Whither Pakistan?

The Taliban have advanced from the lawless tribal areas of Pakistan to within 60 miles of the capitol, Islamabad. What we do not need is for the Taliban to have a nuclear weapon. These puritanical extremists are utterly irrational by Western standards and cannot be reasoned with. Amazingly, this story has not received much attention in mainstream western media.

Today the New York Times reports that the Pakistani government is finally sending in troops and aircraft against the advancing Taliban, albeit only “paramilitary” forces, not regular army. Is it yet another half-hearted effort or do they mean it this time? There is evidence and rumors that the Pakistani government is actually sympathetic to the Taliban and that the Pakistani intelligence agency (ISI) has aided and abetted the Taliban in the past. Surveys show that most Pakistanis are ambivalent about the Taliban. Most of the Muslim terrorist training camps are in Pakistan. So it is difficult to be sanguine about the earnestness or effectiveness of the government’s effort.

According to the Wall Street Journal, House Democrats are now considering whether to speed up financial aid to Pakistan to help them fight. Nearly two billion dollars are destined for Pakistan by later this summer. The question being considered is whether some of that money can be released early, like right now.

This is a story we have heard before. We funded and armed the Taliban in Afghanistan when the Russians invaded it. Look how well that turned out. We funded and armed Saddam Hussein against the Iranians in the 1980’s. We have done the same thing many times before in many parts of the globe. Geopolitical expedience comes back to haunt us. Very often the weapons end up being turned against us, but even when they do not, the culture certainly does. We have done it in Iran, Nicaragua, Panama, … the list goes on.

So far, we have gotten away with arming and propping up Israel; an exception to the rule. But Pakistan? They are halfway over to the Taliban side already. It is only a matter of time. Why don’t we put the $2billion into Afghan border security and let Pakistan fend for itself. If regional players do not care if the Taliban takes over Pakistan, and Pakistan itself doesn’t seem to care much, then why should we? We don’t want a nuclear Taliban (or a nuclear Iran either, or North Korea), but we cannot single handedly hold back the tide. Maybe we should be supporting India more, defending the Afghan borders, and getting ready to respond to a limited nuclear war in the middle east.

Do Republicans Care About Children?

The Obama budget passed both the house and senate with NO Republican votes. Why? Too much spending, increases the deficit says the GOP.

“Let’s not do this to our kids,” said Representative Mike Pence of Indiana, the No.3 Republican in the House. “Let’s not borrow from the next generation of Americans.”
(Hulse, NYTimes.com, 4/2/09).

Representative Pence voted FOR the monster Bush tax cuts of 2001 and 2003 (http://projects.washingtonpost.com/congress/members/p000587/key-votes/), which doubled the national debt from $5 trillion to $10 trillion. (http://www.brillig.com/debt_clock/ ).

Maybe Pence did not care so much about children back then.

It is worth noting that the Reagan tax cuts more than tripled the deficit, from $908 billion in 1980 to $3.2 trillion in 1990. If Pence had been in congress then, no doubt he would have voted for those tax cuts too (since he votes with his party 97% of the time).

Fom what I can discern, Republicans care not one whit for the financial well-being of future generations. Current protestations to the contrary are simply “not consistent with the facts.”

Hair of the Hound?

FASB announced today a “relaxation” of accounting rules for banks. “Relaxation” is a lovely euphemism. Everybody is in favor of relaxation. Who could be against it? What it actually means is a reduction in risk management. We could all be really, really relaxed if there were no laws at all, by that way of thinking.

FASB is the Financial Accounting Standards Board (often pronounced “Faz-bee”), a non-profit, non-governmental accounting industry organization (www.fasb.org). Member organizations include the American Institute of Certified Public Accountants, the American Accounting Association, and 28 others.

FASB attempts to maintain generally accepted accounting principles (GAAP) in the US, which is what makes it possible to understand the financial statement of just about any audited company. If you’re a company and you do not conform to GAAP, your auditors will not sign your financial statements.

The Securities and Exchange Commission (SEC) is responsible for setting and maintaining the accounting standards that publicly traded companies in the US must follow, but the SEC handed off that job to FASB in 1973. I don’t know how a government agency can privatize its legal responsibilities like that, but it happened, and it has been working okay ever since.

