Thursday, May 8, 2008

Three Things That Won't Help the Foreclosure Crisis

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By Liz Chimienti and Dean Baker

Falling home prices, rising foreclosures rates, and a slowing economy have created a perfect storm for homeowners who bought in bubble-inflated markets, or used subprime, adjustable-rate mortgages to purchase their homes.

Members of Congress have responded to the crisis facing their constituents by proposing various measures, some strong, like amending the bankruptcy law to cover primary residences, and some misguided. The following are three major proposals that would actually do more harm than good. As Congress seeks to pass legislation to stem the foreclosure crisis, legislation containing elements of these proposals should not be on the table.

1. Subsidies for Home Buyers

Homeownership can be a useful way for families to accumulate wealth and to provide good secure housing. However, if families are buying homes with bubble-inflated prices, then they are not likely to accumulate any wealth in their home, since the price is likely to fall back to its trend level before they sell their home. (The median period of homeownership for moderate-income families is just four years.) Furthermore, they are likely to pay far more in housing costs each year, than they would to rent a comparable unit.

In the case of moderate-income families facing serious budget constraints, the additional housing costs associated with owning an over-priced home are likely to come at the expense of other necessary items, such as health care and child care. It is difficult to see how the government will have helped a family by encouraging them to buy into such a situation.

Additional tax credits for home buyers in a bubble-inflated market can put more people at risk by encouraging them to buy an over-priced home that will fall in value. In addition, tax credits for the purchase of homes that are in the foreclosure process, but have not yet been returned to the lender, provide a perverse incentive to lenders to foreclose on current homeowners, since they increase the resale value of the house following a foreclosure.

2. Artificial Price Floors

This has nothing to do with linoleum, and everything to do with how prices get set for homes that are refinanced and backed by FHA loans as proposed in legislation being considered by Congress.

If home prices continue to decline, and the government issues guarantees of mortgages at prices that are near current levels, then the government is likely to face a substantial cost associated with a high default rate. The most important factor determining both the default rate and the cost of each default is the movement in house prices.

If prices continue to fall, then many homeowners will again find themselves owing more than the value of their home. This situation leads to defaults for two reasons. First, if a homeowner owes more than the value of her home, then she does not have the option to borrow against equity in order to make her mortgage payments. This eliminates an important source of security if job loss or unusual expenses leaves the homeowner temporarily unable to pay his or her bills.

The other reason why this situation increases default rates is that homeowners who owe more than the value of their home can effectively save themselves money by simply surrendering their house to the bank. If a homeowner owes $200,000 on a home that is currently worth $180,000, the homeowner can effectively save $20,000 by just giving the house back to the bank. While this move will hurt the homeowner’s credit rating, if they don’t have any special attachment to the house, a homeowner may choose this option.

In addition to increasing the number of defaults and foreclosures, falling house prices will also increase the loss on each foreclosure. If the house is still valued at close to the amount of the mortgage, then the losses on the foreclosure will just be the administrative and transactions costs associated with carrying through the foreclosure and reselling the house. However, if the house sells for less than the value of the mortgage, then this can be a substantial source of additional losses for the government.

The government can limit the risk that it will set the guarantee price on new mortgages too high by using an appraisal of rental price as the basis of the guarantee, rather than an appraisal of the sale price. Since rents never rose out of line with fundamentals, an appraisal based on some multiple of annual rent (e.g., 15 times annual rent) should ensure that the government’s guarantee price is set at a level that is close to the price that the home will command after the bubble has deflated.

3. Incentives to Build More Homes

Not letting prices fall back to their equilibrium (see above), or giving generous tax credits to homebuilders will encourage them to build more homes. The more homes that get built, the greater the over supply. This will imply a longer adjustment process and a larger price decline. There is no public interest in taking any steps that can delay the process of price adjustment in the housing market. This process is very painful, but delaying it will only make it more painful.

More research and information on what Congress should do can be found here.

North Korea and the Supernote Enigma

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By Gregory Elich

Allegations that North Koreans are counterfeiting U.S. currency

North Korea, it is often said, is a criminal state. One of the more persistent stories supporting that allegation is that the North Koreans are counterfeiting U.S. currency. Through repetition, the claim has taken on an aura of proven fact. This in turn has been cited as justification for everything from imposing punitive measures against North Korea to suggesting that the nation cannot be trusted as a partner in nuclear negotiations.

The evidence against North Korea is widely regarded as convincing. "The North Koreans have denied that they are engaged in the distribution and manufacture of counterfeits," says Daniel Glaser of the U.S. Treasury Department, "but the evidence is overwhelming that they are. There’s no question of North Korea’s involvement."1 There is no denying that North Korean citizens have been caught passing counterfeit currency in Europe and Asia, and some defectors from the Democratic People’s Republic of Korea (DPRK — the formal name for North Korea) claim to have first-hand knowledge of state-run counterfeiting operations. In Western media reports the case is treated as proven. Yet the closer one examines the matter, the murkier the picture becomes.

Counterfeit currency attributed to North Korea raises deep concern due to its extremely high quality. Dubbed supernotes, their production process closely matches that of the genuine article, and the engraving is so fine it rivals that of the U.S. Bureau of Engraving and Printing.2

Unlike most of the world’s counterfeit currency, which is printed on offset presses or through digital processes, supernotes are printed on an intaglio press. The Bureau of Engraving and Printing uses Giori intaglio presses for the engraved portions of its bank notes, and an offset press for the background colors. Supernotes use the same technology. An intaglio press operates by applying ink on its plates and then wiping them clean, leaving ink only in the engraved lines. The plate is then pressed against the paper, depositing the ink in ridges. The result is raised printing that ordinary counterfeits can’t duplicate. Supernotes have the same look and feel as U.S. currency.

