The CFTC’s Flip Flop on Oil Speculation
IER, July 28, 2009
People, personalities, policies, drapes – just a few of the things the American people have come to expect will change from year to year, and from administration to administration, depending on the philosophy, interest and artistic sensibility of the chief executive.
Here’s what’s not suppose to change: the facts of existence, and the substance of the truth. Unfortunately, in the case of President Obama’s Commodity Futures Trading Commission (CFTC), every bit of analysis the agency did previous to the current regime can be tossed out the window – not because it was wrong then, but because it’s politically inconvenient now.
Observe the latest news from the CFTC this week. On Tuesday, the Commission announced that it will release a report in mid-August blaming the 2008 swings in oil prices on speculators (spoiler alert!) The announcement raises eyebrows because in 2008, the CFTC itself decisively concluded that fundamental supply and demand, not speculation, drove oil up to record highs in the summer of 2008. Bummer if you happen to make a political living off of scaring your constituents with shadows and straw men.
Could it be that the CFTC’s flip flop has something to do with the Obama Administration’s desire to further regulate the financial markets? By placing arbitrary limits on which institutions are allowed to spend their money on certain financial products, the government will make oil prices more volatile, and it will steer even more profits into the huge, politically connected firms on Wall Street. Meanwhile, the American people are still waiting for the government to remove the roadblocks to the offshore energy they were promised last year when two separate bans were finally and formally put out to pasture.
The Social Function of Oil Speculation
The essential insight of Adam Smith was that a market economy harnesses the self-indulgence of individuals and motivates them to serve the common welfare. In a free market, one becomes affluent by creating better and cheaper products or services that consumers are willing to buy.
In the case of speculation, this process actually reduces the volatility of price swings. We have all heard the successful speculator’s motto of “buy low, sell high.” To be more specific, the phrase should really be “short-sell high, cover low.” What this means it that if some investors believe that oil prices will rise sharply in a month, they can profit from this hunch by buying oil futures contracts. If and when the price of oil does rise as they had anticipated, their futures contracts will be adjusted, booking a profit to their trading accounts. (On the flip side, if some investors think oil prices will fall, they can sell—“go short”—oil futures contracts.)
It’s true, as the critics point out, that an investor who purchases oil futures contracts will indirectly pull up the current price of oil. This happens because producers have an incentive to reduce current sales when the futures price gets pushed up. They are effectively diverting some of their scarce supplies of oil to the future, rather than selling it all in the present.
But even if futures purchases push up current oil prices, the speculators perform a service to everybody else so long as they correctly anticipated a price spike. If oil is currently selling at $50, and an investor believes it will jump up to $70 in one month, then the investor will buy futures contracts until the “futures price” gets pushed up to reflect his forecast. In the process, his actions may have pushed the current, spot price up to $55. But that’s a good thing, because now the price will approach $70 more gradually; it won’t shock the market as much when oil hits $70.
Of course, if speculators are wrong, then they do make market prices more volatile. If a price is actually going to fall in the future, and speculators foolishly buy futures contracts because they mistakenly expect a price hike, then yes that does distort markets. But the government doesn’t need to crack down on this antisocial behavior, because the market has a built-in penalty: speculators who guess wrong lose money. And in fact, many investors lost a bundle of money when oil prices collapsed in the fall of 2008. And you didn’t hear the politicians praising speculators for the run down in the price of oil either.
The other thing producers do, and perhaps the most important thing for consumers, is that they are encouraged by the higher price to invest in finding more oil, because they will get a higher price for the oil. They buy equipment, hire people and buy services. They explore for new supplies and add new capacity. By combining their risked capital, additional human resources and intelligence, they bring new oil to the markets. New oil supplies help producers meet the increased demand and prices fall. This is supply and demand working to meet the wants and needs of consumers and there is nothing sinister about it.
Even Paul Krugman Agreed that Speculators Didn’t Cause the 2008 Spike
So we see that even when speculators move prices, so long as their forecasts are correct, they are actually helping to stabilize prices. Ironically, the point is moot regarding the 2008 price swings, because many analysts from across the political spectrum did not believe that speculation drove those movements. Instead, the underlying supply and demand conditions were the best explanation for why oil rose so high by the summer of 2008, and then collapsed in the fall.
The “smoking gun” in this conclusion was the fact that oil inventories were not rising during oil’s large ascent. Independent analyses by IER and the CFTC pointed to this fact, and Paul Krugman has recently reminded his readers that he too does not believe oil speculators were responsible for the 2008 movements.
All three analyses noted that the only way for speculators to drive up prices, is by giving an incentive for people to take oil off the current market and stockpile it for future sale. Since there was no obvious accumulation of oil inventories during the first half of 2008, oil speculation couldn’t have been the driving force. The reason the spot price of oil rose so much through the summer, was that worldwide supply still lagged behind demand for much of the year.Putting
New Curbs on Financial Markets Will Hurt Consumers
Of course, the real reason behind the CFTC’s change of heart is that it needs to justify its desire to expand its regulatory purview and slap on even more regulations of the financial markets. Specifically, the CFTC wants the power to limit “speculative” purchases of oil futures and other derivatives. The idea is that “physical hedgers”—such as airlines and oil producers—can trade in futures contracts as much as they want, because in theory they are just shielding their businesses from sensitive oil price moves. In contrast, the CFTC wants to crack down on those who buy futures contracts out of purely speculative motives.
This is a false dichotomy, and certainly we can’t trust bureaucrats to know the difference in practice. Airline companies can hold an opinion on oil prices too, and “bet” accordingly—that’s why some airlines invest more heavily than others in futures contracts. So even institutions that are directly related to the oil business can dabble in speculative transactions that will affect oil prices based on their forecasts.
On the other hand, investors who are completely isolated from the oil market might buy oil futures as a “hedge.” For example, during 2008 many portfolio managers gained more and more exposure to oil, meaning they “went long” on oil futures contracts. But they weren’t doing this in order to bet on higher prices. Rather, they could see that as oil kept rising, it was hurting the share prices on many major companies. So in order to protect their clients, the portfolio managers diversified their holdings, by selling off some of their stock and bond holdings in order to buy commodity futures. New government regulations could hinder this very useful tool to shield average investors from large price swings.
Finally, we need to realize that CFTC regulations will not stop large speculators from changing the world price of oil. Politically connected investment firms will easily be able to qualify as an “approved” purchaser of oil futures. And if nothing else, rich investors who want to bet on the price of oil can always take their business to foreign exchanges. Does anybody really think George Soros won’t be able to find someone else in the whole wide world willing to take the opposite position of an oil trade he wants to make?
Of course, we will have to suspend final judgment until we see the CFTC’s new report. It’s possible that every single analyst at the CFTC missed something last year when they concluded that speculation wasn’t driving oil prices. But one can’t help but note the timing of the CFTC’s about face – just as the Obama Administration is pushing for more regulation of energy markets.
Tuesday, July 28, 2009
Resistance to mind-altering substances is futile, according to a new "Secret History of Getting High in America"
Why we say yes to drugs. By Laura Miller
Resistance to mind-altering substances is futile, according to a new "Secret History of Getting High in America"
Salon, Jul. 20, 2009
Not long ago, I was talking with a couple of friends who are about a decade younger than I am. We got onto the subject of recreational drugs and how my friends had recently sworn off Ecstasy. "I know a guy who used to love it, and he's quitting, too," one of them explained. "He's learned a lot about it and says it's just too hard on your body." I remarked that since Ecstasy is the sort of drug most people take only very occasionally, it probably wasn't as dangerous as something like cocaine, which can be addictive, expensive and lethal. "Oh, cocaine's not that bad," said my friend, looking puzzled and leaving me surprised. Hadn't he ever worked for someone who'd gotten so tweaked on coke that he burned out his septum, emptied his bank account and triggered a heart attack? Hasn't every journalist worked with someone like that?
Ryan Grim would understand this disconnect perfectly. One of the theses of his new book, "This is Your Country on Drugs: The Secret History of Getting High in America" -- a cornucopia of unconventional wisdom about our relationship to mind-altering substances -- is that the popularity of drugs waxes and wanes according to a complex sum of factors. One of those factors is the "perceived risk" of using a particular chemical, which also fluctuates. There's a tendency to idealize new drugs, as the Boston Medical and Surgical Journal did with a recently isolated narcotic in 1900. "There's no danger of acquiring a habit," it assured its readers about the drug that had just emerged from the labs of the aspirin manufacturer, Bayer. They named it heroin.
Even when we ought to know better, we don't. "It takes about seven years," Grim writes, "for folks to realize what's wrong with any given drug. It slips away, only to return again as if it were new." I came of age professionally at a time when older journalists and editors were wrecking themselves on cocaine right and left; as a result, I still think of the drug as equal parts perilous and pathetic, as well as hopelessly uncool. My friend, no doubt, came up during a coke lull.
A political reporter who currently works at the Huffington Post, Grim wrote a 2004 article for Slate inspired by a curious observation: LSD, which had been "a fixture of my social scene since the early '90s," seemed to have vanished from that scene. No one he knew was taking it or selling it, and when he approached a drugs-policy researcher for some hard data, they discovered that according to several metrics, acid use was at "an historic low: 3.5 percent." By 2003, it was down to 1.9 percent. Why?
It wasn't just that LSD had gone out of style, although it had, somewhat. Grim found evidence of a perfect storm of causes for the decline. In 2000, the DEA had arrested a man named William Pickard, thought to be the manufacturer of as much as 95 percent of the available acid in the U.S. The Grateful Dead, whose concerts provided an opportunity for suppliers and users to connect and network, had stopped touring after the 1995 death of Jerry Garcia, and Phish, a jam band that had stepped in to fill the gap, also stopped touring by the end of 2000. The rave scene began to fade away under pressure from authorities who threatened to arrest organizers for drug offenses committed at their events.
But if Grim has learned anything from his forays into the tangled world of drug laws (he once worked for the Marijuana Policy Project, which lobbies for the repeal of pot prohibition), it's that the American passion for getting high turns enforcement-centered strategies into a vast game of Whack-a-Mole. "Policies enacted to counter other drugs -- marijuana and cocaine, for example -- have ended up encouraging the meth trade, as have laws against meth itself," he writes. Crackdowns on pot smuggled from Mexico during the 1970s caused growers, dealers and users to turn to heroin, meth and especially cocaine, the last of which was brought in from Colombia via the Caribbean and Miami. When federal authorities finally got around to draining the swamp of crime and corruption in Miami (where one-fifth of all real estate transactions were paid for in cash), coke smuggling migrated to Mexico, and when attacked there, it scattered throughout the region, "creating the cartel structure that exists today." This year, the National Drug Threat Assessment has described Mexican cartels as "the greatest organized crime threat to the United States," whose violence has spilled over the border and whose influence "over domestic drug trafficking is unrivaled."
Grim has a knack for digging up facts and crunching statistics to get unexpected results. The meth "epidemic" that has recently inspired so much media alarm is already in decline, while crack use, never as pervasive as it was depicted in the 1980s, has remained fairly steady since then. Today's kids aren't smoking much pot because pot is a "social" drug, shared among peers who gather in parking lots and other hangouts; teens have less unstructured time now and tend to socialize online. They still get high, only on prescription drugs pilfered from adults or ordered off the Internet. "There's no social ritual involved," he observes, "just a glass of water and a pill," which "fits well into a solitary afternoon."
There's more. Early American settlers drank like fish, even the Puritans (though, as Grim fails to note, this was likely a habit transferred from Europe, where the water in many communities wasn't potable). In the 19th century, the heyday of temperance campaigns, it was more socially acceptable to consume opium than alcohol, and by the end of the 1900s, America was a "pharmacopoeia utopia" in which coke, heroin and morphine were all readily available, either with a doctor's prescription or in patent medicines and products like Coca-Cola, once a cocaine-containing beverage marketed as "a substitute for alcohol." Traditionally, attempts to regulate or prohibit drugs in America have come from the left rather than the right; only with the advent of the counterculture did this change.
Some of Grim's arguments are familiar, but with a twist. By now, most informed people know that anti-drug education and P.R. campaigns directed at children don't work, but Grim has noted several studies indicating that they may actually foster experimentation. He sees the mini-boom in drug use among 10th graders in the late '90s as caused by a confluence of the "inner child" therapy boom exhorting parents to encourage children's curiosity and programs like D.A.R.E. (Drug Abuse Resistance Education), which inadvertently directed that curiosity toward exotic chemicals. Despite ample proof of its ineffectiveness, D.A.R.E. continues to be used in three-quarters of all American school districts on some 25 million children. (President Obama even proclaimed April 8 "National D.A.R.E. Day" in honor of the organization's "important work.") Grim thinks that D.A.R.E. and similarly wasteful programs persist simply because they relieve parents from the duty of having awkward (and possibly "hypocritical") conversations with their kids about drugs. Also because no one knows what else to do.
Even less excusable in Grim's eyes is the predominance of law enforcement strategies in America's disastrous war on drugs, initiated by the Reagan administration. Drug courts, in which offenders are directed to court-monitored treatment programs instead of into prison, are, according to Grim, both cheaper and more successful. Yet even politicians inclined to support a treatment-oriented approach to diminishing the American appetite for illegal drugs have opted to emphasize enforcement in order to position themselves as "tough" on crime.
For just this reason, President Clinton replaced his first, reform-minded drug czar, Lee Brown, with retired Gen. Barry McCaffrey, who squandered billions on a scandal-ridden media campaign (planting secret anti-drug messages in prime-time TV dramas) and combating the medical marijuana movement, which is supported by a majority of Americans. Worse yet, overseas enforcement campaigns lead to horrific blowback. Grim points out that aggressive attacks on growers and suppliers cause centralization of the drug trade (only big organizations can afford the losses) and this in turn leads to corruption, as cartel leaders parlay their fortunes into political influence. Not only are we pissing away our own resources on ineffectual enforcement efforts, we have "brought the Mexican government to the brink of collapse, making the prospect of a failed state on America's southern border a very real possibility."
For Grim, most of these mistakes have roots in an elementary error, the inability to accept that "altering one's consciousness is a fundamental human desire." The craving to be more relaxed or more alert, more outgoing or more reflective, happier or deeper or even just sillier and less bored -- in one form other another, this drive has always been and always will be with us, though many of us refuse to admit it. As a result, our political response to drug problems tends to be blinkered. "In reality, there's no such thing as drug policy," Grim writes. "As currently understood and implemented, drug policy attempts to isolate a phenomenon that can't be taken in isolation. Economic policy is drug policy. Healthcare policy is drug policy. Foreign policy, too, is drug policy. When approached in isolation, drug policy almost always backfires, because it doesn't take into account the powerful economic, social and cultural forces that also determine how and why Americans get high."
Yet a simplistic call for legalization fails to take into account the fact that almost all drugs can be very dangerous, and that the impulse to control them may run as deep as the desire to enjoy them. People who trust themselves to use drugs wisely don't necessarily want their kids, or their irresponsible neighbors, or their troubled relatives to enjoy unfettered access to previously controlled substances. For that reason, Grim -- who exhibits a distinct preference for hallucinogens and is prone to idealizing the "psychonauts" who use them to "expand consciousness" -- stops short of calling for the repeal of all drug prohibitions, for the most part, apparently, because he thinks it just won't last. "What would happen if drugs were legalized?" he asks, referring to the "pharmacopoeia utopia" of the late 1800s. "Well, it happened. And history suggests that if we ever legalize them again, it won't be long before we ban them all over again."
"Realism" seems to be the most Grim can bring himself to hope for, which is why he applauds cable TV series like "Weeds," "Breaking Bad" and "The Wire" for their nuanced depictions of the drug trade and the people who ply it. The library-like Web site Erowid.com emerges as one of the few real heroes in "This Is Your Country on Drugs," due to its curators' fierce commitment to objectively and thoroughly substantiating the vast amounts of information -- positive and negative -- they present about virtually every drug under the sun. A little realism would certainly help with regard to cocaine, whose "perceived risk" is rapidly shrinking in my own (admittedly highly anecdotal) experience. In the final pages of the book, Grim remarks that his own observations suggest that "coke's next honeymoon could be right around the corner." Sounds prescient, but not more so than his world-weary conclusion that "America has shown just about zero capacity to learn from its long and complicated history with drugs."
Resistance to mind-altering substances is futile, according to a new "Secret History of Getting High in America"
Salon, Jul. 20, 2009
Not long ago, I was talking with a couple of friends who are about a decade younger than I am. We got onto the subject of recreational drugs and how my friends had recently sworn off Ecstasy. "I know a guy who used to love it, and he's quitting, too," one of them explained. "He's learned a lot about it and says it's just too hard on your body." I remarked that since Ecstasy is the sort of drug most people take only very occasionally, it probably wasn't as dangerous as something like cocaine, which can be addictive, expensive and lethal. "Oh, cocaine's not that bad," said my friend, looking puzzled and leaving me surprised. Hadn't he ever worked for someone who'd gotten so tweaked on coke that he burned out his septum, emptied his bank account and triggered a heart attack? Hasn't every journalist worked with someone like that?
Ryan Grim would understand this disconnect perfectly. One of the theses of his new book, "This is Your Country on Drugs: The Secret History of Getting High in America" -- a cornucopia of unconventional wisdom about our relationship to mind-altering substances -- is that the popularity of drugs waxes and wanes according to a complex sum of factors. One of those factors is the "perceived risk" of using a particular chemical, which also fluctuates. There's a tendency to idealize new drugs, as the Boston Medical and Surgical Journal did with a recently isolated narcotic in 1900. "There's no danger of acquiring a habit," it assured its readers about the drug that had just emerged from the labs of the aspirin manufacturer, Bayer. They named it heroin.
