Europe's Week Ahead: Results from H&M

Obama, Iran and North Korea

Meeting thuggery with coolness

The president is playing a cautious game with rogue regimes

AS IRAN is rocked by the largest street protests since the revolution of 1979, Barack Obama is pursuing a policy of “wait and see”. His priority is to prevent the Iranian regime from acquiring a nuclear bomb. His preferred method is to negotiate directly with Iran’s leaders. Since it is not clear who will end up in charge in Tehran, he is biding his time.

On June 12th, Iran held a presidential election. Before there was time to count the votes, the Iranian government announced that the incumbent, Mahmoud Ahmadinejad, had won by an astonishing margin. At this point, many Americans would have liked their president to have spoken out. Most take a dim view of Mr Ahmadinejad, who denies that the Holocaust happened but makes veiled threats to unleash another one on Israel. Many Americans believe that he or his allies rigged the poll, and that Mr Obama should say so in clear and searing language. Senator John McCain, Mr Obama’s former rival, called the Iranian election an obvious sham and called for action of some kind.

But Mr Obama is playing it cool. He waited until June 15th to offer a few scrupulously measured words. He said he was “deeply troubled” by the violence he had seen on television. He noted that the Iranian government had said it would investigate “irregularities” with the vote. He cautioned that since there were no international observers on the ground, he could “not state definitively” what had happened. He stressed that “it is up to Iranians to make decisions about who Iran’s leaders will be”. This cautious policy, though, could easily be upended if events in Iran were to turn bloodier still.

He pointedly refrained from offering even verbal support to Mir Hosein Mousavi, the reformist leader whose supporters are thronging the streets crying foul—though he did go so far as to say that “we do believe that the Iranian people and their voices should be heard and respected.” Even his vice-president, Joe Biden, who on the campaign trail called Mr Ahmadinejad a “madman”, “that wacko guy” and “the crazy president”, kept his mouth uncharacteristically shut. Pressed by a television interviewer, he said only that he had “doubts” about the Iranian election.

Mr Obama’s critics accused him of failing to support democrats and oppose theocrats with sufficient vigour. “The administration’s silence in the face of Iran’s brutal suppression of democratic rights represents a step backwards for home-grown democracy in the [Middle East],” growled Eric Cantor, the House Republican whip. “It’s very clear that the president’s policies of going around the world and apologising for America aren’t working,” said Mitt Romney, a once and perhaps future Republican presidential candidate.

Mr Obama seems unruffled. Given the history of American-Iranian relations, (which include a CIA-sponsored coup in 1953), it would not be productive to be seen to be meddling in an Iranian election, he said. He would rather let Iranians decide who will rule them. The decision may not be made democratically, but there is little America can do about this, he calculates.

He could offer full-throated or even material support to the opposition, but this would probably backfire: the regime would then be able to portray its opponents as stooges of the Great Satan. So Mr Obama will wait and then deal with whoever emerges on top, predicts Brian Katulis, an analyst at the Centre for American Progress, a think-tank with close links to the White House.

Meanwhile, assuming the current Iranian regime remains in power, Mr Obama will enter negotiations with low expectations, says Mr Katulis. Iran’s leaders seem determined to acquire a nuclear capability that would enable them to make a bomb in short order and to find the means to deliver it. Gentle persuasion is unlikely to sway them. But if Mr Obama is seen to give diplomacy a chance, he may find it easier to build international support for sanctions. Currently, the Treasury makes life hard for banks that do business with Iran, but other countries, particularly Russia, resist the imposition of anything tougher.

Mr Obama is gambling that he can reshape global opinion. A first step is to persuade Muslims that America is not their enemy. In a speech in Cairo this month he quoted the Koran, praised Islamic culture and promised a “new beginning” based on “mutual interest and mutual respect”. In a speech to mark the Iranian new year back in March, he praised Iran’s “great civilisation”, saying he wants it “to take its rightful place in the community of nations”.

If he makes it harder to caricature Americans as bloodthirsty imperialists, he figures, he will deny hardliners in Iran and elsewhere one of their most potent rhetorical tools. And that could make it slightly less difficult for him to resolve the Middle Eastern problems that have frustrated every previous American president, he hopes. He sees many of the region’s ills as interconnected; but he has not yet hit on a grand strategy for addressing them.

Instead, he is feeling his way, trying to keep as many people on his side as possible. When Israel’s prime minister, Binyamin Netanyahu, announced on June 14th that he could accept a Palestinian state but only under conditions most Palestinians deplore (see article), Mr Obama tactfully stressed the positive. “What we’re seeing is at least the possibility that we can restart serious talks,” he ventured.

Meanwhile, he has upset pro-Israeli hawks by demanding an end to the expansion of Jewish settlements on Palestinian land. He is also pressing Israel not to try to destroy Iran’s nuclear programme by bombing it. But as much as people like to suggest that Israel is an American puppet, it is not, says Michael Rubin, an Iran expert at the American Enterprise Institute, a conservative think-tank.

Also troubling Mr Obama this week was the other surviving member of George Bush’s axis of evil. Last week, the UN Security Council tightened sanctions on North Korea for its illegal nuclear weapons. On June 16th, the New York Times reported that the American navy will try to search North Korean ships suspected of smuggling arms or nuclear technology. The paper said American sailors would not board North Korean ships without permission. But they would follow them into ports and insist that the countries where they dock refuse to let them refuel unless they submit to inspections.

At a joint press conference with the president of South Korea Mr Obama confirmed the main thrust of the report, but stressed that the details are still being discussed with China, Russia, Japan and South Korea. “There’s been a pattern in the past where North Korea behaves in a belligerent fashion, and if it waits long enough [it] is then rewarded,” said Mr Obama. “We are going to break that pattern.”

Iran's election

Demanding to be counted

An apparently rigged election is shaking the fragile pillars on which the Iranian republic rests

IRANIANS voted in record numbers on June 12th. Analysts had predicted a close race; hope of change was in the air. So for many, the official result—with a claimed margin of 63% for the incumbent president, Mahmoud Ahmadinejad—was a preposterous sham. At first, youths took to the streets in Tehran and elsewhere, lighting fires and smashing shop windows. When these were beaten back, opposition grew. Braving an official ban and rumours of police gunfire, well over a million Iranians took to the streets of Tehran on June 15th, dwarfing a televised victory rally staged the day before by Mr Ahmadinejad. A fractured, demoralised opposition suddenly appeared united, empowered and focused on Mir Hosein Mousavi, the soft-spoken former prime minister who, by the official count, had polled only 13m votes to Mr Ahmadinejad’s 24m. Their protests have continued ever since.

