JOHAN NORBERG GLOBLOG
A direct link to each entry is obtained by using the button below the entry.

Thursday, 16/7/2009:

09:25 - GOLDMAN SACHS´ RECORD PROFITS - A BAD SIGN:

Goldman Sachs´ record $3.44 billion profit has been welcomed as a sign that the crisis is about to end. But as Wall Street Journal points out, it is probably a sign that all the new government guarantees and bailouts have distorted tha banks´ incentives even more. It´s now in their interest to take enormous risk because potential losses can be sent to taxpayers:

"Goldman´s traders profited in the second quarter from taking advantage of spreads left wide by the disappearance of some competitors (Lehman, Bear Stearns) and the risk aversion of others (Morgan Stanley). Meantime, Goldman´s own credit spreads over Treasurys have narrowed as the market has priced in the likelihood that the government stands behind the risks it is taking in its proprietary trading books...

So for the moment, Goldman Sachs -- or should we say Goldie Mac? -- enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong. We like profits as much as the next capitalist. But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business."

The most market-friendly solution would be to abolish guarantees and prepare a process for seizing and winding down failing giants. But if that is not possible, WSJ want to restrict proprietary trading done by guaranteed financial entities, or to introduce a bailout tax for those deemed too big to fail, so that those institutions would have to pay for the privilege themselves.

Wednesday, 15/7/2009:

00:10 - MICHAEL MOORE WITHOUT THE LAUGHS:

I just read an attack on free markets that was even less impressive than the average anti-globalisation pamphlet. It´s terribly pretentious, but its strong, sweeping statements about the destructive role of markets and globalisation are never backed up with any evidence or statistics. It´s Michael Moore, without the laughs.

The text complains about poverty, without mentioning that poverty has been reduced everywhere where there has been economic freedom, and when it has to admit that some progress has been made in poor countries, it trivialises, mocks and even opposes the biggest poverty reduction in mankind´s history:

"In poorer areas some groups enjoy a sort of ´superdevelopment´ of a wasteful and consumerist kind which forms an unacceptable contrast with the ongoing situations of dehumanizing deprivation."

Instead it presents the usual complaint that free trade and institutional competition results in a race to the bottom, without presenting any new research to back it up:

"These processes have led to a downsizing of social security systems as the price to be paid for seeking greater competitive advantage in the global market, with consequent grave danger for the rights of workers, for fundamental human rights and for the solidarity associated with the traditional forms of the social State."

And part of the solution is said to be government intervention, forced redistribution and more power to trade unions, without ever analysing how these institutions have often undermined freedom, creativit and living standards.

But as I indicated, there is no reason to take this text seriously, because it just contains statements, and no arguments, statistics or research to back them up. Perhaps that´s because the writer relies completely on divine inspiration. It´s Pope Benedict XVI, in his Enclyclical Letter Caritas In Veritate.

It´s fitting, don´t you think, that the Pope combines his bizarre, reactionary thoughts on social issues with this unsubstantiated, reactionary attacks on free markets?

Monday, 13/7/2009:

17:16 - KREATIVITET, INTE KVANTITET:

"Vad gäller USA:s undergång så kan man konstatera att detta inte är första gången den har förutspåtts. Först skulle Japan ta över världen, sedan Indien och nu Kina. Det man då glömmer är den oerhört entreprenöriella kultur som finns i det stora landet i väst. I princip samtliga nya helt revolutionerande affärsmodeller de senaste 20 åren kommer från USA.

Amazon, Google, Dell, Wikipedia, Ebay, Itunes, Iphone, Facebook, Twitter, alla dessa företag har skakat om branscher i grunden. Listan är ändlös. Landets kultur att uppmuntra entreprenörskap och att hylla framgång är ett recept som slår billig tillverkning och många högskoleelever många gånger om."

- Mats Qviberg ger oss hoppet om USA åter, i Expressen.

08:09 - PERSPEKTIVSKIFTE:

"Det får nästan alla andra göra", säger Lars Ohly när han tycker att kronprinsessan borde fixa sin bostad själv. Det är klart att hon borde, men varför sluta där? Ohlys "nästan" behövs därför att en grupp som slipper fixa är riksdagsledamöterna. Låt även dem fixa sina bostäder (övernattningslägenheter i Stockholm) själva, så skulle de nog snart införa en rimligare bostadspolitik.

Sunday, 12/7/2009:

09:59 - $288 000 000 000 TO DESTROY FOOD TRADE:

In another eloquent and intelligent speech Barack Obama says that he wants Ghana - and the rest of Africa - to get rich by be exporting food.

Talk is cheap.

The 2008 $288 billion US Farm Bill that Obama supported is expensive.

Friday, 10/7/2009:

14:50 - BAD TIMING:

Do you wonder what happened to the US stimulus money? It´s slowly working its way through the political process and the economy so that it´s ready to stimulate and overheat the economy when it´s already improving.

Only 47 percent of the highly stimulative spending (only about 40% of the total package, the one with Keynesian multiplier effects) will be spent by the end of fiscal year 2010. A year later, more than a quarter is still not spent, according to the Congressional Budget Office.

Wednesday, 8/7/2009:

08:29 - IMMIGRANTS AND CRIME:

Ok, the time has come to speak candidly about immigration and crime. American studies shows that there is a clear correlation: Immigrants are less likely to commit crimes than native-born. This is true for the nation as a whole, for cities with large immigrant populations and for cities along the US-Mexican border, as Radley Balko explains in Reason.

One reason is that immigrants have an important stake in society, and the costs of losing that is too large. That also points to another possible correlation: Crime is low as long as immigrants are welcome and can integrate into the economy. But if the signs say "Italians Need Not Apply" (as they did), they might have nowhere to go but into crime. So a Europe that is less welcoming and has a more regulated labour market might also turn more immigrants into criminals

It´s not you, it´s me.

(Thanks Johan)

Monday, 6/7/2009:

11:52 - SWEDEN IN THE ECONOMIST:

In The Economist this week Charlemagne is impressed by Sweden´s combination of free markets and welfare state, and says that if Zurich were crossed with Sydney, you would get Stockholm (he picked a good, sunny week to visit). When explaining why Sweden works relatively well he turns to some thoughts of mine, and a forthcoming Cato essay that I have written on the subject:

"Sweden’s big state works because it is Swedish, not because it is big, says Johan Norberg, a liberal economist. The country has had an efficient bureaucracy for 200 years. The public sector expanded only in the 1950s, after a century of astonishing economic growth driven by free trade and free markets (from 1850 to 1950, average incomes multiplied eightfold, as a poor peasant society was transformed into one of the world’s richest countries)."

It would be hard to object to that (apart from the attempt to make an economist out of me).

Thursday, 2/7/2009:

11:02 - POWERPAREN :-):

Jag är inte bara gift med en förtjusande kvinna. Tillsammans har vi tydligen en hel del makt också...

10:43 - KONSERVATISM I MELLANMJÖLKENS FÖRLOVADE LAND:

Roland Poirier Martinssons korståg för konservatismens fortsätter, nu på DN Debatt, där han påstår att kristdemokraterna skulle kunna bli större om de blev mer konservativa. Men trots en påkostad opinionsundersökning och en rad fokusgrupper har Poirier Martinsson inte lyckats visa så mycket mer än att de flesta svenskar är emot daltande med brottslingar, för välfärdsstaten och arbetslinjen (och snusexport!).

Om det är konservatism så är det en "vi-gör-som-vi-alltid-gjort-och-tycker-aldrig-något-som-stör-bordsdamen"-mellanmjölkskonservatism och det täcks väl redan ganska väl in av fyra-fem partier med 80 procent av väljarna bakom sig (inklusive kd). Poirier Martinsson redogör inte för några siffror som tyder på att svenskar vill hindra aborter, missgynna alternativa familjebildningar, betona kristendomen i politiken mer el dyl.

Det är möjligt att kd skulle vinna på att bli mer antiliberalt i kultur- och livsstilsfrågor, men det finns inget i denna artikeln som ger stöd för den tron.

Wednesday, 1/7/2009:

07:47 - MARY POPPINS AND THE US POSTAL SERVICE:

As you might have noticed from my absence I have left for Summer - I am on the west coast for my brother´s wedding and now on my way to the music festival in Arvika. But after I left Stockholm, The Economist´s Charlemagne travelled there, and was impressed by the public services: If it is a nanny state, it is a Mary Poppins nanny state.