To the point, today FASB changed the acceptable accounting rules for banks that are holding piles of those “toxic assets” we have heard so much about. Banks are supposed to show those assets on their financial statements according to what they are worth. But what ARE they worth? In reality, they are worth almost nothing because if they put them up for sale today, they would find few, if any buyers.

Let’s say they are worth only 20 cents of their face value. Why not sell them at 20 cents each then and be done with it? The main reason is that you don’t really know if they are worth 20 cents. You might not get any buyers at 20 cents, or even at 10 cents because there just isn’t a market out there. Nobody’s buying anything. So in effect, if you put the toxic assets on the non-market right now, you could find they are worth zero dollars.

The banks have so many of these assets, they are not willing to put them up for sale and find out they are worth nothing. That would mean a large part of the bank was worth nothing, and that would mean the bank was insolvent. So to put the assets up for sale would be suicide. So they won’t do it. But they have to do it if they want to get the assets off their books because that is the “mark to market” GAAP rule.

But here is the wrinkle: Bankers claim that some of these assets are actually quite valuable. They are probably worth 60 or even 80 cents of face value, they say, because they are debt instruments from solid borrowers with good credentials who are making their payments and there is no problem with these assets other than the fact that everybody is afraid of them. In a normal market, these would be good assets. It just happens that there is no market right now.

FASB has bought that argument and said, okay, you can assign whatever price you think is reasonable to these assets and show that on your books. You don’t have to really mark them to market because there is no market. FASB will allow banks and their auditors to use "significant judgment" to value their “impaired assets” (no longer toxic, just impaired, and who hasn’t been impaired from time to time? ).

Conveniently, the first quarter just ended two days ago and banks are now feverishly preparing 1Q reports. What a godsend to be able to show that the bank is actually healthy, not rotten to the core! How do you think they will value the troubled assets? Zero? Not likely. Twenty percent of face? Well, why not use some “significant judgment” and value them at 80% of face, because then, hallelujah, the report will show that the bank is healthy!

You might think the bankers would be showering FASB with tearful thanks for letting them off the hook and for nullifying the consequences of their greed and irresponsibility. But no. The response of the American Bankers’ Association was to ask FASB, “Could you make that retroactive? This is great for 1Q09, but you know, we took a major hit in 4Q08, so if you would make the rule retroactive, we could revise the ’08 statement and we would really come out smelling like a rose!”

This request would make us laugh with despair, except that House Financial Services Committee Chairman Barney Frank (D-MA), said he will consider it! I hope he meant, “I will give it all the consideration it deserves.” Which is NONE! Frank is a smart guy, and so far he has done the right thing. We must wait to see if he is who he appears to be.

One interesting consequence of the FASB “relaxation” is that Paul Krugman is thwarted. He has been saying for weeks that the banks are rotten and the only cure is to cut out the cancer by nationalizing them. But this FASB move finesses him. Now the toxic assets will have a fantasy value based on their owners’ opinions, but if that fools enough people, investors might show up at Geithner’s yard sale and buy some. Then a market will in fact exist, and the price will be a real-market price, and the financial reports will suddenly be true, and the banks will be recovered. It’s like the Emperor’s New Clothes. If nobody calls “naked!” the scheme might work.

If that is the outcome, I will be the first to praise its brilliance. Markets are 99% psychology anyway, so it could work, and that would be wonderful.

There are loose ends though. One is the moral issue of letting all those greedy banks off the hook so easily. We are supposed to hold our noses and let that go for the sake of the recovery, but that is not easy to do.

Another is that this sleight of hand by the green eyeshade crowd is exactly the kind of non-transparent shenanigans that brought the whole system down in the first place. It is a hair of the hound that bit us. Does that theory work?

In Defense of Bonuses!

I suspect the people who are enraged about the AIG bonus scandal are people who don’t leave tips for wait staff in restaurants. Hey, they already get paid a salary, right, so why leave a tip? This is such a non-issue, I can hardly believe it is still in the news.

The common sense meaning of a “bonus” is something that is over and above what is normally expected in a situation. So it sounds like these AIG employees were showered with gratuitous money on the basis of greed alone.

