Can We Replace DHS Secretary Napolitano with Fox News Legal Expert Napolitano?
On the one hand, you've got the former governor of Arizona who manages to keep talking no matter how many of her own feet she's got stuck in her mouth. Janet Napolitano's agency released a report implying that if you think Ron Paul is onto something or that state governments should ever challenge federal ones, you're a terrorist (really. Take Reason's handy-dandy terrorist quiz and get a free certificate testifying to your status). Even more recently, she fretted and then apologized for worrying that some of our boys coming home from Iraq might be anti-government. Imagine.
On the other hand, she's starting an Obama-sanctioned jihad against illegal immigrants who work in America and the "evil-doers" who hire undocumented workers to cut your grass and clean your sheets. From an appearance on State of Our Union:
What we have to do is target the real evil-doers in this business, the employers who consistently hire illegal labor, the human traffickers who are exploiting human misery.
In what alternate universe is the secretary living where it's evil (E-VIL!) to hire immigrants who are willing to work? Napolitano is also in favor of the idiotic border wall and "boots on the ground," meaning an unending harassment of all residents within Fortress America (after all, if you aggressively pursue illegals and their employers, it means you have to check everybody's papers and payrolls.) Hat tip: Veronique de Rugy.
Is this the hope and change we were looking for? Declaiming limited government devotees as potential terrorists and raiding businesses for hiring people during an economic downturn?
If we have to have a Napolitano in the president's cabinet (as someone whose mother's maiden name was Guida and whose relatives hailed from Campania, I got a-nothin' against dat) I'd like to nominate Fox News Channel's chief legal expert, Judge Andrew Napolitano. The author of several books documenting the demise of constitutional authority in these United States—and the author of a forthcoming legal history of race in America, Dred Scott's Revenge—the judge not only knows the history of this country, he's a stalwart defender of the best aspects of it. A critic of civil liberties violations under the Bush administration, he would also bring an unstinting honesty to the grim world of politics.
Take a gander at the good Napolitano talking at Reason in DC, an October 2007 event hosted by the nonprofit Reason Foundation, publisher of this site.
The Truth About the Tea Parties
The Truth About the Tea Parties
It's the government spending, stupid
Steve ChapmanThe banking collapse and the economic meltdown have prompted many Americans to turn to the federal government as indispensable savior, telling Congress and the president: We hope you can fix it; we want you to do whatever is necessary to fix it; and we don't care what it costs.
That was not the sentiment in evidence at the tea party protests held on Tax Day.
There, the message was one of great skepticism about the efficacy of the government's remedies and great apprehension about the expense (along with some of the extremist lunacy that accompanies any mass movement). The scale of the federal response to the crises has come as a frightening surprise to many Americans, who suspect the cure will be worse, and less transitory, than the disease.
Since last September, a federal budget that was already growing steadily suddenly accelerated out of control. The ride began in the winter of 2008, when Congress and President Bush agreed on a fiscal stimulus package of $170 billion in tax rebates and incentives. It picked up speed in the fall, when the Treasury spent $85 billion to take over insurance giant AIG and Congress approved $700 billion to rescue failing financial institutions.
By the time Barack Obama took office in January, projected federal outlays for this year had soared by nearly $1 trillion over last year, and the budget deficit had nearly quadrupled. But was that enough? Not nearly. Obama saw Bush and raised him, immediately pushing through another fiscal stimulus program with a price tag of $787 billion.
Fiscal hawks thought the budget was out of control before. Now they look back on the pre-2008 profligacy as a golden age of budgetary restraint.
The amount of money involved in all this would be staggering to anyone not benumbed by the incessant torrent of bad news. But judging from the tea party protests, the numbness is not universal. No matter what the state of the economy, some Americans are still capable of being shocked to see trillions of federal dollars pouring out like water rushing over a broken dam. And like many reputable economists, they suspect most of it will be wasted.
The invocations of the Boston Tea Party—on April 15, no less—suggested that the protests stemmed from anger about taxes under Obama. But Obama has not actually increased income taxes—only the federal tax on tobacco, which the majority of people don't pay. His tax plan calls for cutting income taxes for most Americans, and not raising them on the rest until 2011.
So why did people rally across the country when they should have been planning how to spend their tax refunds? Because their true dismay is about the mushrooming of federal outlays, which the demonstrators regard as a future tax increase in the making. Which, of course, it is.
The problem is not just the spending supposedly needed for the current economic emergency. Obama claims that he will cut the deficit in half, to $533 billion, by the end of his first term. Two problems: 1) The Congressional Budget Office says the more likely number is $672 billion, and 2) that is 46 percent more than the deficit in 2008. Worse yet, the CBO says the deficit will then resume its upward trajectory, reaching $1 trillion by 2018 and nearly doubling the national debt over the next decade.
The realism about expenditures is the encouraging thing about the protests. It's easy to convince people that the government should take less of their money. It's harder to persuade them that the government should provide them less in the way of benefits and services. Yet the teabaggers took the view that whatever Washington plans to provide, they don't want—not at this price, anyway.
The country has gotten into a painful fiscal predicament because both parties have let us believe we can have more and more goodies from Washington at no additional cost. The recent explosion of federal spending has succeeded in one way: It has exposed that assumption for the fiction it was.
Like Bernie Madoff's investors, we now face the bleak truth that the comfortable future we expected is gone. Everything the federal government is doing will be forcibly extracted from our future earnings. The tea party protesters see that and are angry. Can the rest of the country be far behind?
Euro Falls to One-Month Low on Concern ECB Discord Deepening
April 20 (Bloomberg) -- The euro fell below $1.30 for the first time in a month and weakened versus the yen on speculation disagreement is deepening among European Central Bank policy makers on measures needed to combat the recession.
The 16-nation currency declined against the Swiss franc after Financial Times Deutschland cited ECB Executive Board member Lorenzo Bini Smaghi as saying the bank’s 1.25 percent target lending rate is “very close” to its floor. The yen and dollar rose against all of the other major currencies on increased demand for safety.
“The ECB is the focal point,” said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. “People are looking for reasons to sell the euro. We are seeing a significant liquidation of the trades that outperformed in recent weeks as we are moving back to risk aversion.”
The euro dropped 1 percent to $1.2917 at 10:06 a.m. in New York, from $1.3044 on April 17. It earlier fell to $1.2907, the lowest level since March 16. Europe’s currency slid as much as 1.5 percent to 127.29 yen, the lowest level since March 30, before trading at 127.37, compared with 129.33 last week. The euro lost 0.2 percent to 1.5170 francs. The yen gained 0.7 percent to 98.45 per dollar from 99.16.
A break of $1.2946, a 61.8 percent retracement of the European currency’s 8 percent advance from March 4 to March 19, indicates it will decline to “mid-$1.27,” Osborne said.
