Tuesday, April 1, 2008

Israel Planning to Build Hundreds of New Homes on Occupied Land

Israel Planning to Build Hundreds of New Homes on Occupied Land

By Griff Witte

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Jerusalem - Israel said Monday that it would build hundreds of new homes on occupied land it considers part of Jerusalem, just hours after U.S. Secretary of State Condoleezza Rice wrapped up a three-day visit to the region by saying the peace process is "moving in the right direction."

The announcement of the new construction, the latest in a series of similar projects advanced by Israel in recent months, was likely to anger Palestinians. The issue also elicited criticism from Rice, who called on Israel to stop building in contested territory even before Monday's announcement.

"Settlement activity should stop - expansion should stop," Rice said at a news conference after meeting with Palestinian Authority President Mahmoud Abbas.

Rice was on her second trip to the region this month. In recent days, she met with top leaders, trying to build momentum in negotiations that thus far have yielded little public progress. President Bush has said he wants to have a "signed peace treaty" by the time he leaves office next January.

After prodding by Rice, Israel said on Sunday it would remove 50 roadblocks out of nearly 600 in the West Bank that inhibit the movement of people and goods in the name of safeguarding Israelis from Palestinian attack.

Settlement construction in the West Bank and East Jerusalem has been a persistent flash point in Israel's negotiations with the Palestinians, who claim the territory for their future state and want East Jerusalem as their capital.

Israel, which captured the land in the 1967 Arab-Israeli war and considers an undivided Jerusalem its capital, says it has the right to continue building in Jewish neighborhoods in and around the city.

The new housing would consist of 800 apartment units in the northeastern Jerusalem neighborhood of Pisgat Zeev, which is within the expanded but internationally unrecognized boundaries of the city set by Israel after the 1967 war.

Shas, an ultra-Orthodox party in the government of Israeli Prime Minister Ehud Olmert, also said Monday it had secured his backing for the construction of hundreds of new homes in the West Bank settlement of Betar Illit. A spokesman for Olmert could not confirm that report but said Israel is allowed to build in the settlement because it will be part of Israel under any future peace deal.

Israel has justified the expansions in part by citing a 2004 letter Bush sent to then-Prime Minister Ariel Sharon in which he acknowledged "already existing major Israeli population centers" that would prevent a return to the pre-1967 boundaries.

Olmert on Monday told fellow members of his Kadima party that the expansion of existing settlements is acceptable. "All the reports of dramatic construction projects in the territories are not true," he said, "and it's not true that we're building in violation of commitments that were made."

The Israel-based advocacy group Peace Now released a report Monday saying that construction in West Bank settlements has boomed since the Annapolis peace conference four months ago. The organization documented new construction in 101 settlements.

"It's a slap in the face to the political process," said Hagit Ofran, head of the organization's settlement watch program. "This is the same mistake Israel has made since Oslo - building in the settlements and not understanding that it's a sign to the Palestinians that Israel does not want peace."

Ofran said the move hurts moderate forces such as Abbas's Palestinian Authority and strengthens more radical groups. "It plays into the hands of Hamas, which says there's no use talking to the Israelis because they'll just build more and more," she said.

Ex-Terror Detainee Says US Tortured Him

Ex-Terror Detainee Says US Tortured Him

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Tells "60 Minutes" he was held underwater, shocked and suspended from the ceiling.

At the age of 19, Murat Kurnaz vanished into America's shadow prison system in the war on terror. He was from Germany, traveling in Pakistan, and was picked up three months after 9/11. But there seemed to be ample evidence that Kurnaz was an innocent man with no connection to terrorism. The FBI thought so, U.S. intelligence thought so, and German intelligence agreed. But once he was picked up, Kurnaz found himself in a prison system that required no evidence and answered to no one.

The story Kurnaz told 60 Minutes correspondent Scott Pelley is a rare look inside that clandestine system of justice, where the government's own secret files reveal that an innocent man lost his liberty, his dignity, his identity, and ultimately five years of his life.

60 Minutes found Murat Kurnaz in Bremen, Germany, where he was born and raised. His parents emigrated there from Turkey. His father works in the Mercedes factory. Kurnaz wasn't particularly religious growing up, but in 2001 he was marrying a Turkish girl who was. And he decided to learn more about Islam.

"I didn't know how to pray. I didn't know anything," Kurnaz says. "So I had to study more about Islam so I could go to the mosque and pray."

In Bremen, he met Islamic missionaries who urged him to go to Pakistan for study. As he was planning the trip, 9/11 happened. He told 60 Minutes he was horrified by the attacks, and had never heard of al Qaeda. He decided to go ahead with his trip anyway.

"You went to Pakistan several weeks after 9/11," Pelley remarks. "Did you begin to think that that wasn't a great idea?"

"Today, I know it wasn't a great idea," Kurnaz says.

Kurnaz told 60 Minutes his story using the English that he learned from his American guards. If he seems a little distant, reserved, you'll understand why as his story unfolds. It begins in 2001, when he was at the end of that trip to Pakistan. He was headed to the airport to fly home to Germany when his bus was stopped at a routine checkpoint.

"They stopped the bus and because of my color, I'm much more different than Pakistani guys," says Kurnaz, who is lighter-skinned. "He looked into the bus and he knocked on my window."

"He" was a Pakistani cop who pulled Kurnaz off the bus. The reason Kurnaz was singled out may always be a mystery. But at the time, the U.S. was paying bounties for suspicious foreigners. Kurnaz, who'd been rambling across Pakistan with Islamic pilgrims, seemed to fit the bill. Kurnaz says that he was told that U.S. intelligence paid $3,000 for him. He ended up bound and shackled on an American military plane.

"I was sure soon as they would find out I'm not a terrorist, they will apologize for it and let me go back home," he says.

But the plane flew him out of Pakistan and to a U.S. base in Kandahar, Afghanistan, where he was mixed with prisoners fresh off the battlefield. His new identity was "number 53." He was kept in an outdoor pen, in sub-freezing weather and interrogated daily.

"They asked me, 'Where is Osama bin Laden,' and if I am from al Qaeda or from Taliban. Questions like that. I told them, 'I don't know where is Osama bin Laden, I never saw him and I don't know anything about al Qaeda. I don't know what it is.' And I spent all my time in Pakistan," he says.

Asked what happened next, Kurnaz says, "I told them just they can call Germany to ask who I am and they can ask anybody in Germany who I am."

Back in Germany, Bremen police were investigating, and what they were hearing made matters worse: Kurnaz's worried mother told them her son had recently become more religious, had grown a beard and was attending a new mosque; schoolmates said that Kurnaz might have been headed to Afghanistan.

"It was just guessing, just fear, no more. But the fear turns into a fact," says attorney Bernhard Docke, who was hired by Kurnaz's mother.

He says there was no reason to suspect Kurnaz knew anything about al Qaeda. But this was weeks after 9/11 and some of the hijackers had been living in Hamburg. "And so close after 9/11, and close after Germany realized that 9/11 started with the Hamburg cell in Germany, everybody in the secret services got crazy," Docke says.

Docke says the police report was sent to the Americans. And Kurnaz claims his interrogations at Kandahar turned to torture. He told 60 Minutes that American troops held his head underwater.

"They used to beat me when my head is underwater. They beat me into my stomach and everything," he says.

"They were hitting you in the stomach while you're head was underwater so that you'd have to take a breath?" Pelley asks,

"Right. I had to drink. I had to ... how you say it?" Kurnaz replies.

"Inhale. Inhale the water," Pelley says.

"I had to inhale the water. Right," Kurnaz says.

Kurnaz says the Americans used a device to shock him with electricity that made his body go numb. And he says he was hoisted up on chains suspended by his arms from the ceiling of an aircraft hangar for five days.

"Every five or six hours they came and pulled me back down. And the doctor came to watch if I can still survive to not. He looked into my eyes. He checked my heart. And when he said okay, then they pulled me back up," Kurnaz says.

"The point of the doctor's visit was not to treat you. It was to see if you could take another six hours hanging from the ceiling?" Pelley asks.

"Right," Kurnaz says.

"I suspect you know that the U.S. military will deny this happened. The U.S. military will deny that you were shocked. It will deny your head was held in a bucket of water. It will deny that you hung from a ceiling for days at a time," Pelley remarks.

"Doesn't matter whatever they will say. The truth will not change," Kurnaz says.

"And you're telling me in this interview that this is the truth?" Pelley asks.

"This is the truth," Kurnaz insists.

Kurnaz isn't alone in these allegations: other freed prisoners have described electric shocks at Kandahar, and even U.S. troops have admitted beating prisoners who were hanging by their arms. Kurnaz's story fits a pattern.