But that is not what a “bonus” means in many industries, including the financial industry. Your bonus is a normal, expected part of your compensation. In the case of AIG it was written into the employment contract over a year ago. There was nothing unexpected, unusual, or gratuitous about it. Some employees could have a salary of $1 per year and a large “bonus” at the end of the year. Remove the bonus and they have worked a year for one dollar. That’s not fair.

Another reason people get tied in a knot over this incident is that the bonuses are very large, compared to what most people earn in a year. Many bonuses were a million dollars or more. But so what? That’s what people make in that industry. If you don’t make that much, maybe you went into the wrong business. Get over it. Resentment over the size of somebody else’s pay package is just unconscionable envy.

The argument has been made that the people who got these bonuses were undeserving. They were the very people who got AIG into so much financial trouble that it required taxpayer bailout. Since a bonus is contingent on performance, it seems inconceivable to many, including those in congress, that these employees could have earned any bonus.

But congresspersons are in no position to judge what is satisfactory performance at a firm like AIG. If the job is to bring in revenues by writing contracts of a certain kind, and you do that well, you get paid. That’s what the employment contract said and that’s what they did, so they got paid. Fair’s fair. It is an incorrect presumption to think that somebody in congress is a better judge of of the employees' performance.

Admittedly, the criterion performance to be rewarded should have been quality, not quantity. That is a common difficulty in any behavior management scheme – specifying the desired behavior with precision. But the employees did not specify the behavior to be rewarded, the bosses did. It is called a labor contract because you exchange your labor for cash payment. So the government would do better to replace the worthless executives in charge and retain the employees who proved so capable of performing the work required!

I did not even bother to write to my congresspersons about the idiotic house proposal to tax the bonuses at 90%. It was so stupid on the face of it that I did not think it had a chance of passing. Was I wrong about that! The legislation was not only a knee-jerk reflex, based on irrational emotion rather than reason, but it is almost certainly unconstitutional. (It is illegal to use tax law to punish individuals or selected groups). I now believe that rationality will prevail in the senate, but I am writing to my senators just in case. You just never know with politicians.

Reincarnation at Treasury?

Reincarnated? These two fellows must be karmically related.

Although Ludwig was never much for economics, Tim isn't strong on language games, either.

Still, you have to wonder.



(Ludwig Wittgenstein) ..................................................... (Timothy Geithner)

Propping Up Versus Fixing

“We had no choice” but to prop up AIG, said Fed Chairman Bernanke (foxnews.com/politics, 3/3/09), as the government dumped another $30 billion into the insurance giant, bringing the taxpayer onus to over $200 billion so far on just that one black hole.

He is right, sickening though it is. And more billions will be probably be needed. The trouble is that AIG insures against default of credit-backed securities for dozens of banks worldwide. If AIG defaulted on its insurance contracts, all those banks would collapse and we would indeed be back to The Great Depression.

So why not fix the problem rather than continual “propping up”? What we do NOT need is a Potemkin banking system.

Whatever happened to the plan for the government to buy the toxic assets? Whatever happened to the “bad bank” strategy? Where the hell is Geithner? I’m starting to get the sinking feeling that nobody is in charge.

The New Hillary

Secretary of State Hillary Clinton visited Asia this week on her first outing as a member of the Obama Administration. She talked with leaders in Myanmar (Burma), Japan, South Korea, China, and Malaysia, and according to news reports, some of her comments were unusually candid. She emphasized economics and climate change, not human rights with China. She talked about North Korean regime change in Seoul, and wondered aloud if sanctions against Burma were useful. There’s nothing wrong with saying what’s obvious, she told reporters (Kessler, G.: Washington Post.com, 22 Feb 09).
(Clinton in China Feb 09 LA Times Photo)

But that is exactly what is not obvious. As she herself has said, diplomacy is a head game. Stating the obvious may not be to one’s advantage. Human rights organizations are furious with her for not emphasizing human rights issues in China. Others wonder if she is just trying to be well-liked or if she has any policy in mind, and if it is a policy, since when did the US no longer care about human rights?

But I think she is doing the right thing, and I confess I did not realize she had the flexibility to think in a different way, whether directed by Obama or not. Her comments show a subtlety of mind I did not know lurked there.

