Is There a Correction in Our Future?

The New York Times and the Financial Times have both warned recently of a possible stock market (and economic?) correction in our future.

The NYT said on March 24, "Investors who fail to take a hard look at the vulnerability of the American economy are courting tremendous risk. The fact that after years of profligacy the federal government is fiscally ill prepared to respond to a destabilizing downturn only increases those risks."

William Rhodes, CEO of Citibank, wrote in the Financial Times on March 29:

The low spreads, the tremendous build-up of liquidity, the reach for yield and the lack of differentiation among borrowers have stimulated both dynamic growth and some real concerns....

As lenders and investors inevitably become more discriminating, liquidity will recede and a number of problems will surface....

I believe that over the next 12 months a market correction will occur and this time it will be a real correction....

Today, hedge funds, private equity and those involved in credit derivatives play important, and as yet largely untested, roles. The primary worry of many who make or regulate the market is not inflation or growth or interest rates, but instead the coming adjustment and the possible destabilising effect these new players could have on the functioning of international markets as liquidity recedes. It is also possible that they could provide relief for markets that face shortages of liquidity.

Either way, this clearly is the time to exercise greater prudence in lending and in investing and to resist any temptation to relax standards.

My own view of what's going on is that interest rates price both inflation and risk. When inflation was higher and interest rates were higher, they more or less incorporated the risk factor, i.e., it was relatively small in comparison to the inflation factor. As inflation fell and interest rates fell with it, the risk portion shrank in tandem. However, if anything the risk has been going up, not down, as hedge funds, private equity, and derivatives have played a more and more important role. In addition, the entry into the world economy of new major players such as China and India, who have kept inflation artificially low by depressing wage costs, has also kept the risk factor artificially low while actually increasing risk.

As Rhodes said, someday investors will begin to notice this underpricing of risk, maybe not until something happens to highlight the risk factor. The sub-prime mortgage sector is probably not big enough in itself to do this, but if some other bump comes along while sub-primes are still a problem, that might do it.

Politically, it should be noted that while interest rates have fallen for big investors, they have risen for small consumers. In addition to the sub-prime mortgage scandal, which came to light because the interest rates on these mortgages increased dramatically, credit card issuers are raising rates far above the prime rates they charge wealthy individuals, as well as adding all kinds of fees and penalties. This doesn't represent risk pricing so much as it does hucksterism and usury. Lenders are taking advantage of people who have gotten themselves in trouble by borrowing too much. This is illustrated by the fact that people in credit trouble often get more offers from lenders ("loan sharks," even if they are big, fancy banks) than people with good credit histories.

George Soros on AIPAC

George Soros has written an excellent article in the New York Review of Books, "On Israel, America and AIPAC." He calls on Israel and the US to deal with Hamas. He says:

AIPAC's mission is to ensure American support for Israel but in recent years it has overreached itself. It became closely allied with the neocons and was an enthusiastic supporter of the invasion of Iraq. It actively lobbied for the confirmation of John Bolton as US ambassador to the United Nations. It continues to oppose any dialogue with a Palestinian government that includes Hamas. More recently, it was among the pressure groups that prevailed upon the Democratic House leadership to drop the requirement that the President obtain congressional approval before taking military action against Iran. AIPAC under its current leadership has clearly exceeded its mission, and far from guaranteeing Israel's existence, has endangered it.

He takes on the American Jewish Committee's attacks on critics of Israel, which were praised by Bill Clinton, as I noted earlier. On behalf of the AJC, Alvin Rosenfeld attacks as anti-Semites Jews such as Tony Judt and Richard Cohen, and gentiles as well. Soros says:

Whether the Democratic Party can liberate itself from AIPAC's influence is highly doubtful. Any politician who dares to expose AIPAC's influence would incur its wrath; so very few can be expected to do so. It is up to the American Jewish community itself to rein in the organization that claims to represent it. But this is not possible without first disposing of the most insidious argument put forward by the defenders of the current policies: that the critics of Israel's policies of occupation, control, and repression on the West Bank and in East Jerusalem and Gaza engender anti-Semitism.

The opposite is the case. One of the myths propagated by the enemies of Israel is that there is an all-powerful Zionist conspiracy. That is a false accusation. Nevertheless, that AIPAC has been so successful in suppressing criticism has lent some credence to such false beliefs. Demolishing the wall of silence that has protected AIPAC would help lay them to rest. A debate within the Jewish community, instead of fomenting anti-Semitism, would only help diminish it.

