Disarming Ourselves
A new report warns Obama about our aging nuclear weapons.
Iraq, Afghanistan and Guantanamo get more press, but among the most urgent national security challenges facing President-elect Obama is what to do about America's stockpile of aging nuclear weapons. No less an authority than Secretary of Defense Robert Gates calls the situation "bleak" and is urging immediate modernization.
![[Review & Outlook]](http://s.wsj.net/public/resources/images/OB-CS079_oj_noo_DV_20081120173656.jpg)
Department of DefenseRobert Gates.
On the campaign trail, Mr. Gates's new boss appeared to take a different view. Candidate Obama said he "seeks a world without nuclear weapons" and vowed to make "the goal of eliminating all nuclear weapons a central element in our nuclear policy." His woolly words have given a boost to the world disarmament movement, including last week's launch of Global Zero, the effort by Richard Branson and Queen Noor to eliminate nuclear weapons in 25 years. Naturally, they want to start with cuts in the U.S. arsenal.
But the reality of power has a way of focusing those charged with defending the U.S., and Mr. Obama will soon have to decide to modernize America's nuclear deterrent or let it continue to deteriorate. Every U.S. warhead is more than 20 years old, with some dating to the 1960s. The last test was 1992, when the U.S. adopted a unilateral test moratorium and since relied on computer modeling. Meanwhile, engineers and scientists with experience designing and building nuclear weapons are retiring or dying, and young Ph.D.s have little incentive to enter a field where innovation is taboo. The U.S. has zero production capability, beyond a few weapons in a lab.
We're told Mr. Gates's alarm will be echoed soon in a report by the Congressionally mandated commission charged with reviewing the role of nuclear weapons and the overall U.S. strategic posture. The commission's chairman is William Perry, a former Clinton Defense Secretary and a close Obama adviser. Mr. Perry is also one of the "Four Horsemen of the Apocalypse," the nickname given to him, George Shultz, Henry Kissinger and Sam Nunn for an op-ed published in these pages last year offering a blueprint for ridding the world of nuclear weapons.
The commission's interim report is due out any day now, and the advance word is that Mr. Perry has come back to Earth. We're told the report's central finding is that the U.S. will need a nuclear deterrent for the indefinite future. A deterrent is credible, the report further notes, only if enemies believe it will work. That means modernization.
That logic ought to be obvious, but it escapes many in Congress who have stymied the Bush Administration's efforts to modernize. Britain, France, Russia and China are all updating their nuclear forces, but Mr. Bush couldn't even get Congress this year to fund so much as R&D for the Reliable Replacement Warhead (RRW) program. Senator Dianne Feinstein dismissed the RRW, saying "the Bush Administration's goal was to reopen the nuclear door."
In the House, similar damage has been done by Ellen Tauscher, chairman of the subcommittee on strategic weapons. Ms. Tauscher, whose California district includes the Lawrence Livermore National Laboratory, likes to talk about a strong nuclear deterrent while bragging about killing the RRW. She also wants to revive the unenforceable Comprehensive Test Ban Treaty, which the Senate rejected in 1999. Let's hope the Perry report helps with her nuclear re-education.
If Congress isn't paying attention, U.S. allies are. The U.S. provides a nuclear umbrella for 30-plus countries, including several -- Japan, Germany and South Korea, for example -- capable of developing their own nuclear weapons. If they lose confidence in Washington's ability to protect them, the Perry report notes, they'll kick off a new nuclear arms race that will spread world-wide.
In a speech this fall, Mr. Gates said "there is no way we can maintain a credible deterrent" without "resorting to testing" or "pursuing a modernization program." General Kevin Chilton, the four-star in charge of U.S. strategic forces, has also spent the past year making the case for modernization. "The time to act is now," he told a Washington audience this month.
The aging U.S. nuclear arsenal is an urgent worry. A world free of nuclear weapons is a worthy goal, shared by many Presidents, including Ronald Reagan. Until that day arrives, no U.S. President can afford to let our nuclear deterrent erode.
The Spirit of ’76
Welcome back, Carter
By Philip JenkinsHistorical analogies have been much in vogue since this election. Are we living at the end of 1932, preparing to face the glories and disasters of a revived New Deal? Or are we in a mirror-image 1980, the beginning of an era of liberal dominance, with a massive party realignment that might not even reach full fruition for another decade or so? These questions matter, not just because such debates give employment to academic historians. Deciding which year offers the closest parallel to the present forces conservatives to think how they will adjust to the new order. Just how radically have public attitudes shifted?