I offer my own explanation: Bureaurcatic competence was there first, and that´s the reason why Swedes could get big government to work relatively well (relative to other countries). More government in the US would not get them a big version of Sweden, it would get them a big version of the US Postal Service.

And if you want the historical reason for Sweden´s exceptionalism I think that in a small, homogenous country without feudalism and invaders, people who became part of the bureaucracy didn´t see themselves as belonging to a more exclusive group with privileges, and people and voters never expected or allowed them to.

Marc Faber Governments Should Be Fired

Obama’s Tax-and-Spend Tastes Seduce Democrats: Caroline Baum

Commentary by Caroline Baum

July 17 (Bloomberg) -- Bill Clinton was in the White House in 1998 when the federal budget went into surplus for the first time in four decades. The budget stayed in the black for the next three years until the Iraq War and the “limited- government” Republicans blew a gaping hole in its side.

Of course, the Clinton budget office never forecast those surpluses. The 1997 reduction in the capital gains tax in conjunction with a stock-market bubble conspired to produce an April tax surprise for several years running.

The surpluses did go a long way toward helping the Democrats shed their label as the party of tax and spend.

President Barack Obama is wasting little time returning his party to its roots.

“He has grand plans and no revenue to pay for them,” says Joe Carson, chief economist at AllianceBernstein.

No revenue? No problem. Taxing the wealthy, and eventually the not-so-wealthy, seems to be the new revenue avenue. In fact, everyone who pays taxes will probably pay more in the near future.

And there’s an increasingly small number that do. An estimated 47 percent of tax filers will pay no income tax in 2009, according to an analysis by the Tax Policy Center. That’s perilously close to a majority. When half the population is on the receiving end of government programs and has no skin in the cost, they will encourage their elected representatives to vote “yes” on every new benefit that comes down the pike.

Universal health care? Slap a surtax on the rich. Exact a penalty fee from companies that don’t provide health insurance to workers. And if the promised cost savings don’t materialize? Just increase the surtax on income and capital gains.

Stakeholders vs. Beneficiaries

What about that aging infrastructure in need of an update? Get businesses to pay for it. A bill introduced in the House of Representatives earlier this week would tax corporate profits to pay for “repairing America’s corroded pipes and overburdened sewer systems,” according to Congressman Earl Blumenauer, Democrat of Oregon, the bill’s chief sponsor. “The $10 billion annual fund will create more than 250,000 jobs.”

That would be in addition to the (fill-in-the-number) million jobs Obama says the $787 billion fiscal stimulus will save or create. (The number keeps changing, which doesn’t really matter since the effect can’t be quantified.)

Blumenauer and his colleagues should read what the Congressional Budget Office has to say about the effect of various proposals on jobs.

‘Play or Pay’

When it comes to health care, employers may pay for insurance, but employees bear the cost -- in the form of lower wages, for example. Imposing “play-or-pay requirements” on employers, as the House’s version of the health-care bill does, could have a negative impact on minimum-wage workers because businesses can’t pass the additional cost along, the CBO says.

Raising the cost of doing business is not an incentive to hire.

“It’s not creating jobs,” says Michael Aronstein, president of Marketfield Asset Management in New York. “It’s not creating businesses. As far as I can tell, there’s not a single thing in the thousands of pages of legislation that would encourage anyone to start or expand a business in the U.S.”

The Bush tax cuts, set to expire in 2010, are supposed to pay for part of cap-and-trade, a plan to cap carbon emissions by creating a market for companies to trade pollution permits. The House of Representatives is floating an array of tax proposals as part of the five-year transportation reauthorization bill, the previous repository of such pork-barrel projects as the “Bridge to Nowhere,” according to Pete Sepp, vice president for communications at Washington’s National Taxpayers Union: things like a mileage tax or gas-guzzler tax.

Redistributing Wealth

Those taxes would fall disproportionately on the poor, which means the Obama administration might have to -- what else? -- soak the rich by selecting only high-end cars as targets.

And to think last year policy makers were worried about the destabilizing effects income inequality could have on society. Aronstein wonders how close we’re getting to a “tax revolt” on the part of those who pay taxes.

The top 1 percent of tax filers, or those with adjusted gross incomes of $389,000 or more, paid 40 percent of the personal income tax in 2006, according to the NTU. The top 50 percent paid 97 percent; the bottom 50 percent paid 3 percent.

And just to make sure the rich don’t catch any kind of break, the White House is still pushing its plan to limit the deductibility of charitable contributions, mortgage interest and other investment expenses.

Highway Robbery

You have to give the president credit for applying gangster Willie Sutton’s apocryphal advice on robbing banks: If you want to raise revenue, go where the money is.

Where the president falls short is in his understanding of the mechanics of job creation. The rich and near-rich who will finance his grand plans are the ones who create the companies that hire the workers.

In less than four years, the voters will get to weigh in on the Democratic Party’s reconnection to its tax-and-spend roots. We know how the beneficiaries of government largess will vote. The only question is whether the taxpaying public will have voted with its feet, leaving the benefits -- and the burden --to others.

Obama’s Stimulus Plan Slow to Trickle Through Economy (Update1)

By Matthew Benjamin and Alison Sider

July 17 (Bloomberg) -- The debate over whether the $787 billion stimulus package is sufficiently large or efficiently designed obscures a broader question, some economists say: Can any fiscal measure pull the economy out of the recession?

With credit still crimped and the outlook for consumer demand gloomy due to rising unemployment and increased personal saving, no amount of government intervention will be able to stanch the hemorrhaging of jobs and quickly ease the U.S. out of its deepest recession in a half-century, they said.

“Many households that want to borrow can’t, and many that can borrow won’t because they now must save for retirement the old-fashioned way,” said Richard Clarida, global strategic adviser at Newport Beach, California-based Pacific Investment Management Co., the world’s biggest bond-fund manager. “As a result, the multiplier from even a well-designed stimulus package is likely to be quite modest.”

The stimulus plan passed in February “is executing pretty much as expected,” yet it “won’t affect the economy’s primary problems, which are falling values of assets like homes and stocks,” said Doug Holtz-Eakin, who was director of the Congressional Budget Office from 2003 to 2006 and is now president at DHE Consulting LLC in Washington. So far, about $60 billion in spending and $43 billion in tax relief has been dispensed, accounting for 13 percent of the plan’s total.

Bond Yields

The slow pace of recovery has driven bond yields lower as investors continue to seek the safety of U.S. government debt. Ten-year note yields are down 38 basis points, or 0.38 percentage point, since June 10.

The outlook for many companies also is clouded. General Electric Co.’s second-quarter profit from continuing operations declined 47 percent, and revenue fell 17 percent, the company said in a statement today. GE, the world’s biggest maker of power-generation equipment and services, is targeting more than 400 stimulus projects valued at $200 billion worldwide, the Fairfield, Connecticut-based company’s chairman and chief executive officer, Jeffrey Immelt, said. While little has been realized so far this year, Immelt said he expects more in the second half.

Proponents of the stimulus said the economic situation and the prospects for recovery would be much bleaker if no fiscal response had been put in place.

‘It’s Working’

“It’s working, it’s demonstrably working,” said Jared Bernstein, chief economic adviser to Vice President Joseph Biden, whose office is overseeing the stimulus rollout.

Even though a second stimulus package is unlikely at this point, those advocating such a measure said it may be needed precisely because the effects of the first have been so modest.

The combination of rising unemployment and thrifty consumers “definitely lowers the multiplier effect” of every stimulus dollar spent, said Dean Baker, a co-director of the Center for Economic and Policy Research in Washington. “That just means you need more stimulus. There’s really no alternative.”

Obama administration officials such as Treasury Secretary Timothy Geithner said the measure needs time to work and are appealing for patience.

“The stimulus program was designed to make a contribution over a two-year period and the biggest impact on investment will come in the second half of this year,” Geithner said yesterday in an Internet chat with Les Echos newspaper in Paris.

Martin Feldstein, a professor of economics at Harvard University in Cambridge, Massachusetts, and former head of the National Bureau of Economic Research, said the stimulus may provide a short-term boost that will quickly ebb.

‘Fade Out’

“We’ll get that bounce for a couple of quarters but then it will fade out,” Feldstein said.