Even when we ought to know better, we don't. "It takes about seven years," Grim writes, "for folks to realize what's wrong with any given drug. It slips away, only to return again as if it were new." I came of age professionally at a time when older journalists and editors were wrecking themselves on cocaine right and left; as a result, I still think of the drug as equal parts perilous and pathetic, as well as hopelessly uncool. My friend, no doubt, came up during a coke lull.
A political reporter who currently works at the Huffington Post, Grim wrote a 2004 article for Slate inspired by a curious observation: LSD, which had been "a fixture of my social scene since the early '90s," seemed to have vanished from that scene. No one he knew was taking it or selling it, and when he approached a drugs-policy researcher for some hard data, they discovered that according to several metrics, acid use was at "an historic low: 3.5 percent." By 2003, it was down to 1.9 percent. Why?
It wasn't just that LSD had gone out of style, although it had, somewhat. Grim found evidence of a perfect storm of causes for the decline. In 2000, the DEA had arrested a man named William Pickard, thought to be the manufacturer of as much as 95 percent of the available acid in the U.S. The Grateful Dead, whose concerts provided an opportunity for suppliers and users to connect and network, had stopped touring after the 1995 death of Jerry Garcia, and Phish, a jam band that had stepped in to fill the gap, also stopped touring by the end of 2000. The rave scene began to fade away under pressure from authorities who threatened to arrest organizers for drug offenses committed at their events.
But if Grim has learned anything from his forays into the tangled world of drug laws (he once worked for the Marijuana Policy Project, which lobbies for the repeal of pot prohibition), it's that the American passion for getting high turns enforcement-centered strategies into a vast game of Whack-a-Mole. "Policies enacted to counter other drugs -- marijuana and cocaine, for example -- have ended up encouraging the meth trade, as have laws against meth itself," he writes. Crackdowns on pot smuggled from Mexico during the 1970s caused growers, dealers and users to turn to heroin, meth and especially cocaine, the last of which was brought in from Colombia via the Caribbean and Miami. When federal authorities finally got around to draining the swamp of crime and corruption in Miami (where one-fifth of all real estate transactions were paid for in cash), coke smuggling migrated to Mexico, and when attacked there, it scattered throughout the region, "creating the cartel structure that exists today." This year, the National Drug Threat Assessment has described Mexican cartels as "the greatest organized crime threat to the United States," whose violence has spilled over the border and whose influence "over domestic drug trafficking is unrivaled."
Grim has a knack for digging up facts and crunching statistics to get unexpected results. The meth "epidemic" that has recently inspired so much media alarm is already in decline, while crack use, never as pervasive as it was depicted in the 1980s, has remained fairly steady since then. Today's kids aren't smoking much pot because pot is a "social" drug, shared among peers who gather in parking lots and other hangouts; teens have less unstructured time now and tend to socialize online. They still get high, only on prescription drugs pilfered from adults or ordered off the Internet. "There's no social ritual involved," he observes, "just a glass of water and a pill," which "fits well into a solitary afternoon."
There's more. Early American settlers drank like fish, even the Puritans (though, as Grim fails to note, this was likely a habit transferred from Europe, where the water in many communities wasn't potable). In the 19th century, the heyday of temperance campaigns, it was more socially acceptable to consume opium than alcohol, and by the end of the 1900s, America was a "pharmacopoeia utopia" in which coke, heroin and morphine were all readily available, either with a doctor's prescription or in patent medicines and products like Coca-Cola, once a cocaine-containing beverage marketed as "a substitute for alcohol." Traditionally, attempts to regulate or prohibit drugs in America have come from the left rather than the right; only with the advent of the counterculture did this change.
Some of Grim's arguments are familiar, but with a twist. By now, most informed people know that anti-drug education and P.R. campaigns directed at children don't work, but Grim has noted several studies indicating that they may actually foster experimentation. He sees the mini-boom in drug use among 10th graders in the late '90s as caused by a confluence of the "inner child" therapy boom exhorting parents to encourage children's curiosity and programs like D.A.R.E. (Drug Abuse Resistance Education), which inadvertently directed that curiosity toward exotic chemicals. Despite ample proof of its ineffectiveness, D.A.R.E. continues to be used in three-quarters of all American school districts on some 25 million children. (President Obama even proclaimed April 8 "National D.A.R.E. Day" in honor of the organization's "important work.") Grim thinks that D.A.R.E. and similarly wasteful programs persist simply because they relieve parents from the duty of having awkward (and possibly "hypocritical") conversations with their kids about drugs. Also because no one knows what else to do.
Even less excusable in Grim's eyes is the predominance of law enforcement strategies in America's disastrous war on drugs, initiated by the Reagan administration. Drug courts, in which offenders are directed to court-monitored treatment programs instead of into prison, are, according to Grim, both cheaper and more successful. Yet even politicians inclined to support a treatment-oriented approach to diminishing the American appetite for illegal drugs have opted to emphasize enforcement in order to position themselves as "tough" on crime.
For just this reason, President Clinton replaced his first, reform-minded drug czar, Lee Brown, with retired Gen. Barry McCaffrey, who squandered billions on a scandal-ridden media campaign (planting secret anti-drug messages in prime-time TV dramas) and combating the medical marijuana movement, which is supported by a majority of Americans. Worse yet, overseas enforcement campaigns lead to horrific blowback. Grim points out that aggressive attacks on growers and suppliers cause centralization of the drug trade (only big organizations can afford the losses) and this in turn leads to corruption, as cartel leaders parlay their fortunes into political influence. Not only are we pissing away our own resources on ineffectual enforcement efforts, we have "brought the Mexican government to the brink of collapse, making the prospect of a failed state on America's southern border a very real possibility."
For Grim, most of these mistakes have roots in an elementary error, the inability to accept that "altering one's consciousness is a fundamental human desire." The craving to be more relaxed or more alert, more outgoing or more reflective, happier or deeper or even just sillier and less bored -- in one form other another, this drive has always been and always will be with us, though many of us refuse to admit it. As a result, our political response to drug problems tends to be blinkered. "In reality, there's no such thing as drug policy," Grim writes. "As currently understood and implemented, drug policy attempts to isolate a phenomenon that can't be taken in isolation. Economic policy is drug policy. Healthcare policy is drug policy. Foreign policy, too, is drug policy. When approached in isolation, drug policy almost always backfires, because it doesn't take into account the powerful economic, social and cultural forces that also determine how and why Americans get high."
Yet a simplistic call for legalization fails to take into account the fact that almost all drugs can be very dangerous, and that the impulse to control them may run as deep as the desire to enjoy them. People who trust themselves to use drugs wisely don't necessarily want their kids, or their irresponsible neighbors, or their troubled relatives to enjoy unfettered access to previously controlled substances. For that reason, Grim -- who exhibits a distinct preference for hallucinogens and is prone to idealizing the "psychonauts" who use them to "expand consciousness" -- stops short of calling for the repeal of all drug prohibitions, for the most part, apparently, because he thinks it just won't last. "What would happen if drugs were legalized?" he asks, referring to the "pharmacopoeia utopia" of the late 1800s. "Well, it happened. And history suggests that if we ever legalize them again, it won't be long before we ban them all over again."
"Realism" seems to be the most Grim can bring himself to hope for, which is why he applauds cable TV series like "Weeds," "Breaking Bad" and "The Wire" for their nuanced depictions of the drug trade and the people who ply it. The library-like Web site Erowid.com emerges as one of the few real heroes in "This Is Your Country on Drugs," due to its curators' fierce commitment to objectively and thoroughly substantiating the vast amounts of information -- positive and negative -- they present about virtually every drug under the sun. A little realism would certainly help with regard to cocaine, whose "perceived risk" is rapidly shrinking in my own (admittedly highly anecdotal) experience. In the final pages of the book, Grim remarks that his own observations suggest that "coke's next honeymoon could be right around the corner." Sounds prescient, but not more so than his world-weary conclusion that "America has shown just about zero capacity to learn from its long and complicated history with drugs."
Germany and the U.K. resist France and the U.S. on green tariffs
Resisting Green Tariffs. WSJ Editorial
Germany and the U.K. resist France and the U.S. on green tariffs.
WSJ, Jul 28, 2009
One of the most dangerous but least reported undercurrents of the global-warming movement is trade protectionism. Now some politicians in Europe are beginning to push back, and we’re delighted to see it.
A carbon tariff has been popular on the intellectual left for some time, as a way to sell heavy new energy taxes to Western voters worried that their jobs will get shipped to countries that don’t also punish carbon use. The U.S. House of Representatives wrote a tariff provision into its recent cap-and-tax bill, rolling over the muted objections of President Obama. Coming from the world’s largest economy and ostensible free-trade leader, the bill is an invitation to the world’s protectionists to camouflage their self-interest in claims of green virtue.
French President Nicolas Sarkozy—a mercantalist in the best of times—escalated the threat last month by suggesting import duties to “level the playing field” with countries that oppose binding greenhouse-gas targets at December’s United Nations climate talks in Copenhagen. Just what a world trying to rebound from recession needs: beggar-thy-neighbor environmentalism.
Now other leaders are beginning to recognize and speak up about the peril. With typical British understatement, U.K. Secretary of State for Energy and Climate Change Ed Miliband said Saturday his government was “skeptical” about the French proposal for carbon tariffs. Germany’s Deputy Environment Minister Matthias Machnig was even more forthright on Friday, branding the exercise as “eco-imperialism” for attempting to punish countries that don’t follow these green dictates. “We are closing our markets for their products, and I don’t think this is a very helpful signal for the international negotiations,” he added. Both statements are notable coming as they do from parties on the political left.
Berlin’s criticism is especially important. Germany has been at the forefront of Europe’s eco-movement from the start, enriching the French language with such words as “le Waldsterben,” a German compound meaning “forest death.” The idea of the man-made destruction of Europe’s trees was the great green scare of the 1970s and 1980s. The forests are still with us, and scientists now believe that the tree decline was as much due to natural phenomena as to “acid rain.” That episode is a lesson in the need for skepticism about proposals that would do tangible economic harm in the heat of environmental manias.
A climate tariff would be damaging even on its own green terms. To the extent it reduced global trade, carbon protectionism would slow the rise in income that we know from the last half century has been crucial to antipollution progress. The richer people are, the more of their income they are willing to devote to cleaner air and water. Several hundred million people have risen from poverty in the last generation thanks to expanding trade, and the world doesn’t need a reversal thanks to old-fashioned protectionism dressed in green drag.
Germany and the U.K. resist France and the U.S. on green tariffs.
WSJ, Jul 28, 2009
One of the most dangerous but least reported undercurrents of the global-warming movement is trade protectionism. Now some politicians in Europe are beginning to push back, and we’re delighted to see it.
A carbon tariff has been popular on the intellectual left for some time, as a way to sell heavy new energy taxes to Western voters worried that their jobs will get shipped to countries that don’t also punish carbon use. The U.S. House of Representatives wrote a tariff provision into its recent cap-and-tax bill, rolling over the muted objections of President Obama. Coming from the world’s largest economy and ostensible free-trade leader, the bill is an invitation to the world’s protectionists to camouflage their self-interest in claims of green virtue.
French President Nicolas Sarkozy—a mercantalist in the best of times—escalated the threat last month by suggesting import duties to “level the playing field” with countries that oppose binding greenhouse-gas targets at December’s United Nations climate talks in Copenhagen. Just what a world trying to rebound from recession needs: beggar-thy-neighbor environmentalism.
Now other leaders are beginning to recognize and speak up about the peril. With typical British understatement, U.K. Secretary of State for Energy and Climate Change Ed Miliband said Saturday his government was “skeptical” about the French proposal for carbon tariffs. Germany’s Deputy Environment Minister Matthias Machnig was even more forthright on Friday, branding the exercise as “eco-imperialism” for attempting to punish countries that don’t follow these green dictates. “We are closing our markets for their products, and I don’t think this is a very helpful signal for the international negotiations,” he added. Both statements are notable coming as they do from parties on the political left.
Berlin’s criticism is especially important. Germany has been at the forefront of Europe’s eco-movement from the start, enriching the French language with such words as “le Waldsterben,” a German compound meaning “forest death.” The idea of the man-made destruction of Europe’s trees was the great green scare of the 1970s and 1980s. The forests are still with us, and scientists now believe that the tree decline was as much due to natural phenomena as to “acid rain.” That episode is a lesson in the need for skepticism about proposals that would do tangible economic harm in the heat of environmental manias.
A climate tariff would be damaging even on its own green terms. To the extent it reduced global trade, carbon protectionism would slow the rise in income that we know from the last half century has been crucial to antipollution progress. The richer people are, the more of their income they are willing to devote to cleaner air and water. Several hundred million people have risen from poverty in the last generation thanks to expanding trade, and the world doesn’t need a reversal thanks to old-fashioned protectionism dressed in green drag.
India Picks Economic Growth Over Carbon Dioxide Caps
India Picks Economic Growth Over Carbon Dioxide Caps
IER, July 27, 2009
The Obama Administration and European governments continue to lobby developing countries, such as India and China, to reduce their carbon dioxide emissions. But India and China reject these calls because they understand that artificial restrictions on carbon dioxide emissions will harm their economies.
During her recent visit, India’s Environment Minister reminded Secretary of State Hillary Clinton that India would not accept caps on their carbon dioxide emissions. According to the Washington Post:
But the clash between developed and developing countries over climate change intruded on the high-profile photo opportunity midway through Clinton’s three-day tour of India. Indian Environment Minister Jairam Ramesh complained about U.S. pressure to cut a worldwide deal, and Clinton countered that the Obama administration’s push for a binding agreement would not sacrifice India’s economic growth.
As dozens of cameras recorded the scene, Ramesh declared that India would not commit to a deal that would require it to meet targets to reduce emissions. “It is not true that India is running away from mitigation,” he said. But “India’s position, let me be clear, is that we are simply not in the position to take legally binding emissions targets.” [emphasis added]
It is refreshing to see that at least some government officials—though not from this country – understand that when you take options away from businesses, you reduce economic activity. If it were really true, as Secretary of State Clinton alleges, that reducing emissions will actually spur job creation and economic growth, then why would the government need to force its plan on the private sector? (See video.)
Furthermore, why stop with caps on carbon dioxide emissions? Why not impose a cap-and-trade plan on the use of steel? All those businesses currently using steel as an input would then have to scramble to find higher-priced substitutes, and this would create jobs in the plastics industries.
Of course the above “logic” is nonsense. Steadily shrinking the cap on permissible emissions will hamper U.S. economic growth and because businesses will be forced to switch to lower-carbon-intensive techniques than they otherwise would have chosen, their output will be lower and the productivity of labor will fall. That is, of course, the intent of the proponents of cap and trade plans including the Waxman-Markey bill that recently passed in the House of Representatives. The so-called “green jobs” created in some sectors, such as wind turbines and solar panels, will be counterbalanced by job destruction in other sectors that rely on fossil fuels and inexpensive energy.
Indian officials have it exactly right: They are being asked to sacrifice the welfare of their own citizens by Western leaders whose countries were built on a foundation of abundant energy.
India’s declaration also undermines the entire rationale for the Waxman-Markey bill. Taken in isolation, some experts contend that the Waxman-Markey caps on U.S. emissions will have virtually no impact on the trajectory of global warming, even taking the standard climate models at face value. Even the most outspoken scientists on global warming agree that unilateral American efforts are pointless, without similar targets being adopted by the developing world.
Proponents of cap and trade have justified its economically crippling, yet environmentally irrelevant, constraints on the U.S. by saying it will provide American negotiators with moral authority when seeking worldwide restrictions on industry. The idea is that we need to impose limits on the U.S. economy before other governments will agree to shackle their own economies in turn.
India, rightly so, has just declared that it will do no such thing. Let us hope that our leaders see the flaws in their logic and reverse course on this job-killing cap and trade plan before it is too late.
IER, July 27, 2009
The Obama Administration and European governments continue to lobby developing countries, such as India and China, to reduce their carbon dioxide emissions. But India and China reject these calls because they understand that artificial restrictions on carbon dioxide emissions will harm their economies.
During her recent visit, India’s Environment Minister reminded Secretary of State Hillary Clinton that India would not accept caps on their carbon dioxide emissions. According to the Washington Post:
But the clash between developed and developing countries over climate change intruded on the high-profile photo opportunity midway through Clinton’s three-day tour of India. Indian Environment Minister Jairam Ramesh complained about U.S. pressure to cut a worldwide deal, and Clinton countered that the Obama administration’s push for a binding agreement would not sacrifice India’s economic growth.
As dozens of cameras recorded the scene, Ramesh declared that India would not commit to a deal that would require it to meet targets to reduce emissions. “It is not true that India is running away from mitigation,” he said. But “India’s position, let me be clear, is that we are simply not in the position to take legally binding emissions targets.” [emphasis added]
It is refreshing to see that at least some government officials—though not from this country – understand that when you take options away from businesses, you reduce economic activity. If it were really true, as Secretary of State Clinton alleges, that reducing emissions will actually spur job creation and economic growth, then why would the government need to force its plan on the private sector? (See video.)
Furthermore, why stop with caps on carbon dioxide emissions? Why not impose a cap-and-trade plan on the use of steel? All those businesses currently using steel as an input would then have to scramble to find higher-priced substitutes, and this would create jobs in the plastics industries.
Of course the above “logic” is nonsense. Steadily shrinking the cap on permissible emissions will hamper U.S. economic growth and because businesses will be forced to switch to lower-carbon-intensive techniques than they otherwise would have chosen, their output will be lower and the productivity of labor will fall. That is, of course, the intent of the proponents of cap and trade plans including the Waxman-Markey bill that recently passed in the House of Representatives. The so-called “green jobs” created in some sectors, such as wind turbines and solar panels, will be counterbalanced by job destruction in other sectors that rely on fossil fuels and inexpensive energy.
Indian officials have it exactly right: They are being asked to sacrifice the welfare of their own citizens by Western leaders whose countries were built on a foundation of abundant energy.