After six weeks in Afghanistan, Kurnaz was loaded onto another plane, this time bound for Guantanamo. The Pentagon labeled the prisoners "unlawful enemy combatants." They didn't have the rights of prisoners of war and were beyond the reach of any court.

At Guantanamo Kurnaz says he endured endless months of interrogations, beatings at the hands of soldiers in riot gear, and physical cruelty which included going without sleep for weeks and solitary confinement for up to a month in cells that were sealed without ventilation or were set up to punish him with extreme conditions.

"It's dark inside. No lights. And they can punish you in isolation by coldness or by the heat. They have special air conditioners over there. Very strong. They can turn it very cold or very hot," Kurnaz says.

He says it went on year after year, always the same questions about al Qaeda, and the endless effort to break his will. He heard nothing from the outside and wondered whether anyone knew that he was there.

Then, in 2004, the U.S. Supreme Court ruled that Guantanamo prisoners did have the right to lawyers. And to his complete surprise, one day Kurnaz was told he had a visitor. It was Baher Azmy, an American lawyer.

"He was chained to a bolt in the floor around his ankle," Azmy says, recalling his first meeting with Kurnaz. "And had an absolutely enormous beard that had marked the years that he was in detention. He looked like someone who had been shipwrecked, which, of course, in a sense, he really was."

Azmy is a professor at the Seton Hall Law School. He dug into the case and found that the military seemed to have invented some of the charges. Military prosecutors said one of Kurnaz's friends was a suicide bomber, but the friend turned up alive and well in Germany.

"How could they have gotten that so wrong? I mean, you're either a suicide bomber or you're not. There's no in between," Pelley remarks.

"This goes to the utter preposterousness of the government's legal process that they established in Guantanamo, this tribunal system that was supposed to differentiate from enemy combatant and civilian. So in order to justify that he was an enemy combatant, they simply made up an allegation about someone he was associated with," Azmy says.

But far worse than the false charges was the secret government file that Azmy uncovered.

Six months after Kurnaz reached Guantanamo, U.S. military intelligence had written, "criminal investigation task force has no definite link [or] evidence of detainee having an association with al Qaeda or making any specific threat toward the U.S."

At the same time, German intelligence agents wrote their government, saying, "USA considers Murat Kurnaz's innocence to be proven. He is to be released in approximately six to eight weeks."

But Azmy says Kurnaz was kept at Guantanamo Bay for three and a half years after this memo was written in 2002.

They kept him, Kurnaz says, by inventing new charges. In a makeshift courthouse, Kurnaz claims that a military judge charged that Kurnaz had been picked up near Osama bin Laden's hideout in Afghanistan while fighting for the Taliban. Ironic, since it was the U.S. that flew him to Afghanistan to begin with.

"Have you ever in your legal career run across anything like this?" Pelley asks Baher Azmy.

"In my legal career, no," Azmy says. "But in Guantanamo, no detainee has ever been able to genuinely present evidence before a neutral judge. And so as absurd as Murat Kurnaz's case is, I assure you there are many, many dozens just as tenuous."

And a U.S. federal judge agreed. She ruled the Guantanamo military tribunals violated the prisoners' right to a defense, and she singled out Kurnaz's case as an example.

60 Minutes asked the Department of Defense to talk to us about Kurnaz. Instead they sent 60 Minutes a statement, calling his allegations "unsubstantiated" and "outlandish," adding that claims that the U.S. military "engaged in regular and systematic torture of detainees cannot withstand even the slightest scrutiny." The statement didn't address why Kurnaz was held to begin with. (Click here to read the full Department of Defense statement.)

The break in Kurnaz's case came when the German chancellor asked President Bush for his release. In August 2006, a plane came to take Kurnaz home. On the way out he was asked to sign a confession his captors had written for him saying he'd been al Qaeda all along. He refused. On the plane he was chained and surrounded by soldiers. But by the end of the flight, he was free.

"There's a picture of you hugging your mother. Tell me about that moment," Pelley asks.

"She wouldn't let me go. She wouldn't let me, anymore. She just hugged me. Of course, she was so happy, she cried. And I would go to my father and my brothers, also, but she didn't let me. And they had to wait," Kurnaz remembers.

He was 19 when he went in, 24 when he returned to Bremen. His wife had divorced him. Kurnaz has written a book, just translated into English called "Five Years Of My Life." And he told 60 Minutes he wanted to visit the United States, but can't because the U.S. still considers him to be an unlawful enemy combatant.

Opposition to Treasury's Blueprint Gains Steam

Opposition to Treasury's Blueprint Gains Steam

By David Cho and Jeffrey H. Birnbaum

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Senior Treasury officials identified three immediate targets yesterday for their plan to overhaul the nation's financial regulatory structure, including streamlining the approval process for securities that contributed to the crisis now roiling Wall Street. But their hopes for a few quick changes are running into mounting opposition from interest groups and officials elsewhere in the Bush administration.

In formally releasing the blueprint yesterday, Treasury Secretary Henry M. Paulson Jr. said he also plans to ask Congress this year to set up a new agency to oversee mortgage lending and take action to enhance his department's role as the chief regulator of financial markets.

The Treasury's initiatives seek to sweep away the current patchwork of regulation over the coming decade in favor of three more powerful agencies to oversee banking, market stability, and consumer and investor protection. The plan's authors have argued that such changes are needed because government oversight has not kept up with the pace of financial innovation.

Paulson acknowledged that the recommendations would not prevent future crises but said that they would make government more nimble in addressing them. "We should and can have a structure that is designed for the world we live in," he said in a speech at the Treasury. "Few, if any, will defend our current balkanized system."

Critics said the Treasury's plan is almost too big to succeed. Longtime Washington institutions would undergo wholesale changes or shut down altogether. Few leaders of these agencies - and the associations that work with them - welcomed such radical transformation.

Interest groups took particular issue with the proposal to create a single regulator to replace the many agencies that now oversee various types of financial firms. Banks could lose their latitude to pick and choose among state and federal regulators. Thrifts could be forced to become banks, which are more regulated.

"Dismantling the thrift charter and crippling state banking charters will weaken banking in America," said Edward Yingling, president of the American Bankers Association. "We must be careful not to let regulatory boxes substitute for real improvement."

Credit union lobbyists also oppose the plan because it could eliminate their unique niche in the banking system and impose new regulations. Dan Mica, chief executive of the Credit Union National Association, said his group was "astonished and angered" by the proposal to phase out the National Credit Union Administration. The Treasury's proposal makes "no sense" for consumers, who would "pay more and get less in return," he said.

Many top federal officials, including some who are normally allies of Paulson, said they were disturbed to learn that the Treasury was proposing to strip their agencies of power. Several of them said they did not see any of the 218-page document until the executive summary was published by the media Friday night.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., expressed concern about the Treasury's idea to take away her agency's oversight of state-run chartered banks, which would be folded into a new banking regulator.

"The FDIC has been a highly successful model for 75 years," she said in a statement. "During this time, no one has lost a single penny of insured deposits and public confidence in our banking system has remained high. Any long-term structural changes to the financial regulatory framework must be carefully weighed against the FDIC's strong record and the fact that it serves as a model for developing countries around the world."

While many agencies would lose their oversight of the markets, the Treasury would enhance its status as the financial market's top regulatory general. Paulson said he would immediately push to include all financial regulators in the President's Working Group on Financial Markets, a committee that he chairs.

Another one of the blueprint's immediate goals is to ease how the Securities and Exchange Commission approves securities, such as mortgage-backed bonds, so financial firms do not try to elude the agency's oversight. Treasury officials said this change would make it simpler for the SEC to eventually merge with its rival, the Commodity Futures Trading Commission.

Before the plan takes hold, however, lawmakers would have to sign off. This would be a challenge given that the CFTC and the SEC report to two different congressional committees, setting up the prospect of a turf battle on Capitol Hill.

Influential investor groups called the change unnecessary, and leaders of the CFTC were openly hostile.

"We shouldn't be about trying to cure what isn't sick - there is enough on the table, right now, that needs healing," said CFTC Commissioner Bart Chilton. "What I don't hear is a call from the countryside for moving boxes around in Washington, D.C., or the need for some omnipresent super-regulator."

Lawyers and analysts familiar with the oversight of securities said Paulson's plan had elements long proposed by the financial industry, which has often chafed under SEC regulation. The blueprint could greatly weaken the SEC's role and shift its authority to the Federal Reserve. Under the plan, the SEC's inspections team would cede its examinations to the Fed. The unit has been criticized by industry and Republican commissioners.

Duke University law professor James D. Cox, a Democrat, said it remains to be seen whether the SEC's traditional emphasis on policing improper stock trades and accounting practices would emerge unscathed in the regulatory shake-up. He said the CFTC has favored an open-ended, free market approach, while the SEC a more prescriptive, tougher hand.

