Castro’s policies,   Chile’s private foreign debt boomed  during  the “miracle” years.  In  l981 alone,  $6 billion of new credits were issued by foreign banks, a huge amount for this small economy, mainly  to  the leading domestic private banks likeBanco de Chile, Banco de Santiago,  Banco Internacional, andBanco Colocadora, whose grupos,  in turn, owned a huge equity stake in Chile’s private sector.  From l980 to l982, private  foreign debt doubled; by l982  the total foreign debt had ap proached $20 billion,     two-thirds of  it private.  The Central Bank re peatedly warned  that it was not responsible  for the  private debt, but  it  al­lowed the spree to continue.  Given   all the “cheap” dollars and low tariffs, im ports  also soared --   luxury imports became  Chile’s equivalent of flight capi tal.   

A NEOLIBERAL CRISIS

The whole situation  finally began to  unravel in  May  1981  when Crav, a leading sugar company, failed. The real crunch came in the summer of l982  when the Latin American debt panic dried up new loans, forcing  Chile to devalue and tighten interest rates, a lethal combination.  By January 1983 unemploy ment  was thirty  percent,  and the six top private banks and the country's two largest pri vate “grupos,” Vial  andCruzat-Larrain, had also both folded. 

At this point Finance Minister de Castro began to get  intense pressure from foreign banks  like Chaseand Bankers Trust to “nationalize”  the private foreign debt.  For a while he stuck to his free-market principles, reminding them of his  earlier warnings -- that such a move  would be no more justified than Allende’s nationalizations, and that this was, after all, private foreign debt, freely contracted, presumably with compensation for the risks of default built into the interest rates.  

But  the great big banks were not concerned with  such abstract princi ples -- any more than they are today.   In January 1983,  they  quietly cut off  all Chile’s foreign trade credit lines – to the point where oil tankers en route to Santiago started to turn around and head home.   De Castro was forced to resign, and his replacement quickly declared that, indeed, the junta would as sume responsibility for the private foreign debt (though not its offshore flight assets!) after all.  In the words of one Chilean banker, “Pinochet achieved what Allende only dreamed of -- the complete so cialization of  our private sector.”[ix]   

Nor was this  the end of the story. When Pinochet’s fourth Finance Minister, a de Castro protégé named Hernan Buchi, took office in l985, he had to em bark on  yet another, even larger  round of privatizations, simply  to rid the government of all the debt-ridden companies that the government had just acquired through the forced nationalization.  

(To his credit, General Pinochet did support the compulsory nationalization of Chile's largest banks -- as compared with the far more generous, CEO-friendly bailouts that the US Treasury has recently employed.) 

Subsequently,  foreign bankers, the World Bank, Wall Street, and the IMF all gave Buchi  and the Pinochet regime rave re views for their brilliant privatization strategy,  designed to attract foreign investment, boost savings,  and downsize Chile’s state.  But they never seemed to acknowledge why his privatization program  had been necessary  andpossi ble  in the first place  -- because  in 1983, neoliberal policies had produced a disaster, and   the junta and Chilean taxpayers had been forced by its  foreign credi tors to take the fall for so many bad debts.

Finally, capping it all,  whom do you suppose were the main beneficiaries of Chile’s latest round of priva ti­za tions?  To  avoid the insider-trading outrages that had characterized many of the 1970s privatizations – helping groups like Vial and Cruzat to grow quickly --   Buchi did offer low-cost loans to workers and pension funds to help them buy stock.  By l988 worker-owned funds owned 14 percent of the privatized shares,  not a bad achievement in worker control for an ostensibly right-wing regime.

But two other kinds of investors became even more important.  The first were  foreign  investors, especially Sergio de Castro’s old friends, the foreign banks. In l986, under the  Central Bank’s “Chapter 19” program,  they  were al lowed to swap their  (dubious) nationalized loans for equity in state-owned companies that were  priva tized on very  fa vorable terms.   

As a result,  Bankers Trust obtained forty percent  of Provida, the country’s largest pension fund, plus Pilmaiquen, a power plant, for   half its book value;   Aetna Insurance bought the country’s second largest pension fund;   Chase, MHT, and Citibank  also acquired major  local interests. Already by 1990,  a handful of foreign-managed pension funds   controlled seventy percent of  Chile’s pension system,  its largest pool of  capital.  Alan Bond, the er ratic  Australian investor whose  financial em pire  later collapsed,  was even permitted to buy the fa mous telephone company that ITT  had fought Allende so hard for.  COPEC, Chile’s oil company, which had been privatized for a song to Grupo Cruzat-Larrain in 1976, had since turned into a debt-ridden conglomeration of fishing, mining, forestry, and finance companies, including half of Banco de Santiago.   When Cruzat cratered in 1983, Chile’s government re-acquired ownership of the now-heavily indebted COPEC, which was also by then Chile’s largest private enterprise. Four years later, it reprivatized COPEC to Grupo Angelini, another leading Chilean private conglomerate, again at fire-sale prices. And so the cycle continued.....[x] 

All told, this  “Chapter 19”  debt-equity swap program was credited  by its supporters -- especially the banks -- with reducing Chile’s debt by more than $2 billion. Of course it was a little ironic for the banks to be praising this achievement. Many others saw  the program  as a dead give-away.  By assuming  all the pri vate foreign debt in the first place, Chile had rewarded bad lending.   And after a decade of tight-fisted government  many of the  privatized assets had actually been in pretty good shape.  Except for the copper company and a few military sup pliers, the only ones the government retained were “dogs” no one else wanted.  It made little sense to let foreigners trade du bious loans for valuable equity  at rock-bottom prices  -- maybe even less sense than Allende’s    nationalizations.  It seems that Chile hadn’t really eliminated state intervention; it had merely inverted its class bias.

The other key investor in Buchi’s  privatizations was the good old Chilean elite -- like Sebastian and his brother.   As we’ve seen, while the government nationalized  private debts,   it didn’t touch  private foreign assets.  And Buchi now offered flight capitalists  a gener ous tax amnesty  if they brought their money home.  His “Chapter 18” program  allowed them to buy   debt from the banks and swap it for  government bonds or equity in state companies at very  favorable prices.  By l990,  this program had brought in another $2 billion. Again, the banks and their clients  naturally sang Chapter 18’s praises. However,  it re­warded tax evasion and effectively swapped for eign  for domestic debt that may  well prove more costly to service in the long run. Such criticisms meant little to the  officials in charge of the program, however -- some of them even benefited  from it personally. Soon after he left government, for example, Jose Pinera be came president of an electric utility that had been privatized. And his brother ended up owning the privatized national airline – which he proceeded to turn into quite a profitable enterprise, even while serving in Chile’s Senate.

So the  circle was complete:  having been bailed out of their foreign debts by the government,  Chile’s elite and the foreign banks now bought back their assets at less than fifty- sixty cents on the dollar, often with the very same flight dollars  that the original loans had financed!  

Here we have one of the purest cases of abusive banking,  one that poses the ques tion of the foreign banks’ responsibility very clearly. For  Chile’s  1983 debt crisis obviously had little  to do with  inefficient public enterprises, excessive public debts,  godless Marxists, welfare-state liberals,   or  all the other usual suspects blamed by neoliberals.   At that point, fully two-thirds of  its  foreign debt was  private, and Pinochet and Co. had long since elimi nated much of the state’s inefficiency, not to mention the political opposition.  Yet by the end of l983,  Chile  had ended up with one of the highest per capita foreign debts in the world, as well as  one of the developing world’s largest state sectors. 

And this “Chicago road to socialism,” it seems, was taken in part because there was no  political opposition, no ac countability – no one to say “enough” to the foreign banks, the domestic elites, their unregulated domestic banks, and the generals. So perhaps democracy had its uses, after all; perhaps “free markets” alone were not sufficient.  

One could almost imagine the righteous tail-cutters in Chicago, taking a break for a micro-second from their round-the-clock crusade for more-perfect markets, experiencing perhaps just a momentary tremor of self-doubt.

*** 

---

[i] As of 2001, Chile officially recognized the existence of 3197 disappearances and extrajudicial killings between September 11, 1973 and March 11, 1990, when the elected government  of Patricio Aylwyn assumed power. See “Korean Panel To Cooperate with Chile To Reveal Truth over Mysterious Deaths,” Korean Herald, February 7, 2001.  

[ii] See Morton Halperin, Jerry Berman, Robert Borosage, and Christine Marwick, The Lawless State.  The crimes of the U.S. Intelligence Agencies. (New York: Penguin Books, 1976), 16.

 

[iii]  For more about Vial, see “La Nueva Derrota,” Que Pasa, November 10, 1997; S. Rosenfed and J.L. Marre, “Chile’s Rich,” NACLA Report on the Americas, May/June 1997.

 

[iv]  See “Milton Friedman: Gurú a regañadientes, “ Revista Qué Pasa, February 28, 1998.

 

This account of the l973-78 period benefited greatly from  an excellent paper by Paul E. Sigmund, “Chile: Privatization, Reprivatization, Hyperprivatization.” (Princeton University, unpublished, July 1989).

 

[v] See, for example, Rodrigo Acuña R. and Augusto Iglesias P., “Chile's Pension Reform After 20 Years,” The World Bank -  Social Protection Discussion Paper No. 0129, December 2001.  Chile’s pension reform, which substituted a privately-funded system for the traditional “pay as you go” government system, was enabled by the fact that its military government could simply mandate the substitution. Subsequent attempts at privatization in more democratic countries like Argentina and Uruguay proved much less successful. 

 

[vi] This theory, espoused by arch-monetarists like Colombia University’s  Robert Mundell, argued that this policy would constrain inflation to the world rate by making a large share of the money supply endogenous.  It basically ignored exchange rate specu lation and capital flight.

 

[vii]  For Vial’s and Lüder’s October 28, 1997 sentences, see “La Nueva Derrota,” Que Pasa, November 10, 1997, available at www. quepasa.cl/revista/1386/18.html..

 

[viii] "Chile Military Analyst,"  Sao Paulo, 2.21.89; “Miami Banker,” 5.91.

 

[ix] Raul Fernandez, former Director of Public Credit for Costa Rica, International Bank of Miami,  4.22.88. 

 

[x] See the account of COPEC in S. Rosenfed and J.L. Marre, “Chile’s Rich,” NACLA Report on the Americas, May/June 1997.

INVEST IN INNOVATION!!!Instead of Eating the Seed Corn...James S. Henry and Jim Manzi

We are called the nation of inventors. And we are. We could still claim that title and wear its loftiest honors if we had stopped with the first thing we ever invented, which was human liberty."  

-- Mark Twain

(The following is a longer version of a piece that appeared this week in The Nation.)

In the midst of our deepening recession, the US faces another  economic crisis that is less visible and dramatic than house foreclosures, bank failures, plant closings,  or stock market avalanches, but even more important in the not-really-that-long run: systematic under-investment in technology and innovation.

Indeed, nothing less than our global economic leadership may be at stake because of this underinvestment.

On the other hand, with a little bit of funding,  foresight, and determination, we believe that it may be possible to kick-start an innovation revival.

Especially at the federal level, for a  modest investment,  there’s an opportunity to create a whole new generation of idea-growing, job-creating  technology hubs all across the country – perhaps even an “automotive Silicon Valley”  in otherwise moribund Detroit.

  This revival would not just be about investing more heavily in R&D. Especially in troubled times like these, we need to remind ourselves that innovation has always been a critical American tradition, a crucial part of our patrimony. It is as much a by-product of our political system and cultural norms as of our business and scientific practices.

This patrimony is now at risk, not only from our failure to invest,   but also from the failure to reward and honor scientists, technicians, engineers, and inventors above lawyers, bankers, and hedge fund managers, and to recognize the central role that real innovation of all kinds has always played in our story.

HANK PAULSON'S OCTOBER REVOLUTIONWhy This Republican X-Banker Has Decided to (Partially) Socialize Our Entire Banking SystemJames S. Henry "

 "We have made changes, Sire. Yes, it is true, we have made changes. But we have made them at the right time. And the right time is, when there is no other choice."

-- Conservative adviser to King Edward VII, explaining his support for liberal reforms

We may have just reached a critical turning point in American political economy -- not only in our efforts to overcome the burgeoning global banking crisis, but also to overcome the pernicious influence of free-market fundamentalism, which has dominated US economic policy for the last 30 years.

Ironically enough, the person who deserves more credit than anyone else for helping us to reach these goals is our current Treasury Secretary, a lifelong die-hard Republican and former Wall Street king-pin.

Last night, a few hours after the US stock market closed,  the Bush Administration, embodied in Henry M. Paulson,Jr.,  announced that in order to stem the continuing turmoil in capital markets,  in conjunction with other G-7 countries, the US federal government will begin "as soon as we can" to use taxpayer money to buy preferred equity in private financial institutions, especially banks.

Depending on how it is implemented, this could very well amount to a partial nationalization of the entire US banking system by the US Government. Are you paying attention here, Hugo, Fidel, and Evo? 

This marks a very sharp U turn in recent US policy. Indeed, just two weeks ago, in their September 23rd testimony before Congress, Paulson and Federal Reserve Chair Ben Bernanke dismissed such equity investments as a "losing strategy," compared to their preferred scheme, a government-run "reverse auction" to buy up to $700 billion of "toxic" bank assets.

HAIL MARY

This policy U-turn was not due to sudden new insights generated by careful academic analysis or some precise economic model. 

It feels more like a Hail-Mary pass,  coming at the end of  one of the most disastrous weekly stock market performances in US and global history.

That, in turn, was preceded by ten exhausting days of political goat-rodeo and Congressional negotiations over the infamous "$700 billion bailout," on top of the preceding six exhausting months of  more or less ad hoc, increasingly expensive but largely unsuccessful one-off  interventions in money markets and the banking system by the US Treasury, the Federal Reserve, and a myriad other US bank regulators. 

Meanwhile, there has been an even more quirky set of poorly-coordinated improvisational remedies administered by diverse regulators in the UK, Germany, France, Iceland, and Belgium. 

At the end of all this,  fear, uncertainty, and doubt (FUD) have continued to spread across global capital markets, as policymakers stumble into each other, national banking systems compete for deposits, the US Treasury becomes (ironically) a huge depository for safe-haven flight capital, and no one manages to get ahead of the crisis.

If the FUD continued to spread, and global credit remained on lock-down,  the forthcoming global recession -- already likely to plunge real growth in Europe and the US  to zero or less next year, China to 6 - 8 percent or less, and the rest of the developing world to 4-6 percent -- would become dire indeed. 

So one answer to the riddle of Paulson's "sudden conversion" is that he simply had no alternative. Given that ad hoc bailouts, coordinated interest rate cuts, increased deposit insurance, the extension of government insurance and liquidity to money market funds, the commercial paper market, on top of the takeovers of AIG and Fannie/ Freddie, had not done the job, nationaliziation -- really internationalization, since global banks are involved, and other countries will presumably be asked to contribute -- is one of the few arrows left in his quiver.

A GREAT TRADITION

This will hardly be the first US experience with quasi-nationalization. On September 16, the Federal Reserve had effectively "nationalized" the giant insurance company AIG, acquiring 80 percent of its equity in exchange for an $85 billion loan.

Way back in the 1930s and 1940s,  the US Reconstruction Finance Corporation seized and recapitalized many banks. The FDIC has also done this many times since then.

European governments have even longer histories of direct intervention in banking markets.  And several of them moved almost too quickly in the last year to nationalize particular banks -- for example, the UK's Northern Rock in February 2008 and Fortis in September 2008.

Of course, most of these recent cases have involved failing institutions, where the government was a "lender of last resort." As discussed below, Paulson's plan is rather different.

Even farther back, in the early 19th century, states like Virginia and Pennsylvania often invested directly in state-chartered banks to set them up and keep them going. Those were not especially happy experiences with government ownership.

But this is hardly a great time for champions of private capital markets to be quibbling about the efficiency costs of government intervention -- private markets in the US alone have just lost $7 trillion of market cap in the last year, including $3 trillion in the last 3 weeks. And the global "opportunity cost" of the crisis is probably at least twice this high.     

A GLOBAL RECOVERY FUND?