India’s declaration also undermines the entire rationale for the Waxman-Markey bill. Taken in isolation, some experts contend that the Waxman-Markey caps on U.S. emissions will have virtually no impact on the trajectory of global warming, even taking the standard climate models at face value. Even the most outspoken scientists on global warming agree that unilateral American efforts are pointless, without similar targets being adopted by the developing world.
Proponents of cap and trade have justified its economically crippling, yet environmentally irrelevant, constraints on the U.S. by saying it will provide American negotiators with moral authority when seeking worldwide restrictions on industry. The idea is that we need to impose limits on the U.S. economy before other governments will agree to shackle their own economies in turn.
India, rightly so, has just declared that it will do no such thing. Let us hope that our leaders see the flaws in their logic and reverse course on this job-killing cap and trade plan before it is too late.
Monday, July 27, 2009
Fukuyama: Iran, Islam and the Rule of Law
Iran, Islam and the Rule of Law. By FRANCIS FUKUYAMA
Islamic political movements have been one form of revolt against arbitrary government.
WSJ, Jul 28, 2009
When Columbia University President Lee Bollinger introduced Iranian President Mahmoud Ahmadinejad at his school in September 2007, he denounced him as a “petty tyrant.”
Ahmadinejad is many bad things, including a Holocaust denier and a strong proponent of a nuclear Iran. But as recent events have underlined, Iran is not quite a tyranny, petty or grand, and the office Ahmadinejad occupies does not give him final say in Iranian affairs. That role is more truly occupied by Ayatollah Ali Khamenei, head of the Council of Guardians and Iran’s supreme leader.
A real tyranny would never permit elections in the first place—North Korea never does—nor would it allow demonstrations contesting the election results to spiral out of control. Yet Iran is no liberal democracy. So what kind of beast is it? And in what ways should we want its regime to evolve?
Political scientists categorize the Islamic Republic of Iran as an “electoral authoritarian” regime of a new sort. They put it in the same basket as Hugo Chávez’s Venezuela or Vladimir Putin’s Russia. By this view, Iran is fundamentally an authoritarian regime run by a small circle of clerics and military officials who use elections to legitimate themselves.
Others think of Iran as a medieval theocracy. Its 1979 constitution vests sovereignty not in the people, but in God, and establishes Islam and the Quran as the supreme sources of law.
The Iranian Constitution is a curious hybrid of authoritarian, theocratic and democratic elements. Articles One and Two do vest sovereignty in God, but Article Six mandates popular elections for the presidency and the Majlis, or parliament. Articles 19-42 are a bill of rights, guaranteeing, among other things, freedom of expression, public gatherings and marches, women’s equality, protection of ethnic minorities, due process and private property, as well as some “second generation” social rights like social security and health care.
The truly problematic part of the constitution is Section Eight (Articles 107-112) on the Guardian Council and the “Leader.” All the democratic procedures and rights in the earlier sections of the constitution are qualified by certain powers reserved to a council of senior clerics.
These powers, specified in Article 110, include control over the armed forces, the ability to declare war, and appointment powers over the judiciary, heads of media, army and the Islamic Revolutionary Guard Corps. Another article lays out conditions under which the Supreme Leader can be removed by the Guardian Council. But that procedure is hardly democratic or transparent.
One does not have to go back to the Middle Ages to find historical precedents for this type of constitution. The clearest parallel would be the German Constitution adopted after the country was unified in the 1870s. Pre-World War I Germany had an elected parliament, or Reichstag, but reserved important powers for an unelected Kaiser, particularly in foreign policy and defense. This constitution got Germany into big trouble. The unelected part of the leadership controlled the armed forces. Eventually, though, it came to be controlled by the armed forces. This seems to be what’s unfolding in Iran today.
Compared to Section Eight, the references in the Iranian Constitution to God and religion as the sources of law are much less problematic. They could, under the right circumstances, be the basis for Iran’s eventual evolution into a moderate, law-governed country.
The rule of law was originally rooted in religion in all societies where it came to prevail, including the West. The great economist Friedrich Hayek noted that law should be prior to legislation. That is, the law should reflect a broad social consensus on the rules of justice. In Europe, it was the church that originally defined the law and acted as its custodian. European monarchs respected the rule of law because it was written by an authority higher and more legitimate than themselves.
Something similar happened in the pre-modern Middle East. There was a functional separation of church and state. The ulama were legal scholars and custodians of Shariah law while the sultans exercised political authority. The sultans conceded they were not the ultimate source of law but had to live within rules established by Muslim case law. There was no democracy, but there was something resembling a rule of law.
This traditional, religiously based rule of law was destroyed in the Middle East’s transition to modernity. Replacing it, particularly in the Arab world, was untrammeled executive authority: Presidents and other dictators accepted no constraints, either legislative or judicial, on their power.
The legal scholar Noah Feldman has argued that the widespread demand for a return to Shariah in many Muslim countries does not necessarily reflect a desire to impose harsh, Taliban-style punishments and oppress women. Rather, it reflects a nostalgia for a dimly remembered historical time when Muslim rulers were not all-powerful autocrats, but respected Islamic rules of justice—Islamic rule of law.
So what kind of future should we wish for Iran, in light of the massive demonstrations? My own preference would be for Iran to some day adopt a new, Western-style constitution guaranteeing religious freedom, a secular state, and sovereignty vested firmly in the people, rather than God.
But a considerable amount of anecdotal evidence (we don’t have anything better) suggests this is not necessarily the agenda of the protesters. Many of them, including opposition candidate Mir Hossein Mousavi, say they want Iran to remain an Islamic Republic. They look at the radical regime change that occurred in next door Iraq and don’t want that for themselves. What they seem to wish for is that the democratic features of the constitution be better respected, and that the executive authorities, including the Guardian Council, and the military and paramilitary organizations, stop manipulating elections and respect the law.
Iran could evolve towards a genuine rule-of-law democracy within the broad parameters of the 1979 constitution. It would be necessary to abolish Article 110, which gives the Guardian Council control over the armed forces and the media, and to shift its function to something more like a supreme court that could pass judgment on the consistency of legislation with Shariah. In time, the Council might be subject to some form of democratic control, like the U.S. Supreme Court, even if its members needed religious credentials.
Eliminating religion altogether from the Iranian Constitution is more problematic. The rule of law prevails not because of its formal and procedural qualities, but because it reflects broadly held social norms. If future Iranian rulers are ever to respect the rule of law as traditional Muslim rulers once did, it will have to be a law that comes from the hearts of the Iranian people. Perhaps that will one day be a completely secular law. That is unlikely to be the case today.
Unfortunately, Iranians may never get to make the choice for themselves. The clerical-military clique currently exercising power is likely to drag Iran into conflict with other countries in the region. This could easily consolidate its legitimacy and power. Let us hope that the country’s internal forces push for an evolution of the political system towards genuine rule of law and democracy first.
Mr. Fukuyama, professor of international political economy at the Johns Hopkins School of Advanced International Studies, is author of “America at the Crossroads: Democracy, Power, and the Neoconservative Legacy” (Yale, 2006).
Islamic political movements have been one form of revolt against arbitrary government.
WSJ, Jul 28, 2009
When Columbia University President Lee Bollinger introduced Iranian President Mahmoud Ahmadinejad at his school in September 2007, he denounced him as a “petty tyrant.”
Ahmadinejad is many bad things, including a Holocaust denier and a strong proponent of a nuclear Iran. But as recent events have underlined, Iran is not quite a tyranny, petty or grand, and the office Ahmadinejad occupies does not give him final say in Iranian affairs. That role is more truly occupied by Ayatollah Ali Khamenei, head of the Council of Guardians and Iran’s supreme leader.
A real tyranny would never permit elections in the first place—North Korea never does—nor would it allow demonstrations contesting the election results to spiral out of control. Yet Iran is no liberal democracy. So what kind of beast is it? And in what ways should we want its regime to evolve?
Political scientists categorize the Islamic Republic of Iran as an “electoral authoritarian” regime of a new sort. They put it in the same basket as Hugo Chávez’s Venezuela or Vladimir Putin’s Russia. By this view, Iran is fundamentally an authoritarian regime run by a small circle of clerics and military officials who use elections to legitimate themselves.
Others think of Iran as a medieval theocracy. Its 1979 constitution vests sovereignty not in the people, but in God, and establishes Islam and the Quran as the supreme sources of law.
The Iranian Constitution is a curious hybrid of authoritarian, theocratic and democratic elements. Articles One and Two do vest sovereignty in God, but Article Six mandates popular elections for the presidency and the Majlis, or parliament. Articles 19-42 are a bill of rights, guaranteeing, among other things, freedom of expression, public gatherings and marches, women’s equality, protection of ethnic minorities, due process and private property, as well as some “second generation” social rights like social security and health care.
The truly problematic part of the constitution is Section Eight (Articles 107-112) on the Guardian Council and the “Leader.” All the democratic procedures and rights in the earlier sections of the constitution are qualified by certain powers reserved to a council of senior clerics.
These powers, specified in Article 110, include control over the armed forces, the ability to declare war, and appointment powers over the judiciary, heads of media, army and the Islamic Revolutionary Guard Corps. Another article lays out conditions under which the Supreme Leader can be removed by the Guardian Council. But that procedure is hardly democratic or transparent.
One does not have to go back to the Middle Ages to find historical precedents for this type of constitution. The clearest parallel would be the German Constitution adopted after the country was unified in the 1870s. Pre-World War I Germany had an elected parliament, or Reichstag, but reserved important powers for an unelected Kaiser, particularly in foreign policy and defense. This constitution got Germany into big trouble. The unelected part of the leadership controlled the armed forces. Eventually, though, it came to be controlled by the armed forces. This seems to be what’s unfolding in Iran today.
Compared to Section Eight, the references in the Iranian Constitution to God and religion as the sources of law are much less problematic. They could, under the right circumstances, be the basis for Iran’s eventual evolution into a moderate, law-governed country.
The rule of law was originally rooted in religion in all societies where it came to prevail, including the West. The great economist Friedrich Hayek noted that law should be prior to legislation. That is, the law should reflect a broad social consensus on the rules of justice. In Europe, it was the church that originally defined the law and acted as its custodian. European monarchs respected the rule of law because it was written by an authority higher and more legitimate than themselves.
Something similar happened in the pre-modern Middle East. There was a functional separation of church and state. The ulama were legal scholars and custodians of Shariah law while the sultans exercised political authority. The sultans conceded they were not the ultimate source of law but had to live within rules established by Muslim case law. There was no democracy, but there was something resembling a rule of law.
This traditional, religiously based rule of law was destroyed in the Middle East’s transition to modernity. Replacing it, particularly in the Arab world, was untrammeled executive authority: Presidents and other dictators accepted no constraints, either legislative or judicial, on their power.
The legal scholar Noah Feldman has argued that the widespread demand for a return to Shariah in many Muslim countries does not necessarily reflect a desire to impose harsh, Taliban-style punishments and oppress women. Rather, it reflects a nostalgia for a dimly remembered historical time when Muslim rulers were not all-powerful autocrats, but respected Islamic rules of justice—Islamic rule of law.
So what kind of future should we wish for Iran, in light of the massive demonstrations? My own preference would be for Iran to some day adopt a new, Western-style constitution guaranteeing religious freedom, a secular state, and sovereignty vested firmly in the people, rather than God.
But a considerable amount of anecdotal evidence (we don’t have anything better) suggests this is not necessarily the agenda of the protesters. Many of them, including opposition candidate Mir Hossein Mousavi, say they want Iran to remain an Islamic Republic. They look at the radical regime change that occurred in next door Iraq and don’t want that for themselves. What they seem to wish for is that the democratic features of the constitution be better respected, and that the executive authorities, including the Guardian Council, and the military and paramilitary organizations, stop manipulating elections and respect the law.
Iran could evolve towards a genuine rule-of-law democracy within the broad parameters of the 1979 constitution. It would be necessary to abolish Article 110, which gives the Guardian Council control over the armed forces and the media, and to shift its function to something more like a supreme court that could pass judgment on the consistency of legislation with Shariah. In time, the Council might be subject to some form of democratic control, like the U.S. Supreme Court, even if its members needed religious credentials.
Eliminating religion altogether from the Iranian Constitution is more problematic. The rule of law prevails not because of its formal and procedural qualities, but because it reflects broadly held social norms. If future Iranian rulers are ever to respect the rule of law as traditional Muslim rulers once did, it will have to be a law that comes from the hearts of the Iranian people. Perhaps that will one day be a completely secular law. That is unlikely to be the case today.
Unfortunately, Iranians may never get to make the choice for themselves. The clerical-military clique currently exercising power is likely to drag Iran into conflict with other countries in the region. This could easily consolidate its legitimacy and power. Let us hope that the country’s internal forces push for an evolution of the political system towards genuine rule of law and democracy first.
Mr. Fukuyama, professor of international political economy at the Johns Hopkins School of Advanced International Studies, is author of “America at the Crossroads: Democracy, Power, and the Neoconservative Legacy” (Yale, 2006).
Sunday, July 26, 2009
Morality and Charlie Rangel’s Taxes
Morality and Charlie Rangel’s Taxes. WSJ Editorial
It’s much easier to raise taxes if you don’t pay them.
WSJ, Jul 27, 2009
Ever notice that those who endorse high taxes and those who actually pay them aren’t the same people? Consider the curious case of Ways and Means Chairman Charlie Rangel, who is leading the charge for a new 5.4-percentage point income tax surcharge and recently called it “the moral thing to do.” About his own tax liability he seems less, well, fervent.
Exhibit A concerns a rental property Mr. Rangel purchased in 1987 at the Punta Cana Yacht Club in the Dominican Republic. The rental income from that property ought to be substantial since it is a luxury beach-front villa and is more often than not rented out. But when the National Legal and Policy Center looked at Mr. Rangel’s House financial disclosure forms in August, it noted that his reported income looked suspiciously low. In 2004 and 2005, he reported no more than $5,000, and in 2006 and 2007 no income at all from the property.
The Congressman initially denied there was any unreported income. But reporters quickly showed that the villa is among the most desirable at Punta Cana and that it rents for $500 a night in the low season, and as much as $1,100 a night in peak season. Last year it was fully booked between December 15 and April 15.
Mr. Rangel soon admitted having failed to report rental income of $75,000 over the years. First he blamed his wife for the oversight because he said she was supposed to be managing the property. Then he blamed the language barrier. “Every time I thought I was getting somewhere, they’d start speaking Spanish,” Mr. Rangel explained.
Mr. Rangel promised last fall to amend his tax returns, pay what is due and correct the information on his annual financial disclosure form. But the deadline for the 2008 filing was May 15 and as of last week he still had not filed. His press spokesman declined to answer questions about anything related to his ethics problems.
Besides not paying those pesky taxes, Mr. Rangel had other reasons for wanting to hide income. As the tenant of four rent-stabilized apartments in Harlem, the Congressman needed to keep his annual reported income below $175,000, lest he be ineligible as a hardship case for rent control. (He also used one of the apartments as an office in violation of rent-control rules, but that’s another story.)
Mr. Rangel said last fall that “I never had any idea that I got any income’’ from the villa. Try using that one the next time the IRS comes after you. Equally interesting is his claim that he didn’t know that the developer of the Dominican Republic villa had converted his $52,000 mortgage to an interest-free loan in 1990. That would seem to violate House rules on gifts, which say Members may only accept loans on “terms that are generally available to the public.” Try getting an interest-free loan from your banker.
The National Legal and Policy Center also says it has confirmed that Mr. Rangel owned a home in Washington from 1971-2000 and during that time claimed a “homestead” exemption that allowed him to save on his District of Columbia property taxes. However, the homestead exemption only applies to a principal residence, and the Washington home could not have qualified as such since Mr. Rangel’s rent-stabilized apartments in New York have the same requirement.
The House Ethics Committee is investigating Mr. Rangel on no fewer than six separate issues, including his failure to report the no-interest loan on his Punta Cana villa and his use of rent-stabilized apartments. It is also investigating his fund raising for the Charles B. Rangel Center for Public Service at City College of New York. New York labor attorney Theodore Kheel, one of the principal owners of the Punta Cana resort, is an important donor to the Rangel Center.
All of this has previously appeared in print in one place or another, and we salute the reporters who did the leg work. We thought we’d summarize it now for readers who are confronted with the prospect of much higher tax bills, and who might like to know how a leading Democrat defines “moral” behavior when the taxes hit close to his homes.
It’s much easier to raise taxes if you don’t pay them.
WSJ, Jul 27, 2009
Ever notice that those who endorse high taxes and those who actually pay them aren’t the same people? Consider the curious case of Ways and Means Chairman Charlie Rangel, who is leading the charge for a new 5.4-percentage point income tax surcharge and recently called it “the moral thing to do.” About his own tax liability he seems less, well, fervent.
Exhibit A concerns a rental property Mr. Rangel purchased in 1987 at the Punta Cana Yacht Club in the Dominican Republic. The rental income from that property ought to be substantial since it is a luxury beach-front villa and is more often than not rented out. But when the National Legal and Policy Center looked at Mr. Rangel’s House financial disclosure forms in August, it noted that his reported income looked suspiciously low. In 2004 and 2005, he reported no more than $5,000, and in 2006 and 2007 no income at all from the property.
The Congressman initially denied there was any unreported income. But reporters quickly showed that the villa is among the most desirable at Punta Cana and that it rents for $500 a night in the low season, and as much as $1,100 a night in peak season. Last year it was fully booked between December 15 and April 15.
Mr. Rangel soon admitted having failed to report rental income of $75,000 over the years. First he blamed his wife for the oversight because he said she was supposed to be managing the property. Then he blamed the language barrier. “Every time I thought I was getting somewhere, they’d start speaking Spanish,” Mr. Rangel explained.
