Thursday, March 27, 2008

Dollar Heads for Biggest Weekly Drop Against Euro in Two Years

Dollar Heads for Biggest Weekly Drop Against Euro in Two Years

By Kosuke Goto

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The dollar fell against the euro, headed for its biggest weekly decline since January 2006, as traders increased bets that the Federal Reserve will cut interest rates again to avert a recession.

The dollar dropped versus 13 of the 16 most-traded currencies this week, falling 2.5 percent versus the euro before a government report today that is forecast by economists to show spending in the U.S. posted the smallest gain in more than a year last month. New Zealand's dollar rose after a government report showed the nation's economic growth accelerated at the fastest annual pace in three years in the fourth quarter.

``The U.S. may have already entered into a recession,'' said Michiyoshi Kato, a senior vice president of currency sales at Mizuho Corporate Bank Ltd. in Tokyo, a unit of Japan's second-largest publicly traded lender by assets. ``The Fed will keep lowering rates to defuse criticism that it always falls behind the curve. I am super dollar bearish.''

The dollar fell to $1.5812 per euro at 8:54 a.m. in Tokyo from $1.5779 in late New York yesterday and $1.5431 a week ago. The U.S. currency was at 99.53 yen from 99.65 yesterday and 99.58 a week ago. Japan's currency was little changed against the euro at 157.38, following a 2.5 percent loss this week.

The dollar may fall to $1.60 a euro next month, Kato forecast. That would surpass the low of $1.5903 reached March 17, the weakest level since the European currency debuted in 1999.

The New Zealand dollar rose against all 16 of the most- traded currencies, gaining to 80.61 U.S. cents from 80.35 cents in New York yesterday, and 80.25 yen from 80.06 yen.

Sixth Quarterly Loss

The U.S. dollar has fallen 7.7 percent against the euro this year, heading for its sixth straight quarterly loss and the biggest since 2004 as the Federal Reserve slashed interest rates by 3 percentage points since September to 2.25 percent to kick start economic growth.

Futures on the Chicago Board of Trade show traders increased bets the Fed will lower its benchmark target lending rate by a half-percentage point at a meeting ending April 30. The futures showed a 42 percent chance of a reduction of that size, compared with 36 percent the prior day. The remaining bets were for a cut of a quarter-point.

U.S. stocks dropped the most in a week on concern banks and securities firms will add to the $208 billion in asset writedowns and credit losses stemming from the collapse of the U.S. subprime-mortgage market since the start of 2007.

`Head South'

``With U.S. stocks falling amid concern over additional writedowns in U.S. financial institutions, there is still no situation for the dollar to recover,'' Masafumi Yamamoto, the Tokyo-based head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc, the fourth-biggest currency trader, wrote in a research note today. ``The dollar has further room to head south.''

The dollar may fall to $1.62 per euro by the middle of the year, Yamamoto forecast.

Japan's currency was little changed after a government report showed Japan's consumer prices rose at the fastest pace in a decade in February as companies passed on higher costs of oil and food to households.

Core consumer prices, which exclude fruit, fish and vegetables, climbed 1 percent from a year earlier, compared with a 0.8 percent gain in January, the government's statistics bureau said in Tokyo. The median estimate of economists surveyed by Bloomberg News was for a 0.9 percent increase.

Japan's Inflation Rate Rises to Highest in Decade

Japan's Inflation Rate Rises to Highest in Decade

By Mayumi Otsuma

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Japan's consumer prices rose at the fastest pace in a decade in February as companies passed on higher costs of oil and food to households.

Core consumer prices, which exclude fruit, fish and vegetables, climbed 1 percent from a year earlier, compared with a 0.8 percent gain in January, the government's statistics bureau said today in Tokyo. The median estimate of economists surveyed by Bloomberg News was for a 0.9 percent increase.

Faster inflation amid slowing growth is a headache for the Bank of Japan, which may have to reverse its policy and cut interest rates to avert a recession. Bank of Japan acting Governor Masaaki ShirakawaKiyohiko Nishimura, both of whom were appointed this month, say costlier energy and raw materials are dimming the economic outlook and the bank is ready to take ``flexible'' steps. and Deputy Governor

``Core inflation numbers will hover at high levels for a while because of oil and food and will hurt confidence'' of businesses and households, said Masamichi Adachi, a senior economist at JPMorgan Securities in Tokyo. ``We can't completely rule out the possibility of a rate cut'' later this year.

Traders see a 46 percent chance the central bank will lower the key overnight lending rate from 0.5 percent by December, JPMorgan Chase & Co. calculations show.

Rising Unemployment

Other reports today showed the unemployment rate unexpectedly rose to 3.9 percent in February and the ratio of jobs to applicants worsened, sliding to a two-year low of 0.97. Household spending was unchanged, the statistics bureau said. Economists estimated a 2.4 percent increase.

The yen traded at 99.53 per dollar at 8:52 a.m. in Tokyo, from 99.44 before the reports were published.

The bank's Tankan business survey on April 1 will probably show confidence of large manufacturers falling to the lowest level in four years as higher costs and a stronger yen erode profits, according to economists surveyed by Bloomberg News.

``No one can deny that the economy has been underperforming'' from the central bank's outlook, said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. ``Recent developments in the economy are pressuring the bank's new leaders to clearly downgrade their projections.''

Miyako Suda, a central bank board member, said yesterday growth in the year starting April 1 will probably fall short of the bank's 2.1 percent projection made in its twice-annual outlook last October. The central bank will release its next projections on April 30.

Consumers Pessimistic

Consumer confidence slid to a five-year low in February as prices of daily necessities rose while pay stagnated. Wages slid 0.7 percent in 2007, the steepest decline in three years.

Japanese food makers have raised prices of noodles, beer and bread in the past year because of higher costs of grains. Crude oil rose to a record $111.80 a barrel on March 17 and wheat soared to the highest ever this month.

Morinaga Milk Industry Co., Japan's second-largest maker of dairy products, this month said it will raise butter prices for the first time in 23 years to reflect costlier milk. Snow Brand Milk Products Co. and Calpis Co. said they'll follow suit.

``The dairy manufacturers had no other choice but to turn on price hikes to avoid making losses,'' said Tomonobu Tsunoyama, an analyst at Tokai Tokyo Securities. ``With little prospect that wages will rise any time soon, there's a concern that the price hikes may end up hurting sales.''

Tokyo's core prices, a harbinger of the nationwide index, rose 0.6 percent in March from a year earlier, following a 0.4 percent gain in February. Tokyo prices rose 0.l percent in the year ending March 31, the first increase in a decade.

Inflation Outlook

Core prices started rising in October after declining for eight months. They either hovered near zero or fell since March 1998, when an increase in the country's sales tax pushed gains to 1.8 percent.

Some economists say inflation may wane later this year as oil and commodities costs ease and consumer demand fails to pick up amid sluggish wage growth.

``With growth slowing and demand weakening in coming months, oil prices will probably fall and companies will continue to struggle to raise prices beyond oil and food,'' said Azusa Kato, an economist at BNP Paribas in Tokyo. ``Core-price inflation may slump to almost zero in the first quarter of 2009.''

Excluding energy as well as food, Japan's consumer prices fell 0.1 percent in February. By that measure, prices have failed to rise for more than nine years.

Parliament's decision on whether to extend a higher tax on gasoline may also affect consumer prices. The tax is set to expire on March 31 after the opposition Democratic Party of Japan refused to discuss a bill to extend it.

The tax may be renewed in a month or disappear indefinitely. An permanent end to the levy would lower core prices by 0.4 percentage point and warrant a change in the inflation outlook, said Chiwoong Lee, an associate economist at Goldman Sachs Group Inc. in Tokyo.

How Not to Prevent Foreclosures

How Not to Prevent Foreclosures

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With foreclosures surging, the last thing the nation needs is another government-hosted meeting where mortgage lenders pledge once again to do their utmost to help distressed borrowers stay in their homes - and then go back to the business of foreclosure.

Yet, a meeting and a round of pledges is exactly what Senator John McCain called for on Tuesday, as if the country had not been down that fruitless road already. The real core of his speech was his argument against government action to help dig distressed homeowners - or the country - out of the mortgage mess.

Mr. McCain’s talk therapy will not ease, let alone end, the worst foreclosure crisis since the Depression or the financial crisis that has erupted in its wake. But worse yet is what it says about the presumptive Republican nominee’s view of the economy and the government’s responsibility to protect and help its citizens.

His suggestion that federal aid might wrongly reward "undeserving" homeowners sounded both mean-spirited and economically naïve. And then there is the double standard. He seemed less concerned about the government helping reckless bankers, endorsing its role in preventing the bankruptcy of Bear Stearns.