 If done right,   Paulson's PIP  (Public Investment Program) will be much broader,  more proactive and more innovative than previous bank nationalizations.

For example, one idea would be to establish a "Global Recovery Fund," permitting fresh private capital, "sovereign wealth funds" like those in Norway and the UAE, and European, Latin and Asian countries that have a clear stake in restoring the world's financial sector to health to invest alongside the US Treasury.

Even, Heaven help us, the IMF and the World Bank's IFC might participate in such a fund.  They have run out of developing country crises to solve, are looking for a new role, and have $billions in untapped credit lines. 

Such an approach would help to share the heavy burden placed on US taxpayers, and make this program more politically palatable than the TARP bailout proved to be.

A global fund would also help to diversify investment risks across many more countries and banks. 

Indeed, the USG and its new partners might even become lenders of far-from-last resort, clearing the way for threatened but essentially-healthy institutions  to survive the financial contagion, raise much more private capital as well, and, most important, turn each and every  new $1 of equity into $10 to $15 of new lending.

If the fund is successful in reviving the world's financial system, and restoring banks to financial health, taxpayers and investors will no doubt all be paid back handsomely. But the most important benefits may be the "hidden" ones -- the catastrophic losses that would be avoided by preventing further chaos and market decline.

This is very different from Paulson's original TARP buy-back scheme, which promised to boost bank equity informally by way of overpaying for toxic assets with highly-uncertain values. 

Ironically, that approach just rewards those companies with the very worst  portfolios and lending practices,  while enabling much less increased lending.

Indeed, TARP's only comparative advantage seems to have been that by avoiding direct government investment in the private sector, it did not violate any red lines of so-called free-market conservatives.

In hindsight, however, given TARP's birth pains, plus the fact that the market value of all US publicly-traded stocks fell from $12.9 trillion on September 19 to $9.2 trillion in the three weeks after Paulson Plan I was announced.

So respecting this neoliberal ideological taboo may well have just cost US investors -- most of whom are taxpayers -- at least $1 to $2 trillion of  market value that might have been saved with an immediate recapitalization plan.

With that much extra dough,  we could almost afford to wage another Iraq-scale war somewhere. 

BUSH SPEAKS: "HOW DID WE EVER GET IN THIS MESS? WHERE HAVE I BEEN?"James S. Henry

Last night on national television, Comrade Bush presented his own miniature 14-minute "Cliff Notes" version of the roots of the current US financial crisis, and a heart-rending appeal for the most generous act to date of his Administration, the $700 billion blank-check Wall Street bailout. 

By now the man has established a bit of a pattern --  customarily trying to scare us all into granting him unlimited powers,  while arguing that there is simply no alternative to whatever bitter pill he happens to be pushing at the moment. 

You are of course free to believe him if you like. Hundreds do.

IMPROVEMENTS

In fact, as we argued yesterday, there are all sorts of improvements to be made to the proposed Whale of a Bailout package.   

These include things like, at a minimum, (1) equity investment and warrants for taxpayers, to provide some upside returns in proportion to the risks we are taking on any purchases of bank assets; (2) stronger oversight; (3) more assistance for the millions of Americans who are experiencing home foreclosures; (4) compensation ceilings, clawbacks, and stiff progressive tax rates on incomes over $1 million and estates over $10 million, to offset the cost of all this; (5) a Financial Products Safety Commission; (6) a new Treasury-backed competitive insurance market for mortgage securities,  available to banks and homeowners; (7) expanded FDIC reserve fund rather than buy "toxic" bank securities up now, set up an  -- since all the "I-banks" are commercial banks now, anyway; (8) a new installment of the 1932 Pecora Commission, complete with subpoena power, to investigate the origins of the crisis and hold people accountable.

(For more details, here is the testimony that Dr. Brent Blackwelder, Friends of the Earth, and I submitted to Rep. Frank's House Financial Services Committee yesterday: BAILOUT.pdf)

ALTERNATIVES

Even more important, the President's central claim that there is no alternative to this bitter pill is a triple whopper with cheese.    

As the IMF -- not our favorite institution, but it does know a thing or two about recapitalizing broken banking sectors --  has suggested just this week, long-term "swaps" of mortgage-backed securities for government bonds could be used to clean up the banks' balance sheets while completely sparing  taxpayers the risks of a huge loss on the $billions of toxic assets we'll soon be owning. 

There are also numerous other approaches  to broken-banking sector restructuring  that have been employed by governments all over the planet in more than 124 banking sector crises since 1970 -- for example, in Chile, Korea, Germany, Mexico, and  Japan.

Doesn't anyone else find it odd that none of this expertise is being put to use?

Or that, with losses on complex derivative and structured securities at the core of this debacle, and thousands of "quants" from MIT and Wharton on Wall Street, we cannot design some simple security vehicles to help taxpayers reduce their personal or collective exposure to its potential costs? 

Perhaps Bush & Co. are not familiar with the IMF or the World Bank/ IFC's "Capital Markets Group." Perhaps Secretary Paulson never bothered to understand the first thing about derivatives and options during his 32 years at Goldman Sachs.   

For their information, the World Bank/ IMF/ IFC  are located at 700 19th St. NW, Washington D.C., three blocks from the White House.

Their staffs are not especially busy at the moment -- indeed,  15 percent of the IMF's professionals are being laid off, so they may have some time to help out.

We've been assured by the Bush Administration, however, that the IMF's assistance is not really needed at this point.

"What are we," Bush asks,  "Some sort of two-bit corrupt, debt-ridden plutocracy  that can't manage its own affairs?"

STAMPEDE

Indeed, the President,  Secretary Paulson, and a weird new assortment of  bottom-feeding Wall Street investors  (Omaha's Warren Buffet, Tokyo's Nomura Holdings and Mitsubishi UJF), and, of course, those who are still left on Wall Street itself are in a white heat to get this deal done, and are trying to create a stampede. 

They are also clearly not interested in improving the bailout. They just want our money -- and a loosey-goosey, behind-closed-doors process for distributing it that hasn't even been designed yet.

Unlike US taxpayers, Buffet, who is reportedly investing $5 billion in Goldman Sachs, was saavy enough to get preferred shares and warrants for his money -- worth up to 8 percent of the premier bank's share.

At that rate, just think how much Wall Street real estate our  $700 billion would buy -- if only Paulson and Bernanke and the US Congress would follow in Buffet's footsteps and insist on some equity and warrants in exchange for a bailout. 

SOCIALISM FOR BANKERS, SAVAGE CAPITALISM FOR EVERYONE ELSE? Bailout Jeopardizes Entire Progressive AgendaJames S. Henry

"“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” --  Warren Buffet, June 2008

Ladies and gentlemen: pardon my intemperance,  but it is high time for some moral outrage --  and a little good old-fashioned class warfare as well, at least in the sense of a return to seriously-progressive taxation. 

After all, as this week's record-setting Wall Street bailout with taxpayer money demonstrates once again,  those in charge of running this country have no problem whatsoever waging "class warfare" against the rest of us -- the middle classes, workers and the poor -- whenever it suits their interests.

At a time when millions of Americans are facing bankruptcy and the risk of losing their homes without any help whatsoever from Washington DC,  the CEOs and speculators who created this mess, and the top 10 percent of the wealth distribution that owns 85 percent of financial stocks, have teamed up with their "bipartisan" cronies in Congress, the US Treasury and the White House to stick us with the bill -- in a bum's rush toward a cockamamie solution.

This time they have gone too far. 

As discussed below, the cost of this bailout could easily jeopardize our ability to pay for the entire economic reform program that millions of ordinary citizens across both major parties have been demanding.

Some kind of bailout may indeed be necessary from the standpoint of managing so-called "systemic" risk to the financial system.

But it should come at a price -- a hefty part of which should be paid by the tiny elite that was most responsible for creating this mess in the first place.

THE "GET REAL" NEW DEAL

To make sure that real economic reform is still feasible, we need to demand a "Get Real/ New Deal" from Congress right now. 

At a minimum, this Get Real/New Deal package should include measures like:  (1) the restoration of stiff progressive income and estate taxes on the top 1 percent of the population (with net incomes over $500,000 a year and estates over $5 million) -- especially on excessive CEO and hedge fund manager compensation; (2) much more aggressive enforcement and tougher penalties against big-ticket corporate and individual tax dodgers; (3) tougher regulation of financial institutions  -- possibly by a new agency that, unlike the US Federal Reserve, the SEC, and the US Treasury, is not "captive" to the industry; (4)  a crackdown on the offshore havens that have been used by leading banks, corporations,  and hedge funds to circumvent our securities and tax laws; and (5) the immediate revision of the punitive bankruptcy law that Congress enacted in 2005 at the behest of this now-bankrupt elite.

We also need (6) a National Commission to investigate the root causes of this financial crisis from top to bottom, and actually (unlike the hapless, ineffectual 9/11 Commission) hold people accountable.

Over time, this progressive Real/ New Deal would help raise the hundreds of billions of new tax revenue that will be needed to offset the costs of this bailout.

It is essential if the Federal Government is to be able to afford key reforms like health insurance, clean energy, and investments in education.

These may not matter very much to Wall Street executives, financial analysts, Treasury and Federal Reserve executives, or the more than 120-130 Members of Congress and 40-45 US Senators who earn more than $1 million a year -- and are already covered by a generous "national health care" package of their own design. But these  are the key "systemic risks" that ordinary Americans face. 

These reforms may sound ambitious. So is the bailout.  And the reforms that we are discussing are only fair.

After all, we the American people have been  the very model of forgiveness and understanding lately. 

We have tolerated and footed the bill for stolen elections,  highly-preventable terrorist attacks, gross mismanagement of "natural" disasters, prolonged, poorly conceived, costly wars, rampant high-level corruption, pervasive violations of the US Constitution,  and the systematic looting of the Treasury by politically-connected defense contractors, oil companies, oligopolistic cable TV and telecommunications firms, hedge fund operators, big-ticket tax evaders,  and our top classes in general. 

Does "class" still matter in America?  You betcha -- perhaps more than ever. But enough is enough.  Call your Congressperson now.  Demand a"Get Real/ New Deal" qualifier to the bailout package before it is too late.

(c) SubmergingMarkets, 2008

NARRATIVES, NOT IDEASMcCain's Contradictory, Fearful Vision of the Next Four YearsJames S. Henry

Outside the Republican convention hall, Twin City cops and National Guardsmen in full-scale battle gear were arresting credentialed journalists like Amy Goodman and pepper-spraying peaceful demonstrators -- though you didn't hear much about that from the respectable TV commentators who were safe inside, battling balloon drops.   

Inside the hall, we were treated to an odd combination of "Naughty Librarian" Gov. Sarah Palin, John McCain trying for the nth time to appear natural while reading the teleprompter and bashing his own party, and 2380 raucous Republican delegates -- 1.5 percent black, 5 percent Hispanic, 32 percent female,  80 percent over 50, and nearly 100 percent over-fed  -- trying to appear jubilant, grinding to the heavy-metal rhythms that someone in the RNC hierarchy must have thought were a cool idea.   

We also had yet another recapitulation of the Arizona Senator's horrific five years in a POW camp, after being shot down on his 23rd mission over Hanoi back in 1967.

Indeed, if McCain somehow manages to win this election, he will have no one more to thank than Nguyen Van Dai, the 68-year old retired  Vietnamese colonel who actually launched the SAM missile that downed McCain's A-4 Skyhawk on October 27, 1967.

In any case, after watching the Republican Convention from mind-numbing start to finish, it is now crystal clear that,  apart from McCain's 41-year-old combat narrative -- supplemented by the less familiar narrative about Palin's decade-long  battle to combine procreation, small-time government, and the Assembly of God's "Plan for Alaska" -- the Republican Party has become the equivalent of the US housing industry.

It is intellectually bankrupt, with almost no new ideas. As former Reagan speech writer Peggy Noonan correctly put it, "They went for this, excuse me, political bullshit about narratives."

Worse than that, the Republican Party has also turned its back on many of its old favorite best ideas and brand values -- for example,  "small government," "balanced budgets," "non-intervention," "environmental protection," and "the US Constitution."

Palin's first 15-minutes of fame temporarily blinded many commentators  to this basic fact.  But even the most faithful die-hard Republican strategists now agree that, apart from the novelty of her Bat Mitsvah,  this abbreviated convention was a gigantic, expensive messaging mess -- and, on balance,  a gift to the hapless Democrats -- who are otherwise still fully capable of losing this race, even with a full-scale political and economic gale at their backs.

We'll explore the numerous contradictions in McCain's program below.

(c) SubmergingMarkets, 2008

MCCAIN's MIGRAINEIs His VP Choice a "Natural," Or An Eagleton/Quayle Combo?James S. Henry and Matthew Maly

By law the US is required to have a Vice President. Do we really want it to be this one?  

Many serious countries with Presidential systems -- like Finland, Germany, France, Ireland,  and South Korea -- have long since dispensed with the role of Vice President completely.

In the wake of the uproar -- indeed, shock and awe -- provoked by John McCain's  surprising selection of 44-year old Gov. Sara Palin of Wasilla, Alaska, on top of all the hoopla over Barack Obama's dissing of Hillary Clinton and our collective nightmare with "Darth" Cheney, some pundits have  suggested that it may be time for the US to follow the Finnish model and have no US Vice President at all.

With each day's new revelations about Gov. Palin's complex personal life and rather extreme views, some pundits have also suggested that she may quickly go the way of former Missouri Senator Thomas Eagleton, who lasted just two weeks as George McGovern's VP pick in 1972 -- or perhaps worse yet for the Republicans, a reprise of the legendary Indiana lightweight, Dan Quayle.

They are wrong.

Ms. Palin's nomination is a perfect demonstration of the incredible entertainment value that only the VP role can provide.

At a time when our economy is in serious trouble, state and federal budget deficits are out of control,  energy costs are unaffordable, the US Constitution is under attack, tax evasion is at a record level, we're still tied down in two major wars in Iraq and Afghanistan, tensions are mounting with Russia, social inequality is soaring, environmental calamities abound, Freddie Mac and Fannie Mae are about to fail, our education system is broken, the drug wars continue unabated, and millions of Americans lack jobs, decent housing and health care,  filling the VP slot with this more-or-less unknown quantity adds a nice soupçon of uncertainty to the entire situation.

It permits the whole nation to "double down" at once,  experiencing a kind of risk-taking that none of us would ever be able to achieve on our own.

This is precisely the kind of entertainment that government, at its best, is supposed to offer.

Indeed, Sara's selection is bound to make our peculiar "imperial electocracy"  the envy of the world -- once again!  

I. FINALLY A BABE!

Ms. Palin may not yet be a household name, but upon closer examination, her qualifications for the Vice Presidency --  just one bad biopsy away from the world's most powerful office -- are overwhelming.

First and foremost, just take a look -- this woman is a looker, a true MILF!

Carla Bruni, where is thy sting?  Angela Merkel, bite your knuckles!  

To paraphrase Joe Biden, Ms. Palin is an "articulate, bright, clean, good-looking" white woman.

And young! Why she was only 4 years old when 72-year old John McCain was bombing peasants from 30,000 feet, and 9 years old when he was released from the POW camp in 1973.

Indeed, Sara was first runner-up in the 1984 Miss Alaska beauty pageant, after being voted Wasilla Alaska's "Miss Congeniality."

True, back then,  Wasilla only had about 5000 residents. But so long as you were not a moose or an environmentalist,  Wasillans were the most congenial people on the planet. And Ms. Sara was the most "congenial" of them all.

Anyone who has ever attended public high school knows what that means - religion or no.

We think we can all trust "Bomber" McCain's judgment on this one.  John may have only met his VP choice two or three times,  but he is an expert on beauty queens.

His first wife Carol was a model  and  his second wife Cindy was Junior Rodeo Queen of Arizona in 1968. 

(Just in -- McCain has also  reportedly expressed interest in naming Sherri McNealley, the real winner of the 1984 Miss Alaska contest, as his future Secretary of State, but so far she's still MIA.

He's also expressed interest in appointing Wasilla's current mayor, Dianne M. Keller, to be his Attorney General, once she completes her law degree.)