Her comments mark a sharp break with the Bush foreign policy. She is saying, we are no longer going to throw our weight around like the bullies we have been. We are now willing to talk plainly and listen with an open mind. That is a fundamental change in direction for US diplomacy and it is important to indicate to all, that is what is happening.

She is also saying, especially by choosing Asia for her maiden voyage, that our important future allies are not necessarily going to be in Europe but in Asia. That’s the truth, and it is smart to signal that, to both Asia and Europe. So there is a policy behind her remarks and it is much larger and more important than whether Tibetans should be allowed more autonomy.

The Chinese can be harsh in dealing with their own citizens, but so can we. They have a billion people to keep in check, three times what we have, with much more diversity in culture and language, and with with a fraction of the wealth and education we enjoy. “Human Rights” should be re-thought in less absolute terms. What do we know about how China works? We barely know how the US works.

The US has been the world leader in promoting human rights since the Carter presidency, and that should continue, but perhaps, in view of our abominable performance in the last eight years, with a bit more humility.

I am impressed with Clinton’s comments. If she continues in such a candid and yet subtly strategic way, she might well be the best secretary of state we have had in living memory. I never saw that coming.

Do Republicans Have Any Ideas?

President Obama’s economic stimulus package passed the House today, 244 to 188, without a single Republican vote. Not one.

I find that remarkable. The president has openly talked up his desire for more bipartisan government, and he made a big display of going up to the Hill to jawbone the Republicans.

Yet the Republicans all, to a person, essentially said, “Go soak your head.” They appear as juvenile, spiteful, self-destructive poseurs obsessed with game-playing, all while the American economy goes down the tubes. How can the whole batch of them be so consistently small, mean-spirited, selfish, and immature? Isn’t there a single statesman among them?

I try to stick to rational analysis of the facts, but these people make it very difficult to remain unemotional.

“Principles!” the Republicans cry. "Of course we want to do what’s best for America, but this stimulus package is so worthless, if not downright harmful or evil, that no conscionable person could vote for it."

That is an implausible argument under the circumstances, but at least conceivable. Is there any truth behind it? I can’t find it.

Republicans have only a single concept of governance: elimination of taxes. It does not seem to bother them, or occur to them, that if we were to eliminate taxes, there would be no government and no Republicans either. But they apparently get a “tax-cut” chip implanted in their brain as a condition of joining the party. Anything other than massive tax cuts, especially those that benefit the wealthy, is considered utterly unacceptable to them.

This is notwithstanding actual facts, such as,

1. The economic stimulus package is made up of about 1/3 tax cuts and 2/3 new spending. So it is simply not the case that the legislation does not accommodate the Republican desire for tax cuts. One third of 800 billion dollars is $260 billion in tax cuts, not a trivial amount. The Republicans’ “principled” objection to the legislation rings hollow.

2. Tax cuts don’t do much good for individuals or business that aren’t paying much in taxes. Especially for small businesses (under 100 employees), projected near-term profits are expected to be small to zero, so tax cuts on nonexistent profits wouldn't be much of an economic stimulus.

3. The Republicans had eight years to play around with tax cuts, which they did, and the result has not turned out well. The “trickle-down” mythology has been thoroughly repudiated in fact and theory. What legitimate justification could there be for clinging to the tax-cut mantra in the face of evidence? One is tempted to suspect that the motivations are less than noble.

Try this simple test. Watch any television news show that interviews a Republican about the stimulus package. Clock how much time passes before the Republican says the phrase “tax cuts.” I have done this and the mean elapsed time is 15 seconds. These people must be possessed by an evil spirit. Or have a brain implant. I am not aware of any alternative economic stimulus proposal from the Republicans that involves anything other than “Tax cuts!”

Another Republican criticism of the stimulus package is that it spends too much on non-economic items, such as health, education, and safety. In what alternate universe is education NOT the basic engine of economic growth? For a Republican, economic growth apparently only means more cash, today! No doubt there are some stupid or irrelevant line items buried in the package and I'm sure we will hear all about them soon. That kind of idiocy is not a particularly Democratic problem. If we look at the largest 80% of the stimulus package, not the 20% chaff, it looks eminently reasonable.

Yet another Republican criticism is that they did not have sufficient “input” to the drafting of the legislation. From what I can gather, that is because they declined to participate when invited. Their complaint is at best disingenuous, more likely, misdirection and petulant whining.