"I don't see the SEC regulatory culture being the one that emerges out of this [blueprint]," Cox said. "It will be diluted by being matched up with the CFTC, and the political winds are going the other way."

Irving M. Pollack, a prominent former SEC staff member, said he would be concerned if the SEC lost some of its power, especially in light of recent abuses in mortgage lending. The virtue of any change will depend on the details, he said. "I don't know whether this is an attempt to rein in the regulatory and enforcement functions of the SEC," he said. "That would be not bright."

Several business lobbies whose members would be directly affected by the changes applauded them. Richard H. Baker, president of the Managed Funds Association, the lobby for hedge funds, said his group was in "full support."

Meanwhile, the Securities Industry and Financial Markets Association called the restructuring plan "thoughtful," adding that the current regulatory regiment is not well suited for today's environment.

But some critics said the Treasury had erred in trying to make U.S. markets more competitive by easing the regulation of securities.

"This blueprint will not serve as a substitute for the need to do something about the current crisis. We have homeowners and neighborhoods that are drastically impacted," said Gail Hillebrand, an attorney at Consumers Union. "The proposals so far haven't made a dent in that."

Indicted Embassy Bomber Faces Tribunal, Not Trial

Military Charges Accused Embassy Bomber Despite Civilian Indictment

By Carol Rosenberg

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The Pentagon announced Monday that it will seek to try a Tanzanian man for war crimes in the 1998 East African embassy bombings - a decade after he was indicted in New York in the case and four years after he was taken into U.S. custody.

The decision to bring Ahmad Ghailani before a military commission at Guantanamo Bay, Cuba, rather than before a civilian federal court was immediately denounced by the Center for Constitutional Rights, whose lawyers represent dozens of the 280 or so detainees at Guantánamo.

"The only reason the government is now militarizing these criminal acts is to hide what the CIA is doing in its interrogation program behind the secrecy of the commissions," it said in a statement.

The group noted that other bombing cases have been successfully prosecuted in criminal courts in the United States, Spain and the United Kingdom, and ended with convictions and life sentences.

Ghailani was captured in 2004 in Pakistan and was held by the CIA in secret detention until September 2006, when he was surrendered to U.S. military authorities and transfered to Guantanamo. There has been no known efforts by civilian Justice Department attorneys to have him transferred to New York to stand trial.

But the Pentagon's military commissions legal advisor, Brig. Gen. Thomas Hartmann, who announced the charges on Monday, said in an interview that prosecutions at Guantanamo and in New York are not mutually exclusive.

"The president of the United States made a determination that the alleged war crimes that are committed in connection with the global war on terror are going to be tried at the commissions," he said.

"If the Southern District of New York wants to proceed with a trial process, they can do that."

Spokesmen for Manhattan U.S. Attorney Michael Garcia declined to comment, as did the Department of Justice in Washington.

Ghailani, who is in his 30s, is accused of conspiracy, murder and providing material support for terror in the Aug. 7, 1998 suicide attack at the U.S. Embassy in Dar es Salaam, Tanzania. If convicted before the military commission, he could receive the death penalty.

That day, suicide bombers simultaneously struck at the U.S. Embassy in Kenya, a coordinated precursor of the Sept. 11, 2001 attacks on New York and the Pentagon. Eleven Africans were killed and about 80 others were wounded in Dar as Salaam, the Tanzanian capital.

The five-foot-four-inch Ghailani, who was born on the Tanzanian island of Zanzibar, addressed the charges during a hearing in Guantanamo, according to a Pentagon transcript released later.

Ghailani rejected claims that he had conducted surveillance on the U.S. Embassy before the attack.

But he said that he did help deliver explosives that turned a Nissan pickup into a deadly truck bomb, though he said he thought the explosives were bound for a diamond mine in Somalia, as well as a "training camp'' in Somalia. He did not elaborate.

Unlike other so-called high value detainees who'd been held in CIA custody, Ghailani made no allegation that he'd been tortured or abused while in custody.

No military commission case has been fully prosecuted. Aus- tralian foot soldier David Hicks pleaded guilty to providing material support for terrorism a year ago, served a nine-month sentence in Australia and is now free.

The charges against Ghailani still must be approved by a Bush administration appointee, Susan Crawford. If the charges are approved, the Pentagon chief defense would assign him a military defense to help him prepare for trial.

But whether he'll face a military commission trial will be held at Guantanamo is uncertain.

Lawyers familiar with military legal procedures have said it is unlikely capital cases such as his can be prepared before the end of the Bush administration, and none of the presidential candidates have shown much interest in continuing the process at Guantanamo.

Hillary Clinton has said she'll seek to have accused terrorists tried in civilian courts. Barrack Obama, while less specific, also has questioned the military commissions system. Republican John McCain has pledged to close Guantanamo and move any military commissions to the United States.

The Trillion Dollar Meltdown

The Trillion Dollar Meltdown

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Be it ever so devalued, $1 trillion is a lot of dough.

That's roughly on a par with the Russian economy. More than double the market value of Exxon Mobil Corp. About nine times the combined wealth of Warren Buffett and Bill Gates.

Yet $1 trillion is the amount of defaults and writedowns Americans will likely witness before they emerge at the far side of the bursting credit bubble, estimates Charles R. Morris in his shrewd primer, ``The Trillion Dollar Meltdown.'' That calculation assumes an orderly unwinding, which he doesn't expect.

``The sad truth,'' he writes, ``is that subprime is just the first big boulder in an avalanche of asset writedowns that will rattle on through much of 2008.''

Expect the landslide to cascade through high-yield bonds, commercial mortgages, leveraged loans, credit cards and -- the big unknown -- credit-default swaps, Morris says. The notional value for those swaps, which are meant to insure bondholders against default, covered about $45 trillion in portfolios as of mid-2007, up from some $1 trillion in 2001, he writes.

Morris can't be dismissed as a crank. A lawyer, former banker and author of 10 other books, he knows a thing or two about the complex instruments that have spread toxic debt throughout the credit system. He once ran a company that made software for creating and analyzing securitized asset pools. Yet he writes with tight clarity and blistering pace.

The financial innovations of the past 25 years have done some good, Morris notes. Collateralized mortgage obligations, invented in 1983, saved homeowners $17 billion a year by the mid-1990s, according to one study.

Slicing and Dicing

CMOs transformed the business by slicing pools of mortgages into different bonds for different risk appetites. Top-tier bonds had the first claim on all cash flows and paid commensurately low yields. The bottom tier was the first to absorb all the losses; it paid yields resembling those on junk bonds.

What began as a good thing, though, soon spawned a bewildering array of new asset classes that spread throughout the financial system, marbling balance sheets with what Morris calls inflated valuations, hidden debt and ``phony triple-A ratings.'' The more the quants fine-tuned the upper tranches of CMOs and other collateralized debt obligations, the more dangerous the bottom slices grew. Bankers began calling it ``toxic waste.''

Guess where the toxins wound up? That's right: Credit hedge funds are now the weakest link in the chain, Morris says. Their equity stands at some $750 billion and is so massively leveraged that ``most funds could not survive even a 1 percent to 2 percent payoff demand on their default swap guarantees,'' he writes.

`Utter Thrombosis'

Morris sketches a scenario in which hedge fund counterparty defaults would ripple through default swap markets, triggering writedowns of insured portfolios, demands for collateral, and a rush to grab cash from defaulting guarantors. The credit system would suffer ``an utter thrombosis,'' he says, making the subprime crisis``look like a walk in the park.''

As bankers and regulators try to prop up the ``Yertle the Turtle-like unstable tower of debt,'' Morris points to two previous episodes of lost market confidence.

The first was the 1970s inflationary trauma that prompted investors to suck money out of the stocks and bonds that finance business. Confidence returned only after Fed chief Paul Volcker slew runaway inflation by ratcheting up interest rates.

The other precedent is the popped 1980s Japanese asset bubble. In that case, politicians and finance executives tried to paper over their troubles. Two decades later, Japan still hasn't recovered, Morris writes.

We should be as bold as Volcker, he suggests: Face the scale of the mess, take a $1 trillion writedown and shore up regulatory measures. His recommendations include forcing loan originators to retain the first losses; requiring prime brokers to stop lending to hedge funds that don't disclose their balance sheets; and bringing the trading of credit derivatives onto exchanges.

What he fears is that the U.S. will instead follow the Japanese precedent, seeking to ``downplay and to conceal. Continuing on that course will be a path to disaster.''

Chaos on Wall Street

Chaos on Wall Street

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The big banks' fear of big losses is threatening to bring down the entire system, with dire consequences for all of us. Here's what's going on, and what we can do about it.