North Korea purchased an intaglio press from the Swiss firm Giori in the mid-1970s.3 This fact is regarded as an indication that the nation has the technology available to print supernotes. Yet there have been significant advances in the field since the time of its purchase. Because certain auxiliary equipment is lacking, the model owned by the DPRK is considered by experts to be incapable of achieving the level of quality seen on supernotes. Not long after purchasing the Giori, North Korea defaulted on its loan after having made just two payments. For that reason, as well as due to U.S. pressure, Giori ceased shipping spare parts to North Korea many years ago, and according to one expert the North Korean printing press now stands idle.4

One striking feature of supernotes is the composition of the paper. Throughout the world, currency is printed on cotton-based paper. But U.S. currency is different, being composed of a mix of 75 percent cotton pulp and 25 percent linen. Supernote counterfeits rely on the same unique combination. To produce secure paper like that used in U.S. currency requires advanced technology and the cost far surpasses that of manufacturing regular paper. The price of even a small plant can exceed $100 million. To remain profitable, a paper plant would have to produce more than four thousand metric tons of such banknote paper a year. But the quantity of supernotes seen in circulation so far has required only a tiny fraction of that total. It would seem, then, that the only option for North Korea would be to procure its paper from an existing plant outside of its borders. This would be no easy matter. The paper used in U.S. currency is produced on a Fourdrinier machine at a plant located in the state of Georgia. This machine uses longer pulp fibers than the short pulp fibers used by the rest of the world relying on cylinder mold methods.5

Former director of the Bureau of Engraving and Printing Thomas Ferguson comments on the quality of the paper in supernotes. "They’re not simulating the paper features by printing on the paper. They are not using somebody else’s paper or bleaching the ink off of genuine notes. Someone specifically made paper, which is a pretty big commitment."6

Remarkably, supernote paper even incorporates colored microfibers, a thin security thread marked "USA 100" in microprint, and a multi-tone watermark. These features can only be produced through the use of sophisticated technology at substantial cost. One expert who conducted a chemical and physical analysis of supernotes discovered that the cotton originated in the southern region of the U.S. — precisely where the Bureau of Engraving and Printing gets its cotton. Southern U.S. cotton is available on the world market, but this would make it traceable to some extent. The expert conducting the analysis is said to have been warned by "interested parties" not to make the results public. The implication was that these parties worked for the U.S. government.7

One of the special features of U.S. currency is the use of optically variable ink (OVI) manufactured by the Swiss firm Société Industrielle et Commerciale de Produits Amon (SICPA). This organization is the sole source for OVI. On the U.S. $100 bill, this color shifting ink is employed on the number in the lower right hand corner. Turning the bill one way, the number appears bronze green. Turned another, it appears black. Supernotes duplicate the same color shift.8 This particular color combination is reserved for the exclusive use of the U.S. Bureau of Engraving and Printing and is manufactured at only one location in the world. A joint venture was established between SICPA and the California-based OCLI laboratory to manufacture this combination of OVI ink. Bronze-green and black OVI is mixed at the SICPA plant in Virginia, which serves only the U.S. market. The rest of the world gets its supply of OVI from SICPA’s main plant in Switzerland.9

North Korea was at one time a client of SICPA. Each nation is assigned a unique color combination. The DPRK’s combination was green and magenta, which Treasury official Daniel Glazer asserts can be manipulated to appear similar to the U.S. combination.10 Yet a forensic laboratory has found that the security ink used in supernotes is not similar. It matches U.S. currency.11 Furthermore, it is probable that North Korea has long ago exhausted its limited supply of OVI. SICPA spokeswoman Sarah Van Horn points out, "We ceased all OVI deliveries in early 2001, and later that year all security ink supplies." Severing trade with North Korea came at the request of U.S. officials, long before the Bush Administration publicly accused North Korea of manufacturing and distributing supernotes.12

One South Korean specialist on the DPRK says that interviews with defectors convinced him of the existence of a state-run counterfeiting operation, and that the intent was to fund covert operations and wage economic warfare against the U.S.13 But the stories defectors tell do not always hold up. In some cases, defectors report hearsay — what they have heard from others. Other times, defectors appear to have first-hand knowledge, such as the two who talked to BBC News.14 Yet North Korean defectors, eager to please their new hosts, have been noted for a tendency to tell stories that turn out to be dubious. As Raphael Perle, an analyst for the Congressional Research Service, points out, "A lot of defectors or refugees give us information, but they tell us anything we want to know. You have to question the reliability of what they say."15

A North Korean defector who claimed that he had helped design the supernote went into hiding after being accused of being paid to lie about the matter. When asked whose picture was on the $100 bill and what building was depicted on its backside, he said he did not know. A U.S.-based activist interviewed the man, intending to have him testify before Congress, but the activist came to the conclusion that his stories were implausible. "He lost credibility with me. I found him mentally unstable." The activist said that many defectors tell stories that they think journalists and intelligence agencies want to hear. "He was expecting money." Defectors "think the U.S. government will give them hundreds of thousands of dollars." Another defector who initially claimed to be involved in the decision to print supernotes later admitted he had not seen the operation, nor did he learn any details of how it was being done.16

The 2004 U.S. indictment of Sean Garland, leader of the Irish Worker’s Party and Official Republican Army, on charges of distributing supernotes is considered the centerpiece of the evidence against North Korea. "In or about October 1997," the indictment reads, Garland met North Korean officials in Poland "to arrange for the purchase of a quantity of supernotes." Then for the next three years, Garland is said to have distributed the counterfeit currency in Ireland and Great Britain. As leader of the Irish Worker’s Party, he often travelled abroad for "ostensibly legitimate business and personal reasons." But, the indictment reads, in his travels he met with North Koreans who were involved in the "transportation and sale of supernotes." Garland also visited Russia, where he is alleged to have purchased more supernotes, although the transactions did not complete until a later time in Belarus. Six codefendants were indicted along with Garland, one of whom was said to have informed law enforcement officials of the location in Moscow of $70,000 in supernotes "that he had obtained from the Sean Garland supernote organization."17

In 2002, three of Garland’s codefendants were jailed in Great Britain, as a result of an investigation into the activities of a large-scale counterfeiting ring. Garland himself was not arrested until three years later, and then only in response to the U.S. indictment. Released on bail, he eluded extradition to the U.S. by going to Ireland.

The most striking thing about the indictment is its vagueness. No North Korean is identified, and meetings with North Koreans are mentioned without any actual transaction being described. Sean Garland himself states, "I have no associate named Corcoran [one of the codefendants] nor have I any associates in jail in Britain."18 The impression one gets is that Garland was indicted because of his political and business contacts with North Koreans, and that tying him to an actually existing counterfeiting ring would make for a persuasive sounding case against North Korea. In contrast to the lack of anything definite concerning Garland, the indictment is more detailed when describing the activities of the codefendants. Garland writes that "neither myself or my legal team have had as yet received any information from the U.S. authorities to set out the nature of the allegations against me." As for the indictment, "No evidence is offered of any crime or wrongdoing," and Garland "strenuously" denied the allegations.19 Having political and business contacts with North Koreans does not in itself indicate involvement in the supernote trade.