It’s too early to consider another round of fiscal priming, Geithner said. “I don’t think we’re in a position yet to make that judgment.”

For the moment, the initial measure has shown little impact. The net worth of households has fallen almost 22 percent, by almost $14 trillion, since 2007, to the lowest level in five years. House prices have fallen more than 32 percent from their 2006 peak, according to the S&P/Case-Shiller national index, while the Standard & Poor’s index of 500 stocks is 40 percent below its October 2007 level.

The crisis reminded Americans that home values can fall as well as rise and that bull markets don’t last forever, causing consumers to stash away a much larger portion of their incomes. Government data showed that the household savings rate rose to 6.9 percent in May, from zero in April 2008. The May figure is the highest in almost 16 years.

Personal Savings

Nouriel Roubini, an economist at New York University who is chairman of RGE Monitor, and Richard Berner, co-head of global economics at Morgan Stanley in New York, forecast the rate could rise to 10 percent. Economists Reuven Glick and Kevin Lansing of the Federal Reserve Bank of San Francisco estimated in a May 18 paper that Americans would continue to boost their rate of savings, which could reach 10 percent by 2018. Such a jump would trim three-quarters of a percentage point per year from consumer spending.

“There’s been a fundamental change in people’s behavior,” said Lyle Gramley, a senior economic adviser with New York-based Soleil Securities Corp. and a former Federal Reserve governor.

Rising joblessness could further damp the ability of consumers, whose spending in recent years has made up more than two-thirds of the economy, to continue to shoulder that burden.

Contractions in industries such as autos, construction and financial services have helped shrink payrolls by 6.5 million since the recession began in 2007, Labor Department figures show. The June jobless rate reached 9.5 percent, the highest since 1983.

Jobless Rate

Federal Reserve officials are anticipating a jobless rate of 9.8 percent to 10.1 percent this year, according to the central bank’s latest economic forecast. In an interview last month, President Barack Obama also said the jobless rate would exceed 10 percent before turning for the better.

In addition, the rolls of the long-term unemployed are growing, with 29 percent of the jobless out of work for more than 26 weeks, the most since records began in 1948. A broader measure of underemployment that includes those who want full- time positions but work part-time has almost doubled over the past two years, to 16.5 percent.

Consumer spending is forecast to rise 1.5 percent in the fourth quarter and 1.7 percent for all of 2010, according to a July Bloomberg survey of more than 50 economists. The average quarterly increase from 1997 through 2007 was 3.5 percent.

‘Consumption Animal’

The U.S. consumer “clearly is not going to be the consumption animal that he was for the last 10 or 20 years,” Joshua Shapiro, chief U.S. economist at MFR Inc. in New York, said in a July 6 interview with Bloomberg radio.

Retailers such as San Francisco-based Gap Inc., operator of the Old Navy and Banana Republic chains, and Abercrombie & Fitch Co., a teen-clothing franchise based in New Albany, Ohio, are feeling the pinch. Both reported June sales declines steeper than analysts estimated.

Airlines including Fort Worth, Texas-based AMR Corp., parent of American Airlines, are suffering as business travel declined. The world’s second-largest carrier’s traffic, measured in miles flown by paying passengers, fell 8.2 percent for the quarter, as American and other airlines discounted fares to fill planes. American filled 81.8 percent of its available seats in the second quarter, down from 82.5 percent a year earlier.

Credit Crunch

Credit, which consumers often turn to during recessions, remains difficult to obtain for many Americans.

About 50 percent of domestic banks tightened credit standards on prime mortgages in the first months of 2009, up from 45 percent in January, according to a survey of bank loan officers conducted by the Federal Reserve in April.

“Although financial market conditions had improved, credit was still quite tight in many sectors,” the central bank said in minutes of the Federal Open Market Committee’s June 23-24 meeting, released earlier this week.

What this means, Clarida said, is that “you’re not going to get the bang per buck that some of the stimulus proponents hoped for.”

U.S. Markets Wrap: Dow Industrials Rise, Bonds Fall on Housing

By Elizabeth Stanton

July 17 (Bloomberg) -- The Dow Jones Industrial Average rose, capping its best weekly gain since March, as International Business Machines Corp. rallied on an increased earnings forecast and housing starts unexpectedly jumped. Oil rose and treasuries declined.

IBM surged 4.3 percent as cost cuts improved its profit outlook. JPMorgan Chase & Co., KB Home and DR Horton Inc. gained as builders broke ground on the most homes in seven months. Four stocks fell for every three that rose on the New York Stock Exchange. The Standard & Poor’s 500 Index slipped, giving it a weekly gain to 7 percent.

“The large, multi-national companies that have more than 50 percent of their business overseas are doing quite well in this earnings season,” said Kevin Rendino, who manages $10 billion including IBM shares at BlackRock Inc. in Plainsboro, New Jersey. “It’s definitely a stock picker’s market.”

The Dow added 32.12 points, or 0.4 percent, to 8,743.94 at 4:05 p.m. in New York. The S&P 500 slipped less than 0.1 percent to 940.38. The Russell 2000 Index fell 0.5 percent.

The Dow advanced 7.3 percent this week after analyst Meredith Whitney said bank shares will rally and companies from Goldman Sachs Group Inc. to Intel Corp. and Johnson & Johnson reported results that topped estimates. The S&P 500’s weekly gain was also its best since March.

Earnings Beat Estimates

Earnings beat analysts’ estimates by an average of 16 percent for the 38 companies in the S&P 500 that released results since July 8. Profits fell an average 35 percent in the second quarter and will drop 21 percent from July through September, according to analysts’ estimates compiled by Bloomberg. The S&P 500 has rallied 39 percent from its 12-year low on March 9 amid speculation the economy is recovering.

“Analysts had lowered their expectations to the point that most companies seem to be beating in one fashion or another,” said William Dwyer, senior investment officer at Baltimore-based MTB Investment Advisors Inc., which manages $13 billion.

IBM advanced $4.78 to $115.42, the highest since Sept. 30. The world’s biggest computer-services provider was the second technology company in the Dow this week to post forecasts that beat estimates, following Intel on July 14, indicating they are coping with the worst economic slump in five decades.

Technology Companies Advance

Technology companies, the best-performing industry group in the S&P 500 this year, extended their 2009 gain to 31 percent, nearly double the 16 percent return of commodity producers, the next-best group.

IBM made almost 65 percent of its revenue outside the U.S. last year, while Intel Corp. made all but 15 percent of its sales in other countries. Growth in Emerging and developing economies will outpace advanced economies this year and next year, the International Monetary Fund predicted July 8.

The IMF forecast growth of 4.7 percent next year and 1.5 percent this year for emerging economies. Developed economies will grow 0.6 percent in 2010 after shrinking 3.8 percent this year, the Washington-based lender said. The U.S. economy will shrink 2.6 percent this year and grow 0.8 percent next year, the IMF said.

Treasuries fell, posting their first five-day decline in six weeks, after the housing starts report added to signs the recession may be easing.

Ten-year note yields rose after Commerce Department figures showed U.S. housing starts increased 3.6 percent to an annual rate of 582,000, higher than the 530,000 median forecast of economists surveyed by Bloomberg News. Yields declined earlier after bomb blasts in Indonesia’s capital Jakarta killed eight people, spurring demand for the safety of U.S. debt.

‘Caught Off Guard’

“The bond market was completely caught off guard by the increase in housing starts,” said Jane Caron, chief economic strategist in Burlington, Vermont, at Dwight Asset Management Co., which oversees $70 billion. “The market took it as a positive sign.”

The 10-year yield rose nine basis points, or 0.09 percentage point, to 3.65 percent at 4:52 p.m. in New York, according to BGCantor Market Data. The price of the 3.125 percent security maturing in May 2019 fell 23/32, or $7.19 per $1,000 face value, to 95 22/32.

The dollar and the yen posted the biggest weekly declines against the euro since May as increasing U.S. housing starts and companies reporting earnings that topped analysts’ estimates boosted demand for higher-yielding assets.

Dollar, Yen Rebound

The U.S. and Japanese currencies rebounded today versus the Australian and New Zealand dollars after explosions at two hotels in Indonesia renewed demand for a refuge from turmoil. The Mexican peso headed for a weekly gain after policy makers said they will “pause” after cutting the overnight interest rate a quarter percentage point to 4.5 percent.