Mr. Rangel promised last fall to amend his tax returns, pay what is due and correct the information on his annual financial disclosure form. But the deadline for the 2008 filing was May 15 and as of last week he still had not filed. His press spokesman declined to answer questions about anything related to his ethics problems.
Besides not paying those pesky taxes, Mr. Rangel had other reasons for wanting to hide income. As the tenant of four rent-stabilized apartments in Harlem, the Congressman needed to keep his annual reported income below $175,000, lest he be ineligible as a hardship case for rent control. (He also used one of the apartments as an office in violation of rent-control rules, but that’s another story.)
Mr. Rangel said last fall that “I never had any idea that I got any income’’ from the villa. Try using that one the next time the IRS comes after you. Equally interesting is his claim that he didn’t know that the developer of the Dominican Republic villa had converted his $52,000 mortgage to an interest-free loan in 1990. That would seem to violate House rules on gifts, which say Members may only accept loans on “terms that are generally available to the public.” Try getting an interest-free loan from your banker.
The National Legal and Policy Center also says it has confirmed that Mr. Rangel owned a home in Washington from 1971-2000 and during that time claimed a “homestead” exemption that allowed him to save on his District of Columbia property taxes. However, the homestead exemption only applies to a principal residence, and the Washington home could not have qualified as such since Mr. Rangel’s rent-stabilized apartments in New York have the same requirement.
The House Ethics Committee is investigating Mr. Rangel on no fewer than six separate issues, including his failure to report the no-interest loan on his Punta Cana villa and his use of rent-stabilized apartments. It is also investigating his fund raising for the Charles B. Rangel Center for Public Service at City College of New York. New York labor attorney Theodore Kheel, one of the principal owners of the Punta Cana resort, is an important donor to the Rangel Center.
All of this has previously appeared in print in one place or another, and we salute the reporters who did the leg work. We thought we’d summarize it now for readers who are confronted with the prospect of much higher tax bills, and who might like to know how a leading Democrat defines “moral” behavior when the taxes hit close to his homes.
Libertarian: Did Deregulation Cause the Financial Crisis?
Did Deregulation Cause the Financial Crisis?, by Mark A. Calabria
Cato Policy Report, July/August 2009
The growing narrative in Washington is that a decades-long unraveling of the regulatory system allowed and encouraged Wall Street to excess, resulting in the current financial crisis. Left unchallenged, this narrative will likely form the basis of any financial reform measures. Having such measures built on a flawed foundation will only ensure that future financial crises are more frequent and severe.
Rolling Back the Regulatory State?
Although it is the quality and substance of regulation that has to be the center of any debate regarding regulation's role in the financial crisis, a direct measure of regulation is the budgetary dollars and staffing levels of the financial regulatory agencies. In a Mercatus Center study, Veronique de Rugy and Melinda Warren found that outlays for banking and financial regulation increased from only $190 million in 1960 to $1.9 billion in 2000 and to more than $2.3 billion in 2008 (in constant 2000 dollars).
Focusing specifically on the Securities and Exchange Commission—the agency at the center of Wall Street regulation—budget outlays under President George W. Bush increased in real terms by more than 76 percent, from $357 million to $629 million (2000 dollars).
However, budget dollars alone do not always translate into more cops on the beat —all those extra dollars could have been spent on the SEC's extravagant new headquarters building. In fact most of the SEC's expanded budget went into additional staff, from 2,841 full-time equivalent employees in 2000 to 3,568 in 2008, an increase of 26 percent. The SEC's 2008 staffing levels are more than eight times that of the Consumer Product Safety Commission, for example, which reviews thousands of consumer products annually.
Comparable figures for bank regulatory agencies show a slight decline from 13,310 in 2000 to 12,190 in 2008, although this is driven completely by reductions in staff at the regional Federal Reserve Banks, resulting from changes in their check-clearing activities (mostly now done electronically) and at the FDIC, as its resolution staff dealing with the bank failures of the 1990s was wound down. Other banking regulatory agencies, such as the Comptroller of the Currency —which oversees national banks like Citibank—saw significant increases in staffing levels between 2000 and 2008.
Another measure of regulation is the absolute number of rules issued by a department or agency. The primary financial regulator, the Department of the Treasury, which includes both the Office of the Comptroller of the Currency and the Office of Thrift Supervision, saw its annual average of new rules proposed increase from around 400 in the 1990s to more than 500 in the 2000s. During the 1990s and 2000s, the SEC issued about 74 rules per year.
Setting aside whether bank and securities regulators were doing their jobs aggressively or not, one thing is clear—recent years have witnessed an increasing number of regulators on the beat and an increasing number of regulations.
Gramm-Leach-Bliley
Central to any claim that deregulation caused the crisis is the Gramm-Leach-Bliley Act. The core of Gramm-Leach-Bliley is a repeal of the New Deal-era Glass-Steagall Act's prohibition on the mixing of investment and commercial banking. Investment banks assist corporations and governments by underwriting, marketing, and advising on debt and equity issued. They often also have large trading operations where they buy and sell financial securities both on behalf of their clients and on their own account. Commercial banks accept insured deposits and make loans to households and businesses. The deregulation critique posits that once Congress cleared the way for investment and commercial banks to merge, the investment banks were given the incentive to take greater risks, while reducing the amount of equity they are required to hold against any given dollar of assets.
But there are questions about how much impact the law had on the financial markets and whether it had any influence on the current financial crisis. Even before its passage, investment banks were already allowed to trade and hold the very financial assets at the center of the financial crisis: mortgage-backed securities, derivatives, credit-default swaps, collateralized debt obligations. The shift of investment banks into holding substantial trading portfolios resulted from their increased capital base as a result of most investment banks becoming publicly held companies, a structure allowed under Glass-Steagall.
Second, very few financial holding companies decided to combine investment and commercial banking activities. The two investment banks whose failures have come to symbolize the financial crisis, Bear Stearns and Lehman Brothers, were not affiliated with any depository institutions. Rather, had either Bear or Lehman possessed a large source of insured deposits, they would likely have survived their short-term liquidity problems. As former president Bill Clinton told BusinessWeek in 2008, "I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill."
Gramm-Leach-Bliley has been presented by both its supporters and detractors as a revolution in financial services. However, the act itself had little impact on the trading activities of investment banks. The off-balancesheet activities of Bear and Lehman were allowable prior to the act's passage. Nor did these trading activities undermine any affiliated commercial banks, as Bear and Lehman did not have affiliated commercial banks. Additionally, those large banks that did combine investment and commercial banking have survived the crisis in better shape than those that did not.
Did the SEC Deregulate Investment Banks?
One of the claimed "deregulations" resulting from the mixing of investment and commercial banking was the increase in leverage by investment banks allowed by the SEC. After many investment banks became financial holding companies, European regulators moved to subject European branches of these companies to the capital regulations dictated by Basel II, a set of recommendations for bank capital regulation developed by the Basel Committee on Banking Supervision, an organization of international bank regulators. In order to protect its turf from European regulators, the SEC implemented a similar plan in 2004.
However the SEC's reduction in investment bank capital ratios was not simply a shift in existing rules. The SEC saw the rule as a movement beyond its traditional investor protection mandates to one overseeing the entire operations of an investment bank. The voluntary alternative use of Basel capital rules was viewed as only a small part of a greatly increased system of regulation, as expressed by SEC spokesman John Heine: "The Commission's 2004 rule strengthened oversight of the securities markets, because prior to their adoption there was no formal regulatory oversight, no liquidity requirements, and no capital requirements for investment bank holding companies."
The enhanced requirements gave the SEC broader responsibilities in terms of the prudential supervision of investment banks and their holding companies.
Derivatives as Financial Mischief
After Gramm-Leach-Bliley, the most common claim made in support of blaming deregulation is that both Congress and regulators ignored various warnings about the risks of derivatives, particularly credit default swaps, and chose not to impose needed regulation. In 2003, Warren Buffett called derivatives "weapons of mass financial destruction," and warned that the concentration of derivatives risk in a few dealers posed "serious systemic problems." Buffett was not alone in calling for increased derivatives regulation.
But would additional derivatives regulation have prevented the financial crisis?
During her chairmanship of the Commodity Futures Trading Commission Brooksley Born published a concept paper outlining how the CFTC should approach the regulation of derivatives. Her suggestions were roundly attacked both by members of the Clinton administration, including Robert Rubin and Larry Summers, and by the leading members of the CFTC oversight committees on Capitol Hill.
Foremost among Born's suggestion was the requirement that derivatives be traded over a regulated exchange by a central counterparty, a proposal currently being pushed by Treasury secretary Timothy Geithner. Currently most derivatives are traded as individual contracts between two parties, each being a counterparty to the other, with each party bearing the risk that the other might be unable to fulfill its obligations under the contract. A central counterparty would stand between the two sides of the derivatives contract, guaranteeing the performance of each side to the other. Proponents of this approach claim a central counterparty would have prevented the concentration of derivatives risk into a few entities, such as AIG, and would have prevented the systemic risk arising from AIG linkages with its various counterparties.
The most basic flaw in having a centralized counterparty is that it does not reduce risk at all, it simply aggregates it. It also increases the odds of a taxpayer bailout, as the government is more likely to step in and back a centralized clearinghouse than to rescue private firms. In the case of AIG, Federal Reserve vice chairman Donald Kohn told the Senate Banking Committee that the risk to AIG's derivatives counterparties had nothing to do with the Fed's decision to bail out AIG and that all its counterparties could have withstood a default by AIG. The purpose of a centralized clearinghouse is to allow users of derivatives to separate the risk of the derivative contract from the default risk of the issuer of that contract in instances where the issuer is unable to meet its obligations. Such an arrangement would actually increase the demand and usage of derivatives.
Proponents of increased regulation of derivatives also overlook the fact that much of the use of derivatives by banks is the direct result of regulation, rather than the lack of it. To the extent that derivatives such as credit default swaps reduce the risk of loans or securities held by banks, Basel capital rules allow banks to reduce the capital held against such loans.
One of Born's proposals was to impose capital requirements on the users of derivatives. That ignores the reality that counterparties already require the posting of collateral when using derivatives. In fact, it was not the failure of its derivatives position that led to AIG's collapse but an increase in calls for greater collateral by its counterparties.
Derivatives do not create losses, they simply transfer them; for every loss on a derivative position there is a corresponding gain on the other side; losses and gains always sum to zero. The value of derivatives is that they allow the separation of various risks and the transfer of those risks to the parties best able to bear them. Transferring that risk to a centralized counterparty with capital requirements would have likely been no more effective than was aggregating the bulk of risk in our mortgages markets onto the balance sheets of Fannie Mae and Freddie Mac. Regulation will never be a substitute for one of the basic tenets of finance: diversification.
Credit Rating Agencies
When supposed examples of deregulation cannot be found, advocates for increased regulation often fall back on arguing that a regulator's failure to impose new regulations is proof of the harm of deregulation. The status of credit rating agencies in our financial markets is often presented as an example of such.
Credit rating agencies can potentially serve as an independent monitor of corporate behavior. That they have often failed in that role is generally agreed upon; why they've failed is the real debate. Advocates of increased regulation claim that since the rating agencies are paid by the issuers of securities, their real interest is in making their clients happy by providing the highest ratings possible. In addition they claim that the rating agencies have used their "free speech" protections to avoid any legal liability or regulatory scrutiny for the content of their ratings.
The modern regulation of credit rating agencies began with the SEC's revision of its capital rules for broker-dealers in 1973. Under the SEC's capital rules, a broker-dealer must write down the value of risky or speculative securities on its balance sheet to reflect the level of risk. In defining the risk of held securities, the SEC tied the measure of risk to the credit rating of the held security, with unrated securities considered the highest risk. Bank regulators later extended this practice of outsourcing their supervision of commercial bank risk to credit rating agencies under the implementation of the Basel capital standards.
The SEC, in designing its capital rules, was concerned that, in allowing outside credit rating agencies to define risk, some rating agencies would be tempted to simply sell favorable ratings, regardless of the true risk. To solve this perceived risk, the SEC decided that only Nationally Recognized Statistical Rating Organizations would have their ratings recognized by the SEC and used for complying with regulatory capital requirements. In defining the qualifications of an NRSRO, the SEC deliberately excluded new entrants and grandfathered existing firms, such as Moody's and Standard and Poor's.
In trying to address one imagined problem, a supposed race to the bottom, the SEC succeeded in creating a real problem, an entrenched oligopoly in the credit ratings industry. One result of this oligopoly is that beginning in the 1970s, rating agencies moved away from their historical practice of marketing and selling ratings largely to investors, toward selling the ratings to issuers of debt. Now that they had a captive clientele, debt issuers, the rating agencies quickly adapted their business model to this new reality.
The damage would have been large enough had the SEC stopped there. During the 1980s and 1990s, the SEC further entrenched the market control of the recognized rating agencies. For instance, in the 1980s the SEC limited money market funds to holding securities that were investment grade, as defined by the NRSROs. That requirement was later extended to money market fund holdings of commercial paper. Bank regulators and state insurance commissioners followed suit in basing their safety and soundness regulations on the use of NRSRO-approved securities.
The conflict of interest between raters and issuers is not the result of the absence of regulation, it is the direct and predictable result of regulation. The solution to this problem is to remove the NRSROs' monopoly privileges and make them compete in the marketplace.
Predatory Lending or Predatory Borrowing?
As much of the losses in the financial crisis have been concentrated in the mortgage market, and in particularly subprime mortgagebacked securities, proponents of increased regulation have argued that the financial crisis could have been avoided had federal regulators eliminated predatory mortgage practices. Such a claim ignores that the vast majority of defaulted mortgages were either held by speculators or driven by the same reasons that always drive mortgage default: job loss, health care expenses, and divorce.
The mortgage characteristic most closely associated with default is the amount of borrower equity. Rather than helping to strengthen underwriting standards, the federal government has led the charge in reducing them. Over the years, the Federal Housing Administration reduced its down-payment requirements, from requiring 20 percent in the 1930s to the point today that one can get an FHA loan with only 3.5 percent down.
The predatory lending argument claims that borrowers were lured into unsustainable loans, often due to low teaser rates, which then defaulted en masse, causing declines in home values, which led to an overall decline in the housing market. For this argument to hold, the increase in the rate of foreclosure would have to precede the decline in home prices. In fact, the opposite occurred, with the national rate of home price appreciation peaking in the second quarter of 2005 and the absolute price level peaking in the second quarter of 2007; the dramatic increase in new foreclosures was not reached until the second quarter of 2007. While some feedback between prices and foreclosures is to be expected, the evidence supports the view that initial declines in price appreciation and later absolute declines in price led to increases in foreclosures rather than unsustainable loans leading to price declines.
Normally one would expect the ultimate investors in mortgage-related securities to impose market discipline on lenders, ensuring that losses stayed within expectations. Market discipline began to breakdown in 2005 as Fannie Mae and Freddie Mac became the largest single purchasers of subprime mortgage-backed securities. At the height of the market, Fannie and Freddie purchased over 40 percent of subprime mortgage-backed securities. These were also the same vintages that performed the worst; subprime loans originated before 2005 have performed largely within expectations. Fannie and Freddie entering this market in strength greatly increased the demand for subprime securities, and as they would ultimately be able to pass their losses onto the taxpayer, they had little incentive to effectively monitor the quality of underwriting.
Conclusion
The past few decades have witnessed a significant expansion in the number of financial regulators and regulations, contrary to the widely held belief that our financial market regulations were "rolled back." While many regulators may have been shortsighted and over-confident in their own ability to spare our financial markets from collapse, this failing is one of regulation, not deregulation. When one scratches below the surface of the "deregulation" argument, it becomes apparent that the usual suspects, like the Gramm-Leach-Bliley Act, did not cause the current crisis and that the supposed refusal of regulators to deal with derivatives and "predatory" mortgages would have had little impact on the actual course of events, as these issues were not central to the crisis. To explain the financial crisis, and avoid the next one, we should look at the failure of regulation, not at a mythical deregulation.
Mark A. Calabria is Director of Financial Regulation Studies at the Cato Institute.
Cato Policy Report, July/August 2009
The growing narrative in Washington is that a decades-long unraveling of the regulatory system allowed and encouraged Wall Street to excess, resulting in the current financial crisis. Left unchallenged, this narrative will likely form the basis of any financial reform measures. Having such measures built on a flawed foundation will only ensure that future financial crises are more frequent and severe.
Rolling Back the Regulatory State?
Although it is the quality and substance of regulation that has to be the center of any debate regarding regulation's role in the financial crisis, a direct measure of regulation is the budgetary dollars and staffing levels of the financial regulatory agencies. In a Mercatus Center study, Veronique de Rugy and Melinda Warren found that outlays for banking and financial regulation increased from only $190 million in 1960 to $1.9 billion in 2000 and to more than $2.3 billion in 2008 (in constant 2000 dollars).
Focusing specifically on the Securities and Exchange Commission—the agency at the center of Wall Street regulation—budget outlays under President George W. Bush increased in real terms by more than 76 percent, from $357 million to $629 million (2000 dollars).
However, budget dollars alone do not always translate into more cops on the beat —all those extra dollars could have been spent on the SEC's extravagant new headquarters building. In fact most of the SEC's expanded budget went into additional staff, from 2,841 full-time equivalent employees in 2000 to 3,568 in 2008, an increase of 26 percent. The SEC's 2008 staffing levels are more than eight times that of the Consumer Product Safety Commission, for example, which reviews thousands of consumer products annually.
Comparable figures for bank regulatory agencies show a slight decline from 13,310 in 2000 to 12,190 in 2008, although this is driven completely by reductions in staff at the regional Federal Reserve Banks, resulting from changes in their check-clearing activities (mostly now done electronically) and at the FDIC, as its resolution staff dealing with the bank failures of the 1990s was wound down. Other banking regulatory agencies, such as the Comptroller of the Currency —which oversees national banks like Citibank—saw significant increases in staffing levels between 2000 and 2008.