In the three decades since the Islamic Republic was founded, Iran has not been rocked like this. Tehran is engulfed in huge marches every day. Women in chadors, bus conductors, shopkeepers and even turbanned clerics have joined the joyous show of people power. Nationwide strikes are planned.

But the government has struck back. Its men have beaten up protesters and fired on the crowd. Reformers, intellectuals, civil leaders and human-rights activists have been arrested or have gone missing, not only in Tehran but also in Tabriz, in the north-west, and across the country. Since the Ministry of Guidance has expelled foreign journalists, the course of the repression will be hard to follow. And the outcome of this clash is impossible to predict.

The unrest is not, or not yet, about the basic underpinnings of the system created by Iran’s 1979 revolution. Protesters have deliberately dressed modestly, enlisting religious symbolism to appeal to the notions of injustice and redemption that lie at the heart of Shia Islam. It is about feelings, shared on both sides of the divide, that the Islamic Republic has gone astray. The split reflects not only a polarised electorate, but also a deep and growing schism within the ruling establishment.

Iran’s unique system rests uncomfortably on two pillars, one democratic, the other theocratic. The elected parliament and presidency have plenty of power over state spending and investment, but little over national security, including Iran’s controversial nuclear programme. This falls under the aegis of the theocratic branch, embodied by the supreme leader, Ayatollah Ali Khamenei. Mr Khamenei serves not only as a moral authority but also as commander-in-chief of the armed forces, and controls a range of powerful bodies intended to enforce the “Islamic” nature of the system, including courts, state broadcasting and the Guardian Council, an appointed committee charged, among other things, with vetting candidates and monitoring elections.

Today’s upheaval undermines both these pillars at once. Most Iranians believe electoral fraud has occurred on a massive scale. The implications are far-reaching. Extracting the state from the cloud of suspicion that has fallen over it will be tricky. A clampdown by the army and police, with Mr Ahmadinejad brazening out his critics, would wreck the Islamic Republic’s democratic pretensions for good. But this turmoil has not just undermined Iranian democracy; it has also damaged the prestige of the supreme leader.

Most of Iran’s fast-expanding but hard-pressed urban middle class dislike Mr Ahmadinejad. They suspect that his re-election was intended to stamp legitimacy on the grip of hardliners who consider the “Islamic” bit of the revolution more essential than its “republican” part. Among his opponents are pious conservatives, including some prominent senior clerics, as well as liberals who would, if given a real choice, probably opt for a secular state. But even in south Tehran, a working-class area assumed to be for Mr Ahmadinejad, pro-Mousavi voters thronged the streets: a middle-aged woman in tears lest the election was stolen, and a young man who used the only English word at his command to explain his choice: “Freedom”.

Their leaders are figures who, like Mr Mousavi, gained prominence in the early years of the revolution, but have learned pragmatism since. Many are linked to the reformist movement that briefly thrived during the presidency, from 1997 to 2005, of Muhammad Khatami, a smiling cleric whose enormous popularity failed to make headway against entrenched and occasionally vicious conservative opposition. Several of those arrested this week were Mr Khatami’s close advisers.

Men like these see Mr Ahmadinejad’s administration as dangerously incompetent in its domestic policy and recklessly confrontational in foreign affairs. Most ominous to some have been his purges not just of reformists, but also of the wider revolution-era nomenklatura from ministries, local government and universities in favour of people seen as narrow-minded, bullying provincials. This, together with the parcelling-out of rich government contracts to ideological allies such as the Revolutionary Guard, has raised fears that the state is drifting towards a Venezuelan model of demagogic cronyism.

What conservatives dread

The president’s supporters also suspect a coup, but one along the lines of eastern Europe’s colour revolutions. The danger, as they see it, is that Iran’s pure Islamic identity will be diluted by a wave of Western materialism, encouraged by a corrupt elite whose revolutionary ardour has faded. Supporters of Mr Ahmadinejad’s millenarian populism include commanders of the Revolutionary Guard and its larger volunteer auxiliary, the baseej, as well as allies the president has packed into the regular army, police and intelligence services. They are backed by extreme conservatives among the Shia clergy, some of whom say a pious elect, not the people, should rule. Other support comes from the (shrinking) peasantry, pensioners, war veterans and others who have benefited from the spendthrift but scattershot generosity of Mr Ahmadinejad’s government.

Getty ImagesScornful Ahmadinejad

The supreme leader, too, who should theoretically remain above the political fray, has frequently signalled tacit support for Mr Ahmadinejad. This means that he cannot easily dissociate himself, as he has in the past, from whatever electoral malpractice there may have been. Not only did he hastily bless the election result, pre-empting its validation by the Guardian Council as the rules require. He also, before the election, described the kind of candidate voters should choose in terms that made it clear he was referring to the president. Moreover, one of Mr Khamenei’s sons is believed to have not only quietly sponsored the president’s rise from provincial obscurity, but also orchestrated his two presidential campaigns.

The first of these, in 2005, also produced credible charges of fraud, albeit on a smaller scale. Mehdi Karroubi, a reformist cleric who ran in the recent election, was narrowly beaten to second place in a first round of voting because of a suspiciously heavy tilt to Mr Ahmadinejad in outlying provinces. This propelled Mr Ahmadinejad, then a political novice, into a surprise second-round triumph against Hashemi Rafsanjani, a former president. Mr Karroubi’s protests at the time were quashed by the supreme leader.

This new result looks even more suspect. Before the vote, the president’s rivals had voiced worries about possible fraud. A news report claimed that whistleblowers inside the Ministry of Interior, which organises vote-counting, had warned that it planned to tamper with the outcome. Mr Rafsanjani, still a power-broker as head of two bodies that are meant to adjudicate between branches of government, took the unusual step of firing off a long, heated public letter to Mr Khamenei, declaring that unless the supreme leader acted to ensure a fair vote, trouble would ensue.

Conservatives at the heart of Iran’s “deep state”—that coterie of officials and clerics who are assumed really to be running things—were known to have been disturbed by the sudden snowballing of support for Mr Mousavi. He had at first been seen as a conveniently weak replacement for Mr Khatami, who withdrew from the race in his favour. Particularly upsetting to them was the disregard for public decorum displayed by the young women (“whores of the West” in one baseej newspaper) who joined Mr Mousavi’s rallies. The rigged count itself appeared to many to be a direct response to these fears.

Early on Mr Mousavi, who, supporters say, was tipped off by allies within the Ministry of Interior, proclaimed himself the likely winner. But soon afterwards rolling official results, announced with unusual speed, showed him far behind with only a third of the vote. Suspicions rose further as observers were barred from some counting centres, and the campaign headquarters of Mr Ahmadinejad’s opponents found its telephone lines cut, along with the nationwide text-messaging services they had intended to use to keep an independent tally of the vote. Any remaining doubts vanished on June 14th, as police sealed the headquarters of Messrs Karroubi and Mousavi, placed them under house arrest and detained dozens of their most prominent supporters.