In any case, unfortunately, this VP choice will probably not swing Hillary's disaffected female supporters to the McCain camp. Most of them are die-hard feminists who have serious issues with Palin's political views -- for example,  her opposition to abortion even in the case of rape or incest, and her unsympathetic description of Hillary Clinton as a "whiner."   (Where on earth would she get such an idea?)   

From a strictly male hormonal perspective, however, this may be the best VP selection in history -- precisely the kind of candidate we need to arouse our interest and get us up off the couch. After years of enduring so many talented but extraordinarily plain women in national politics (viz Senators Clinton, Hutchinson,  Mikulski, Boxer, and Feinstein, for example), -  finally the US Senate will be presided over by someone who still leaves something to the imagination.

II. SHE'S HYPER-PRODUCTIVE!

Sara Palin is a doer, not a talker.  Not only is she the Governor of Alaska, but she is a "hockey mom" with five children by birth (but no adopted ones, unlike the 72-year old McCain). These include an unmarried pregnant 17-year old, a son on the way to Iraq, and a 5-month old infant with Downs Syndrome. She hunts and fishes. She runs 5-10 miles a day.  She's under investigation by Alaska's State Ethics Commission for "using her public office to settle a private score." (Who could resist doing that?) 

When Sara was pregnant with her fifth child, her water broke while she was attending a Republican Governors' conference in Dallas, and she flew all the way back to a Wasilla Alaska hospital to have the child delivered at home.

That's precisely the kind of crazy, life-threatening behavior that we need much more of in the highest echelons of the US Government! Shock-Treatment Tom (Eagleton), we hardly knew ye!!!

Adding the burden of the US Vice Presidency to this full plate will no doubt give us a shining example of just how to precisely strike that delicate balance between family life, work life, and blind ambition -- as well as the many benefits of the "Just Say No" approach to birth control!

(c) Submerging Markets, 2008 

 

"ATTACK OF THE GLOBAL PIRATE BANKERS!"The Great White Sharks at UBS and LGTJames S. Henry

(Note: The following is an expanded version of our article that appeared in the July 22, 2008 online edition of The Nation, available here.)

"For what is the crime of burgling a bank, compared with the crime of building one?"
-- Brecht

The Hearing

Last week in Washington we got a rare look inside the global private banking industry, whose high purpose it is to gather up the assets of the world's wealthiest people and many of its worst villains, and shelter them from tax collectors, prosecutors, creditors, disgruntled business associates, family members and each other.

Thursday's standing-room-only hearing on tax haven banks and tax compliance was held by the US Senate's Permanent Subcommittee on Investigations, chaired by Michigan Senator Carl Levin, a regular critic of tax havens--except when it comes to offshore leasing companies owned by US auto companies. He presented the results of his Committee's six-month investigation of two of Europe's most venerable financial institutions - LGT Group, the largest bank in Liechtenstein and the personal fiefdom of Crown Prince Hans-Adam II and the royal family, with more than $200 billion in client assets; and UBS, Switzerland's largest bank and the world's largest private wealth manager, with $1.9 trillion in client assets and nearly 84,000 employees in fifty countries, including 32,000 in the United States.Kieber

The theatrics included videotaped testimony by Heinrich Kieber, a Liechtenstein computer expert in a witness protection program with a $7 million bounty on his head, for supplying a list of at least 1,400 LGT clients - some say more than 4,500 - to tax authorities in Europe and the United States; two former American clients of LGT, who took the Fifth Amendment; Martin Liechti, head of UBS international private banking for North and South America, who'd been detained in Miami since April, and who also took the Fifth; Douglas H. Shulman, our sixth IRS commissioner in eight years, who conceded that offshore tax evasion must be a "serious, growing" problem even though the IRS has no idea how large it is; and Mark Branson, CFO of UBS's Global Wealth Management group, who apologized profusely, pledged to cooperate with the IRS (within the limits of Swiss secrecy) and surprised the Committee by announcing that UBS has decided (for the third time since 2002) to "exit" the shady business of providing new secret Swiss accounts to wealthy Americans.

There were also several other potential witnesses whose importance was underscored by their absence. Peter S. Lowy, of Beverly Hills, another former LGT client who'd been subpoenaed, is a key member of the Westfield Group, the world's largest shopping mall dynasty, which has interests in and operates 55 US malls and 63 others around the world with a combined value of more than $60 billion, holds the lease for a new shopping mall at the reconstructed World Trade Center, has many other properties in Australia and Israel, and was recently awarded a L3 billion project for the UK's largest shopping mall, in time for the 2012 Olympics.

His lawyer, the renowned Washington fixer Robert S. Bennett, reported that Lowy was "out of the country" and would appear later, probably also just to take the Fifth. Perhaps he traveled to Australia, where his family is also reportedly facing an LGT-related tax audit. (Bennett's law partner, David Zornow, the head of Skadden, Arps' White Collar Crime practice, represents UBS's Liechti.)

Steven D. Greenfield, a leading New York City toy vendor and private equity investor whose business had been personally recruited by the Crown Prince's brother, went AWOL and did not bother to send a lawyer.

LGT Group declined to follow UBS's contrite example and also failed to appear.

Also missing from the roster were two prominent UBS executives: Robert Wolf, CEO of UBS Americas, who has reportedly raised over $500,000 for Barack Obama, bundled more than $370,850 for him this year from his bank alone, making UBS Obama's fifth-largest corporate donor, and had private dinners with the junior Senator from Illinois; and former Texas Senator Phil Gramm, vice chairman of UBS Securities LLC, a leading lobbyist for UBS until March, and until recently, John McCain's senior economics adviser. (In 1995, while preparing his own ultimately-unsuccessful race for the Republican Presidential nomination, Gramm commented memorably, "I have the most reliable friend you can have in American politics, and that's ready money.")

While neither of these UBS executives have been directly implicated in the tax scandal, both might reasonably be questioned about precisely what the rest of UBS in the States knew about the Swiss program, what it implies for US tax policy, and whether those who complain about UBS's knowing facilitation of tax fraud are just whining.

While they were on the subject of offshore abuses, the Senate might also have wanted to depose former top McCain fundraiser James Courter, who also resigned last week, after it was disclosed that his telecom firm, IDT, had been fined $1.3 million by the FCC for using a haven company in the Turks and Caicos to pay bribes to former Haitian President Jean-Bertrand Aristide.

The Cases

This crowded docket, combined with the UBS mea culpa, almost distracted us from the sordid details of the Levin Committee's actual findings.

UBS: UBS opened its first American branch in 1939, and for all we know, has likely been facilitating tax fraud ever since, but the Senate investigation focused only on 2000 to 2007. During this period, even as UBS was sharply expanding its onshore US operations by acquiring Paine Webber, expanding in investment and retail banking, it also mounted a top-secret effort to recruit wealthy Americans, spirit their money to Switzerland and other havens and conceal their assets from the IRS.

This program, aimed at people with a net worth of $40 million to $50 million each, was staffed by fifty to eighty senior calling officers and 1,000 client advisors. Based in Zurich, Geneva, and Lugano, each officer made two to ten surreptitious trips per year to the United States, calling on thirty to forty existing clients per visit and trying to recruit new ones by attending HNW (high net worth) watering holes like Miami's Art Basel and the UBS Regatta in Newport. By 2007, this program had garnered 20,000 American clients, with offshore assets at UBS alone worth $20 billion.

To achieve these results, UBS established an elaborate formal training program, which coached bankers on how to avoid surveillance by US customs and law enforcement, falsify visas, encrypt communications, secretly move money in and out of the country and market security products even without broker/dealer licenses.

Meanwhile, back in 2001, UBS had signed a formal "qualified intermediary" agreement with the US Treasury. Under this program, it agreed either to withhold taxes against American clients who had Swiss accounts and owned US stocks, or disclose their identities. However, when UBS's American clients refused to go along with these arrangements, the bank just caved in and lied to the US government. Eventually, it concealed 19,000 such clients, partly by helping to form hundreds of offshore companies. This cost the US Treasury an estimated $200 million per year in lost taxes.

In early July 2008, a US court approved a "John Doe" subpoena for UBS, demanding the identities of these 19,000 undisclosed clients. However, as of last week's Senate hearing, UBS has refused to disclose them. While it maintains that it is no longer accepting new Swiss accounts from Americans, it is also insisting on the distinction between "tax fraud" and "tax evasion," reserving full disclosure only for cases involving criminal tax fraud, which is much harder to prove under Swiss law. This means it may be difficult to ever know whether it has kept its commitments.

Ultimately UBS got caught, not by virtue of diligent law enforcement, much less the Senate's investigation, but by sheer accident. In late June, Bradley Birkenfeld, a senior private banker who'd worked with UBS from 2001 until late 2005 out of Switzerland, and then continued to service the same clients from Miami, pleaded guilty to helping dozens of wealthy American clients launder money. His name surfaced when his largest client, Igor Olenicoff, a Russian emigré property developer from Southern California, was accidentally discovered by the IRS to be reporting much less income tax than he needed to justify his $1.6 billion measurement on the Forbes 400 list of billionaires.

With Birkenfeld's help, Olenicoff succeeded in parking several hundred million of unreported assets offshore--including millions in accounts controlled by a Bahamian company that he said had been set by former Russian Premier Boris Yeltsin. Ultimately, Olenicoff settled with the IRS for $52 million in back taxes, one of the largest tax evasion cases in Southern California history, and also agreed to repatriate $346 million from Switzerland and Liechtenstein. In theory he faced up to three years of jail time, but--following standard US practice of going easy on big-ticket tax evaders who have no "priors"--he received only two years probation and three weeks of community service.

As noted, Olenicoff also gave up his UBS private bankers, including Birkenfeld, who plead guilty in June to facilitating tax fraud and is now awaiting sentencing--the first US prosecution of a foreign private banker in history. It was Birkenfeld's revelations, in turn, that led to the disclosure of UBS' program for wealthy Americans, and at least one-half of the Senate investigation.

The most important point is that this entire program would clearly have been impossible without the knowledge and approval of the bank's most senior officials in Switzerland, and probably some senior US executives as well -- although the Committee did not press this point. As former UBS CEO Peter Wuffli once said, "A company is only as ethical as its people." From this standpoint, we have reason to be concerned that UBS's behavior may repeat itself, so long as so many of these same senior executives remain in place.

LGT: For all its pretensions to nobility, Liechtenstein is well-known in the trade as the "place for money with the stains that won't come out," a flexible jurisdiction whose "trusts" and "foundations" are basic necessities for everyone from Colombian drug lords and the Saudi royals to the Suhartos, Marcoses, Russian oligarchs, and Sicilian mafia.

As detailed by the Senate investigation, LGT Group has certainly lived up to this reputation in the US market. It maintained a program that was, if anything, even more sophisticated and discreet than that of UBS for large fortunes. Among its specialties: setting up conduit companies in bland places like Canada, allowing clients to transfer money without attracting attention; leaving the designation of "beneficiaries" up to corporations controlled by potential beneficiaries themselves, a neat way of avoiding "know your customer" rules; rarely visiting clients at home, let alone mailing, e-mailing, or phoning them, certainly never from a Liechtenstein post office, Internet address, or area code; shifting the names of trust beneficiaries to very old folks just before death to make it look like a repatriation of capital was an inheritance.

In terms of precise trade craft, indeed, LGT had it all over UBS. It only really got caught red-handed when it tried to modernize and trusted Heinrich Kieber, a fellow citizen and IT expert ,who turned out to be either a valiant whistleblower, a well-paid extortionist (he was paid $7.5 million by the German IRS alone for his DVDs), or both.

"HEY OBAMA: I WANT MY $$ BACK!"Barack, Lieberman, Republicans, and Red-Dog Dems Vs. the U.S. ConstitutionJames S. Henry

Today the U.S. Senate voted 69 to 28 in favor of the FISA Amendments Act (H.R. 6304). This monstrosity not only grants complete retroactive immunity to leading telecommunications companies for violating our civil rights since 2001, but also opens the door to mass surveillance of US citizens without warrants, in blatant violation of the Fourth Amendment to the US Constitution.

Unfortunately, for those of us who had taken Barack Obama at his word when he promised on numerous occasions to oppose -- or even filibuster -- against this completely unconstitutional bill, he decided to retreat rather than fight.

In doing so, Obama broke ranks with Senators Feingold, Clinton, Schumer, Dodd, Biden,  Kerry, Reid, Byrd, Senator Kennedy if he'd been well enough to vote, and a majority of other progressive Senate Democrats, all of whom courageously voted against this horrific bill.

Instead, Barack Obama chose to stand with belligerent warmongers and crypto-Republicans like Joe Lieberman, dim-witted carnival barkers like Diane Feinstein, Evan Bayh,  and Jay Rockefeller, plus nearly every single Republican in the Senate -- except for John McCain and Pete Sessions, who did not even bother to vote on this critical issue.

THE OLD SOFT SHOE

In explaining his FISA bill vote, Obama cited several arguments that turn out upon closer inspection  to be completely disingenuous arguments, evidently concocted on the fly to conceal his political motives. 

First, he claimed the bill was an "improvement" over the original one proposed by VP Cheney and House Republicans. This sets the bar so low that it is buried in the sand.

Second, Obama  said he remained opposed to telecom immunity, and would vote to amend that provision in the bill -- as if this little bit of sugar excused the bitter pill left over after the amendment failed.

Third, and most important, Obama says that he is now convinced that unfettered wiretapping and email surveillance are needed to prevent yet another terrorist attack in the US.

In fact, as many other commentators have argued at length elsewhere, this kind of unfettered surveillance is neither necessary nor sufficient to prevent such attacks.

Furthermore, the very best evidence on 9/ll shows quite clearly that the Bush Administration's inability to prevent the attack had little to do with a shortage of intelligence, let alone any limitations on wiretapping powers under already-generous FISA procedures. Rather, the Bush Administration's failure to prevent 9/ll was due mainly to its incredibly incompetent -- nay, criminally negligent -- handling of abundant intelligence.

By reviving the old false dilemma that there is an intrinsic conflict between national security and constitutional rights, Obama has, in effect, just provided the Bush Administration a get-of -out-of-jail free card, and set back the quality of discourse on this issue at least six years.

And all this from a "professor of constitutional law!"

MORNING-AFTER REGRETS

This was only the latest in a series of sharp right turns and U turns that the Junior Senator from Illinois has made in the wake of his primary victory over Senator Clinton just six weeks ago.

On issues ranging from gun control and abortion to civil liberties, campaign finance, nuclear power,  the death penalty, and government support for faith-based initiatives, many of those who have worked hard for Obama  and contributed to his campaign from very early on are now having "morning after" regrets  -- you know, that awful feeling when you wake up next to someone you barely know, someone who looked a whole lot better the night before at 2 am on the dimly-lit dance floor, under the influence of hope, desire, grog, and near-sightedness.

Apparently now that Obama's the nominee-in-waiting, he pictures those of us on the Center/Left as the survivors of Oceanic Flight 815, marooned on his mysterious tropical island with nowhere else to go.

He also probably thinks that his vote today makes it easier to convince "independents" and even some "Republicans"  that he's not "soft" on national security.

In my experience, however,  the vast majority of people who still consider themselves "Republicans" as of 2008 are beyond redemption, at least this side of the Inferno. On the other hand,  many "independents" actually do give a hoot about the Bill of Rights.

The one thing we thought Barack was able to do was to stand up and defend basic principles in the face of the inevitable right-wing onslaught. 

For millions of those who  supported him because we thought he was the real "change" candidate,  this was clearly not the kind of "change" we had in mind.

A HILLARY REVIVAL?

Perhaps the Junior Senator from Illinois needs to be reminded that he is not quite yet the official Democratic Party nominee.

There's more than a month to go before the August convention, when 800 super-delegates are entitled to vote freely for the candidate they consider to be the most worthy. 

We've also just waked up from the six-month primary binge to learn that it may indeed be Hillary who not only has the best  positions on many of these key issues,  but also has the courage to stick by her convictions. 

During the long primary season, I had many heated arguments with Hillary supporters about the value of her vaunted "experience."  Now I finally understand what they were talking about -- not just that she has a Graduate Degree in Government 101, but that there's a solid core of values that she's defended for decades.