The yen appreciated 2.1 percent to 55.15 per New Zealand dollar and 3.2 percent to 69.41 per Australian dollar as stocks declined on speculation U.S. banks face more losses, reducing speculation investors will buy higher-yielding assets.
Stress Tests
President Barack Obama said yesterday he will demand “accountability” from any U.S. banks that require additional taxpayer money following “stress tests” being conducted by regulators. The tests are being used to determine whether the companies have enough capital to cover losses over the next two years should the recession worsen. The Federal Reserve plans to give results May 4.
The Australian dollar fell as much as 2.5 percent to 70.41 U.S. cents, the biggest intraday decline since Feb. 10. The Canadian dollar dropped as much as 1.9 percent to C$1.2362 per U.S. dollar, the weakest level since April 9.
Europe’s Dow Jones Stoxx 600 Index slipped as much as 3 percent, the most since March 30, and the Standard & Poor’s 500 Index fell 2.1 percent.
The euro dropped to a three-week low versus the yen on signs the recession in the 16-nation region is deepening. The contraction in Germany, Europe’s largest economy, worsened in the first quarter, the country’s central bank said.
‘Recessive’ Trend
“The recessive underlying trend in the German economy deepened after real gross domestic product fell by 2.1 percent” in the three months to December, the Frankfurt-based Bundesbank said in its monthly bulletin today.
Bini Smaghi, asked if he favors cutting the benchmark rate to 1 percent and leaving it there, said “it would be more credible to act that way,” according to Financial Times Deutschland. Council members George Provopoulos from Greece and Athanasios Orphanides of Cyprus have indicated they may support cutting the target rate to less than 1 percent and buying debt to pump money into the economy. The ECB’s next meeting is May 7.
ECB President Jean-Claude Trichet said in Tokyo yesterday he wouldn’t exclude another “very measured” rate cut, though a zero interest-rate policy wouldn’t be appropriate for the bank.
The Swedish krona fell for a fourth day versus the euro, dropping 0.7 percent to 11.1033. The Riksbank may halve the benchmark repo rate to a record low of 0.5 percent tomorrow, according to the median forecast in a Bloomberg survey.
Currency Volatility
Gains in the yen may be tempered after the JPMorgan Chase & Co. benchmark index of investor expectations for currency swings dropped to a six-month low of 14.4 percent on April 17.
Lower currency volatility indicates smaller exchange-rate fluctuations that can erode profit on carry trades, in which funds are borrowed in countries with lower interest costs, such as Japan, and invested in nations with higher rates, allowing investors to pocket the difference.
“Big currency moves are behind us,” said Maxime Tessier, chief of foreign exchange at Montreal-based Caisse de Depot et Placement du Quebec, Canada’s biggest pension-fund manager, with about $99 billion in assets. “The volatility spike has to unwind itself over time. Selling volatility has been the winning trade so far this year and will continue to work well.”
The benchmark interest rate is 0.1 percent in Japan and as low as zero in the U.S., compared with 3 percent in Australia and in New Zealand.
Obama Steers Between Dueling Critics in Latin American Outreach
April 20 (Bloomberg) -- President Barack Obama returns from a four-day Latin American trip to face Republican criticism that he went too far in reaching out to critics like Venezuelan President Hugo Chavez and lingering complaints from regional leaders he didn’t go far enough to change U.S. policies.
Obama sought to strike a balance during the Summit of the Americas, which ended yesterday, by trying to open an avenue for relations with long-time regional adversaries like Chavez without retreating from core U.S. positions such as a demand for democratic change in Cuba.
The president proclaimed his approach a success at the end of the summit, even if others were less certain.
“The test for all of us is not only words, but also deeds,” Obama said at a news conference in Port of Spain, Trinidad. “What we showed here is that we can make progress when we are willing to break free from some of the stale debates and old ideologies that have dominated and distorted the debate.”
Obama’s remarks reflected an approach to international relations that he previewed earlier this month in meetings with European leaders: a willingness to acknowledge where past policies have gone wrong -- which he says allows the U.S. “to speak with greater moral force and clarity” -- while telling nations they should no longer make his country a scapegoat for their own failings.
James Thurber, director of the Center for Congressional and Presidential Studies at American University in Washington, said Obama “has built political capital without spending any of his” at the summit. “The proof will come later when working on some very tough issues.”
Cuba’s Shadow
The discussion of Cuba before and during the summit overshadowed broader issues, such as the global economic crisis, aid for the poorest nations in the region and cooperation on energy, the environment and security.
Latin American leaders from Mexico to Argentina were united in pressing the U.S. to help bring Cuba, which wasn’t part of the 34-nation summit, out of isolation. Obama’s aides said before the meeting that they didn’t want Cuba to be a focal point of the summit, and Obama tried to neutralize the issue by announcing April 13 he would ease restrictions on travel and remittances by U.S. citizens with family members in Cuba.
While the U.S. is open to further engagement, Obama said yesterday, “it is important to send the signal that issues of political prisoners, freedom of speech, freedom of religion, democracy” continue to be the main U.S. priorities.
Regional Divisions
The attention to Cuba obscured divisions between Chavez and the rest of the region. It also put a spotlight on some of Latin America’s smallest countries, such as Nicaragua, with a $5.7 billion economy, while influential nations such as Brazil, with a $1.3 trillion economy, stayed on the public sidelines.
Chavez and his allies -- linked through a trade bloc Chavez founded as an alternative to a U.S.-proposed Free Trade Area of the Americas -- focused on old grievances.
Bolivian President Evo Morales, who has regularly accused the U.S. of aiding the political opposition in his country, told reporters he still sees “policies of conspiracy” under Obama. Argentine President Cristina Fernandez de Kirchner, complained of past U.S. “subordination” of the region. Nicaraguan President Daniel Ortega used the opening ceremonies to deliver a 50-minute speech that made reference to “Yankee troops” in counterinsurgency efforts in the 1980s.
Handshakes
Chavez, who once called former President George W. Bush the “devil” and Obama an “ignoramus” about Latin America, shook hands with Obama at least three times over the weekend. Obama said that Chavez is “better at positioning the cameras” than other heads of state. Obama also sat next to Ortega during a session yesterday.
“I do not see eye to eye with every regional leader on every regional issue, and I do not agree with everything that was said at this summit by leaders from other nations,” Obama said.
He also dismissed domestic critics, including Republican Senator John Ensign of Nevada, who said yesterday that Obama was “irresponsible” to be seen “joking” with Chavez.
“You would be hard pressed to paint a scenario in which U.S. interests would be damaged as a consequence of us having a more constructive relationship with Venezuela,” Obama said.
U.S. Alliances
Obama didn’t leave crucial U.S. alliances unattended, before or during the summit.