Another measure of regulation is the absolute number of rules issued by a department or agency. The primary financial regulator, the Department of the Treasury, which includes both the Office of the Comptroller of the Currency and the Office of Thrift Supervision, saw its annual average of new rules proposed increase from around 400 in the 1990s to more than 500 in the 2000s. During the 1990s and 2000s, the SEC issued about 74 rules per year.
Setting aside whether bank and securities regulators were doing their jobs aggressively or not, one thing is clear—recent years have witnessed an increasing number of regulators on the beat and an increasing number of regulations.
Gramm-Leach-Bliley
Central to any claim that deregulation caused the crisis is the Gramm-Leach-Bliley Act. The core of Gramm-Leach-Bliley is a repeal of the New Deal-era Glass-Steagall Act's prohibition on the mixing of investment and commercial banking. Investment banks assist corporations and governments by underwriting, marketing, and advising on debt and equity issued. They often also have large trading operations where they buy and sell financial securities both on behalf of their clients and on their own account. Commercial banks accept insured deposits and make loans to households and businesses. The deregulation critique posits that once Congress cleared the way for investment and commercial banks to merge, the investment banks were given the incentive to take greater risks, while reducing the amount of equity they are required to hold against any given dollar of assets.
But there are questions about how much impact the law had on the financial markets and whether it had any influence on the current financial crisis. Even before its passage, investment banks were already allowed to trade and hold the very financial assets at the center of the financial crisis: mortgage-backed securities, derivatives, credit-default swaps, collateralized debt obligations. The shift of investment banks into holding substantial trading portfolios resulted from their increased capital base as a result of most investment banks becoming publicly held companies, a structure allowed under Glass-Steagall.
Second, very few financial holding companies decided to combine investment and commercial banking activities. The two investment banks whose failures have come to symbolize the financial crisis, Bear Stearns and Lehman Brothers, were not affiliated with any depository institutions. Rather, had either Bear or Lehman possessed a large source of insured deposits, they would likely have survived their short-term liquidity problems. As former president Bill Clinton told BusinessWeek in 2008, "I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill."
Gramm-Leach-Bliley has been presented by both its supporters and detractors as a revolution in financial services. However, the act itself had little impact on the trading activities of investment banks. The off-balancesheet activities of Bear and Lehman were allowable prior to the act's passage. Nor did these trading activities undermine any affiliated commercial banks, as Bear and Lehman did not have affiliated commercial banks. Additionally, those large banks that did combine investment and commercial banking have survived the crisis in better shape than those that did not.
Did the SEC Deregulate Investment Banks?
One of the claimed "deregulations" resulting from the mixing of investment and commercial banking was the increase in leverage by investment banks allowed by the SEC. After many investment banks became financial holding companies, European regulators moved to subject European branches of these companies to the capital regulations dictated by Basel II, a set of recommendations for bank capital regulation developed by the Basel Committee on Banking Supervision, an organization of international bank regulators. In order to protect its turf from European regulators, the SEC implemented a similar plan in 2004.
However the SEC's reduction in investment bank capital ratios was not simply a shift in existing rules. The SEC saw the rule as a movement beyond its traditional investor protection mandates to one overseeing the entire operations of an investment bank. The voluntary alternative use of Basel capital rules was viewed as only a small part of a greatly increased system of regulation, as expressed by SEC spokesman John Heine: "The Commission's 2004 rule strengthened oversight of the securities markets, because prior to their adoption there was no formal regulatory oversight, no liquidity requirements, and no capital requirements for investment bank holding companies."
The enhanced requirements gave the SEC broader responsibilities in terms of the prudential supervision of investment banks and their holding companies.
Derivatives as Financial Mischief
After Gramm-Leach-Bliley, the most common claim made in support of blaming deregulation is that both Congress and regulators ignored various warnings about the risks of derivatives, particularly credit default swaps, and chose not to impose needed regulation. In 2003, Warren Buffett called derivatives "weapons of mass financial destruction," and warned that the concentration of derivatives risk in a few dealers posed "serious systemic problems." Buffett was not alone in calling for increased derivatives regulation.
But would additional derivatives regulation have prevented the financial crisis?
During her chairmanship of the Commodity Futures Trading Commission Brooksley Born published a concept paper outlining how the CFTC should approach the regulation of derivatives. Her suggestions were roundly attacked both by members of the Clinton administration, including Robert Rubin and Larry Summers, and by the leading members of the CFTC oversight committees on Capitol Hill.
Foremost among Born's suggestion was the requirement that derivatives be traded over a regulated exchange by a central counterparty, a proposal currently being pushed by Treasury secretary Timothy Geithner. Currently most derivatives are traded as individual contracts between two parties, each being a counterparty to the other, with each party bearing the risk that the other might be unable to fulfill its obligations under the contract. A central counterparty would stand between the two sides of the derivatives contract, guaranteeing the performance of each side to the other. Proponents of this approach claim a central counterparty would have prevented the concentration of derivatives risk into a few entities, such as AIG, and would have prevented the systemic risk arising from AIG linkages with its various counterparties.
The most basic flaw in having a centralized counterparty is that it does not reduce risk at all, it simply aggregates it. It also increases the odds of a taxpayer bailout, as the government is more likely to step in and back a centralized clearinghouse than to rescue private firms. In the case of AIG, Federal Reserve vice chairman Donald Kohn told the Senate Banking Committee that the risk to AIG's derivatives counterparties had nothing to do with the Fed's decision to bail out AIG and that all its counterparties could have withstood a default by AIG. The purpose of a centralized clearinghouse is to allow users of derivatives to separate the risk of the derivative contract from the default risk of the issuer of that contract in instances where the issuer is unable to meet its obligations. Such an arrangement would actually increase the demand and usage of derivatives.
Proponents of increased regulation of derivatives also overlook the fact that much of the use of derivatives by banks is the direct result of regulation, rather than the lack of it. To the extent that derivatives such as credit default swaps reduce the risk of loans or securities held by banks, Basel capital rules allow banks to reduce the capital held against such loans.
One of Born's proposals was to impose capital requirements on the users of derivatives. That ignores the reality that counterparties already require the posting of collateral when using derivatives. In fact, it was not the failure of its derivatives position that led to AIG's collapse but an increase in calls for greater collateral by its counterparties.
Derivatives do not create losses, they simply transfer them; for every loss on a derivative position there is a corresponding gain on the other side; losses and gains always sum to zero. The value of derivatives is that they allow the separation of various risks and the transfer of those risks to the parties best able to bear them. Transferring that risk to a centralized counterparty with capital requirements would have likely been no more effective than was aggregating the bulk of risk in our mortgages markets onto the balance sheets of Fannie Mae and Freddie Mac. Regulation will never be a substitute for one of the basic tenets of finance: diversification.
Credit Rating Agencies
When supposed examples of deregulation cannot be found, advocates for increased regulation often fall back on arguing that a regulator's failure to impose new regulations is proof of the harm of deregulation. The status of credit rating agencies in our financial markets is often presented as an example of such.
Credit rating agencies can potentially serve as an independent monitor of corporate behavior. That they have often failed in that role is generally agreed upon; why they've failed is the real debate. Advocates of increased regulation claim that since the rating agencies are paid by the issuers of securities, their real interest is in making their clients happy by providing the highest ratings possible. In addition they claim that the rating agencies have used their "free speech" protections to avoid any legal liability or regulatory scrutiny for the content of their ratings.
The modern regulation of credit rating agencies began with the SEC's revision of its capital rules for broker-dealers in 1973. Under the SEC's capital rules, a broker-dealer must write down the value of risky or speculative securities on its balance sheet to reflect the level of risk. In defining the risk of held securities, the SEC tied the measure of risk to the credit rating of the held security, with unrated securities considered the highest risk. Bank regulators later extended this practice of outsourcing their supervision of commercial bank risk to credit rating agencies under the implementation of the Basel capital standards.
The SEC, in designing its capital rules, was concerned that, in allowing outside credit rating agencies to define risk, some rating agencies would be tempted to simply sell favorable ratings, regardless of the true risk. To solve this perceived risk, the SEC decided that only Nationally Recognized Statistical Rating Organizations would have their ratings recognized by the SEC and used for complying with regulatory capital requirements. In defining the qualifications of an NRSRO, the SEC deliberately excluded new entrants and grandfathered existing firms, such as Moody's and Standard and Poor's.
In trying to address one imagined problem, a supposed race to the bottom, the SEC succeeded in creating a real problem, an entrenched oligopoly in the credit ratings industry. One result of this oligopoly is that beginning in the 1970s, rating agencies moved away from their historical practice of marketing and selling ratings largely to investors, toward selling the ratings to issuers of debt. Now that they had a captive clientele, debt issuers, the rating agencies quickly adapted their business model to this new reality.
The damage would have been large enough had the SEC stopped there. During the 1980s and 1990s, the SEC further entrenched the market control of the recognized rating agencies. For instance, in the 1980s the SEC limited money market funds to holding securities that were investment grade, as defined by the NRSROs. That requirement was later extended to money market fund holdings of commercial paper. Bank regulators and state insurance commissioners followed suit in basing their safety and soundness regulations on the use of NRSRO-approved securities.
The conflict of interest between raters and issuers is not the result of the absence of regulation, it is the direct and predictable result of regulation. The solution to this problem is to remove the NRSROs' monopoly privileges and make them compete in the marketplace.
Predatory Lending or Predatory Borrowing?
As much of the losses in the financial crisis have been concentrated in the mortgage market, and in particularly subprime mortgagebacked securities, proponents of increased regulation have argued that the financial crisis could have been avoided had federal regulators eliminated predatory mortgage practices. Such a claim ignores that the vast majority of defaulted mortgages were either held by speculators or driven by the same reasons that always drive mortgage default: job loss, health care expenses, and divorce.
The mortgage characteristic most closely associated with default is the amount of borrower equity. Rather than helping to strengthen underwriting standards, the federal government has led the charge in reducing them. Over the years, the Federal Housing Administration reduced its down-payment requirements, from requiring 20 percent in the 1930s to the point today that one can get an FHA loan with only 3.5 percent down.
The predatory lending argument claims that borrowers were lured into unsustainable loans, often due to low teaser rates, which then defaulted en masse, causing declines in home values, which led to an overall decline in the housing market. For this argument to hold, the increase in the rate of foreclosure would have to precede the decline in home prices. In fact, the opposite occurred, with the national rate of home price appreciation peaking in the second quarter of 2005 and the absolute price level peaking in the second quarter of 2007; the dramatic increase in new foreclosures was not reached until the second quarter of 2007. While some feedback between prices and foreclosures is to be expected, the evidence supports the view that initial declines in price appreciation and later absolute declines in price led to increases in foreclosures rather than unsustainable loans leading to price declines.
Normally one would expect the ultimate investors in mortgage-related securities to impose market discipline on lenders, ensuring that losses stayed within expectations. Market discipline began to breakdown in 2005 as Fannie Mae and Freddie Mac became the largest single purchasers of subprime mortgage-backed securities. At the height of the market, Fannie and Freddie purchased over 40 percent of subprime mortgage-backed securities. These were also the same vintages that performed the worst; subprime loans originated before 2005 have performed largely within expectations. Fannie and Freddie entering this market in strength greatly increased the demand for subprime securities, and as they would ultimately be able to pass their losses onto the taxpayer, they had little incentive to effectively monitor the quality of underwriting.
Conclusion
The past few decades have witnessed a significant expansion in the number of financial regulators and regulations, contrary to the widely held belief that our financial market regulations were "rolled back." While many regulators may have been shortsighted and over-confident in their own ability to spare our financial markets from collapse, this failing is one of regulation, not deregulation. When one scratches below the surface of the "deregulation" argument, it becomes apparent that the usual suspects, like the Gramm-Leach-Bliley Act, did not cause the current crisis and that the supposed refusal of regulators to deal with derivatives and "predatory" mortgages would have had little impact on the actual course of events, as these issues were not central to the crisis. To explain the financial crisis, and avoid the next one, we should look at the failure of regulation, not at a mythical deregulation.
Mark A. Calabria is Director of Financial Regulation Studies at the Cato Institute.
Clinton and Geithner: A New Strategic and Economic Dialogue with China
A New Strategic and Economic Dialogue with China. By HILLARY CLINTON AND TIMOTHY GEITHNER
Few global problems can be solved by either country alone.
WSJ, Jul 27, 2009
When the United States and China established diplomatic relations 30 years ago, it was far from clear what the future would hold. In 1979, China was still emerging from the ruins of the Cultural Revolution and its gross domestic product stood at a mere $176 billion, a fraction of the U.S. total of $2.5 trillion. Even travel and communication between our two great nations presented a challenge: a few unreliable telephone lines and no direct flights connected us. Today China’s GDP tops four trillion dollars, thousands of emails and cellphone calls cross the Pacific Ocean daily, and by next year there will be 249 direct flights per week between the U.S. and China.
To keep up with these changes that affect our citizens and our planet, we need to update our official ties with Beijing. During their first meeting in April, President Barack Obama and President Hu Jintao announced a new dialogue as part of the administration’s efforts to build a positive, cooperative and comprehensive relationship with Beijing. So this week we will meet together in Washington with two of the highest-ranking officials in the Chinese government, Vice Premier Wang Qishan and State Councilor Dai Bingguo, to develop a new framework for U.S.-China relations. Many of our cabinet colleagues will join us in this “Strategic and Economic Dialogue,” along with an equally large number of the most senior leaders of the Chinese government. Why are we doing this with China, and what does it mean for Americans?
Simply put, few global problems can be solved by the U.S. or China alone. And few can be solved without the U.S. and China together. The strength of the global economy, the health of the global environment, the stability of fragile states and the solution to nonproliferation challenges turn in large measure on cooperation between the U.S. and China. While our two-day dialogue will break new ground in combining discussions of both economic and foreign policies, we will be building on the efforts of the past seven U.S. administrations and on the existing tapestry of government-to-government exchanges and cooperation in several dozen different areas.
At the top of the list will be assuring recovery from the most serious global economic crisis in generations and assuring balanced and sustained global growth once recovery has taken hold. When the current crisis struck, the U.S. and China acted quickly and aggressively to support economic activity and to create and save jobs. The success of the world’s major economies in blunting the force of the global recession and setting the stage for recovery is due in substantial measure to the bold steps our two nations have taken.
As we move toward recovery, we must take additional steps to lay the foundation for balanced and sustainable growth in the years to come. That will involve Americans rebuilding our savings, strengthening our financial system and investing in energy, education and health care to make our nation more productive and prosperous. For China it involves continuing financial sector reform and development. It also involves spurring domestic demand growth and making the Chinese economy less reliant on exports. Raising personal incomes and strengthening the social safety net to address the reasons why Chinese feel compelled to save so much would provide a powerful boost to Chinese domestic demand and global growth.
Both nations must avoid the temptation to close off our respective markets to trade and investment. Both must work hard to create new opportunities for our workers and our firms to compete equally, so that the people of each country see the benefit from the rapidly expanding U.S.-China economic relationship.
A second priority is to make progress on the interconnected issues of climate change, energy and the environment. Our two nations need to establish a true partnership to put both countries on a low-carbon pathway, simultaneously reducing greenhouse gas emissions while promoting economic recovery and sustainable development. The cross-cutting nature of our meetings offers a unique opportunity for key American officials to meet with their Chinese counterparts to work on the global issue of climate change. In the run-up to the international climate change conference in Copenhagen in December, it is clear that any agreement must include meaningful participation by large economies like China.
The third broad area for discussion is finding complementary approaches to security and development challenges in the region and across the globe. From the provocative actions of North Korea, to stability in Afghanistan and Pakistan, to the economic possibilities in Africa, the U.S. and China must work together to reach solutions to these urgent challenges confronting not only our two nations, but many others across the globe.
While this first round of the U.S.-China Strategic and Economic Dialogue offers a unique opportunity to work with Chinese officials, we will not always agree on solutions and we must be frank about our differences, including establishing the right venues to have those discussions. And while we are working to make China an important partner, we will continue to work closely with our long-standing allies and friends in Asia and around the world and rely on the appropriate international groups and organizations.
But having these strategic-level discussions with our Chinese counterparts will help build the trust and relationships to tackle the most vexing global challenges of today—and of the coming generation. The Chinese have a wise aphorism: “When you are in a common boat, you need to cross the river peacefully together.” Today, we will join our Chinese counterparts in grabbing an oar and starting to row.
Mrs. Clinton is the U.S. Secretary of State. Mr. Geithner is Secretary of the Treasury.
Few global problems can be solved by either country alone.
WSJ, Jul 27, 2009
When the United States and China established diplomatic relations 30 years ago, it was far from clear what the future would hold. In 1979, China was still emerging from the ruins of the Cultural Revolution and its gross domestic product stood at a mere $176 billion, a fraction of the U.S. total of $2.5 trillion. Even travel and communication between our two great nations presented a challenge: a few unreliable telephone lines and no direct flights connected us. Today China’s GDP tops four trillion dollars, thousands of emails and cellphone calls cross the Pacific Ocean daily, and by next year there will be 249 direct flights per week between the U.S. and China.
To keep up with these changes that affect our citizens and our planet, we need to update our official ties with Beijing. During their first meeting in April, President Barack Obama and President Hu Jintao announced a new dialogue as part of the administration’s efforts to build a positive, cooperative and comprehensive relationship with Beijing. So this week we will meet together in Washington with two of the highest-ranking officials in the Chinese government, Vice Premier Wang Qishan and State Councilor Dai Bingguo, to develop a new framework for U.S.-China relations. Many of our cabinet colleagues will join us in this “Strategic and Economic Dialogue,” along with an equally large number of the most senior leaders of the Chinese government. Why are we doing this with China, and what does it mean for Americans?