By Allan Sloan, senior editor at large

(Fortune Magazine) -- What in the world is going on here? Why is Washington spending billions to bail out Wall Street titans while leaving struggling homeowners to fend for themselves? Why are the Federal Reserve and the Treasury acting as if they're afraid the world may come to an end, while the stock market seems much less concerned? And finally, what does all this mean to those of us who aren't financial professionals?

Okay, take a few breaths, pour yourself a beverage of your choice, and I'll tell you what's happening - and what I think is going to happen. Although I expect these problems will resolve themselves without a catastrophic meltdown, I'll also tell you why I'm more nervous about the world financial system now than I've ever been in my 40 years of covering business and markets.

Finally, I'll tell you why I fear that the Wall Street enablers of the biggest financial mess of my lifetime will escape with relatively light damage, leaving the rest of us - and our children and grandchildren - to pay for their misdeeds.

We're suffering the aftereffects of the collapse of a Tinker Bell financial market, one that depended heavily on borrowed money that has now vanished like pixie dust. Like Tink, the famous fairy from Peter Pan, this market could exist only as long as everyone agreed to believe in it.

So because it was convenient - and oh, so profitable! - players embraced fantasies like U.S. house prices never falling and cheap short-term money always being available. They created, bought, and sold, for huge profits, securities that almost no one understood. And they goosed their returns by borrowing vast amounts of money.

The first shoe

The fantasies began to fade last June when Bear Stearns (BSC, Fortune 500) let two of its hedge funds collapse because of mortgage-backed-securities problems. Debt market - both here and abroad - went sour big-time. That, in turn, became a huge drag on the U.S. economy, bringing on the current economic slowdown.

And before you ask: It's irrelevant whether or not we're in a recession, which National Bureau of Economic Research experts define as "a significant decline in economic activity spread across the economy, lasting more than a few months." What matters is that we're in a dangerous and messy situation that has produced an economic slowdown unlike those we're used to seeing.

How is this slowdown different from other slowdowns? Normally the economy goes bad first, creating financial problems. In this slowdown the markets are dragging down the economy - a crucial distinction, because markets are harder to fix than the economy.

A leading political economist, Allan Meltzer of Carnegie Mellon, calls it "an unusual situation, but not unprecedented." When was the last time it happened in the U.S.? "In 1929," he says. And it touched off the Great Depression.

No, Meltzer isn't saying that a Great Depression - 25% unemployment, social unrest, mass hunger, millions of people's savings wiped out in bank collapses - is upon us. Nor, for that matter, am I. But the precedent is unsettling, to say the least. You can only imagine how unsettling it is to Federal Reserve chairman Ben Bernanke, a former economics professor who made his academic bones writing about the Great Depression.

Academics now feel that the 1929 slowdown morphed into a Great Depression in large part because the Fed tightened credit rather than loosening it. With that precedent in mind, you can see why Bernanke's Fed is cutting rates rapidly and throwing everything but the kitchen sink at today's problems. (Bernanke will probably throw that in too, if the Fed's plumbers can unbolt it.) None of this Alan Greenspan (remember him?) quarter-point-at-a-time stuff for him.

Fear is the culprit

So why hasn't the cure worked? The problem is that vital markets that most people never see - the constant borrowing and lending and trading among huge institutions - have been paralyzed by losses, fear, and uncertainty. And you can't get rid of losses, fear, and uncertainty by cutting rates.

Giant institutions are, to use the technical term, scared to death. They've had to come back time after time and report additional losses on their securities holdings after telling the market that they had cleaned everything up. It's whack-a-mole finance - the problems keep appearing in unexpected places. Since the Tink market began tanking, so many shoes have dropped that it looks like Imelda Marcos's closet.

We've had problems with mortgage-backed securities, collateralized debt obligations, collateralized loan obligations, financial insurers, structured investment vehicles, asset-backed commercial paper, auction rate securities, liquidity puts. By the time you read this, something else - my bet's on credit default swaps - may have become the disaster du jour.

To paraphrase what a top Fednik told me in a moment of candor last fall: You realize that you don't know what's in your own portfolio, so how can you know what's in the portfolio of people who want to borrow from you?

Combine that with the fact that big firms are short of capital because of their losses (some of which have to do with accounting rules I won't inflict on you today) and that they're afraid of not being able to borrow enough short-term money to fund their obligations, and you can see why credit has dried up.

The fear - a justifiable one - is that if one big financial firm fails, it will lead to cascading failures throughout the world. Big firms are so interlinked with one another and with other market players that the failure of one large counterparty, as they're called, can drag down counterparties all over the globe. And if the counterparties fail, it could drag down the counterparties' counterparties, and so on. Meltdown City.

The long-term view

In 1998 the Fed orchestrated a bailout of the Long-Term Capital Management hedge fund because it had $1.25 trillion in transactions with other institutions. These days that's almost small beer, because Wall Street has created a parallel banking system in which hedge funds, investment banks, and other essentially unregulated entities took over much of what regulated commercial banks used to do.

But there's a vital difference. Conventional banks have reason to take something of a long-term view: Mess up and you have no reputation, no bank, no job, no one talking to you at the country club.

In the parallel system a different ethos prevails. If you take big, even reckless, bets and win, you have a great year and you get a great bonus - or in the case of hedge funds, 20% of the profits. If you lose money the following year, you lose your investors' money rather than your own - and you don't have to give back last year's bonus. Heads, you win; tails, you lose someone else's money.

Bernanke and his point man on Wall Street, New York Fed president Tim Geithner, know everything I've said, of course. As does Treasury Secretary Hank Paulson, former head of Goldman Sachs (GS, Fortune 500).

They know a lot more too - such as which specific institutions are running out of the ability to borrow and have huge obligations they need to refinance day in and day out. Walk by Fed facilities in New York City or Washington, and you can feel the fear emanating from the building.

Because these aren't normal times, the Fed has tried to reassure the markets by inventing three new ways to inundate the financial system with staggering amounts of short-term money. This is in addition to the Fed's existing mechanisms, which are vast.

Europe poised to bolster Web shield

Europe poised to bolster Web shield

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PARIS: Nearly a year after Estonia weathered an onslaught of cyberattacks, its name has become a rallying cry for countries pressing to streangthen global cooperation between governments and private Internet service providers to combat computer crime. But some privacy advocates and computer experts remain wary of such efforts.

On Tuesday, the Council of Europe plans to introduce guidelines to aid computer crime investigators, building on a cybercrime treaty that has been signed by 43 nations, including the United States. A controversial proposal would require service providers to give the authorities a list of the types of information that they could offer.

On Wednesday, NATO will present a strategy for countering computer attacks at a meeting for heads of state in Bucharest, with a proposal to create a central cyberdefense authority.

"The attacks on Estonia - directed at services on which Estonian citizens rely - could happen anywhere," said James Appathurai, a NATO spokesman. "The only way to defend against them is through multinational, multilateral cooperation."

That kind of military talk concerns privacy advocates and computer experts, who fear that private companies will be pressed into service to police users as part of these strategies.

"One of the great consequences of all of this is that an agenda is created for a society that is under surveillance," said Peter Sommers, a senior research fellow at the London School of Economics and author of "The Hacker's Handbook," written under the pseudonym Hugo Cornwall. "And in the panic, we lose the quality of control."

Sommers added, "You can talk yourself into the threat of terrorism or cyberterrorism that has no relationship to the actual risk you face."

At the Bucharest summit meeting, the NATO authorities will seek final approval for a plan to emphasize international cyberdefense training programs, an information alert system and the development of a central authority to coordinate cyberdefense.

The civilian and military authorities in Estonia are rushing to complete a NATO center for digital defense in the capital, Tallinn. The center, in an old military barracks, is designed to be an international academy that brings together experts from Western countries to analyze cyberthreats and develop counterstrategies.

The United States, Germany, Italy and Spain have signaled that they will take part in the center under an accord that is expected to be signed in May. About 50 technicians and scientists will be recruited to work on strategies for detecting and foiling attacks.

"Today it is quite easy to organize these attacks, and these criminals know very well that there are not enough regulations and not enough laws," said Estonia's foreign minister, Urmas Paet, who lobbied for an international center in his country and more cooperation. "It's difficult to investigate and also to punish."

Estonia is also participating in the Council of Europe's cybercrime conference, contributing €50,000, or $79,000, to finance cybercrime training programs along with Microsoft, which has donated $560,000.

The Council of Europe, where 47 member nations work to promote human rights, is urging more countries to sign its cybercrime convention. It was the first international treaty to define cybercrimes from child pornography to computer fraud and network security violation.

The council is now trying to raise public and private cooperation with guidelines for investigators to make information requests to a 24-hour emergency contact network of service providers to obtain quick, efficient responses from them.