Counterfeiting allegations against North Korea provided the pretext for harsh economic measures. As the September 2005 six-party nuclear disarmament negotiations were taking place in Beijing, Stuart Levey, under secretary for terrorism and financial intelligence in the Department of the Treasury, issued a press release designating Macao-based Banco Delta Asia as a "primary money-laundering concern." The bank, Levey reported, "has been a willing pawn for the North Korean government to engage in corrupt financial activities." By providing financial services to the DPRK for over twenty years, it "has facilitated many of that regime’s criminal activities, including circulating counterfeit U.S. currency." 20 In a matter of days, U.S. financial institutions were instructed to sever relations with Banco Delta Asia. By December of the same year, the Treasury Department had issued an advisory in which it warned that the DPRK "may be seeking banking services elsewhere" following the action taken against the Macao bank. U.S. financial institutions were told to "take reasonable steps to guard against the abuse of their financial services by North Korea." Tellingly, it added, "We encourage financial institutions worldwide to take similar precautions."21

U.S. intelligence officials knew Banco Delta Asia was one of the primary means for North Korea to conduct normal foreign commerce. The effect of the Treasury Department’s announcement was immediate. In the six-day gap between the announcement and the bank’s closing, panicked depositors had withdrawn $132 million, more than a third of the bank’s total funds.22 Banco Delta Asia was quick to deny the charge, saying that its business relations with North Korea were entirely legitimate and commercial, but the Macao Monetary Authority assumed management of the bank and froze all of North Korea’s accounts.23

The action against Banco Delta Asia deprived North Korea of a portion of its foreign trade. More importantly, it also served as a means of magnifying the effect of sanctions. By blacklisting Banco Delta Asia, the U.S. set off a chain reaction, and the campaign soon took on global significance. The U.S. Treasury Department sent warning letters to banks around the world, resulting in a wave of banks shutting down North Korean accounts. International financial institutions feared U.S. retaliation, and felt it prudent to close North Korean accounts rather than risk being blocked from access to the U.S. financial system. A blacklisting would in effect mean being driven out of business. Stuart Levey observed with satisfaction that sanctions and U.S. threats had succeeded in applying "huge pressure" on the DPRK, and that this had led to a "snowballing avalanche effect." U.S. actions undermined the prospect of a peaceful settlement of the nuclear issue. "Squeeze them," a senior Bush Administration official said, "but keep the negotiations going." Talks, the official continued, would serve as nothing more than a means for accepting North Korea’s capitulation. A second U.S. official described the goal of talks as a "surrender mechanism." Even before the signing of the September 19, 2005 nuclear disarmament agreement, the U.S. had already decided "to move toward more confrontational measures," claimed a former Bush Administration official.24

Daedong Credit Bank, a majority foreign-owned joint venture bank operating in Pyongyang and primarily serving importers, was immediately affected by the U.S. action, as it had several million dollars in Banco Delta Asia. As general manager of Daedong Credit Bank, Nigel Cowie was in a position to witness the effect of the Treasury Department’s letters. "We have heard from foreign customers conducting legitimate business here, who have been told by their bankers overseas to stop receiving remittances from the DPRK, otherwise their accounts will be closed." To illustrate the lengths to which U.S. officials were prepared to go, Cowie described an operation that involved his own firm, from which, he said, "you can draw your own conclusions." An account was opened with a Mongolian bank. Arrangements were made for legal cash transactions. But when the Daedong Credit Bank’s couriers arrived in Mongolia, they were detained by Mongolian intelligence officials, and their money confiscated. Accusations were made that the couriers were transporting counterfeit currency from North Korea. A leak to the news media from an unidentified source led to reports charging that "North Korean diplomats" had been arrested for smuggling counterfeit currency. After two weeks, the Mongolian "intelligence officials in a meeting with us finally conceded that all the notes were genuine; the cash was released." In the final meeting, Mongolian intelligence officials "appeared rather embarrassed that they had been given incorrect information." It was the U.S. that had provided that information and set in motion what was in effect harassment by proxy.25

U.S. actions had widespread repercussions. "For our part," Cowie explains, "we are only conducting legitimate business, but have nonetheless been seriously affected by these measures. A large amount of our and our customers’ money ­ not just in USD, but in all currencies ­ has effectively been seized, with no indication of when they’ll give it back to us." The fate of Banco Delta Asia served as an object lesson, as did the freezing of Daedong Credit Bank’s $7 million deposits at Banco Delta Asia. "Banks with any kind of U.S. ties are just terrified to have anything to do with any North Korean bank," Cowie said. After the majority interest in Daedong Credit Bank was purchased by British-owned Koryo Bank, the new owner, Colin McAskill, asked U.S. officials to examine the bank’s records in order to prove that its funds were legitimate and should be unfrozen. "They’ve had it much too much their own way without anyone questioning what they are putting out," he said.26

Warning letters to banks were often followed by personal visits from U.S. officials. Bankers and American officials said that the messages contained a mix of implicit threats and explicit actions. Unsurprisingly, it was not long before nearly all of North Korea’s accounts in foreign banks were closed. The DPRK’s international trade was being choked. Quite often, no pretense was even being made that the actions were related to illegal transactions. U.S. officials were openly pressing financial institutions to sever all economic relations with the DPRK. "The U.S. government is urging financial institutions around the world to think carefully about the risks of doing any North Korea-related business," Levey said. By September 2006, the U.S. had sent official dispatches to each UN member state, detailing plans for harsher economic sanctions. The planned measures were so strong that several European nations expressed concern, and it was said that the plans aimed at nothing less than a total blockade on all North Korean trade and financial transactions.27

Selig Harrison, director of the Asia Program at the Center for International Policy, visited the DPRK and reported on what he saw. "I found instances in North Korea authenticated by foreign businessmen and foreign embassies in which legitimate imports of industrial equipment for light industries making consumer goods have been blocked. The North Koreans understandably see this as a regime change policy designed to bring about the collapse of their regime through economic pressure."28

The U.S. also imposed sanctions on several North Korean import-export firms, on the unsubstantiated charge that they were involved in the arms trade. Yet more sanctions were then announced, this time against several Indian and Russian firms doing business with the DPRK, along with several North Korean companies.29

Russian Ambassador to South Korea Gleb Ivashentsov called for the U.S. to offer proof to back its accusation of counterfeiting. "The side that raises the suspicions should present evidence," he said. "Russia has not received any concrete evidence. There is rumor-level talk on the issue."30 Chinese Foreign Ministry spokesman Liu Jianchao was equally skeptical, saying that his nation knew nothing of North Korean counterfeit currency flowing into China.31