Actually, the year that offers the closest historical parallels to the present might be neither 1932 nor 1980 but 1976, and that analogy helps us understand the directions in which the country will be moving. Both in government and opposition, people might want to hold off on planning for the next New Deal, still less for a coming generation of liberal hegemony. In three or four years, the main political fact in this country could well be a ruinous crisis of Democratic liberalism.
Why 1976? That was the year Jimmy Carter defeated Gerald Ford for the presidency by a slim but convincing margin: Ford won 48 percent of the popular vote, a little more than John McCain’s 46 percent. Democrats did significantly better in the House in 1976 than they did last month. They held a two-to-one majority of seats, and they retained a supermajority of 61 in the Senate. Broadly, however, the 1976 results look similar to 2008.
The mood of the country in 1976 also parallels our present situation, with a pervasive sense of disgust at politics as usual and widespread fears of national decline. As if the end of the Vietnam War and the Watergate fiasco were not catastrophic enough, foreign-policy disasters in Africa and Asia suggested that the U.S. was losing its hegemony. The oil crisis pointed to a vast transfer of wealth and power to the Middle East, while many pundits predicted environmental catastrophe. The sharp economic downturn resulted in heavy unemployment and rising inflation. A concatenation of scandals tarnished once-trusted institutions: corporations, the military, intelligence agencies, police, and, of course, the politicians.
So disaffected was bicentennial America that it sought leaders unconnected to the establishment. In Jimmy Carter, voters found a candidate whose main qualifications were his lack of experience and connections within the Beltway or corporate worlds. Like Barack Obama, Carter claimed to rise above failed partisanship, while his New South background allowed him to symbolize racial healing. Carter, like Obama, sold himself mainly on the virtues of his character. He presented himself as a man of simple honesty, faith, and decency, and his lack of a track record allowed voters to see in him what they wanted, however far-fetched those hopes might be. If they hadn’t believed it, they wouldn’t have seen it with their own eyes. Above all, Carter promised change, a message that carried weight as long as its details remained nonspecific. The problem with messiahs from nowhere is that when they do exercise power, people discover to their horror what their leader’s actual views and talents are. The disillusion can be dreadful.
The rhetoric and psychology of the Democratic Party in 1976 also foreshadows the present day. And as they did in 1976, Democrats now show every sign of repeating the blunders that led to a generation-long discrediting of liberalism. As the phrase goes, they have learned nothing in the intervening years, and they have forgotten nothing. And they will soon face a barrage of issues that they have neither the will nor competence to understand. Liberal triumph in 1976 led inexorably to evisceration in 1980. The same trajectory is likely to recur in the Obama years.
The key mistake Democrats made in 1976 was failing to realize what brought them to power. Democrats won because of public dissatisfaction with the previous regime, which had overseen the economic crisis, and also because of a wider fear that America would have to live with diminished expectations. But although they won on largely economic grounds, Democrats acted as if they had a sweeping mandate for cultural transformation—for social libertarianism, affirmative action and egalitarianism, dovish internationalism, and idealistic notions of human rights. These ideas dominated a radical Congress and were enthusiastically adopted by the cohort of Carter appointments to the judiciary. They all ignored a basic principle: just because people are unhappy where they are does not mean they are willing to go anywhere you try to lead them.
In 1976, liberals were wrong on multiple counts, and all the signs point to them repeating the same mistakes. Even if Obama plays Mr. Moderate, the congressional party contains more than enough take-no-prisoners far leftists to torpedo any chance of bipartisanship or restraint. Specifically, liberals believe that the public will support radical change in three highly sensitive areas, and in each area they will overreach to the point of self-destruction. In domestic affairs, they believe the culture wars are over and that revolutionary social changes like gay marriage can now advance unchecked. They think that popular concern over environmental problems will translate into a blank check for limitless government spending and the decisive transfer of U.S. sovereignty to international agencies. And liberals are now sure that all that foolishness with international dangers and crises is firmly behind us so that we no longer need the military or intelligence capabilities developed to respond to them. As the coming three or four years will show, they are dreadfully wrong on all counts.
In the 1970s, liberal hubris manifested itself especially in domestic politics. Democrats focused obsessively on race and class, to the exclusion of culture, morals, and religion. Reading the situation in those terms allowed liberals an easy framework for explaining opposition to their policies, which must be based on overt or disguised forms of racism (and that was before they had a President Obama). If every social problem boiled down to matters of economic and racial justice, then there could be no legitimate grounds for concerns that presented themselves as cultural or religious.