Mr Ahmadinejad certainly has millions of enthusiasts, particularly in areas beyond the scrutiny of Tehran’s chattering classes. Yet the official result still seemed incredible. Mr Karroubi, for instance, had won more than 5m votes in 2005, but now trailed in last place with a mere 330,000 out of the 39m cast, fewer than the number of spoiled or blank ballots. All three challengers were shown to have lost even in their own home regions, despite strong local loyalties and the expectation of state largesse from having sons in high places.

What could explain such an apparently blatant attempt to rig an election that, even had Mr Mousavi won, would have represented little threat to either the republic or its supreme leader? The most likely theory is of a plan gone awry. Given the line-up of institutions either controlled by Mr Khamenei or systematically packed with Mr Ahmadinejad’s supporters, and given that no incumbent president in Iran has yet lost to a challenger, it may have seemed safe to bet on the president’s victory. This would have brought the added satisfaction to many dyed-in-the-wool conservatives, possibly including Mr Khamenei, of weakening the position of Mr Rafsanjani, who has mounted a rearguard struggle to contain the president’s influence.

ReutersCautious Khamenei

Just to make sure, strong potential challengers, such as Mr Khatami and the popular, conservative mayor of Tehran, Muhammad Qalibaf, were “persuaded” by the supreme leader not to run. Compared with the ebullient, politically canny Mr Ahmadinejad, the three remaining challengers appeared drab and uninspiring. Mr Ahmadinejad felt so confident that he agreed to an unprecedented series of televised debates. His superior political skills gave him the advantage on screen, but his scorn for his rivals helped stir up a surge of sympathy for Mr Mousavi, dispelling the political apathy that normally pervades Iran’s middle class.

Conservatives suddenly found themselves facing a torrent of youthful activists, their passion for change magnified by the spontaneous but effective use of simple symbols and modern communications. Stunned by this turn of events, Iran’s deep state appears to have opted for a last-minute, and therefore clumsy, attempt to alter the outcome in the president’s favour.

Democracy in the balance

What will happen now? None of the possible outcomes looks good. Mr Mousavi, who, along with Mr Karroubi, has shown unexpected steel in the face of pressure, insists that the only solution is to cancel the election results altogether. “Otherwise,” he says, “nothing will remain of people’s trust in the government and ruling system.” Yet, in deference to the Supreme Leader, the three disappointed challengers have also gone through the motions of a formal protest to the Guardian Council.

This 12-man body, chaired by an ultra-conservative who personally endorsed Mr Ahmadinejad, officially has ten days to investigate the charges pressed by Messrs Mousavi and Karroubi. Faced with the pressure of street protests, it has already, grudgingly, agreed to at least a partial recount of votes. Mr Khamenei has sought to bolster his position by issuing his own call for an inquiry. Yet many reformists fear that the intention is to play for time while passions burn out, and then declare some slight irregularities that do not affect the outcome. As a result, they appear grimly determined to carry on the protests.

ReutersWaiting for change

The more immediate concern is that Mr Ahmadinejad may impose a form of martial law. There are already ominous signs of such a move, as arrests of prominent reformists widen, censorship and controls on communication tighten, and feared vigilantes of the baseej lash out with impunity. Given the machinery of oppression at his disposal, Mr Ahmadinejad could probably maintain power by force, though no one can say for sure where the army stands. But force would devastate the image of a state that he exalts as the pinnacle of good governance. Moreover, Mr Ahmadinejad would need the support of the far more cautious, consensus-seeking supreme leader, and this is far from assured.

Mr Khamenei faces a deep quandary. A resolution to the crisis that fails to assuage the huge and growing mass of Mr Mousavi’s supporters would do permanent damage to his regime’s democratic pillar. Few Iranians would ever again deign to volunteer for the empty pageantry of voting. Yet giving in completely to their demands would expose his own weakness and fallibility. Underlying all this is the bitter irony that in its paranoia to avoid a “velvet revolution”, Iran’s deep state has itself engineered precisely the conditions that might make such a revolution happen.

Addressing Systemic Risk

Risk of system-wide breakdown is an unavoidable characteristic of market economies

ALAN GREENSPAN

Mr. Greenspan delivered this speech June 3 at the American Enterprise Institute in Washington.

Risk of system-wide breakdown is an unavoidable characteristic of market economies. So long as there is a division of labor and, hence, private trading counterparties, the possibility of systemic failure cannot be eliminated. Financial institutions that require significant leverage to yield an adequate rate of return on equity are especially prone to a disabling "run on the bank." A depository institution depends on investors' willingness to hold its liabilities, knowing full well that if all lenders attempted to withdraw their monies at the same time, the bank or thrift would fail.

Only an institution whose assets are overnight riskless Treasury bills or their equivalent can consistently fend off failure. But no private institution could fund that portfolio, except at a loss. Thus, financial institutions, to profit, must hold portfolios of risky assets in order to obtain a rate of return in excess of private borrowing costs. And for such institutions to be consistently profitable, their portfolio must be successfully diversified.

Banking has always been a game of inducing depositors, or in earlier centuries note holders, to fund bank assets. In the 1840s, for example, U.S. commercial banks had to maintain a capital buffer in excess of 50% of assets in order to create willing holders of their notes. In modern times, this necessary capital buffer has dwindled, reflecting improved information availability and the existence of various government safety nets. However, even with deposit insurance and activist monetary authorities, many banks and other financial intermediaries, have failed, sometimes with disastrous systemic consequences.

The Fed and other central banks have always been aware of the substantial risks inherent in financial intermediation. Let me quote at length from a speech I delivered from this AEI podium more than 9 years ago; remarks that remain relevant to this day. "There is [a] . . .difficult problem of risk management that central bankers confront every day, whether we explicitly acknowledge it or not: How much of the underlying risk in a financial system should be shouldered [solely] by banks and other financial institutions?

"[Central banks] have chosen implicitly, if not in a more overt fashion, to set capital and other reserve standards for banks to guard against outcomes that exclude those once or twice in a century crises that threaten the stability of our domestic and international financial systems.

"I do not believe any central bank explicitly makes this calculation. But we have chosen capital standards that by any stretch of the imagination cannot protect against all potential adverse loss outcomes. There is implicit in this exercise the admission that, in certain episodes, problems at commercial banks and other financial institutions, when their risk-management systems prove inadequate, will be handled by central banks. At the same time, society on the whole should require that we set this bar very high. Hundred-year floods come only once every hundred years. Financial institutions should expect to look to the central bank only in extremely rare situations."

Such a flood almost washed away our financial system following the Lehman default.