On December 16, 2005, U.S. officials finally briefed a number of nations on the evidence against North Korea. But South Korean officials noted afterwards that all they heard was a lot of circumstantial evidence but no concrete information.32 At the request of the Bush Administration, a conference was organized by Interpol and held in Lyon, France, in July 2006. There the U.S. Secret Service presented its case to more than sixty international bankers, police officials, and banknote producers. No evidence was offered on that occasion either, and the attitude was that the audience should accept the Secret Service’s assertions on faith alone. "I can’t remember if I was laughing or asleep," remarked one attendee afterwards.33 A survey of the participants taken at the end of the conference showed that not one person had been fully convinced of the U.S. position.34

U.S. Treasury officials also met with a North Korean delegation in New York in March 2006, but provided no information to back the charge. DPRK delegation head Ri Gun remarked afterwards, "There was no evidence. There were neither comments nor discussion" relating to evidence. During the meeting, Ri Gun proposed creating a joint U.S.-DPRK consultative body to "exchange information on financial crimes and prepare countermeasures." The North Koreans said they would respond to evidence of counterfeiting and arrest those who were involved and seize the equipment. "Both sides can have a dialogue at the consultative body through which they can build trust. It would have a very positive impact on addressing the nuclear issue on the Korean peninsula," Ri said. The delegation also suggested that a North Korean settlement account be opened at a U.S. financial institution and placed under U.S. supervision, so as to allay suspicions. The North Korean offers were ignored.35 In a conciliatory move, the DPRK enacted a law nearly a year later that banned transactions based on illegal activities, including counterfeiting.36

It took a year and a half, but when the U.S. Treasury Department completed its investigation into the matter, it decided to finalize the rule prohibiting U.S. financial institutions from dealing with Banco Delta Asia. The Department determined that not only were its earlier allegations accurate, but that the bank had also engaged in "additional illicit financial conduct."37 Stanley Au, the founder of Banco Delta Asia, responded that his bank did not knowingly do wrong. "We have sent evidence to prove our innocence to the U.S. government several times."38 Au charged that the Treasury Department had acted unfairly in punishing his bank without offering any evidence.39 Because the bank was a small family-owned firm, it lacked the most recent advanced technology for screening cash for counterfeits. Therefore, as a matter of routine the bank sent all large deposits to HSBC in New York to be analyzed before the amounts would be credited to accounts.40

In the aftermath of the Treasury Department’s initial accusations, the Macao government hired the accounting firm Ernst & Young to investigate operations at Banco Delta Asia. In its final report, Ernst & Young indicated that there was room for improvement in some procedures. But "the procedures in place at the Bank for handling large value (wholesale) deposits of U.S. currency notes ensured that, to a material degree, the Bank did not introduce counterfeit U.S. currency notes into circulation over the relevant period." For smaller deposits, the accounting firm found that Banco Delta Asia was using a counterfeit banknote scanning machine, as well as doing manual checking. "To this end the Bank passed most U.S. currency notes to HSBC for validation. NK entities were not given value for their deposits of currency until after HSBC had confirmed the deposit to be genuine." Ernst & Young found that in relation to the total value of U.S. currency sent to HSBC for checking, "the value of counterfeit notes detected was minor. Once detected the counterfeit notes were withdrawn from circulation."41

It appears that the Treasury Department’s charges against Banco Delta Asia were motivated strictly by political considerations. Certainly the charges were found to have had no connection to reality. No doubt this is why U.S. officials failed to furnish any evidence to back their accusations. Banco Delta Asia was chosen to serve as an example to other financial institutions dealing with the DPRK. As former State Department official David Asher put it, "We decided to kill the chicken to scare the monkey."42 By targeting one of North Korea’s primary external financial partners, the Bush Administration had succeeded in shutting off much of that nation’s foreign trade. That the charge lacked substance was of no import. It had served the purpose of furthering political aims, as had the Bush Administration’s earlier claims about Iraqi chemical, biological and nuclear weapons programs. In both cases, media saturation ensured that the lies would be firmly implanted as truth in the minds of the American public.

The freezing of North Korea’s funds at Banco Delta Asia violated the recently signed nuclear disarmament agreement and halted its implementation. North Korea justifiably insisted that its funds be released before it would proceed with its obligations under the agreement. In time, the issue became enough of a political embarrassment that the Bush Administration was compelled to relent. North Korea got its money back, believing that this would enable it to regain its limited toehold in the international financial system. But the damage was done. Banco Delta Asia remained blacklisted and most banks continued to be wary of doing business with the DPRK, not wanting to risk U.S. retribution.

The Banco Delta Asia story was a fabrication. But what about the main charge — that North Korea is producing supernotes? It is true that on occasion North Korean officials have passed supernotes while abroad. But then so have citizens from dozens of other countries. Indeed, U.S. Secret Service investigations have involved more than 130 countries.43

It should be noted that much of North Korea’s trade is conducted on a cash basis. The U.S. designation of the DPRK as a "terrorist nation" mandates its exclusion from contact with the U.S. financial system, and for the most part the international system follows suit. Only a handful of banks such as Banco Delta Asia have been willing to do business with North Korea. Nigel Cowie, general manager of Daedong Bank, points out that North Korea’s currency is not convertible, "so imported goods are bought and sold for hard currency." One of the reasons Cowie gives for North Korea’s reliance on cash transactions is "the absence of the normal system of reciprocal correspondent bank accounts that exists in other countries which enables transactions to be settled by electronic book entry." The bottom line "is that people tend to transact largely in cash, which in itself is not illegal - in this market, it is in fact often the only way."44

That very reliance on cash transactions ensures that supernotes inevitably make their way into the local economy. For someone looking to unload a quantity of supernotes, where better to move them than by trading with North Korea? With a population reluctant to deposit money in bank accounts and with banks lacking the kind of counterfeit detection equipment that would flag a supernote as fake, North Korea makes an inviting target. And sooner or later, those same supernotes are going to find their way outside of the North Korean economy. This does not necessarily mean that North Koreans passing the notes would be aware of it, although it is possible that there may be some corrupt individuals in North Korea who are knowingly involved in the trade.