Simply put, few global problems can be solved by the U.S. or China alone. And few can be solved without the U.S. and China together. The strength of the global economy, the health of the global environment, the stability of fragile states and the solution to nonproliferation challenges turn in large measure on cooperation between the U.S. and China. While our two-day dialogue will break new ground in combining discussions of both economic and foreign policies, we will be building on the efforts of the past seven U.S. administrations and on the existing tapestry of government-to-government exchanges and cooperation in several dozen different areas.
At the top of the list will be assuring recovery from the most serious global economic crisis in generations and assuring balanced and sustained global growth once recovery has taken hold. When the current crisis struck, the U.S. and China acted quickly and aggressively to support economic activity and to create and save jobs. The success of the world’s major economies in blunting the force of the global recession and setting the stage for recovery is due in substantial measure to the bold steps our two nations have taken.
As we move toward recovery, we must take additional steps to lay the foundation for balanced and sustainable growth in the years to come. That will involve Americans rebuilding our savings, strengthening our financial system and investing in energy, education and health care to make our nation more productive and prosperous. For China it involves continuing financial sector reform and development. It also involves spurring domestic demand growth and making the Chinese economy less reliant on exports. Raising personal incomes and strengthening the social safety net to address the reasons why Chinese feel compelled to save so much would provide a powerful boost to Chinese domestic demand and global growth.
Both nations must avoid the temptation to close off our respective markets to trade and investment. Both must work hard to create new opportunities for our workers and our firms to compete equally, so that the people of each country see the benefit from the rapidly expanding U.S.-China economic relationship.
A second priority is to make progress on the interconnected issues of climate change, energy and the environment. Our two nations need to establish a true partnership to put both countries on a low-carbon pathway, simultaneously reducing greenhouse gas emissions while promoting economic recovery and sustainable development. The cross-cutting nature of our meetings offers a unique opportunity for key American officials to meet with their Chinese counterparts to work on the global issue of climate change. In the run-up to the international climate change conference in Copenhagen in December, it is clear that any agreement must include meaningful participation by large economies like China.
The third broad area for discussion is finding complementary approaches to security and development challenges in the region and across the globe. From the provocative actions of North Korea, to stability in Afghanistan and Pakistan, to the economic possibilities in Africa, the U.S. and China must work together to reach solutions to these urgent challenges confronting not only our two nations, but many others across the globe.
While this first round of the U.S.-China Strategic and Economic Dialogue offers a unique opportunity to work with Chinese officials, we will not always agree on solutions and we must be frank about our differences, including establishing the right venues to have those discussions. And while we are working to make China an important partner, we will continue to work closely with our long-standing allies and friends in Asia and around the world and rely on the appropriate international groups and organizations.
But having these strategic-level discussions with our Chinese counterparts will help build the trust and relationships to tackle the most vexing global challenges of today—and of the coming generation. The Chinese have a wise aphorism: “When you are in a common boat, you need to cross the river peacefully together.” Today, we will join our Chinese counterparts in grabbing an oar and starting to row.
Mrs. Clinton is the U.S. Secretary of State. Mr. Geithner is Secretary of the Treasury.
Micheletti: The Path Forward for Honduras
The Path Forward for Honduras. By ROBERTO MICHELETTI
Zelaya’s removal from office was a triumph for the rule of law.
WSJ, Jul 27, 2009
One of America’s most loyal Latin American allies—Honduras—has been in the midst of a constitutional crisis that threatens its democracy. Sadly, key undisputed facts regarding the crisis have often been ignored by America’s leaders, at least during the earliest days of the crisis.
In recent days, the rhetoric from allies of former President Manuel Zelaya has also dominated media reporting in the U.S. The worst distortion is the repetition of the false statement that Mr. Zelaya was removed from office by the military and for being a “reformer.” The truth is that he was removed by a democratically elected civilian government because the independent judicial and legislative branches of our government found that he had violated our laws and constitution.
Let’s review some fundamental facts that cannot be disputed:
• The Supreme Court, by a 15-0 vote, found that Mr. Zelaya had acted illegally by proceeding with an unconstitutional “referendum,” and it ordered the Armed Forces to arrest him. The military executed the arrest order of the Supreme Court because it was the appropriate agency to do so under Honduran law.
• Eight of the 15 votes on the Supreme Court were cast by members of Mr. Zelaya’s own Liberal Party. Strange that the pro-Zelaya propagandists who talk about the rule of law forget to mention the unanimous Supreme Court decision with a majority from Mr. Zelaya’s own party. Thus, Mr. Zelaya’s arrest was at the instigation of Honduran’s constitutional and civilian authorities—not the military.
• The Honduran Congress voted overwhelmingly in support of removing Mr. Zelaya. The vote included a majority of members of Mr. Zelaya’s Liberal Party.
• Independent government and religious leaders and institutions—including the Supreme Electoral Tribunal, the Administrative Law Tribunal, the independent Human Rights Ombudsman, four-out-of-five political parties, the two major presidential candidates of the Liberal and National Parties, and Honduras’s Catholic Cardinal—all agreed that Mr. Zelaya had acted illegally.
• The constitution expressly states in Article 239 that any president who seeks to amend the constitution and extend his term is automatically disqualified and is no longer president. There is no express provision for an impeachment process in the Honduran constitution. But the Supreme Court’s unanimous decision affirmed that Mr. Zelaya was attempting to extend his term with his illegal referendum. Thus, at the time of his arrest he was no longer—as a matter of law, as far as the Supreme Court was concerned—president of Honduras.
• Days before his arrest, Mr. Zelaya had his chief of staff illegally withdraw millions of dollars in cash from the Central Bank of Honduras.
• A day or so before his arrest, Mr. Zelaya led a violent mob to overrun an Air Force base to seize referendum ballots that had been shipped into Honduras by Hugo Chávez’s Venezuelan government.
• I succeeded Mr. Zelaya under the Honduran constitution’s order of succession (our vice president had resigned before all of this began so that he could run for president). This is and has always been an entirely civilian government. The military was ordered by an entirely civilian Supreme Court to arrest Mr. Zelaya. His removal was ordered by an entirely civilian and elected Congress. To suggest that Mr. Zelaya was ousted by means of a military coup is demonstrably false.
Regarding the decision to expel Mr. Zelaya from the country the evening of June 28 without a trial, reasonable people can believe the situation could have been handled differently. But it is also necessary to understand the decision in the context of genuine fear of Mr. Zelaya’s proven willingness to violate the law and to engage in mob-led violence.
The way forward is to work with Costa Rican President Oscar Arias. He is proposing ways to ensure that Mr. Zelaya complies with Honduras’s laws and its constitution and allows the people of Honduras to elect a new president in the regularly scheduled Nov. 29 elections (or perhaps earlier, if the date is moved up as President Arias has suggested and as Honduran law allows).
If all parties reach agreement to allow Mr. Zelaya to return to Honduras—a big “if”—we believe that he cannot be trusted to comply with the law and therefore it is our position that he must be prosecuted with full due process.
President Arias’s proposal for a moratorium on prosecution of all parties may be considered, but our Supreme Court has indicated that such a proposal presents serious legal problems under our constitution.
Like America, our constitutional democracy has three co-equal and independent branches of government—a fact that Mr. Zelaya ignored when he openly defied the positions of both the Supreme Court and Congress. But we are ready to continue discussions once the Supreme Court, the attorney general and Congress analyze President Arias’s proposal. That proposal has been turned over to them so that they can review provisions that impact their legal authority. Once we know their legal positions we will proceed accordingly.
The Honduran people must have confidence that their Congress is a co-equal branch of government. They must be assured that the rule of law in Honduras applies to everyone, even their president, and that their Supreme Court’s orders will not be dismissed and swept aside by other nations as inconvenient obstacles.
Meanwhile, the other elements of the Arias proposal, especially the establishment of a Truth Commission to make findings of fact and international enforcement mechanisms to ensure Mr. Zelaya complies with the agreement, are worthy of serious consideration.
Mr. Zelaya’s irresponsible attempt on Friday afternoon to cross the border into Honduras before President Arias has obtained agreement from all parties—an attempt that U.S. Secretary of State Hillary Clinton appropriately described as “reckless”—was just another example of why Mr. Zelaya cannot be trusted to keep his word.
Regardless of what happens, the worst thing the U.S. can do is to impose economic sanctions that would primarily hurt the poorest people in Honduras. Rather than impose sanctions, the U.S. should continue the wise policies of Mrs. Clinton. She is supporting President Arias’s efforts to mediate the issues. The goal is a peaceful solution that is consistent with Honduran law in a civil society where even the president is not above the law.
Mr. Micheletti, previously the president of the Honduran Congress, became president of Honduras upon the departure of Manuel Zelaya. He is a member of the Liberal Party, the same party as Mr. Zelaya.
Zelaya’s removal from office was a triumph for the rule of law.
WSJ, Jul 27, 2009
One of America’s most loyal Latin American allies—Honduras—has been in the midst of a constitutional crisis that threatens its democracy. Sadly, key undisputed facts regarding the crisis have often been ignored by America’s leaders, at least during the earliest days of the crisis.
In recent days, the rhetoric from allies of former President Manuel Zelaya has also dominated media reporting in the U.S. The worst distortion is the repetition of the false statement that Mr. Zelaya was removed from office by the military and for being a “reformer.” The truth is that he was removed by a democratically elected civilian government because the independent judicial and legislative branches of our government found that he had violated our laws and constitution.
Let’s review some fundamental facts that cannot be disputed:
• The Supreme Court, by a 15-0 vote, found that Mr. Zelaya had acted illegally by proceeding with an unconstitutional “referendum,” and it ordered the Armed Forces to arrest him. The military executed the arrest order of the Supreme Court because it was the appropriate agency to do so under Honduran law.
• Eight of the 15 votes on the Supreme Court were cast by members of Mr. Zelaya’s own Liberal Party. Strange that the pro-Zelaya propagandists who talk about the rule of law forget to mention the unanimous Supreme Court decision with a majority from Mr. Zelaya’s own party. Thus, Mr. Zelaya’s arrest was at the instigation of Honduran’s constitutional and civilian authorities—not the military.
• The Honduran Congress voted overwhelmingly in support of removing Mr. Zelaya. The vote included a majority of members of Mr. Zelaya’s Liberal Party.
• Independent government and religious leaders and institutions—including the Supreme Electoral Tribunal, the Administrative Law Tribunal, the independent Human Rights Ombudsman, four-out-of-five political parties, the two major presidential candidates of the Liberal and National Parties, and Honduras’s Catholic Cardinal—all agreed that Mr. Zelaya had acted illegally.
• The constitution expressly states in Article 239 that any president who seeks to amend the constitution and extend his term is automatically disqualified and is no longer president. There is no express provision for an impeachment process in the Honduran constitution. But the Supreme Court’s unanimous decision affirmed that Mr. Zelaya was attempting to extend his term with his illegal referendum. Thus, at the time of his arrest he was no longer—as a matter of law, as far as the Supreme Court was concerned—president of Honduras.
• Days before his arrest, Mr. Zelaya had his chief of staff illegally withdraw millions of dollars in cash from the Central Bank of Honduras.
• A day or so before his arrest, Mr. Zelaya led a violent mob to overrun an Air Force base to seize referendum ballots that had been shipped into Honduras by Hugo Chávez’s Venezuelan government.
• I succeeded Mr. Zelaya under the Honduran constitution’s order of succession (our vice president had resigned before all of this began so that he could run for president). This is and has always been an entirely civilian government. The military was ordered by an entirely civilian Supreme Court to arrest Mr. Zelaya. His removal was ordered by an entirely civilian and elected Congress. To suggest that Mr. Zelaya was ousted by means of a military coup is demonstrably false.
Regarding the decision to expel Mr. Zelaya from the country the evening of June 28 without a trial, reasonable people can believe the situation could have been handled differently. But it is also necessary to understand the decision in the context of genuine fear of Mr. Zelaya’s proven willingness to violate the law and to engage in mob-led violence.
The way forward is to work with Costa Rican President Oscar Arias. He is proposing ways to ensure that Mr. Zelaya complies with Honduras’s laws and its constitution and allows the people of Honduras to elect a new president in the regularly scheduled Nov. 29 elections (or perhaps earlier, if the date is moved up as President Arias has suggested and as Honduran law allows).
If all parties reach agreement to allow Mr. Zelaya to return to Honduras—a big “if”—we believe that he cannot be trusted to comply with the law and therefore it is our position that he must be prosecuted with full due process.
President Arias’s proposal for a moratorium on prosecution of all parties may be considered, but our Supreme Court has indicated that such a proposal presents serious legal problems under our constitution.
Like America, our constitutional democracy has three co-equal and independent branches of government—a fact that Mr. Zelaya ignored when he openly defied the positions of both the Supreme Court and Congress. But we are ready to continue discussions once the Supreme Court, the attorney general and Congress analyze President Arias’s proposal. That proposal has been turned over to them so that they can review provisions that impact their legal authority. Once we know their legal positions we will proceed accordingly.
The Honduran people must have confidence that their Congress is a co-equal branch of government. They must be assured that the rule of law in Honduras applies to everyone, even their president, and that their Supreme Court’s orders will not be dismissed and swept aside by other nations as inconvenient obstacles.
Meanwhile, the other elements of the Arias proposal, especially the establishment of a Truth Commission to make findings of fact and international enforcement mechanisms to ensure Mr. Zelaya complies with the agreement, are worthy of serious consideration.
Mr. Zelaya’s irresponsible attempt on Friday afternoon to cross the border into Honduras before President Arias has obtained agreement from all parties—an attempt that U.S. Secretary of State Hillary Clinton appropriately described as “reckless”—was just another example of why Mr. Zelaya cannot be trusted to keep his word.
Regardless of what happens, the worst thing the U.S. can do is to impose economic sanctions that would primarily hurt the poorest people in Honduras. Rather than impose sanctions, the U.S. should continue the wise policies of Mrs. Clinton. She is supporting President Arias’s efforts to mediate the issues. The goal is a peaceful solution that is consistent with Honduran law in a civil society where even the president is not above the law.
Mr. Micheletti, previously the president of the Honduran Congress, became president of Honduras upon the departure of Manuel Zelaya. He is a member of the Liberal Party, the same party as Mr. Zelaya.
CNN: 5 freedoms you'd lose in health care reform
5 freedoms you'd lose in health care reform. By Shawn Tully, editor at large
If you read the fine print in the Congressional plans, you'll find that a lot of cherished aspects of the current system would disappear.
CNN, July 24, 2009: 10:17 AM ET
NEW YORK (Fortune) -- In promoting his health-care agenda, President Obama has repeatedly reassured Americans that they can keep their existing health plans -- and that the benefits and access they prize will be enhanced through reform.
A close reading of the two main bills, one backed by Democrats in the House and the other issued by Sen. Edward Kennedy's Health committee, contradict the President's assurances. To be sure, it isn't easy to comb through their 2,000 pages of tortured legal language. But page by page, the bills reveal a web of restrictions, fines, and mandates that would radically change your health-care coverage.
If you prize choosing your own cardiologist or urologist under your company's Preferred Provider Organization plan (PPO), if your employer rewards your non-smoking, healthy lifestyle with reduced premiums, if you love the bargain Health Savings Account (HSA) that insures you just for the essentials, or if you simply take comfort in the freedom to spend your own money for a policy that covers the newest drugs and diagnostic tests -- you may be shocked to learn that you could lose all of those good things under the rules proposed in the two bills that herald a health-care revolution.
In short, the Obama platform would mandate extremely full, expensive, and highly subsidized coverage -- including a lot of benefits people would never pay for with their own money -- but deliver it through a highly restrictive, HMO-style plan that will determine what care and tests you can and can't have. It's a revolution, all right, but in the wrong direction.
Let's explore the five freedoms that Americans would lose under Obamacare:
1. Freedom to choose what's in your plan
The bills in both houses require that Americans purchase insurance through "qualified" plans offered by health-care "exchanges" that would be set up in each state. The rub is that the plans can't really compete based on what they offer. The reason: The federal government will impose a minimum list of benefits that each plan is required to offer.
Today, many states require these "standard benefits packages" -- and they're a major cause for the rise in health-care costs. Every group, from chiropractors to alcohol-abuse counselors, do lobbying to get included. Connecticut, for example, requires reimbursement for hair transplants, hearing aids, and in vitro fertilization.
The Senate bill would require coverage for prescription drugs, mental-health benefits, and substance-abuse services. It also requires policies to insure "children" until the age of 26. That's just the starting list. The bills would allow the Department of Health and Human Services to add to the list of required benefits, based on recommendations from a committee of experts. Americans, therefore, wouldn't even know what's in their plans and what they're required to pay for, directly or indirectly, until after the bills become law.
2. Freedom to be rewarded for healthy living, or pay your real costs
As with the previous example, the Obama plan enshrines into federal law one of the worst features of state legislation: community rating. Eleven states, ranging from New York to Oregon, have some form of community rating. In its purest form, community rating requires that all patients pay the same rates for their level of coverage regardless of their age or medical condition.
Americans with pre-existing conditions need subsidies under any plan, but community rating is a dubious way to bring fairness to health care. The reason is twofold: First, it forces young people, who typically have lower incomes than older workers, to pay far more than their actual cost, and gives older workers, who can afford to pay more, a big discount. The state laws gouging the young are a major reason so many of them have joined the ranks of uninsured.
Under the Senate plan, insurers would be barred from charging any more than twice as much for one patient vs. any other patient with the same coverage. So if a 20-year-old who costs just $800 a year to insure is forced to pay $2,500, a 62-year-old who costs $7,500 would pay no more than $5,000.
Second, the bills would ban insurers from charging differing premiums based on the health of their customers. Again, that's understandable for folks with diabetes or cancer. But the bills would bar rewarding people who pursue a healthy lifestyle of exercise or a cholesterol-conscious diet. That's hardly a formula for lower costs. It's as if car insurers had to charge the same rates to safe drivers as to chronic speeders with a history of accidents.