“We finish the week with economic data globally not as bad as people feared, and the market is willing to take risk again,” said Mark Rzepczynski, managing director at Lakewood Partners, a fund management firm in Boston. “We’ll continue to have the push-and-pull between inflation and deflation, between flight-to-quality and global risk seeking.”

The U.S. currency fell 1.2 percent to $1.4102 per euro at 5 p.m. in New York, from $1.3936 on July 10. The yen lost 3 percent to 132.85 per euro, from 129 a week earlier. The declines were the biggest since the five-day period ended May 22. The Japanese currency fell 1.8 percent to 94.19 per dollar this week.

Crude oil rose more than $1 a barrel as construction of single-family dwellings jumped by the most since 2004, a sign the worst of the recession may have passed.

Crude Rises

Oil increased after the Commerce Department reported that construction of single-family homes climbed 14 percent in June. The report also showed that total housing starts rose to the highest since November. Futures tumbled to $32.40 a barrel in December, a four-year low, as the economic contraction curbed demand, allowing stockpiles to grow.

“The housing starts number was frankly great,” said Bill O’Grady, the chief market strategist for Confluence Investment Management in St. Louis. “You are starting to see evidence that the worst of the recession is over.”

Crude oil for August delivery rose $1.54, or 2.5 percent, to $63.56 a barrel at 2:50 p.m. on the New York Mercantile Exchange, the highest settlement price since July 6. Oil climbed 6.1 percent this week, the first weekly gain since June 12. Futures are down 57 percent from a record $147.27 a barrel reached on July 11, 2008.

Marc Faber Governments Should Be Fired

Michael Savage - Obama's Communist Revolution in America and Universal HealthCare

British forces in Afghanistan

And the soldier home from the hill

The British public is honouring its fallen troops as never before. But for how long will it support the war in Afghanistan?

FIRST came the tolling bells of St Bartholomew’s church. Then the traffic disappeared and the throng on both sides of the road fell silent. The order for the members of the Royal British Legion to dip their standards was shouted out. The undertaker, in a black top hat, began his slow march, followed by eight gleaming hearses, each carrying the coffin of a fallen British soldier wrapped in the Union Flag. Their passage was punctuated by faint thuds of flowers being thrown on the bonnets. Hesitantly at first, then vigorously, a ripple of applause rose from the onlookers. Finally came the sound of muffled sobbing.

The village of Wootton Bassett in Wiltshire, close to RAF Lyneham, has honoured British servicemen killed in war dozens of times since the first impromptu show of respect in 2007. But never has there been a public salute such as the gathering on July 14th. It became a national day of mourning, broadcast live on television, with thousands of people from across the country—veterans of wars past, and citizens who have never known war—honouring the dead soldiers. It was not a day for politics. But there was a clear sense of anger with the government, whether for sending boys to die in a distant war, or for trying to fight that war on the cheap, without the right manpower or equipment. “I’m here to respect them young lads that have lost their lives over what I consider an unnecessary war,” said a former soldier wearing three campaign medals. “They [the Afghans] thrashed the Russians, and they’re going to thrash us again.”

The British public has long been accustomed to the deaths in action of its servicemen. Almost every year since 1945 has seen military fatalities in some corner of the world. Indeed, Britain prides itself on being a nation of fine soldiers. It invaded Iraq with America, and provides the second-largest contingent of forces to the NATO-led International Security Assistance Force (ISAF) in Afghanistan. But something is shifting in the attitude of the British public towards the war in Afghanistan, and it will be watched closely by America and other allies. President Barack Obama has been quick to praise the “extraordinary” work of British troops, recognising that he needs to help keep them in the fight.

It has been a particularly bloody month in Helmand province, where British troops have been slugging it out with the Taliban for three years for limited gains. Fifteen soldiers have died so far this month; more have now lost their lives in Afghanistan than in Iraq. The eight who arrived at Wootton Bassett died in the space of 24 hours. Five were killed in a double bombing in Sang in that all but put their platoon out of action. The rest died in the district of Nad Ali, where the British forces are trying to push the Taliban out in Operation Panchai Palang, or Panther’s Claw. The operation has been making slow progress through a maze of irrigation canals—a terrain as hard as the bocage of Normandy in the second world war, mixed with Iraq-like fighting around civilian compounds and countless home-made bombs. To a growing number of critics, it is the British who are caught in the Taliban’s claws.

The war in Afghanistan has, until recently, had an oddly low political profile in Britain. One reason is that it was long overshadowed by the conflict in Iraq. With the withdrawal of Britain’s last combat troops from Basra, that is no longer the case. The other reason is that, unlike the conflict in Iraq, the Afghan war has commanded broad political support. Whereas the Liberal Democrats, the country’s third party, opposed Britain’s participation in the invasion of Iraq, all the main parties have supported the country’s involvement in Afghanistan since the outset. At least, they have done so until now.

Ministers against generals

The cross-party consensus on Afghanistan is under more strain than ever before. Both the Tories and the Lib Dems still say they back the deployment, but they attack the government’s perceived lack of strategy and its parsimony towards the armed forces. Liam Fox, the Tory shadow defence secretary, has accused the government of “the ultimate dereliction of duty”. The Tories have concentrated their fire on the shortfall in the helicopters available to British forces—though the criticism is undermined by their reluctance to promise extra defence spending if they win the election due by next year. Nick Clegg, the leader of the Lib Dems, has been sharper: he talks about soldiers’ lives being “thrown away”, describing the mission in Afghanistan as “over-ambitious in aim and under-resourced in practice”.

Yet the most important divide may not be between political parties but between government ministers and military commanders. Gordon Brown’s ill-judged appointment of Des Browne in 2006 as defence secretary, doubling the next year as Scottish secretary, alienated some of the top brass. Confidence has hardly been increased by the loss of his successor, the well-liked John Hutton, during last month’s crisis over the future of Mr Brown, and the promotion of the junior defence minister, Bob Ainsworth, to the main job as the least bad option.

The prime minister now stands accused by many generals, more explicitly than is customary, of skimping on the men and kit needed for the Afghan campaign. In an interview this week in Helmand General Sir Richard Dannatt, the outgoing head of the army, noted that he was flying in an American helicopter because a British one was not available. He had asked in public for a reinforcement of 2,000 troops (and more in private), but received the promise of only a temporary boost of 700 soldiers, amid resistance from the Treasury and the Foreign Office. All this feeds the generals’ belief that Mr Brown does not much care for the armed forces. One general says: “Tony Blair did not understand us. Gordon Brown does not like us.”

This vocal disgruntlement is one factor that may sway public opinion about the war. Polls have offered wildly varying impressions of the support it enjoys among the electorate. One conducted this week, for the BBC and the Guardian newspaper, found that roughly equal proportions declared themselves for and against the war—and that support for it was actually higher now than it had been in 2006. Britain’s precarious fiscal position will make a difference; voters may be less inclined to back expensive military adventures as state expenditure at home is cut, as it soon must be. And, above all, the rising level of fatalities may tilt sentiment, and embolden politicians, against the war.

Matters are only aggravated by the fact that the service chiefs are not just fighting the war in Afghanistan, but are also scrapping among themselves over scarce funds and the future of defence policy. On current plans, the bill for military equipment will amount to billions more than the defence budget provides for, and nobody expects more money. Today’s wars are being fought primarily on land, but the big money is being spent mostly on fighter jets, ships and submarines. For some officials in Downing Street, the army’s request for more resources is a ploy to shore up its position relative to the other services—a policy of “use it or lose it”.

Such suspicions are not without foundation. Consultations have started for a Strategic Defence Review, the first since the one overseen by George Robertson in 1998, that both Labour and the Tories promise to set up after the next general election. General Sir David Richards, the incoming army chief, says there are two contending visions: “fortress Britain”, in which the country equips itself for a conventional all-out war against, say, Russia; and “asymmetric” warfare, in which Britain continues to involve itself in messy counter-insurgency campaigns. In his view, Britain needs to concentrate on asymmetry—by implication, cutting big programmes for planes and ships. The “risk” it would take in high-end warfare would be mitigated by NATO’s protection.