There is much that is odd about supernotes. Banknote specialist Klaus W. Bender points out that experts regard the print quality as "simply superb." In some ways, Bender continues, "the supernotes are even better than the authentic 100-dollar bills of the Bureau of Engraving and Printing. Under the microscope, for example, the supernote shows an especially fine execution of lines on the facing side, which cannot be found on the real note. The complicated seal of the Department of the Treasury on the facing side is copied with absolute perfection, but just below it, one finds in the banknote numbering a marking compound that should not be there. And then, missing from this excellently copied supernote, of all things, are the magnetic and infrared security features that would prevent banknote examining systems from bouncing it. Every surveillance device of an American bank or the Fed recognizes the supernote immediately as a counterfeit and spits it out. Do the counterfeiters perhaps intend that the supernote be recognized immediately in the United States?"45 A report issued by the Swiss police concurs that the makers of the supernote seem to have deliberately introduced subtle errors into the process. Extra strokes have been added. When placed under ultraviolet or infrared light, stripes can be seen or numbers vanish on supernotes.46

The most perplexing aspect of supernote production is their low quantity. By 2006, the Secret Service had seized $50 million in supernotes, an average of just $2.8 million per year since the first one was discovered. And since supernotes are usually detected the moment they enter the international banking system, the total quantity produced is probably not significantly higher. Supernotes make up a small percentage of the total counterfeit dollars in circulation. "To provide a point of reference," said Michael Merritt of the U.S. Secret Service, "during fiscal year 2005, the Secret Service seized over $113 million in counterfeit U.S. currency." Not only is the amount of supernotes small relative to less sophisticated counterfeits, but it is insignificant compared to the $760 billion in genuine U.S. currency in circulation.47

The Swiss police observe, "What defies logic is the limited, or even controlled, amount of ’exclusive’ fakes that have appeared over the years. The organization could easily circulate tenfold that amount without raising suspicions." Yet a printing press "like the one in North Korea can produce $50 million worth of bills in a few hours."48 During the 1970s, Giori replaced its standard model printers in a phased approach with its new "Super" series. The standard model was capable of printing three thousand sheets per hour. Each sheet held 32 notes. If North Korea purchased one of the older standard models, it would have taken just over five hours to produce $50 million. And $2.8 million a year would have required running the press for less than half an hour. Production would be done for the year. The newer Orlof press can spew out 12,000 sheets per hour, each sheet containing sixty notes. Only two and a half minutes would be needed to generate $2.8 million in notes.49 Clearly, supernotes are being produced for a very specific purpose.

Also difficult to explain is the speed with which supernotes have kept pace with the numerous modifications made to U.S. engraving plates since 1989. This in itself is a prohibitively expensive process. German banknote specialist Klaus W. Bender remarks, "The counterfeiters immediately implemented each and every change to the 100-dollar bill. The pace at which they put out their revised fake notes made observers even wonder whether they had access to information concerning to the speed with which the Fed replaced its old notes."50 The microprint in U.S. currency sometimes measures only 1/42,000 of an inch. "This microprint is considered unique in the world of banknotes. It was reproduced so perfectly by the counterfeiters that even under a microscope no difference is distinguishable. The gravure of an intaglio printing plate requires many months of hard work and eats up many tens of thousands of dollars per plate. For security reasons, the craft is always taught in-house only. So where do the counterfeiters get this specialized knowledge?"51

Just who is producing supernotes? Initially, the U.S. accused Iran and Syria, even though the latter country did not have a banknote press of its own. Then North Korea was identified as the culprit. While it cannot be ruled out that North Korea is producing supernotes, that prospect raises the question of motive. By the reckoning of the U.S. Secret Service, supernotes pose a low threat, given the small amounts in circulation and the preponderant distribution outside of U.S. borders. Furthermore, supernotes are identified the moment they hit the U.S. banking system, which would seem to rule out the motivation of "economic warfare" that has been attributed to North Korea.

Nor does the production of supernotes make sense as a profit-making venture. A single new Giori printing machine now costs more than the $50 million in supernotes found so far. To give some idea of the expense, when Nigeria opened its second printing plant in Abuja, it cost more than $135 million, and that does not take into account property costs.52 A plant to produce the type of paper used in supernotes is similarly expensive and large quantities of the proper type of paper would have to be manufactured to avoid ongoing financial loss. OVI ink is also quite expensive, even more so since most of the ink is lost when the printing plates are wiped clean just before pressing the paper. Factor in the cost of keeping up with multiple changes to the engravings, and no sane individual would undertake such a daunting operation to produce limited quantities with an eye to making a profit.

U.S. officials like to point out that they have seen no evidence that any nation other than North Korea is producing supernotes. True enough, but neither is there any evidence that North Korea is doing so. By all accounts, such an operation would require the resources of a government or governmental organization. Klaus W. Bender suggests one intriguing possibility. "One notices that the supernotes always turn up in small, well-measured quantities, as though their volume were controlled." This is not how normal counterfeiters behave. "They want to unload their hot goods as quickly as possible. Further, experts believe they have determined that the supernotes regularly crop up in those regions in which U.S. foreign policy is just encountering problems: the Near and Middle East, central African countries, and especially East Africa. Active in these places are opposition politicians, rebelling tribes, and private armies of diverse warlords doing the bidding of the CIA. Could it be that they are being paid for their services in counterfeit dollar notes?" Bender posits that such groups might use the money to purchase arms abroad, including from North Korea, and that from North Korea the money would make its way back to Western nations. "It is not clear how much the U.S. Secret Service knows itself, or is allowed to know." The CIA is said to have a printing plant located north of Washington, DC, in which the same Giori printing presses are installed that are used in the Bureau of Engraving and Printing.53

It has also been suggested that limited quantities of counterfeit notes are being introduced into the market in such a way as to assist law enforcement agencies in tracking the movement of funds among criminal and terrorist organizations.54 Everything is speculation at this point in time, but of all the various scenarios that have been suggested, it is this last one that is the most plausible. It is the only one where all of the pieces fit together into a coherent whole.

The U.S. still insists that it has solid evidence against North Korea, even though it won’t reveal it. But U.S. officials also claimed to have proof that Banco Delta Asia was culpable in aiding North Korea in distributing supernotes. Given the Bush Administration’s proclivity for mendacity, some measure of skepticism would seem to be called for. When looking at the facts alone, the only thing that can be said with certainty is that the source of supernotes has yet to be determined. As with all stories that the public is asked to accept on blind faith, the topic should be examined with critical thinking. At a minimum, the expectation of evidence should be the norm when unsubstantiated stories with a political point are told. Too often, credulity and misplaced trust in Western leaders have led to tragic consequences.

Portrait of an Oil-Addicted Former Superpower

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By Michael T. Klare

How Rising Oil Prices Are Obliterating America's Superpower Status

Nineteen years ago, the fall of the Berlin Wall effectively eliminated the Soviet Union as the world’s other superpower. Yes, the USSR as a political entity stumbled on for another two years, but it was clearly an ex-superpower from the moment it lost control over its satellites in Eastern Europe.