No one has ever proposed helping real estate speculators. And the senator’s language obscures the reality that most troubled homeowners did not get into trouble by themselves. Lenders, aided and abetted by bankers and do-nothing regulators, lured many borrowers into overly complex, ultimately unaffordable loans. Mr. McCain also failed to grasp that the foreclosure problem has gone far beyond the issue of the deserving and undeserving. What is on the line now is the health of the economy, including the viability of the financial system: Helping troubled borrowers stay in their homes would help the banks by reducing defaults and foreclosures.

The question now is not whether the government should intervene, but how. The two Democratic candidates clearly understand that better than the White House or Senator McCain. Senators Hillary Rodham Clinton and Barack Obama have called for a bigger role for the Federal Housing Administration that would allow it to restructure or refinance more troubled loans.

Mr. Obama has endorsed the best idea currently on the table to prevent foreclosure: amending the law so that troubled borrowers can have their mortgages modified in bankruptcy court. That would give lenders a big incentive to work with borrowers - reducing interest or lowering principal balances - before they opted for bankruptcy protection. Mrs. Clinton has not endorsed bankruptcy reform. She has called for $30 billion in federal funds to bolster state and local foreclosure-prevention efforts and has proposed a 90-day moratorium on foreclosures and a rate freeze on subprime adjustable mortgages. Those measures also could help, but as the crisis has developed, the problem has become less one of resetting interest rates and more one of borrowers owing more than their homes are worth. Bankruptcy reform is a better way to deal with that problem.

The country, of course, cannot wait for the next president to be inaugurated to seriously address the foreclosure problem - although we fear that Mr. Bush still doesn’t see the urgency or the full dangers of inaction. The candidates’ prescriptions for the mortgage mess are an important guide to what sort of leader he or she would be. After eight years of Mr. Bush’s serial failures, what the country needs is a president who is willing to recognize when the government’s help is essential - and who is ready to use government power.

House price slump in US dashes hope of end to credit crisis

House price slump in US dashes hope of end to credit crisis

By Stephen Foley

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Declines in US house prices are continuing to accelerate, according to surveys that signal there will be no quick end to the credit crisis.

The price of the average home was 11 per cent lower than a year ago, the S&P Case-Shiller index showed yesterday, as repossessed homes flood the market – and economists predict that the price adjustment may belittle more than half over.

The Case-Shiller index has become one of the most widely followed measures of the US economy because American homes are the collateral that supports hundreds of billions of dollars of mortgage-backed securities and other credit derivatives.

The latest figures cover house prices in 20 metropolitan areas in January, and show that price declines have spread far beyond the once-hot speculative property markets in Florida and the South-west and crumbling industrial towns. Now, Charlotte, North Carolina, is the sole region showing year-on-year gains.

The year-on-year decline of 10.7 per cent in the average house price is worse than anything seen in the last downturn in the early Nineties. Prices fell 2.4 per cent in just one month.

"It does not look like early 2008 is marking any turnaround in the housing market,," said David Blitzer, S&P index committee chairman. "Home prices continue to fall, decelerate and reach record lows across the nation. No markets seem to be immune from the housing crisis."

A second measure of the housing market, by the mortgage regulator Ofheo, showed a 3 per cent year-on-year decline in January. It excludes many pricier homes.

Falling property values are now feeding through into weaker consumer confidence. The monthly Conference Board survey set a new five-year low in March, the reading of 64.5 coming in well below Wall Street expectations of 73. It was the third sharp decline in as many months.

The disappointing data came a day after sales figures for February had raised hopes that a bottom might be near for the beleaguered housing market. An estate agents' survey showed a modest increase in activity, suggesting that falling prices have lured bargain-hunters into the market.

Many economists, though, said the picture will not become clear until the spring selling season.

Kevin Logan, senior US economist at Dresdner Kleinwort, said he expected house prices would eventually reset to 2004 levels – about a 20 per cent decline from their peak in 2006. "The number of sales is still about 20 per cent below their year-ago levels, and we are still in a down trend. The housing market is in a slump and it is not coming out of a slump this year."

There are already large numbers of unsold homes and an expected wave of repossessed properties still to hit the market, Mr Logan added, while mortgage lenders are demanding bigger deposits and more financial checks on borrowers. "The background is pretty grim."

His comments were echoed by David Stubbs, senior economist at Rics in London. "Prices on the Case-Shiller index have at least a further 10 per cent to fall before they stabilise," he said. "The existing homes sales figures for February which showed a modest bounce are likely to be reversed in coming months as the pressure on the US economy intensifies, and the labour market continues to weaken. Any lasting stabilisation in sales activity appears to be at least six months in front of us, if not more."

Yesterday's economic data brought a halt to a two-session rally by the Dow Jones Industrial Average, which closed 0.1 per cent lower at 12,532.6. Asian and European stock markets – playing catch-up with Wall Street's strong showing late last Thursday and on Easter Monday – were all higher yesterday.

Wall Street firms have written off more than $120bn (£60bn) of their investments in mortgage-backed securities and more complex derivatives that include US home loans, but the ultimate level of their losses will depend on where house prices settle and on how many borrowers fail to keep up payments.

Economy Nearly Stalled in Fourth Quarter

Economy Nearly Stalled in Fourth Quarter

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Washington - The economy nearly sputtered out at the end of the year and is probably faring even worse now amid continuing housing, credit and financial crises.

The Commerce Department reported Thursday that gross domestic product increased at a feeble 0.6 percent annual rate in the October-to-December quarter. The reading - unchanged from a previous estimate a month ago - provided stark evidence of just how much the economy has weakened. In the prior quarter, the economy clocked in at a sizzling 4.9 percent growth rate.

The gross domestic product (GDP) measures the value of all goods and services produced in the United States and is the best barometer of the country's economic health.

Many economists say they believe growth in the current January-to-March quarter will be even weaker than the 0.6 percent figure of the previous quarter. A growing number also say the economy may actually be shrinking now. Under one rough rule, the economy needs to contract for six straight months to be considered in a recession. The government will release its estimate for first-quarter GDP in late April.

"The economy just kept its head above water" in the fourth quarter, said Nigel Gault, chief U.S. economist at Global Insight. "We think that GDP will decline, albeit slightly, during the first half of 2008," he said. "The first half outlook is bleak."

On Wall Street, stocks were down in morning trading.

In another report, fewer people signed up for unemployment benefits last week, although that didn't change the broader picture of a deteriorating jobs market. The Labor Department said jobless claims fell by 9,000 to 366,000, a better showing than many economists were forecasting. Still, unemployment is expected to rise this year given all the problems clobbering the economy.

The newly released fourth-quarter GDP figure matched analysts' expectations.

Thursday's report underscored the damage to the economy from the collapse in the housing market, which has dragged down housing prices, pushed home foreclosures up to record highs and has led to a glut of unsold homes.

Against that backdrop, builders slashed spending on housing projects by a whopping 25.2 percent on an annualized basis in the fourth quarter, the biggest cut in 26 years.

To limit the damage from the crises, the Federal Reserve has taken a number of extraordinary actions. It has slashed a key interest rate over the last two months by the most in a quarter century. And to relieve turmoil on Wall Street, which intensified after the crash of the country's fifth-largest investment firm, Bear Stearns, the Fed has resorted to its greatest expansion of lending authority since the 1930s. Big securities firms will temporarily be allowed to go to the Fed directly for loans - a privilege that had been afforded only to commercial banks.

With the nation's economic woes a top concern for voters, the White House and Democrats in Congress have been scrambling to provide relief. Democratic presidential candidate Barack Obama on Thursday called for an overhaul of financial regulations.

Consumers, whose spending is indispensable to the economy's vitality, boosted buying at a 2.3 percent pace in the fourth quarter. That was better than the 1.9 percent growth rate previously estimated but still marked a slowing from the third quarter's 2.8 percent pace.

Businesses - nervous about customers' waning appetite to buy given all the problems in the economy - cut back sharply on their inventories of unsold goods. That shaved 1.79 percentage points off fourth-quarter GDP, the most in more than two years.

Spending by businesses on equipment and software, meanwhile, rose at a pace of 3.1 percent in the final quarter of last year. That was slightly less than previously estimated and marked a slowdown from the prior quarter's 6.2 percent growth rate.

Businesses' profits also took a hit in the final quarter. A measure linked to the GDP report showed that after-tax profits fell 3.3 percent at the end of last year, after being flat in the prior quarter.