Mexican President Felipe Calderon received a visit in Mexico City one day before the summit. Brazilian President Luiz Inacio Lula da Silva met with Obama in Washington in March and at the Group of 20 meeting in London earlier this month and spoke to him by telephone just before the summit opened.
Colombian President Alvaro Uribe said he talked with Obama at the summit about a U.S. trade agreement that has been stalled by Obama’s fellow Democrats in Congress and the future of Plan Colombia, the country’s anti-narcotics program funded with more than $600 million a year in U.S. aid.
“We found a great willingness to advance our bilateral agenda,” Uribe said April 18.
To help jump-start development for the region’s poorest victims of the recession, Obama announced a microfinance growth fund, while stopping short of committing to a capital increase for the Washington-based Inter-American Development Bank.
“A real metric about whether people are serious or not is whether the countries will, using the institutions they’ve got, commit capital to helping people at a time when they need help,” said David Rothkopf, a visiting scholar at the Carnegie Endowment for International Peace.
Obama also announced a new “voluntary” partnership to advance energy security and combat climate change.
“On balance, the region does want a deeper engagement, so long as they perceive it being on the basis of mutual respect,” said Eric Farnsworth, vice president of the Washington-based Council of the Americas. “It takes two to tango.”
U.K.’s Sudden Star Boyle Revives American Dream: Kevin Hassett
Commentary by Kevin Hassett
April 20 (Bloomberg) -- Occasionally, an artist emerges who is, like Bob Dylan in the 1960s, perfect for the times. Last week, the unlikely artist of these times emerged: Susan Boyle.
Boyle, the frumpy, unemployed 47-year-old church lady from the tiny Scottish village of Blackburn, lives alone with her cat and grew up singing in the church choir. She decided to enter a talent contest to honor the memory of her dead mother, who always encouraged her to pursue her singing talent.
Mom was right. After wowing judges on the U.K. television show “Britain’s Got Talent” with her rendition of “I Dreamed a Dream,” Boyle became a sensation of historic proportions.
As of Friday, the most popular YouTube video of her performance had been viewed almost 20 million times, and Boyle spent the week hopping from morning show to morning show. Her reception was especially warm in the U.S. She announced that she is about to appear on Oprah Winfrey’s talk show, and reports of recording deals are already circulating.
There is a fairy-tale beauty to this story. A selfless woman devotes herself to caring for her elderly mother, then succeeds beyond her wildest dreams when she no longer is needed at her mother’s side. That alone would have generated a good amount of attention in any day.
For Americans, Boyle is so much bigger than that for two reasons: She gives us hope and reminds us of our roots.
With unemployment skyrocketing and the airwaves filled with the pessimism and doomsaying of the Krugmans and the Roubinis, the world is wall-to-wall with down-on-their-luck individuals who each day must decide whether to hang it up and stop looking for a new job, or to persevere, stay hopeful and keep on trying.
Indelibly Optimistic
In the past, the unemployed may have clung to their fundamental belief in the free-market system and the knowledge that all prior recessions have eventually ended. Indelible optimism has been a striking American characteristic since our founding. It’s hard to say where that optimism and belief in the virtue of hard work came from; somewhat persuasively, Alexis de Tocqueville connected them to our Puritan heritage.
Regardless of the source, this long-run optimism has served the country well and has been in itself a natural governor of downturns. Faith in free markets has been a kind of safety net for our economy.
As legendary economist Dave Cass and his colleague Karl Shell taught us with their pioneering work on business cycles, beliefs can be self-fulfilling. If citizens believe that the economic system is sound and will right itself, their actions can produce that outcome. If everyone believes that the system is irretrievably damaged, the system will fail.
Core Beliefs
This economic crisis has been so harmful to the American spirit because it has challenged the core beliefs that have sustained us for centuries. Countless commentators now assert that faith in free markets is misplaced, capitalism is dead, and the destruction is irreparable unless we hand over the keys to big government. If we accept that, then we are headed for the abyss.
Which is why hope seems at an all-time low, and why the Boyle story resonates so much with Americans.
The odds of a 47-year-old suddenly leaping to stardom are so low that any sensible friend would have told Boyle to give up her dream. But she didn’t, even though her actions couldn’t be supported rationally.
It is an understatement to say that it worked out for her.
So maybe, the public must be thinking, the 47-year-old unemployed construction worker in South Florida should keep plugging away too. With an eye on our Puritan heritage, seeing Boyle receive earthly rewards after a life of saintly service is a very powerful tonic. Perhaps she is great because she is good.
As with this recession, it is hard to say exactly how the Boyle story will end. But Americans’ response to Boyle should strengthen the hope that the so-called green shoots of this recovery will take root.
For a people that respond with such intensity to Boyle’s story must still possess the sentiments that have, since before de Tocqueville’s time, been the source of our greatness.
(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.)
Oracle to Acquire Sun Microsystems for $7.4 Billion (Update2)
April 20 (Bloomberg) -- Oracle Corp. agreed to buy Sun Microsystems Inc. for about $7.4 billion in cash, stepping in after International Business Machines Corp.’s talks to buy the server maker collapsed.
The per-share price is $9.50, 42 percent more than Sun’s closing price April 17. The acquisition probably will add $1.5 billion to Oracle’s operating profit, excluding some items, in the first year, the companies said today in a statement.
The acquisition will give Oracle Sun’s Java technology and the Solaris operating system software. Oracle, the world’s second-biggest software maker, has spent almost $34.5 billion on purchases since 2005, making it the most acquisitive software company in the world.
IBM trails both Oracle and Microsoft Corp. in software sales. The company was in takeover discussions with Sun in the past month, with negotiations breaking down over price, according to people familiar with the situation.
Sun’s shares had gained almost 80 percent the day reports of the talks with IBM surfaced, only to drop 25 percent after the two sides stopped negotiating.
Sun, based in Santa Clara, California, rose $2.51 to $9.20 in early trading after closing at $6.69 on the Nasdaq Stock Market on April 17. Oracle, based in Redwood City, California, dropped 91 cents to $18.15 after closing at $19.06 last week.
Sun’s Solaris operating system competes with Linux and Microsoft Corp.’s Windows software. Sun boosted software sales by 21 percent last quarter and said in January that it projects revenue from those products to reach about $600 million a year. That compares with Oracle’s software sales of $17.8 billion in its latest fiscal year.
(The companies will hold a conference call today at 8:30 a.m. New York time. To access the call, go to www.oracle.com/investor.)
Leading Economic Indicators Index in U.S. Fell 0.3% in March
Leading Economic Indicators Index in U.S. Fell 0.3% in March
April 20 (Bloomberg) -- The index of U.S. leading economic indicators in March fell more than forecast, indicating any recovery from what may be the longest recession in the postwar era is still many months away.
The Conference Board’s gauge fell 0.3 percent after a 0.2 percent drop in February that was smaller than previously estimated, the New York-based research group said today. The index points to the direction of the economy over the next three to six months.