That severely blinkered view goes a very long way to explaining the collapse of liberalism in 1979-80. America in the 1970s was undergoing traumatic social and moral changes, which caused widespread unhappiness and fear. Many social conservatives were alarmed that governments were using children as tools in social experimentation, an issue made most explicit in school busing. Popular opposition focused on the defense of community and local autonomy but above all on child safety. Once again, though, liberals had no valid answer to these fears, as any questioning of public education must of necessity be a disguised form of vulgar prejudice. Their response was predictable: Damn the racists, full speed ahead.
Across the board, the critical pressure points in the social politics of the 1970s involved children and young people. For the ’60s generation, progress demanded removing restraints on the actions of consenting adults, whether this involved sexual experimentation, gay rights, drug use, or participation in weird and wonderful fringe religions. Who was to say that individuals should not be allowed to go to hell in their chosen way? That principle worked splendidly, unless and until people began to reflect on the effects on children. Yes, an adult could consent to engage in bizarre or self-destructive behavior, but that libertarian approach did not and could not extend to the young. Time and again, Americans have shown themselves liberal on social issues that are framed in terms of “live and let live.” They draw the line when the behavior in question appears to threaten youth. Hence the most successful conservative campaigns on domestic issues of the late 1970s focused strictly on child protection, and those movements coalesced into a general concern about defending and restoring American culture.
From 1977—the pivotal year of the social-conservative revival—liberals suffered reversal after reversal, on issues of drug abuse, pornography, and gay rights. In every case, child protection gave the key to victory. Carter administration plans to decriminalize drugs foundered on the opposition of a burgeoning parents’ movement. Popular fears of threats to children defeated referenda on gay rights. Near universal nausea about the availability of child porn provoked the first serious questioning of ever expanding sexual frankness. Fears about threats against children merged easily with concerns about threats by children. The astonishing rise of violent youth crime, which reached its Himalayan peak between 1979 and 1981, was read as a symptom of a feral generation that had not been subject to appropriate family restraints or care. By the end of the 1970s, these various child-related themes drove a triumphant social conservative coalition, which included those newly galvanized religious voters mobilized in the Moral Majority.
America today has changed enormously since 1978, but many of those older issues survive in latent form and should resurface shortly. Questions of youth protection will transform the gay-marriage debate, which for most media observers has been framed in terms of social justice and equality. Presumably by judicial fiat, the practice will extend to many more states in the coming years and quite conceivably to all 50 states. This in itself will not be a popular move: recall the recent California referendum, which was decided by the blacks and Latinos who turned out to support Obama but who favored traditional family models.
How will attitudes to gay marriage evolve when people contemplate the proper age of consent in such unions? Assuming the age is to be the same as in heterosexual marriages, then adolescents of 18 will marry freely, and in many states parental consent will grant that right to boys of 16 or so. Are Americans ready to see blushing teenage male brides? And if boys of that age can marry, demands to reduce the age of sexual consent for all youngsters will certainly follow.
The more strenuously liberals press for gay equality in matters involving youth, in marriage and adoption, the more they will generate a child-protection reaction, even among people who consider themselves socially liberal, and the more likely this reaction is to take religious forms. Following the recent California referendum, Mormons bore the brunt of liberal fury, and Catholics and other religious groups will face legal challenges for refusing to participate in gay adoptions and marriages. Other areas like abortion, contraception, and transgender surgery promise to generate many confrontations between religious believers and the current sexual revolution, and religious sensibilities can expect no sympathy from government, courts, or media. The resulting battles should re-energize a religious constituency that is currently disoriented and disillusioned. Anyone for Moral Majority II: The Sequel?
As in the 1970s, the problem of out-of-control youth could very soon be back on the political agenda. Although youth crime hasn’t been on the national radar since the crack boom of the early 1990s, demographic trends confidently predict a rising storm that should break within two years or so. The crime surge of the 1970s was in large part the consequence of the baby boom reaching its most crime-prone years, as the huge cohort of those born around 1960 hit their late teens. Something very similar is about to happen again. The number of babies born in the U.S. in 1990 was only slightly smaller than the 1960 generation, and by 2010 we could be entering an alarming era of violent crime, manifested in soaring rates for homicide and robbery. Factor in the economic crisis, and American cities could look as frightening and dangerous as they did at the time of New York City’s 1977 blackout, with its rioting and looting.