Systemic risk in the U.S. is almost exclusively a financial institution risk—a decided concern that defaults of large institutions could dismantle the financial system and with it the broader economy, owing to the myriad and intricate ways that finance supports all economic activity. Nonfinancial company systemic risk is far less daunting. Such companies have a different risk mix and much lower capabilities of generating system-wide risk. Fixed plant and equipment, the dominant assets of most nonfinancial businesses, are especially illiquid in that they rarely trade in active markets. The consequence is a need for a much larger capital cushion of one-third to one-half of the value of assets, compared with only 5% to 15% for financial firms. The default of a nonfinancial corporation will affect its creditors, suppliers, and some of its customers, but rarely does it impact much beyond that. Nonfinancial corporate defaults do not have the broad systemic impact that is associated with a financial institution's default.

The perceived systemic impact of the failure of large financial institutions is the genesis of the "too big to fail" (TBTF) or "too big to liquidate quickly" problem. For years I have been concerned about the ever larger size of our financial institutions. A decade ago, I noted that "megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risks in the national and international economy should they fail." Federal Reserve research had been unable to find economies of scale in banking beyond a modest-sized institution. I often wondered: had bankers discovered economies of scale that Fed research had missed? It is clear, in retrospect, that they had not.

One highly disturbing consequence of the TBTF-bailout problem is that I can see no way to convince markets henceforth that every large financial institution, should the occasion arise, would be subject to being bailed out with taxpayer funds. The implicit subsidy that such notions spawn insidiously impairs the efficiency of finance and the allocation of capital.

Effective financial systems are too often underappreciated as major contributors to economic growth and standards of living. Economic growth requires that obsolescent, i.e., low productivity, capital facilities be replaced with cutting edge, i.e., high productivity, technologies. The role of a financial system is to facilitate this process of "creative destruction" by directing a nation's scarce savings to fund capital facilities with the greatest risk-adjusted rates of return—almost always those that offer the highest rates of productivity growth. Inefficiencies in financial systems resulting from inadequate or misplaced capital input thwart this process. Investment in previously capital-starved, but potentially productive areas of economic activity invariably yields above average rates of return and, in the process, supplies the resources to eliminate the inefficiency.

This process was most evident in the United States prior to the onset of the current financial crisis. The combination of domestic saving and borrowed saving (our current account deficit) was modest at best, yet we exhibited above average cyclically-adjusted rates of gain in output per hour because our financial system helped us make good use of the limited funds available. In contrast, there are innumerable examples of developing countries, especially those governed by central planning, where saving rates were high and productivity growth low or nonexistent.

Government guarantees of the liabilities of institutions viewed as too big to fail thwarts the competitive process that produces capital efficiency. It results in protected businesses having market and cost-of-capital advantages, but not efficiency advantages over firms not thought to be too big to fail. TBTF freezes obsolescent capital in place and impairs creative destruction—the primary means by which output per hour and standards of living are raised.

Of all the regulatory challenges that have emerged out of this crisis, I view the TBTF problem and the TBTF precedents, now fresh in everyone's mind, as the most threatening to market efficiency and our economic future.

There are certain regulatory problems for which there are no good solutions. And TBTF is one of them. All efforts, of which I am aware, at addressing TBTF have drawbacks. At a minimum, we will be forced to offset the TBTF borrowing cost advantage by imposing a comparable cost—such as increased capital requirements of a sufficient magnitude to offset the implicit government-created subsidy, a tricky calculation at best. Early resolution of bank problems under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) appeared to have worked with smaller banks during periods of general prosperity. But as Peter Wallison pointed out recently, the notion that risks can be identified in a sufficiently timely manner to enable the liquidation of a failing bank with minimum loss, has proved untenable during this crisis. It remains to be seen how such procedures now widely advocated would work for mega-banks.

I am puzzled that there has been no evident rush to form new banks. With interest-rate spreads so wide, a new bank without a legacy of toxic assets could be quite profitable. Major investments in new banks could significantly contribute to the recovery of financial intermediation. Unlike a steel or oil company with facilities that take years to build, a financial intermediary can be put together (and liquidated) in short order. A billion dollar money market mutual fund or hedge fund, for example, with proper legal authority, can be organized, at least theoretically, in days, and then, if necessary, liquidated in days. I admit it is a rather large stretch, but in principle at least, a large part of a newly rebuilt system of financial intermediation can emerge from the ashes, with new, less risky, and not TBTF, institutions.

A potential alternative to a capital charge or a banking system broadly populated with new startups is an approach that addresses the problem of TBTF in a wholly different manner.

A major source of financial system breakdown has been the failure of incentive structures to contain risk taking on the part of financial corporate managers. I agree with Jim Glassman who noted earlier this year that a large step in addressing that incentive failure—in fact, a step backwards in time—would be to require non-bank financial activities to be organized as partnerships, in effect reversing the New York Stock Exchange ruling of 1970 that permitted members to incorporate.

As partnerships, investment banks were an exceedingly cautious bunch. They rarely took speculative positions, as general partners were particularly sensitive to their personal unlimited liability. It is inconceivable that, as partnerships, investment banks would have taken the enormous risks that turned out so badly this decade.

One problem with turning back the clock in this way is that commercial banks, for good reason, are currently authorized to engage in investment banking. It is possible that financial non-banks organized as partnerships might simply convert to bank charters so that they could more safely (for them) take on risk.

The deeper issue is a version of the classic principal-agent dilemma. Is there any way to increase the scope of personal liability of corporate executives to replicate the behavior of general partners in a partnership? Modern corporations have lost the effective tie between ownership and management of assets. In capitalist societies, we need shareholders to govern. But their perspective has become increasingly that of investors, not owner-managers. When dissatisfied with corporate performance, they tend to sell their shares rather than seek to change management.

No form of economic organization can fully contain bouts of destructive speculative euphoria. Though history is not encouraging, I like to believe that such human excess can be muted. In principle, at least, there is always a level of capital cushion that will absorb any risk.

Even with the breakdown of self regulation and risk management in the summer of 2007, the financial system would have held together had the second bulwark against crisis—our existing regulatory system—functioned effectively. But, under crisis pressure, it too failed. Only a year earlier the FDIC had confidently noted that "more than 99% of all insured institutions met or exceeded the requirements of the highest regulatory capital standards."

Our banks are extensively regulated, and even though for years America's largest 10 to 15 banking institutions have had permanently assigned on-site examiners to oversee daily operations, many of these banks still were able to take on toxic assets that brought them to their knees. The highly praised U.K. Financial Services Authority was unable to anticipate and thus prevent the bank run that threatened Northern Rock. The Basel Committee on Banking Supervision, representing regulatory authorities from the world's major financial systems, promulgated a set of capital rules that failed to foresee the need that arose in August 2007 for large capital buffers.