Hooray for Soros! I don't know that it will have much effect. It's interesting that Bill Clinton is already undermining Soros, who has been one of the main benefactors of the Democratic Party through Move-On.org and other contributions. So, Soros' concern about whether the Democratic Party can liberate itself from AIPAC is well founded.

AIPAC supporters are already returning fire, see for example this article in Forward.

Bill Clinton Attacks Jimmy Carter for Jew Money

The following is from an email from the AJC:

President Clinton Thanks AJC for Efforts on New Carter Book

Former President Bill Clinton, in a handwritten letter to AJC Executive Director David Harris, voiced appreciation for his efforts to expose the inaccuracies in President Jimmy Carter’s book on the Israeli-Palestinian conflict. “Thanks so much for your articles about President Carter’s book. I don’t know where his information (or conclusions) came from …” said Clinton. “I’m grateful.”

Normally, one ex-President does not attack another, but apparently Bill and Hillary need money, and Jews have a lot of it. Bill is a smart guy, but he has the morals of a snake. His successor is stupid and has no morals at all. Poor America!

Jimmy Carter was intelligent and had morals. He would not negotiate for hostages. His undoing was that Ronald Reagan, unlike Carter, was willing to deal with Iran to get the hostages back and win the election. (Remember Iran-Contra?) Carter chose principle over being re-elected. And although he negotiated the Camp David accords, the Jews hate him because he is even-handed. Just like they hate Franklin Roosevelt, who liberated the surviving Jews from the concentration camps, because he was not willing to kill more Christians to save the Jews earlier. No one is likely to call Clinton or Bush even-handed in dealing with Israel and the Jews. Elliot Abrams, who was convicted of a felony for Iran-Contra, is one of Bush's senior national security advisers on the NSC.

Israel's Answer to Kristof

The Jerusalem Post has an op-ed replying to Nicholas Kristof's column on Israel. The bottom line is that Israel wants peace, but nobody else does. Sure, Israel wants peace if you call "peace" unconditional surrender by everybody else in the region. Israel wants peace about as much as Osama bin Laden does. Call a spade a spade! Israel hates all of its neighbors. It's not interested in peace.

Reagan's Courage Or Lack Thereof

Reading over VP Cheney's speech to AIPAC, I noticed that he mentioned the terrorist attack in Beirut in 1983 that killed 241 Marines. As he said, the US under Reagan withdrew from Beirut -- pulled out immediately; it did not "stay the course." That certainly qualifies as cowardice under today's definition by the Republicans of what Iraq withdrawal means. Yet, today Reagan is praised as a courageous leader who defeated Communism. Which is it? Is Reagan a courageous leader (in Europe) or a coward (in the Middle East)?

The Economist on AIPAC

The Economist magazine reports on the recent AIPAC meeting. AIPAC got every politician who counts to come kiss its feet. Cheney was particularly prominent in paying obeisance. Its violently right wing attitudes opposing Middle East peace on any basis expect complete surrender to Israel are its most identifiable characteristic, but The Economist points out that many American Jews are considerably less hawkish. And as I've mentioned earlier, many Israelis are less hawkish. Nevertheless, it says this is the best of times and the worst of times for AIPAC. Because of AIPAC's predominant position in Washington, it appears to be the spokesman for all American Jews. The article says that George Soros is considering starting up a liberal counterpoint organization to AIPAC, but so far he hasn't done so. He has written an excellent article in the Financial Times calling on the US and Israel to deal with Hamas. The Economist says:

The lobbyists had every reason to feel proud of their work. Congress has more Jewish members than ever before: 30 in the House and a remarkable 13 in the Senate. (There are now more Jews in Congress than Episcopalians.) Both parties are competing with each other to be the “soundest” on Israel. About two-thirds of Americans hold a favourable view of the place.

Yet they have reason to feel a bit nervous, too. The Iraq debacle has produced a fierce backlash against pro-war hawks, of which AIPAC was certainly one. It has also encouraged serious people to ask awkward questions about America's alliance with Israel. And a growing number of people want to push against AIPAC. One pressure group, the Council for the National Interest—run by two retired congressmen, Paul Findley, a Republican, and James Abourezk, a Democrat—even bills itself as the anti-AIPAC. The Leviathan may be mightier than ever, but there are more and more Captain Ahabs trying to get their harpoons in....

But the growing activism of liberal Jewish groups underlines a worrying fact for AIPAC: most Jews are fairly left-wing. Fully 77% of them think that the Iraq war was a mistake compared with 52% of all Americans. Eighty-seven per cent of Jews voted for the Democrats in 2006, and all but four of the Jews in Congress are Democrats.