Rising unemployment and tight credit mean recent gains in consumer spending, the biggest part of the economy, will probably not be sustained, extending the contraction well into the second half of the year. The report cautions that Federal Reserve and Obama administration measures to boost the financial system may not immediately pay off.
“There is just no pickup in general economic conditions despite all the gas being given it from monetary and economic stimulus,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report.
The index was forecast to decline 0.2 percent, according to the median of 51 economists in a Bloomberg News survey, after an originally reported decrease of 0.4 percent the prior month. Estimates ranged from a drop of 0.7 percent to a 0.1 percent gain.
Six of the 10 indicators in today’s report subtracted from the index, led by a plunge in building permits and declining stock prices. Faster vendor performance --signaling a decrease in order backlogs -- a decline in factory hours, rising jobless claims and a drop in bookings for capital goods also contributed to the drop.
April Improvement
Two of the gauges show signs of improving this month. The number of applications for jobless benefits two weeks ago fell to the lowest level since January and stocks have rallied 29 percent since reaching a 12-year low on March 9.
Three of the leading components improved last month, led by an increase in the supply of money. Other positives were a gain in the University of Michigan consumer expectations gauge and a widening spread between the 10-year Treasury and the overnight fed funds rate. Orders for consumer goods were little changed.
A preliminary report last week showed consumer expectations continued to improve this month.
Increased lending and purchases of securities by the Fed since credit markets seized last year have contributed to a jump in the money supply, the biggest component of the leading index.
‘Long-Lasting’ Damage
Still, Fed Chairman Ben S. Bernanke last week said the credit crisis will probably cause “long-lasting” damage to home prices and household wealth.
Economists surveyed by Bloomberg in the first week of April forecast consumer spending will falter this quarter after a first-quarter spurt and recover only gradually toward the end of the year. Purchases will drop at a 0.5 percent pace from April to June and grow at an average 0.9 percent rate the next six months, economists forecast.
Gross domestic product will probably decline at a 2 percent pace in the second quarter after an estimated 5 percent drop in the first three months of the year, according to the survey. Growth will pick up to an average pace of almost 1 percent in the second half, the surveyed showed.
The recession that began in December 2007 already matches the longest since 1933, and the 6.3 percent decline in fourth- quarter GDP was the biggest since 1982. The downturn has cost 5.1 million jobs and economists surveyed by Bloomberg forecast the unemployment rate will rise to 9.5 percent by the end of the year.
Stocks
The rebound in stocks that began last month was sparked by reports that banks were again turning a profit. A report today from Bank of America Corp., the largest U.S. bank by assets, has taken some of the shine off the equity rally.
The Charlotte, North Carolina-based bank said first-quarter profit more than tripled on gains from home refinancing and trading. Still, the stock dropped as more borrowers fell behind on their payments.
“We continue to face extremely difficult challenges primarily from deteriorating credit quality driven by weakness in the economy and growing unemployment,” Chairman and Chief Executive Officer Kenneth D. Lewis, said in a statement.
The Conference Board’s index of coincident indicators, a gauge of current economic activity, decreased 0.4 percent, after falling 0.6 percent the prior month. The index, which tracks payrolls, incomes, sales and production, is used by the National Bureau of Economic Research to Help determine the end of recessions.
The gauge of lagging indicators also dropped 0.4 percent following a 0.3 percent decrease in the prior month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.
U.S. Stocks Fall as Banks, Commodity Shares Drop
April 20 (Bloomberg) -- U.S. stocks declined, indicating the market may retreat following six weeks of gains, as concern grew that credit losses are worsening and lower commodity prices dragged down energy and material producers.
Bank of America Corp., the lender that’s fallen 72 percent in the past year, tumbled 11 percent as rising charge-offs for uncollectible loans overshadowed better-than-estimated earnings. Citigroup Inc. dropped 12 percent as Goldman Sachs Group Inc. said the bank’s credit losses are growing at a “rapid rate.” U.S. Steel Corp. and Halliburton Co. declined as oil and industrial metal prices decreased.
The Standard & Poor’s 500 Index slid 1.9 percent to 853.48 at 9:35 a.m. in New York. The Dow Jones Industrial Average lost 130.47 points, or 1.6 percent, to 8,000.86. The Russell 2000 Index of small companies fell 2.1 percent.
“We’ve had a big rally for six weeks and I wouldn’t be surprised to a see consolidation phase that could last anywhere from two to four weeks,” said Bruce Bittles, the Nashville-based chief investment strategist at Robert W. Baird & Co., which oversees $16 billion. “Financials had a bigger run than the market and certainly they are not out of the woods as well as the rest of the economy.”
The S&P 500 wrapped up its steepest six-week gain since 1938 on April 17, as profits at Goldman Sachs and JPMorgan Chase & Co. ignited gains in bank shares. The rally may falter as a prolonged recession dents corporate earnings, George Hoguet, global investment strategist at Boston-based State Street Global Advisors Inc., said in an April 18 interview.
Leading Indicators
The S&P 500 surged 29 percent from a 12-year low on March 9 through last week as banks including Citigroup said they were profitable at the start of the year and expectations grew that the worst of a global recession is past. The index of U.S. leading indicators for March may today show the longest economic slowdown in the post-World War II era will start loosening its grip in coming months.
The gauge of the outlook over the next three to six months dropped 0.2 percent following a 0.4 percent February decrease, according to the median estimate of 40 economists surveyed by Bloomberg News. The New York-based Conference Board’s index is due at 10 a.m. Washington time.
Analysts estimate that profits at S&P 500 companies decreased for the seventh straight quarter in the January to March period, the longest stretch of declines since at least the Great Depression.
‘Pullback’
“We’re likely to see a pullback in stock markets as earnings disappoint,” Hoguet said in an interview in Shanghai. “We are undergoing a severe shock and the global economy will take several quarters to get back to trend growth.” State Street Global Advisors oversees $1.4 trillion.
Bank of America fell 11 percent to $9.43 even after saying first-quarter net income more than tripled on gains from home refinancing and trading.
Citigroup declined 45 cents, or 12 percent, to $3.20. The bank’s credit losses are growing at a “rapid rate,” undermining Chief Executive Officer Vikram Pandit’s efforts to stabilize the company, according to Goldman Sachs.
While Citigroup posted first-quarter net income of $1.6 billion last week, the New York-based bank suffered an “underlying” loss of 38 cents a share, Richard Ramsden, a Goldman Sachs analyst, wrote in a research note dated yesterday. He repeated a “sell” rating on the stock.
American International Group Inc. fell 7.4 percent to $1.50. The insurer bailed out by the U.S. agreed to sell preferred stock and warrants for common shares to the government in return for access to $29.8 billion.