Making the situation still worse, the massive expansion of union membership for which many Democrats clamor will add mightily to the plethora of urban problems. Imagine cities devastated by youth crime and gang wars, while emergency workers, hospitals, buses, and garbage services are regularly on strike. If you think Americans were alienated from government in 2008, come back in two years. Liberals will try to interpret the coming crisis in terms of race and class, a problem to be solved by unlimited social spending. Conservatives had better be ready to respond with ideas of individual and family responsibility and the defense of social order.
In other ways, too, liberals utterly misread public sentiment and will build their policy upon those delusions. Americans have shown themselves open to green rhetoric and feel that policies to protect the environment are generally a good thing. Few conservatives would criticize any move in the direction of energy independence, which would be a wonderful first step toward extracting the nation from Middle Eastern quagmires. But of course, that is not what we are going to get. We will instead be facing a determined and fanatical campaign to eliminate the vastly exaggerated menace of global warming, which will mean a wholesale assault on America’s energy supplies. This will translate into striking at coal- and oil-based energy while refusing to make progress toward reliance on nuclear resources, all the while seeking to curb carbon usage through onerous taxes and surcharges. Remember those Americans infuriated by strikes and intimidated by crime? They are also going to be freezing, living with rationed energy and brownouts. A grossly underpowered economy will find it all but impossible to reconstruct and revive when the coming depression ends.
As if all this isn’t bad enough, expect global-warming rhetoric to be used as a wedge to undermine national sovereignty. Under Obama, we face the virtual certainty of American accession to new treaties that go far beyond Kyoto in demanding radical cutbacks in carbon usage. The U.S. will presumably stand out as the only power attempting to enforce these standards, which would institutionalize the nation’s relative decline in the face of Chinese and Indian growth. The moral and political issue of sovereignty will thus be linked to the practical daily realities of the energy crisis at home.
And then there is national security. Democrats observe, quite rightly, that Americans are uncomfortable with images of Guantanamo and waterboarding, and they are profoundly unhappy with open-ended military commitments in Iraq and Afghanistan. But here, too, liberals will overreach when they interpret these moral qualms as a basis for winding up American military and intelligence capabilities.
However dreadful the Carter administration may have been, however widespread the domestic discontent, what actually finished off the Democrats and opened the door for Ronald Reagan was the Iran hostage crisis. And that was a direct and predictable consequence of overreach by the administration and Congress. Since 1976, congressional liberals had led a series of campaigns against the intelligence services, exposing supposed abuses and atrocities, and in the process discrediting the whole work of intelligence. By 1977, massive purges had removed many of the CIA’s best agents, while congressional restrictions made it all but impossible for the agency to pursue its work. In the Middle East and elsewhere, America was flying blind.
Underlying these bizarre actions was a theory of human rights that assumed the whole world could and should operate according to Western theories of democratic liberalism. Unfortunately, it didn’t. In Iran, the shah was an unsavory dictator with a heavy-handed secret police, but he exercised his powers to pursue a pro-American policy. Under the Carter regime, the U.S. ended its support of the shah, while ceasing to pay off the truly dangerous radical Islamists who would eventually replace him. American efforts at self-immolation succeeded in 1979, with the Islamic Revolution and the hostage crisis that destroyed the Carter administration.
Surely congressional liberals are not stupid enough to do anything like that again? Don’t believe it. By the end of 2009, expect a purge of U.S. intelligence agencies, as well as suffocating new constraints on intelligence-gathering capacities. These moves will probably be accompanied by a series of congressional hearings, which will provide maximum opportunities for showboating by politicos, while embarrassing the CIA. A blinded and disarmed Obama administration will then blunder anew into confrontations that will once again plumb the depths of national humiliation—if not in Iran, then in Taiwan, Ukraine, Venezuela, or Pakistan. If we’re very unlucky, airliners will again be crashing into our skyscrapers and cargo ships will be exploding in our ports. And as in the late 1970s, there will be plenty of discharged and disaffected former intelligence agents wandering the corridors of power, serving as endless sources of leaks and disinformation against the Obama regime. Expect the worst age of political scandal since, well, the 1970s.
All analogies limp, and no one is suggesting a straight replay of the Carter years, still less that some kind of new Reagan era is its inevitable sequel. But if liberals seem so determined to repeat the mistakes of that era, then we have at least a plausible sketch of the coming Obama administration—of its rise and ruin. 