Such evidence of failure is common to every crisis and points up the broader problem that forecasting the onset of financial crisis, except by chance, has always proved to be beyond our reach. This should not come as a surprise. A financial crisis is characterized, in fact defined by an abrupt, discontinuous break in asset prices. But discontinuities are, of necessity, a surprise and that requires that the crisis be largely unanticipated by market participants. For, were it otherwise, financial arbitrage would have diverted it.

Earlier this decade, for example, it was widely expected that the next crisis would be triggered by the large and persistent US current-account deficit precipitating a collapse of the US dollar. The dollar accordingly came under heavy selling pressure. The rise in the euro-dollar exchange rate from, say, 1.10 in the spring of 2003 to 1.30 at the end of 2004 appears to have arbitraged away the presumed dollar trigger of the "next" crisis.

In the years ahead, forecasters will readily identify risk that is underpriced—or at least identify risks priced at less than their historic average. But in instance after instance, risk has remained underpriced for years. Forecasters as a group will almost certainly miss the onset of the next financial crisis, as they have in the past, as will any newly designated "systemic regulator."

This inherent forecasting incapacity is critical to how we handle systemic risk. It is not possible to identify which financial organization, big or small, has, say, a .999 probability of disabling the whole financial system, should it fail. But short of so high a bar, large numbers of failing institutions will invariably be bailed out. It is one thing to identify firms whose collapse might severely impair financial intermediation; it is quite another to identify institutions whose failure will lead to systemic breakdown. Systemic risk is readily identifiable. Potential systemic failure is not.

Those tasked with reforming our current regulatory structure confront an additional policy dilemma. On the one hand, the United States has embraced global free trade. President Obama and his G-20 colleagues recently reaffirmed the principles of the global trading system that gradually evolved during the post World War II years in rejection of the Smoot-Hawley and "beggar thy neighbor" policies of the 1930s. But to compete successfully in the global marketplace requires that the domestic market itself be highly competitive. Heavy regulation and a thwarting of creative destruction undermine that capability. In short, there is a limit to the degree domestic regulation can go without severely impairing the global competitive economic advantages that the U.S. has enjoyed for so many decades.

* * *

I noted in January 2000 before an assemblage of the Economic Club of New York, that "When we look back at the 1990s, from the perspective of say 2010, the nature of the forces currently in train will have presumably become clearer. We may conceivably conclude from that vantage point that, at the turn of the millennium, the American economy was experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity, output, corporate profits, and stock prices at a pace not seen in generations, if ever." I then countered, "Alternatively, that 2010 retrospective might well conclude that a good deal of what we are currently experiencing was just one of the many euphoric speculative bubbles that have dotted human history." Finally, I cautioned, "And, of course, we cannot rule out that we may look back and conclude that elements from both scenarios have been in play in recent years."

The last alternative is still on the table.

We Need Greater Global Governance

The crisis reveals the weakness of nation-based regulation.

PETER MANDELSON

Fingering the villain in the banking crisis of 2008 turns out to be tougher than it looks. Was it the banker with the skewed incentives and the poor grasp of risk? Was it the over-indebted consumer with the 125% mortgage? Was it the politicians and regulators who failed to see the risks in both?

The answer, of course, is that it was all three, and any number of other contributing factors. But what enabled the banking crisis to happen was a structural imbalance in the growth model of the global economy over the last two decades.

That model has produced unprecedented global growth, but it also developed a serious weakness at its center. Unless we address that weakness, any other counter-recessionary strategy is palliative at best. The risk is that as the global economy slowly returns to growth, the urgency to address this fundamental problem will recede.

Reduced to its crudest form the problem was this: Credit was too cheap in the developed world. It was kept cheap by a number of factors. The commitment of China to an export-led growth model, matched by a willingness from rich-world consumers to keep spending, created persistent surpluses in China in particular.

Those surpluses were invested in developed-world debt, particularly the U.S., pushing down interest rates. That encouraged investors to look for riskier and riskier investments to increase their yield. It also encouraged people to buy houses they couldn't afford with the help of people who probably shouldn't have lent them the money in the first place. That debt was sold around the world. The end of the housing bubble revealed the risk in the system.

The precise detail of this process matters less here than the simple problem it represents. The stability or otherwise of the global economy is the sum of sovereign national macroeconomic policies. There is no mechanism to mediate between those policies or insist on action that would counter systemic risk. Similarly, national financial regulators have a clear enough remit for national market stability, but financial markets are now regional and global. Nobody was asleep at the wheel of globalization because there is no wheel to speak of.

If these imbalances are to be unwound in an orderly way, China will have to build a social welfare system that reduces huge levels of precautionary saving and thus boost domestic demand. It will need to continue to move towards greater currency flexibility. The export-led growth models of other surplus economies such as Germany and Japan are also both going to have to give way to greater domestic demand. Both consumers and governments in the U.S. and Britain are going to have to repair their balance sheets. We are going to have to save and invest more and export more.

Is any of this actually possible? Is it possible to preserve the benefits of open trade and an open global economy, addressing macroeconomic risk while totally respecting the choices of sovereign governments?

The answer has to be: not really. No government in the global economy, and certainly not economies on the scale of the U.S., China, Japan and the European Union, can claim a prerogative over domestic action that entirely ignores the systemic affects of its policies. The only way forward is a totally renovated approach to international coordination of economic policy.

We need to strengthen and depoliticize the International Monetary Fund and give it a new surveillance role that covers all aspects of systemic risk. It needs to be mandated to make recommendations on weaknesses in the system, and countries should be obliged to take these recommendations extremely seriously. Peer pressure is going to be vital -- just as it has been in keeping trade barriers at bay over the last year.

We need much greater global coordination of financial regulation, facing up to systemic risk and ensuring that market participants are not able to play one regulatory jurisdiction against another. The Group of 20 leaders have taken the first steps down this road.

Free-market true believers will resist the conclusion, but the only way to preserve a global growth model based on the huge benefits of dynamic markets is to regulate it better. The bill for the benefits of an open global economy has arrived, and it can only be paid in greater global governance.

Mr. Mandelson is Britain's business secretary and was EU Trade Commissioner from 2004 to 2008.

ObamaCare Sticker Shock

A $1.6 trillion deficit boost, and the uninsured will still be with us.

This was supposed to be a red-letter week for national health care, as Democrats started the process of hustling a quarter-baked bill through Congress to reorganize one-sixth of the economy on a partisan vote. Instead it was a fiasco.