Finally, consider that even if the economic stimulus package was a bitter pill for any Republican to swallow, on principle, why not support it anyway, for Heaven’s sake? The country is going down! What kind of high and mighty “principles of governance” are so sacred that you would choose ashes in everyone’s mouth instead of compromise? I think “principles” are not the issue here at all. Republican behavior points to psychological immaturity and a paucity of ideas badly papered over by tawdry egos.

Maybe I was wrong in my criticism of Krugman’s book, “The Conscience of a Liberal.” (Halfway down the page at www.waadams.net/2194.html).

I said Krugman was unjustifiably hostile toward conservatives and had devolved to mere name-calling. But maybe he was more perceptive than I realized. Unless the Republicans come up with some reasoned, evidence-based explanations for their behavior, I think the Democrats should just ignore them because they can’t be spoken to.

The Inaugural Address

The Inaugural Address

It almost didn’t matter what he said. The very fact of him, a young African-American, standing there, said it all. The speech was a success before he opened his mouth.

Nevertheless, I was disappointed. I wanted the soaring rhetoric he is famous for, something that acknowledged the significance of the moment. Instead, we got a fairly pedestrian speech, albeit finely crafted.

Mr. Obama opened with thinly veiled words of criticism for G.W. Bush’s administration, as if he, Obama had been holding back a steaming kettle of Pelosi-esque disgust and derision until the very first moment when he could let the whistle sound without being inappropriate. He emphasized that his administration, only minutes old, was an about face. “From this moment on,” he would reject the idea that our ideals (e.g., constitutional rights) must be sacrificed for safety. He would replace the politics of fear-mongering with the politics of hope. He pointed a blaming finger at the "greed and irresponsibility of some" and said that a free market economy must be well-regulated if there is to be prosperity for more than the prosperous few. He will "restore science to its rightful place." And so on. It was a scathing indictment delivered with feeling.

Abruptly, Mr. Obama changed direction and spoke about his awareness of the many sacrifices that have gone before us. He spoke of George Washington, our forefathers, the defenders of American freedom through history, and so on. It was standard history book stuff, although he alluded to the fact that our history has a dark side too. Slavery and the civil war were mentioned. He asked us to choose “our better history,” a strange request. Wouldn't that be intentional biasing of the facts?

He paused to issue a statement to worldwide Islamist extremists: “You can’t outlast us and we will get you,” he averred. I am young but no milquetoast.

Then he segued into the need for personal responsibility among all Americans. But this was an unclear admonition. We should all work at a soup kitchen once in a while? Ok, fine, but what is the political point? People should be nicer? Of course they should. It was a nonspecific argument he was trying to sell. We should drive smaller cars? Maybe, but also, he said “Americans do not apologize for our way of life.” So I guess SUVs are ok after all. I thought the implication might have been, if you want to partake of the forthcoming government largesse, you must sacrifice something, in some unspecified way. But what? How? That part of the speech went past me.

Just as vaguely, Mr. Obama emphasized that we are now in the era of post-partisan politics. It does not matter whether you think government is too big or too small, he said, only what actually works. Well, sure. But “what works” is as much a matter of ideology as of empiricism. Do massive government bureaucracies, such as government-sponsored health care, “work,” or do they only lead to involuted “big gummint”? Do large, permanent tax cuts “work” or are they only subsidies for the rich? Obama cannot be described as naïve, so his rhetoric of post-partisan politics must be seen as partisan populist positioning ahead of what he knows are going to be tough ideological battles.

Taken as a whole, the speech seemed flat to me, full of platitudes, and maybe even a little dishonest in the sense that it was ostensibly addressed to the 2 million people standing in front of him, but actually addressed to the politicians sitting near him, and listening to him around the world.

On the other hand, the speech had the artistic quality of deicticism, meaning it demonstrated in fact what it was about in content. The speech began with burning criticism of the past administration and arced forward to glowing terms of hope and bipartisanship. That verbal change of scenery echoed the transition between the two administrations in front of our eyes, and the facticity of Obama standing there, confidently addressing millions of screaming followers, while G.W. Bush sat beside him with a blank expression. So the speech expressed its own gesture.