Margus Kolga, director general of security policy for the Estonian Ministry of Foreign Affairs, said the guidelines were essential because current relations between law enforcement and service providers were based on informal ties.

Kolga said that when Estonia came under attack last spring, most Internet service providers cooperated with local investigators, but there were exceptions, notably from ISPs in Russia, the suspected origin of the cyberattacks. The help of private companies is vital, Kolga said, because "criminals use certain channels to do things."

"And through cooperation with the ISPs, those channels can be blocked and the information flow can be redirected," Kolga said. "And then it's possible to keep things operating."

They can also help, he noted, in the most difficult part of an investigation by providing information that may identify anonymous hands on a keyboard.

Experts say one of their most difficult tasks remains the determination of whether they are looking for the handiwork of a hacker, a national government, a company or a mix of all three.

The ISPs have not raised major objections to the guidelines, but there are a few controversial proposals that they expect will be eliminated during the council's conference, said Michael Rotert, a vice president of EuroISPA, a trade organization for the largest Internet providers in Europe.

"These guidelines will give a certain set framework that can be applied without interfering with national laws such as a 24/7 hotline," Rotert said, adding that the companies opposed direct interference, like Scotland Yard investigators in Britain calling a German company with a demand for information.

Rotert said he expected at least one proposal to be deleted at the conference. "They want the service providers to tell them what data is available," he said. "That should be the other way around."

Marco Gerke, who led a working group of 25 computer experts that devised the guidelines over the last six months, said the framework was designed to set up a format of standard, written requests to help overcome the often uneasy relationship between investigators and service providers.

"Cooperation between law enforcement and ISPs is very difficult," he said. "Law enforcement has a view of what they want to get, but by the book they're not allowed to get it. So this can lead to conflicts for a service provider that wants to protect the rights of the customers."

Paet, the foreign minister of Estonia, said he hoped that more countries would support the various international agreements to create "a legal, concrete framework." But it may not improve matters in the long term with Russia, which, along with nations like Georgia, Turkey and Liechtenstein, has not signed the Council of Europe's cybercrime treaty.

USA 2008: The Great Depression

USA 2008: The Great Depression

By David Usborne

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Food stamps are the symbol of poverty in the US. In the era of the credit crunch, a record 28 million Americans are now relying on them to survive – a sure sign the world's richest country faces economic crisis

We knew things were bad on Wall Street, but on Main Street it may be worse. Startling official statistics show that as a new economic recession stalks the United States, a record number of Americans will shortly be depending on food stamps just to feed themselves and their families.

Dismal projections by the Congressional Budget Office in Washington suggest that in the fiscal year starting in October, 28 million people in the US will be using government food stamps to buy essential groceries, the highest level since the food assistance programme was introduced in the 1960s.

The increase – from 26.5 million in 2007 – is due partly to recent efforts to increase public awareness of the programme and also a switch from paper coupons to electronic debit cards. But above all it is the pressures being exerted on ordinary Americans by an economy that is suddenly beset by troubles. Housing foreclosures, accelerating jobs losses and fast-rising prices all add to the squeeze.

Emblematic of the downturn until now has been the parades of houses seized in foreclosure all across the country, and myriad families separated from their homes. But now the crisis is starting to hit the country in its gut. Getting food on the table is a challenge many Americans are finding harder to meet. As a barometer of the country's economic health, food stamp usage may not be perfect, but can certainly tell a story.

Michigan has been in its own mini-recession for years as its collapsing industrial base, particularly in the car industry, has cast more and more out of work. Now, one in eight residents of the state is on food stamps, double the level in 2000. "We have seen a dramatic increase in recent years, but we have also seen it climbing more in recent months," Maureen Sorbet, a spokeswoman for Michigan's programme, said. "It's been increasing steadily. Without the programme, some families and kids would be going without."

But the trend is not restricted to the rust-belt regions. Forty states are reporting increases in applications for the stamps, actually electronic cards that are filled automatically once a month by the government and are swiped by shoppers at the till, in the 12 months from December 2006. At least six states, including Florida, Arizona and Maryland, have had a 10 per cent increase in the past year.

In Rhode Island, the segment of the population on food stamps has risen by 18 per cent in two years. The food programme started 40 years ago when hunger was still a daily fact of life for many Americans. The recent switch from paper coupons to the plastic card system has helped remove some of the stigma associated with the food stamp programme. The card can be swiped as easily as a bank debit card. To qualify for the cards, Americans do not have to be exactly on the breadline. The programme is available to people whose earnings are just above the official poverty line. For Hubert Liepnieks, the card is a lifeline he could never afford to lose. Just out of prison, he sleeps in overnight shelters in Manhattan and uses the card at a Morgan Williams supermarket on East 23rd Street. Yesterday, he and his fiancée, Christine Schultz, who is in a wheelchair, shared one banana and a cup of coffee bought with the 82 cents left on it.

"They should be refilling it in the next three or four days," Liepnieks says. At times, he admits, he and friends bargain with owners of the smaller grocery shops to trade the value of their cards for cash, although it is illegal. "It can be done. I get $7 back on $10."

Richard Enright, the manager at this Morgan Williams, says the numbers of customers on food stamps has been steady but he expects that to rise soon. "In this location, it's still mostly old people and people who have retired from city jobs on stamps," he says. Food stamp money was designed to supplement what people could buy rather than covering all the costs of a family's groceries. But the problem now, Mr Enright says, is that soaring prices are squeezing the value of the benefits.

"Last St Patrick's Day, we were selling Irish soda bread for $1.99. This year it was $2.99. Prices are just spiralling up, because of the cost of gas trucking the food into the city and because of commodity prices. People complain, but I tell them it's not my fault everything is more expensive."

The US Department of Agriculture says the cost of feeding a low-income family of four has risen 6 per cent in 12 months. "The amount of food stamps per household hasn't gone up with the food costs," says Dayna Ballantyne, who runs a food bank in Des Moines, Iowa. "Our clients are finding they aren't able to purchase food like they used to."

And the next monthly job numbers, to be released this Friday, are likely to show 50,000 more jobs were lost nationwide in March, and the unemployment rate is up to perhaps 5 per cent.

NKorea Threatens South With Destruction

NKorea Threatens South With Destruction

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SEOUL, South Korea (AP) - North Korea threatened South Korea with destruction Sunday after Seoul's top military officer said his country would consider attacking the communist nation if it tried to carry out a nuclear attack.

The statement from North Korea's official news agency marked the third straight day of bellicose rhetoric from the North, which is angry over the harsher line the South's conservative new president has taken against the country since assuming office last month.

``Our military will not sit idle until warmongers launch a pre-emptive strike,'' said an unidentified KCNA military commentator. ``Everything will be in ashes, not just a sea of fire, if our advanced pre-emptive strike once begins.''

On Friday, North Korea test-fired a barrage of missiles into the sea and warned it would ``mercilessly wipe out'' any South Korean warships that violate its waters near their disputed sea border.

Such rhetoric by North Korea at times of increased tensions is not rare, and it comes just two days before a scheduled visit to South Korea by the chief U.S. negotiator in North Korean nuclear disarmament talks.

South Korea's Defense Ministry reacted calmly.

A senior military officer at the ministry said officials were working ``to ensure the public would not worry about'' the North's recent actions and statements. He declined to elaborate and asked not to be named because he was not authorized to speak to media.

Sunday's KCNA statement also warned that the North would suspend all scheduled inter-Korean dialogue unless Seoul retracts and apologizes for the remark by its new top military leader.

Kim Tae-young, chairman of the South's Joint Chiefs of Staff, told a parliamentary hearing Wednesday that the military would strike a suspected North Korean nuclear weapons site if Pyongyang attempts to attack the South with atomic bombs.

His office later said he was talking about a general military principle dealing with outside threats, not about launching an unprovoked pre-emptive attack on the North.

South Korea's Defense Ministry said Sunday that it would decide whether to send a response to the North over its demand for a retraction in a few days.

The North Korean military commentator reaffirmed that Pyongyang would ban South Korean officials, including military officers, from crossing the border.

The statement did not say when the ban would take effect or how long it would last.

South Korean officials have occasionally traveled across the two countries' heavily fortified border for talks.

South Korean President Lee Myung-bak has pledged to review rapprochement projects pushed by his two liberal predecessors, saying progress in efforts to halt the North's nuclear program was a prerequisite for further large investment and aid projects.

International negotiations aimed at the North's denuclearization have been stalled for months because of differences over whether Pyongyang has met a requirement to fully declare its atomic programs. Assistant Secretary of State Christopher Hill, Washington's point man on North Korea, was due in Seoul on Tuesday for talks with South Korean officials.