There was a bright spot in the mostly gloomy report, however. Sales of U.S. goods and services to other countries grew at a 6.5 percent pace. That was better than the 4.8 percent growth rate previously estimated, although it was down sharply from the prior quarter's blistering 19.1 percent growth rate.

U.S. exports have been helped by the sinking value of the U.S. dollar, which makes U.S. goods less expensive to foreign buyers. The U.S. dollar recently plunged to record lows against the euro and has fallen sharply against the Japanese yen.

The drooping dollar can aggravate inflation pressures.

An inflation measure linked to the GDP report showed that overall prices increased at a rate of 3.9 percent in the fourth quarter. That was not as high as previously estimated but marked a big pickup from the third quarter's 1.8 percent pace.

Another gauge showed that "core" prices - excluding food and energy - grew at a rate of 2.5 percent at the end of last year. That was down from a previous estimate of a 2.7 percent pace but was up from the prior quarter's 2 percent growth rate.

The new core inflation figure is above the Fed's comfort zone - the upper bound of which is a 2 percent inflation rate.

Although the Fed's No. 1 job is trying to save the economy from a deep and prolonged recession, it is also keeping close tabs on inflation and soaring energy prices.

Oil prices are topping $105 a barrel. Gasoline prices have marched higher, too. High energy prices can spread inflation if lots of companies boost prices charged to customers for a wide range of goods and services. High energy prices also can be a drag on overall economic growth by crimping consumer spending.

The combination of slowing economic growth and rising inflation make the Fed's job more difficult. It also has raised fears the country may be headed for a bout of stagflation, a scenario the U.S. hasn't experienced since the 1970s. Fed Chairman Ben Bernanke, however, has said that's not the case.

The Fed's rate reductions along with the government's $168 billion stimulus package of tax rebates for people and tax breaks for businesses should help revive economic growth in the second half of this year, economists said.

Oil prices surge past 107 dollars on Iraq pipeline attack

Oil prices surge past 107 dollars on Iraq pipeline attack

LONDON (AFP) — Oil prices jumped above 107 dollars a barrel on Thursday when concern about tight supplies increased on news that saboteurs had blown up a major Iraqi export pipeline, traders said.

New York's main oil contract, light sweet crude for delivery in May, rose by 1.12 dollars to 107.02 dollars per barrel.

London's Brent North Sea crude for May climbed 86 cents to 104.85 dollars.

"The main current fundamental risk for oil is the extended fighting in Basra and this morning's report of a bomb attack on one of the export pipelines will bring a risk premium for the weekend," said Petromatrix analyst Olivier Jakob.

One of Iraq's two main oil export pipelines near the southern city of Basra was blown up by saboteurs on Thursday, Samir al-Maksusi, spokesman for the Southern Oil Company told AFP.

The pipeline transports crude oil from the Zubair oil field to the Al-Faw storage facility from where it is exported, Maksusi said.

"Thus far, exports from Basra have not been materially affected, but concerns regarding those exports are high and rising," said Dennis Gartman, editor of daily trading note The Gartman Letter.

Oil prices were also supported by a weaker-than-expected energy stockpiles report in the United States, the world's biggest energy user, dealers said.

The US government's Energy Information Administration (EIA) said Wednesday that American crude inventories were unchanged at 311.8 million barrels in the week ending March 21.

That contrasted sharply with market expectations for a weekly gain of 1.8 million barrels.

"Oil futures were higher Thursday, extending gains from last night amid the broad weakness in the US dollar and a bullish US fuel inventories report from the EIA," said Sucden analyst Andrey Kryuchenkov.

Global supplies are being further pressured by the OPEC cartel's decision to maintain its output levels earlier this month.

Oil prices have been supported by long-term concerns over the ability of producers to meet rising energy demand from the developing world, notably China and India.

"Also many are using commodities to hedge themselves against much feared inflation," added Kryuchenkov.

New York crude hit a record intraday high of 111.80 dollars on March 17, while London Brent scored a historic peak of 108.02 dollars earlier this month.

The Little Administration That Couldn't

The Little Administration That Couldn't

Rebuilding the American Economy, Bush-style

By Tom Engelhardt

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No one was prepared for the storm when it hit. The levees meant to protect us had long since been breached and key officials had already left town. The well-to-do were assured of rescue, but for everyone else trapped inside the Superdome in a fast-flooding region, there was no evacuation plan in sight. The Bush administration, of course, claimed that it was in control and the President was already assuring his key officials that they were doing a heck of a job.

No, I'm not talking about post-Katrina New Orleans. That was so then. I'm talking about the housing and credit crunches, as well as the Bear Stearns bailout, that have given the term "bear market" new meaning.

Now, don't get me wrong -- when it comes to the arcane science of economics, like most Americans, I'd benefit from an "Economics for Dummies" course. What I do know something about, though, is history, a subject that hasn't been on the Bush administration's course curriculum since the President turned out not to be Winston Churchill and conquered Iraq refused to morph into occupied Germany ‘n Japan 1945.

History may not repeat itself, but the administration's repetitive acts these past seven years make an assessment of our economic situation possible, even if you are an economics dummy.

Just consider the record: Administration officials proved incapable of rebuilding two countries that their military occupied and damaged. In Afghanistan and Iraq, while talking up the President's "freedom agenda," they were the equivalent of a natural disaster, a whirlwind of destruction.

In the case of Iraq, in disbanding its military, its government, and even its economy, they were literal nation-wreckers. On taking Baghdad, their first act of omission was to let the capital be looted. ("Stuff happens," commented Secretary of Defense Donald Rumsfeld at the time.) Soon after, the administration's new viceroy in Baghdad, L. Paul Bremer III, promptly plunged the country into the equivalent of the Great Depression -- without a Bear Stearns bailout in sight.

In the case of Afghanistan, only a staggering boom in opiate growing -- the country now supplies an estimated 93% of the global market in illegal opiates, bringing about four billion dollars into the country -- has slightly offset the disaster of "liberation." By just about any other measure, Afghanistan is a wreck.

In the case of New Orleans, the Bush administration not only couldn't rebuild an American city that nature (and the Army Corps of Engineers) damaged, but turned a natural disaster into a man-made catastrophe that has yet to end.

Despite a reputation for being the most disciplined, tough, and focused administration in memory, Bush's men and women couldn't even secure their fondest inside-the-Beltway dream: constructing a generation-long Pax Republicana in Washington. In fact, it looks suspiciously as if Republicans in the House and Senate, fleeing Congress as if it were New Orleans -- it's politely called "retirement," not cutting and running -- could even be swept into minority status for a generation.

And now, with a mere ten "lame duck" months to go, comes the American economy…

You don't faintly need to understand economics to grasp the immediate danger. The people overseeing the handling of this crisis have done little these last years but hand money over to the rich, while running American power into the dirt.

Let me review our history lesson for a moment: No to nation-rebuilding, no to city-rebuilding, no to Congressional majority-building…

Who dares imagine that the people who brought you Iraq, the war, could begin the rebuilding of an economy, or even successfully caulk the cracks in the levees of a system that, in its complexity, puts Iraq's feeble economy to shame?

In some ways, an administration -- whatever its periodic changes of personnel -- can be compared to an individual. At a certain age, its urges become predictable, its habits set, its limits largely known. While change may be possible, you wouldn't want to bet your house on it.

So what exactly has the Bush administration proven itself good at? The twin skills of destruction and looting would stand at the top of any list. Perhaps that's because it chose to put its "eggs" in only two baskets -- those of the U.S. military and crony corporations.

Awed by the shock-and-awe force of forces that fell into their hands, administration officials moved to transfer as many powers of civil governance as possible to the Pentagon. From diplomacy to disaster relief, nation-building to intelligence gathering, an organization built only to destroy was designated as the go-to outfit for activities normally associated with those who have building in mind.

At the same time, the government was being staffed, top-to-bottom, with ill-prepared political pals, while a small set of crony corporations, of which Halliburton is certainly the best known, was given the nod in every rebuilding situation. It really didn't matter where you looked, they were the ones camped out, making money, on the landscape of destruction. With their no-bid, cost-plus contracts, these companies ran up the hours and then tended to jump ship when the going got bad. The same corporations that had essentially looted Iraq -- it was labeled "reconstruction" -- were the first ones called in when New Orleans went down. (Of the initial six contracts the Bush administration offered for the reconstruction of the city, five went to companies previously involved in Iraq's reconstruction program.)

Unsurprisingly, the Bush administration has proved serially incapable of building anything, even -- in the long run -- their own machine. And, from the Enron moment to the Bear Stearns one, whenever it looked like the Titanic might have hit an iceberg, it was a lock that those passengers assigned to the limited places in the lifeboats wouldn't be from steerage (or be weighed down with subprime mortgages).