3. Freedom to choose high-deductible coverage
The bills threaten to eliminate the one part of the market truly driven by consumers spending their own money. That's what makes a market, and health care needs more of it, not less.
Hundreds of companies now offer Health Savings Accounts to about 5 million employees. Those workers deposit tax-free money in the accounts and get a matching contribution from their employer. They can use the funds to buy a high-deductible plan -- say for major medical costs over $12,000. Preventive care is reimbursed, but patients pay all other routine doctor visits and tests with their own money from the HSA account. As a result, HSA users are far more cost-conscious than customers who are reimbursed for the majority of their care.
The bills seriously endanger the trend toward consumer-driven care in general. By requiring minimum packages, they would prevent patients from choosing stripped-down plans that cover only major medical expenses. "The government could set extremely low deductibles that would eliminate HSAs," says John Goodman of the National Center for Policy Analysis, a free-market research group. "And they could do it after the bills are passed."
4. Freedom to keep your existing plan
This is the freedom that the President keeps emphasizing. Yet the bills appear to say otherwise. It's worth diving into the weeds -- the territory where most pundits and politicians don't seem to have ventured.
The legislation divides the insured into two main groups, and those two groups are treated differently with respect to their current plans. The first are employees covered by the Employee Retirement Security Act of 1974. ERISA regulates companies that are self-insured, meaning they pay claims out of their cash flow, and don't have real insurance. Those are the GEs (GE, Fortune 500) and Time Warners (TWX, Fortune 500) and most other big companies.
The House bill states that employees covered by ERISA plans are "grandfathered." Under ERISA, the plans can do pretty much what they want -- they're exempt from standard packages and community rating and can reward employees for healthy lifestyles even in restrictive states.
But read on.
The bill gives ERISA employers a five-year grace period when they can keep offering plans free from the restrictions of the "qualified" policies offered on the exchanges. But after five years, they would have to offer only approved plans, with the myriad rules we've already discussed. So for Americans in large corporations, "keeping your own plan" has a strict deadline. In five years, like it or not, you'll get dumped into the exchange. As we'll see, it could happen a lot earlier.
The outlook is worse for the second group. It encompasses employees who aren't under ERISA but get actual insurance either on their own or through small businesses. After the legislation passes, all insurers that offer a wide range of plans to these employees will be forced to offer only "qualified" plans to new customers, via the exchanges.
The employees who got their coverage before the law goes into effect can keep their plans, but once again, there's a catch. If the plan changes in any way -- by altering co-pays, deductibles, or even switching coverage for this or that drug -- the employee must drop out and shop through the exchange. Since these plans generally change their policies every year, it's likely that millions of employees will lose their plans in 12 months.
5. Freedom to choose your doctors
The Senate bill requires that Americans buying through the exchanges -- and as we've seen, that will soon be most Americans -- must get their care through something called "medical home." Medical home is similar to an HMO. You're assigned a primary care doctor, and the doctor controls your access to specialists. The primary care physicians will decide which services, like MRIs and other diagnostic scans, are best for you, and will decide when you really need to see a cardiologists or orthopedists.
Under the proposals, the gatekeepers would theoretically guide patients to tests and treatments that have proved most cost-effective. The danger is that doctors will be financially rewarded for denying care, as were HMO physicians more than a decade ago. It was consumer outrage over despotic gatekeepers that made the HMOs so unpopular, and killed what was billed as the solution to America's health-care cost explosion.
The bills do not specifically rule out fee-for-service plans as options to be offered through the exchanges. But remember, those plans -- if they exist -- would be barred from charging sick or elderly patients more than young and healthy ones. So patients would be inclined to game the system, staying in the HMO while they're healthy and switching to fee-for-service when they become seriously ill. "That would kill fee-for-service in a hurry," says Goodman.
In reality, the flexible, employer-based plans that now dominate the landscape, and that Americans so cherish, could disappear far faster than the 5 year "grace period" that's barely being discussed.
Companies would have the option of paying an 8% payroll tax into a fund that pays for coverage for Americans who aren't covered by their employers. It won't happen right away -- large companies must wait a couple of years before they opt out. But it will happen, since it's likely that the tax will rise a lot more slowly than corporate health-care costs, especially since they'll be lobbying Washington to keep the tax under control in the righteous name of job creation.
The best solution is to move to a let-freedom-ring regime of high deductibles, no community rating, no standard benefits, and cross-state shopping for bargains (another market-based reform that's strictly taboo in the bills). I'll propose my own solution in another piece soon on Fortune.com. For now, we suffer with a flawed health-care system, but we still have our Five Freedoms. Call them the Five Endangered Freedoms.
If you read the fine print in the Congressional plans, you'll find that a lot of cherished aspects of the current system would disappear.
CNN, July 24, 2009: 10:17 AM ET
NEW YORK (Fortune) -- In promoting his health-care agenda, President Obama has repeatedly reassured Americans that they can keep their existing health plans -- and that the benefits and access they prize will be enhanced through reform.
A close reading of the two main bills, one backed by Democrats in the House and the other issued by Sen. Edward Kennedy's Health committee, contradict the President's assurances. To be sure, it isn't easy to comb through their 2,000 pages of tortured legal language. But page by page, the bills reveal a web of restrictions, fines, and mandates that would radically change your health-care coverage.
If you prize choosing your own cardiologist or urologist under your company's Preferred Provider Organization plan (PPO), if your employer rewards your non-smoking, healthy lifestyle with reduced premiums, if you love the bargain Health Savings Account (HSA) that insures you just for the essentials, or if you simply take comfort in the freedom to spend your own money for a policy that covers the newest drugs and diagnostic tests -- you may be shocked to learn that you could lose all of those good things under the rules proposed in the two bills that herald a health-care revolution.
In short, the Obama platform would mandate extremely full, expensive, and highly subsidized coverage -- including a lot of benefits people would never pay for with their own money -- but deliver it through a highly restrictive, HMO-style plan that will determine what care and tests you can and can't have. It's a revolution, all right, but in the wrong direction.
Let's explore the five freedoms that Americans would lose under Obamacare:
1. Freedom to choose what's in your plan
The bills in both houses require that Americans purchase insurance through "qualified" plans offered by health-care "exchanges" that would be set up in each state. The rub is that the plans can't really compete based on what they offer. The reason: The federal government will impose a minimum list of benefits that each plan is required to offer.
Today, many states require these "standard benefits packages" -- and they're a major cause for the rise in health-care costs. Every group, from chiropractors to alcohol-abuse counselors, do lobbying to get included. Connecticut, for example, requires reimbursement for hair transplants, hearing aids, and in vitro fertilization.
The Senate bill would require coverage for prescription drugs, mental-health benefits, and substance-abuse services. It also requires policies to insure "children" until the age of 26. That's just the starting list. The bills would allow the Department of Health and Human Services to add to the list of required benefits, based on recommendations from a committee of experts. Americans, therefore, wouldn't even know what's in their plans and what they're required to pay for, directly or indirectly, until after the bills become law.
2. Freedom to be rewarded for healthy living, or pay your real costs
As with the previous example, the Obama plan enshrines into federal law one of the worst features of state legislation: community rating. Eleven states, ranging from New York to Oregon, have some form of community rating. In its purest form, community rating requires that all patients pay the same rates for their level of coverage regardless of their age or medical condition.
Americans with pre-existing conditions need subsidies under any plan, but community rating is a dubious way to bring fairness to health care. The reason is twofold: First, it forces young people, who typically have lower incomes than older workers, to pay far more than their actual cost, and gives older workers, who can afford to pay more, a big discount. The state laws gouging the young are a major reason so many of them have joined the ranks of uninsured.
Under the Senate plan, insurers would be barred from charging any more than twice as much for one patient vs. any other patient with the same coverage. So if a 20-year-old who costs just $800 a year to insure is forced to pay $2,500, a 62-year-old who costs $7,500 would pay no more than $5,000.
Second, the bills would ban insurers from charging differing premiums based on the health of their customers. Again, that's understandable for folks with diabetes or cancer. But the bills would bar rewarding people who pursue a healthy lifestyle of exercise or a cholesterol-conscious diet. That's hardly a formula for lower costs. It's as if car insurers had to charge the same rates to safe drivers as to chronic speeders with a history of accidents.
3. Freedom to choose high-deductible coverage
The bills threaten to eliminate the one part of the market truly driven by consumers spending their own money. That's what makes a market, and health care needs more of it, not less.
Hundreds of companies now offer Health Savings Accounts to about 5 million employees. Those workers deposit tax-free money in the accounts and get a matching contribution from their employer. They can use the funds to buy a high-deductible plan -- say for major medical costs over $12,000. Preventive care is reimbursed, but patients pay all other routine doctor visits and tests with their own money from the HSA account. As a result, HSA users are far more cost-conscious than customers who are reimbursed for the majority of their care.
The bills seriously endanger the trend toward consumer-driven care in general. By requiring minimum packages, they would prevent patients from choosing stripped-down plans that cover only major medical expenses. "The government could set extremely low deductibles that would eliminate HSAs," says John Goodman of the National Center for Policy Analysis, a free-market research group. "And they could do it after the bills are passed."
4. Freedom to keep your existing plan
This is the freedom that the President keeps emphasizing. Yet the bills appear to say otherwise. It's worth diving into the weeds -- the territory where most pundits and politicians don't seem to have ventured.
The legislation divides the insured into two main groups, and those two groups are treated differently with respect to their current plans. The first are employees covered by the Employee Retirement Security Act of 1974. ERISA regulates companies that are self-insured, meaning they pay claims out of their cash flow, and don't have real insurance. Those are the GEs (GE, Fortune 500) and Time Warners (TWX, Fortune 500) and most other big companies.
The House bill states that employees covered by ERISA plans are "grandfathered." Under ERISA, the plans can do pretty much what they want -- they're exempt from standard packages and community rating and can reward employees for healthy lifestyles even in restrictive states.
But read on.
The bill gives ERISA employers a five-year grace period when they can keep offering plans free from the restrictions of the "qualified" policies offered on the exchanges. But after five years, they would have to offer only approved plans, with the myriad rules we've already discussed. So for Americans in large corporations, "keeping your own plan" has a strict deadline. In five years, like it or not, you'll get dumped into the exchange. As we'll see, it could happen a lot earlier.
The outlook is worse for the second group. It encompasses employees who aren't under ERISA but get actual insurance either on their own or through small businesses. After the legislation passes, all insurers that offer a wide range of plans to these employees will be forced to offer only "qualified" plans to new customers, via the exchanges.
The employees who got their coverage before the law goes into effect can keep their plans, but once again, there's a catch. If the plan changes in any way -- by altering co-pays, deductibles, or even switching coverage for this or that drug -- the employee must drop out and shop through the exchange. Since these plans generally change their policies every year, it's likely that millions of employees will lose their plans in 12 months.
5. Freedom to choose your doctors
The Senate bill requires that Americans buying through the exchanges -- and as we've seen, that will soon be most Americans -- must get their care through something called "medical home." Medical home is similar to an HMO. You're assigned a primary care doctor, and the doctor controls your access to specialists. The primary care physicians will decide which services, like MRIs and other diagnostic scans, are best for you, and will decide when you really need to see a cardiologists or orthopedists.
Under the proposals, the gatekeepers would theoretically guide patients to tests and treatments that have proved most cost-effective. The danger is that doctors will be financially rewarded for denying care, as were HMO physicians more than a decade ago. It was consumer outrage over despotic gatekeepers that made the HMOs so unpopular, and killed what was billed as the solution to America's health-care cost explosion.
The bills do not specifically rule out fee-for-service plans as options to be offered through the exchanges. But remember, those plans -- if they exist -- would be barred from charging sick or elderly patients more than young and healthy ones. So patients would be inclined to game the system, staying in the HMO while they're healthy and switching to fee-for-service when they become seriously ill. "That would kill fee-for-service in a hurry," says Goodman.
In reality, the flexible, employer-based plans that now dominate the landscape, and that Americans so cherish, could disappear far faster than the 5 year "grace period" that's barely being discussed.
Companies would have the option of paying an 8% payroll tax into a fund that pays for coverage for Americans who aren't covered by their employers. It won't happen right away -- large companies must wait a couple of years before they opt out. But it will happen, since it's likely that the tax will rise a lot more slowly than corporate health-care costs, especially since they'll be lobbying Washington to keep the tax under control in the righteous name of job creation.
The best solution is to move to a let-freedom-ring regime of high deductibles, no community rating, no standard benefits, and cross-state shopping for bargains (another market-based reform that's strictly taboo in the bills). I'll propose my own solution in another piece soon on Fortune.com. For now, we suffer with a flawed health-care system, but we still have our Five Freedoms. Call them the Five Endangered Freedoms.
Friday, July 24, 2009
WaPo: Why defend the rule of law in Honduras but not in Venezuela?
Democrats in Need of Defense. WaPo Editorial
Why defend the rule of law in Honduras but not in Venezuela?
WaPo, Friday, July 24, 2009
LATIN AMERICAN diplomats remain preoccupied with the political crisis in Honduras, which has been teetering between a negotiated solution that would conditionally restore ousted President Manuel Zelaya to office and an escalation of conflict that would play into the hands of anti-democratic forces around the region. While the drama drags on, those forces continue to advance in other countries, unremarked on by some of the same governments that rushed to condemn Mr. Zelaya's ouster. So it's worth reporting on a meeting that took place Tuesday at the Organization of American States headquarters in Washington between OAS Secretary General José Miguel Insulza and three elected Venezuelan leaders who, like Mr. Zelaya, have been deprived of their powers and threatened with criminal prosecution.
The three are Caracas Mayor Antonio Ledezma and the governors of two states, Pablo Pérez of Zulia and César Pérez Vivas of Tachira. All three won election in November, along with several other opposition leaders. But since then, Venezuelan President Hugo Chávez has used decrees, a rubber-stamp parliament and a politically compromised legal system to strip the officials of control over key services and infrastructure.
Mr. Insulza, a Chilean socialist who has been flamboyant in his defense of Mr. Zelaya, listened to the Venezuelans' account. But the OAS leader insisted that there was nothing he could do about Mr. Chávez's actions, even under the Inter-American Democratic Charter, which was adopted by all 34 active OAS members in 2001. This month, Mr. Insulza helped spur the OAS to suspend Honduras on the grounds that it had violated the charter. But in the case of Mr. Chávez's stripping power from the governors and mayors, Mr. Insulza said, "I can't say whether it is bad or good." His authority, he said, is limited to "trying to establish bridges between the parties."
That is not how Mr. Insulza handled the case of Honduras, of course. Far from promoting dialogue, the secretary general refused to negotiate or even speak with the president elected by the Honduran National Congress to replace Mr. Zelaya. Instead he joined in a Venezuelan-orchestrated attempt to force Mr. Zelaya's return that, predictably, led to violence. Now, with an attempted mediation by Costa Rican President Oscar Arias stalled, Mr. Zelaya is again threatening to enter the country without an agreement. Don't expect the OAS chief to dissuade him.
Still, Mr. Insulza has a point. The weakness of the Democratic Charter is that it protects presidents from undemocratic assault but does not readily allow OAS intervention in cases where the executive himself is responsible for violating the constitutional order -- as Mr. Zelaya did before his ouster. The Honduras crisis provides an opportunity for the Obama administration to seek changes in those rules. If the administration is to depend on organizations such as the OAS to advance its policies in Latin America, it must push it to counter attacks on democracy whenever and wherever they occur.
Why defend the rule of law in Honduras but not in Venezuela?
WaPo, Friday, July 24, 2009
LATIN AMERICAN diplomats remain preoccupied with the political crisis in Honduras, which has been teetering between a negotiated solution that would conditionally restore ousted President Manuel Zelaya to office and an escalation of conflict that would play into the hands of anti-democratic forces around the region. While the drama drags on, those forces continue to advance in other countries, unremarked on by some of the same governments that rushed to condemn Mr. Zelaya's ouster. So it's worth reporting on a meeting that took place Tuesday at the Organization of American States headquarters in Washington between OAS Secretary General José Miguel Insulza and three elected Venezuelan leaders who, like Mr. Zelaya, have been deprived of their powers and threatened with criminal prosecution.
The three are Caracas Mayor Antonio Ledezma and the governors of two states, Pablo Pérez of Zulia and César Pérez Vivas of Tachira. All three won election in November, along with several other opposition leaders. But since then, Venezuelan President Hugo Chávez has used decrees, a rubber-stamp parliament and a politically compromised legal system to strip the officials of control over key services and infrastructure.
Mr. Insulza, a Chilean socialist who has been flamboyant in his defense of Mr. Zelaya, listened to the Venezuelans' account. But the OAS leader insisted that there was nothing he could do about Mr. Chávez's actions, even under the Inter-American Democratic Charter, which was adopted by all 34 active OAS members in 2001. This month, Mr. Insulza helped spur the OAS to suspend Honduras on the grounds that it had violated the charter. But in the case of Mr. Chávez's stripping power from the governors and mayors, Mr. Insulza said, "I can't say whether it is bad or good." His authority, he said, is limited to "trying to establish bridges between the parties."
That is not how Mr. Insulza handled the case of Honduras, of course. Far from promoting dialogue, the secretary general refused to negotiate or even speak with the president elected by the Honduran National Congress to replace Mr. Zelaya. Instead he joined in a Venezuelan-orchestrated attempt to force Mr. Zelaya's return that, predictably, led to violence. Now, with an attempted mediation by Costa Rican President Oscar Arias stalled, Mr. Zelaya is again threatening to enter the country without an agreement. Don't expect the OAS chief to dissuade him.
Still, Mr. Insulza has a point. The weakness of the Democratic Charter is that it protects presidents from undemocratic assault but does not readily allow OAS intervention in cases where the executive himself is responsible for violating the constitutional order -- as Mr. Zelaya did before his ouster. The Honduras crisis provides an opportunity for the Obama administration to seek changes in those rules. If the administration is to depend on organizations such as the OAS to advance its policies in Latin America, it must push it to counter attacks on democracy whenever and wherever they occur.