For my money, Barack, by comparison, is looking more and more like the Manchurian Candidate -- another ad hoc Madison Avenue concoction that arises out of our seemingly inexhaustible supply of hope, desire, grog, and near-sightedness.

At the very least, all this should be enough to earn Hillary Clinton the VP slot on the Democratic Party ticket. Clearly we need her to provide a rudder for this campaign -- rather than, say, the irascible Senator Webb, the ex-Republican from Virginia who also voted today in favor of the shameless FISA betrayal.

Of course to many of us,  Hillary's one glaring fault was her original position on the war. Now that Obama's positions on so many issues -- perhaps even his timetable for withdrawing from Iraq --  have been shown to be,  politically speaking, up for sale, that one error in judgment does not seem quite so fatal.

True, Barack and Michele still seem a little more personable and fresh than Hillary and Bill. But the bloom is definitely off the rose. We'll just have to see how well the charm holds up, once the Democrat Convention is over and Karl and the Rovettes open up their little bag of dirty tricks.

What's already clear is that on this matter of fundamental principle, the US Constitution, this Great Black Hope from Chicago has just turned out to have a very broad bright yellow streak right down the middle of his bowling shirt.

So, at least until Hillary Clinton joins him on the ticket, I for one am demanding my money back.

Meanwhile, for those of you who still care about the Bill of Rights, here's what the ACLU has to say about today's capitulation by the Democratic Party's latest addition to the ranks of "Beltway bandits:"

 

       

THE EDUCATION OF DR. PHIL GRAMMUBS Role Raises Basic Questions About McCain's Key Economic AdviserJames S. Henry

John McCain has long since admitted that he has a great deal to learn when it comes to economics.  But it turns out that his own chief economic advisor,  former US Senator Dr. Phil Gramm, has also needed rather expensive retraining lately. Unfortunately this has been acquired mainly at the expense of millions of US home buyers, honest taxpayers, former Enron employees, and would-be enforcers of our (bank-driven,  loophole-ridden) anti-money laundering laws.

GRAMM CRACKERS

Gramm, a somewhat goofy-looking, deceptively slow-talking business economist from Georgia, spent 12 years teaching economics at Texas A&M before getting elected to Congress as a conservative Democrat in 1978. By 1982 he'd switched sides, joining the Reagan Revolution to become of the Republican Party's most outspoken champions of deregulation, tax cuts, and spending controls -- so long as this didn't affect his pet interest groups.

In the next two decades,  Dr. Gramm was perhaps the Senate's leading proponent of  financial services deregulation, weakened restrictions commodity trading, credit cards, consumer banking, and predatory lending practices.  As chairman of the Senate Banking Committee from 1996 to 2000, he was a key author of legislation that eliminated most of the legal barriers between US banks, brokerages, investment banks, and insurance companies that had been in place since the 1930s. He was also a determined opponent of tougher IRS tax enforcement and a principal author of a 2000 law that exempted companies like Enron from regulation for online energy trading activities. This made sound economic sense. Phil's wife Wendy was a member of Enron's board, and Enron was Phil's largest corporate contributor in the 1990s.

In 2000-2002, both before and after 9/11, Phil also became the key opponent of tougher anti-money laundering regulations, and -- not coincidentally-- one of the largest recipients of contributions from the powerful financial services lobby. Among independent journalists, all this helped to make him known by a variety of sobriquets, including "Foreclosure Phil," "Slick Philly," and "The Personal Messenger from the Bank of Antigua."

U-BS-er

This track record stood Dr. Gramm in good stead when it came time to seek new employment in 2003, after the Republicans lost control of the Senate.  Naturally enough,  he gravitated toward his friends in the global private banking industry, whose noble calling it is to gather the assets of the world's wealthiest people and protect and conceal them from taxes, regulation, and expropriation, not to mention  embittered family members, ex-lovers and business partners,  and each other.   

Since 2002, Dr. Gramm has served as Vice Chairman of UBS Investment Bank, which is owned by UBS AG, the largest Swiss bank, the world's 16th largest commercial bank,  and the world's largest private asset manager, with more than 80,000 employees and offices in 50 countries.

Even after joining McCain's campaign during the summer of 2007, Dr. Gramm continued to serve as a registered Washington lobbyist for UBS  until April 2008, lobbying Congress to maintain weak restrictions on sub-prime lending and predatory lending.

BAD TIMING

In hindsight, Dr. Gramm's recent crusade for even more financial freedom turned out to be  ill-timed,  for several reasons.

First, this was hardly the moment for even more financial deregulation than the US had already experienced in the 1990s. After 2002, on Dr. Gramm's watch, UBS became one of the most world's aggressive banks, helping to foment and finance the sub-prime lending crisis that has already cost nearly three million Americans their homes, generated more than $250 billion in bank losses, and driven a $7.7 trillion hole in global equity markets.

Since November 2007 UBS alone has written off $37 billions in mortgage-related assets, the largest write-off for any bank.  In March 2008, Peter Wuffli,  UBS AG's CEO, was forced to resign, and its stock price plummeted to the lowest level since 2002.

Second, it now turns out that Dr.Gramm's  colleagues at the bank have also been up to their eyeballs in another dubious business:  helping more than 20,000 wealthy American tax cheats hide their wealth offshore and commit outright tax fraud, cheating the IRS out of tens of $billions in tax revenue.

BRINGING THE WAR BACK HOME (Part I.)Jordan C. Haerter, 19, Killed In RamadiJames S. Henry

"To save this world, you asked this man to die.
Would this man, could he see you now, ask why?"
-- Auden

Monday April 28th was an unusually chilly wet morning in Sag Harbor, New York, even for April, our "cruelest month."  But that didn't prevent more than a third of Sag Harbor's 2,200 year-around residents from lining the flag-lined streets and filling the Old Whalers' Church to capacity to mourn the loss of  US Marine Lance Corporal Jordan C. Haerter, age 19.

Even apart from the drizzle, there was hardly a dry eye in the village. The Rev. Steven Howarth offered a moving recollection of Jordan's short life, describing his popularity, impatience with book learning, determination to learn to fly at 16 and to join the military at 17, and his courage under fire. The minister asked the crowd to take comfort in the fact that Jordan would undoubtedly be granted eternal life in the after-world.

After the service, a long cortege made its way slowly to Oakland Cemetery, where Jordan Haerter was buried with full military honors, accompanied by his family, dozens of classmates, scores of police, firemen, Marines in dress uniform,  local American Legion members, and a squadron of motorcyclists from an organization called the Patriotic Guard. More than a hundred school children from Jordan's former elementary school stood in the rain across from the church, carrying little Chinese-made star-spangled flags and signs that read, "We will remember." Every local newspaper, radio station, and TV station in the Hamptons carried extensive coverage of the funeral and Jordan's story.

Everyone agreed that Jordan had behaved courageously in Iraq, and that his death was a tragic loss for the whole community.

No one was quite ready to ask the more uncomfortable questions: (1)  Why on Earth did this young man from Sag Harbor decide to enlist and serve in this lousy war, years after it had been discredited? (2) What responsibility do Jordan's mentors -- especially his teachers, guidance counselors, military recruiters, political leaders, and others in the community at large who were in a position to know better and influence his decision -- bear for failing to prevent this tragic mistake, including failing to speak out against this war?  (3) What can we learn from how Jordan served and died about the sensibility of the US military's current "surge" strategy in Iraq?

YET ANOTHER STATISTIC

Less than one week earlier, Jordan had become another statistic in the seemly-interminable Iraq War. At approximately 7:30 a.m. Baghdad time on April 22nd, Jordan and another Marine had been killed by a suicide bomber at a military checkpoint in Ramadi, the capital of Anbar Province in Iraq. Two Iraqi policemen and 24 other Iraqis were also injured in the incident.

According to military sources, Haerter, an ace rifleman -- his platoon's  "high shooter" --  was credited with shooting the driver of the bomb-laden truck before it detonated, quite possibly saving the lives of more than 30 Marines and Iraqis who were standing nearby.

Haerter became Sag Harbor's first Iraq War casualty, and indeed, its first combat fatality since World War II. He was also the first Suffolk County resident, 31st Long Islander, 203rd New Yorker, 4053rd American soldier (plus 186 contractors), and 253rd American 19-year old to die in Iraq since the US-backed invasion in March 2003.

Jordan had been in Iraq just one month, on his very first trip ever outside the US.

PREPARING FOR WAR

Jordan, a life-long Sag Harbor resident,  was  the only child of Christian Haerter and JoAnn Lyles, who had been divorced in the 1990s. Christian, 50, ran a water treatment business and JoAnn, with whom Jordan lived, worked at a building supply company. Jordan's grandfather Werner, a tool-and-die maker at the local Bulova Watch plant until  it closed in 1981, had emigrated to Sag Harbor from Germany by way of Canada in 1953. He died in 1994, when Jordan was four. 

Jordan was reportedly a well-liked, pretty conventional teenager with average-to-good grades and a bit of a willful streak. According to local newspaper accounts, his passions were for driving a small outboard motor boat on Peconic Bay, hanging out with his friends, driving his 1991 Toyota 4Runner on muddy back-trails around Sag Harbor, and eating his grandmother Lilly Haerter's spaetzle and home-grown blueberries.

There was also flying. According to a widely-repeated story about Jordan, at age 16, he'd started taking flying lessons on his own, even though he had not informed his parents and was not yet old enough to legally drive himself to airport.

Jordan was just as single-minded about joining the Marines. He and a high school classmate -- Josh DiStefano, one of his closest friends --  entered the US Marine Corps together in September 2006, just three months after graduating from Sag Harbor's Pierson High School, and one month after Jordan turned 18.

According to another close friend, Jordan had met a Marine recruiter at Pierson's annual "Career Day" that spring. Soon after, at a meeting with a high school guidance counselor, he stunned his mother with the news that he had decided to join the Marines. 

At the time Jordan was still just 17, so his parents still had to sign off on his four-year commitment to the Marines' delayed-entry program. They did so reluctantly, but without much opposition  -- they'd always encouraged Jordan to be action-oriented and to get a "real world" education. Jordan apparently used the enlistment bonus that he collected from the Marines to buy a new Dodge Ram pickup truck -- the same truck that his friend Josh would drive in Jordan's April 28th funeral procession.

WHERE WERE THE WARNING LABELS?

Jordan's reasons for joining the Marines are not entirely clear. Of course most young men his age are now avoiding military service like the plague. That is one reason why there has  been a crisis in military recruiting.

This, in turn,  is partly because the five-year old Iraq War is by now widely regarded by most Americans as an unmitigated fiasco, none of whose official justifications -- WMDs, Saddam's supposed ties to Al Qaeda, "democratization," or even the value of controlling Iraq's oil supplies -- have held up.

At best we are now down to a faith-based argument about whether things will be more  or less disastrous if we exit the country now rather than at some ill-defined time in the future -- not exactly an inspiring ground for enlisting.

What is clear that Iraq is a very dangerous way to spend one's youth. Not only have there been more than 4075 US military fatalities, but there have also been at least 30,000 Americans physically wounded, 3000-5000 of whom have injuries so severe that they probably would have died in earlier wars that lacked today's rapid medical evacuations.

According to a RAND study released in April, 31.7 percent, or 520,000 of the 1.64 million American military personnel who have served in Iraq or Afghanistan since 2001 also suffer from "post-traumatic stress syndrome" (PTSD), depression, and/or "traumatic brain injury" (TBI) induced by explosive devices. These "less visible" injuries have not only contributed  to a surge in suicides by US military personnel -- an estimated 6000 suicides in 2005 alone, growing at 20 percent in 2006-2007, with more than 12,000 attempts each year. Thus the number of  Iraq-related suicide deaths in the American military far exceeds the number of combat deaths.

These mental injuries also impose a high cost on the families and friends of returning veterans, especially given the acute shortage of psychiatric care for returning veterans and their families. The Rand study found that only about half of those with such conditions were getting treatment, and half of those who have been treated got inadequate treatment.

Some cynics have even suggested that the military's understatement of these problems is partly due to the fact that the US military is so dependent on "voluntary" reenlistment that it is afraid to focus on PTSD and TBI  -- both of which are amplified by the long tours of duty that troops are facing.

There is also evidence that such battlefield risks are systematically understated by recruiters, who are under severe pressure to fill quotas. Certainly there are is nothing comparable to the hazard warnings, "truth in lending," and SEC  anti-fraud disclosure notices attached to, say, cigarette packages, drug prescriptions, car purchases, mortgages, and private equity investments that apply to these life-and-death enlistment decisions by 17-19 year olds. This has lead to widespread demands for new "truth in recruiting" standards, and restrictions on recruiter access to the nation's public high schools.

Finally, from an economic standpoint, military service -- now entirely voluntary, except for the "stop-loss" orders that has affected more than 80,000 reservists -- is simply not very competitive, as discussed below. Unless a student has virtually no civilian job alternatives, and either can't get into college  at all or can't afford to go, the military is likely to be a losing economic proposition, unless it somehow plays a role in some longer-term career plan (see below).

WHAT WAS HE THINKING?

As noted, Jordan's family says that his decision to join the Marines came as a complete surprise.

While other family members had served in the military, there was no tradition of volunteering for duty in Jordan's family. His grandfather Werner, whom Jordan had known as a child, had been drafted into the German Army in World War II, and his other grandfather John Lyle had been drafted into the US Army. Jordan's father Christian had never served.

He spoke no foreign languages and,  as noted, he'd never traveled outside the US. In high school, he'd shown no particular interest in world events or history. Although he appears to have supported the War after enlisting, he'd never expressed strong feelings about the Iraq War before doing so.   

From age five on, Jordan had enjoyed playing shoot-'em-up games on the computer, which he would later actually compare with some of his experiences in the military. He'd also insisted that his Halloween costumes, meticulously designed by his mother, be accurate copies of those worn by soldiers in America's Revolutionary War. But such interests didn't differ all that much from those of any other Sag Harbor boys.

Nor does it seem that Jordan's decision to enlist in the Marines for the minimum term of four years strictly  a matter of short-term job opportunities. True, he had probably received a small ($10,000 or less) signing bounty for enlisting. At the time of his death, however, Lance Cpl Haerter's "E-3" pay grade was earning him just  $19,044 a year before taxes, plus food and housing allowances. By his fourth year in the service, depending on his rank, that might have increased to $25,000 per year at most -- less than $12 per hour. But that wage rate should have been easy for Jordan to beat in the Hamptons.   

 

THE CLINTONS ARE STILL AT LARGE!Part I. BLACKENING OBAMA, EVEN IF IT ELECTS JOHN MCCAINJames S. Henry

For six months now, partly under the influence of Senator Barack Obama's refreshingly naive quest for a higher level of discourse in American politics, we've resisted the temptation to "go negative" on his arch-rival -- "Sir Hillary" Diane Rodham Clinton, the relentless one-and-one-third term New York Senator,  two-term First Lady, five-term Arkansas Governor's wife, and life-long honorary Queen of the State of Blind, Unbridled Ambition.   

Along the way, we've watched aghast as some of our closest associates -- people who describe themselves as "Democrats" and "Hillary supporters," but really turn out to be Obama haters who threaten to vote for John McCain in November if Hillary is not the Democratic nominee -- have tried nearly every trick in the book to tear Obama down.   

BLACK FACE

For example, on January 4, 2008,  just one day after the Iowa primary, one such pundit was overheard suggesting to members of Sir Hillary's inner circle that the best way to undermine Obama's surprisingly broad appeal would be to "blacken" him. 

At the time, Hillary's campaign was still reeling from her third-place finish in Iowa, based on the fact that Barack had done so well across conventional racial, ethnic, gender, and age boundaries.   

Evidently the advice was taken. This explains Hillary's odd, a-historical comments on January 7 in New Hampshire, when she compared Lyndon Johnson's role in securing US civil rights legislation during the 1960s to that of Martin Luther King, Jr. ("It took a President to get it done.") 

(Actually it took a mass protest movement, based on years of organization and lots of blood, sweat, and tears, to get it done. Hillary's inaccurate recollections about that period may be have been due to the fact that in 1964, at age 17, she had spent her time campaigning actively for Barry Goldwater, the Republican Presidential candidate who opposed the US Civil Rights Act.)