So rebuilding. No. Saving people who aren't already friends. No. Doing a heck of a job in a crisis. No. Now, our latest and greatest crisis is upon us, the sort that, in a matter of weeks, has sent media commentators and pundits from reluctant discussions of whether we might be heading into a recession straight to references to the "d" word, "1929," and the Great Depression. And they're not alone. A recent USA Today/Gallup poll indicates that a startling 59% of Americans already believe we're heading for a long-term depression, not a recession (and 79% are worried about the possibility). Leave the definitional details to the experts. Most Americans have undoubtedly assessed the Bush administration's proven incapacity in perilous times and drawn the logical conclusions.

Ten months is a long, long time when only their hands are near the pilot's wheel of the ship of state and water's already seeping through the hull. It's an eon for an administration capable of sinking New Orleans in a matter of days, and Iraq in little more than months. Or, thought of another way, it's plenty of time if your expertise happens to lie in deconstruction. After all, barring a miracle, you're talking about the little administration that couldn't, no matter how hard Ben Bernanke may try.

So, even if you, like me, know next to nothing about economics, you already know enough to be afraid, very afraid.

Tom Engelhardt, who runs the Nation Institute's, is the co-founder of the American Empire Project. His book, The End of Victory Culture (University of Massachusetts Press), has been updated in a newly issued edition that deals with victory culture's crash-and-burn sequel in Iraq.

US Document Confirms Iraq Dungeon

US Document Confirms Iraq Dungeon

A classified memo written by the top U.S. military officer in western Iraq reveals that a prison in downtown Fallujah is so overcrowded and dirty that it does not even meet basic “minimal levels of hygiene for human beings.”

“The conditions in these jails are so bad that I think we need to do the right thing in terms of caring for the prisoners even with our own dollars, or release them,” says the memo, written in late February by Maj. Gen. John Kelly, commander of U.S forces in western Iraq.

The classified document, leaked to the Web site Wikileaks where whistleblowers can "reveal unethical behavior in their governments and corporations," was authenticated by the organization and has not been challenged by the U.S. military when asked about it.

The memo contains other shocking revelations about conditions at the jail, including a massive shortage of food and water. The prison is said to be run by Iraqi officials. U.S. Marines oversee operation of the facility.

“I found the conditions there to be exactly (unbelivable [sic] over crowding, total lack of anything approaching even minimal levels of hygiene for human beings, no food, little water, no ventilation) to those described in the recent (18 February) FOX news artickle [sic] by Michael Totten entitled the ‘Dungeon of Fallujah,’” says Kelly’s memo.

“We need to go to general quarters on this issue right now... To state that the current system is broken would erroneously imply that there is a system in place to be broken."

Totten, an independent journalist, said the prison can house a maximum of 110 prisoners but he discovered that there were more then 900 crammed into the facility. U.S. contractors built the prison in 2005 which is located next to the U.S. Joint Communications Center.

It is unknown who received the memo from Kelly. A Pentagon spokesman did not return calls for comment late Wednesday.

Kelly wrote that when he inspected the prison “iraqis [sic] and marines present throughout my inspection as to why these conditions existed, three conditions were universaly [sic] cited as problems in Fallujah as well as the rest of Anbar,” the commander’s memo says.

“First, there is zero support from the government for any of the jails in Anbar. No funds, food or medical support has been provided from any ministry,” Kelly said.

“Second, the police that run Anbar's jails are the same personnel responsable [sic] for investigating crimes. These jailer/investigators are undermanned and more often than not spend most of their time out begging and scavenging for food than investigating crimes. (It is unlikely the prisoners will eat today)...

“I believe the Iraqi police are doing the best they can, and they literally begged me on humanitarian, moral and religious grounds to help them help the prisoners by somehow moving the government to action.”

In a report published earlier Wednesday, Lt. Col. Michael Callanan told United Press International that following an inspection of the prison by Kelly, U.S. forces decided to “advise and assist” Iraqis managing the jail and are providing food to the prisoners.

"They are being fed now," Callanan told UPI.

In addition to the substandard conditions at the prison, Kelly’s memo describes how the U.S. military, five years since invading the country, still cannot seem to find success training Iraq security forces.

“The Iraqi police will ultimately be the ones whose shoulders the burden of winning or losing the fight will be carried,” the classified memo says. “To date, little attention has been paid to the Iraqi corrections system in Anbar and its current discrepancies will prevent the [Iraqi police] from becoming a professional law enforcement force unless immediate and significant support is provided.”

Soldier Asks Himself: "Am I a Torturer?"

Soldier Asks Himself: "Am I a Torturer?"

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Ben Allbright watches "The Daily Show," worships Dave Eggers - and still wound up "softening up" prisoners in Iraq.

The prisons in Iraq stink. Ask any guard or interrogator and they'll tell you it's a smell they'll never forget: sweat, fear, and rot. On the base where Ben Allbright served from May to September 2003, a small outfit named Tiger in western Iraq, water was especially scarce; Ben would rig a hose to a water bottle in a feeble attempt to shower. He and the other Army reservists tried mopping the floors, but the cheap solvents only added a chemical note to the stench. During the day, when the temperature was in the triple digits, the smell fermented.

It got even hotter in the Conex container, the kind you see on top of 18-wheelers, where Ben kept his prisoners. Not uncommonly the thermometer inside read 135, even 145 degrees. The Conex box was the first stop for all prisoners brought to the base, most of them Iraqis swept up during mass raids. Ben kept them blindfolded, their hands bound behind their backs with plastic zip ties, without food or sleep, for up to 48 hours at a time. He made them stand in awkward positions, so that they could not rest their heads against the wall. Sometimes he blared loud music, such as Ozzy or AC/DC, blew air horns, banged on the container, or shouted. "Whatever it took to make sure they'd stay awake," he explains.

Ben was not a "bad apple," and he didn't make up these treatments. He was following standard operating procedure as ordered by military-intelligence officers. The MI guys didn't make up the techniques either; they have a long international history as effective torture methods. Though generally referred to by circumlocutions such as "harsh techniques," "softening up," and "enhanced interrogation," they have been medically shown to have the same effects as other forms of torture. Forced standing, for example, causes ankles to swell to twice their size within 24 hours, making walking excruciating and potentially causing kidney failure.

Ben says he never saw anything like that. The detainees didn't faint or go insane, as people have been known to do under similar conditions, but they also "weren't exactly lucid." And, he notes, "I was hardly getting any sleep myself."

When I first set off to interview the rank-and-file guards and interrogators tasked with implementing the administration's torture guidelines, I thought they'd never talk openly. They would be embarrassed, wracked by guilt, living in silent shame in communities that would ostracize them if they knew of their histories. What I found instead were young men hiding their regrets from neighbors who wanted to celebrate them as war heroes. They seemed relieved to talk with me about things no one else wanted to hear-not just about the acts themselves, but also about the guilt, pain, and anger they felt along with pride and righteousness about their service. They struggled with these things, wanted to make sense of them-even as the nation seemed determined to dismiss the whole matter and move on.

This, perhaps, is the real scandal of Abu Ghraib: In survey after survey, as many as two-thirds of Americans say torture is justified when it's used to get information from terrorists. In an abc/Washington Post poll in the wake of the 2004 scandal, 60 percent of respondents classified what happened at Abu Ghraib as mere abuse, not torture. And as recently as last year, 68 percent of Americans told Pew Research pollsters that they consider torture an acceptable option when dealing with terrorists.

Critics of the administration's interrogation policies warn that the ramifications will be felt across the globe, including by Americans unlucky enough to be imprisoned abroad. Foreign-policy scholars fear the fallout from Abu Ghraib has already weakened the U.S. military's anti-terrorism capabilities. Lawyers warn about war-crime tribunals. But hardly anyone is discussing the repercussions already being felt here at home. It's the soldiers tying the sandbags around Iraqis' necks and blaring the foghorns through the night who are experiencing the effects most acutely. And the communities they're returning to are reeling as a result.

When i went to visit Ben in Little Rock, Ark., I wanted to know why this charming, intelligent, and overly polite 27-year-old had done what he'd done. For 10 days we rode around in his beat-up maroon 1970s Mercedes-running errands, picking up job applications, meeting his girlfriend for lunch. Ben wore pink shirts, hipster blazers, and color-coordinated Campers; he used hair products, which to his friends meant being a metrosexual; he listened to indie rock, watched The Daily Show, and wrote attitude-filled blogs on veterans rights, which meant being a liberal. He refereed football games, worshipped novelist Dave Eggers, and placed special orders at McDonald's so his meals would be fresh.