An even bigger threat to AIPAC comes from the general climate of opinion. It is suddenly becoming possible for serious people—politicians and policymakers as well as academics—to ask hard questions about America's relationship with Israel. Is America pursuing its own interests in the Middle East, or Israel's? Should America tie itself so closely to the Israeli government's policies or should it forge other alliances?

Zbigniew Brzezinski, a former national security adviser, worries that America is seen in the Middle East as “acting increasingly on behalf of Israel”. Condoleezza Rice, the secretary of state, has compared the situation in Palestine to segregation, and argued that there could “be no greater legacy for America than to help bring into being a Palestinian state”. Philip Zelikow, her former counsellor, argues, in diplomatic language, that the only way to create a viable coalition against terrorists that includes Europeans, moderate Arabs and Israelis, is a “sense that Arab-Israeli issues are being addressed”.

Cowardice on Israel

Nicholas Kristof's column in yesterday's NYT was right. American politicians avoid criticism of Israel, no matter what Israel does. He correctly touts Jordanian King Abdullah's speech to the US Congress. And he correctly points out that there is much more criticism of Israeli policies in Israel than there is in the US. Kristof said:

One reason for the void is that American politicians have learned to muzzle themselves. In the run-up to the 2004 Democratic primaries, Howard Dean said he favored an “even-handed role” for the U.S. — and was blasted for being hostile to Israel. Likewise, Barack Obama has been scolded for daring to say: “Nobody is suffering more than the Palestinian people.” In contrast, Hillary Rodham Clinton has safely refused to show an inch of daylight between herself and Prime Minister Ehud Olmert.

A second reason may be that American politicians just don’t get it. King Abdullah of Jordan spoke to Congress this month and observed: “The wellspring of regional division, the source of resentment and frustration far beyond, is the denial of justice and peace in Palestine.” Though widely criticized, King Abdullah was exactly right: from Morocco to Yemen to Sudan, the Palestinian cause arouses ordinary people in coffee shops more than almost anything else.

He points out that last year while Palestinians killed 17 Israelis, of whom one was a child, the Israelis killed 660 Palestinians, of whom 141 were children.

It's ironic that Americans, especially American politicians who fear AIPAC, are so much more conservative in their support for oppresive Israeli policies than Israelis are themselves.

Too Bad Kahlid Sheik Mohammed Didn't Confess with Constitutional Protections

It's too bad that Khalid Sheik Mohammed confessed under the undemocratic conditions in Guantanamo. It makes the confession less believable and deniable by those who don't want to believe it, although it probably is true, at least part of it. The fact that he confessed to almost everything bad that's happened in the last 10 years are so, seems questionable, but he probably did at least some of them. The confessions to the ones he didn't do are probably due to torture, which makes you confess to almost anything whether you did it or not, or due to the fact that he wants to take the heat off of those who actually planned the other attacks.

In any case, the administration would have greatly aided its case in the court of world opinion by adhering to the rule of law in the treatment of its prisoners.

Listen to King Abdullah

King Abdullah of Jordan addressed a joint session of Congress and appeared on the PBS Newshour. He made an eloquent plea for peace in the Middle East, which he said should start with the Israel-Palestine issue. Here's the comment by James Zogby on the Huffington Post; not surprisingly Zogby liked the speech.

Review of Jimmy Carter Book on Israel

See this review of Jimmy Carter's book on Israel from the New York Review of Books.

Israel Gets More Foreign Aid from the US than the Continent of South America

Earlier I noted that the 2008 foreign aid budget for Israel, which Tom Friedman says has one of the strongest economies in the world, was about $2.4 billion. This USA Today article dealing with Bush's trip to South America says that aid for all Western Hemisphere countries, where tens of millions of people live in poverty, is slated to be $1.45 billion for 2008, cut from $1.6 billion this year.

Rice Mismanages Relationship with Russia

Despite Robert Gates' protestation in Munich that "One cold war is quite enough," we seem on the verge of a second one. Gates' remarked were prompted by Putin's speech in Munich, including statements such as, "Today we are witnessing an almost uncontained hyper use of force - military force - in international relations, force that is plunging the world into an abyss of permanent conflicts." And "We are seeing a greater and greater disdain for the basic principles of international law."

