Saturday, March 8, 2008

Inside Iraq - The landmark visit to Iraq

The visit of Mahmoud Ahmadinejad, Iran's president, to Iraq is seen as a new chapter in relations between the two countries.

The historic trip, the first by an Iranian leader since the Iran-Iraq war, sparked heated protests and outraged many Sunni Arabs.

Some political observers think this underscored how a growing Iranian influence in Iraq could aggravate the existing mistrust and further sour relations between Shia and Sunnis.

However, Iraqi political leaders appear determined to move closer to Tehran, despite American accusations that Iran finances and supports militias inside Iraq.

How will this new level of closer political and economic relations between Iran and Iraq impact the political future of Baghdad and the wider region?

What are its implications on the already strained political power play between Sunni and Shia factions in Iraq?

How will the US react and will it change its security and military strategies in Iraq?

Our guests this week are:

Dr Sadeq Zibakalam from Teheran University, Rich Schmierer from the US State Department and Dr Abdallah Alshaaal, former Egyptian Assistant Foreign Minister.

Let the Bankruptcies Roll

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By Michael S. Rozeff

Certain financial developments of late, commonly treated by the mainstream media as negative, are gladdening my heart. It is sheer delight to read that Carlyle Capital Corp. is unable to meet margin calls. Its stock fell from $12 to $5 in one day. I hope it goes to $0. I am happy because Carlyle is an affiliate of the Carlyle Group, which is a charter member of the corrupt military-political-industrial complex. It is the home, or former home, or palace, or safe deposit box of both Bush presidents and an incredible roster of other once high-placed officials, such as John Major, Frank Carlucci, James Baker III, Richard Darman, Arthur Levitt, and Mack McLarty, to name a few.

Carlyle invested $21.7 billion in mortgage-backed securities issued by two government-sponsored enterprises, namely, the Federal National Mortgage Association (ticker symbol FNM), known as Fannie Mae, and the Federal Home Loan and Mortgage Corporation (ticker symbol FRE), known as Freddie Mac. Carlyle used excessive leverage (issuing debt of its own) to finance these purchases. It borrowed by issuing very short-term debt known as repurchase agreements using the mortgage-backed securities as collateral. When these mortgage-backed securities fell in price, the lenders demanded more capital (margin) from Carlyle. But it had borrowed so much that it could not meet the margin calls. It received a notice of default. Wonderful!

How long the mighty fall before they manipulate the system to bail themselves out is anybody’s guess. In the meantime, it is fun to see even a token victory. Half a loaf of comeuppance is better than none.

The Northern Rock bank in England issued large amounts of mortgage-backed securities, financing them by wholesale sources of short-term funds such as borrowings from other banks. In this respect, it was like Carlyle. When its short-term sources of funds dried up, the bank failed. England nationalized this bank. It should have been allowed to fail. Failures are good when they are deserved. We may not learn from them, but at least they give us the opportunity to learn. And we need to learn a great deal.

Investors who over-reached for yield and over-reached for yield spreads are learning the hard way that this was a risky policy. When yields on short-term money market funds fell drastically, the number of ultra-short bond funds doubled. These bring in extra current yield by, among other things, investing in mortgage and other asset-backed securities. Although they seem like money-market funds, they are not. A fund like Fidelity’s Ultra-Short Bond Fund maintained a $10 value for over 4 years, only suddenly to drop to $8.61. (Some others have fared better, depending on their investments.)

Carlyle Capital bought debt securities of FNM and FRE, but their stocks are also falling. The stock price of Fannie Mae, which almost hit $90 in December of 2000 is down to $22. It fell over 10 percent on March 6 alone. I hope this company goes bankrupt along with Freddie Mac, which is down to $20 after being north of $70 a share. The government has no business butting into the mortgage business, so if Fannie Mae and Freddie Mac fail, good riddance.

Although I’d enjoy seeing a complete debacle occur in these two government-created monsters, quite possibly the government will prevent or otherwise forestall their bankruptcies should they ever be imminent. The government provides no explicit guarantees to these companies, and the companies state that there are no guarantees. Nevertheless, investors have acted as if the companies had some implicit guarantees. They have good reason. Congress clearly wants these companies around so that they can buy up mortgages. The political fallout from their failures would be severe.

Investors therefore have lent money to Fannie Mae and Freddie Mac at (low) rates not in accord with their risk. This has allowed these companies to create and dominate a secondary market in mortgages. They bought up mortgages originated by banks, packaged them up, and resold them as the kinds of mortgage-backed securities that Carlyle invested in. How ironic that a company with so many ex-politicos in it might be dented a bit by another government-sponsored enterprise! These securities have been turning sour because the mortgages in them are defaulting. As a result, the yields on these debts are running 3 percent higher than Treasury bond yields, as compared with a more typical 1 percent. And even that premium is not as high as other troubled mortgage-related debts.

What is this secondary market that Fannie Mae deals in? It’s basically a used-item or resale market. A secondary market is a market in which buyers and sellers can trade an item, like a security, after it has been issued. The used-car market is a secondary market. So is the New York Stock Exchange.

If there is no such market or if the market is limited or thin, the security is said to be illiquid, which means that it cannot be sold or sold quickly in significant amounts at a price near to its previous price. When a market is illiquid, there is good reason for it. There may not be enough active buyers and sellers to warrant an exchange. Such a market usually becomes a dealer market.

In the good old days, banks originated mortgages and then generally kept them in house, that is, retained their ownership. They were illiquid loans. The secondary market in home mortgages was very limited.

Some items have secondary markets and others do not. There is no natural financial or economic law that says that every loan or security must have a secondary market, liquid or not. A secondary market develops spontaneously if conditions and circumstances warrant it. Otherwise, it doesn’t.

Farmers used to write illiquid forward contracts to sell their corn production. Later, the futures markets, which provided far more liquidity by standardizing the contract and by other risk-control methods, came to displace the older forward contracts. Put and call markets used to operate as an illiquid dealer market and with ads in Barron’s until the Chicago Board Options Exchange devised standard contracts. On the other hand, there are thousands of bonds that are unstandardized and that have illiquid secondary markets.