Less than a month ago, the United States similarly lost its claim to superpower status when a barrel crude oil roared past $110 on the international market, gasoline prices crossed the $3.50 threshold at American pumps, and diesel fuel topped $4.00. As was true of the USSR following the dismantling of the Berlin Wall, the USA will no doubt continue to stumble on like the superpower it once was; but as the nation’s economy continues to be eviscerated to pay for its daily oil fix, it, too, will be seen by increasing numbers of savvy observers as an ex-superpower-in-the-making.

That the fall of the Berlin Wall spelled the erasure of the Soviet Union’s superpower status was obvious to international observers at the time. After all, the USSR visibly ceased to exercise dominion over an empire (and an associated military-industrial complex) encompassing nearly half of Europe and much of Central Asia. The relationship between rising oil prices and the obliteration of America’s superpower status is, however, hardly as self-evident. So let’s consider the connection.

Dry Hole Superpower

The fact is, America’s wealth and power has long rested on the abundance of cheap petroleum. The United States was, for a long time, the world’s leading producer of oil, supplying its own needs while generating a healthy surplus for export.

Oil was the basis for the rise of first giant multinational corporations in the U.S., notably John D. Rockefeller’s Standard Oil Company (now reconstituted as Exxon Mobil, the world’s wealthiest publicly-traded corporation). Abundant, exceedingly affordable petroleum was also responsible for the emergence of the American automotive and trucking industries, the flourishing of the domestic airline industry, the development of the petrochemical and plastics industries, the suburbanization of America, and the mechanization of its agriculture. Without cheap and abundant oil, the United States would never have experienced the historic economic expansion of the post-World War II era.

No less important was the role of abundant petroleum in fueling the global reach of U.S. military power. For all the talk of America’s growing reliance on computers, advanced sensors, and stealth technology to prevail in warfare, it has been oil above all that gave the U.S. military its capacity to "project power" onto distant battlefields like Iraq and Afghanistan. Every Humvee, tank, helicopter, and jet fighter requires its daily ration of petroleum, without which America’s technology-driven military would be forced to abandon the battlefield. No surprise, then, that the U.S. Department of Defense is the world’s single biggest consumer of petroleum, using more of it every day than the entire nation of Sweden.

From the end of World War II through the height of the Cold War, the U.S. claim to superpower status rested on a vast sea of oil. As long as most of our oil came from domestic sources and the price remained reasonably low, the American economy thrived and the annual cost of deploying vast armies abroad was relatively manageable. But that sea has been shrinking since the 1950s. Domestic oil production reached a peak in 1970 and has been in decline ever since -- with a growing dependency on imported oil as the result. When it came to reliance on imports, the United States crossed the 50% threshold in 1998 and now has passed 65%.

Though few fully realized it, this represented a significant erosion of sovereign independence even before the price of a barrel of crude soared above $110. By now, we are transferring such staggering sums yearly to foreign oil producers, who are using it to gobble up valuable American assets, that, whether we know it or not, we have essentially abandoned our claim to superpowerdom.

According to the latest data from the U.S. Department of Energy, the United States is importing 12-14 million barrels of oil per day. At a current price of about $115 per barrel, that’s $1.5 billion per day, or $548 billion per year. This represents the single largest contribution to America’s balance-of-payments deficit, and is a leading cause for the dollar’s ongoing drop in value. If oil prices rise any higher -- in response, perhaps, to a new crisis in the Middle East (as might be occasioned by U.S. air strikes on Iran) -- our annual import bill could quickly approach three-quarters of a trillion dollars or more per year.

While our economy is being depleted of these funds, at a moment when credit is scarce and economic growth has screeched to a halt, the oil regimes on which we depend for our daily fix are depositing their mountains of accumulating petrodollars in "sovereign wealth funds" (SWFs) -- state-controlled investment accounts that buy up prized foreign assets in order to secure non-oil-dependent sources of wealth. At present, these funds are already believed to hold in excess of several trillion dollars; the richest, the Abu Dhabi Investment Authority (ADIA), alone holds $875 billion.

The ADIA first made headlines in November 2007 when it acquired a $7.5 billion stake in Citigroup, America’s largest bank holding company. The fund has also made substantial investments in Advanced Micro Systems, a major chip maker, and the Carlyle Group, the private equity giant. Another big SWF, the Kuwait Investment Authority, also acquired a multibillion-dollar stake in Citigroup, along with a $6.6 billion chunk of Merrill Lynch. And these are but the first of a series of major SWF moves that will be aimed at acquiring stakes in top American banks and corporations.

The managers of these funds naturally insist that they have no intention of using their ownership of prime American properties to influence U.S. policy. In time, however, a transfer of economic power of this magnitude cannot help but translate into a transfer of political power as well. Indeed, this prospect has already stirred deep misgivings in Congress. "In the short run, that they [the Middle Eastern SWFs] are investing here is good," Senator Evan Bayh (D-Indiana) recently observed. "But in the long run it is unsustainable. Our power and authority is eroding because of the amounts we are sending abroad for energy…."

No Summer Tax Holiday for the Pentagon

Foreign ownership of key nodes of our economy is only one sign of fading American superpower status. Oil’s impact on the military is another.

Every day, the average G.I. in Iraq uses approximately 27 gallons of petroleum-based fuels. With some 160,000 American troops in Iraq, that amounts to 4.37 million gallons in daily oil usage, including gasoline for vans and light vehicles, diesel for trucks and armored vehicles, and aviation fuel for helicopters, drones, and fixed-wing aircraft. With U.S. forces paying, as of late April, an average of $3.23 per gallon for these fuels, the Pentagon is already spending approximately $14 million per day on oil ($98 million per week, $5.1 billion per year) to stay in Iraq. Meanwhile, our Iraqi allies, who are expected to receive a windfall of $70 billion this year from the rising price of their oil exports, charge their citizens $1.36 per gallon for gasoline.

When questioned about why Iraqis are paying almost a third less for oil than American forces in their country, senior Iraqi government officials scoff at any suggestion of impropriety. "America has hardly even begun to repay its debt to Iraq," said Abdul Basit, the head of Iraq’s Supreme Board of Audit, an independent body that oversees Iraqi governmental expenditures. "This is an immoral request because we didn’t ask them to come to Iraq, and before they came in 2003 we didn’t have all these needs."

Needless to say, this is not exactly the way grateful clients are supposed to address superpower patrons. "It’s totally unacceptable to me that we are spending tens of billions of dollars on rebuilding Iraq while they are putting tens of billions of dollars in banks around the world from oil revenues," said Senator Carl Levin (D-Michigan), chairman of the Armed Services Committee. "It doesn’t compute as far as I’m concerned."