Paulson's Fix for the Financial System: Less regulation, More Power to the Fed

Paulson's Fix for the Financial System: Less regulation, More Power to the Fed

By Mike Whitney

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It is being billed as a “massive shakeup of US financial market regulation”, but don't be deceived. Treasury Secretary Henry Paulson's proposals for broad market reform are neither “timely” nor “thoughtful” (Reuters) In fact, its all just more of the same free market “we can police ourselves” mumbo jumbo that got us into this mess in the first place. The real objective of Paulson's so called reforms is to decapitate the SEC and increase the powers of the Federal Reserve. Same wine, different bottle. Paulson's real motive is to preempt the regulatory sledgehammer that is set to descend on the entire financial industry following the 2008 election. There's growing fear that a President Obama may tote his firehose down to Wall Street and flush out some of the debris that has collected in the market's dark corners.

If Paulson's plan is approved in its present form, Congress will have even less control over the financial system than it does now and the same group of self-serving banking mandarins who created the biggest equity bubble in history will be able to administer the markets however they choose without the annoyance of government supervision. That's exactly what Treasury Secretary and his pals at the Fed want; unlimited power with no accountability.

Paulson is expected to lay out guidelines and principles that are intended to help regulators supervise the financial markets. According to AFP:

“The President's Working Group on Financial Markets said the current regulatory structure is working well despite calls by some US lawmakers.”

In other words, the failing banking system, the housing meltdown, and the frozen corporate bond market are all signs of a robust financial system? This may be the most incongruous statement since “Mission accomplished”. The system is imploding and real people are being hurt by the fallout. Thirty years of industry-led lobbying has dismantled the regulatory regime which made US financial markets the envy of the world. The credibility and transparency are gone along with Glass-Steagall and government oversight of the explosive growth of over-the counter derivatives instruments. Now the system is prey to all types of dodgy debt instruments, suspicious "dark pool" trading and off-balance sheets operations which further reinforce the belief that cautious investment is no better than casino gambling.

"The regulatory line of sight today is by the counterparties," the official said, adding that the guidelines should be "beneficial to industry." (AFP)

How is that different than saying, “Caveat emptor"? That's not a motto that inspires confidence. Many people still naively believe that planning their retirement should not have to be a Darwinian tussle with a crafty junk-bond salesman.
Under Paulson's plan, the Federal Reserve will be granted new regulatory powers, but whatever for? The Fed doesn't use the powers it has now. No one stopped the Fed from intervening in the mortgage lending fiasco, or the ratings agency abuses or the off-balance sheets shenanigans. They had the authority and they should have used it. The Fed knew everything that was going on---including the mushrooming sales of derivatives contracts which soared from under $1 trillion in 2000 to over $500 trillion in 2006---but they decided to cheerlead from the sidelines rather than do their jobs. The fact is, they were worried that if they got involved they might upset the gravy-train of obscene profits that was enriching their bankster friends.

Former Fed chief Greenspan used to croon like a smitten teenager every time he was asked about subprime loans or adjustable rate mortgages. And, as New York Times columnist Floyd Norris points out, (Greenspan) “praised the growth in the derivatives market as a boon for market stability, and resisted calls to use the Fed’s power to increase regulation.” Of course, he did. It was all part of Maestro's “New Economy”; trickle-down Elysium, where the endless flow of low interest credit merged with financial innovation to create a Reaganesque El Dorado. There are no regulations in Eden; anything goes and to heck with the public, they can fend for themselves. Its a dog eat dog world and there ain't no love.

Now its Paulson's job to keep the neoliberal flame lit long enough to make sure that government busybodies and bureaucratic do-goodies don't upset the applecart. That means concocting a wacky public relations campaign to convince the public that Wall Street is not just a pirate's cove of land-sharks and bunko artists, but a trusted ally in maintaining a strong economy through vital and efficient markets.

The Times' Norris summed up Paulson's sham reforms like this:

“The plan has its genesis in a yearlong effort to limiting Washington's role in the market. And that DNA is unmistakably evident in the fine print. Although the proposal would impose the first regulation of hedge funds and private equity funds, that oversight would have a light touch, enabling the government to do little beyond collecting information — except in times of crisis. The regulatory umbrella created in the 1930s would grow wider, with power concentrated in fewer agencies. But that authority would be limited, doing virtually nothing to regulate the many new financial products whose unwise use has been a culprit in the current financial crisis. (“In Treasury Plan, a Reluctant Eye over Wall Street”, Floyd Norris, New York Times)

What nonsense. The house is on fire and hyperventilating Hank is still wasting our time with this rubbish. The real problem is that Paulson and his buddies at the Federal Reserve think of the financial system as their personal fiefdom so they refuse to loosen their hoary grip even though the economy is listing starboard and the water is flooding into the lower decks.

Once again, the New York Times:

“All the checks and balances in the plan reflect the mindset of its architect, Treasury Secretary Henry Paulson, who came to Washington after a long career on Wall Street. He has worried that any effort to substantially tighten regulation could hamper the ability of American markets to compete with foreign rivals.”

No one elected Paulson to do anything. He has no mandate. He is an industry rep. who has worked exclusively for a small group of wealthy investors who have put the entire country at risk with their toxic mortgage-backed bonds, their reckless Ponzi-type speculation, and their off-book chicanery. Paulson should be removed immediately and returned to his wolf's lair at G-Sax. If Bush is serious about straightening out Wall Street, then bring in Eliot Spitzer. He's available. And he'll do what it takes to clean house, that is, put a truncheon-wielding robo-cop in every trading-pit at the NYSE, and dispatch government accountants to every office of every CFO making sure they have a Big Red Pen in one hand and a taser in the other. That's the only way to get the attention of the bandit-class.

“I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil,” says Paulson.

Paulson is wrong. The current turmoil is all about the lack of regulation and he'd better prepare himself for some big changes. The pendulum is already in motion and tighter regulations will soon follow. There needs to be an accounting process for all transactions and capital requirements for every financial institution that creates credit. No exceptions. All of these businesses pose a real danger to the overall system and, therefore, must conform to clearly articulated and strictly enforced rules; no off-balance sheets operations, no dark pool trading, no unregulated derivatives contracts, no level 3 assets, no “mark to model” garbage bonds where CFOs unilaterally decide what they are worth by picking a number out of a hat. Its time to restore order to the markets so retirees and working class families can feel safe investing in their futures. They are the ones who are most hurt by Wall Street's endless trickery.

Paulson's plan is a non starter. The era of sandbagging, supply-side banditry is over. Good riddance.

Those Who Control Oil And Water Will Control The World

Those Who Control Oil And Water Will Control The World

New superpowers are competing for diminishing resources as Britain becomes a bit-player. The outcome could be deadly

By John Gray

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H
istory may not repeat itself, but, as Mark Twain observed, it can sometimes rhyme. The crises and conflicts of the past recur, recognisably similar even when altered by new conditions. At present, a race for the world's resources is underway that resembles the Great Game that was played in the decades leading up to the First World War. Now, as then, the most coveted prize is oil and the risk is that as the contest heats up it will not always be peaceful. But this is no simple rerun of the late 19th and early 20th centuries. Today, there are powerful new players and it is not only oil that is at stake.

It was Rudyard Kipling who brought the idea of the Great Game into the public mind in Kim, his cloak-and-dagger novel of espionage and imperial geopolitics in the time of the Raj. Then, the main players were Britain and Russia and the object of the game was control of central Asia's oil. Now, Britain hardly matters and India and China, which were subjugated countries during the last round of the game, have emerged as key players. The struggle is no longer focused mainly on central Asian oil. It stretches from the Persian Gulf to Africa, Latin America, even the polar caps, and it is also a struggle for water and depleting supplies of vital minerals. Above all, global warming is increasing the scarcity of natural resources. The Great Game that is afoot today is more intractable and more dangerous than the last.

The biggest new player in the game is China and it is there that the emerging pattern is clearest. China's rulers have staked everything on economic growth. Without improving living standards, there would be large-scale unrest, which could pose a threat to their power. Moreover, China is in the middle of the largest and fastest move from the countryside to the city in history, a process that cannot be stopped.

There is no alternative to continuing growth, but it comes with deadly side-effects. Overused in industry and agriculture, and under threat from the retreat of the Himalayan glaciers, water is becoming a non-renewable resource. Two-thirds of China's cities face shortages, while deserts are eating up arable land. Breakneck industrialisation is worsening this environmental breakdown, as many more power plants are being built and run on high-polluting coal that accelerates global warming. There is a vicious circle at work here and not only in China. Because ongoing growth requires massive inputs of energy and minerals, Chinese companies are scouring the world for supplies. The result is unstoppable rising demand for resources that are unalterably finite.