Most of the devastation was wreaked by the Congressional Budget Office, which on Tuesday reported that draft legislation from the Senate Finance Committee would increase the federal deficit by more than $1.6 trillion over the next decade while only partly denting the population of the uninsured. The details haven't been made public, but the short version seems to be that President Obama's health boondoggle prescribes vast new spending without a coherent plan to pay for it even while failing to meet its own standards for social equity.

Finance Chairman Max Baucus postponed the health timeline, probably until after Congress's July 4 vacation. His team will try to scale down the middle-class insurance subsidies and make other cuts to hold the sticker shock under $1 trillion. (Oh, is that all?) Mr. Baucus also claims he's committed to a bipartisan consensus, yet most Republicans have been closed out of the negotiations, and industry lobbyists have been pre-emptively warned that even meeting with the GOP will invite retribution.

Useful to emphasize amid the mayhem is that CBO's number-crunching is almost always off -- predicting too much spending for market-based policies and far too little for new public programs, especially on health care. The CBO score for a new entitlement is only the teaser rate, given that the costs will inevitably balloon as the years pass and more people mob "free" or subsidized insurance.

Mitt Romney pitched his 2006 health reform -- which Democrats view as a model for universal coverage -- as modest and affordable, yet already its public option is annihilating the Massachusetts fisc. The original cost estimate for last year was $472 million; final spending came in at $628 million. Spending this year is at least $75 million over initial budget, while projections for next year range as high as $880 million -- and even those are probably too low.

Capitol Hill's entitlement Democrats are determined too press ahead, despite this cost detour. Still, this week's lesson is that ObamaCare might not be inevitable once Americans figure out the astonishing price tag.

A Flat Tax for California?

The Governator goes back to his roots as a reformer.

'California is so broken that we must look at every bold proposal out there, no matter how daring or radical -- including the idea of a flat tax."

-- Arnold Schwarzenegger, June 11, 2009

Now we're getting somewhere. Having had his grand budget deal repudiated by the voters, and facing a $24.3 billion deficit only six months after raising taxes to close a $40 billion deficit, California's Governor is going back to his roots as a reformer.

Mr. Schwarzenegger has shocked nearly everyone in Sacramento by embracing some seismic policy changes to fix the California budget for the long term. These reforms include a flat-rate income tax, a spending limitation measure with teeth, and deep cuts in wasteful spending. Yesterday he declared that he won't sign another tax increase and he will no longer allow the state to issue new short-term debt to punt its budget problems down the road. He even told the liberal Democrats who run the legislature that if they're not ready to make cuts, get ready for a long hot summer that may end in "a shutdown of all the funding -- a grind to the halt" in government.

Mr. Schwarzenegger has called for cutbacks even in education, Medicaid, prisons and pensions, heretofore the sacred cows of state politics. And why not? That's where three-quarters of the money goes and the dollars are buying far too little in results. The state has the highest teacher salaries in the nation, but the second lowest math and reading test scores, according to U.S. Department of Education data. The state spends $49,000 per prison inmate, or 50% more per criminal than the average state.

"Other states have privately run correctional facilities," notes Mr. Schwarzenegger. "Why not California?" Good question. The Governor also wants to eliminate and consolidate scores of mostly useless boards and panels -- such as the $1.2 million blueberry commission -- that exist mostly for political patronage.

The best idea is his semi-endorsement of a flat tax for California. The state's budget problem has two main causes: The first is runaway spending and the second is a tax structure that smothers businesses and entrepreneurs. California's income tax is the most progressive of all 50 states, with the second highest top rate (10.55%) after New York City's 12.62%. The Governor's revenue office calculates that between 50% and 55% of the income tax in the state comes from Kobe Bryant and the rest of the richest 1% of taxpayers.

This sounds like a liberal's tax paradise, but the "soak the rich" system has imploded on itself. As tax rates keep rising, more Californians move to places like Nevada and Texas where they can pay zero income tax, leaving Sacramento with fewer revenue sources. Moreover, the progressive rate structure means that California experiences more extreme gyrations in its revenues than any other state.

The nearby chart shows how state tax revenues rise and fall more excessively than does state personal income. From 2003 to 2008, state revenues boomed by 40% as the economy expanded. But in the last year, revenues have fallen by more than 20%. Politicians in Sacramento pile on new spending in the boom years, building in new pension and other commitments that are unsustainable in the downturns. The interest groups furiously oppose any spending decline, so the politicians dutifully raise taxes, and the cycle repeats.

Mr. Schwarzenegger has appointed a bipartisan tax reform commission and it is exploring a "uniform tax" with a rate of 6% on individuals and corporations with few deductions. This would raise enough revenue to run the government while reducing the sharp revenue shifts from boom to bust and back. More important, it is the kind of tax overhaul that could start to attract business back to the state.

None of this will be easy to pass, but Mr. Schwarzenegger has everything to gain for his state and his reputation. His term ends in 2010 and he's not running for re-election. The state's economy can't prosper under its current burdens, and voters have resoundingly rejected tax-and-spend-as-usual. Arnold became Governor on the promise of reform, and in his final months he once again has a chance to make good on that promise.

"The Fear Is Gone'

Voices from Iran.

Kaveh from Tabriz

Ahmadinejad has taken revenge on the students of Iran during these violent days. The regime's aim is to damage universities, since they are the first base of change, movement and protest.

I live in the dorms at Tehran University. I was asleep when Basij militiamen entered my room early Monday morning, demolished everything and started beating us. A man with a long beard broke my notebook and said: "It is destroyed, this book that you were using against Islam and Ahmadinejad."

They beat students more when they saw posters of Mousavi in their rooms. And they carried big knives and guns.

They also attacked the women's dormitory next door. The Supreme Leader calls us rioters, but I want to ask him: How can sleeping women in their beds be rioters? Is this the Islamic justice he believes in?

President Obama's speech was good; he says that he will support us. He also said that nations must decide the fate of their countries by themselves. I agree with him, but now we don't have any power to change the situation, so we need help and attention.

We ask the president not to accept this coup d'etat.

Marching to Freedom Square

By Alireza in Tehran

There is something in the air in Tehran these days. We remain afraid, but we also dare to speak.

I left my home in Tajrish along with my family at 3 p.m. to head to the protest on Monday. We knew that people were supposed to gather in Enghelab [Revolution] Square at 4 p.m. and march toward Azadi [Freedom] Square. From Gisha Bridge onwards, we saw people walking. Cars were blowing their horns and people were flashing the victory sign. I also saw a group of about 20 militiamen with long beards and batons on motorbikes.

My hand was hanging out of the taxi window with a little green ribbon -- the color of the reformists -- tied around my finger. One of the militiamen told me to "throw that ribbon away!" When I refused, 15 people attacked me inside the car. They beat me with their batons and tried to pull me out.