Certainly, however, our allies in the region, especially the Sunni kingdoms of Kuwait, Saudi Arabia, and the United Arab Emirates (UAE) that presumably look to Washington to stabilize Iraq and curb the growing power of Shiite Iran, are willing to help the Pentagon out by supplying U.S. troops with free or deeply-discounted petroleum. No such luck. Except for some partially subsidized oil supplied by Kuwait, all oil-producing U.S. allies in the region charge us the market rate for petroleum. Take that as a striking reflection of how little credence even countries whose ruling elites have traditionally looked to the U.S. for protection now attach to our supposed superpower status.

Think of this as a strikingly clear-eyed assessment of American power. As far as they’re concerned, we’re now just another of those hopeless oil addicts driving a monster gas-guzzler up to the pump -- and they’re perfectly happy to collect our cash which they can then use to cherry-pick our prime assets. So expect no summer tax holidays for the Pentagon, not in the Middle East, anyway.

Worse yet, the U.S. military will need even more oil for the future wars on which the Pentagon is now doing the planning. In this way, the U.S. experience in Iraq has especially worrisome implications. Under the military "transformation" initiated by Secretary of Defense Donald Rumsfeld in 2001, the future U.S. war machine will rely less on "boots on the ground" and ever more on technology. But technology entails an ever-greater requirement for oil, as the newer weapons sought by Rumsfeld (and now Secretary of Defense Robert Gates) all consume many times more fuel than those they will replace. To put this in perspective: The average G.I in Iraq now uses about seven times as much oil per day as G.I.s did in the first the Gulf War less than two decades ago. And every sign indicates that the same ratio of increase will apply to coming conflicts; that the daily cost of fighting will skyrocket; and that the Pentagon’s capacity to shoulder multiple foreign military burdens will unravel. Thus are superpowers undone.

Russia’s Gusher

If anything demonstrates the critical role of oil in determining the fate of superpowers in the current milieu, it is the spectacular reemergence of Russia as a Great Power on the basis of its superior energy balance. Once derided as the humiliated, enfeebled loser in the U.S.-Soviet rivalry, Russia is again a force to be reckoned with in world affairs. It possesses the fastest-growing economy among the G-8 group of major industrial powers, is the world’s second leading producer of oil (after Saudi Arabia), and its top producer of natural gas. Because it produces far more energy than it consumes, Russia exports a substantial portion of its oil and gas to neighboring countries, making it the only Great Power not dependent on other states for its energy needs.

As Russia has become an energy-exporting state, it has moved from the list of has-beens to the front rank of major players. When President Bush first occupied the White House, in February 2001, one of his highest priorities was to downgrade U.S. ties with Russia and annul the various arms-control agreements that had been forged between the two countries by his predecessors, agreements that explicitly conferred equal status on the USA and the USSR.

As an indication of how contemptuously the Bush team viewed Russia at that time, Condoleezza Rice, while still an adviser to the Bush presidential campaign, wrote, in the January/February 2000 issue of the influential Foreign Affairs, "U.S. policy… must recognize that American security is threatened less by Russia’s strength than by its weakness and incoherence." Under such circumstances, she continued, there was no need to preserve obsolete relics of the dual superpower past like the Anti-Ballistic Missile (ABM) Treaty; rather, the focus of U.S. efforts should be on preventing the further erosion of Russian nuclear safeguards and the potential escape of nuclear materials.

In line with this outlook, President Bush believed that he could convert an impoverished and compliant Russia into a major source of oil and natural gas for the United States -- with American energy companies running the show. This was the evident aim of the U.S.-Russian "energy dialogue" announced by Bush and Russian President Vladimir Putin in May 2002. But if Bush thought Russia was prepared to turn into a northern version of Kuwait, Saudi Arabia, or Venezuela prior to the arrival of Hugo Chávez, he was to be sorely disappointed. Putin never permitted American firms to acquire substantial energy assets in Russia. Instead, he presided over a major recentralization of state control when it came to the country’s most valuable oil and gas reserves, putting most of them in the hands of Gazprom, the state-controlled natural gas behemoth.

Once in control of these assets, moreover, Putin has used his renascent energy power to exert influence over states that were once part of the former Soviet Union, as well as those in Western Europe that rely on Russian oil and gas for a substantial share of their energy needs. In the most extreme case, Moscow turned off the flow of natural gas to Ukraine on January 1, 2006, in the midst of an especially cold winter, in what was said to be a dispute over pricing but was widely viewed as punishment for Ukraine’s political drift westwards. (The gas was turned back on four days later when Ukraine agreed to pay a higher price and offered other concessions.) Gazprom has threatened similar action in disputes with Armenia, Belarus, and Georgia -- in each case forcing those former Soviet SSRs to back down.

When it comes to the U.S.-Russian relationship, just how much the balance of power has shifted was evident at the NATO summit at Bucharest in early April. There, President Bush asked that Georgia and Ukraine both be approved for eventual membership in the alliance, only to find top U.S. allies (and Russian energy users) France and Germany blocking the measure out of concern for straining ties with Russia. "It was a remarkable rejection of American policy in an alliance normally dominated by Washington," Steven Erlanger and Steven Lee Myers of the New York Times reported, "and it sent a confusing signal to Russia, one that some countries considered close to appeasement of Moscow."

For Russian officials, however, the restoration of their country’s great power status is not the product of deceit or bullying, but a natural consequence of being the world’s leading energy provider. No one is more aware of this than Dmitri Medvedev, the former Chairman of Gazprom and new Russian president. "The attitude toward Russia in the world is different now," he declared on December 11, 2007. "We are not being lectured like schoolchildren; we are respected and we are deferred to. Russia has reclaimed its proper place in the world community. Russia has become a different country, stronger and more prosperous."

The same, of course, can be said about the United States -- in reverse. As a result of our addiction to increasingly costly imported oil, we have become a different country, weaker and less prosperous. Whether we know it or not, the energy Berlin Wall has already fallen and the United States is an ex-superpower-in-the-making.

Michael Klare is a professor of peace and world security studies at Hampshire College and author of the just-released Rising Powers, Shrinking Planet: The New Geopolitics of Energy (Metropolitan Books). A documentary film based on his previous book, Blood and Oil, is available from the Media Education Foundation and can be ordered at A brief video of Klare discussing key subjects in his new book can be viewed by clicking here.

Lebanon descends into chaos as rival leaders order general strike

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By Robert Fisk

Burning tyres on the airport road, flights suspended, demands from the Druze leader Walid Jumblatt that Hizbollah moves secret cameras from runway 1-7 and end the militia's equally secret underground communications equipment. Across Corniche Mazraa, crowds of shrieking Sunni and Shia Muslims hurl abuse and stones at each other. A soldier comes up to my car at the crossroads. "Turn round," he shouts. "They're shooting."