Although oil reserves may not have peaked in any literal sense, the days when conventional oil was cheap have gone forever. Countries are reacting by trying to secure the remaining reserves, not least those that are being opened up by climate change. Canada is building bases to counter Russian claims on the melting Arctic icecap, parts of which are also claimed by Norway, Denmark and the US. Britain is staking out claims on areas around the South Pole.

The scramble for energy is shaping many of the conflicts we can expect in the present century. The danger is not just another oil shock that impacts on industrial production, but a threat of famine. Without a drip feed of petroleum to highly mechanised farms, many of the food shelves in the supermarkets would be empty. Far from the world weaning itself off oil, it is more addicted to the stuff than ever. It is hardly surprising that powerful states are gearing up to seize their share.

This new round of the Great Game did not start yesterday. It began with the last big conflict of the 20th century, which was an oil war and nothing else. No one pretended the first Gulf War was fought to combat terrorism or spread democracy. As George Bush Snr and John Major admitted at the time, it was aimed at securing global oil supplies, pure and simple. Despite the denials of a less honest generation of politicians, there can be no doubt that controlling the country's oil was one of the objectives of the later invasion of Iraq.

Oil remains at the heart of the game and, if anything, it is even more important than before. With their complex logistics and heavy reliance on air power, high-tech armies are extremely energy-intensive. According to a Pentagon report, the amount of petroleum needed for each soldier each day increased four times between the Second World War and the Gulf War and quadrupled again when the US invaded Iraq. Recent estimates suggest the amount used per soldier has jumped again in the five years since the invasion.

Whereas Western countries dominated the last round of the Great Game, this time they rely on increasingly self-assertive producer countries. Mr Putin's well-honed contempt for world opinion might grate on European ears, but Europe is heavily dependent on his energy. Hugo Chávez might be an object of hate for George W Bush, but Venezuela still supplies around 10 per cent of America's imported oil. President Ahmadinejad is seen by some as the devil incarnate, but with oil at more than a $100 a barrel, any Western attempt to topple him would be horrendously risky.

While Western power declines, the rising powers are at odds with each other. China and India are rivals for oil and natural gas in central Asia. Taiwan, Vietnam, Malaysia and Indonesia have clashed over underwater oil reserves in the South China Sea. Saudi Arabia and Iran are rivals in the Gulf, while Iran and Turkey are eyeing Iraq. Greater international co-operation seems the obvious solution, but the reality is that as the resources crunch bites more deeply, the world is becoming steadily more fragmented and divided.

We are a long way from the fantasy world of only a decade ago, when fashionable gurus were talking sagely of the knowledge economy. Then, we were told material resources did not matter any more - it was ideas that drove economic development. The business cycle had been left behind and an era of endless growth had arrived. Actually, the knowledge economy was an illusion created by cheap oil and cheap money and everlasting booms always end in tears. This is not the end of the world or of global capitalism, just history as usual.

What is different this time is climate change. Rising sea levels reduce food and fresh-water supplies, which may trigger large-scale movements of refugees from Africa and Asia into Europe. Global warming threatens energy supplies. As the fossil fuels of the past become more expensive, others, such as tar sands, are becoming more economically viable, but these alternative fuels are also dirtier than conventional oil.

In this round of the Great Game, energy shortage and global warming are reinforcing each another. The result can only be a growing risk of conflict. There were around 1.65 billion people in the world when the last round was played out. At the start of the 21st century, there are four times as many, struggling to secure their future in a world being changed out of recognition by climate change. It would be wise to plan for some more of history's rhymes.

The Decline And Coming Fall Of US Hegemony

The Decline And Coming Fall Of US Hegemony

By K Gajendra Singh

"History is ruled by an inexorable determinism in which the free choice of major historical figures plays a minimal role", Leo Tolstoy

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When I went back to Ankara in late 1992 to head the Indian Embassy, many of my friends from the Turkish Foreign Office from my 1969-73 tenure as First Secretary, were going out as ambassadors to newly independent states in Central Asia and the Baltic, following the breakup of the Soviet Union. Looking at the creation of so many new missions, a cheeky young Turkish diplomat in the Foreign Ministry said rather mischievously than hopefully, that only if United States of America broke up into 50 independent states, could he ever hope to head like them a Turkish Embassy, in north America. Turkish diplomats trace their traditions and archives to six centuries of Ottoman rule over an empire from which more than two dozen nations have emerged.

But the wish of the young diplomat is not going to be fulfilled any time soon, if ever. But still—

An editorial titled ’ Collapse of U.S. economy ’ in Belleville Intelligencer of 27 Feb, 2008 confirms , by now generally accepted ill health of US economy . Harry Koza in the Globe and Mail recently quoted Bernard Connelly, the global strategist at Banque AIG in London, that the likelihood of a Great Depression is growing by the day. Martin Wolf of U.K.’s Financial Times cited Dr. Nouriel Roubini of the New York University’s Stern School of Business, who outlines how the losses of the American financial system will grow to more than $1 trillion, an amount equal to all the assets of all American banks.

The next domino to fall will be credit card defaults, and after that... who knows? There are so many exotic funds out there, with trillions of dollars in paper - or rather computer-screen money - all carrying assorted acronyms, and all about to disintegrate into nothingness. Over the next couple of years, scores of banks that have thrived on these devices, based on quickly disappearing equities, will fail.
The most frightening forecast so far comes from the Global Europe Anticipation Bulletin (GEAB), "The end of the third quarter of 2008 (thus late September, a mere seven months from now) will be marked by a new tipping point in the unfolding of the global systemic crisis.
"At that time indeed, the cumulated impact of the various sequences of the crisis will reach its maximum strength and affect decisively the very heart of the systems concerned, on the front line of which (is) the United States, epi-centre of the current crisis.

"In the United States, this new tipping point will translate into - get this - a collapse of the real economy, (the) final socio-economic stage of the serial bursting of the housing and financial bubbles and of the pursuance of the U.S. dollar fall. The collapse of U.S. real economy means the virtual freeze of the American economic machinery: private and public bankruptcies in large numbers, companies and public services closing down."

"We are not experiencing a "remake" of the 1929 crisis nor a repetition of the 1970s oil crises or 1987 stock market crisis. What we will have, instead, is truly a global momentous threat - a true turning point affecting the entire planet and questioning the very foundations of the international system upon which the world was organized in the last decades."

After the end of the cold war in the wake of the two World Wars ,the decline of western hegemony over the East and South during the last few centuries ,first exercised by rapacious and brutal European colonialists and then from Washington ,is now likely to morph into a fall because of the new forces unleashed by the US led invasions of Afghanistan and Iraq .The two debt financed wars have brought US economy close to a recession ( Indian economy including the realty sector would also be affected ,Indian officials and media still remain oblivious if not dishonest in spite of the fall in Indian Sensex). Forces and changes have been set into motion which will completely alter the existing international financial and strategic structures and result in a new dynamics. Unless of course the irresponsible leadership of USA, still with colossal powers of destruction at its command or say a reckless Israel, bomb Iran and hurl the world towards a rapid general warfare between Israel & West vs Muslim nations and masses, leading to even a nuclear holocaust and Armageddon. Verily , it would then be the last Crusade vs Jihad !

Contrary to the self proclaimed congratulatory triumphalism of neo-liberals after the collapse of Communism and Socialism in end 1980s, celebrated from house tops by the so called philosophers , think tanks and analysts with delusions of permanent world domination of Western financiers and corporate houses based on dubious theories of ’the End of History ’or ’the Clash of Civilizations’ and even claims of Washington- the new Rome with absolute control planned in the ’Project for American Century ’ by arrogant and historically ignorant Straussian neo-cons and their supporters ; the religious , economic , scientific and historic forces and currents unleashed during the last few centuries are coalescing towards a major East-West conflagration , which will bring about results quite opposite to those dreamed up in Washington , London and Paris.

The importance of petroleum in warfare and economy had become obvious even before the Second World War. By 1940s , the British who dominated the Middle East and still ruled over India, realising the importance of oil and the strategic importance of Middle East as lifeline to India, had created military alliances with most of the countries of the Middle East including Iran to protect oil wells from the Soviet Union. The British created a weak and dependent Pakistan as a bulwark against any USSR overture into the Gulf. After the Second WW, USA was formally anointed the leader of the Western Christian nations although after the end of the First WW the financial power centre had started shifting towards the Wall Street from the City of London, but the latter still has great leverage for manipulation.