Entrepreneurs devise secondary markets if it pays them to. E-bay created or enhanced many secondary markets. There is no need for government to foster or encourage secondary markets where none naturally exist or where they are illiquid. In such cases, there is no secondary market because it does not pay to have one.

When the government steps in, as it did in 1938 when it created Fannie Mae, it does so to benefit some special interest groups. The government draws resources into an uneconomic use and it undermines the primary market in various subtle ways. This happened in the secondary mortgage market.

Banks used to hold mortgages and not resell them. Fannie Mae gave the banks a way to sell their mortgages. Since Fannie Mae borrowed at privileged rates, due to the implicit government guarantee, and bought mortgages from the banks, the banks benefited.

Bank capital is limited, and the amount of mortgages they can carry is therefore limited. But if a bank can originate a mortgage and then sell it to Fannie Mae, then with the same capital it can increase the number of its mortgage originations. Its profits go up. Its incentive and capacity to push mortgage loans rises. This distorts economic activity.

In the good old days when the banks both originated and held the mortgages, they faced several risks, and good bank management required that they manage these risks. They generally borrowed short and lent long. They borrowed by issuing short-term securities such as CDs. They lent by making long-term mortgage loans. The short-term interest rates they paid were usually lower than the long-term rates they received. A liquidity problem arises when the short-term rates exceed the long-term rates. Another problem arises when the long-term rates go up, as this reduces the value of the mortgages. Usually when short-term and long-term interest rates rise, the short-term rate rises more than the long-term rate, and the bank’s position deteriorates.

When mortgage loans were illiquid, the bank had to be careful to maintain alternative sources of funds in case interest rates rose. It had to be careful in managing its mortgage and loan portfolio so that they were diversified. It could not concentrate too heavily in one type of loan, one maturity of loan, or one borrower.

The bank also had to maintain the quality of its mortgages, because if interest rate rises were associated with hard times or brought on hard times, then its bad mortgage loans might rise. The bankers managed these risks partly by knowing their customers. The three C’s of credit were Character, Credit, and Capital. The bank looked into the borrower’s past history, how much credit he could handle, and what his other assets were. The loan officer’s own reputation and prospects of rising within the bank through promotion depended on his being careful in making the loans.

In recent years, the three C’s became a joke. Banks made loans on no character, no credit, and no capital. Why not? They sold these loans to Fannie Mae and Freddie Mac, or to some other intermediaries who then repackaged them into pools (called securitization) and resold them to other investors. These included all sorts of institutions including large banks overseas.

The secondary market, combined with the innovations in securitization and the ready pools of money seeking high yields in a low-yield environment, altered the incentive structure in mortgage origination. Mortgage lenders no longer cared as much to whom they lent; and the guidelines for how much they loaned deteriorated.

The stocks of a heap of banks and mortgage companies are now falling in price drastically, the main reason being that they are holding bad loans. Washington Mutual (WM), a bank known for its mortgage loans in overheated markets in California and Florida, is down to $11 from $47. Citibank (C) is down to $21 from $55. They, not I or you or the taxpayer, made these bad loans, and they (and their suppliers of capital) should suffer the consequences. If those who took the loans walk away, and that is their choice, so be it. If the lenders have to deal with the costs of foreclosures, that is how it should be. Why should you or I bail them out? If we do, they will give us a repeat performance (this is called moral hazard).

I’m hoping to see the bankruptcies roll along unimpeded, but realistically what I expect is a roll call of political rhetoric, name-calling, blame-placing, and misguided government attempts to halt the truth of the ticker tape, which is that the boom is over and its excesses are now being liquidated. So I have to take what little enjoyment I can get from watching the stocks of these enterprises collapse.

A good, solid, scary bear market that chastens all concerned is just what we need, that is, if it were allowed to provide its salutary effect, which it won’t. Many more people need to be taught many lessons.

Among our influential leaders, I see no evidence of any truth-telling. Was there ever? I seem to remember at least occasional flashes of truth emanating from an occasional Senator or Representative or novelist or artist. But in recent years, there is not even the smallest sign from any of the rich and powerful who command the nation and the airwaves that they are prepared to lay aside their demoniacal control over this country.

There are two Americas: the official America of endless b.s., and the real America glimpsed in the unhampered and uninhibited writings beneath the surface in the blogosphere. I do see hopeful signs of light in the blogosphere.

I will keep my computer running while I continue to make sure that my Mute button works on other media so that I can tune out the waterfall of official baloney that such bankruptcies or a grinding bear market will elicit. The rich and powerful cannot halt a bear market or all its ramifications. But, sad to say, they know how to use it to their advantage in order to propagandize and solidify still further their grip on the lives of Americans.

Bush Poised to Veto Waterboarding Ban

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By Dan Eggen

Move could reverberate in campaign.

President Bush today will veto legislation meant to ban the CIA from using waterboarding and other harsh interrogation tactics and will argue that the agency needs to use tougher methods than the U.S. military to wrest information from terrorism suspects, administration officials said.

Bush's decision to veto an intelligence authorization bill that contains the waterboarding provision is the subject of his weekly presidential radio address, to be broadcast today, the White House said.

"The bill would take away one of the most valuable tools on the war on terror: the CIA program to detain and question key terrorist leaders and operatives," White House spokesman Tony Fratto said yesterday.

Although long expected, Bush's formal move to veto the bill reignites the Washington debate over the proper limits of the U.S. interrogation policies and whether the CIA has engaged in torture by subjecting prisoners to severe tactics, including waterboarding, a type of simulated drowning.

The issue also has potential ramifications for GOP presidential nominee John McCain (R-Ariz.), a longtime critic of coercive interrogation tactics who nonetheless backed the Bush administration in opposing the CIA waterboarding ban. The Democratic presidential candidates, Sens. Hillary Rodham Clinton (N.Y.) and Barack Obama (Ill.), both support the ban, though neither was present for last month's Senate vote for the bill that Bush is to veto.