This cynical tactic also helps to explain Bill Clinton's patronizing remarks in South Carolina on January 26, when he compared Obama's campaign to the Rev. Jesse Jackson's 1984 and 1988 Presidential bids -- as if Obama were just another "black niche" candidate. 

The point is that all these statements were deliberately made,  regardless of their merit, because the Clintons wanted to provoke rebuttals from prominent black celebrities like the Rev. Jackson, the Rev. Al Sharpton, and Spike Lee.

Bill and Hillary knew full well that this might well cost them votes in a handful of states like South Carolina, where blacks are a majority of registered Democrats. Indeed, they were both widely criticized for their remarks.

However,  in their cynical calculus, what really mattered was that the official black response would remind white voters elsewhere that  while Senator Obama might seem to be "articulate and bright and clean" (in Joe Biden's memorable description),  he's really just (as one anonymous Clinton campaign adviser put it) "the black candidate."

DIE HARDISM...OR WORSE?

In the short term, many observers thought that such cynical tactics had backfired. Indeed they may have. Contrary to Sir Hillary's best laid plans, Barack not only survived "Super Tuesday" on February 5, but went on to acquire a commanding lead in delegates.

Even after last week's machine-state primary in Pennsylvania, Barack still leads by at least 133 delegates. If the latest polls in the remaining nine primaries hold up,  Hillary would need  to capture an improbable 73 percent of the remaining unpledged "super delegates" to win. (Click on the chart below.)

Unfortunately, this situation appears to have only redoubled the Clintons' willingness to engage in McCarthyite tactics, including  race-baiting and "guilt by association,"  regardless of the impact on the Democratic Party's chances in November.

The Clintons are notorious for pursuing their own selfish interests at the expense of the Party (just ask Bill Bradley, Al Gore, and John Kerry). But this spectacle is setting new records.

These tactics include trying to smear Senator Obama with the radical views of the Rev. Wright, the Rev. James Meeks, or even the Rev. Louis Farrakhan; reminding people of the Senator's admitted occasional drug use 25 years ago (as compared with Gov. Bill Clinton's denied, much heavier use of cocaine during the same period); and attacking Obama for having a few corrupt contributors in Chicago ("...NOT Chicago!!!") like Antoin "Tony" Rezko (compared with the Clintons' legions of corrupt contributors); and associating Obama with former Weatherman and now Distinguished University of Chicago Prof. William Ayers, who was never convicted of anything (while Bill Clinton had sought fit to pardon two former Weathermen who'd been convicted of involvement in terror-related crimes.)

The smarmy tactics also include promoting the idea that Obama can't possibly appeal to white working -class voters, Hispanics, Jews, or Catholics in battleground states, simply because.... well, you see, the country may just not be "ready" for a "black" President -- whatever those terms mean.

Of course the Clintons argue that dwelling on such material now is justified because Karl Rove and the Republicans would only focus on it later. This is more self-serving flim-flam. The fact is that Hillary & Co. have run a terrible campaign, and are now reduced to throwing bombs rather than talking about real issues.

If the Clintons had not under-estimated Obama so badly, they could have discussed all of this character-assassination material long ago. By mounting the intense diatribe so late, and continuing the race well past the point of diminishing returns, they are wasting precious attention and resources that ought to be devoted to attacking the real enemy.

SNATCHING VICTORY?The Democrats Descend Into the Politics of Mutually-Assured Destruction James S. Henry

On an occasion of this kind, it becomes more than a moral duty to speak one's mind. It becomes a pleasure.

-- Oscar Wilde

Isn't this a pretty picture? 

On the one hand, after seven long years of catastrophic incompetence in Washington, our country is literally begging for new ideas and leadership, especially from the erstwhile Party of the Opposition.

Recent polls show that an unprecedented 81 percent of Americans believe their country is "on the wrong track," while President Bush's approval rating has sunk to an all-time low of 28 percent. There is a growing popular demand for decisive government action on any number of issues that have been festering while "Nero" Bush and "Imperator" Cheney have been fiddling.

THE DEMAND FOR CHANGE

John "McSame's" feisty personality notwithstanding, this is not the ideal moment to be plumping for free-market solutions, let alone more tax cuts for the extremely rich,  hands-off deregulation for our wondrous mortgage banking, health care, automotive, airlines, handgun, coal-fired utility, and social insurance industries, and the unending prospect of more unilateral, open-ended wars.

No -- this is a time that cries out for smart, can-do, progressive, and -- yes -- youthful government.

Its precise slogan should be:  Yes, we had better -- or else.

 
REAL ISSUES

At the risk of depressing our readers, among the many tough issues that demand this  pragmatic approach right now are the following:

>Containing the mortgage crisis and the deep recession that it has produced.
>Withdrawing from Iraq as soon as possible, while discouraging Iran from filling the void.
>Intensifying the hunt for Bin Laden, without losing Pakistan and Afghanistan to a Taleban revival.
>Protecting our nation against the genuine on-going global terrorist menace.
>Fixing our high-cost, inhumane health insurance system once and for all.
>Biting the bullet on climate change and global warming.
>Rebuilding public education and college assistance.
>Guaranteeing the financial integrity of Social Security and Medicare.
>Restoring civil liberties and reversing the drift toward a state of siege.
>Reviving American's reputation in the world and its relations with key allies.

> Revising our increasingly disfunctional "free trade" agreements.
>Reviving efforts to prosecute corrupt politicians, war profiteers, and big-ticket tax evaders to the limits of the law, as opposed to granting them Presidential pardons.
>Slashing government waste, especially the bloated $800+billion "total war"  budget and the huge agro-industry subsidies that are literally wiping out poor farmers all over the world. 

All together,  this adds up to a demand for nothing less than at least a decade of intense regime change right here at home.

John McCain: "No We Can't" Reviving The "Daisy" Strategy in 2008 James S. Henry

My friends:  we have spent far too much time and treasure on the prolonged, intense, but ultimately intra-familial and largely issues-free beauty contest between Hillary Clinton and Barack Obama.   

Now that that contest is finally drawing to a close, it is time for us to focus like a gamma-ray laser on the real enemy in the fast-approaching November 2008 Presidential election -- Senator John McCain, the bellicose 5'7" septuagenarian fly-boy from Arizona.  

What is it about Air Force-trained Republican Senators from Arizona, anyway? 

In many respects this year's race recalls 1964, when Senator Barry Goldwater, another war-mongering, outspoken, short-tempered Air Force veteran and Republican Presidential candidate from Arizona,  scared the B'Jesus out of the entire country with his threats to use nuclear weapons preemptively ("Let's lob a nuclear bomb into the men's room at the Kremlin").

Usually such pro-war designs are kept well hidden until after the election, as the Bush Administration did in 2000 --  and, indeed, as President Lyndon Johnson did in the 1964 election, when he made Goldwater out to be a mad-man (the "Daisy" strategy," after the notorious political ad by that name: Download 20_johnson_64.mov). Johnson conveniently failed to tell the public during the election campaign that he was also a mad-man, already planning to park more than 500,000 US troops in Vietnam within a year.   

In any case, not since 1964 have the Democrats faced a Republican candidate who is as openly pro-war as John McCain is. This should provide them with  a remarkable opportunity for party unity,  a clear brand, and victory in November.     

However, it is very important to reunite the Party and get moving. McCain is already attracting fuzzy-minded support from  moderate Democrats and independents who are beguiled by his tough-guy "maverick" image -- especially lower middle-class white males who are (a) bearing the brunt of this year's  economic downturn, and (b) not entirely comfortable with voting for either  Barack  ("the black guy"_ or ("that woman") Hillary. Oddly enough, many of these folks also claim to be anti-war.

Partly because the Democrats have been so distracted by their own interminable (..19 debates??!...six months of primaries?) nominating process, the most  telling criticisms of John McCain have so far been provided by his enemies among the Very Far Right Ranters (VFRRs), including leading professional ranters  like Anne Coulter, Rush Limbaugh, and James C. Dodson. This crew complains that McCain doesn't quite pass muster on pet right issues like undocumented immigration, gay marriage, and tax cuts. Ironically, Barry Goldwater himself would have also failed these same litmus tests. Indeed, if the 1964 Presidential election had been fought on social issues and the economy rather than on war and peace, the former Air Force Major General from Arizona would most likely have carried many more states than the 6 that he did carry. Defeating Goldwater in 1964 may not have absolutely required the war-mongering issue, but it certainly helped.  

Some conservatives have also criticized McCain's preference for voluptuous office assistants and fly-boy-style socializing.  From their angle, he also lacks appropriate Christian zeal, was once involved in the shady "Keating Five" savings-and-loan scandal,  and has an intermittent work ethic.

Indeed, in the last five Congresses he missed an incredible 21 percent of all Senate votes, including 56 percent in the current 110th Congress. This high rate of absenteeism is also no doubt partly due to the Presidential race, McCain's long-standing battle with cancer, and the fact that at age 71.5,  he is already the oldest living leading Presidential candidate ever, having already lived longer than over half of all US Presidents.

The real problem for Democrats and independents, however, should not be McCain's lack of religious fervor, moldy old rumors about the Keating Five or extra-marital relationships, his age, or even his absenteeism, unless that is due to health problems.

And after this year's endless bouts of the smooth-talking ignoramus the Rt. Reverend Huckabee, the lack of religious zeal and ideological purity in a leading Republican candidate is really rather refreshing.

No -- our core problems with John McCain are twofold. First, whenever he actually manages to show up in the Senate and legislate, the  results are usually far to the right of what most Democrats, independents, and sensible people in general stand for  -- and what both Barack and Hillary, in particular,  stand for.

For example,  while Barack and Hillary have both earned lifetime voting scores from the American Conservative Union (ACU) of just 8 percent, McCain's  lifetime score is 82. While this may be insufficient for VFRRs like Limbaugh and Coulter, it is well above the tail end of the Republican Senate distribution.

McCain may have mellowed slightly in recent years -- in 2006, for example, his ACU score was just 65.  However, this is still higher than any Senate Democrat, and it is more than three times the 17 rating scored by McCain's turncoat friend Joe Lieberman.  Indeed, on a wide range of key issues that progressives and independents should really care about --  from Supreme Court nominations and extending Bush's tax cuts for the rich to the State Children's Health Insurance program, setting a timetable for withdrawal from Iraq, and  bankruptcy reform, and even on his own trademark issues like campaign finance, immigration, the definition of torture, and the Bush tax cuts, the senior Senator from the Grand Canyon state is usually a big disappointment.   

Second, and even more important, on the most crucial issue of our time, the conduct of present and future wars,  McCain appears to have quite frankly gone completely off the rails.

Misguided Democratic Party strategists like John Podesta, Mark Penn, and Bob Schrum notwithstanding,  this issue of the war, and not just "the economy" or "health care," should be at center stage for this election. 

This is precisely because, on the one hand,  military affairs are supposed to be McCain's core competence, and because, on the other hand, he has gotten this central issue completely wrong.      

As discussed below, while millions of Iraqis continue to vote with their feet and either flee abroad or stay there, McCain just keeps repeating the big lie that "the surge is working."

In fact the main reasons that US military casualties,  and, to a lesser extent, Iraqi civilian casualties have dropped is not because of "the surge," but because (a) Baghdad has been ethnically cleansed, and is now a sharply divided, Shiite-dominated enclave;  (b) Sunni insurgents, fed up with al-Qaeda, have decided temporarily to ally with the "occupiers" and assert control over the "foreign terrorists;" and (c) Iran has temporarily decided to cut down on its support for attacks on US troops, in the interests of undermining the "neocon" coalition in the US, Saudi Arabia, and Israel that is plumping for a McCain-style bombing. (See the video below).

None of this implies that the surge has achieved anything more than a kind of stop-gap temporary stabilization of this very ill patient's condition -- a Bush Adminstration effort that just happens to coincide with a Presidential election year. Since it is unlikely that the surge is sustainable, in terms of troops and dollars, and since its benefits are likely to be temporary, McCain should be compelled to explain on every possible occasion whether the slim increased chance that a Republican president will get elected is really worth the price.

But McCain is at least consistent. Apparently he also still believes that the Vietnam War could have been won with just a little more persistence and less interference from Washington.
 

For all his putative military experience, therefore,  in the grand tradition of Major General/ Senator Goldwater and Air Force General Curtis {"Bombs Away") LeMay,  in his 20 hours of flight time over North Vietnam, and his five years of captivity, apparently John McCain never managed to learn the fundamental lesson that millions of ground troops have learned the hard way -- that guerrilla wars, and, indeed, wars on terror,  are ultimately won or lost by political and economic development, not by military tactics. And, furthermore,  that the blind over-application of military force to a hostile civilian population by an occupying army and Air Force can actually increase enemy resistance much faster than it can be controlled.

Far from repeating the 2004 Kerry campaign's central mistake and focusing this campaign only on the US economy, therefore, it will be vital for us to keep McCain's extraordinary appetite for war in plain view.

The more general question of why so many Air Force professionals -- including, for example, the Israeli General who was widely blamed for mismanaging last year's conflict with Hezbollah in Lebanon -- tend to systematically overestimate the efficacy of military power, will be left for another time. Plainly this is not just an Arizona malady.

 For the interested reader, the following is a smattering of sundry provocative materials with respect to Senator McCain. Not all of it is worth taking seriously --- some of it even resembles the scurrilous attacks on John Kerry's war record in 2004,  when McCain, it should be recalled, came to Kerry's defense.  We've presented it here in the interests of of airing it out and redirecting our attention to the clear and present danger of a Republican Party that, even in its death throes,  may still be able to unite around this "great white hawk" from Arizona. 

Saddam's Demise - Do You Really Feel Safer?"James S. Henry

(Note: the following essay first appeared on SubmergingMarkets on December 13, 2003.)

Printable PDF Version Cynics say it was always just a matter of time. Indeed, the real story is not about Saddam Hussein’s capture, but about how he managed to survive so long, given all the forces that were arrayed against him.

There is also the dismal possibility that, despite his capture, the Iraqi resistance will continue to escalate its attacks, especially on other Iraqis. (Indeed, at least in the first few days after Saddam's arrest, this is precisely what has happened. The arrest has, however, resulted in some short-term gains against the resistance. We can only hope that these prove to be longer-lasting than the impacts of the deaths of Saddam's sons last summer.)

Furthermore, the tactics that were applied to "get him" may be largely inapplicable to "real terrorists" like Osama bin Laden and Ayman Al-Zawahiri, who have already targeted thousands of US civilians, yet remain free. From their standpoint, on the one hand, they never got very much (or perhaps any -- the evidence is very sketchy) support from Saddam, and as President Bush has admitted, there is no evidence that he was involved in 9/11. On the other hand, they are probably delighted to see the US tied down in this costly military venture in Iraq, rather than focusing on them. (The recent upgrade of the US terror alert status to "high" (orange) is not inconsistent with this interpretation. We hope that we are proved wrong.)

Finally, of course, the direct costs of this "arrest" have indeed been astronomical. As of this week, this most recent US-backed effort to invade Iraq and eliminate Saddam has, according to most recent estimates, cost the lives of more than 543 Coalition troops, 8-10,000 Iraqi civilians, another 8-10,000 Iraqi combatants during the first month of battle, and at least that number of combatant lives since then. The number of Coalition wounded is now at least 3100, while the number of Iraqi wounded may be conservatively estimated at 50,000 (about 2 times the minimum number of fatalities).

In addition, it now looks as if former Bush economic advisor Larry Lindsey was absolutely right: the cost of the Second Iraq War and the reconstruction to follow will easily reach $166-$200 billion by the end of 2004. By comparison, the USG's entire foreign aid budget in 2004 for all other countries is less than $20 billion.

Compared with all these costs, it is now clear that the best way to have avoided Saddam's menace would have been to have not assisted his rise to power in the first place in the 1960s and 1970s, or at least to have not armed him to the teeth in the 1980s, or at least to have not prevented UN coalition forces from removing him in 1991, after the Gulf War.