Lebanon seems to feed on crisis, need crisis, breathe crisis, like a wounded man needs blood. The man who should be the president is head of the army and the man who believes he leads the resistance – Sayed Hassan Nasrallah of the Hizbollah – accuses Mr Jumblatt of doing Israel's work while Mr Jumblatt claims the head of Beirut airport security, Colonel Wafic Chucair, works for the Hizbollah and should be fired.

Yesterday, in case you hadn't guessed, was a "general strike" by opponents of the Lebanese government with all the usual chaos. Mr Nasrallah is to hold a press conference today and then we'll all find out if this latest crisis is the greatest crisis since the last great crisis. Yes, a good cup of cynicism is necessary to wash down the rhetoric and threats of the past few days. At its most serious is the incendiary language in which Lebanon's politicians now address each other, the kind of menacing words that could easily touch an assassin's heart.

Indeed, the start of this latest drama might be traced to the murder of two Phalangist officials in the Bekaa town of Zahle a few weeks ago. The murderer has been named, is linked to the pro-Syrian opposition and is still at large.

You could hear gunfire crackling across Beirut all morning. To top it all, soaring price increases – even of basic food – is creating a little revolution in the hearts of many Lebanese. Yesterday's strike was supposed to be organised by the General Labour Confederation, which is objecting to the government's new minimum wage offer of £171 a month.

The darker side of all this, of course, involves Beirut airport. Mr Jumblatt's claim that Hizbollah has installed cameras beside one of the runways appears to be correct. Lebanese army officers have apparently noticed the cameras which can monitor executive jets taking off and landing. However, the apparatus may well have been installed because the Hizbollah believes that runway 1-7 – which starts a few metres above the Mediterranean – could be used for a small seaborne landing by Israeli troops. There is a persistent rumour in Beirut that the Israelis were about to stage such an operation against the Hizbollah-controlled southern suburbs of Beirut on 28 April but that it was cancelled for equally mysterious reasons. Was this the origin of the cameras and of Hizbollah's unpleasant suggestion that Mr Jumblatt is doing Israel's work?

As usual, it was the sectarian content of the street violence which alarmed the army – a good many stones were chucked from high-rise buildings near the Cola bridge in west Beirut, the exact location of Sunni-Shia fighting in January last year. Even in the very centre of Beirut, piles of tyres were set alight, giving the city a sombre curtain of black smoke that drifted out to sea. So the capital of a country without a president – and for most of the time without a sitting parliament – is set to lose yet more international confidence.

What is it about Lebanon that creates these crises? Maybe at heart, it is the same old problem: to be a modern state, Lebanon must abandon confessionalism – the system which provides a Maronite for the presidency, a Sunni for the prime minister's seat, a Shia for the speaker of parliament, and so on. But if Lebanon abandoned confessionalism, it would no longer be Lebanon, because sectarianism is its identity; a fate which its children do not deserve but whose country was created by French masters on the ruins of the Ottoman empire. Ironically, the Lebanese Prime Minister Fouad Siniora now rules – or tries to rule – his nation from a building which was once the Beirut cavalry stables of the Ottoman army.

A human rights crime

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By Jimmy Carter

The world is witnessing a terrible human rights crime in Gaza, where a million and a half human beings are being imprisoned with almost no access to the outside world. An entire population is being brutally punished.

This gross mistreatment of the Palestinians in Gaza was escalated dramatically by Israel, with United States backing, after political candidates representing Hamas won a majority of seats in the Palestinian Authority parliament in 2006. The election was unanimously judged to be honest and fair by all international observers.

Israel and the US refused to accept the right of Palestinians to form a unity government with Hamas and Fatah and now, after internal strife, Hamas alone controls Gaza. Forty-one of the 43 victorious Hamas candidates who lived in the West Bank have been imprisoned by Israel, plus an additional 10 who assumed positions in the short-lived coalition cabinet.

Regardless of one's choice in the partisan struggle between Fatah and Hamas within occupied Palestine, we must remember that economic sanctions and restrictions on the supply of water, food, electricity and fuel are causing extreme hardship among the innocent people in Gaza, about one million of whom are refugees.

Israeli bombs and missiles periodically strike the area, causing high casualties among both militants and innocent women and children. Prior to the highly publicised killing of a woman and her four children last week, this pattern had been illustrated by a report from B'Tselem, the leading Israeli human rights organisation, which stated that 106 Palestinians were killed between February 27 and March 3. Fifty-four of them were civilians, and 25 were under 18 years of age.

On a recent trip through the Middle East, I attempted to gain a better understanding of the crisis. One of my visits was to Sderot, a community of about 20,000 in southern Israel that is frequently struck by rockets fired from nearby Gaza. I condemned these attacks as abominable acts of terrorism, since most of the 13 victims during the past seven years have been non-combatants.

Subsequently, I met with leaders of Hamas - a delegation from Gaza and the top officials in Damascus. I made the same condemnation to them, and urged that they declare a unilateral ceasefire or orchestrate with Israel a mutual agreement to terminate all military action in and around Gaza for an extended period.

They responded that such action by them in the past had not been reciprocated, and they reminded me that Hamas had previously insisted on a ceasefire throughout Palestine, including Gaza and the West Bank, which Israel had refused. Hamas then made a public proposal of a mutual ceasefire restricted to Gaza, which the Israelis also rejected.

There are fervent arguments heard on both sides concerning blame for a lack of peace in the Holy Land. Israel has occupied and colonised the Palestinian West Bank, which is approximately a quarter the size of the nation of Israel as recognised by the international community. Some Israeli religious factions claim a right to the land on both sides of the Jordan river, others that their 205 settlements of some 500,000 people are necessary for "security".

All Arab nations have agreed to recognise Israel fully if it will comply with key United Nations resolutions. Hamas has agreed to accept any negotiated peace settlement between the president of the Palestinian Authority, Mahmoud Abbas, and Israel's prime minister, Ehud Olmert, provided it is approved in a referendum of the Palestinian people.

This holds promise of progress, but despite the brief fanfare and positive statements at the peace conference last November in Annapolis, the process has gone backwards. Nine thousand new Israeli housing units have been announced in Palestine; the number of roadblocks within the West Bank has increased; and the stranglehold on Gaza has been tightened.

It is one thing for other leaders to defer to the US in the crucial peace negotiations, but the world must not stand idle while innocent people are treated cruelly. It is time for strong voices in Europe, the US, Israel and elsewhere to speak out and condemn the human rights tragedy that has befallen the Palestinian people.