He was unemployed, fired from his latest job as a bank teller the day before I arrived. Ben had worked there for four months-the longest he'd held down a full-time job since coming home from Iraq. He'd tried tutoring high schoolers, bagging groceries, and doing IT support for Best Buy. Part of the problem, he said, was the lack of good jobs in the area, part of it his own "flailing and procrastinating." He had toyed with the idea of law school and scored a near-perfect 178 on the lsat entrance test, but then turned down offers from schools such as nyu. While I was in town he picked up an application for a job at his corner liquor store. In high school he was one of two students voted most likely to become famous. "The other kid became a doctor," Ben confessed, "and I, well, yeah..."

As a kid, Ben was a sort of Doogie Howser, blowing through school, asking teachers for more work, until his mom, fearing the classes weren't challenging enough, pulled him out in the fourth grade in order to home school him. His parents finally bought a TV set when Ben was in eighth grade. Ben says his dad was an original member of Pat Robertson's 700 Club. He was an executive for American Airlines, a job that moved the family around a lot: St. Louis, Kansas City, Nashville. After they lost their nest egg in the 1987 stock market crash, the family moved from Chicago's lakeshore suburbs to the South Side. Finally, when Ben was a teenager, they settled in Lonoke, outside Little Rock.

Ben took me to the town, 4,300 people and 22 churches. Tractors dotted the fields that hadn't yet been grabbed by developers. He noted a "Free Greens" sign advertising leftovers from someone's garden and the customary wave from passing cars. His condescension about the "bumblefuck" town cracked when he showed me a plot of land, near one that his buddy had just bought, that he saw as a potential home for a future family.

Ben pointed out the Grace Baptist Church, which he attends because he's friends with the pastor and his son, "not because I agree with their fundamentalist views." As an undergraduate at the University of Arkansas, Ben explored Buddhism and Taoism, but he returned to Christianity as a way to make sense of the world, even though sometimes it's "awkward reconciling my religion and military profession."

Ben was still in high school when he enlisted as a reservist; his friend Brandon had asked Ben to accompany him to the recruiter's office as a "bullshit detector." In the end, he enrolled along with Brandon, applying twice before he finally bulked up enough to meet the weight requirement. He saw it as a chance to get out from under his parents' thumb and learn about computers. But mainly it was his idealistic sense of duty-right out of Starship Troopers, the 1959 Robert Heinlein novel that is now a cult hit in military circles. "Like in the book, there's the idea that to be a full citizen you have to contribute."

Ben was called up to go to Iraq in February 2003. His father told him the invasion seemed like a mistake, but they didn't have time to discuss the subject much; he died of cancer a month later. Half an hour after the funeral, Ben was on his way to Kuwait.

In iraq, ben was assigned to the 82nd Airborne Division; since there was no computer work for him to do, he was made a prison guard.

Things on the Tiger base were pretty "ad hoc," Ben recalls. Some orders, like the mandate that the heavy Kevlar helmets be fastened at the chin at all times, were clearly posted on the wall. Others were left to word-of-mouth, including instructions about detainee handling. Military-intelligence officers issued various orders; then there were the anonymous ogas, a.k.a. other government agencies, code for either private contractors or cia officers with civilian clothes, long beards, and fake names like Joe Stallone and Frank Norris. The chain of command was chaotic.

Ben was soon promoted to warden and made small changes on his shift: Guards had to limit stress positions, and detainee rations were increased from crackers and peanut butter to whole Meals Ready to Eat, which were served three times, not two times, a day. He enforced a ban on cameras to discourage the degrading treatment that usually came when soldiers posed with prisoners for trophy photos. "But I could only do so much," he admits.

When he was first ordered to soften up detainees, "it didn't seem so weird," Ben says; nothing in the war zone was normal. "You don't think about what you're doing until later." He was asked to stand in on dozens of interrogations, to help intimidate the subject: one more body, one more gun. The small room was usually crowded with guards, military-intelligence officers, and ogas. They were told to wear T-shirts, not uniforms that would signal their rank. Under the single bulb, the interrogator would loom above a prisoner seated in a child-size chair. Sometimes the room suddenly went dark and strobe lights flashed on. Other times the soldiers would bang pots and pans in the detainee's face, blare loud music, blast air horns and sirens. The sounds were meant to disorient, but also to mask the screams. More than half the time, even if they were cooperative the detainees were beaten, kicked out of their chairs, punched in the windpipe or gut, pulled by the ears-blows that wouldn't leave lasting marks. Occasionally things got out of hand, but with their medical training, the military-intelligence officers could stitch up or bandage injuries, avoiding a call to the medics and an entry in the logbooks that the Red Cross could read.

The first time Ben saw a detainee get beaten, he took the lead interrogator aside afterward to ask, "Was this stuff really allowed? Didn't it violate the Geneva Conventions?"

"These aren't pows; they're detainees," he was told. "Those rules are antiquated and don't apply. You can't get any information without breaking that stuff." Ben asked other officers, but "it was basically like, 'Dude, you're actually worried about how we're treating them? They wouldn't afford you the same respect.'"

If there is anything Ben hates, it's not having all the information. Like most, he hadn't listened when the Geneva Conventionswere covered in basic training. But as it happened, when first arriving in country he'd asked a military lawyer for a cd-rom of various documents, just to have on hand. Now, scrolling through the text on his laptop, Ben saw what anyone could: All prisoners-civilians and combatants-are protected against violence. There is no separate category for unlawful combatants. "Outrages upon personal dignity" and "humiliating and degrading treatment" are prohibited. Abuses like those at the Tiger base were "grave breaches." War crimes.

Ben made a verbal complaint to his platoon leader and later to his platoon leader's boss, asking for an investigation. The officers seemed surprised. "They said they'd look into it and tell their superiors," Ben recalls. "But it didn't seem like a priority." Nothing happened.

"I'm not one of those hardcore 'Duty! Honor! Country!' guys," explains Ben. "But I had signed a contract with rules and obligations. I figured that I did the responsible thing by notifying people. I felt helpless not being able to do more. But at least I'd covered my end." He tried quizzing the guards under him about the Geneva Conventions, but they "just wanted to fuck with people." He developed a reputation as a softy.

In the summer of 2003, the interrogators threw a detainee against a concrete wall, punched him in the neck and gut, kicked him in the knees, threw him outside, and dragged him back in by his hair. For the entire two-hour ordeal, the prisoner wouldn't talk; Ben later found out he spoke Farsi and couldn't understand the interrogators' English and Arabic. Afterward, Ben hid behind a building and cried for the first time since his dad's death. "It was like a loss of humanity. Like we were trading one dictator in for another. I had to weigh my integrity against my duty. Why couldn't I stand up more? Why was I hesitant?"

Ben told me this as we were sitting in his bedroom back home in Little Rock; by the end of the story he had climbed into bed and pulled blankets up around him and was hugging a pillow. There were tears in his eyes, and he apologized for being so "weird about this stuff." Ben writes poetry, and he's fiercely loyal to his Army buddies. But now, for the briefest moment, I saw rage in his eyes.

War, ben was discovering, is "not like what you see on TV. It's insanely boring and depressing." His trip home at Thanksgiving in 2003 lasted just long enough for him to discover that his girlfriend had a new man. Back at Tiger, he joined a group of grunts watching a Michael Moore dvd. It struck a chord with them. "I was never political before I went to Iraq. But I was already disgruntled and fed up just being in Iraq. The movie made me angrier."

It wasn't Fahrenheit 9/11 that so resonated with the soldiers; it was Roger & Me, a documentary that follows the decline of Flint, Michigan, after the General Motors plants closed down. Ben saw "connections between U.S. policies away and at home, how the administration is willing to sacrifice regular people. They were throwing people out of their homes in Flint just like we were taking people out of their homes in Iraq. We got all misty-eyed. It was emotional and had a lingering effect on us."

Ben began to think about what was behind the abuses he'd seen. Soldiers were sent off to war with the promise that they'd be heroes. They had been trained to kill bad guys, not baby-sit detainees. "You need to think that you're there for a reason, that there is some purpose," Ben says. But now people at home were saying the war was a mistake; body counts were mere blips in the news. When Ben first arrived in Iraq, he played soccer with locals; a few months later Iraqis wouldn't even set foot on the base. More and more, the soldiers turned their anger on the prisoners. They poked them with rifles, called them "towel heads" and "sand niggers." Guards would let other soldiers "snag a guy to fuck with or whatever, as long as it didn't leave a mark."