The legislation would have limited the CIA to using 19 less-aggressive tactics outlined in a U.S. Army field manual on interrogations. Besides ruling out waterboarding, that restriction would effectively ban temperature extremes, extended forced standing and other harsh methods that the CIA used on al-Qaeda prisoners after the Sept. 11, 2001, attacks.

Bush and his aides have argued that the CIA's "enhanced interrogation program" was crucial in uncovering terrorist plans and averting deadly plots. CIA Director Michael V. Hayden has also spoken out against the Senate bill and defended the methods as lawful and effective.

In a statement to The Washington Post, Hayden said the Army manual guidelines were intended for "a different population of detainees, a different group of interrogators, and for different intelligence needs" than those of the nation's chief spy agency. The CIA has not specified all the tactics it wants to keep using but says it no longer uses waterboarding. Administration officials have not ruled out using the tactic again.

Many Democrats and human-rights groups say the tactics are often counterproductive and that, regardless, they constitute illegal torture under U.S. and international law. Senate Majority Leader Harry M. Reid (D-Nev.) said yesterday that Bush has "compromised the moral leadership of our nation," and said the administration is ignoring the advice of military experts who oppose harsh techniques.

Retired Army Lt. Gen. Harry E. Soyster, a former director of the Defense Intelligence Agency, suggested that those who support harsh methods simply lack experience and do not know what they are talking about. "If they think these methods work, they're woefully misinformed," Soyster said at a news briefing called in anticipation of the veto. "Torture is counterproductive on all fronts. It produces bad intelligence. It ruins the subject, makes them useless for further interrogation. And it damages our credibility around the world."

In two separate forums earlier this week, FBI Director Robert S. Mueller III and Navy Rear Adm. Mark H. Buzby, commander of the military detention facility at Guantanamo Bay, Cuba, defended the efficacy of less-coercive, "rapport-building" interrogation tactics.

"We get so much dependable information from just sitting down and having a conversation and treating them like human beings in a businesslike manner," Buzby told reporters in a conference call Thursday.

Sharp Drop in Jobs Adds to Grim Picture of US Economy

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By Edmund L. Andrews

Washington - The worst fears of consumers, investors and Washington officials were confirmed on Friday, as deepening paralysis on Wall Street collided with stark new evidence of falling employment and a likely recession.

In a report that was far worse than most analysts had expected, the Labor Department estimated that the nation lost 63,000 jobs in February. It was the second consecutive monthly decline, and the third straight drop for private-sector jobs.

Even before the bad news on jobs emerged, the Federal Reserve was already racing to ease the latest crisis in the credit markets, where seemingly rock-solid companies have been caught short because the markets are devaluing the collateral they had posted to back billions of dollars in loans. Much of that collateral consists of mortgages.

In a surprise announcement early Friday, the Federal Reserve said it would inject about $200 billion into the nation's banking system this month - with more to come after that - by offering banks one-month loans at low rates and in return letting them pledge mortgage-backed bonds and even riskier assets as collateral.

Though monthly payroll data are notoriously volatile and subject to revision, the jobs report was so bleak that many of the few remaining optimists on Wall Street threw in the towel and conceded that the United States was already in a recession.

"Godot has arrived," wrote Edward Yardeni, who had been one of Wall Street's most relentlessly upbeat forecasters. "I've been rooting for the muddling through scenario. However, the credit crisis continues to worsen and has become a full-blown credit crunch, which is depressing the real economy."

The convulsions in the credit markets were spurred in part when Thornburg Mortgage, one of the nation's biggest independent mortgage lenders, and Carlyle Capital, the offspring of one of the country's largest private equity firms, failed to meet demands by lenders to post more cash or pledge other assets, also known as margin calls, on debts that had been backed by packages of mortgages.

Fed officials said Friday that they were not pumping money into the system in response to the poor jobs data but rather to the growing unwillingness or inability of investors to finance even routine business deals. Fed officials have long feared that anxiety about credit losses would create a "negative feedback loop," or self-perpetuating spiral of rising unemployment, more home foreclosures and yet more credit losses.

"You have big credit losses that make it harder to get new credit, which means the economy starts to slow down and foreclosures go up," said Nigel Gault, a senior economist at Global Insight, a forecasting firm. "Then you get even bigger credit losses, which makes banks even less willing to lend and you keep spiraling down."

The Fed's problem is that its main weapons against a downturn - lower interest rates and easier money - are ill suited to a crisis that stems from collapsing confidence about credit quality.

Even though the central bank sharply cut short-term interest rates twice in January and clearly signaled that it would cut them again on March 18, rates for home mortgages have risen and rates for many forms of commercial loans have jumped sharply.

"There has been a tug of war under way between deteriorating credit conditions and monetary policy," wrote Laurence H. Meyer, a former Fed governor and now a forecaster at Macroeconomic Advisers. As a result, he said, credit conditions have remained almost as tight as ever.

The darkening economic outlook, coming just nine months before presidential elections, puts enormous pressure on President Bush and could pose a problem for Senator John McCain, the presumptive Republican nominee for president. Typically, the party in power has not been able to hold onto the White House when the economy is in a recession in an election year.

President Bush, in a hastily arranged appearance before television cameras on Friday afternoon, acknowledged that the economy had slowed but predicted that it would get a lift this summer from the $168 billion stimulus package of tax rebates and temporary tax cuts that Congress recently passed.

"Losing a job is painful, and I know Americans are concerned about the economy," Mr. Bush said.

"The good news is, we anticipated this and took decisive action to bolster the economy, by passing a growth package that will put money into the hands of American workers and businesses."

Edward P. Lazear, chairman of President Bush's Council of Economic Advisers, said the White House had downgraded its earlier forecasts but still believed that the tax rebates of up to $1,200 for many families will help the economy escape a recession.

"There is no denying that when you get negative job numbers, realistically the economy is less strong than we had hoped it would be," Mr. Lazear said. "The question is how quickly will it pick up. We think it will pick up - as I mentioned, we think it will pick up by the summer."

Few private forecasters were so buoyant. Many firms had already concluded that a recession was under way. Within minutes of the new report on employment, many in the dwindling pool of optimists changed their positions.