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Philip Jenkins the author, most recently, of The Lost History of Christianity.
| The Future of U.S. Affluence | |
By Robert J. Samuelson |
In order to understand the economic challenges of the U.S. economy today, we must look to the past. And as Newsweek's Robert Samuelson — and the author of "The Great Inflation and Its Aftermath" — points out, "History is what we say it is." In the following questions and answers, based on his book, Samuelson explains economic trends and discusses changes that he believes would improve America's economic prospects.
What is going on in the global economy?
"At present, the world economy is growing topsy-turvy, with more countries coming under its influence. Global markets — shaped both by impersonal forces and by governments’ political decisions — are poorly understood."
Where's the real pitfall?
"Most nations are tempted to pursue their own narrow interests on the assumption that some other country — or group of countries — will watch over everyone’s collective interests."
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What about the role of the United States in all of this? Why are you worried?
"Sometimes, the global economy needs governmental supervision. The question is whether it will be there in the future. The United States is less able to perform the stabilizing role — its trading position is diminished, its currency is less preeminent, its military power is less effective against terrorist threats — but there is no obvious substitute."
What is the impact on Americans' economic well-being?
"Americans’ personal borrowing will mainly follow the contours dictated by today’s high debt burdens, an aging society and the maturing of consumer credit markets."
Doesn't productivity offer the way out of this mess?
"Productivity gains may or may not match past performance, but even if they do, most of the increases may be siphoned off into higher taxes, higher energy prices (to combat global warming, among other things) and high health costs. The residual gains in purchasing power for many households may be slight."
What do you see as the solution?
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"We need to stem the welfare state’s mounting costs. This means curbing the spending for older Americans. If we don’t, the great danger is that the economy and welfare state will go into a death spiral."
How about other options?
"Taxes may have to go up somewhat, but if they go up too much, they will lead to lower economic growth. The same is true of a permanent increase in the size of budget deficits.
"Lower economic growth in turn would make the promised benefits harder to pay — and threaten yet higher taxes or budget deficits. Social Security, Medicare and Medicaid are essential parts of the U.S. social fabric, but that does not mean that every benefit must be perpetuated forever."
What was the reasoning behind the welfare state when it was created decades ago?
"When the U.S. Congress enacted Social Security and Medicare in 1935 and 1965, respectively, many older Americans were poorer than the rest of the population.
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"Social Security and Medicare have moved beyond their original purpose of protecting people from destitution and have become retirement subsidies — welfare payments to enable people to enjoy their 'golden years.'"
Is there anything wrong with wanting to live well in your "golden years"?
"The welfare state has in part created a reverse Robin Hood effect: It sometimes transfers income from the struggling young to the relaxed old. Even if this did not threaten economic growth, it would pose a moral issue: Is it fair?"
As Of This Briefing, We Have Commenced Operation Global Penumbra
Good afternoon, gentlemen, Mei-Ling, Your Grace, Madame Secretary. Welcome to the Department for Special Acquisitions and Liquidations. May I entreat you to take your seats? I thank you all for arriving early and am sorry there was not time to brief you en route. I'm sure you'll understand our need for expediency when I tell you that 18 hours and 33 minutes ago our department, sensing the worldwide sociopolitical climate was favorable to our needs, launched DSAL Project GFG-33.1 variant 4, code referent "Penumbra" in every nation you all serve and/or represent.
Please, everyone, spare me your murmurs and grumbles. After recent events in the Italian Alps, the discovery of certain...deposits in the Adirondacks, and the unforseen but certainly fortuitous crash in the Gobi, you must have at least suspected the moment was at hand. Operatives are currently working toward the goals outlined in the briefing, a document with which I hope you are familiar but which I will review now in order to be certain we are all of the same mind.
But I forget my duty as host of this august gathering. Coffee? It's quite excellent. Feel free to have some port, or a snifter of this excellent Armagnac, if you wish.
Ah, good. Now that we are all comfortable: a brief synopsis. It goes without saying that the first-approximation disposition of our globe is one of great political and financial anxiety, mixed with a certain guarded optimism. Very carefully mixed indeed, for which I must congratulate our new asst. dept. head. Well played, Mei-Ling. The cultivation and nurturing of the correct pan-cultural anxieto-psychosexual frame of reference, or "mood," is no trifling matter, and it is vital that Penumbra be carried out in a world that is ready for its implications. That Mei-Ling was able to foster this "mood" worldwide, without the creation of new churches or television networks, is a credit to all those clever lying bastards she keeps locked up on the 11th floor.