My wife and my daughter who were sitting in the back seat cried and held me tight. I also held myself tight to the chair. As they tried to shatter the car windows the driver went out and explained that he is just a taxi driver, we are just his passengers, and he hadn't done anything wrong. After about five minutes they left us alone.

Soon we joined the crowd at Enghelab Street. What I saw there was the most magnificent scene I have ever witnessed in my life. The huge numbers of people were marching hand-in-hand peacefully. There were no slogans being shouted. Hands were held up in victory signs with green ribbons. People carried placards which read: silence. Young and old, men and women, rich and poor were marching cheerfully. It was an amazing show of solidarity. I was so proud.

Enghelab Street, the widest avenue in Tehran, was full of people. Some estimated that there were one to two million people there. As we marched, we passed a police department and a Basij base. In both places, we could see fully-armed riot police and militiamen watching us from behind fences. Near Sharif University of Technology, where the students had chased away Mahmoud Ahmadinejad a few days before, Mir Hossein Mousavi (the reformist president-elect) and Mehdi Karrubi, the other reformist candidate, spoke to the people and were received with cries of praise and applause.

My family and I had put stickers on our mouths to represent the suppression of the regime. Other people carried signs. One quoted the national poet Ahmad Shamlu: "To slaughter us/why did you need to invite us/to such an elegant party." Another made fun of the government's claim that Ahmadinejad won 24 million votes: "The Miracle of the Third Millennium: 2 x 2 = 24 million." Others just read: "Where is my vote?"

When we finally arrived at Azadi Square, which can accommodate around 500,000 people, it was full. We saw smoke coming from Jenah Freeway and heard the gunshots. People were scared but continued walking forward.

Later, my sister told me that she saw four militiamen come out from a house and shoot a girl. Then they shot a young boy in his eye and the bullet came out of his ear. She said that four people were shot.

On my way home at around 2 a.m. I saw about 10 buses full of armed riot police parked on the side of the road. There were scattered militiamen in civilian clothes carrying clubs patrolling the empty streets. And in Tajrish Square I saw a boy around 16 holding a club, looking for something to attack.

At Ahmadinejad's "victory" ceremony, government buses transported all his supporters from nearby cities. There was full TV coverage of that ceremony, where fruit juice and cake were plentiful. At most, 100,000 gathered to hear his speech, including all the militiamen and soldiers.

We reformists have no radio, no newspaper, and no television. All our Internet sites are filtered, as well as social networks such as Facebook. Text messaging and mobile communication were also cut off during the demonstrations. And yet we had hundreds of thousands, if not millions.

The state-run TV station has announced that riot police will severely punish anybody that demonstrates. Ahmadinejad called the opposition a bunch of insignificant dirt who try to make the taste of victory bitter to the nation. But his remark was answered by the largest demonstrations ever.

Older people compared Monday's gathering to the demonstrations of 1979 which marked the downfall of the Shah's regime. They even said that this event was larger.

Democracy is a long way ahead. I may not be alive to see that day. With eyes full of tears in these early hours of June 16, I glorify the courage of those who have already been killed. I hope that the blood of these martyrs will make every one of us more committed to freedom, to democracy and to human rights.

Women on the Front Lines

By Negin in Tehran

Friends from all over the world call my cellphone nonstop to make sure we're safe. The connection is either cut or so bad that we have to guess what the other person is saying. But the other day one call was very clear: My mother was wondering if I could help her with her computer. She recently joined Facebook and can't stand the fact that her favorite site is filtered.

She's stopped complaining that my father follows the news day and night. If they're not outside in the middle of the city, my parents are both glued to the television.

Until a few days ago most people believed that this protest was just the voice of suppressed students and youngsters. But now we know this isn't true. "No fear, no fear: We are together." This is what we heard today from millions of people from different generations in Tehran.

The number of people that participated in the demonstration surprised everyone, but what has fascinated me is their variety. At the beginning I thought this was going to be a fight between the lower class and the middle class. What I saw on Monday changed my mind completely. I saw many women, young and old, covered head-to-toe in black chadors shouting and chanting among the demonstrators and joining the young girls who were sitting on the ground in the middle of the street to stop the Basij militia from walking inside the crowd.

That image will never be wiped away from my mind. The women on the front line with their loose colorful scarves had opened their arms, ready to be killed, while others were beaten by the Basij on the side of the road.

People want to be heard and supported by the rest of the world. They were sending messages to the West with their cameras. They were calling on Obama and Sarkozy to demand that the Free World not recognize this government. I saw a few women shouting: "Now it's your turn to support democracy and human rights."

"The fear is gone. Nothing seems to be an obstacle anymore. They can filter all the Web sites and shut down the Internet, SMS service, and mobile phones, but they cannot shut our mouths." This is what I hear all the time.

Late at night everyone wants to share their experience with others. Telephones don't stop ringing. Sara, my girlfriend, called me half an hour ago. She had heard gunfire near her house and had seen bloodied people. Although she was panicked and needed to talk to someone, she hung up the phone to go onto her roof and shout. Within a few minutes I heard my neighbors shouting "Allahu Akbar" (God is great) from their balconies as well.

I remember how sometimes I used to be irritated by the loud prayer call which starts with the same phrase, Allahu Akbar. Now this phrase has turned out to be the most beautiful one.

After a while I called back my mother to help her with her computer problem. She didn't answer. Perhaps she is on the roof too.

This Government Is a Lie

By Soudeh in Tehran

I have never seen such a huge number of diverse people protesting in Iran. People are really angry and refuse to be patient. Ahmadinejad's government challenged our honor. How can we trust anything when the government perpetrates such a big lie?

They don't have pity on anyone. Some of the police cannot speak Farsi. I saw one of them beating a man as he cursed in Arabic. People say they are from Hezbollah.

These men barge into homes and threaten people by calling their families. And they are savage against peaceful demonstrators.

Hospitals are full of people injured by the Military Guard, yet the Supreme Leader of Iran called us seditious. We just want the right to a real vote.

This is the first time an American president did not interfere with Iran's situation -- and it's a good thing. In the past, U.S. support for the protestors led the Iranian government to punish the people more, accusing them of being spies for or taking money from the U.S.

But I think Obama must hear the message of the protests: Ahmadinejad's government is a lie.

A Grenade Exploded At Our Door

By Shahin in Tehran

It was about 1:30 a.m. when I heard windows and doors on our street being smashed one after another. My parents had gone to sleep an hour earlier and I was surfing the Internet to see the latest reactions to Monday's demonstration of Mousavi supporters.

The people from our neighborhood who protested in the streets had already gone back home, so I was scared for them.

The smashing sound came closer and I could hear that my family's apartment door was being attacked. I was really frightened because I had heard that the people who were breaking into houses at night were the plainclothes police who support Ahmadinejad.