So how did Condi Rice let us get into this mess? She made her career, academically and politically, as an expert on the Soviet Union. If there is one relationship she should be able to manage, it's the one with Russia. Yet, we stay silent while Russia is straying far from the democratic ideals we once saw taking root there, and it wins international sympathy when it accuses the US of failing to respect international law. What's wrong with this picture?

When Bush looked into Putin's heart and saw a good man, did he consult Condi? I think Condi, based on her study of the old Soviet Union, looks at Putin and sees another Stalin or Brezhnev. These divergent view have produced stalemate, while the Pentagon coasting along on orders from its old boss, Rumsfeld, is planning anti-ballistic missile (ABM) sites in Poland and Czech. Interestingly, one of Bush's first affronts to international law was his decision to unilaterally leave the ABM treaty. A better man would have proposed to renegotiate it, not just dump it. The ABM treaty was intended to avoid the very problems now straining the US-Russian relationship. Do something, Condi!

For a different take, but one which doesn't really blame anybody much, see this Washington Post column by Fred Hiatt.

Giuliani & Vietnam

Giuliani seems to be leading the polls as the leading Republican candidate for President. Much of the enthusiasm for him seems to come from people who want a strong leader on national defense, and like him because of his actions during 9/11. As noted below, most of his support probably comes from fellow draft dodgers who feel guilty about avoiding the draft during Vietnam.

As a Vietnam veteran, I'm not happy about people who avoided the draft being touted as strong leaders on national security. Look at the mess we got with George Bush II (& Cheney) who ran on exactly that basis. This article links to several other articles about how Giuliani avoided the draft. I suspect that if he pushes 9/11 too hard, it will come back to haunt him; he talked a good game, but he didn't really do much. The World Trade Center is still basically just a hole in the ground. That may not be Giuliani's fault, but he didn't solve the problem either. Casualties of 9/11 got Federal money; I don't know that New York City did much for them. We'll see how it plays.

The strength of Giuliani's campaign has got to be embarrassing to Bush because the main reason that Giuliani gets so much credit for his performance after 9/11 was that Bush and Cheney were essentially missing in action immediately after the attacks.

Obama's Speech to AIPAC

Here's a link to Obama's speech to AIPAC. I haven't read it, yet, but I'm guessing it's better than a lot of Republicans' speeches to AIPAC, but probably not as tough on Israel as I would like. Can't offend those big contributors!

Walter Reed No Surprise

As a Vietnam veteran, I'm not surprised at what happened at Walter Reed Hospital. This country has not respected its veterans since World War II. The difference between World War II and subsequent wars is that almost everybody served in WW II, but fewer and fewer served in subsequent wars. The Korean War was close enough in time to WW II that some of the same respect carried over to Korean veterans, but they did not rate the "Greatest Generation" profusion of thanks that the WW II vets got. Of course, many Korean vets, like my father, were also WW II vets.

In essence, WW II vets looked out for each other. There were enough of them to dominate politics, business, and most other sectors of local and national life. Plus the war had come close enough to home, beginning in Hawaii and affecting every household with rationing, defense jobs, and other direct impacts, so that no one could ignore it, even if they didn't fight. Korea was less intrusive; Vietnam even less, and Iraq, with no draft, almost not at all. How many households today are making significant sacrifices because of Iraq? Outside of military families, not many. And those profiting the most -- Halliburton, and other unscrupulous defense contractors -- seem to represent the very worst of America.

While Vietnam vets were off in Asia, their draft avoiding cohorts were getting ahead in life. But, especially because of avoiding the draft, they felt guilty about it, and therefore tended to do whatever they could to bring down the returning veterans, such as calling them war criminals, baby killers, etc. The draft dodgers tried to make the returning veterans into second class citizens, in order to make themselves feel better about not serving. This was especially harmful to the lower class soldiers, often poor and black, who came back and found it harder to get jobs and re-integrate into society. When I was working at the State Department in Washington, I was struck by the fact that there were probably more Vietnam vets sleeping on the steam grates outside of the State Department than there were working inside of the building.

Iraq is probably somewhat better for the veterans because there is no draft. Thus, their cohorts can feel less guilty about not fighting there, especially if they go around saying they support the troops. Saying they support the troops has the additional benefit of encouraging someone else (besides them) to go fight in Iraq. So, Iraqi veterans are probably treated somewhat better than Vietnam veterans were, despite abuses like Abu Ghraib and the various murders and rapes currently under investigation, which probably surpass the atrocities committed in Vietnam. These things happen; war is hell, but compared to Vietnam, the Iraqi vets pretty much get a pass in the atrocity department. Again, partly because to reduce these atrocities, you need better quality troops, college educated from good families, exactly the type that are avoiding going. But despite all the talk about supporting the troops, Americans really don't. They go on about their lives. Hence, the atrocities at Walter Reed. And Iraqi vets should not think that once the war is over, having "veteran" on their resume will help them get a job; it will probably work against them.