In short, while it would be perverse not to celebrate Saddam's capture, this development is surely no panacea, and the "opportunity costs" of abetting Saddam's rise and fall appear to have been very high. Let's hope that the US at least learns something from this very expensive tutorial about the long-run costs of coddling dictatorships.

***

Bolivia's Growing Regional ConflictJames S. Henry and Donald K. Ranvaud

The new year is already off to a turbulent start in Bolivia. During the week of January 7 to 15, up to six thousands supporters of President Evo Morales' MAS party-- mainly cocaleros from the Chapare coca-growing region,  campesinos, and indigenous groups --  showed up in Cochabamba,  Bolivia's third largest city of 800,000,  in the country's center. 

They had come to demand the resignation of Cochabamba's   right-wing Governor, Manfred Villa-Reyes, who has become an outspoken supporter of the "autonomista" movement, which is seeking greater "states rights" for the country's nine provinces -- especially the wealthier, "whiter" eastern and southern provinces of Beni, Pando, Santa Cruz, and Tarija, where most of Bolivia's natural gas and richest farms are located.

As shown in this exclusive video footage from Cochabamba (See Parts I and Part II). shot by Bolivian film crews working under the direction of  our colleague, award-winning Hollywood producer Donald K.Ranvaud (The Constant Gardener, City of God, Central Station, etc.), the MAS supporters encountered a fierce reaction from the city's middle-class residents and pro-autonomista forces, including a crowd of more than well-organized thousand stick-waiving people who reportedly attacked the cocaleros and campesinos aggressively on January 13th. In the ensuing conflict, at least two people were killed and more than 150 were injured.

By Saturday January 14th, calm had returned to the city. Governor Manfred returned from Santa Cruz, where he had apparently fled out of concerns for his own safety, and  Evo Morales also returned from Nicaragua, where he had been attending Daniel Ortega's inauguration. Steps have been taken on all sides to pacify the situation.

However, as we'll discuss below, the potential for renewed conflict is very high. This is not only because none of the fundamental economic and political causes of the conflict have been addressed. It is also because on all sides,  Bolivia's political leaders have not exactly shown the capacity for compromise and the maturity that will be essential to avoid a "lose lose" outcome for Bolivians of all backgrounds and social classes.   

Skating on EcstasySpecial Treatment for An Israeli Drug Lord?James S. Henry

While most major US drug dealers get prison terms of at least 15 years to life for selling a few kilos of coke or a few hundred pills of the Class A illegal drug Ecstasy (MDMA), the world's ecstasy king-pin, Israel-based Russian mobster Ze'ev Rosenstein, has apparently just learned to skate.    

Rosenstein is reportedly one of the "godfathers" in Israel's burgeoning criminal underworld  --  one of "the worst of the worst" among global drug dealers, according to a former US attorney. 

Long sought by Israeli police and the US DEA,  Rosenstein was finally arrested in Tel Aviv in November 2004. At the time, the arrest was hailed as a major victory over transnational crime by former US Attorney General John Ashcroft:

"The arrest of Ze’ev Rosenstein is the result of extraordinary close and creative cooperation between U.S. and Israeli law enforcement. It is a significant step forward in our common struggle against trans-border organized crime and international narcotics trafficking that will make both of our countries safer."

After two years in a maximum security cell, in March 2006 Rosenstein was finally extradited to Miami, charged with having organized an international drug gang that reportedly exported millions of tabs of MDMA from Netherlands-based labs to the US -- including the 800,000 pills that were seized in a New York apartment in July 2001.

Rosenstein, who was  also accused of importing Colombian hit men to conduct a hit on the rival Alperon crime family, faced at least 14 years to life in imprison. In 2004, one of his top lieutenants, Shem Tov Michtavi,  had received  a 20-year sentence for lesser miscondut  -- although in November 2005, the US Court of Appeals for the 11th circuit  reduced it to a maximum of 16 years. With Rosenstein finally in US hands, many thought that he'd probably spend the rest of his days in a Miami prison cell, not far from Panama's former dictator Manual Noriega, who is serving 35 years for drug trafficking.

HOW DID GENERAL PINOCHET GET SO RICH?James S. Henry

Most assessments of General Pinochet, pro and con, acknowledge his responsibility for thousands of grevious human rights violations. But there is growing evidence that his criminality did not stop there -- as it rarely does when governments are vested with unfettered authority, whether in the name of “national security,” religious truth, or just raw personal power.

As noted in our lead article on the General’s legacy, only in the last three years have historians come appreciate just how far-reaching and systematic was  his regime's involvement in criminal activity -- partly just because its political opponents had been systematically eliminated, so that there were few limits on Pinochet's power. 

As we’ll see, Pinochet was no exception to the “absolute power corrupts” cliché.

Indeed, there is strong evidence that leading members of his regime were deeply involved in a wide range of crimes for profit, including diversions of public funds, tax evasion, money laundering, bribery, illegal arms exports, falsification of identity documents, drug trafficking, money laundering, and murder-for-profit.

There is also strong evidence that “mi General” and his family profited handsomely from such crimes.

From this angle, Pinochet’s death in early December probably saved him and his family from convictions,  stiff penalties and fines in the six criminal prosecutions and more than 300 civil suits still pending against him – for charges ranging from the misuse of public funds and tax evasion to torture and murder. 

But at least there was a modicum of justice. The General’s extensive crimes apparently contributed to Chile's decision to deny him  an official state funeral.  And -- the ultimate insult -- the Chilean Army also returned his ashes, refusing to bury them at the huge Lenin-like tomb that he’d built for himself at the Escuela Militar.

SOURCING THE MONEY

This evidence provides the key to the puzzle posed by all the recent revelations (especially since the US Senate Permanent Investigations Committee's July 2004 report on Riggs Bank) regarding the large personal fortune that Pinochet and his family accumulated during his 17-year reign – now estimated at at least $31 million in US and Swiss bank accounts and total family wealth of at least $100 million -- plus as much as $211 million more if the October 2006 allegations about 9.62 tons of Pinochet gold at HSBC hold up in the on-going investigation.

BEST BUDDIES

The evidence about Pinochet’s arms deals also helps us to understand another one of his many interesting attributes – why the Baroness Margaret Thatcher, in particular, was so “deeply saddened” by his death.

It turns out that Pinochet was no stranger to arms deals involving British companies like British Aerospace, Rolls Royce, and Royal Ordnance  -- companies that Mark Thatcher, the Baroness' only son, had also worked for as a highly-paid  "intermediario" on huge, lucrative arms deals (for example,  the $40 billion 1985 "Al Yamamah" aircraft deal, which involved hundreds of millions in payoffs. ) Indeed, when Pinochet was detained in London in October 1998, the reason he'd gone there in the first place was not his "health," but to facilitate another arms deal.
 
SCHIZOPHRENIA

Curiously, while even the General’s most ardent admirers acknowledge his many human rights violations, they have been much more reluctant to admit there were other criminal activities.

This is partly because Pinochet carefully cultivated the image of being -- in contrast to all other modern dictators, especially those from Latin America -- an austere Prussian type who eschewed personal wealth and served his country out of sheer dedication to Deus, patria, y honor. We recall all the appeals for help with his medical and legal bills when the General was interned in London in the late 1990s –  appeals that some of his more middle-class followers responded to by dipping into precious life savings and selling off the family jewels.

This schizophrenia about Pinochet’s crimes also derives from the sharp distinction that many of his followers draw between selfless and venal crimes.  In their view -- and, at least initially, that of Chile’s Catholic Church -- even his worst crimes against humanity may have been justified in the name of la causa superior – saving Chile from “godless communism.” 

On the other hand, crimes that smack of personal enrichment, the exploitation of arbitrary power, or insider influence are supposedly taboo.

In practice, of course, these boundaries tend to blur, especially with a regime that held absolute power for nearly two decades – and retained many “protectors” long after that.   

WEEKLY PUZZLER: "WHAT MADE GERALD R. FORD SO TRULY GREAT, ANYWAY?"James S. Henry

Some cynical pundits may have been surprised at the outpouring of grief associated with the passing of Gerald R. Ford, the 38th President of the US, who died of natural causes at the age of 93.

Ford had been an ex-President longer than than any one except Herbert Hoover, and had survived two assassination attempts. So some people may have just assumed that he was one of the handful of Yale Law graduates who are truly immortal, and were shocked to discover the truth. 

However, the pundits would be correct to point out that Ford was not high on the standard roster of reknowned US Presidents. 

To begin with, of course, he was never actually elected President. His Presidency was the product of our felicitous criminal justice system. He ascended to the Vice Presidency in 1973 by replacing one felon, and then to the Presidency in 1974 by agreeing to pardon another one.

There were also,  to be sure, relatively few truly memorable positive acts by President Gerald Ford -- and many of those are best forgotten, as we'll see below.

Despite these concerns, we believe that a very strong case can be made for the proposition that Gerald R. Ford was one of our finest -- if not the finest - recent Presidents. This is not so much because of what he did, as what he did not do -- especially in comparison with other, much better-known post-war US Presidents.

Saddam's Midnight LynchingOutsmarting Ourselves Again?James S. Henry

I'm certainly no palpitating, hand-wringing absolutist opponent of capital punishment in the abstract. If there were any evidence whatsoever that the death penalty's  deterrent effects outweighed its high costs, brutalizing impacts,  and other perverse side-effects, and that it was not just someone's idea of "I-4-I"/ Old Testament/Koranic personal justice, then by all means -- bring on the scaffolds and start selling ring-side seats! 

However, especially in the wake of last week's extra-legal fiasco of Saddam Hussein's midnight lynching by a Klan-like band of hooded henchman for Iraq's increasingly partisan Shiite-dominated government, it is worthwhile reminding ourselves that: 

(1) The vast majority of countries that are "civilized" and "developed" have long since abolished the death penalty.

These include all First World/ OECD countries except the US (38 out of 50 states), Japan, and South Korea -- Austria, Australia, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland,  Israel, Italy, Mexico, Netherlands, New Zealand, Norway, Poland,  Slovak Republic, Sweden, Switzerland, Turkey and the UK (plus Vatican City, San Marino, Monaco, and Andorra). 

(2) Most enlightened/ mid-level developing countries have also abolished the death penalty. 

These include Albania, Azerbaijan, Bolivia, Bosnia, Brazil, Bhutan, Bulgaria, Cambodia, Chile, Colombia, Costa Rica, Croatia, the Dominican Republic, Ecuador, El Salvador, Estonia, Georgia, Haiti, Latvia, Liberia, Lithuania, Mauritius, Mozambique, Namibia, Nepal, Nicaragua, Panama, Peru, the Philippines, Serbia, South Africa, Timor-Leste, Turkmenistan,  Ukraine, Uruguay, and Venezuela.

Indeed, the anti-death penalty ranks now include every South American country except Guyana and Suriname, all Central American countries except Guatemala and Belize, most FSU/Eastern European countries, several key African countries like Cote d'Ivoire, Liberia, Namibia, South Africa and Mozambique, and even a few Central Asian countries.

All told, as of 2007, 88 countries have completely abolished the death penalty for all crimes, while 40 more have effectively abolished it in practice.  Furthermore, despite the "global war on terrorism," the global abolition movement appears to have gained momentum, with 40 countries abolishing the death penalty since 1990.

(3) On the other hand, the countries that still employ the death penalty -- especially by way of primitive methods like hanging, beheading, and stoning -- are dominated by such stellar examples of enlightened democratic development as Afghanistan, Bahrain, Bangladesh, Burma, China, Equatorial Guinea, Egypt, Indonesia, India, Iran, Kazahkstan, Kuwait, Libya, Malaysia, Morocco, Nigeria, North Korea, Pakistan, Qatar, Saudi Arabia, the UAE, Uzbekistan, Yemen, and Zimbabwe.    

Most of these countries also are at the head of the class among the world's most nefarious one-person, one-family, one-party, and one-general dictatorships.

(4) Many countries that still retain the death penalty, like the US,  Japan, and Singapore,  have long since decided to use alternatives to the barbaric practices of hanging, stoning, or beheading.

In China, for example,  which now accounts for at least 83% to 95% of the world's 2138 to 8400  legal executions per year, most executions are now handled by lethal injections.  

Only such leading "negative role models" as Iran and Saudi Arabia -- the world's second and third largest legal execution markets respectively, just ahead of the US-- still employ hanging, let alone beheading and stoning. 

There is a demand among some "Christian Taliban" sects in the US for a return to these anachronistic punishments, perhaps because they would be such crowd-pleasers among their followers. But so, I'd bet, would witch dunking, cross burning, and the occasional fitted-sheet night ride.

BLIND JUSTICE

Of course, during his 35-year reign, Saddam Hussein also made Iraq a world leader in "legal" hangings and beheadings -- in addition to mass gassing, shooting, and torture. From this angle, many would argue that he only reaped what he'd sown.  

However, precisely in this situation, we might have hoped that Iraq's new democracy and its Washington patrons would have been smart enough to recognize the virtue of breaking sharply with Saddam's own wretched past practices,  seizing the opportunity to set an example for the whole region.

 What an example it would been  for him to have been condemned to live out the rest of his miserable life in a dark, dank cell at an undisclosed location, with no publicity whatsoever.

In such a situation,  reeking vengeance against Prisoner Saddam Hussein was a needless indulgence.

At the very least, his execution should have been designed to avoid granting Saddam the very status that,  next to being set free, he desired most of all,  and that he never would have  been able to achieve without the cupidity of his captors -- the status as a martyr,  a victim, and a myth. 

As Pontecorvo remarked long ago -- "Better silence than songs," for you cannot kill a myth.
 

(c) SubmergingMarkets, 2007    

For This We've Been Waiting?The Iraq Study Group's Underwhelming ReportJames S. Henry

So the November 2006 US elections  delivered a clear message to our elected leaders that we want the troops home from Iraq ASAP, right?

And the overwhelming majority of Iraqis also favor a rapid withdrawal of US troops, right?

And most of our loyal allies, including Britain, Italy, Japan, South Korea, and Spain, have either already withdrawn all their own troops from Iraq,  or have announced plans to do so by the middle of next year, right? 

And after having complained loudly about being "misled" into voting for the War back in Fall 2002, and having just won nearly 58 percent of the nationwide popular vote, Democrats have newfound courage, and are finally going to stand up and be counted on this issue, right?

So we ought to start seeing the 140,000 US troops in Iraq coming home real soon now, right?

Well, not so fast, my friends....

You see, this is Democracy in America we're talking about, not some tin-horn dictatorship.....

These are complex issues, which can't just be  delegated to any Tom, Dick, or Sheila on the street.

No - these issues requre careful study over many months by an enormous Bipartisan Iraq Study Group.

JUST WHAT WE NEEDED?   

Such a group must be staffed by the best and the brightest people that we can possibly find......People like Alan Simpson, Ed Meese, Sandra Day O'Conor, Leon J. Panetta, and Vernon Jordan.....

They'd be aided, of course,  by four other 12-person subpanels of US experts on "the economy and reconstruction," "political development," "the military and security," and the "strategic environment!" 

The resultng "goat rodeo" of all these Iraqi experts has resembled nothing so much as Hillary Clinton's  expert-laden Health Care reform effort back in the early 1990s. That effort also produced a grand scheme and a cornucopia of interesting ideas, few of which were ever adopted.

By the time the  Iraqi Study Group returned to the surface after taking six months to analyze the (constantly-changing) situation, it boldly declared that "the situation in Iraq is grave and deteriorating," and that President Bush's strategy is "not working." 

To that, the rest of us have been obliged to say, echoing the immortal Johnny Carson:

""Thank YOU!  WE DID NOT KNOW that! " 

The STUDY GROUP also produced a tightly-coupled 79-STEP PROGRAM that would merely REQUIRE...

1. A sharply-expanded  US training mission -- in the face of evidence that such training may take years, and that the first tough task  will be to "train the trainers"...
   