I was pacing around my apartment when I heard a massive explosion that woke up everybody in our apartment complex.

I rushed downstairs in the dark with my neighbors as our complex was being attacked. One of them said "Man! They exploded a grenade just few feet from me. Can you see the blood dropping from my fingers? I can barely hear anything." An old woman on the first floor said the plainclothes forces broke the front porch, knocked on some doors and left.

We learned that the sounds of windows being broken were coming from three neighboring apartment complexes and garages. My injured neighbor had gone to check the source of the sound just when the grenade exploded.

In the morning, I checked out the damage myself and took pictures of smashed cars, windows and doors. I also found some bullet casings left in front of our house. I quickly posted them on Facebook where I received lots of comments from others who had the same experience. One of them commented "Yours was just 23 cars. How about our four-story parking garage that now looks like a junkyard?!"

Mousavi's supporters wanted the crowd to stay calm and stage a peaceful demonstration, so as not to give Ahmadinejad's supporters a reason to resort to violence.

State-run TV asked everybody to gather in Vali-asr Square to protest against Mousavi's supporters who the government accused of rioting late into the night. Mousavi's supporters planned on having their second peaceful demonstration in Vali-asr square on Tuesday but cancelled it right after this TV announcement. But despite the announcement, I saw a huge crowd protesting either on foot or in their cars all the way up Vali-asr Street, Tehran's longest street. People are enraged by the lies.

As an optimistic young Iranian who voted in all the presidential elections since 1997, I feel strongly that all those who voted for anyone but Ahmadinejad were insulted badly. I believe some in the ruling elite have come to realize that supporting Ahmadinejad was not worth an uprising in every city.

I hope that the Guardian Council can fix this through a recount or void the whole rigged election.

It's Like an Invasion

By Setareh in Tehran

In the past few days, I've participated in several rallies. During all of the protests, plainclothes militiamen would enter the crowds and manipulate people into dispersing by telling them that if they stayed the security forces would shoot them.

All satellite signals have been jammed, SMS texting has been cut off since election day, and land lines have been disrupted. Though it takes about 20 minutes to download Yahoo's Web site in Tehran, in other cities the Internet has been completely shut down.

The regime is also using psychological warfare to keep people in their homes, calling protestors "hooligans" and constantly warning parents to keep their sons and daughters inside so they don't get killed.

But we are nonviolent. It is the Basij who attack protestors and set cars on fire. They do this so that the security forces have a pretext for using harsher tactics on the demonstrators. The security forces have knives, body armor, tasers and mace. It's as though Iran is under invasion by a foreign government. They have killed many university students in the past few days.

Europe's Week Ahead: Results from H&M

More volatility ahead for U.S. markets

Nasdaq Leads Market's Gains

Stocks edged higher Friday morning, with traders focused on the "quadruple witching" expiration of exchange-traded derivatives at the closing bell.

Quadruple witching is the simultaneous expiration of options on individual stocks, index options, single-stock futures, and index futures. In the past, it has brought additional volatility to the market, with traders frantically selling or buying shares to deliver against their previous bets using futures and options contracts.

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But some observers said that most of the expected pressure probably occurred in the beginning of the week, when the Dow Jones Industrial Average suffered a three-day losing streak in which it fell more than 300 points. From Thursday's opening bell through the latest action, the market has been relatively calm.

The Dow was recently up about 33 points. The S&P 500 rose 0.6% as most of its sectors traded in a narrow range.

"What we've generally been seeing in this expiration cycle is people rolling over whatever options positions they have," settling the expiring contracts and then taking on similar bets in contracts for the following month, said Allen Greenberg, the Chicago-based options chief for brokerage BNY ConvergEx. "They're not necessarily looking for a big new move in either direction."

Health-care stocks gained, as insurers including Aetna, Cigna and UnitedHealth Group continued to rise after a rally on Thursday. Investors are betting that the Obama administration's health-care reform proposals will be scaled back.

The Nasdaq Composite Index was up 1.4%. Apple rose more than 2% as its newest iPhone hit store shelves and Palm, which recently debuted its Pre smart phone, was up 9.5%. Research In Motion shares dipped 1.9% after it said on Thursday that its earnings jumped on strong sales of BlackBerry smart phones but issued an outlook that disappointed some traders.

Mineral extractors gained as investors continued to hope the global economy has moved past the worst point. Rio Tinto was up 1.9% and BHP Billiton rose 1.9%. Commodities prices were generally higher, with the front-month crude-oil futures contract hovering near $72 a barrel.

Asia stocks were mostly higher, but several indexes moved off their peaks. The Nikkei 225 finished up 0.9% higher, with the Hang Seng logging similar gains. In Europe, markets were stronger. The FTSE 100 was up 1.5%.

Iran Not Ready for Another Revolution

Iran's Supreme Leader Praises Vote Results

FARNAZ FASSIHI

Reuters

Iran's Supreme Leader Ayatollah Ali Khamenei delivers a sermon during Friday prayers at Tehran University on Friday.

TEHRAN, Iran -- Iran's supreme leader said Friday there was "definitive victory" and no rigging in disputed presidential elections, offering no concession to protesters demanding the vote be canceled and held again.

Checks and Balances

Iran's government is a combination of democracy and Islamic theocracy. Take a look at the power structure.

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Supreme Leader Ayatollah Ali Khamenei, in a rare speech at Friday prayers at Tehran University, said the election dispute was nothing more than a family disagreement within the frame of the Islamic Republic. He added that the legitimacy of the regime was never at question and all candidates had a shinning track record of serving the Islamic Republic.

Demonstrating savvy diplomacy, Mr.Khamenei criticized both sides for attacking each other. He defended President Mahmoud Ahmadinejad by saying his rivals had unfairly called him a liar and questioned his policies. He also slapped the president for accusing some high-level clerics, such as Ali Akbar Hashemi Rafsanjani, of being corrupt and said Mr. Rafsanjani had given his life to serving the regime and accusations of his financial corruption were baseless rumors.

Mr. Khamenei firmly called for a stop to the recent street demonstrations by Mr. Ahmadinejad's rivals and said vote disputes must be settled legally, not in the streets. He also said if the demonstrations didn't stop there might be chaos and bloodshed, and that rival candidates calling for protests would be blamed.

Mr. Khamenei blamed the U.K. and Iran's enemies for the unrest, vigorously defending the ruling system in his first public comments since supporters of challenger Mir Hossein Mousavi flooded the streets of Tehran.

The Friday prayer was televised live on state-run Channel One. The camera showed Mr. Ahmadinejad sitting in the front row and conservative candidate Mohsen Rezaei a few rows back. It wasn't clear whether Mr. Mousavi or Mehdi Karroubi had accepted the leader's invitation to come to the prayers.