About a month after Ben left Tiger for good, an insurgency leader detained there, Maj. General Abed Hamed Mowhoush, was suffocated in a sleeping bag-a technique that, like waterboarding, Ben had heard was used but had never seen. The General, as he was known, was one of the 160-plus detainees who have died in U.S. custody in Iraq and Afghanistan since August 2002, according to aclu attorney Hina Shamsi. Chief Warrant Officer Lewis Welshofer, the man accused of murdering Mowhoush, claimed he'd been following orders. In 2006, he was convicted of negligent homicide and dereliction of duty and sentenced to 60 days of barracks confinement, the equivalent of house arrest.

After ben came home in March 2004, he was treated warmly. "I was at Applebee's one night and a guy overheard that I had just come back from Iraq," he recalls, "so he bought me a Jack and Coke." He was offered discounts on cell phones and cars. "I finally felt appreciated after feeling used for so long."

But the welcomes couldn't silence the questions that kept him up at night. Ben loves to debate, perhaps because he usually wins, but now he was endlessly, fruitlessly arguing with himself. "Every human being instinctively knows right from wrong. There is never a justification for torture." But then again, "Is softening people up wrong on some levels? I don't know. It wasn't beneficial to them, but it was presented as necessary." He had seen a side of himself he didn't know existed, and now he had to live with that. "In combat you question your mortality," he told me. "In these prisons you question your morality."

I asked Ben point-blank if he considered himself a torturer. It was a hard question to ask, a harder one to answer. He said he didn't know. He asked me how other soldiers in his situation had responded. Most, I told him, didn't even brook use of the word "torture" instead of "harsh interrogation." He finally said he guessed he didn't want to have to think of himself that way, and that it was time to go meet his girlfriend.

When he first got back from Iraq, Ben had nightmares and couldn't remember things; this was infuriating, since he'd always prided himself on his perfect memory. A psychiatrist diagnosed him with ptsd, but he refused medication. Instead he blew $14,000 on bar tabs his first four months home. "I drank every night. I'd wake up next to a stranger at around 4 p.m. and head off to the strip club again." He traveled some, because "you can reinvent yourself when you're out of town." He also reenlisted; he'll be on active duty until 2013, which means that once a month he has to cut his perfectly messy hair and show up at the local base. He thinks the military needs people like him, "people who can see both sides of things."

When Ben first started speaking out about torture, posting to blogs and testifying for a human rights group, he didn't use his real name. Then, gradually, he grew bolder. Brandon, his high school friend, Army buddy, and now roommate, encouraged him, so long as he wasn't trying to become famous. He got the occasional blog flame-"un-American commie bastard"-but there was none of the reprisal from the Army that he'd feared. Nor, for that matter, any call from the various military investigators looking into human rights abuses. No one seemed to care.

People cared when Specialist Joseph Darby spoke out, though not always in the way he would have wanted them to. Darby is the Army reservist who turned in the Abu Ghraib photos. He hates the term "whistleblower," which is understandable, since it's earned him others like "rat" and "traitor." He's gotten death threats, from phone calls and emails to just whispers around his hometown of Cumberland, Maryland. His sister-in-law's house was vandalized; his wife was verbally harassed and the police refused to help.

I met with Darby at a Starbucks in a strip mall along a busy four-lane route. He is still in a sort of witness-protection program the military put him in after his role in the scandal was revealed. He didn't want me to detail his appearance, which has changed somewhat from the recognizable round face that appeared in magazines and on television. This, he said, was his last interview before he put Abu Ghraib behind him forever.

He said being in hiding wasn't so tough; he'd always kept to himself. His marriage was rocky while he was in Iraq, and seclusion had forced the couple back together. Whenever our conversation got difficult, he fiddled with his wedding ring.

Darby joined the Army Reserves for tuition money when he was 17, but he never did end up going to college. Instead, after returning from a deployment in Bosnia in June 2002, he found construction work off the books. Eight months later, he was called up again to go to Iraq. When his unit was assigned to guard prisoners at Abu Ghraib, Darby asked for a job where he wouldn't have too much contact with the detainees; with his temper, he didn't trust himself around the Iraqis. He became the guy you called to get a mop, garbage bags, or meals brought up to the tiers.

Unlike Ben, Darby didn't witness any abuse; he came across the torture photos by accident. The desert heat had warped his own snapshots, so he asked Corporal Charles Graner for some pictures, hoping for images of camels and tanks. Scrolling through the CD, he laughed when he saw the pyramid of naked Iraqis. Then he got to the simulated-fellatio pictures.

He insists he's not a goody-two-shoes tattletale or a saint by any stretch. "I'm as crooked as the next MP," he explains. "I've bent laws and I've broke laws." Months earlier, Graner (who is now serving a 10-year sentence) had shown him a photo of a prisoner tied up in a stress position and said, "The Christian in me knows this is wrong, but the corrections officer in me can't help but love to make a grown man piss himself." Darby says he was too tired to think much about it.

It took him three weeks of soul-searching to decide whether he should turn in the photos. He finally took them not to his superior officers but to the Army investigation office, where soldiers can report everything from sexual harassment to theft-a breach of the chain of command that many would later hold against him. Four months later, Darby was sitting in the Abu Ghraib mess hall; cnn was on, showing Secretary of Defense Donald Rumsfeld's congressional testimony on prisoner abuse. Darby had no idea his tip-which military investigators had assured him would remain anonymous-had led to a national scandal. He heard Rumsfeld name various people who'd provided information-"first the soldier, Specialist Joseph Darby, who alerted the appropriate authorities...My thanks and appreciation to him for his courage and his values."

Darby dropped his fork midbite. Oh shit. He felt 400 pairs of eyes on him. Seymour Hersh had already published his name, but as Darby says, "Who reads the damn New Yorker?"

His mom was dying of cancer; now, the compassionate-leave request he had filed a week before was rushed through. When his plane touched down stateside, officers were there with his wife. They escorted the couple to an undisclosed location, where they lived with around-the-clock security for the next six months. He didn't get the formal thank-you he'd expected from the Army, though a personal letter from Rumsfeld arrived at one point-asking him to stop talking about how he'd been outed.

When the Abu Ghraib photos splashed on television sets, people in Cumberland watched, hoping their loved ones weren't involved. Not all were so lucky. Kenneth England saw the pictures of his daughter, Lynndie, as did the welders and machinists who work with him at the csx railroad. They supported him as best they knew how: by not mentioning it. While Pentagon flacks spun the scandal as the work of a few bad apples from Appalachia, people in the area hung yellow ribbons and "hometown hero" posters for the accused MPs. Reservists' wives organized candlelight vigils.

"Everybody needs his time over there to mean or count for something," Sergeant Ken Davis, a teetotaler nicknamed Preacher Man by the other MPs at Abu Ghraib, told me. "It has to be right in the greater scheme of things. But if the U.S. government was truly at the helm, ordering the abuse, then it actually means nothing. And now we live with ghosts and demons that will haunt us for the rest of our lives."

Davis, who has a clean, bleachy smell to him and says "dang" a lot, was in some of the photos, and he says he reported the abuse to his superior. For that, people at the police department near Cumberland where he worked call him a narc. He's become an Abu Ghraib junkie, attending the trials, testifying at some, collecting photos and evidence, corresponding with the accused. It's a way, he says, to get closure. "A lot of soldiers, when we come back, are lost. You don't belong anymore. It's especially true for a unit accused of abuse, when you hear lies about what happened and people deny what you saw." At 37, he's particularly worried about the younger soldiers he served with. "They were put in situations where they had to do things they didn't agree with just to survive," he says. "All they know about being an adult is the military. We've got a lost generation on our hands."

Military recruiters always had it easy in Cumberland. Beyond honor, responsibility, and meaning, they pitched a paycheck and a ticket out. It was on the steps of Cumberland's City Hall that Lyndon B. Johnson first announced his War on Poverty back in 1964, but neither the coal mining industry, the railway, nor a series of short-lived manufacturing booms could win that battle. Of the big factories in the area, only the paper mill is still open. One in five residents live below the poverty line, a third more than the national average. A food bank operates out of a former bread factory. In February 2007, a high school football player shot himself during a game of Russian roulette.

I often asked people in town what they thought about the war, but conversation inevitably turned to jobs. Supporting the troops was akin to union solidarity-a pact among the people doing the country's grunt work. As one ex-Marine told me, "Sometimes you just have to do what you can to get by. And you have to be able to believe in the validity of what you're doing."

People told me the threat against Darby was exaggerated. The university's chaplain had been harassed for hosting an anti-war event, the newspaper's columnist threatened for advocating gun control, but no harm had come to either of them. Colin Engelbach, the commander of the local vfw post-who called Darby a "borderline traitor" on national television-said that by "get him," people just meant they would make Darby's life hell.