From the metaphysical to the geophysical, we go now to the map—don't blink, now, your ocular nerves will accept the retinal projection momentarily—where we see our ambitious plan for the future of the Gulf Stream is actually ahead of schedule, with all that implies for Penumbra in Europe. Luckily, the world's mere governments will still be squabbling over the Middle East, Central Asia, and the American South during the expected period of increased volcanic activity we're projecting. I'll admit, this field of study is a new one for us, and unfamiliar, but when we found our rivals were researching in the field....
We cannot afford to play catch-up. Remember Barcelona.
In any case, climactic realignment will, through drastically altered patterns of farming and tourism, also help offset the inevitable side effects of our low-level economic proxy wars on the American continent. As a sidenote, I observe that banking is still one area where we are unopposed and unequaled, although for the nth time please remember that the money question is of little importance to Penumbra. While we will lose a few trillion out of the budget, I urge you to think of that as.... Let us term it, without being cynical, an investment in large-scale urban renewal.
And the rest of the Penumbra dossier, I'm afraid, is mostly spreadsheet after spreadsheet, which any of you can read as easily as Russian—which in turn, as you'll note on page 608, will soon be as much use to anyone as Etruscan. I urge you to pay special attention to the following sections of your briefing: Tailored petro-algae, the tentative schedule for encouraging fruitful internal tensions within the Hindu faith, and for those with a flexible sense of humor, the parts dealing with China.
Again, thank you for your attention. We are in for a very active 50 years or so. Please leave the dossiers where you found them. The aides will see you to your aircraft.
Would someone wake the archbishop? Thank you, Pierre.
Iran's Nuclear Operation Revealed To Be Cover For Greatest Roller Coaster Ever
TEHRAN, IRAN—Nearly 30 years of tense relations between the U.S. and Iran came to a dramatic end this March when Iranian president Mahmoud Ahmadinejad revealed that his country's suspected nuclear program was in fact a covert operation to build "Ali Baba and the 40 Loops"—the largest, most thrilling roller coaster in the Middle East.
In a globally televised address before the United Nations, Ahmadinejad unveiled the 500-foot-tall steel coaster, which he called a "very real threat" to anyone not interested in having a blast. The Iranian leader then challenged all thrill-seekers—young and old, Christian, Muslim, or Jew—to ride the mighty coaster, which can reportedly reach speeds of 165 mph by using a newly developed electromagnetic propulsion system previously seen only in blurry satellite images.
All U.N. inspectors were given complimentary season passes for being so patient.
"I regret having kept you in the dark for this long, but doesn't the surprise make it so much better?" a smiling Ahmadinejad said while gesturing to the massive coaster's interlocking quadruple vertical corkscrews. "And to think, you were all afraid we would use this technology for evil. Well, the only thing the world should fear now is Ali Baba's heart-stopping 400-foot drop!"
Members of a special U.N. envoy were immediately granted access to the new ride, and spent the next six hours conducting more than 30 separate critical examinations of the roller coaster. By late evening, however, inspectors said their findings were still inconclusive and determined that the fact-finding mission would require further test rides, corn dogs for everyone, and photographic documentation of their efforts.
Despite years of economic sanctions and the constant threat of military action, Iran reportedly continued working on the clandestine project by stockpiling metal tubes for the tracks, enriching uranium to provide glow-in-the dark lighting for the subterranean portion of the ride, and purchasing hundreds of gallons of neon green paint from Pakistan.
"We have moved wisely and decisively to establish Iran as a regional power in the amusement park field," said Ahmadinejad, adding defiantly that the nation would not succumb to Western standards for height requirements. "Wheeeee!"
In response to rumors that the new Iranian amusement park will include a ride dedicated to bridging the foreign relations gap with Israel, Ahmedinejad flatly denied the existence of the so-called "Holocoaster."
Bernie Madoff
Ponzi squared
From Economist.com
Just when Wall Street needs it least, Bernie Madoff’s pyramid scheme takes financial fraud to new lows
FOLLOWERS of the past year and a half’s financial misadventures have become inured to bucketfuls of red ink. Even so, the potential losses from the scam perpetrated by Bernie Madoff, a Wall Street veteran, are jaw-dropping. The $17 billion of investors’ funds that his firm supposedly held earlier this year have all but evaporated and the hole could be as big as $50 billion. That would make it the biggest financial fraud in history.