2. The insertion of small groups of (relatively defenseless) US trainers inside large units of (relatively clueless and unreliable) Iraqi forces -- a measure that is not only dangerous, but has also been rejected as "patronizing" by Iraqi officials
   
3. "Hail Mary"  negotiations with Syria and Iran -- not exactly our strongest allies in the region, and a step that the Iraqi Government may want to reserve for itself;
   
4. Quick progress on the (until-now intractable) Israeli Palestinian issue -- with few details about how the existing Hamas/Israeli deadlock can be overcome; 
5. Decisive action from the (heretofore nothing-if-not-indecisive) Iraqi Prime Minister -- who is finding it risky to side too closely with the Americans;
6. Amnesty for the (at least the non-al Qaeda/ more likeable) insurgents...(amnesty for Saddam was fortunately not proposed)...
7. Etc. Etc.....(79)

Well then. Perhaps the poor public,  the "customers" for this elaborate consulting study,  may be forgiven for being a bit skeptical about how iall this could ever be implemented.

On the other hand, most of us have also long since concluded that "Bush's policy is not working." So the implication is that if the ISG's elaborate, impractical plan really is necessary for a solution, it is time to head for the exits.  

WHITHER NOW?

As we might have expected, in the wake of these recommendations,  the PRO-WAR RIGHT -- including the indispensable one-person-party, Senator Joe Lieberman -- has sensed blood in the water, and is attacking aggressively..

Given its own miserable track record and diminished credibility, this may not matter very much. By now the pro-war right is taken seriously mainly by each other. This is not to say that it can no longer make trouble -- especially on matters involving Iran, Lebanon, Syria, and Palestine, where "Fifth Columnists" are working overtime to explain away the messes they've created.

But the most interesting questions now are for Democrats -- especially those who hoped that the Iraq Study Group would save them the trouble of having to find their own solution to this nightmare.

This is also an interesting time for the still-all-too-timid anti-war movement, which clearly has a majority of the country on its side. 

 In principle, this movement should be in a position to demand that the new Democratic Congress keeps its promises and starts to compel US troop withdrawals early next year.

To this extent, the Study Group report is helpful, because it demonstrates that there are no free lunches here, no  clever "technical fixes" or "soft landings."

The only real choice appears to be between two rather stark alternatives: 

• (1) MAKING A PROLONGED commitment to keeping US troops in Iraq -- indeed,  even increasing their numbers in the short run;  or

• (2) WITHDRAWING with all deliberate speed, along the lines suggested months ago by Congressman John Murtha.

One might have thought that the American people had just spoken clearly on this matter in the November 2006 election, favoring the second alternative.

But of course these are complex issues, which can't just be delegated to any Tom, Dick, or Sheila on the street....!!!   

                                               *****

(c)SubmergingMarkets, 2006

 

 

CUBA'S HEALTH CARE REVOLUTION, LATIN AMERICA'S HIDDEN HOLOCAUSTSomething for Fidel to Be Proud OfJames S. Henry

While US media conglomerates like Time and Fox have been obsessing for months about whether or not 80-year old Fidel Castro is finally about to meet El Fabricante,  Cuba has been busy setting health records -- helping its 11.4 million citizens achieve lower mortality and longer lives than almost anywhere else in the developing world.

Now that a leading Madrid surgeon has made it clear -- contrary to USG agitprop -- that Fidel is not suffering from terminal cancer, and, indeed, is recovering well from last summer's stomach operation,   perhaps this other Cuban health story will finally receive the attention that it deserves. 

Just this month Cuba announced that its infant mortality rate has reached the First World average of just 5.3 per thousand -- on a par with the latest rates for the UK, Canada and New Zealand, even lower than the 6.7 US average,  and less than half the 14.1 average rate for all African-Americans in the US.

LATIN AMERICA'S HIDDEN HOLOCAUST

Even more to the point, Cuba's infant mortality rate is also the lowest in Latin America and the Caribbean, and indeed, the lowest for any developing country in the world.

The corollary is another important story. This is the fact that while Fidel's tiny, isolated, centrally-planned, highly-inefficient, antediluvian island economy has managed to set record after record on public health, education, poverty reduction, and gender equality since the 1970s,  the "non-revolutionary" rest of Latin America has lagged far behind. Over time, the cumulative impact has been huge.

For example, as we'll see below, if other Latin American and Caribbean countries had simply kept pace with Cuba's percentage improvements in infant mortality from the 1960s to 2005, an additional 6.4 million infants -- an average of 184,000 per year for the region as a whole -- would have survived the first year of childbirth.

In effect, all these "missing children" amount to nothing less than a continuing hidden holocaust -- attributable at least in part to the pro-elite development paths that most of these countries have pursued.

Many of those critics on the Right who like to rail against the deficiencies of Castro's regime -- its admitted lack of US-style national elections and market freedoms, its shortage of big fancy cars and other consumer goods -- also profess to be profoundly concerned about human rights,  the welfare of Elian Gonzalez, "the rights of the unborn," and so forth.

Perhaps they will now bring themselves to admit that at least in one respect, Fidel's Revolution is actually a role model -- and that naked capitalist development also has very high costs. 

This goes a long way to explain why, far from being the pariah that USG has tried to make him, Fidel is today treated with greater respect and admiration throughout Latin America than ever before -- certainly in comparison with former US-backed right-wing thugs like Pinochet, Rios Montt, Banzer, Fujimori, and the Argentine and Brazilian juntas.

Consistent with this, on October 28, 2006, the UN General Assembly voted for the 13th year in a row to condemn the US embargo on Cuba. Every Latin American and Caribbean country voted to support the resolution, joining 179 countries that did so. Only four countries voted against it -- the US, Israel, the Marshall Islands, and Palau.

In any case, whatever the quality of life in Cuba for adults today, the fact is that if you are an unborn infant of average means who somehow gets to decide where in the entire developing world to be born, there's no contest.

(For all the gory statistical details, read on below):

 

REMEMBERING THE GENERALPart I: OverviewJames S. Henry

---

I was born a Chilean,  I am a Chilean,
I will die a Chilean.
They, the fascists, were born traitors,
live as traitors, and will be remembered forever as fascist traitors.

-- Orlando Letelier, 1932-76

---

Both Chile's General Augusto Pinochet and Saddam Hussein, two formerly US-backed dictators, have at last had to confront Higher Authorities that they were unable to intimidate, compromise, or evade.

However, unlike Saddam, who was hanged in the middle of a night on December 30, 2006, by a nervous Iraqi Government tribunal,  Pinochet managed to escape human justice for his crimes, and died of natural causes at the age of 91. 

How does the General deserve to be remembered? Did he not richly deserve the same fate as Saddam? And how did he manage to avoid it? 

Was he simply a ruthless, corrupt right-wing tyrant, the puppet of foreign interests and their handmaidens, like ITT,  Nixon, Kissinger, the CIA, George H.W. Bush, Margaret Thatcher, and Reagan?   

Or was he, as many of his defenders still maintain,  an essential bulwark against the Leftist Horde in Latin America?

If perhaps not exactly the world's staunchest defender of political liberalism, was he at least -- as Thatcher, some neoliberal  economists, The Wall Street Journal, and even supposedly "liberal" newspapers like The Washington Post now maintain --  a staunch defender of  "free markets" who deserves much of the credit for Chile's economic performance since the 1970s?

As we'll see,  most conventional portraits of General Pinochet are flat-out wrong, not only with respect to his alleged role in combating Soviet expansionism, but also with respect to his regime's alleged beneficial influence on Chile's economy.

First,  Pinochet was at best only a non-essential bit player in the anti-Soviet struggle. Allende's broad-based social democratic "revolution" was never taken seriously by Moscow or Havana. Nor was it strong enough to mount a Cuban-style revolution, or even to precipitate a civil war. Left to its own devices, Allende's "leftish" alliance would probably have burned itself out by the next election or plebiscite in 1974.

Furthermore, even if Chile's leftists had somehow managed to create a "Soviet Republic of Patagonia," tiny Chile was already completely surrounded by other countries that had much greater strategic importance to the West.

By 1973, they either already had their own right-wing dictatorships (Brazil, Paraguay, and Bolivia), or were well on the way (Argentina and Uruguay).

In short,  killing off Chile's long-standing democracy was gratuitous -- the political equivalent of exaggeratinging Iraq's "slam dunk" WMD threat.

All the repression was for nothing.

On the economic front, Pinochet's interregnum was also a costly, needless detour. 

Indeed, one key reason why Chile's so-called "economic miracle" has proved to be so successful in the long run -- with great help from human capital finally brought back home by many well-educated returning "Leftists" who were  driven out of country in 1973-90 -- was precisely because Pinochet's first decade of experiments with "Los Chicago economics" proved to be so disastrous. Giving Pinochet credit for the subsequent corrective reforms is like crediting Leonid Brezhnev with last decade's revival of economic growth in Eastern Europe.

(For more details, see Parts II and III...)

 

   

Blood DiamondsPart 1: The Empire Strikes Back!by James S. Henry

"...(O)ne of the great dramas of Africa: extremely rich areas are reduced to theaters of misery...."

-- Rafael Marques, Angolan journalist (July 2006)

"For each $9 of rough diamonds sold abroad, our customers, after cutting them, collect something like $56..." 

-- Sandra Vasconcelos, Endiama (2005)

"We found the Kalahari clean. For years and years the Bushman have lived off the land....thousands of years...We did not buy the Kalahari. God gave it to us. He did not loan it to us. He gave it to us. Forever. I do not speak in anger, because I am not angry. But I want the freedom that we once had."

-- Bushman, Last Voice of an Ancient Tongue, Ulwazi Radio, 1997 

 

---

The global diamond industry, led by giants like De Beers, RTZ,  BHP Bililton, and Alrosa  Co Ltd., Russia's state-owned diamond company,  a handful of aggressive independents like Israel's Lev Leviev,  Beny Steinmetz's BSG Group, and Daniel Gertier's DGI, a hundred other key "diamantaires" in New York,  Ramat-Gan, Antwerp,  Dubai, Mumbai, and Hong Kong,  and leading "diamond industry banks" like ABN-AMRO, is not exactly renowned for its abiding concern about the welfare of the millions of diamond miners, cutters,  polishers, and their families who live in developing countries.

But the industry -- whose top five corporate members still control more than 80 percent of the 160 million carets that are produced and sold each year into the $70 billlion  world-wide retail diamond jewelry market -- certainly does have an undeniable long-standing concern for its own product's image.

PERENNIAL FEARS

Indeed, for decades, observers of the diamond industry have warned that it was teetering on the brink of a price collapse, because the industry's prosperity has been based on a combination of artificial demand and equally-artificial -- but often more unstable -- control over supply.

Most of the doomsayers have always predicted that the inevitable downfall, when it came, would arrive from the supply side, in the form of some major new diamond find that produced a flood of raw diamonds onto the global market.

The precise culprits, in turn, were expected to be artificial diamonds (in the 1960s and 1970s), "an avalanche of Australian diamonds" (in the 1980s,) and Russian diamonds (in the 1990s.)

This supply-side pessimism has lately been muted, given the failure of the earlier predictions and the fact that raw diamond prices -- though not, buyers beware,  retail diamond resale prices!! --  have recently increased at a hefty 10-12 percent per year.  There is also some evidence that really big "kimberlite mines" are becoming harder and harder to find.

However, there are still an awful lot of raw diamonds out there waiting to found, and one does still hear warnings about the long-overpredicted Malthusian glut, now from new sources like deep mines in Angola, Namibia's offshore fields, Gabon, Zambia, and the Canadian Northwest.

THE REAL THREAT?

Meanwhile, the other key threat to the industry's artificial price structure -- where retail prices are at least 7 to 10 times the cost of raw diamonds -- comes from the demand side. This is the concern that diamonds may lose the patina of glamour, rarity and respectability that the industry has carefully cultivated since the 1940s.

It is therefore not surprising that the industry has been deeply disturbed by the December 8, 2006, release of Blood Diamond, a block-buster Hollywood film that stars Leonard DiCaprio, Jennifer Connelly, and Djinmon Hounsou.

While extraordinarily violent and a bit too long, the film is entertaining, mildly informative, and far from "foolish" -- the sniff that it received from one snide NYT reviewer -- who clearly knew nothing about the subject matter, other than, perhaps, the fact that the Times' own Fortunoff- and Tiffany-laden ad department didn't care for  the film. 

Indeed,  this film does provide the most critical big-screen view to date of the diamond industry's sordid global track record, not only in Africa, but also in Brazil, India, Russia, and, indeed, Canada and Australia, where diamonds have often been used to finance civil wars, corruption, and environmental degradation, and  indigenous peoples often been pushed aside to make room for the industry's priorities.

Surely the film is a small offset to decades of the diamond cartel's shameless exploitation of Hollywood films, leading ladies like Marilyn Monroe, Elisabeth Taylor, and Lauren Bacall, and scores of supermodels, rock stars, and impresarios.

INDUSTRY WHITE WASH
 

Dismayed at the potential negative impact of the film ever since the industry first learned about Blood Diamond in late 2005, it is reportedly spending at least an extra $15 million on a  PR campaign that responds to the film  -- in addition to the $200 million per year that the World Diamond Council already spends on regular marketing.

For example, if you Google "blood diamonds," for example, you'll see that the industry has purchased top billing for its own version of the "facts" regarding this film. Always eager for a new marketing angle, some diamond merchants have also seized the opportunity to pitch their own product lines as "conflict diamond - free."

DEF JAM'S  BLACK WASH

This shameless PR campaign has also included a "black wash" effort by the multimillionaire hip hop impresario Russell Simmons, who launched his own diamond jewelry line by way of the Simmons Jewelry Co. in 2004,  in partnershp with long-time New York diamond dealer M. Fabrikant & Sons.

Simmons, who admits to "making a lot of money by selling diamonds," rushed back to New York on December 6 from a whirlwind nine-day private jet tour of diamond mines in South Africa and Botswana -- but, admittedly,  not in conflict-ridden Sierre Leone, Angola, the Congo, the Ivory Coast or Chad.

Simmons was originally scheduled to travel with one of his latest flames, the  27-year old Czech supermodel and Fortunoff promoter, Petra Nemcova. But Petra reportedly preferred to stay home and accept a huge diamond engagement ring of her own from British singer/soldier James Blunt, whose 2005 pop hit "You're Beautiful" was recently nominated the "fourth most annoying thing in Britain," next to cold-callers, queue-jumpers, and caravans.

The timing of Simmons' trip, which he filmed for UUtube, just happened to coincide with the December 8 release of the Warner Brothers feature.

Upon his return, Simmons held a press conference, accompanied by his estranged wife Kimora Lee Simmons and Dr. Benjamin  F. Chavis Mohammed, a former civil rights activitist and fellow investor in the jewelry company who is perhaps best remembered for being fired as NAACP Director in 1994  after settling a costly sexual harassment suit, and for joining the Rev. Louis Farrakhan's Nation of islam. Simmons' astounding conclusion from his wonder-tour: "Bling isn't so bad."

Whatever the credibility of Simmons and his fellow instant experts, it was  evidently not enough to save M. Fabricant & Sons,  which filed for Chapter 11 in November.

THE GODS MUST (STILL) BE CRAZY

Simmons managed to tour a few major diamond mines on his African safari, but apparently he lacked time to examine the contentious land dispute between the Kalahari  San Bushmen, the members of one of Africa's oldest indigenous groups,  and the Botswana Government -- with the diamond industry's influence lurking right offstage.

In the 1990s, after diamond deposits were reportedly discovered on the Bushmen's traditional lands, the Botwana Government -- which owns 15 percent of De Beers, is a 50-50 partner with De Beers in the Debswana diamond venture, the largest diamond producer in Africa, and derives half its revenue from diamond mining -- has pressured the Bushmen to leave their tribal lands.

The methods used were not subtle. To force the Bushmen into resettlement camps outside the Reserve, the Botswana Government closed schools and clinics, cut off water supplies, and subjected members of the group to threats, beatings, and other forms of intimidation for hunting on their own land -- all of it ordained by F.G. Mogae, Botswana's President,  who declared in February 2005 that he 'could not allow the Bushmen to return to the Kalahari." Those who have been resettled have been living in destitution, without jobs and little to do except drink. (See a recent BBC video on the subject.) 

Thankfully, on December 13, 2006, Botswana's High Court ruled that in 2002, more than 1000 Bushmen had been illegally evicted by the Botswana Government from the Central Kalahari Game Reserve, where they'd lived for 30,000 years.