Stress Tests
Obama administration officials signaled there may be no need to request more financial-rescue funds from Congress as several banks plan to return taxpayer money and others are pushed to tap private markets first.
The White House chief of staff, Rahm Emanuel, said while he had not seen results of stress tests on the 19 biggest banks, he believed the White House won’t have to request more bailout funds.
“The first resort for more capital is going to the private markets,” by issuing new equity or swapping some liabilities into stock that dilutes other stakeholders, National Economic Council Director Lawrence Summers said.
Introducing A Tiger by the Tail
Introducing A Tiger by the Tail
The small book you are holding in your hands is unique. It is perhaps the finest introduction to the thought of a major thinker ever published in the discipline of economics. What makes it unique is the fact that it comprises selections and short excerpts from a broad range of Hayek's works written over a span of forty years. Despite its broad coverage, the book is amazingly compact and coherent, seamlessly integrating the main themes from Hayek's writings on money, capital, business cycles, and international monetary systems. Furthermore, although it mainly uses Hayek's own words, some from his more technical works, it has been compiled and arranged by the late Sudha Shenoy in a way that makes it comprehensible to the layperson and student but can also be read with profit by the professional economist and teacher. Because of Shenoy's brilliant choice and arrangement of the 23 separate excerpts and her own illuminating, but never intrusive, introductions to each separate selection, the book stands as a work in its own right and gives new insight into Hayek's thought. In a real sense, it is as much Shenoy's book as it is Hayek's.
The publication of the new edition of this classic could not have come at a better time, moreover. For it is not merely an outstanding contribution to intellectual history, but also a tract for our times. The United States has been mired in an officially recognized recession for more than a year now with no end in sight. Our current downturn is fast becoming the lengthiest and most severe of the post–World War II era. Entering its fourteenth month, it has already surpassed the average length of the last six recessions and is rapidly approaching the postwar record of sixteen months. The net decline in employment of 2.6 million recorded for 2008 represents the greatest absolute decline in the number of jobs since 1945. With over a half-million workers losing their jobs in December 2008 alone, the unemployment rate unexpectedly spiked from 6.8 percent in November 2008 to 7.2 percent, the highest level in sixteen years. The 4.78 million Americans now claiming unemployment insurance is the highest since 1967, when this statistic began to be recorded and represents the highest proportion of the work force since 1983. Adding to the dismal employment picture, the average work week for the month plummeted to 33.3 hours, the lowest level since 1964, while part-time jobs shot up by 700,000, or nearly 10 percent, from the previous month, indicating that many part-time workers counted as officially employed were either previously terminated from full-time jobs or reduced from full-time to part-time employment by their current employers. Other indicators of the severity of recession besides employment reveal that the current recession has been deeper than the average recession, including industrial production, real income, and retail sales. As one Fed economist concluded, "Main recession indicators tend to support the claim that this recession could be the most severe in the past 40 years."[1]
Indeed the dread word "depression" is now being used by some economists and media pundits to portray our current difficulties, conjuring up the specter of the prolonged mass unemployment amidst idle industrial capacity and unsold piles of raw materials that marked the 1930s. For most recognized experts and opinion leaders, how we got into our current difficulties is now a moot question. Everyone is clamoring for a way out. A massive government bailout involving $700 billion to purchase risky assets and to subsidize troubled financial service and domestic automobile firms has proven spectacularly ineffective in reversing or even slowing the contraction of the economy, although it has led to a staggering projected federal budget deficit of $1.2 trillion for the current fiscal year. Accompanying this deluge of red ink is highly inflationary growth in the official Fed monetary aggregates, with MZM shooting up by 10.1 percent and M2 by 7.6 percent year-over-year as of November 2008. Driving this monetary inflation has been the Fed's expansion of the adjusted monetary base by 76 percent over the same period, which has reduced the target federal-funds rate from 5.25 percent in mid-2007 to less than .25 percent by the end of 2008.[2]
In response to the deepening economic crisis, politicians and their economic advisers are offering more of the same deficit-spending and money-creation snake oil. President Obama is promoting a massive $800-billion program of increased government spending and tax cuts over two years that includes the largest public-works program since World War II. But this "stimulus program" is nothing but a continuation of the failed financial bailout under a new name. The federal government will continue to spend and spend like a drunken sailor on shore leave. And, as Chairman Bernanke has indicated, the Fed will happily accommodate this orgy of wasteful and destructive spending by creating money to buy assets of every kind imaginable.
Crude, old-style Keynesianism has thus returned with a vengeance. In truth, it never really left. Despite all the talk by government policy makers and central bankers and their macroeconomic advisers that they have painstakingly developed and learned to deploy sophisticated new tools of "stabilization policy" in the last 25 years, their tool shed is, in actual practice, completely bare of all but the blunt and well-worn instruments of deficit spending and cheap money. For their part, the mandarins of academic macroeconomics have revealed the total intellectual bankruptcy of their discipline and the laughable irrelevance of their formal models by abandoning all scholarly reserve and decorum and stridently promoting and endorsing the long discredited policies of old-fashioned Keynesianism. The amazing, knee-jerk resort to simplistic Keynesian remedies by the macroeconomics establishment in the current crisis is tantamount to the admission that there has been absolutely no progress in the postwar era in understanding the causes and cures of business cycles. This reveals a deeper and more chilling truth: contemporary stabilization policy is implicitly based on one of the oldest and most naïve of all economic fallacies, one that has been repeatedly demolished by sound economic thinkers since the mid-18th century. This fallacy is that there exists a direct causal link between the total volume of money spending and the levels of total employment and real income.
In this book, Hayek provides an incisive critique of this fallacy in its Keynesian form and demonstrates the dire consequences of pursuing policies based on it. But the book contains much more than a critique of fallacious theories and policies: it holds the recipe for a solid and steady recovery from our current depression (and yes, always the straight talker, Hayek uses this forbidden word).
In brief, Hayek argues that all depressions involve a pattern of resource allocation, including and especially labor, that does not correspond to the pattern of demand, particularly among higher-order industries (roughly, capital goods) and lower-order industries (roughly, consumer goods). This mismatch of labor and demand occurs during the prior inflationary boom and is the result of entrepreneurial errors induced by a distortion of the interest rate caused by monetary and bank credit expansion. More importantly, any attempt to cure the depression via deficit spending and cheap money, while it may work temporarily, intensifies the misallocation of resources relative to the demands for them and only postpones and prolongs the inevitable adjustment.
The reason why this is not perceived by Keynesians is because of an implicit assumption that Hayek identified in Keynes's writings. Keynes wrongly assumed that unemployment typically involves the idleness of resources of all kinds in all stages of production. In this sense, Keynesian economics left out the vital element of the scarcity of real resources, the pons asinorum of undergraduate economic-principles courses. In Keynes's illusory world of superabundance, an increase in total money expenditure will indeed increase employment and real income, because all the resources needed for any production process will be available in the correct proportions at current prices. However, in the real world of scarcity, as Hayek shows, unemployed resources will be of specific kinds and in specific industries, for example unionized labor in mining or steel fabrication.