Thursday, July 23, 2009
Protecting Civil Aviation from MANPADS Attacks: New Milestone Reached
Protecting Civil Aviation from MANPADS Attacks: New Milestone Reached
US State Dept, Bureau of Public Affairs, Office of the Spokesman, Washington, DC, Thu, 23 Jul 2009 13:54:26 -0500
The United States in close cooperation with 29 countries has destroyed over 30,000 foreign, at-risk Man-Portable Air Defense Systems (MANPADS) since 2003, thus potentially preventing these weapons – commonly referred to as shoulder-fired anti-aircraft missiles – from falling into the hands of arms traffickers, criminals, and terrorists who could threaten civil aviation.
The threat posed by MANPADS to civil aviation is real. 40 civilian aircraft have been hit by these missiles since the 1970s. A total of 859 deaths resulted from these attacks.
The United States salutes the countries that have worked cooperatively to reduce their excess, aging stocks of MANPADS. The United States encourages all nations to voluntarily reduce the MANPADS and other conventional weapons that are not essential to their defense needs, and to reduce their old and unstable munitions.
The U.S. Department of State appreciates the assistance of the Defense Threat Reduction Agency, Transportation Security Administration, Organization of American States, NATO’s Partnership for Peace Program, the Organization for Security and Cooperation in Europe, the Regional Center on Small Arms in Kenya, and other international organizations for their vital collaboration on MANPADS threat reduction initiatives to make the world’s skies safer for airline passengers and international aviation.
As part of the U.S. Government’s inter-agency threat reduction response to the misuse of these light, easily concealed weapons, the Transportation Security Administration has since 2003 conducted 33 “Assist Visits” to airports in 26 countries in order to help the host nations identify vulnerabilities to potential MANPADS attacks, at a cost of approximately $500,000.
Since 2001, the U.S. Department of State’s Bureau of Political-Military Affairs has invested over $113 million to help destroy 1.3 million small arms and other conventional weapons around the world, including these more than 30,000 MANPADS. In fiscal year 2009, the Bureau’s Office of Weapons Removal and Abatement is investing approximately $130 million to destroy MANPADS and other conventional weapons, and to conduct humanitarian mine action in a continuous effort to make the world safer.
Visit www.state.gov/t/pm/wra to learn more about the Office of Weapons Removal and Abatement’s conventional weapons destruction and humanitarian mine action programs.
PRN: 2009/770
US State Dept, Bureau of Public Affairs, Office of the Spokesman, Washington, DC, Thu, 23 Jul 2009 13:54:26 -0500
The United States in close cooperation with 29 countries has destroyed over 30,000 foreign, at-risk Man-Portable Air Defense Systems (MANPADS) since 2003, thus potentially preventing these weapons – commonly referred to as shoulder-fired anti-aircraft missiles – from falling into the hands of arms traffickers, criminals, and terrorists who could threaten civil aviation.
The threat posed by MANPADS to civil aviation is real. 40 civilian aircraft have been hit by these missiles since the 1970s. A total of 859 deaths resulted from these attacks.
The United States salutes the countries that have worked cooperatively to reduce their excess, aging stocks of MANPADS. The United States encourages all nations to voluntarily reduce the MANPADS and other conventional weapons that are not essential to their defense needs, and to reduce their old and unstable munitions.
The U.S. Department of State appreciates the assistance of the Defense Threat Reduction Agency, Transportation Security Administration, Organization of American States, NATO’s Partnership for Peace Program, the Organization for Security and Cooperation in Europe, the Regional Center on Small Arms in Kenya, and other international organizations for their vital collaboration on MANPADS threat reduction initiatives to make the world’s skies safer for airline passengers and international aviation.
As part of the U.S. Government’s inter-agency threat reduction response to the misuse of these light, easily concealed weapons, the Transportation Security Administration has since 2003 conducted 33 “Assist Visits” to airports in 26 countries in order to help the host nations identify vulnerabilities to potential MANPADS attacks, at a cost of approximately $500,000.
Since 2001, the U.S. Department of State’s Bureau of Political-Military Affairs has invested over $113 million to help destroy 1.3 million small arms and other conventional weapons around the world, including these more than 30,000 MANPADS. In fiscal year 2009, the Bureau’s Office of Weapons Removal and Abatement is investing approximately $130 million to destroy MANPADS and other conventional weapons, and to conduct humanitarian mine action in a continuous effort to make the world safer.
Visit www.state.gov/t/pm/wra to learn more about the Office of Weapons Removal and Abatement’s conventional weapons destruction and humanitarian mine action programs.
PRN: 2009/770
US Surpasses Target of 75,000 Trained Peacekeepers by 2010
U.S. Department of State Surpasses Target of 75,000 Trained Peacekeepers by 2010
US State Dept, Bureau of Public Affairs, Office of the Spokesman, Washington, DC, Thu, 23 Jul 2009 13:55:37 -0500
The United States has surpassed its commitment, adopted at the 2004 G-8 Sea Island Summit, to train and equip 75,000 new peacekeepers to be able to participate in peacekeeping operations worldwide by 2010. As of this month, the Department of State’s Global Peace Operations Initiative (GPOI) has succeeded in training and equipping more than 81,000 new peacekeepers, and has facilitated the deployment of nearly 50,000 peacekeepers to 20 United Nations and regional peace support operations to secure the peace and protect at-risk populations in the Democratic Republic of the Congo, Haiti, Lebanon, Somalia and Sudan. Additionally, GPOI provides support to the Italian-led Center of Excellence for Stability Police Units that instructs stability/formed police unit trainers and has graduated over 2,000 trainers from 29 countries.
This commitment to enhance global peacekeeping capabilities was made in support of the G-8 Action Plan to Expand Global Capability for Peace Support Operations, which was adopted at the 2004 G-8 Sea Island Summit. The bulk of the training in support of this commitment has been conducted in Africa by GPOI’s Africa Contingency Operations Training and Assistance (ACOTA) Program. Other G-8 member states are also making significant contributions to fulfilling commitments made under the G-8 Action Plan through efforts to build capacity for global peace support operations, which are often in partnership with or complementary to the United States’ projects.
GPOI represents the U.S. government’s contribution to the 2004 G-8 Action Plan to increase global capacity to meet the growing requirement and complexity of peace support operations. GPOI has provided peace support operations training and non-lethal equipment for the militaries of 56 partner countries in Africa, Asia, Europe, and Central/South America, as well as staff training, technical assistance, equipment, and building refurbishments for two regional headquarters and 23 peace support operations training centers.
GPOI capacity building activities are implemented through partnerships between the U.S. Department of State and the U.S. Department of Defense. United States combatant commands – including Africa Command, Central Command, European Command, Pacific Command, and Southern Command – play critically important implementing roles. The United States coordinates extensively with international and regional organizations, especially the United Nations, to maximize complementarities and reduce redundancies in global peace support operations capacity building efforts.
Starting in October 2009, GPOI will embark on its second phase (Fiscal Years 2010-2014) in which it will build on its success with a shift in focus from providing direct training to increasing the self-sufficiency of partner countries to conduct sustainable, indigenous peace support operations training on their own. In doing so, GPOI will help partner countries achieve full operational capability in peace support operations training and consequently develop stronger partners in the shared goal of promoting peace and stability in post-conflict societies.
Information about GPOI is available at http://www.state.gov/t/pm/ppa/gpoi/index.htm.
US State Dept, Bureau of Public Affairs, Office of the Spokesman, Washington, DC, Thu, 23 Jul 2009 13:55:37 -0500
The United States has surpassed its commitment, adopted at the 2004 G-8 Sea Island Summit, to train and equip 75,000 new peacekeepers to be able to participate in peacekeeping operations worldwide by 2010. As of this month, the Department of State’s Global Peace Operations Initiative (GPOI) has succeeded in training and equipping more than 81,000 new peacekeepers, and has facilitated the deployment of nearly 50,000 peacekeepers to 20 United Nations and regional peace support operations to secure the peace and protect at-risk populations in the Democratic Republic of the Congo, Haiti, Lebanon, Somalia and Sudan. Additionally, GPOI provides support to the Italian-led Center of Excellence for Stability Police Units that instructs stability/formed police unit trainers and has graduated over 2,000 trainers from 29 countries.
This commitment to enhance global peacekeeping capabilities was made in support of the G-8 Action Plan to Expand Global Capability for Peace Support Operations, which was adopted at the 2004 G-8 Sea Island Summit. The bulk of the training in support of this commitment has been conducted in Africa by GPOI’s Africa Contingency Operations Training and Assistance (ACOTA) Program. Other G-8 member states are also making significant contributions to fulfilling commitments made under the G-8 Action Plan through efforts to build capacity for global peace support operations, which are often in partnership with or complementary to the United States’ projects.
GPOI represents the U.S. government’s contribution to the 2004 G-8 Action Plan to increase global capacity to meet the growing requirement and complexity of peace support operations. GPOI has provided peace support operations training and non-lethal equipment for the militaries of 56 partner countries in Africa, Asia, Europe, and Central/South America, as well as staff training, technical assistance, equipment, and building refurbishments for two regional headquarters and 23 peace support operations training centers.
GPOI capacity building activities are implemented through partnerships between the U.S. Department of State and the U.S. Department of Defense. United States combatant commands – including Africa Command, Central Command, European Command, Pacific Command, and Southern Command – play critically important implementing roles. The United States coordinates extensively with international and regional organizations, especially the United Nations, to maximize complementarities and reduce redundancies in global peace support operations capacity building efforts.
Starting in October 2009, GPOI will embark on its second phase (Fiscal Years 2010-2014) in which it will build on its success with a shift in focus from providing direct training to increasing the self-sufficiency of partner countries to conduct sustainable, indigenous peace support operations training on their own. In doing so, GPOI will help partner countries achieve full operational capability in peace support operations training and consequently develop stronger partners in the shared goal of promoting peace and stability in post-conflict societies.
Information about GPOI is available at http://www.state.gov/t/pm/ppa/gpoi/index.htm.
On Federal President's Foreign Policy
O's Foreign Failures. By Peter Brookes
New York Post, Jul 23, 2009
MOST Americans have noticed that President Obama's economic policies aren't getting the job done. Fewer, however, realize that the administration's foreign policies are flagging after just six months in the White House, too.
Yup, that's right: All that Obama hopey-changey, blame- America-first, anything-but-W stuff hasn't restored, much less advanced, America's position in the world as was promised.
In fact, quite the opposite: Weak-kneed, apologetic "Obama-plomacy" is already being exploited across the globe -- at great expense to our national security.
Start with Iran: The Obama administration has extended an unclenched fist toward the mullahs, but the theocrats have done little more than slap it away -- repeatedly.
In fact, today they have even more uranium-enriching centrifuges spinning, meaning Iran is moving closer to having the bomb. Many analysts believe the fateful moment is just around the corner.
Yet the administration wants to give Tehran more time (till the end of the year) to see the error of its ways. Sorry, Mr. President: After 20-plus years of involvement in a mostly clandestine nuclear program, that's just not likely.
This "What, me worry?" attitude is putting Israel and the Arab Middle East increasingly on edge as they await the day Iran joins the Mushroom-Cloud Club.
And where was the leader of the Free World when Iranians were demonstrating -- indeed, dying -- for liberty on Tehran's streets recently? Spending weeks dithering with talking points to ensure he didn't look like he was "intervening."
Over in Asia, North Korea has launched missiles, set off a nuke and threatened war. The regime is refusing to come back to the nuclear-negotiating table and is holding two arrested US journalists. It's also likely trying to send bad stuff to the junta in Myanmar (possibly for transshipment to Iran or another rogue regime).
While he's rightly surged US troops in Afghanistan, Obama was unable to charm the Europeans into giving more troops, despite our mutual interest in keeping the country out of terrorists' mitts.
And then there's Russia. We made unilateral concessions in a strategic-arms agreement that may undermine the strength of our conventional forces by eliminating dual-mission bombers and submarines.
Obama's hope was that in exchange for the (in principle) nuke-arms-reducing pact, we'd get the Kremlin's help stopping Tehran's nuclear program. Oops: After the summit, Moscow publicly delinked the two issues.
Nor have we reached an understanding with Russia on the missile-defense bases the Bush administration was planning to build in Eastern Europe to protect us from Iran.
Speaking of Eastern Europe: America's fawning over Russia has left these nations wondering about Obama's commitment to their security in the looming shadow of an increasingly growly Moscow bear. In an open letter to Obama last week released in a Polish newspaper, 20 former senior officials from the region expressed concern about current US policies.
In Latin America, the Obamanistas totally botched the situation in Honduras, siding with power-grabbing, deposed President Manuel Zelaya -- and thus with his ally, Venezuelan caudillo Hugo Chavez.
They've also back-burnered getting Congress to ratify free-trade agreements with our best ally in Latin America, Colombia, as well as Panama -- and have gone cheap on helping Mexico fight the surging narcotraficantes just over the border.
Osama bin Laden, his deputy Ayman al Zawahiri and the rest of the al Qaeda gang haven't given up the ghost yet, either, despite Obama's can't-we-all-just-get-along speech in Cairo.
Sadly, there's nothing to balance out this string of losses in the wins column, sports fans. The hapless Washington Nationals have a better record.
OK, foreign policy is a tough business. But Obama overpromised on foreign affairs -- and, so far, he's underdelivered.
The president wrongly thought he could turn his perceived popularity abroad into results. Instead, like many liberals in the past, he's come face-to-face with the reality of the dog-eat-dog world of international politics, where some of the pooches are self-interested pit bulls. If current trends continue, we're going to end up on the wrong end of someone's canine teeth.
Indeed, as many have correctly said over the years, getting domestic policy wrong can cost people their jobs -- and it has. But getting foreign policy wrong can cost people their lives -- and it will.
Peter Brookes is a Heritage Foundation senior fellow and a former deputy assistant secretary of defense.
New York Post, Jul 23, 2009
MOST Americans have noticed that President Obama's economic policies aren't getting the job done. Fewer, however, realize that the administration's foreign policies are flagging after just six months in the White House, too.
Yup, that's right: All that Obama hopey-changey, blame- America-first, anything-but-W stuff hasn't restored, much less advanced, America's position in the world as was promised.
In fact, quite the opposite: Weak-kneed, apologetic "Obama-plomacy" is already being exploited across the globe -- at great expense to our national security.
Start with Iran: The Obama administration has extended an unclenched fist toward the mullahs, but the theocrats have done little more than slap it away -- repeatedly.
In fact, today they have even more uranium-enriching centrifuges spinning, meaning Iran is moving closer to having the bomb. Many analysts believe the fateful moment is just around the corner.
Yet the administration wants to give Tehran more time (till the end of the year) to see the error of its ways. Sorry, Mr. President: After 20-plus years of involvement in a mostly clandestine nuclear program, that's just not likely.
This "What, me worry?" attitude is putting Israel and the Arab Middle East increasingly on edge as they await the day Iran joins the Mushroom-Cloud Club.
And where was the leader of the Free World when Iranians were demonstrating -- indeed, dying -- for liberty on Tehran's streets recently? Spending weeks dithering with talking points to ensure he didn't look like he was "intervening."
Over in Asia, North Korea has launched missiles, set off a nuke and threatened war. The regime is refusing to come back to the nuclear-negotiating table and is holding two arrested US journalists. It's also likely trying to send bad stuff to the junta in Myanmar (possibly for transshipment to Iran or another rogue regime).
While he's rightly surged US troops in Afghanistan, Obama was unable to charm the Europeans into giving more troops, despite our mutual interest in keeping the country out of terrorists' mitts.
And then there's Russia. We made unilateral concessions in a strategic-arms agreement that may undermine the strength of our conventional forces by eliminating dual-mission bombers and submarines.
Obama's hope was that in exchange for the (in principle) nuke-arms-reducing pact, we'd get the Kremlin's help stopping Tehran's nuclear program. Oops: After the summit, Moscow publicly delinked the two issues.
Nor have we reached an understanding with Russia on the missile-defense bases the Bush administration was planning to build in Eastern Europe to protect us from Iran.
Speaking of Eastern Europe: America's fawning over Russia has left these nations wondering about Obama's commitment to their security in the looming shadow of an increasingly growly Moscow bear. In an open letter to Obama last week released in a Polish newspaper, 20 former senior officials from the region expressed concern about current US policies.
In Latin America, the Obamanistas totally botched the situation in Honduras, siding with power-grabbing, deposed President Manuel Zelaya -- and thus with his ally, Venezuelan caudillo Hugo Chavez.
They've also back-burnered getting Congress to ratify free-trade agreements with our best ally in Latin America, Colombia, as well as Panama -- and have gone cheap on helping Mexico fight the surging narcotraficantes just over the border.
Osama bin Laden, his deputy Ayman al Zawahiri and the rest of the al Qaeda gang haven't given up the ghost yet, either, despite Obama's can't-we-all-just-get-along speech in Cairo.
Sadly, there's nothing to balance out this string of losses in the wins column, sports fans. The hapless Washington Nationals have a better record.
OK, foreign policy is a tough business. But Obama overpromised on foreign affairs -- and, so far, he's underdelivered.
The president wrongly thought he could turn his perceived popularity abroad into results. Instead, like many liberals in the past, he's come face-to-face with the reality of the dog-eat-dog world of international politics, where some of the pooches are self-interested pit bulls. If current trends continue, we're going to end up on the wrong end of someone's canine teeth.
Indeed, as many have correctly said over the years, getting domestic policy wrong can cost people their jobs -- and it has. But getting foreign policy wrong can cost people their lives -- and it will.
Peter Brookes is a Heritage Foundation senior fellow and a former deputy assistant secretary of defense.
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