The Botswana Attorney General has already attempted to attached strict conditions to the ruling, so this struggle is far from over. But at least the first prolonged legal battle has been won -- thanks to the determination of the Bushmen, public-spirited lawyers like Gordon Bennett, their legal counsel, courageous crusaders like Professor Kenneth Good, and  NGOs like Survival International, which has supported the legal battle.

In the wake of this decision, as usual,  the global diamond industry, led by De Beers, has denied that any responsibility whatsoever for the displacement of the Bushmen.

However, the fact is that De Beers and other companies has been prospecting actively in the Kalahari Reserve, especially around the Bushman community of Gope (see this video), where De Beers has falsely claimed that no Bushmen were living when it started mining. It has actively opposed recognizing the rights of indigeneous peoples in Africa. In 2002, at the time of the eviction, Debswana's Managing Director -- appointed by De Beers -- commented that "The government was justified in removing the Basarwa (Bushmen)….’.

De Beers' behavior in Botswana has so outraged activists that they have joined together with prominent actors like Julie Christie and several Nemcova-like supermodels who used to appear in De Beers ads, in an appeal for people to boycott the now-UK-based giant -- which has lately been trying to move downstream into retail diamonds.

However, De Beers is far from alone in this effort.  Indeed, as has often been the case with  "conflict diamonds," less well-known foreign companies have been permitted to do much of the nastier pioneering. 

In Botswana's case, these have included Vancouver-based Motapa Diamonds and Isle of Jersey-based Petra Diamonds Ltd. both of which have have obtained licenses to explore and develop milliions of acres, including CKGR lands. Petra is not unfamiliar with "conflict diamonds;" it is perhaps best known for a failed 2000 attempt to invest in a $1 billion diamond project in the war-torn DR Congo, in which Zimbabwe's corrupt dicator, Robert Mugabe, reportedly held a 40 percent interest.

In the case of Botswana, in September 2005 Petra acquired the country's largest single prospecting license -- covering 30,000 square miles, nearly the size of Austria -- by purchasing Kalahari Diamonds Ltd, a company that was 20 percent owned by BHP Billiton and 10 percent by the World Bank/IFC -- which apparently saw the sponsorship of CKGR mining as somehow consistent with its own financial imperatives, if not its developmental mission. (!!!). Petra has also licensed proprietary explorations technology from BHP Billiton, and offered it development rights, a front-runner for the Australian giant.

Meanwhile, at least 29 of the 239 Bushmen who filed the lawsuit have perished while living in settlement camps, waiting for the case to be decided, and many others are impoverished. 

Perhaps the diamond industry's $15 million might be better spent simply helping these Bushmen return to their homes -- and also settling up with  the Nama people in South Africa, the Intuit and Kree peoples in Canada, and the aborigines in Australia.

FAR CRY

Meanwhile, as we'll examine in Part II, despite the "Kimberly Process" that was adopted by many -- but not all -- key diamond producers in 2003, the fact is that diamonds continue to pour out of conflict zones like the Congo, Ghana, and the Ivory Coast, providing the revenues that finance continuing bloodshed.

The industry's vaunted estimate that they account for just "1 percent" of total production is based on thin air -- there are so many loopholes in the current transnational supply chain that there is just no way of knowing. Of course, given the scale of the global industry, and the poverty of the countries involved, even a tiny percent of the global market can make a huge difference on the ground.

Furthermore, in cases like Angola, the Kimberly Process has provided an excuse for corrupt governments to team up with private security firms and diamond traders to crack down on independent alluvial miners.

Finally, the diamond industry still has much work to do on other fronts --  pollution, deforestation, and, most important, the task of creating a fairer division of the spoils, in an industry where the overwhelming share of value-added is still captured by just a handful of First World countries. 

The objective here is not to kill the golden goose. In principal, the diamond industry should be able to reduce world inequality and poverty, since almost all retail buyers are relatively-affluent people in rich countries, while more than 80 percent of all retail diamonds come from poor countries.

But beyond eliminating traffic in "blood diamonds," however,  we should also demand that this industry starts to redress its even more fundamental misbehaviors.

                                                           ***

(c) SubmergingMarkets,2007

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BEYOND DEBT RELIEFThe Next Stage In the Fight for Global Social JusticeJames S. Henry

“Third World debt relief”  has become a little like Boston’s “Big Dig,” the Middle East “peace process,” and the “ultimate cure for cancer” -- long anticipated, endlessly discussed, and perpetually, it seems, just around the corner.

At the end of the day, after decades of effort, the fact is that very little Third World debt relief has actually been achieved.

There is also mounting evidence that even the paltry amount of debt relief that has been achieved has not done very much good. 

This is partly  because debt relief tends to reinforce questionable policies and bad habits that get developing countries into hock in the first place.  It is also because debt relief has reinforced the prerogatives of IMF/World Bank econo-crats, whose policies have often been incredibly detrimental. 

Finally, debt relief is also often a very poor substitute for other forms of aid and development finance. 

Furthermore, most of the costs of debt relief have been born by ordinary First and Third World taxpayers, while the global banks and Third World elites that have profited enormously from all the lousy projects, capital flight, and corruption that were financed by the debt have escaped scot-free.

This is not to suggest that the debt relief campaign has been utterly pointless.

It has provided a bully pulpit for scores of entertainers, politicians, economists, religious leaders, and NGOs. It  has occasionally reminded us of the persistent problems of global poverty and inequality.

It has also provided an excuse for some pretty good free concerts.

From the standpoint of actually providing enough increased aid to improve living conditions in debt-ridden countries, however, debt relief has been a disappointment. In the immortal words of Bono himself, "We still haven't found what we're looking for."

Fortunately, there is an alternative strategy that would have much greater impact. But this strategy would require a more combative stance on the part of anti-debt activists, and it would almost certainly not generate nearly as many convivial press conferences or photo opportunities.

ISRAEL'S STRATEGIC BLUNDERS, ROUND TWOLessons (Re)-Learned?James S. Henry

LESSONS (RE)-LEARNED?

In hindsight, Israel and the US  should have just re-learned some very costly lessons about the risks of taking on a highly-motivated, well-trained and adequately-armed guerilla army on its own turf. They also have an opportunity to remember some important lessons about the limitations of purely-military solutions to such conflicts.    

> As in the case of  the US strategic bombing campaign in Vietnam, Nato's air war in Kosovo (1999), and, indeed, the Allied air war against the Nazis during World War II, Israel's month-long air war against Hezbollah has largely failed to accomplish its strategic objectives. In particular, Hezbollah's ability launch dozens of missiles into northern Israel went utterly unscathed, with the largest single number of missles launched on August 12, the day before the ceasefire.

>Given the elaborate ground defenses, arsenal, and trained force that Hezbollah was able to pre-position in South Lebanon, its ground forces also avoided the knock-out blow that Israel and Washington had hoped for.

>By far the most effective "weapons" on the ground were not Iranian-supplied long-range missiles, cruise missles, or even Katushyas, but a combination of hard-core tactical training, heavy investments in combat engineering, and anti-tank missiles, many of which appear to have been supplied by Russia, by way of Iran and Syria.

>At the same time, the widespread bombing campaign exacted a horrific price from Lebanon's civilian population, uniting most political factions within Lebanon against Israel rather than against Hezbollah, at least temporarily.

>It has also greatly boosted political support for Hezbollah on the "Arab street" throughout the Middle East, converting the initial anti-Hezbollah reactions by the Saudis, Egypt, and other conservative regimes into official expressions of support.

>Syria, which had been under strong political pressure to continue its detachment from Lebanon, has been "reaccredited" by Israel's excesses during the conflict -- able to assume the self-righteous role of Lebanon's protector against foreign aggression. On the other hand, the Baathist regime may also now be in a stronger negotiating position with respect to the West.

>Iran's hardcore anti-reformers have so far only been strengthened by Hezbollah's performance to date in this conflict, and by Israel's costly tactics. Nor were they discouraged from pursuing their nuclear development program.

>Most important, Hezbollah's ability to define victory as "not losing" against one of the world's most powerful armies has certainly not encouraged other radical groups around the planet to lay down their arms and pursue peaceful alternatives.

>For every Hezbollah fighter that was killed by the Israelis in the last month, the heavy bombing campaign probably generated several new recruits -- not only in Lebanon, but also in Afghanistan, Iraq, Kashmir, and the West Bank.

• In short, as a result of this strategic setback, Condi Rice's Panglossian "birth pangs of democracy" are likely to prove more prolonged and painful than ever.   

WAS THERE ANY ALTERNATIVE?

• At a tactical level, clearly Israel and the US both need to do much work to do regarding the failures of their intelligence operations with respect to Hezbollah's arsenal and military preparations. We can add this to the lengthy list of their  other intelligence failures in the last decade alone.
  

• The preference for high-altitude offensive bombing,  naval shelling, and open-field tank/ heavy vehicle warfare over hard-slog ground offensives also needs to be reexamined. To the extent that this reflects a preference for arms-length "hi-tech warfare," and a reluctance to sacrifice infantry for the sake of defeating dedicated militants like Hezbollah, this may indeed rise to the level of the same "morale/ will to die"  handicap that has crippled other many colonial armies,  in places like Vietnam, Algeria, China, and (long ago) the US itself.      

• At a strategic level, the notion that the "enemy" simply consists of a finite stock of "fanatical terrorists," motivated primarily by "Islamo-fascist" dogma, or -- as Benjamin Netanyahu put it last week -- "12th century religious doctrines," is simple-minded and unhelpful. Unless military planners come to appreciate the political implications of what they do, they may lose the war off the battlefield.

• True, it is now very late in the day, and the long-term failure of Israel and its enemies in the region to make any progress at the bargaining table may indeed mean that this overall story is headed for a terrible climax.

• From this angle, however, perhaps the one good thing about this strategic disaster is that it may remind Israel and the US that, whatever the final outcome of any attempt to solve the problems of the Middle East by military means,  it will not be cheap, easy, or devoid of surprises.

• (c) JSH, SubmergingMarkets, 2006     

ISRAEL'S STRATEGIC BLUNDERSSnatching Disaster From the Jaws of Victory?James S. Henry

"Retaliation is not the point in this case. This 3000-man raid with tanks and planes was out of all proportion to the provocation and was aimed at the wrong target." 

-- Walt Rostow, Advisor to Pres. Lyndon Johnson, Memo Re: Israel Raid on Jordan, November 1966

For those of us who have always defended Israel's "right to exist,"  its wild over-reaction -- or, more likely, its willful, calculated,  brutilitarian, and -- worst of all -- ineffective response to Hezbollah's July 12th provocation has certainly not made the job any easier.

Only the Bush Administration, the Pentagon, and our own hapless intelligence agencies were supposed to be capable of such counterproductive conduct in such a one-sided war. 

Now it emerges that, indeed, according to The New Yorker's Seymour Hersh, Israel may have consulted closely with Vice President Cheney and other senior members of the  Bush Administration on its plans for a punishing air campaign against Hezbollah, well before the July 12th incident on the Lebanese border.

Evidently all these astute war planners expected widespread bombing not only to degrade Hezbollah quickly, but also to cause it to lose political support within Lebanon. According to Hersh, Cheney and Bush were especially enamored of this strategy because they hoped to achieve a similar miracle with an air campaign against Iran -- by some reports, supposed to begin in just a few months.

Now that Hezbollah has been able to stand up to Israel's onslaught for more than five weeks, and has only seen its political position strengthened, Israeli and Washington war planners should in principle reconsider the premises of their high-tech air war/ quick strike-based strategy.

UN-approved "ceasefires" not withstanding, Hezbollah has succeeded in pulling the IDF back into a ground war in Lebanon -- something it has been hankering for since 2000.

In just the last 24 hours of this war, it cost the Israelis the lives of at least 40-45 soldiers, nearly 10 percent of their losses in Lebanon from 1982 to 2000. 

While most Americans and Israelis have dismissed the Hezbollah fighters as "terrorists," throughout the Muslim world they are now being hailed as heroes -- thanks in large measure to this massive Cheney-approved bombing strategy.

As discussed below, while Hezbollah can justifiably be accused of having lit the match on July 12th, there had been plenty such provocations before, without leading to this conflagration.

Overall,  the so-called Middle East "peace process" -- and, indeed, "democratization," have become a casualties, not only of "Islamic extremism," but also of  Israel's prolonged dawdling over withdrawing from the Occupied Territories, and its preference for "military solutions," except in impossible outposts like Gaza, which all but a few Israeli extremists had long since agreed to forego.  

The only remaining "process" now is a war process, which has cost more than 20,000 Lebanese lives, 8,000 Palestinian lives, and more than 2,000 Israeli lives since 1982.

The most fundamental truth is that there are no "uncaused causes" in this conflict, nor are there are any "white hats" -- any more than there were in the case of the IRA and the Unionists in Northern Ireland.  As in all such quasi-colonial struggles,  one person's "terrorist" is indeed another's "resistance fighter." Anyone who doubts that just needs to examine the biographies of Begin, Weitzman, and Shamir, all of whom were pretty cool killers in their time. While Israel boasts about the fact that it has supposedly just killed "500 Hezbollah terrorists," its bombing campaign in Lebanon and its escalating "lock down"  against the residents of Gaza and the West Bank have almost certainly produced more than an ample supply of potential replacements.

All this explains the fact that a growing share of Americans finds it increasingly hard to justify taking sides in, much less subsidizing,  the seemingly endless, obsessive conflicts over this parched, inhospitable, water- and resource-bare, way-too theocratized territory one-tenth the size of California.

THE BUBBLE 

Ironically, as of early July 2006, just before the latest crisis erupted, Israel had achieved a very high level of international support, even among Muslim countries, and its strategic and economic position was stronger and more secure than ever.  

• The Tel-Aviv stock market was at an all-time high, Warren Buffet had just made a $4 billion investment in a northern Israel-based company, investments by other high-tech foreign investors like SanDisk and HP  were also setting records, economic growth was accelerating, and Jewish immigration -- the "Aliya" -- was at an all-time monthly high.   

• The economic situation was especially good news for the 18 wealthy families that now control over half of Israel's business GDP. It probably also encouraged Israel's "best and brightest" to engage in wishful thinking about the growing security risks in their own neighborhood,  and to swallow the fantasy that their country can continue to develop as an outpost of Western civilization, with stronger economic and diplomatic ties to the US, Europe, and Asia than to the Middle East.
  

• In 2005, Syria had been compelled to withdraw its Army from Lebanon for the first time since 1976 -- something that Israel had not been able to achieve in two decades of military occupation. 


• Since May 2000 and 2005 respectively, Israel had managed to withdraw from untenable occupations in both Lebanon and Gaza.

• While Hezbollah still had a large following in Lebanon,  popular support for its military activities had waned since Israel's withdrawal, while its relatively-weak position in a newly-elected coalition government was creating pressures to refocus on political activities -- along "IRA conversion" lines.

• Despite a surprising victory in the January 2006 Palestinian Legislative Council elections on the West Bank and Gaza, Hamas had been effectively isolated by the US and Europe,  because of its refusal to recognize Israel's right to exist.

• While armed resistance continued from the West Bank and Gaza, the "Oslo process" toward a negotiated two-state solution was all but dead, and Israel appeared to face little practical pressure to abandon its "unilateral homeland" approach to the problem.

• Iran's loud-mouthed President had been widely condemned by the international community, and pressure was building for multilateral sanctions against Iran's home-grown nuclear research program.    

• Libya, which had recently been close to acquiring nuclear weapons, had given them up voluntarily, but was also cooperating with the US and Europe on fighting terrorism and welcoming trade and investment.
  

• Pakistan was seriously considering recognizing Israel,  as Jordan and Egypt had done in 1994 and 1979. Morocco was also about to renew diplomatic ties after a four-year hiatus. Israel also enjoyed close new ties with Turkey, a leading non-Arab Islamic country, and India, which actually has the world's largest Muslim population.
  

• While Iraq's insurgency was continuing, and a low-level civil war among Shiites and Sunni elements had begun,  Ira'q  newly-elected Shiite leaders had not yet adopted an overt anti-Israel/ pro-Hezbollah.

• Some observers have expressed concern about a resurgence of anti-Jewish feelings -- so-called