Mr. Yardeni was hardly alone. Just one minute after the Labor Department published its report at 8:30 a.m., JPMorgan Chase reversed its stance, declaring that a recession appeared to have begun. Lehman Brothers switched its position as well.

Unemployment typically starts to rise only after a recession has started, and it keeps climbing for many months after the economy has hit bottom and begun to recover.

Paul Ashworth, an economist at Capital Economics, noted that private-sector payroll employment has now declined by an average of 47,000 a month - a decline that has been followed by a recession every time it has happened in the last 50 years. In each of those recessions, Mr. Ashworth added, the job market recovered only after monthly job losses peaked at 200,000 jobs.

Ben S. Bernanke, chairman of the Federal Reserve, had already sent clear signals in recent weeks that the central bank was ready to reduce the overnight federal funds rate when policy makers meet on March 18.

Since August, the Fed has sharply cut overnight rates five times, to 3 percent from 5.25 percent, and investors have been all but assuming that the central bank would reduce them by at least another half a percentage point, and perhaps three-quarters of a point, at the next meeting.

But by Thursday, Fed officials had become increasingly alarmed that rates for many kinds of lending were skyrocketing as investors demanded steep risk premiums that are normally associated with a serious economic recession.

What particularly alarmed Fed officials was that the margin calls on Carlyle Capital and Thornburg Mortgage had stemmed from plunging confidence about the value of highly conservative mortgages that were guaranteed by Fannie Mae and Freddie Mac, the giant government-sponsored mortgage companies.

If investors lose confidence in Fannie Mae and Freddie Mac, which have become the only major remaining source of mortgage financing in recent months, Fed officials fear that home sales and housing prices could plunge further and foreclosures could climb even higher than they already have.

On Thursday, the Mortgage Bankers Association reported that about 7.9 percent of all loans - a record high - were past due or in foreclosure. Until the third quarter of last year, the rate had not climbed above 7 percent since 1979.

Home prices are falling in almost every part of the country, a phenomenon that Fed officials and many other experts until recently thought was all but impossible, and some analysts now predict that average home prices will ultimately fall 20 percent from their peak in 2006.

The effect is reducing household wealth. According to data this week from the Fed, net household wealth declined by $900 billion in the fourth quarter of last year.

Indeed, the ratio of homeowners' equity to the value of their homes fell below 50 percent for the first time in history last year, according to the Fed. Far more alarming, however, is that about 30 percent of all homes bought in 2005 and 2006 are "under water," meaning they have mortgages that are higher than their resale value.

"We're at the beginning of the bursting of the housing bubble," said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal research organization in Washington. "The rate of foreclosures is just going to increase as time goes on."

Eric S. Rosengren, president of the Federal Reserve Bank of Boston, noted that the housing calamity thus far has occurred even though unemployment is still low, at just 4.8 percent. But a surge in joblessness would almost certainly lead to more foreclosures and more downward pressure on home prices.

"A downside risk that we do need to consider is whether a rising unemployment rate generated by slow growth will force some people to sell their houses, creating further downward pressure on housing prices," Mr. Rosengren said in an interview.

In opening up its monetary spigots on Friday, the central bank left little doubt that it wanted to increase the money for mortgage lending.

Its first move was to offer up to $100 billion through the Term Auction Facility, a program created in December that allows any bank or savings and loan to bid for loans at what amounts to wholesale rates and allows them to pledge a wide variety of securities - including mortgage-backed securities that are not tradable at the moment - as collateral.

The central bank's other new initiative is to lend an additional $100 billion in March through its open-market operations. That money is available only to primary dealers, a few dozen major investment banks, but the loans can be secured by certain mortgage-backed securities, like those issued by Fannie Mae or Freddie Mac.

Fed officials said they were prepared to infuse even bigger sums of money into the financial system if they see a need, and the central bank said it was in "close consultation with foreign central bank counterparts" - a hint that it might seek support from other central banks if the credit problems persist.

The ramifications of Ahmadinejad’s visit to Iraq

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By James Cogan

The visit to Iraq on March 2 and 3 by Iranian President Mahmoud Ahmadinejad highlights the profound impact of the US invasion on political relations throughout the region. The US occupation of the country has unleashed processes that the American ruling elite did not foresee and does not welcome.

Ahmadinejad is the first head of the Islamic Republic of Iran to visit Iraq since the overthrow of the pro-US regime of Shah Mohammad Reza Pahlavi in 1979. Within a year of the Iranian revolution, Iraqi dictator Saddam Hussein, with the tacit backing of the US and its regional allies, invaded Iran and initiated a murderous war that lasted until 1988 and claimed over one million lives. Relations between the two states were subsequently dominated by hostility and suspicion.

In stark contrast to the decades of enmity, Ahmadinejad was kissed, hugged and feted by the leadership of the American puppet government in Iraq. Iraqi president, Kurdish leader Jalal Talabani, publicly proposed that Ahmadinejad call him “Uncle Jalal”, to symbolise the closeness of the Iraq-Iran relationship.

Unlike American dignitaries, who fly into the country in secret and are not able to leave heavily guarded compounds, Iraqi officials saw no problem with Ahmadinejad driving down the major road from the airport—once dubbed the “Highway of Death” by US soldiers—and making a night-time visit to the mausoleum of two of the 12 Shiite Imams. An entire 30,000-strong Iraqi army division was assigned to his protection. One thousand Kurdish pesh merga militiamen provided a personal bodyguard.

Iraqi Prime Minister Nouri al-Maliki stood supportively alongside Ahmadinejad as he baldly stated: “Iraqi people do not like America.” The Iranian leader proceeded to launch a scathing criticism of the US occupation. “The presence of foreigners in the region has been to the detriment of the nations of the region,” he declared. “It is nothing but a humiliation.... The people of this region have got nothing from the occupation here except damage, sabotage, destruction, insults and degradation.... We believe that the forces that came from overseas and travelled thousands of kilometres to reach here must leave the region...”