Nevertheless, I thought I could read the thoughts on Bush’s forehead: “He has no idea. A rude shock awaits.”

The End of Israel?

Israel’s current attack on Gaza has several objectives, according to news reports:
1. Stop Hamas rockets being fired into Israel.
2. Destroy Hamas as a governing body
3. Get the Kadima party re-elected in Israel.

Of these, only the third is achievable.

The rocket materials and other weapons are coming in from Iran, Syria, and elsewhere via Egypt. It is unclear to me why it is impossible for Israel to seal the borders of Gaza. All they would need is a strip a few kilometers wide on the Gaza side of Egypt. Tunnels could be closed. The rest of the borders are easy. No more rockets.

Border monitoring must be more difficult than I realize. I never could understand why the U.S. did not seal the Iraqi borders early on, either. Sure, it’s expensive; sure it takes a lot of manpower. But it has got to be cheaper than war. Whatever the reasons, it apparently cannot be done so the rockets will continue to come in and be fired into Israel.

It may be possible to disable Hamas in Gaza for a while by disrupting their operations. But already Hamas leaders are pronouncing eternal revenge from Syria and elsewhere. Hamas will be around for a long time.

Israel does have the moral and legal right to defend itself against rocket attacks, of course. If Mexico started lobbing rockets into Texas, there is no question that a vigorous response would follow. It is no different for Israel.

However, bombing Gaza is a knee-jerk reaction. Since Hamas locates its weapons and military centers inside schools, hospitals, and universities (with callous indifference to its own people!), then attacks on Hamas have high collateral civilian damage. Then, since the news media are born to sell news, the desperate plight of the civilians is highlighted without consideration of the underlying causes.

Israel cannot hope to overcome the negative public opinion that results from biased news reporting. They have barred reporters from Gaza for that reason, but it is futile to attempt a news blackout. So they are losing, and will continue to lose international goodwill. Even in the U.S. it is not inconceivable that the “Special Relationship” between the U.S. and Israel could disintegrate rather quickly, due to changing public sentiment, however unjustified it might be in military terms.
(Photo Welt Online)

But let’s just suppose that some kind of ceasefire is called, say around January 20, 2009. Some clever diplomatic language will be found to allow Israel to monitor smuggling into Gaza while declaring that the borders are “open.” Hospitals are rebuilt, bandages changed, food supplies restored.

How long is it going to take for the Palestinians to forget about the attack? How long will it take Gazans and their compatriots in the West Bank to forgive? A couple hundred years might not be enough. Israel should not imagine it could ever achieve peace with the Palestinians after something like this attack. It is self-destructive behavior, no matter how righteous it feels at the moment.

(Photo Welt Online)

Then there is the problem of demographics in Israel. Palestinians out-breed the Israelis, and soon will be a majority of the population, certainly in the West Bank, and probably in most other parts of Israel as well. This could happen within 50 years. What will Israel do? Will it maintain a minority – rule, apartheid government? As we know, that solution has little long term viability. But a fully open democracy would lead to the obvious outcome of Palestinian rule, and it would not take long after that to replace the flag.

The Israelis could establish an iron-fisted dictatorship. That could work for a while, but in the long run, would surely cost the economic support of the U.S. There would be no Israel today without U.S. foreign aid, and that would be withdrawn from a dictatorship. Maybe some other country would be willing to pick up the slack. But it would be the end of Israel, the idea, leaving only Israel, the junta.

There is no apparent scenario under which Israel survives and prospers for another century as a democracy, and perhaps not at all. So maybe we should start adjusting our thinking now.

Maybe it was not such a good idea for the Western powers to arbitrarily carve an artificial country out of Palestine in 1948. It was an experiment; it didn’t work. Maybe the U.S. should start tilting its foreign policy to the Arab/Muslim world, which is the Next Big Thing.

With the demise of Israel as a state, what would become of the 7 million Israelis? Some might choose to live under a benign Palestinian government. It is sort of working like that in South Africa. Some could emigrate to America. Look how enormously we benefitted from the last great Jewish immigration. We could do it again. Some probably would want to set up another theocracy somewhere, like Somalia maybe? They need a government.

This Gaza war is more than a symptom. It is a signal that we may need to start imagining a world without Israel.