Bloodied in the green zone

Such debates seem distant from the men of the 1st battalion of the Welsh Guards, pushing grittily along the Shamalan canal. The idea behind Operation Panther’s Claw is to extend control of the populous, irrigated “green zone” by linking up the capital of Helmand, Lashkar Gah, with Gereshk, on the main ring road. The canal would become the new defensive line, keeping the Taliban out in the west while protecting the population on the other side. By controlling the bridges over the canal, and by using biometric technology, they will keep a close watch on those crossing in and out. For now, though, the British troops are under fire from both sides of the canal. Their only supply route is the narrow road along it, where the Taliban have been planting as many bombs as they can muster. Attacks on the British positions at dawn and dusk are routine; one Welsh Guards company was attacked 15 times in a day.

Progress has been slow, partly because the troops are being methodical in holding on to their gains and partly because they are meeting strong resistance from the Taliban. The British have advanced only two kilometres in two months of fighting. It is a tough, frustrating and bloody business. One of several fatalities in the operation was the battalion’s commander, Lieutenant-Colonel Rupert Thorneloe. The Ministry of Defence has resorted to boasting about the number of Taliban it has killed in the operation, nearly 200, even though senior officers know that such “body counts” are irrelevant.

In parallel, American marines are making a big push to extend control of areas farther south. The American overall commander, General Stanley McChrystal, has urged his troops to minimise civilian deaths, even at risk to themselves. It is easier said than done, as Major Giles Harris, a company commander, explained. “When we meet the bad guys, we win,” he said. But protecting civilians was “a continual challenge”. “It is the discipline required not to take the gloves off. You are asking my guardsman not to empty the magazine of his weapon into the compound wall from which he is being shot at.”

All along the canal, a frequent refrain from soldiers is: “Do you think we are winning?” The more pertinent question, perhaps, is why the area was lost in the first place. Until 2008 Nad Ali had been held by pro-government militias financed, in large part, by the drugs trade. In 2007, when the Taliban took root around the town of Babaji, they were evicted by British forces helped by the militias. The next year, however, Toor Jan, the leader of the biggest militia, was killed, security collapsed and the Taliban took over. One factor was the influx of Taliban fighters pushed out of the Garmser district, where American marines were clearing insurgents. Another was that Nad Ali, as a government-held area, was the only part of Helmand where large-scale eradication of opium poppies took place, helping to turn the population against the government. By late 2008 Nad Ali became known as a place of tough, pure Taliban justice, in contrast with the corrupt ways of Toor Jan’s henchmen.

Haji Meshan Khail, a tribal elder from the district, says: “Before the British soldiers came to Helmand we had very good security and peace. Now we are escaping from one place to another because there is a lot of fighting and bombing. People in the Nad Ali district are tired of ISAF and Taliban. They don’t like either of them. But they think that Taliban is better. When British soldiers capture a place they start checking all the houses and arrest the civilians without any reason.”

The story of Nad Ali illustrates the unhappy experience in Helmand. British forces never really wanted to deploy there; they would rather have gone to Kandahar, the biggest city in the south, but it was allocated to the Canadians. British paratroopers arrived in Helmand in the spring of 2006, with the then defence secretary, John Reid, declaring incautiously that he would be “perfectly happy to leave in three years’ time without firing one shot”. The British had planned to concentrate on creating a “development zone” between Lashkar Gah and Gereshk. But under pressure from the government to stop outlying towns from falling to the Taliban, the force was parcelled out into “platoon houses” that came under severe attack. In their first six-month deployment, the paras fired about half a million rounds.

Subsequent British contingents were similarly stretched out. One aim was to clear the road to the Kajaki dam to allow the refurbishment of a hydroelectric plant. Another was to retake the town of Musa Qala, abandoned by the British in 2006 despite American protests. British tactics changed with each six-month rotation of troops. One especially damaging practice was “mowing the lawn”—raiding areas repeatedly to clear out insurgents without holding the ground, exposing anyone friendly to the British to grisly retribution. Whereas the American army and marines drew up a new manual on counter-insurgency in 2006, the British have yet to revise their doctrine. They rely heavily on American thinking, without American resources.

EyevineUnderresourced, underequipped and fired at from both sides

There were several reasons why British commanders asked for more troops last year: to “thicken” the forces available to hold central Helmand, to deal more efficiently with bombs and to release men to train the Afghan police, widely regarded as corrupt and predatory. Demand for helicopters has always outstripped the (growing) supply. Yet the British debate over military resources misses important points: heavy mine-resistant vehicles are unable to move off the roads and surprise the enemy; helicopters are vulnerable and must stay away from high-threat areas; and Britain will never have enough troops to secure Helmand province. Counter-insurgency is about engaging local populations, and that cannot be done from the air or from inside a Mastiff armoured vehicle.

In any case, the question of whether Britain should send a few hundred more troops and a dozen extra helicopters, useful as they may be, is marginal compared with the military power that the Americans are bringing into Helmand this year: 10,000 marines (more than the total number of British, who are nominally in charge) and 100 or more helicopters. But even these reinforcements are not enough.

More Afghans, not more Brits

General McChrystal privately reckons he needs about 400,000 Afghan soldiers and police, double the number now envisaged, though the proportions of each are subject to debate. In Helmand there are just 3,000 Afghan soldiers compared with around 20,000 foreign troops. “I need ten Afghans for every British soldier,” says one British commander. Worse, Afghan battalions are exhausted. They do not rotate out of the front line: soldiers fight without a break for the three years they are enlisted. Afghanistan cannot afford the army it has, let alone a bigger one. Expanding Afghan forces will cost donor countries several billion dollars a year indefinitely. But trying to garrison Afghanistan with foreign troops would be even more expensive.

The country needs a lot more than just military force, above all a legitimate and functioning government and a process to bring Taliban fighters and commanders back into the fold. For all of this, creating strong Afghan forces is the prerequisite. Without them, British soldiers will continue to die, and the people of Wootton Bassett will continue to line the road—until the day, that is, when the British public has had enough and demands that the troops come home. A retreat without securing some sort of success would be the cruellest blow for the men on the ground.

Jakarta bombings

A bloody wake-up call

Hotels are bombed in Jakarta as terrorism returns to haunt Indonesia

JUST as Indonesia was congratulating itself on a largely peaceful presidential election, murderous attacks in the capital have come as a jolt. At least nine people were killed and dozens were injured in early-morning explosions on Friday July 17th at the JW Marriott and Ritz-Carlton hotels in the heart of Jakarta’s business district. Another bomb at the Marriott failed to explode. Elsewhere a car-bomb exploded on a toll-road in the north of the city killing two more people.

The newly re-elected president, Susilo Bambang Yudhoyono, has blamed unknown terrorist groups. None has claimed responsibility. But in a country with more Muslims than any other—some 90% of its 240m population—and a history of terrorist violence, suspicion will inevitably fall on Islamist fanatics. In particular, the focus will be on Jemaah Islamiah (JI), an extremist Islamist group affiliated to al-Qaeda, that has carried out similar outrages in the past, most notably in Bali in 2002, when 202 people from 21 countries were killed.

Three of the culprits for that slaughter were executed last November, prompting fears of revenge attacks. When none came, it seemed further evidence of the success of the Indonesian authorities in weakening JI. A campaign of “deradicalisation” had weaned away some potential recruits. Some of its leading and most dangerous members, such as Noordin Top, believed to be a bombmaker, were still at large. But many had been rounded up, or driven abroad. Some had taken refuge among other al-Qaeda franchise-holders in Mindanao in the southern Philippines.

The Marriott and the Ritz-Carlton were said to be among the most secure hotels in Jakarta. Elsewhere, however, the ubiquitous security checks at hotels and office blocks in the city centre had often become perfunctory: a mirror on a stick would be wafted under cars entering the grounds; at lobbies, bags would be scrutinised only cursorily and beeping metal-detectors simply ignored.

If Jakarta had let its guard down, it would not be surprising. There have been no attacks that have claimed the lives of foreigners there since 2003, when the Marriott was also bombed though nine locals were killed in an attack on the Australian embassy in 2004. As the memory of such incidents has faded, Indonesia’s image has improved.

Seen in the early years of this century as a dangerous, unstable place where a newly democratic government was struggling to contain separatist and extremist elements, Indonesia has become something of a model of pluralism, tolerance and stability. Not only is democracy well-entrenched, as the recent elections have demonstrated. But also, political Islam seems firmly in the mainstream. Religion was hardly an issue in the presidential election campaign and in the parliamentary poll in April Islamic parties fared worse than they had in the previous election in 2004.