The Iranian president signed a seven-point agenda for closer economic ties between Iran and Iraq and pledging $1 billion to assist with the reconstruction of Iraqi infrastructure. Iran is already Iraq’s largest source of imports, with trade between the two states over $8 billion per year. Pointedly, new proposals include the provision of electricity, some of which would be generated by Iran’s nearly completed nuclear power plant that the US accuses of being a front for a nuclear weapons program.

In the days following the US invasion on March 20, 2003, the last thing that would have been predicted in Washington is that five years later a fundamentalist Iranian president and opponent of US policy would be welcomed to Baghdad, allowed to condemn the American presence and outline a plan to economically entwine Iraq with Tehran.

The militarist cabal in Washington had a very different future in mind. The Iranian regime was the second on Bush’s “axis of evil” list. There is every reason to believe that as US tanks rampaged through Baghdad, the expectation in the White House was that, certainly by 2008, they would have returned Iran to the status of a US client state as well.

Instead, US imperialism has confronted setback after setback in its agenda of establishing domination over the energy resources of the Middle East and Central Asia—nowhere more so than in Iraq itself. The Sunni Arab base of Hussein’s Baathist regime launched a bitter guerilla war within days of Baghdad’s fall. By April 2004, the US occupation confronted an even more threatening uprising among the Shiite working class and urban poor. To prevent the insurgency escalating, Washington depended upon the Shiite clergy headed by the Iranian-born Ayatollah Ali al-Sistani and Shiite fundamentalist parties with religious and political ties with Iran, particularly what is now named the Islamic Supreme Council of Iraq (ISCI).

The pay-off was the acceptance by the US that the puppet government would be dominated by the Iraqi Shiite elite, rather than by various stooges cultivated by the CIA among the Iraqi exile community during the 1990s, such as Iyad Allawi and Ahmad Chalabi. The Shiite ascendancy led to the outbreak of a vicious sectarian civil war in 2006 between rival Shiite and Sunni factions, in which hundreds of thousands of Iraqis were killed or displaced and hatred of the occupation vastly intensified.

Even after the death of over one million people and the utter destruction of the country’s social fabric and infrastructure, an insurgency against the US presence still continues in both Sunni and Shiite areas. Last year, the US military was compelled to “surge” its occupation force to over 160,000 troops—half the available combat units of the American Army and Marine Corp. The crisis for the Pentagon is expressed most clearly in the fact that it has to hire more than 100,000 mercenary contractors to supplement its own forces.

While US spending on “Operation Iraqi Freedom” drains the US treasury of more than $5 billion per month, little progress has been made toward opening up Iraq’s vast oil and gas reserves to exploitation by American corporations. Moreover, the instability that the war has produced is a factor in the rise of oil prices to over $100 per barrel and global inflationary pressures.

The Iranian regime, by contrast, has benefited from the quagmire. The US invasion overthrew Iran’s main regional rival—the Baathist regime. China and Russia, both threatened by the US attempts to dominate energy supplies, have sought out closer ties with Tehran and sought to limit the impact of the Bush administration’s accusations that Iran is seeking to construct nuclear weapons. In the Middle East, the stalling of US efforts to remove the Iranian regime has led pro-US states such as Turkey, Egypt and Saudi Arabia to distance themselves from the US antagonism toward Iran. Instead, they have opened up closer diplomatic and trade relations.

The same calculations underlie the welcome given to Ahmadinejad by the dominant pro-occupation political factions inside Iraq—the Shiite alliance as well as the Kurdish nationalist parties, which have established an autonomous region in the country’s three northern provinces. US imperialism, they fear, will ultimately be compelled by economic or political pressures to abandon its militarist attempt to dominate the Middle East. Iran, however, a country of 70 million on their doorstep, is a power with whom they will need to deal with.

The obvious question is whether there is any validity in an assessment that the American capitalist class will accept having only marginal influence over the exploitation of world’s main oil and gas supplies. Any serious analysis of the past 30 years and particularly the years since September 11, 2001, indicates that the answer is a definitive “no”. US imperialism is determined to retain its hegemonic position in the region and internationally. Its instrument for doing so is the massive military machine it possesses and its criminal willingness to trample over all the norms of post-war inter-state relations. Both parties of the American ruling elite, Republican and Democratic, subscribe to the Bush doctrine of “pre-emptive war”—the “right” of the United States to attack any country deemed to be real or potential threat to American interests.

Ahmadinejad’s demand that the US leaves the Middle East was answered on Tuesday by the second-in-command of US forces in Iraq, Lieutenant General Ray Odierno. He accused Tehran of supplying weapons to insurgents attacking US troops and labelled Iran as the greatest “long-term threat” to Iraq’s stability. The logic of these geo-political tensions is more likely to be war than US withdrawal.

US plot to overthrow elected Palestinian government exposed Part One

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By Jean Shaoul

The United States plotted the armed overthrow of the Hamas government elected by the Palestinian people in January 2006, according to “The Gaza Bombshell”, an article based on leaked documents and interviews with key players in the Bush administration that was published in the latest edition of the US magazine Vanity Fair.

Vanity Fair called the affair “Iran Contra 2.0”, a reference to the Reagan administration’s funding of the Nicaraguan Contras by covertly selling arms to Iran in contravention of official policy. This latest plot was prepared not by some middle-ranking spies and military personnel, but by the State Department with approval from the very top of the political establishment, including President George W. Bush. It was implemented by Secretary of State Condoleezza Rice and Deputy National Security Advisor Elliott Abrams, who has a long history in plotting coups and illegal activities on behalf of US imperialism.

The plan was being prepared and implemented at the same time as Bush publicly professed that the last great ambition of his presidency was to broker a deal that would create a viable Palestinian state, bring peace to the region and further his “freedom agenda” of engineering the election of pro-US regimes throughout the Middle East.

The intention was that Muhammad Dahlan, Palestinian President Mahmoud Abbas’s national security advisor and a Fatah strongman, would facilitate the downfall of Hamas with forces armed by the US. Dahlan, who has worked closely with the FBI and CIA since the 1990s, was publicly described by Bush as “a good solid leader” and privately called “our man.”