From 1950s onwards , USSR made inroads into many Arab states led by secular, and nationalist leaders like Gamal Nasser of Egypt. West used religion and conservative and hereditary rulers to counter the egalitarian waves of socialism sweeping the Middle East, Asia and Africa. The battle lines for influence and control between the West and USSR ( and China) saw many ups and downs . An epochal change occurred when Iran was lost in 1979 and US ally the Shahenshah was overthrown by Khomeini led Shia revolution , threatening the Sheikhdoms and Kingdoms in the region. Western world and its frightened allies in the region, taken aback , encouraged and helped financially and militarily Saddam Hussein to douse the leaping flames from the volcano of Shia revolution with its belief in martyrdom. Iran and Iraq lost over a million young men ; the 1980s Iraq –Iran war only protected the vested interests of the West and its allies in the region.

From the Middle East , Western strategic lever to manipulate and control the region and its resources extended into South Asia through an axis between the USA, Saud dynasty, obscurantist Wahabi clerics and Pakistan military. This axis along with support from other Muslim countries and even China fathered , nurtured , trained and financed with arms and billions of dollars ,the present monster of militants and Jihadis to battle and force out the Soviet forces from Afghanistan .The nurseries of terrorism were left behind intact which morphed into Al Qaeda and Talebans , the latter with full support from Pakistan and the Gulf’s Arab rulers and US acquiescence , which wanted a ’stable’ Afghanistan for its Multinationals’ pipelines to carry energy from central to South Asia and beyond. That project remains unfulfilled.

For his cooperation ,Pakistan President Gen Zia- ul- Haq was suitably rewarded with money and military aid which emboldened Islamabad to carry out an invasion in Kargil in India .With abundance of arms ,Pakistan acquired a Kalashnikov culture of violence while increased opium production in Afghanistan , with Pakistan as an exit route left millions of it citizens addicted to the drug. Gen Zia Islamised Pak polity and completed nuclear bomb program with acquiescence and even support form the West.

But Al Qaeda chief Osama Ben Laden , chosen for the Jihad in Afghanistan by the Saudi rulers nurtured dreams of taking over Muslim states gone astray and conquer other peoples too. The victims were India and newly independent central Asian states like Tajikistan , Kyrgyzstan and Uzbekistan and Arab states which had supported and sent volunteers to fight in Afghanistan.

In its strategy to defeat the Christian West and the Crusaders in the Middle East , even on the sacred soil of Arabia after the 1991 US led war on Iraq , Al Qaeda first attacked US missions in East Africa .But the stunning events of 9/11 showed up the fundamental contradictions in the US-Saudi –Pak axis , with 14 of the 19 hijackers being of Saudi origin ,led by an Egyptian and Al Qaeda’s octopus like tentacles deeply embedded in Pak military, ISI and the establishment .

The hyper power USA then mounted an invasion of Afghanistan , the objective being to control the region and extending into central Asia with its resources . But the strains and stresses in the Crusader-Jihadi axis became even more acute after the US led illegal invasion of Iraq in March, 2003, angering and pitting Muslim masses all over the world against USA , UK and other western nations in the backdrop of continued illegal occupation and encroachments on Palestinian land by Israel since 1967 and daily killings of Palestinians telecast on channels like Al Jazeera and others.

This is acutely true in US-Saudi relations with the latter being the leading Sunni Muslim state , protecting the holy Islamic shrines in Mecca and Medina and blessed with vast oil resources. With increasing public support for Al Qaeda inside the Kingdom ,Riyadh is now in a quandary. Its power and prestige have been eroded as a result of its rival Shia power Iran’s strengthened position in Iraq and the region , just the opposite of what Washington had foolishly hoped for. President George Bush did not even know the difference between Shia and Sunni Islam and Ahmet Chalebi ,a wily Iraqi ,exiled after the 1958 overthrow of the Hashemite dynasty , had sold to the willing in the Pentagon the charade that US troops would be welcomed with flowers by the Iraqis .No body ever cared to read the history of Iraq or the region.

US invasion and occupation has divided Iraq into at least three parts, Shia, Sunni and Kurdish ; it now appears difficult to hold them together .Apart from exposing the hollow claims of the US success of its ’Surge ’ and stability in Iraq ,the current fighting between the puppet government Iraqi troops and Mahdi army ,the Moqtada –as Sadr militia , specially in Basra and Baghdad is" a result of an attempt to impose Colombian-style democracy on the unstable country. Iraqi PM Maliki’s goal, shared by the like-minded allies among the Shia, Sunni and Kurdish parties that dominate his administration, and with U.S. approval and air support , is to kill off the opposition and then hold a vote." Moqtda is fighting to retain control for provincial elections in October, as" the winners of those elections will determine the future of the Iraqi state. Control of the country’s oil wealth, and how its treasure will be developed, will also be significantly influenced by the outcome of the elections."

Washington which had coerced President Gen Pervez Musharraf after 9/11, under threat to bomb Pakistan back to stone ages ( some ally?), to align Islamabad in its so called ’War on terror ’wanted Pakistan to destroy Al Qaeda , Pushtun Talebans and Muslim Jihadis in Pakistan and Afghanistan, with whom Saudi Arabia , Pak Army , ISI and the establishment have umbilical connections since their holy Jihad against atheist Soviet Union in Afghanistan during 1980s.( Israel now wants PLO to destroy Tehran aligned Hamas-originally incubated by Mossad to counter Al Fattah.)

US has lost the war on the ground in Iraq and Nato is in disarray in Afghanistan .At the end of ’Operation Iraqi freedom ’ transmuted into a ’ war on terror’ , really the mother of all battles for oil, raw materials and strategic space in west , south and central Asia , the frontiers in the Middle East and even Pakistan are likely to be redrawn , but not by the West but by the movements , militias and peoples of the region .Say by Shias in south Iraq and Pushtuns in Pak-Afghanistan border who might obliterate the Durand Line officially , to begin with. But West has invested too much in the region and its prosperity depends on it. It is unlikely to give in or give up without a bloody fight.

The Kingdom of Afghanistan was accepted as a defacto buffer state by the British and Russian empires at the end of ’the Great Game’ in Central Asia in 19th century .By the end of the 20th century , the British and Russian empires in Asia had vanished and many new states have emerged out of them. Thus the very raison d’etre of that buffer state no longer holds good. The Afghan territory is under control of different armed groups , foreign and local , with Washington installed President Hamid Karzai, with US mercenaries as his bodyguards, barely controlling the city of Kabul. Look at new states sprung from former Russian and British empires now , at Europe after the two world wars and at the end of the Cold War . State and national boundaries are always waxing and waning , some times changing drastically. So what is new if Pakistan breaks apart .Little effort has been made by its leaders since 1947 to even develop a territory based nationalism. China would not escape further problems in Tibet and may be even in Xinjiang.

Following the collapse of the Soviet Union, USA went about methodically in dismantling Russia and its near abroad and succeeded, with ample help from a naive Gorbachev and an often drunk or drugged Boris Yeltsin. The 9/11 assaults on US symbols of power was exploited by the Bush administration to spread its tentacles to Afghanistan and beyond in central Asia . For USA the Cold War never really ended and all means were employed to push Western military arm NATO to encroach into and encircle Russian strategic space. In central Europe it was carried out by dismantling Yugoslavia, an Orthodox Christian Slav nation like and friendly to Russia and by aligning Georgia and Azerbaijan to Washington. US franchised street revolutions failed in Belarus but succeeded in Serbia and Georgia and partially in Ukraine. When USA tried the same in Uzbekistan and Kyrgyzstan, Uzbek ruler Islam Karimov expelled the Americans from the air base and Kyrgyzstan placed new restrictions. The eastward movement of NATO has resulted in the creation of Shanghai Corporation Organisation which is now promoting military coordination and collaboration among its members and possibly even a formal military alliance in future to counter Nato.

In its backyard Latin America, USA maintained its dominance under Monroe doctrine except for defiant Cuba under Fidel Castro .But Washington is losing its sway and total control, led against it by Hugo Chavez of Venezuela and other leaders who represent and implement aspirations of their people and not of the old elites in cahoots with corporate interests in USA and Europe. US attempt for a colonial style control of its oil has been brought to a halt by fierce Sunni Iraqi resistance ; full Shia resistance would also emerge. Defied by Iran and even forced to engage with it , there are limitations to what Washington, now caught in the Iraqi quagmire , can do in Latin America . With a defiant nuclear North Korea, and China, an emerging economic power house, the policies of Japan, the second economic industrial power in the world which can quickly transmute its formidable industrial base into a lethal military machine, the situation in East Asia remains pregnant with many unpredictable possibilities. But certainly the US writ and influence are on the wane every where.

K Gajendra Singh, Indian ambassador (retired), served as ambassador to Turkey and Azerbaijan from August 1992 to April 1996. Prior to that, he served terms as ambassador to Jordan, Romania and Senegal. He is currently chairman of the Foundation for Indo-Turkic Studies. Copy right with the author. E-mail: Gajendrak@hotmail.com .