The bombings do nothing in themselves to threaten Indonesia’s fundamental stability or the huge progress it has made in recent years—every country is prey to the violence of a lunatic fringe. But they will dent a carefully nurtured international image. Already, as if to symbolise the setback, and, in the process, disappointing millions of fans whose enthusiasm has been whipped up by a nationwide poster campaign featuring its stars, Manchester United, England’s football champions, have cancelled a visit. The players were booked into the Ritz-Carlton.

Barack Obama and Africa

How different is his policy?

Barack Obama said all the right things about Africa—and left a few ticklish ones unsaid. The tone may shift a bit but the policy will be similar to George Bush’s

“DEVELOPMENT depends on good governance.” Said by a white Texan dynast in Ghana, an African country once ravaged by the slave trade, that unexceptionable insight might sound a shade patronising. Said by a son of Africa whose election to the world’s most powerful post thrilled the continent, it was taken at its respectable face value. “We must start from the simple premise that Africa’s future is up to Africans.” In other words, throwing aid at bad governments—and Barack Obama made plain that there were still far too many of them—will not work. The president’s candour was well received.

In truth, Mr Obama’s Africa policy is unlikely to differ much from his predecessor’s, which was viewed favourably by Africans in general and by most pundits of African development. There was little in the speech that could not have been said by George Bush, who poured a cascade of cash—far more than any of his forerunners—into such projects as the President’s Emergency Plan for AIDS Relief (PEPFAR) and into his Millennium Challenge Accounts, whose largesse was partly meant to reward good governance.

Mr Obama acknowledged Mr Bush’s “strong efforts”. But he puzzled analysts by declaring that his own administration had “committed $63 billion to meet these challenges”. It was unclear whether that sum included projects under way or was new money and, either way, what it was for and over what period it would be spent.

In several passages he stressed that bad governments, especially corrupt or repressive ones, could not expect his help. “I have directed my administration to give greater attention to corruption in our human-rights reports,” he said. He also assailed tribalism, which had, he said, “for a long stretch derailed” his own Kenyan father’s career. And he singled out several miscreants for blaming their self-inflicted woes on others. “The West is not responsible for the destruction of the Zimbabwean economy over the last decade,” he declared.

The choice of Ghana for his first African visit as president was pointed. Citing its recent success both in economics and democracy, he praised “strong parliaments; honest police forces; independent judges [applause]; an independent press; a vibrant private sector; a civil society.” And he lauded “leaders who accept defeat graciously”, as they did recently in Ghana, a rare event in Africa. “Africa doesn’t need strong men; it needs strong institutions.”

Mr Obama’s speech was equally notable for what it omitted. Some delicate but pressing issues were mentioned only cursorily. In keeping with his pronouncements elsewhere in the world, he avoided the phrase “war on terror” and skated over America’s growing need for African oil: about a quarter of what America requires will soon come from Africa, mainly Nigeria and Angola. He did not mention Nigeria’s crisis of security and production in its oil-rich Delta region; this week, rebels for the first time attacked Nigeria’s commercial capital, Lagos, killing eight guards and setting oil facilities ablaze.

In fact, though Mr Obama did not wish to dwell on security, his biggest headaches in Africa, as for Mr Bush, do still relate to armed conflict. His worst problem is Somalia, where his closest advisers upbraided Mr Bush for worsening matters by arming Somali warlords who claimed to be fighting militant Islam. More recently, however, Mr Obama won a waiver from the UN to send arms to Somalia’s beleaguered government, which is threatened by jihadists (“terrorists”, he bluntly called them) with links to al-Qaeda. He is unlikely to let his warships or aircraft bomb jihadist strongholds in Somalia for fear of enraging the civilian population. But equally he is plainly loth to let that failed state slide further into the domain of al-Qaeda.

Rather vaguely, he welcomed “steps being taken by organisations like the Africa Union…to better resolve conflicts.” The AU, he preferred not to say, is patently failing to bolster Somalia’s government. Several of Mr Obama’s closest advisers on Africa are known to be disgusted by the AU’s refusal to isolate—let alone encourage the arrest of—Omar al-Bashir, Sudan’s leader, who has been indicted on charges of war criminality. “When there’s a genocide in Darfur,” said Mr Obama, “these aren’t simply African problems.” “We will stand behind efforts to hold war criminals accountable,” he said, without naming names. He failed to deplore the AU’s reluctance to co-operate with the International Criminal Court at The Hague, where Mr Obama hopes Mr Bashir will be sent.

Mr Obama’s administration may not yet have determined its policy towards Sudan. Several of his team, notably Susan Rice, his ambassador to the UN, and Samantha Power at the National Security Council, have in the past urged more robust action to deter Mr Bashir over Darfur. But Mr Obama’s new envoy to the conflict zone, Scott Gration, is seeking diplomatic engagement. It was under Mr Bush’s watch that a separate peace accord was hatched between the Sudanese government and a rebel movement in the south that may be offered the option of secession following a referendum promised for 2011. Mr Obama may well be called on to help sort out that mess if conflict breaks out again, as many fear, within the next year or so.

Another awkward area for him is Kenya, the land of his own forebears. Along with the Nigerians and the South Africans, who may get a visit by Mr Obama during next year’s football World Cup, the Kenyans were sad to have been passed over. (His secretary of state, Hillary Clinton, is due to visit next month for a big trade meeting.) Mr Obama barely mentioned Kenya in a favourable light. For sure, he is aware that the current president, Mwai Kibaki, is widely thought to have stolen the presidential election a year-and-a-half ago from Raila Odinga, now prime minister in a floundering power-sharing government, who happens to hail from the same ethnic group as Mr Obama’s father. Yet the country has long been an American ally in security matters in the region. Mr Obama’s moment to try sorting out Kenya’s many problems may come. But not yet.

The deeper truth is that Africa is not high on the American president’s agenda. His Ghana speech was sensible and stirring. But in the end his message was that African-American relations would see no grand change.

Banyan

End of the line for the LDP

Japan has long been changing faster than its Liberal Democratic Party, which is now in terminal decline

HIS distraught colleagues cannot forgive Taro Aso for calling a general election on August 30th, following a dismal stint as prime minister. They accuse him of setting up the opposition Democratic Party of Japan (DPJ) for a landslide victory, so bringing the long rule of the Liberal Democratic Party (LDP) to an abrupt and ignominious end.

Yet the question is not why the LDP’s rule looks about to end soon. Rather it is how on earth the party managed to cling on to power for so long. A once-invincible party failed to adapt to wholesale changes in the social and economic model that it was set up to manage. If its 54-year rule really does come to a halt, that fact alone will confront both party and country with wrenching change and unprecedented uncertainty.

Few things more powerfully demonstrate the inbred character of LDP-dominated politics than its family background. Mr Aso’s grandfather, Shigeru Yoshida, was the great statesman of shattered Japan’s post-war reconstruction. Yoshida’s rule came to an end in 1954 when he was unseated as prime minister by his nemesis, Ichiro Hatoyama. The next year the two men joined forces and the Liberal Party merged with the Japan Democratic Party to form the Liberal Democratic Party, which has dominated Japan’s politics ever since. The man who will bring the LDP’s rule to an end this summer is Hatoyama’s grandson, Yukio Hatoyama, leader of the DPJ. Family honour is demanding its due: for Shigeru Yoshida’s grandson, it is nobler to fall to Ichiro Hatoyama’s descendant than to succumb to mere LDP hoplites. In any case, Mr Aso knows no one can save his party now.

That is because its history runs so deep. Old Hatoyama and Yoshida formed the LDP as a bulwark against resurgent socialist parties and the political system they devised seems expressly designed to resist change. The American occupiers had anyway pushed Japan in a conservative direction as early as 1948, when the risk of communist revolution in Japan and China—to say nothing of the Soviet threat—had come to be seen as a greater peril than militarism. The Korean war reinforced these priorities, while adding an economic dimension: the United States needed Japan’s economy to be humming again to help the war effort.