But the plan back fired. Instead of removing Hamas, its effect was to provoke a tragic and ongoing factional struggle between Fatah and Hamas that brought Palestine to the point of civil war and a pre-emptive coup in Gaza by Hamas to forestall the coup planned by Fatah last June. The result was yet another foreign policy debacle for Bush.

While some of this was known at the time, the full extent of Washington’s skulduggery was not. The article by award winning British journalist David Rose, who also writes for the Observer, provides documentary evidence of the conspiracy, setting out the nuts and bolts of the plans. It also provides a revealing insight into what passes as policy making within the Bush administration, its modus operandi and the tense relations and divisions within the neo-conservative circle surrounding Bush.

The coup plan is hatched

“The Gaza Bombshell” explains how, after the death of Yasser Arafat in November 2004, the White House insisted upon early elections — under the guise of giving the Palestinians the chance to choose new leaders who were not “compromised by terror”. This was intended to forestall growing support for Hamas. Dahlan and Abbas repeatedly told Bush that the elections should be delayed until Fatah was ready. But Bush and his advisors would not listen.

Hamas came to power in January 2006 as a result of widespread disaffection with Fatah over its readiness to agree a rotten deal with Bush and its own endemic corruption. An offshoot of the Muslim Brotherhood, Hamas does not represent a progressive alternative to Fatah but articulates the interests of sections of the Arab bourgeoisie and petty bourgeoisie.

When democracy resulted in the wrong party winning, the Bush administration was taken by surprise. Condoleezza Rice told reporters. “I don’t know anyone who wasn’t caught off guard by Hamas’s strong showing.” According to Vanity Fair’s sources, a Department of Defence official said, “Everyone blamed everyone else. We sat there in the Pentagon and said, ‘Who the f*** recommended this?’”

The White House rejected any idea of working with Hamas, even though leading Israelis including Ephraim Halevy, a former head of Mossad, supported such an approach. A senior State Department official said, “The administration spoke with one voice: ‘We have to squeeze these guys.’ With Hamas’s election victory, the freedom agenda was dead.”

First, the US ensured that the Quartet, made up of the US, the United Nations, the European Union and Russia, terminated aid to the Hamas government, depriving it of most of its budget and the means of paying salaries. Second, Israel closed its borders with Gaza and severely restricted the Palestinians’ freedom of movement. These measures were designed to turn the Palestinians against Hamas. Israel arrested 64 Hamas officials, including half of its elected legislators, most of whom are still in detention today, making Hamas’s parliamentary majority inoperable.

Washington was furious when Hamas began holding talks with Abbas in an attempt to form a “unity government”. In October 2006, Rice went to see Abbas. According to officials present at their private meeting, she told in him in no uncertain terms that the US expected him to dissolve the government of Prime Minister Ismail Haniyeh as soon as possible and hold fresh elections.

Abbas, like Yasser Arafat before him, found himself being asked to sign off on a civil war. Unlike Arafat, Abbas agreed, albeit reluctantly, to take action within two weeks.

When there was no action, Rice sent Jake Walles, the US consul general in Jerusalem, to present Abbas with an ultimatum. A “talking points” document prepared for him by the State Department and authenticated as genuine by US and Palestinian officials, stated:

“We need to understand your plans regarding a new [Palestinian Authority] government. You told Secretary Rice you would be prepared to move ahead within two to four weeks of your meeting. We believe that the time has come for you to move forward quickly and decisively.”

“Hamas should be given a clear choice, with a clear deadline: ... they either accept a new government that meets the Quartet principles, or they reject it. The consequences of Hamas’ decision should also be clear: If Hamas does not agree within the prescribed time, you should make clear your intention to declare a state of emergency and form an emergency government explicitly committed to that platform.”

Since no one doubted that such an ultimatum would lead to fighting on the streets, the document said that the US was already working to strengthen Fatah’s security forces: “If you act along these lines, we will support you both materially and politically, we will be there to support you.” Abbas should be encouraged to “strengthen [his] team” to include “credible figures of strong standing in the international community.” This was a reference to Muhammad Dahlan.

In the long term, Abbas and the handful of Palestinian millionaire and even billionaire families whose interests he represented were entirely dependent upon Washington and had no choice but to comply. But he was still reluctant to initiate a fratricidal conflict and did not dissolve the Hamas government. So the US instead worked to provoke a civil war, which it thought Hamas would lose, by boosting military support for Fatah. Abbas was sidelined in favour of direct talks with Dahlan.

Dahlan had been Yasser Arafat’s security chief in Gaza, which he had run as his own personal fiefdom. He headed up the Preventive Security Service, an outfit of thugs, whose trademark was kidnappings and torture. It was an occupation that had made him a very rich man.

Rose’s article cites a State Department official as saying that David Welch, assistant Secretary of State, who was in charge of Middle East policy, “didn’t fundamentally care about Fatah. He cared about results, and [he supported] whatever son of a bitch you had to support. Dahlan was the son of a bitch we happened to know best. He was a can-do kind of person. Dahlan was our guy.”

This apparently alarmed Avi Dichter, Israel’s internal-security minister and the former head of its Shin Bet security service. When he heard senior American officials refer to Dahlan as “our guy”: “I thought to myself, the president of the United States is making a strange judgment here.”

Bush’s schemes fell afoul of his administration’s previous polices. While Fatah’s forces were numerically superior, most of its strength had been destroyed by the US-backed Israeli invasion of the West Bank in 2002, aimed at destroying Arafat’s political and security infrastructure. Furthermore, without the economic support from the EU, there was no money to pay Fatah security forces, with the result that Fatah could neither control Gaza’s streets — Hamas’s power base — nor protect its own personnel.

Dahlan tried to convey an impression of strength. He initiated a series of kidnappings accompanied by torture. Fighting broke out between Fatah and Hamas. Atrocities were committed on both sides. Soon dozens were dying each month.

The US security coordinator for the Palestinians, Lieutenant General Keith Dayton, met with Dahlan. He said that US would supply weapons and training. Dahlan should take responsibility for all the Palestinian forces as national security advisor and the number of separate forces would be reduced. This would include disbanding Dahlan’s own Preventive Security Service, widely known to be perpetrating kidnapping and torture.