Aid to Israel

In his February 28 column in the NYT, Tom Friedman wrote about Israel:

''The economy is blooming, growing in the last quarter of 2006 by almost 8%,'' said Sever Plocker of the Yedioth Ahronoth newspaper, who is one of Israel's top economics writers. ''Foreign direct investment is flowing in at unprecedented rate -- $13.4 billion in 2006. The high-tech sector exports are approaching $18 billion, and the stock exchange is at an all-time high. The shekel is stronger than ever, the inflation nonexistent. Interest rates are lower than in U.S. or Britain, the budget deficit less than 1% of G.D.P., and the balance of payments is positive, which means Israel achieved its economic independence and is actually a net creditor to the rest of the world.

''In short, we never had it so good in the economy.''

Yossi Vardi, one of the founding fathers of Israel's high-tech industry, told me that in the last month alone, four start-ups that he was an investor in were sold: one to Cisco, one Microsoft, and two to Israeli companies. ''In the last nine months I've probably invested in at least nine new companies,'' added Mr. Vardi, all started by ''kids 25 to 35 years old.''

Meanwhile, the US continues to send billions in "foreign assistance" to Israel, which according to Tom Friedman has one of the most vibrant economies in the world. The following is from a Congressional Research Service report on Israel (page 18):

Israel has been the largest recipient of U.S. foreign aid since 1976. In 1998, Israeli, congressional, and Administration officials agreed to reduce U.S. $1.2 billion in Economic Support Funds (ESF) to zero over ten years, while increasing Foreign Military Financing (FMF) from $1.8 billion to $2.4 billion. The process began in FY1999, with P.L. 105-277, October 21, 1998. Separately from the scheduled ESF cuts, Israeli has received an extra $1.2 billion to fund implementation of the Wye agreement (part of the Israeli-Palestinian peace process) in FY2000, $200 million in anti-terror assistance in FY2002, and $1 billion in FMF in the supplemental appropriations bill for FY2003. P.L. 109-102, November 14, 2005, the Foreign Operations Appropriations Act, 2006, provided $240 million in ESF, $2.28 billion in FMF, and $40 million for the settlement of migrants to Israel. H.R. 5522, the Foreign Operations Appropriations bill, FY2007, passed in the House on June 9, 2006, appropriates $120 million in ESF, $40 million for migration and refugee assistance, and $2.34 billion in FMF (of which $610 million may be spent for defense acquisitions in Israel), for Israel. The Senate has not yet passed a bill....

Congress has legislated other special provisions regarding aid to Israel. Since the 1980s, ESF and FMF have been provided as all grant cash transfers, not designated for particular projects, and have been transferred as a lump sum in the first month of the fiscal year, instead of in periodic increments. Israel is allowed to spend about one-quarter of the military aid for the procurement in Israel of defense articles and services, including research and development, rather than in the United States. Finally, to help Israel out of its economic slump, P.L. 108-11, April 16, 2003, provided $9 billion in loan guarantees over three years, use of which has since been extended to 2008 and may be extended further. As of September 2006, $4.5 billion of the guarantees remain unexpended.

According to State Department budget documents, for 2008 the budget requested $2.4 billion in Foreign Military Financing (FMF) for Israel out of a total budget of $4.536 billion, or about 53% of all of this assistance for the entire world. On the other hand, the budget includes no funds for Israel from the Economic Support Fund, which also totals over $4 billion worldwide.

Names from the Past

Larry Pezzullo, the subject of this book by his son Ralph, worked in the same suite of offices I worked in when I was working on the Brazil desk early in my State Department career. I think he was preparing to go to Uruguay as ambassador.

Chas Freeman, who was DCM (#2) at the embassy in Bangkok when I was assigned there, and went on to be ambassador to Saudi Arabia among other things, has written several articles;
--A talk to new members of Congress entitled, "National Security in the Age of Terrorism," and
--A series of articles on "Diplomacy and Empire."

Terri Jones and her husband David have written an article on global warming, "The Zen of Global Warming." I worked with Terri in the State Department's OES (Oceans, Environment and Science) bureau in the early 1990's.