Details are still emerging, but Mr Madoff has himself described it as a giant Ponzi scheme. For years, it seems, the returns paid to investors came, in part at least, not from real investment gains but from inflows from new clients. It might still have been going on, were it not for the global financial crisis. Redemption requests for $7 billion, by investors looking to pull back from turbulent stockmarkets, forced Mr Madoff to admit that his coffers were empty—bearing out Warren Buffett’s adage that only when the tide goes out is it clear who was swimming naked.
The affair has robbed an embarrassingly long list of supposedly sophisticated investors of their swimwear. Hundreds of banks, hedge funds and wealthy individuals parked money with Mr Madoff, impressed by the steady returns on offer: 10-15% a year, even in rough times, with barely a down month. Global banks such as Banco Santander, BNP Paribas and HSBC, all three of which had until now survived the credit crisis relatively unscathed, are among those reported to be heavily exposed. So too is Bramdean Alternatives, a fund run by Nicola “Superwoman” Horlick, a celebrated British money manager. Others had most or even all of their eggs in the Madoff basket. Several well-heeled Americans have reportedly lost everything but their properties.
Why were they not suspicious of the unnaturally consistent returns? Mr Madoff’s pedigree may have played a part. A former chairman of the NASDAQ stockmarket, he has long been a fixture on Wall Street. He even has an exemption (to the former “uptick rule” for short-selling) named after him. He has served on an advisory committee assembled by the Securities and Exchange Commission (SEC), America’s main market watchdog. Savvy marketing was another factor. Investors had to be invited, lending his operation an air of exclusivity. This went down well in the country clubs of Florida, Minnesota and other states, where the firm’s unofficial agents told of Bernie’s magic touch, explaining that not anyone could get in, yet always somehow finding space for those who fancied a piece.
According to reports, some of those who put their faith in Mr Madoff suspected that he was engaged in wrongdoing, but not the sort that would endanger their money. They thought he might be trading illegally for their benefit on information gleaned by a separate business within his group, which made a market in shares. The firm had been investigated for “front-running”, using information about client orders to trade for its own account before filling those orders.
Even so, the affair has—like the subprime-mortgage debacle—exposed a stunning lack of due diligence. Droves of investors who should have known better tossed in billions, preferring to keep their fingers crossed rather than ask awkward questions of a firm whose investment strategy was vague and opaque. Even within his own group, Mr Madoff’s money-management business was a black box: no one but he had full access to the accounts. As a broker-dealer, it was able to clear its own trades, a privilege that should give pause for thought. Worse, questions had been hanging over the operation since the mid-1990s. Some institutional investors have long steered clear of Mr Madoff, unable to understand how he spun his gold, or uneasy that his books were audited by a tiny, three-person accounting firm.
The SEC, which seems to have been taken aback by the scale of the malfeasance, can hardly hold its head up high either. It did not get round to examining the books of Mr Madoff’s money-management business, even though he registered it with the commission in September 2006—though it did probe the market-making arm and found that it had violated some technical rules.
For an agency that is fighting for its life, that is unfortunate. Even before this scandal the SEC was on the back foot, having stood by as the big Wall Street investment banks it was charged with policing ran amok. In its defence, the commission argued that its primary role was investor protection, not prudential regulation. Now it has been shown wanting in its core competence—though, with 11,000 fund managers to oversee, not to mention the boom in mortgage-related cases, some may think it inevitable. Congress is next year expected to revamp America’s dysfunctional system of financial regulation. One option, already proposed by Hank Paulson, the outgoing treasury secretary, is to fold the SEC’s responsibilities into a new set of agencies.
The sloppy regulators and credulous investors whom Mr Madoff duped must now hope that he has pulled off one last deceit: exaggerating the scale of the losses. Even in these accident-prone times $50 billion sounds like an awful lot for one man to lose. But it is just about possible if he levered up his bets with borrowed money or supercharged them with derivatives (which he is known to have used to reduce volatility). But even if the fraud extends no further than the $17 billion under management, it will go down as a humdinger. Indeed, it makes Charles Ponzi’s promise in 1920 to double investors’ money in three months—which caused losses equivalent to around $160m in today’s money—look like a trifle. Perhaps from now on it should be known as the “Madoff scheme”.
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