When Dahlan ridiculed the idea, saying, “The only institution now protecting Fatah and the Palestinian Authority in Gaza is the one you want removed,” Dayton replied, “We want to help you. What do you need?”

The project was hugely controversial even within the administration. Some agreed with the general approach, but thought Dahlan was soiled goods and wanted nothing to do with him. Others disagreed about the type of weaponry and the cost. Israel itself was worried that arms destined for Fatah would end up in Hamas’s hands and was reluctant to cooperate. It stipulated that only light weaponry would be acceptable.

The $86.4 million financial support package promised by Dayton, with the ostensible purpose, according to a US document published by Reuters, of paying to “dismantle the infrastructure of terrorism and establish law and order in the West Bank and Gaza”, never materialised.

Congress dragged its feet, finally blocking payment in January 2007. The House Subcommittee on the Middle East and South Asia feared that military aid to the Palestinians would end up being used against Israel, a forecast that ultimately proved to be correct. Congress finally approved a reduced, $59 million package for non-lethal aid in April 2007.

Covert funds

According to the Vanity Fair article, the coterie around Bush were simultaneously scouting around for an alternative, covert means of getting funds and weapons to Dahlan. Congress’s reluctance to provide funding meant that “you had to look for different pots, different sources of money,” said a Pentagon official.

A State Department official added, “Those in charge of implementing the policy were saying, ‘Do whatever it takes. We have to be in a position for Fatah to defeat Hamas militarily, and only Muhammad Dahlan has the guile and the muscle to do this.’ The expectation was that this was where it would end up—with a military showdown.”

There were, this official said, two “parallel programs”—the overt one, which the administration took to Congress, “and a covert one, not only to buy arms but to pay the salaries of security personnel.”

The covert plan, according to State Department officials, consisted of Rice phoning and meeting up with the leaders of four Arab nations—Egypt, Jordan, Saudi Arabia, and the United Arab Emirates. She wanted them to provide Fatah with military training, pledge funds to buy weapons for its forces and pay money into accounts controlled by President Abbas.

As David Rose explained, the scheme was similar to the Iran-contra scandal where the Reagan administration sold arms to Iran, an enemy of the US, and used the proceeds to fund the Contra rebels in Nicaragua in violation of a congressional ban. Some of the money for the Contras, like that for Fatah, was provided by Arab allies as a result of US lobbying, while the arms were channelled through Israel.

Supplying arms to Dahlan and Fatah was not illegal, because Congress had never explicitly outlawed it. But “It was close to the margins,” a former intelligence official with experience in covert programs told Rose.

By late December 2006, four Egyptian trucks crossed an Israeli-controlled border point into Gaza and handed over their contents to Fatah. These included 2,000 Egyptian-made automatic rifles, 20,000 ammunition clips, and two million bullets. When news of the shipment leaked, Benjamin Ben-Eliezer, an Israeli cabinet member, said on Israeli radio that the guns and ammunition would give Abbas “the ability to cope with those organizations which are trying to ruin everything”— meaning Hamas.

As Avi Dichter pointed out, since Israel had to approve all weapons shipments, it was unlikely to want Washington to send high-tech weaponry into Gaza in case it was used against Israel. A State Department official is quoted as saying, “One thing’s for sure, we weren’t talking about heavy weapons. It was small arms, light machine guns, ammunition.”

Rose believes that it could even have been Elliott Abrams himself who held back from sending in heavy weaponry, to avoid breaking the law for a second time in the same way. In 1991, Abrams had been convicted and fined for unlawfully withholding information from Congress during Iran Contra affair but was later pardoned by the first President Bush.

One of his associates says Abrams, who refused an interview for the Vanity Fair article, was torn over the policy—between the disdain he felt for Dahlan and his overriding loyalty to the Bush administration. David Wurmser, Vice President Dick Cheney’s former adviser, admitted that Abrams was not the only one: “There were severe fissures among neoconservatives over this. We were ripping each other to pieces.”

Rice herself was in for a shock. When she went to the Middle East in January 2007, her Arab allies stonewalled and refused to cough up. This was not simply because they had differences with Washington. Rather, as one official told Rose, “The Arabs felt the US was not serious. They knew that if the Americans were serious they would put their own money where their mouth was. They didn’t have faith in America’s ability to raise a real force. There was no follow-through. Paying was different than pledging, and there was no plan.”

This official believed that Rice’s trip with the begging bowl raised “a few payments of $30 million”—mostly, as other sources agree, from the United Arab Emirates. Dahlan himself says the total was only $20 million, and confirms that “the Arabs made many more pledges than they ever paid.”

To be continued

US: 63,000 jobs lost as economy continues downslide

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By Patrick Martin

Total US employment fell by 63,000 jobs in February, the second consecutive monthly decline and worst showing in five years, according to a Labor Department report released Monday. The figure demonstrates that the recession in the US economy is worsening and that the corporate onslaught against the jobs and living standards of working people will intensify.

The stock market plunged 147 points, following Thursday’s drop of 215 points, in a decline that has taken the Dow-Jones Industrial Average to well below the 12,000 mark. The New York Stock Exchange closed at 11,893.69, its lowest point in nearly two years, and more than 2,100 points down from the peak last October 11. The total losses on all stocks traded are approaching three trillion dollars in less than five months.

The wave of selling was fueled by the jobs report, although Wall Street frequently celebrates such indicators of job market distress because rising unemployment dampens wage demands and business costs and makes it possible for the Fed to cut interest rates without sparking inflation.

In the current context, however, such concerns are dwarfed by the fear that rising unemployment will trigger a further wave of defaults on mortgages, credit cards and other consumer debt, exacerbating the credit crisis that has unfolded over the past eight months since the crisis in the sub-prime mortgage market erupted. Moreover, inflation is raging, symbolized by the soaring price of oil, over $106 a barrel in trading Friday, and the price of gold, now approaching $1,000 an ounce.

To be blunt, what Wall Street fears now is not a recession—it is already widely accepted that the US economy slipped into recession last fall—but the collapse of major financial institutions and market dislocations which could set the stage for a full-scale worldwide depression, of a kind not seen since the 1930s.