Engelbach is a small guy whose eyes had trouble meeting mine. He spent ten years in the National Guard and four on active duty, though he didn't see combat. Now he works double shifts making depleted-uranium munitions at Alliant Tech. For several months after our interview, he called me with "dirt" on Darby; the overall message was that Darby had put himself before his comrades, that he was not a real American.

"People aren't pissed because I turned someone in for abuse," Darby told me. "People are pissed because I turned in an American soldier for abusing an Iraqi. They don't care about right and wrong."

Five miles down from Cumberland, Cresaptown, home to the 372nd Military Police Company's headquarters, is little more than the junction of U.S. Highway 220 and Route 53. There's no town hall, the civic improvement center is shuttered, and old toys sit forgotten on the front porches of houses behind low wire fences. It's only a few steps from Pete's Tavern to the Big Claw bar and the Eagles Club, which a few years back launched a minor scandal by admitting a black man. ("He may be a nigger, but he's also a cop," one Pete's regular told me, "so they had to let him in.")

Driving down the hill into Cresaptown, the first thing you notice is the sweeping expanse of glimmering barbed wire and corrugated metal buildings that house the roughly 1,700 inmates and 500 employees of the Western Correctional Institution. The 161-acre property used to be the Celanese factory, where you could swim in the public pool for a quarter. Next door is the brand new $24.8 million prison, built by out-of-state contractors and lauded as a state-of-the-art maximum-security facility. The 372nd's inconspicuous brick building is down the road, past the Liberty Christian Fellowship, the technical high school (whose sign declares "teamwork" the word of the month), and the Boy Scout building.

On most afternoons you'll find John Kershner, a sergeant with the 372nd, sitting at the Big Claw smoking his usa brand menthols with his change lined up on the bar, ready for his next dollar-fifty Miller Lite. The night I was there "Sarge" was talking more than he had in a while, he admitted. He was polite in an old-time kind of way, making a point of taking off his well-worn Eagles Club hat indoors, revealing a balding shaved head. His light blue eyes were shielded behind his thick glasses. Sarge knows Darby well; he was the guy who hired him to work off the books at his self-storage-construction company after the two served together in Bosnia-though it was Darby who told me about this later, not Kershner. "People here feel more hurt by this whole thing than anything," Sarge whispered into my ear. "I just wish Darby would shut his mouth and let the rest of us move on."

Sarge had to sell his construction business when he deployed to Iraq. Now employers tell him he's either overqualified or, at a war-weathered 56, too old. He's been filing for his veterans benefits for two years now but continues to get the runaround. He knows what most everyone in the bar does for a living-he's a roofer, he's a pharmacist, she's a beautician. "I'm not saying that the photos were correct," one of the other patrons, his work boots still muddy, told me. "But our people had their heads cut off."

"Other countries can torture our men to death and it's okay, but if we drop one decimal dip below our standards, you have guys paying the price," Sarge said. "Now you need permission to even shoot back when you're under attack. You let them win there, and we'll be fighting here next."

There is a peace group in Cumberland. It's spearheaded by Larry Neumark, the Protestant chaplain at local Frostburg State University whose cardigan sweaters and soft voice conjure up Mr. Rogers. Early on in the war, the group-mostly composed of faculty from Frostburg and nearby community colleges, who clung to each other as a "lifeline"-struggled for attention. "You'll be accused of being unpatriotic and un-American if you speak up," said Neumark. A local college has rejected courses with "peace" in the title as unpatriotic. "But in the last six to seven months people have been more willing to talk."

When I first visited Cumberland in December 2006, Neumark told me that he had caught hell for inviting Ray McGovern, a retired cia officer, to speak on campus against the war. By last spring, he was having a hard time filling the pro-war slot on a panel discussion he was setting up. Torture, though, was another story. Neumark had proposed a discussion about the topic, but people were "very on edge" about it, as Daniel Hull, a member of the group, told me. Even the activists were split on whether they should "go in that direction."

Eventually Neumark did pull together his panel, featuring a man who had been tortured in the Philippines during the Marcos regime. About 100 students, many of them earning class credits, listened to him recall mock executions and solitary confinement. One student argued that the Geneva Conventions were outdated. "Has fear been used to effectively deaden our critical senses?" Neumark asked. An audience member stomped out. In the back someone snoozed. "Torture is a form of terrorism," offered Neumark. "Why do you think people aren't speaking out about this?" No one had an answer.

In ben's two-bedroom apartment in a suburban complex, the shades are always down and the lights are dimmed. An Ikea rug covers the cheap wall-to-wall carpeting, Yellow Tail wine bottles line the mantle, Aristotle and Dostoevsky serve as toilet reading, and a large-screen TV with a PlayStation 2 dominates the living room. Ben shares the place with Brandon, who circumvented the postwar job problem by taking a civilian job at the nearby Army base. He seems more stereotypically military than Ben, with wide biceps, close-cropped hair, and a closetful of Army T-shirts. But he writes poetry and acoustic songs about things such as post-traumatic stress and how he almost reflexively hit his girlfriend one day and never regained her trust.

One afternoon, with a sitcom on TV and his dog skidding around the sofa, I grilled Ben about torture. After returning from Iraq, he studied the philosophical theories surrounding the issue to prepare for just these kinds of conversations-particularly in case he ever got to talk to Senator John McCain, to whom he'd written during the drafting of the Detainee Treatment Act. We discussed the ticking-time-bomb argument-the hypothetical challenge arguing the morality of torturing someone who knows where a bomb is hidden-which Ben called "total bullshit" since "we aren't living in some fantasy 24 kind of world where those sorts of situations occur." Besides, he said, torture will induce false confessions. And most of the detainees at Tiger didn't even have anything to confess; like 70 to 90 percent of those jailed across Iraq, according to a 2004 Red Cross report, they'd been arrested by mistake.

When the Abu Ghraib photos came out, Ben was on a trip around Europe. He pretended to be Canadian, and the whole thing pained him-because he's a patriot, and because the images brought back memories. "It was like a bad nostalgia," he said. "But it was also embarrassing. I just didn't want to be associated with it."

When I asked Ben if Brandon judged him for what he did in Iraq, he said they don't really talk about it. "It's two separate parts of our lives and we keep it that way," Ben explained. "It's like, 'Iraq sucked. Now get on with it.'" He said he doesn't talk about it to anyone close to him-he'd tell his mom, he said, but she has never asked and he doesn't want to bother her.

His girlfriend, Gretchen, flat out doesn't want to know. Gretchen trained Ben as a teller at the bank. She's gorgeous, with long dark hair and tall leather boots. Within a week, they were making out; six months later, she's sure he's the one. They seemed too young to be talking about marriage, until I saw their friends with kids, mortgages, and ex-spouses.

I asked Gretchen if we could have coffee. "It's not like I know anything about what happened over there," she said. "I probably should, but he doesn't talk about it, and I don't want to think about it." Gretchen blushed when she asked me what Abu Ghraib was. ("She doesn't know much about politics," commented Ben, "and that's to put it nicely.") "I realize I'm naive," she said. "I get upset about stuff that's sad on TV." She didn't have a "real opinion about the war. I figure the people in charge know more, so I trust them."

But Gretchen did know how Ben would "tear up" sometimes, like when he was fired from the bank, even though he said it was no big deal, or how he only stayed for five minutes when he visited his dad's grave, or how he used to wake up in the middle of the night shouting. She thought Ben liked her not being political because she didn't argue with him. I thought he liked the escape.

When i was in Little Rock in January 2007, Ben was chastising himself for not having spoken out more about the war. He had just bought a new Web domain,, to consolidate his blogs and had big plans for building his veterans site, Operation Comeback, into a full-on grassroots movement. Human Rights Watch had encouraged him to work for them, and he thought that was a great idea. But he was also excited about cheap properties in the area, and when he got upset by our conversations about Iraq, he told me he'd been trying to "block it out a little bit."

A year later, when I checked in with him again, he had bought a brand new three-bedroom house in Lonoke, the town where he'd grown up. Gretchen had moved in with him. He was working with the military as a communications expert-the "resident computer geek," as he put it-at the local base. He was up for a promotion to Warrant Officer candidate. His new website was blank and he hadn't posted on his blogs in months. And Senator McCain had never called.

"I'm told that I'm courageous for speaking out," he said. "But I wonder if I get blamed enough for the bad things I've done. Did I stand up enough? Using a situation to justify it, like I did, doesn't make it right. It's the sense of being helpless that still weighs heavily on my soul."