Thus developed Japan’s characteristic mix of anti-communist—even anti-civic—politics with state-directed development and policy set by bureaucrats. Yoshida founded the Ministry for International Trade and Industry, MITI, whose bureaucrats were famously powerful. Trust-busting efforts were quickly wound down after the second world war. Oligopolies—in the form of the former zaibatsu conglomerates—were supported, even if they had been implicated in Japanese aggression. A man accused of war crimes became a notable post-war prime minister and Yakuza gang bosses consorted with top politicians and helped put down left-wing protests. The political and bureaucratic system was solidly made and has lasted, like so many things in Japan. But its origins, and its effects on Japan, were ultimately rotten.

In some countries—Italy, say—incestuous politics is resented, mocked or circumvented by the rest of the country. During Japan’s boom years, it seemed to be delivering the goods. Outside the radical left, most Japanese were bought off by a social contract in which politicians, bureaucrats and big business arranged the country’s economic affairs. Businesses won preferential finance and in return offered “salarymen” job guarantees and the dream of a middle-class life. But the contract could be honoured only with high rates of growth, and the oil shocks of the early 1970s put paid to these.

Perhaps this might have been the end of the LDP, but political competition had been so stifled that there was nothing to take the party’s place. Instead, the crisis of the 1970s led to a steep rise in corruption. Factional competition within the party increased. Fund-raising skills came to the fore (in Japan, like America, politicians mostly finance their own campaigns). So did the ability to fund public works in rural areas that were still the LDP’s base. Corruption cemented local baronies and for a good while won votes. Even today the late Kakuei Tanaka, an astonishingly corrupt prime minister, is more often praised than cursed.

The beginning of the end

A 19th-century Russian said that Europe’s democracies were moderated by corruption. Japan had corruption moderated by democracy. During the 1980s, the LDP managed to adapt itself somewhat to new political concerns, such as pollution and the success of issue-driven opposition figures in cities and prefectures. The party even lost power briefly in 1993 and, in 2001-06, a razzle-dazzle prime minister, Junichiro Koizumi, seemed to be giving it a new lease on life.

But by the time Mr Koizumi came along, the tension had become intolerable between the change-resisting features of politics on the one hand, and the reality of profound economic and social upheaval on the other. Companies could no longer keep lifetime promises to workers yet the government failed to take over social-welfare obligations. Women wanted better work prospects yet ministers would refer to them as “breeding machines”. The demands of civic groups for more consumer protection were met grudgingly and late.

Now, the LDP has abandoned nearly all pretence at reform. Though the party has plenty of modernisers, many—notably the so-called Koizumi’s children—will be the first to be swept out on August 30th while the old guard may survive better because they have their own sources of funding and support. That the LDP is still so mired in the past shows both why its fall would be such an historic moment and why it would also be only the start of real change. The party was the keystone of a political system that has long been crumbling. To effect change means not just replacing the keystone but painstakingly rebuilding the arch.

Allegations of massive fraud in the Gulf

A $10 billion Saudi fraud claim

A respected business family claims it has fallen victim to a spectacular swindle

OF THE merchant families that dominate Saudi capitalism, few are as respected as the Gosaibis, a “blue-chip” clan which could borrow on the strength of its name alone. It was, therefore, a shock when in May parts of the family conglomerate, Ahmad Hamad Algosaibi & Brothers Company (AHAB), defaulted, prompting lawsuits in various countries. But on July 15th the shock turned to astonishment. In documents filed in New York’s state Supreme Court and seen by The Economist, AHAB claims that it has been the victim of a “massive fraud” orchestrated for years by Maan al-Sanea, a Saudi billionaire who is married to a daughter of one of AHAB’s founders. The company says Mr Sanea “misappropriated” around $10 billion in the alleged swindle.

Mr Sanea has his own business, the Saad Group, a vast investment company once reckoned to hold over $30 billion of assets worldwide, including the second biggest stake in HSBC. He also used to work for the Gosaibis and, besides having married into their family, he freely admits he has “long had personal relations with the partners of AHAB”. But he insists that the business ties between his Saad group and AHAB are now on an “arm’s length commercial basis.”

However, AHAB claims that Mr Sanea was until very recently a “senior executive” of its financial-services arm, the Money Exchange, which chiefly handles remittances by workers inside and outside Saudi Arabia. It says Mr Sanea made use of this position to borrow from banks “using forged or falsified documents”. He then “diverted the funds received to his own use.”

AHAB has made these allegations in response to a lawsuit filed against it in New York by Mashreqbank, a lender based in the United Arab Emirates which was one of the first banks to admit openly to having an exposure to AHAB. Mashreqbank is going to court over a foreign-exchange deal on which it claims AHAB defaulted. It wired $150m to an AHAB account on April 28th and says it was due to receive 564.3m Saudi riyals a week later in return. But AHAB failed to pay. In its court document of July 15th AHAB responds that it knew nothing about this currency deal until the New York court sought to attach its assets over Mashreqbank’s claim.

Having looked into the matter further, AHAB now says the transaction was one of many organised by Mr Sanea with “a variety of financial institutions in the United States, the Middle East, and elsewhere”, while keeping them off the books to conceal them from AHAB’s partners and directors. It says that Mashreqbank alone entered into 52 such deals, totalling $4.7 billion, between January 1st 2008 and May 1st 2009.

AHAB claims that having these huge amounts of cash constantly sloshing around in the Money Exchange’s accounts allowed Mr Sanea to siphon off some of it by, among other things, writing fraudulent cheques, and transferring cash to people, companies and accounts that he “controlled directly or indirectly”. It says Mr Sanea told AHAB employees not to record the transactions in the company’s books and in July 2006, it alleges, he sent a memo to senior employees of the Money Exchange telling them to withhold any messages intended for the board of directors and “to deliver those communications to him instead”. AHAB says Mr Sanea’s manoeuvres allowed him “to continue looting AHAB and to conceal the massive scope of his thievery from AHAB and its Board”.

AHAB does not accuse Mashreqbank or the other banks that engaged in the currency deals of knowingly participating in the fraud it alleges. However it does claim that in the $150m transaction at the centre of the court case, Mashreqbank stood to enjoy a “grossly inflated profit margin”. And it argues that the transaction “had no legitimate commercial purpose which would have been obvious to both parties in the transaction.” It says almost all the other transactions involving Mashreqbank likewise gave it a substantial profit. Mashreqbank’s spokesman said on Friday that it felt unable to comment on the matter until it had consulted its lawyers.

A spokesman for Mr Sanea’s Saad group, asked to comment on AHAB’s accusations, said, “We have not seen or been served with this claim, although it appears from press reports to be a repetition of claims previously presented extensively to the press and elsewhere and which are baseless. If we are served with such a claim, we will respond to it vigorously through specialist counsel, confident in both the true facts and the judicial process.” Last week when The Economist put similar allegations to Mr Sanea’s lawyers, they described them as “scurrilous and utterly untrue”.

Although their scale is spectacular, the nature of the allegations will not come as a complete surprise to some bankers in the Middle East. The Gosaibis had previously said that they had found evidence of “substantial financial irregularities” in their financial-services arm. And in a confidential creditors’ meeting in Bahrain on June 24th the group disclosed the scale of the problem, according to sources familiar with the matter. They say it left creditors in little doubt about whom it suspected as the author of its misfortunes.

But to make this complaint in black and white, in a New York court document, is an extraordinary twist. Family businesses in the Gulf traditionally settle their disagreements behind closed doors, judging that “the preservation of the family reputation is of paramount importance,” as a banker in the region puts it.

In this case, more is at stake. The Algosaibi group owes more than $9 billion to more than 120 banks all over the world. The uncertainty over its finances is making some of them wonder if it is worth lending to Saudi Arabia at all. The group’s creditors had hoped that the Saudi monarchy would step in to broker a truce between Mr Sanea and his aggrieved in-laws. Instead, an internecine family feud in a normally secretive kingdom will now be pursued in the open through the American courts. Like Ahab’s harpoon in “Moby Dick”, the allegations that AHAB has fired off may drag Saudi Arabia’s financial reputation into the vortex.

John Law and the Invention of Modern Finance

Mises Daily by Doug French

When the stock market was on a tear after hitting bottom in March, there was no talk of another stimulus plan. Now, suddenly, with stock prices melting in the summer heat, discussion of a second stimulus plan has Washington buzzing. Nobel laureate Paul Krugman believes that "[t]he bad employment report for June made it clear that the stimulus was, indeed, too small." Obama supporter and Wall Street wise man Warren Buffett says that the first stimulus "was sort of like taking a half a tablet of Viagra … It doesn't have really quite the wallop that might have been anticipated." The soon-to-be-79-year-old investor is all for a second stimulus — and presumably full doses of Viagra.