Under these circumstances, an increase in expenditure will increase employment, but only by raising overall prices and making it temporarily profitable to reemploy these idle resources by combining them with resources misdirected away from other industries where they were already employed. When costs of production have once again caught up with the rise in output prices, unemployment will once again appear, but this time in a more severe form because of the misallocation of additional resources. The government and central bank will then once again face the dilemma of allowing unemployment or expanding the stream of money spending. This sets up the conditions for an ever-accelerating monetary and price inflation, punctuated by periods of worsening unemployment, as was the case during the Great Inflation of the 1970s and early 1980s.
The alternative to this, Hayek argues, is to eschew monetary inflation and permit the prices of the unemployed resources to naturally readjust downward to levels that are sustainable at the current level of money income. In this case, unemployed labor and other resources will be guided by the price system into production processes that are sustainable at the current level of monetary expenditure. Permitting the market adjustment of relative prices and wage rates thus ensures a structure of resource employment that is coordinated with the structure of resource demands. In contrast, inflating aggregate money expenditure leads to a short-run increase in employment that causes an inappropriate distribution of resources whose inevitable correction ensures another depression. Such a correction can be postponed, but never obviated, only by repeatedly neutralizing relative price changes through accelerating inflation.
Those who deny Hayek's analysis — as all contemporary mainstream macroeconomists and policymakers do — and promote ever-increasing spending as the panacea for our present crisis live in the simplistic Keynesian fantasy land from which scarcity of real resources has been banished and in which the scarcity of money and credit is the only constraint on economic activity. As Hayek pointed out, such people do not merit the name "economist":
I cannot help regarding the increasing concentration on short-run effects — which in this context amounts to the same thing as a concentration on purely monetary factors — not only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilization. To the understanding of the forces which determine the day-to-day changes of business, the economist has probably little to contribute that the man of affairs does not know better. It used, however, to be regarded as the duty and the privilege of the economist to study and to stress the long-run effects which are apt to be hidden to the untrained eye, and to leave the concern about the more immediate effects to the practical man, who in any event would see only the latter and nothing else.[3]
The recent bailouts and prospective stimulus package are aimed at reflating financial-asset and real-estate values back to levels inconsistent with the optimal distribution of labor and other resources as determined by the free interplay of market prices. And if enough money and spending are pumped into the economy, it is just possible that such a policy may, for a short while, freeze some resources in and return others to suboptimal employments, thus arresting or reversing our present downturn. But the advocates of these short-run spending palliatives are blind to what lies beyond: the long-run aftereffects of progressive inflation which, when eventually reined in, will result in an even more severe crisis and precipitous plunge into depression.
The prevailing macroeconomics paradigm has burst asunder along with the real-estate bubble. Modern macroeconomists failed to forewarn against the dangers of the recklessly inflationary monetary policy pursued by the Fed in the first half of this decade. They now are at a complete loss for a coherent explanation of its consequences in the deepening financial crisis and recession that afflicts the global economy. Instead, they are reduced to reflexively prescribing the long obsolescent Keynesian "stimulus" policy of deficit spending and cheap money — a sure recipe for a prolonged and grinding depression. Fortunately, there exists an analysis of business cycles — of bubbles, crises, and depressions — based on a long tradition of sound economic reasoning that will guide us out of the current morass to a steady and solid recovery. If one wishes to learn about this analysis, he or she can do no better than to start with a careful reading of A Tiger by the Tail.
The audacity of hope
Banks
The audacity of hope
Optimism that banks’ fortunes have reached bottom may be premature
LLOYD BLANKFEIN may travel by train rather than private jet these days, but the firm he heads has moved back into the fast lane. On April 13th Goldman Sachs kicked off the banks’ earnings season in impressive fashion: the $1.8 billion of net profit it posted for the first quarter smashed analysts’ forecasts, leaving them wondering, if only for a moment, whether they were back in 2006. At the same time, Goldman cheekily raised more than $5 billion of common equity to help pay back the $10 billion of taxpayer money it was arm-twisted into taking last October.
Goldman is keen to distinguish itself from weaker banks, but optimists see its results as part of a pattern of recovery for the industry. JPMorgan Chase reported stronger-than-expected results on April 16th. Wells Fargo expects to post record quarterly profits, largely thanks to surging mortgage refinancing as interest rates have fallen. Optimism about banks’ performance has given their shares a much-needed lift from their March lows (see chart). Hope is growing that, with markets thawing and the yield curve steeper, allowing banks to lend at higher rates than those at which they borrow, many will be able to earn their way out of trouble. The reality may be less cheering.
It is easy to see why Goldman considers it a “duty” to repay the government (it would be the first big bank to do so). With a business model that relies on rewarding top performers handsomely, it is chafing more than most under the executive-pay restrictions that come with the infusion—though it still managed to pay employees slightly more last quarter, as a proportion of total costs, than it did the year before, a “massive middle finger” to congressional critics, as one rival puts it. Goldman worries about other forms of interference, too: politicians have questioned, for instance, whether it should have so much invested in foreign banks, such as China’s ICBC.
Goldman hopes to be able to settle its debt to the taxpayer once it gets the result of the stress tests being conducted on America’s 19 largest banks, which are due to end at the end of April. A clean bill of health seems all but assured given its high capital ratio, a $164 billion pool of cash and a culture of marking assets to market.
But what is good for one bank may be bad for the system as a whole. Regulators worry that letting one or two strong banks repay risks turning the weak into targets and takes lending capacity out of the system. They also worry about the embarrassing prospect of banks that repay early having to return to the trough if markets deteriorate again, which would create political fireworks. Brad Hintz of Alliance Bernstein expects the government to delay Goldman’s repayment until a larger group of banks is able to repay simultaneously.
When that might be is far from clear. Even Goldman is in less stellar shape than its results might suggest. First, they excluded December, a poor month that fell into a convenient gap when Goldman and Morgan Stanley switched to calendar-year reporting on becoming bank-holding firms.
Second, Goldman, like others, benefited from one-off boosts, such as the surge in corporate-bond issuance as seized-up markets began moving again in January, and from managing each other’s government-backed debt issues. They are also enjoying freakishly high bid-ask spreads and margins in “flow” businesses, such as fixed income, currencies and commodities (FICC). These have widened by up to 300% thanks to spiking volatility and the retreat of several big rivals, according to a study by Morgan Stanley and Oliver Wyman, a consultancy. Fully 70% of Goldman’s first-quarter revenue came from FICC.
These spreads are sure to come down as new actors enter the fray and old ones return, albeit gingerly. Other businesses will struggle to take up the slack any time soon. Goldman’s quarter-on-quarter investment-banking revenues were down 20%. Merger-advisory fees are likely to remain depressed for several years.