Military Tells Bush of Troop Strains

Military Tells Bush of Troop Strains

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Washington - Behind the Pentagon's closed doors, U.S. military leaders told President Bush Wednesday they are worried about the Iraq war's mounting strain on troops and their families. But they indicated they'd go along with a brief halt in pulling out troops this summer.

The Joint Chiefs of Staff did say senior commanders in Iraq should make more frequent assessments of security conditions, an idea that appeared aimed at increasing pressure for more rapid troop reductions.

The chiefs' concern is that U.S. forces are being worn thin, compromising the Pentagon's ability to handle crises elsewhere in the world.

In the war zone itself, two more American soldiers were killed Wednesday in separate attacks in Baghdad, raising the U.S. death toll to at least 4,003, according to an Associated Press count. Volleys of rockets also slammed into Baghdad's Green Zone for the third day this week, and the U.S. Embassy said three Americans were seriously wounded. At least eight Iraqis were killed elsewhere in the capital by rounds that apparently fell short.

Wednesday's 90-minute Pentagon session, held in a secure conference room known as "the Tank," was arranged by Defense Secretary Robert Gates to provide Bush an additional set of military views as he prepares to decide how to proceed in Iraq once his troop buildup, which began in 2007, runs its course by July.

"Armed with all that, the president must now decide the way ahead in Iraq," said Pentagon press secretary Geoff Morrell. The discussion covered not only Iraq but Afghanistan, where violence has spiked, and broader military matters, said Morrell, who briefed reporters without giving details of the discussion. Some specifics were provided by defense officials, commenting on condition of anonymity in order to speak more freely.

The Joint Chiefs are particularly concerned about Afghanistan and an increasingly active Taliban insurgency.

The United States has about 31,000 troops in Afghanistan and 156,000 in Iraq.

U.S. forces in Iraq peaked at 20 brigades last year and are to be cut to 15 brigades, with a total of about 140,000 combat and support troops, by the end of July. A key question facing Bush is whether security conditions will have improved sufficiently by then to justify more reductions.

One of the leading advocates of Bush's troop buildup last year, military historian Frederick Kagan of the American Enterprise Institute, said in an interview Wednesday that security conditions in Iraq, while better, are not good enough to justify any commitment to troop reductions beyond July.

"The military reality is that it's virtually inconceivable that it will make sense to draw down below 15 brigades this year," Kagan said.

Gates has said he would like to see the total drop to 10 brigades by the end of this year, but that now looks unlikely.

Gen. David Petraeus, the top U.S. commander in Iraq, has proposed what is commonly called a "pause" to assess the impact of having withdrawn five combat brigades since December. He has argued that it would be reckless to shrink the American force so rapidly that the gains achieved over the past year are compromised or lost entirely.

Bush is expected to endorse Petraeus' approach. If, as expected, Petraeus is given until August or September to weigh the effects of the current round of reductions, then it is unlikely that the force would get much below 15 brigades by the time Bush leaves office in January.

Bush is unlikely to announce his decision until after Petraeus and the top U.S. diplomat in Baghdad, Ryan Crocker, return to Washington next month to report to Congress.

The Joint Chiefs, who do not command troops but are legally responsible for ensuring the fitness of the forces they provide to commanders, have grown increasingly concerned that the weight of five-plus years of war in Iraq could create severe, long-term problems, particularly for the Army and Marine Corps.

In their session with Bush, the chiefs laid out their concerns about the health of the U.S. force, several defense officials said. Bush was accompanied by his chief of staff, Joshua Bolten; his national security adviser, Stephen Hadley, and Vice President Dick Cheney.

"The conversations today with the Joint Chiefs were much broader than just Iraq," Hadley said later. "It was a step-back look of what are the challenges we face here in the next decade."

A senior administration official said the chiefs generally are in sync with Petraeus on slowing the pace of troop reductions.

Morrell said Bush is "constantly asking the Joint Chiefs about the health of the force, about retention rates, about family life, and so that was a large part of the conversation today."

The session was led by Navy Adm. Michael Mullen, chairman of the Joint Chiefs. He presented the consensus view of the chiefs of the Army, Navy, Air Force and Marine Corps on Iraq strategy.

Mullen and Gates have said repeatedly that in addition to reducing troop levels in Iraq, they want to shorten tour lengths for soldiers from 15 months to 12 months as soon as possible. A decision to do that is expected, perhaps shortly after Bush reaffirms that the number brigades in Iraq will be cut to 15 by July. The Army calculates that at that point it could drop tours to 12 months and still give units at least 12 months at home to recover, retrain and rearm before deploying again.

Morrell said a decision on shortening tour lengths would be made by Gates in consultation with Bush.

"We are not there yet," Morrell said.

Shortly after they Petraeus and Crocker reported to Congress last September Bush announced the decision to reduce the number of combat brigades from 20 to 15.

At the time, Petraeus said additional cuts would be made but that he needed to wait until this spring to recommend a timetable. Since September, violence in Iraq has ebbed and U.S. and Iraqi casualties have declined markedly, although violence has jumped in recent weeks.

The president is to give a speech Thursday in Ohio on the political and economic situation in Iraq.

Pakistan’s New Leaders Tell US: We Are No Longer Your Killing Field

Pakistan’s New Leaders Tell US: We Are No Longer Your Killing Field

By Declan Walsh

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Visiting envoys earn cold reception from coalition. PM wants new approach to fight Islamic extremism.

Islamabad - The Bush administration is scrambling to engage with Pakistan’s new rulers as power flows from its strong ally, President Pervez Musharraf, to a powerful civilian government buoyed by anti-American sentiment.

Top diplomats John Negroponte and Richard Boucher travelled to a mountain fortress near the Afghan border yesterday as part of a hastily announced visit that has received a tepid reception.

On Tuesday, senior coalition partner Nawaz Sharif gave the visiting Americans a public scolding for using Pakistan as a "killing field" and relying too much on Musharraf.

Yesterday the new prime minister, Yousaf Raza Gilani, said he warned President George Bush in a phone conversation that he would prioritise talking as well as shooting in the battle against Islamist extremism. "He said that a comprehensive approach is required in this regard, specially combining a political approach with development," a statement said.

But Gilani also reassured Bush that Pakistan would "continue to fight against terrorism", it said.

Since 2001 American officials have treasured their close relationship with Musharraf because he offered a "one-stop shop" for cooperation in hunting al-Qaida fugitives hiding in Pakistan.

But since the crushing electoral defeat of Musharraf’s party last month, and talk that the new parliament may hobble the president’s powers, that equation has changed. Now the US finds itself dealing with politicians it previously spurned.

The body language between Negroponte and Sharif during their meeting on Tuesday spoke volumes: the Pakistani greeted the American with a starched handshake, and sat at a distance .

In blunt remarks afterwards, Sharif said he told Negroponte that Pakistan was no longer a one-man show. "Since 9/11, all decisions were taken by one man," he said. "Now we have a sovereign parliament and everything will be debated in the parliament."

It was "unacceptable that while giving peace to the world we make our own country a killing field," Sharif said, echoing widespread public anger at US-funded military operations in the tribal belt.

"If America wants to see itself clean of terrorism, we also want our villages and towns not to be bombed," he said.

US officials have long paid tribute to the virtues of democracy in Pakistan. But, as happened in the Palestinian Authority after the 2006 Hamas victory, policymakers are racing to catch up with the consequences of a result that challenges American priorities.

The US has long been suspicious of Sharif, whom it views as sympathetic to religious parties. Unlike Benazir Bhutto, whose return from exile was negotiated through the US, Sharif came under the protection of Saudi Arabia. But now Sharif’s party, which performed well in the poll, is an integral part of the new government.

Yesterday Negroponte and Boucher travelled to the Khyber Pass in North-West Frontier Province, the centre of a growing insurgency. They met with the commander of the Frontier Corps, a poorly equipped paramilitary force that the US has offered to upgrade. The US has earmarked $750m (£324m) for a five-year development programme in tribal areas. At least 22 military instructors are due to start training the corps this year.

The timing of the American visit - before the new cabinet is announced - has offended Pakistanis. "It flies in the face of normal protocol at a time when public opinion is rife that they are making a last ditch effort to save Musharraf," said Talat Hussain, a prominent journalist.

It is unclear how Pakistan’s foreign policy will be formulated in future. Musharraf’s power may have been cut but the strong army is lurking in the shadows, and the coalition is wrangling over cabinet posts, including that of foreign minister.

Gilani must manage other tensions, particularly over whether to reinstate Iftikhar Muhammad Chaudhry, the deposed chief justice who was freed from house arrest on Monday. Chaudhry has become a folk hero but is viewed with suspicion by Gilani’s Pakistan People’s party.