In an effort to stave off the wave of selling triggered by the jobs report, the Federal Reserve announced Friday that it would make $100 billion in new credit available to major banks this month, on top of $160 billion in short-term loans it has extended in occasional auctions since December. The Fed also announced that it will increase the size of the short-term lending in auctions set for March 10 and March 24 from $30 billion to $50 billion apiece.

Fed Chairman Ben Bernanke has already indicated that the central bank will likely cut interest rates again at the next meeting of its Open Market Committee, now set for March 18. The Fed has cut rates by 1.25 percent in the last two months (2.25 percent since October) in an increasingly desperate effort to stimulate the financial markets.

The job report was particularly jolting to financial markets because most economists had predicted a small rise in payrolls, with forecasts estimating the increase at 25,000 jobs. Some 52,000 net jobs were eliminated in manufacturing, as well as 39,000 net jobs in construction, on top of a loss of 25,000 jobs in January.

Despite these numbers, the official jobless rate actually declined slightly, from 4.9 percent to 4.8 percent, because 450,000 unemployed stopped looking for work in February and accordingly were excluded from the count, which is based on the number of people actively seeking jobs.

The Labor Department report also found that January’s net job losses were worse than initially reported, 22,000 compared to 17,000, meaning that 85,000 net jobs have been eliminated since the first of the year. The agency also cut in half its estimate of net job creation in December, from 82,000 to 41,000.

The US economy must generate an increase of 150,000 new jobs each month just to keep pace with population growth, so the figures reported mean that over the past three months job creation fell short of the number of workers seeking employment by nearly half a million jobs.

The top economic adviser to President Bush, Edward Lazear, chairman of the White House Council of Economic Advisers, told the press Friday that the US economy might actually shrink in the first quarter, the first time that any top official has admitted that the US growth rate would fall below zero. “We don’t really know whether it will be negative or not,” he told reporters. “We have definitely downgraded our forecast for this quarter.”

The official government definition of a recession is two consecutive quarters of zero or negative growth, a figure increasingly likely for the first half of 2008. J.P. Morgan’s chief economist, Bruce Kasman, told the Associated Press, “It is appropriate to characterize the US economy as having entered a recession in the first quarter.”

The jobs report was only one of a series of economic reports and market events that have shaken financial markets in the last few days. Particularly significant was the default by two major companies caught in the aftershocks of the mortgage crisis.

Thornburg Mortgage, the second-largest independent mortgage lender in the US, after Countrywide, revealed Wednesday that it was in default on $610 million in loans after failing to meet a margin call from one lender, J. P. Morgan. The company, based in Santa Fe, New Mexico, said it would restate its 2007 financial results and take a charge of $428 million to reflect losses on adjustable-rate mortgages.

CEO Larry Goldstone issued a bitter statement Friday warning that the company might be unable to continue as a going concern, and declaring, “The panic that has gripped the mortgage financing market is irrational and has no basis in investment reality.”

Thornburg specializes in luxury homes and has relatively few sub-prime mortgages. Its margin calls began after the Swiss bank UBS announced a write-down February 14 on the value of $26.6 billion in “Alt-A” mortgages—higher-priced and higher value than sub-prime. Since then, Thornburg’s share price has been driven down from $11.54 to $1.22 Thursday.

On Thursday, Carlyle Capital, a subsidiary of the giant hedge fund Carlyle Group based in the British Channel Islands, said it had failed to meet margin calls from banks on $21.7 billion in mortgage-backed securities. The company was heavily engaged in purchasing mortgage-backed bonds issued by Fannie Mae and Freddie Mac, the two huge government-sponsored institutions that underwrite much of the US home mortgage market. Carlyle Group is expected to provide credit to prevent a default of Carlyle Capital, but the crisis casts a shadow over the most important financial institutions in the US mortgage industry.

A report Thursday by the Federal Reserve showed that household net wealth fell for the first time in five years, dropping $532.9 billion, or 3.6 percent, in the fourth quarter of 2007. The collapse of real estate values accounted for a third of the decline, while the decline in financial assets accounted for nearly half.

The Fed report also found that for the first time since such records began in 1945, American homeowners owed more on their homes than they owned. Average net home equity dropped below 50 percent—a figure that is even more remarkable since one third of US homeowners have either paid off their mortgages or bought without a mortgage, and therefore have 100 percent equity.

Other figures reported include:

* An increase in the proportion of mortgages in foreclosure to 2.04 percent, an all-time high and nearly double the level of 1.19 percent a year ago. The proportion of loans either past due or in foreclosure hit 7.9 percent in the fourth quarter, up from 6.1 percent a year earlier, and the highest since figures were first collected in 1979.

* A published estimate that mortgage losses would cost the banks $400 billion, about 40 percent of the $1 trillion in combined capital of all banks insured by the FDIC. Bank lending would be cut by $900 billion as a result.

* The Federal Reserve “beige book” report on business conditions in the United States, released Wednesday, found weak or no growth in 8 of 12 regions.

* Factory orders for January plunged 2.5 percent, according to the Commerce Department, while orders for durable goods fell more than 50 percent.

* Credit-card borrowing soared 7 percent in January, up from an increase of 2.8 percent in December, as consumers had to resort to charge cards to finance their expenses. Consumer debt overall rose 3.3 percent, nearly double the growth rate of 1.8 percent in December.

The reaction in official Washington to the dismal developments was a combination of imbecilic rhetoric and inadequate action. President Bush made a hastily organized appearance before television cameras to understate the obvious, admitting “It’s clear our economy has slowed,” and adding, “Losing a job is painful and I know Americans are concerned about our economy. So am I.”

Declaring, “our economy will prosper,” Bush touted the economic stimulus package approved by Congress last month at the instigation of the White House, although the size of the package, $168 billion, is less than one third of the decline in net worth of the fourth quarter, and entirely dwarfed by the trillions wiped out in the real estate collapse.

Bush urged taxpayers to buy consumer goods with their $600 or $1,200 rebates when they get them, which will not be until May or June, although surveys already predict that the vast majority will use the money to pay urgent bills.