There is, moreover, still plenty of red ink sloshing around. Citigroup was expected to post its sixth straight quarterly loss on April 17th. It continues to shrink its balance-sheet and to look to sell non-core assets. Morgan Stanley, too, is expected to report a loss on April 22nd, largely thanks to having to mark-to-market its own debt, which has become more expensive. Across the Atlantic UBS, a Swiss bank, warned on April 15th of yet another loss and more job cuts as it tries to stem client defections that, according to its outgoing chairman, have put it in a “precarious” situation.
More blows are coming. Banks worldwide have written down their assets by $1.1 trillion. The final tally is expected to be double that, or more. The pain is only now starting to spread through commercial property and commercial loans. As a result, the first-quarter reprieve will turn out to be a “head fake”, says Chris Whalen of Institutional Risk Analytics.
It does not help that many banks have not set aside enough reserves for credit losses—though the blame lies as much with accounting rules as with their own managers. Analysts at Keefe, Bruyette & Woods argue that Wells Fargo holds an array of assets at rose-tinted values and may need another $25 billion in capital, on top of the $25 billion it has already taken from the Treasury. Few banks hold their commercial-property portfolios anywhere close to the 50-60 cents on the dollar valuation that Goldman does.
The longer-term outlook is equally sobering. In 2006 investment banks made an average return on equity of 17%. Just to get back to double digits, they will have to cut costs by well over $100m for every $100 billion of assets they hold, reckon the authors of a recent report from the Boston Consulting Group. Commercial banks can expect their returns to stay in the 10-12% range of the 1940s-80s for the indefinite future, says Richard Ramsden, a Goldman analyst.
Although the overall pie will be less mouth-watering, some will enjoy a bigger slice. Barclays, which snapped up Lehman Brothers’ American operations for a song, now boasts a 15% share of the Treasuries market, for instance. But even the survivors remain cautious. David Viniar, Goldman’s chief financial officer, this week said market conditions remain “dangerous”. One interpretation of the timing of the bank’s capital-raising is that it wants to grab what it can in case the second quarter is not as hospitable as the first. No wonder American bank shares are still, on average, trading some 70% below their peak.
The week ahead
The coming days
The week ahead
From Economist.com
A big election in South Africa and other news of the coming days
• A LANDMARK election is held in South Africa on Wednesday April 22nd. The African National Congress, which has held office since the end of apartheid in 1994, is certain to dominate parliament again, and will probably retain its two-thirds majority, sufficient to alter the constitution. Attention will be paid to a new black-led opposition party, Congress of the People (COPE), which includes leading ANC figures who broke away from the ruling party in recent months. A strong electoral performance this year could indicate a more credible opposition movement is emerging in the country. The new parliament will in turn pick a new president: Jacob Zuma, the candidate of the ANC.
For background, see article
• THE parlous state of America’s banks may not be wholly reflected when more results are released. Wells Fargo, which officially reports on the first quarter on Wednesday April 22nd, has said that it will make record profits, largely thanks to surging mortgage refinancing as interest rates have fallen. But it still holds a heap of assets at rose-tinted values and may need another $25 billion in capital. Morgan Stanley is expected to report a loss on Wednesday, largely thanks to having to mark its own debt to market values.
For background, see article
• BRITAIN'S chancellor of the exchequer (finance minister), Alistair Darling, presents a budget on Wednesday April 22nd that is set to be laden with gloom. Mr Darling will be forced to announce ballooning debt and gloomier forecasts for the economy that are likely to mean that he must make spending cuts and raise taxes. Other measures are expected to give help to the jobless and savers hit by rock-bottom interest rates. The environment and beleaguered carmakers may benefit from a “cash for clunkers” scheme that will pay to encourage the scrapping of old and polluting cars.
For background, see article
• THE World Bank and IMF hold their two-day spring meetings in Washington, DC, starting on Saturday April 25th. Finance and development ministers from member countries have had plenty of opportunity to talk recently at emergency meetings to discuss the world’s economic ills. These problems have thrust the IMF to the forefront of the struggle to save the world economy. The G20 made several recommendations for strengthening IMF and World Bank governance. The IMF may announce more takers for its precautionary credit line for emerging economies (Poland has become the second country, after Mexico, to ask for one), which would strengthen its claim to be more like an insurer of economies rather than its earlier role as a policeman.
For background, see article
Ties that bind
America and Israel
Ties that bind
Israel's new government is weighing up relations with America
AVOID a confrontation with the new American administration. That is what Israel’s defence minister, Ehud Barak, sought to persuade his prime minister, Binyamin Netanyahu, on Sunday April 19th. Rather, said Mr Barak, turn up in Washington, DC, next month with your own Israeli peace plan. This should recognise the Palestinians’ right to an independent state but only subject to stringent limitations and qualifications in the interests of Israel’s security.
Mr Barak delivered his lecture on Sunday at a meeting of Israel’s new “kitchen cabinet”—Mr Netanyahu, Mr Barak and the new foreign minister, Avigdor Lieberman—convened as part of an ongoing review of policy on peace and the Palestinians.
The defence minister’s remarks came in leaked driblets from the secret consultation. Publicly Mr Barak, the leader of the Labour Party, has been careful not to criticise or dissent from Mr Netanyahu, who heads the more rightist Likud. By the same token, Mr Netanyahu has been unwontedly reticent on his own views and plans, for fear of prematurely ventilating differences with the Obama administration.
The prime minister is apparently still loth to embrace the two-state solution and abandon his election platform, which spoke of “economic peace” as distinct from full political peace between two equal states. In leaks of his own last week, Mr Netanyahu aired the demand that the Palestinian Authority accepts Israel’s self-definition as “the Jewish state”. In local diplomatic casuistry, that would imply the Palestinians’ renunciation of the “right of return” of their refugees.
The prospect of a showdown with a new American administration, which fills rightist Israelis with trepidation and at least some leftist ones with hope, has arisen every four years since the occupation began after the 1967 war. It has never materialised. Despite ups and downs, relations between the superpower and its unruly client have grown steadily closer over the decades. Efforts by all the successive American administrations to stop Israeli settlement building in the Palestinian areas have been resisted or ignored.
Speculation this time has focused on the fact that Mr Netanyahu made tentative plans to visit Washington, DC, early in May, but the White House let it be known that the president would not be available. Mr Netanyahu then indicated that his government had embarked on a policy review. His visit is now expected to take place towards the end of next month. By then, however, Barack Obama will have received Jordan’s King Abdullah and got an earful about the Netanyahu government’s recalcitrance.
A particular target of Arab ire is Mr Lieberman, leader of a Russian-immigrant party, Yisrael Beitenu, which campaigned on an anti-Arab platform and emerged as the third-largest party. After a blustery start, Mr Lieberman seems to be settling into a quieter mode. At the weekend he announced the appointment of a young Israeli-Arab diplomat as a member of his inner staff.
Mr Obama’s peace envoy to the region, George Mitchell, a former Senator, admonished Israelis and assured Palestinians last week that “two states” remained the bedrock of American policy. He made a point, in his public pronouncements, of describing Israel as the Jewish state, but there is plainly no interest on the American side in seeing this issue of nomenclature become a big obstacle between Israelis and Palestinians. Mr Barak urged Mr Netanyahu not to make Palestinian recognition of Israel’s Jewishness a precondition for negotiations. Mr Netanyahu has said that he would not.
When Messrs Obama and Netanyahu do meet at last, some observers expect America’s president to push for a “grand bargain” involving American and international pressure on Iran in return for Israeli concessions to the Palestinians. Mr Netanyahu, more than any other Israeli politician, has been ominously outspoken since the mid-1990s on the existential threat to Israel, as he sees it, of Iran’s attaining nuclear weapons. Mr Obama’s policy of attempting dialogue with Teheran worries some Israeli policymakers. But there is also a growing awareness here that the policy’s success, as well as the strength and effectiveness of Sunni Arab opposition to Iran’s nuclear ambitions, may hinge on America’s ability to show substantive progress on Israeli-Palestinian and Israeli-Arab peacemaking.
Yuanzone Baby Steps
Yuanzone Baby Steps
Making local-currency trading easier is a good idea.
From today's Wall Street Journal Asia
Much of China's recent
wealth has been built by opening up to foreign trade and taking steps to modernize capital allocation back home. This month's move to make local-currency trading easier is another step in the right direction.
The State Council announced on April 8 that Shanghai and four southern Chinese cities -- Guangzhou, Shenzhen, Dongguan and Zhuhai -- would commence trade settlement schemes in yuan. The idea is to let companies at home and abroad denominate their trade exclusively in yuan if they want to, rather than convert through another currency. No start date or further details were given.
China has allowed yuan convertibility for commercial purposes since 1996. The difference now is that it will let businesses with yuan income keep that money abroad and use it to pay for goods and services or stash it in bank accounts and let it earn interest.
Think of this as a baby step toward a yuanzone. If a mainland Chinese tourist buys jewelry at a Hong Kong shop, for instance, the jeweler could accept the yuan and keep it in Hong Kong, rather than having to immediately exchange it into Hong Kong dollars or U.S. dollars. That saves the jeweler the transaction cost of changing money, alleviates the risk of a dollar shortage in volatile markets and discourages fraudulent practices to move yuan across borders.
The more China lets capital flow freely, the more trade will occur, to the benefit of both sides. China let Hongkongers open up yuan-denominated retail banks accounts in 2004, for instance, and now the territory has 54 billion yuan ($8 billion) in deposits. Corporate capital flows will likely dwarf that amount.
Since the 1997 handover, Beijing has used Hong Kong as a financial laboratory to give individuals and companies more financial freedom. The yuan won't supplant the dollar as the world's trading currency of choice anytime soon. But the more China frees trade, the better off everyone will be.
The Memos Prove We Didn't Torture
The Memos Prove We Didn't Torture
The Red Cross was completely wrong about 'walling.'
DAVID B. RIVKIN JR. LEE A. CASEY
The four memos on CIA interrogation released by the White House last week reveal a cautious and conservative Justice Department advising a CIA that cared deeply about staying within the law. Far from "green lighting" torture -- or cruel, inhuman or degrading treatment of detainees -- the memos detail the actual techniques used and the many measures taken to ensure that interrogations did not cause severe pain or degradation.
Interrogations were to be "continuously monitored" and "the interrogation team will stop the use of particular techniques or the interrogation altogether if the detainee's medical or psychological conditions indicates that the detainee might suffer significant physical or mental harm."
An Aug. 1, 2002, memo describes the practice of "walling" -- recently revealed in a report by the International Committee of the Red Cross, which suggested that detainees wore a "collar" used to "forcefully bang the head and body against the wall" before and during interrogation. In fact, detainees were placed with their backs to a "flexible false wall," designed to avoid inflicting painful injury. Their shoulder blades -- not head -- were the point of contact, and the "collar" was used not to give additional force to a blow, but further to protect the neck.
The memo says the point was to inflict psychological uncertainty, not physical pain: "the idea is to create a sound that will make the impact seem far worse than it is and that will be far worse than any injury that might result from the action."
Shackling and confinement in a small space (generally used to create discomfort and muscle fatigue) were also part of the CIA program, but they were subject to stringent time and manner limitations. Abu Zubaydah (a top bin Laden lieutenant) had a fear of insects. He was, therefore, to be put in a "cramped confinement box" and told a stinging insect would be put in the box with him. In fact, the CIA proposed to use a harmless caterpillar. Confinement was limited to two hours.
The memos are also revealing about the practice of "waterboarding," about which there has been so much speculative rage from the program's opponents. The practice, used on only three individuals, involved covering the nose and mouth with a cloth and pouring water over the cloth to create a drowning sensation.
This technique could be used for up to 40 seconds -- although the CIA orally informed Justice Department lawyers that it would likely not be used for more than 20 seconds at a time. Unlike the exaggerated claims of so many Bush critics, the memos make clear that water was not actually expected to enter the detainee's lungs, and that measures were put in place to prevent complications if this did happen and to ensure that the individual did not develop respiratory distress.
All of these interrogation methods have been adapted from the U.S. military's own Survival Evasion Resistance Escape (or SERE) training program, and have been used for years on thousands of American service members with the full knowledge of Congress. This has created a large body of information about the effect of these techniques, on which the CIA was able to draw in assessing the likely impact on the detainees and ensuring that no severe pain or long term psychological impact would result.
The actual intelligence benefits of the CIA program are also detailed in these memos. The CIA believed, evidently with good reason, that the enhanced interrogation program had indeed produced actionable intelligence about al Qaeda's plans. First among the resulting successes was the prevention of a "second wave" of al Qaeda attacks, to be carried out by an "east Asian" affiliate, which would have involved the crashing of another airplane into a building in Los Angeles.
The interrogation techniques described in these memos are indisputably harsh, but they fall well short of "torture." They were developed and deployed at a time of supreme peril, as a means of preventing future attacks on innocent civilians both in the U.S. and abroad.
The dedicated public servants at the CIA and Justice Department -- who even the Obama administration has concluded should not be prosecuted -- clearly cared intensely about staying within the law as well as protecting the American homeland. These memos suggest that they achieved both goals in a manner fully consistent with American values.
Messrs. Rivkin and Casey, who served in the Justice Department under George H.W. Bush, were U.S. delegates to the U.N. Subcommission on the Promotion and Protection of Human Rights.
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