Even economists who don't favor another stimulus package are counting on the first one to finally kick in, as well as for the Federal Reserve's massive monetary stimulus to show results. After all, the federal response to the current downturn (so far) is twelve times greater than that to the Great Depression. Allen Sinai says that "lags in monetary and fiscal policy actions" should be allowed to "work through the system," and ex-Fed governor Wayne Angell claims, "monetary policy always works!"

Of course, nothing could be further from the truth. "Often after time the message in past events is more easily read," writes Janet Gleeson in Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance. "Unraveling Law's story three centuries on, one cannot help but feel a sense of plus ça change plus c'est la même chose — nothing really has changed."

John Law may have died in disgrace after his Mississippi System failed in 1720, but government and its cheerleaders in the economics profession continue to embrace his ideas, believing that the printing of money can lift an economy from the doldrums. They believe enlightened central bankers know just how much money an economy requires, or just how high or low interest rates must be to ensure prosperity.

"But time's passage has seemingly brought little in the way of additional invulnerability to the giant institutions public investment has created," Gleeson points out. "In the world of banking and finance the specter of financial calamity looms as intimidatingly as ever it did to investors in Regency Paris or in Georgian London."

Just as the Treasury, the Federal Reserve, and all of Washington attempt to throw the weight of government power and largesse behind restoring our bubble economy, John Law tried every trick he knew to keep his Mississippi Company shares afloat, the French economy humming along, and the French citizens from cashing in their paper for silver and gold.

In Millionaire, Gleeson paints the most complete picture of John Law to date — and does so beautifully. The book is written for a general audience and has been culled of the complex financial details and numbers that would put off the average reader. But her bibliography is first-rate and leans on scholar Antoin Murphy for what financial details she does provide.

In Gleeson's hands, Law's story reads like an action novel with the ending of a Greek tragedy. Law is James Bond-like — a suave, debonair, womanizing gambler who always seems to come out on top. He has plenty of friends in high places and works the party circuit throughout Europe. All the while, he has a skeleton in his closet in the form of Edward Wilson, whom he killed in a duel for which details remain sketchy. (Did the two men duel over Elizabeth Villiers, "the king's boss-eyed, unattractive mistress," or a certain Mrs. Lawrence, or money Wilson had received from a homosexual lover?)

But the sturdy Scotsman was a monetary playboy. "He had not only pondered mathematical and financial conundrums," writes Gleeson, "in his idle hours he had continued to gamble and philander." In 1715 a heavily indebted France was in a depression, and the government was nearly bankrupt. Law thought the only thing France needed was more money, and if there was a shortage of gold and silver, "the answer was to establish a national bank and issue money made of paper."

Law got his chance to print France to prosperity when his friend Philippe, Duc d' Orléans, came to power. Law and Orléans were each athletic, handsome, and brilliant tennis players, according to Gleeson, and "[b]oth enjoyed extraordinary success with the opposite sex," she writes. "Orléans could outstrip even Law in his sexual conquests, although power and position were on his side."

Law's financial scheme started small with Banque Générale, but within a year Orléans helped the bank by requiring that tax collectors remit payments to the Treasury in Law's banknotes. But Law had enemies, and they tested him early on by demanding silver for five million livres in notes. Of course, Law couldn't satisfy this bank run on the spot, but he promised to pay a day later. As much as the finance minister disliked Law, because of Law's cozy relationship with Orléans, he felt that he had to bail him out and provided the silver to satisfy the redemption demand.

When Law's system ramped up, everyone succumbed to speculative fever. And Law made it easy, with the masses being able to buy shares with little money down and also to speculate in what were essentially options on Mississippi Company shares. "The wider general public had never before taken part [in buying shares], nor had such rapid rises on such a scale ever been witnessed," Gleeson explains. "Like gluttons at a Mississippi banquet, most investors ingenuously accepted the opportunity to gorge themselves and never considered the consequence."

Just as Keynesians and financial commentators bemoan the fact that people are reacting to the current downturn and stock market crash by saving instead of spending and investing, Law did all he could to keep investors from fleeing his crashing Mississippi Company shares and battered currency. Among the first to cash in was Law's friend the Irish banker Richard Cantillon. Gleeson suspects that Cantillon had inside information when he bought his shares cheap, and later benefited again from information that his brother provided: Bernard Cantillon had supervised the prospecting party that sailed to Louisiana, finding not the treasure that Law's propaganda claimed, but instead disease and hostile natives.

"Cantillon realized that the bull market was based on little more than smoke and mirrors and ever-increasing quantities of paper money," Gleeson writes. Many others ran for the cover of silver as well. Vendors were not interested in taking paper and did so only at a discount, while livestock sellers would only accept silver and gold. Price inflation was rampant, with prices rising 25 percent in just two months' time, while the prices of some food items (like bread) soared 300 to 400 percent.

Law then resorted to despotic power, banning the export of coins and bullion. Next he prohibited the purchase or wearing of diamonds and other jewels. When this didn't stop the exit from paper, Law outlawed the production and sale of all gold and silver artifacts with the exception of religious paraphernalia, resulting in soaring prices in crosses and chalices. Within a month Law banned the possession of more than 500 livres' worth of silver or gold and required that all payments of more than 100 livres be made in banknotes. People were promised generous rewards if they informed on their neighbors. "The slightest suspicion that gold was being concealed illegally would be enough for any house, whether palace or hovel, to be searched," Gleeson writes.

We can only imagine what draconian currency and financial controls will come out of the current meltdown.

In no way is Millionaire written from an Austrian point of view. Gleeson refers to the return to coinage after Law's fiasco as "draconian." She writes that Law's inflation, although rampant, was "beneficial inflation," and that it "relieved the need for high taxation," not realizing that inflation is itself a diabolically sinister form of taxation.

But these are slight quibbles with an otherwise outstanding book, which was published ten years ago to no fanfare that I can find. Books about old financial bubbles and busts just don't capture the public's imagination like high-flying stock and real estate opportunities. Those who ignore history — or learn the wrong lessons from it — are doomed to repeat it.

Why Obamacare Can't Work: The Calculation Argument

Mises Daily by Gabriel E. Vidal

In his speech to the AMA in Chicago June 15, 2009, Obama shared his diagnosis, solutions, and justification for healthcare reform: health costs are spiraling out of control and are a threat to the economy, families, businesses, and the federal government. The current system is unsustainable. Costs are increasing faster than they should because we spend money on things that don't make us healthier. We equate expensive care with better care. We overuse and reimburse for treatments that are not needed and we pay for quantity instead of quality.

We can categorize Obama's major solutions to the healthcare crisis as follows:

1. Payment reform. Change how providers are paid by bundling payments so they team up to treat episode of care or illness. Pay for quality outcomes.

2. Knowledge reform. Invest in examining and disseminating knowledge of what treatments are more cost effective and clinically effective to cut costs.

3. Information-technology reform. Upgrade medical records from paper to electronic. This will avoid duplication of tests, track information from doctor to doctor, lower administrative costs, improve doctors' productivity, and reduce medical errors.

4. Insurance reform. Make the purchase of health insurance mandatory for everyone. Eliminate preexisting-condition waivers and insurance companies' ability to "cherry-pick" whom to cover. Introduce an affordable public option for individuals in order to inject competition into the marketplace to keep private insurance companies honest.

Obama assures us that this is not government-run healthcare, that this is not a single-payer system, that the only consequence to these reforms is that healthcare will cost less and that anybody who denies this is misleading or does not understand the facts. Without his reform, he insists, costs will grow unsustainably, which will threaten reimbursements and the stability of the healthcare system.

Unfortunately, since Obama uses faulty logic to diagnose the problem, his solutions will only make matters worse faster. The correct framework within which to diagnose the problem is to admit that costs are out of control because they do not reflect prices created by the voluntary exchange between patients and providers, between customers and producers, like every well-functioning industry.

Instead, health costs reflect the distortions that government regulators have introduced through reimbursement mechanisms created by command-and-control bureaucracies at federal and state levels.

Simply put, Medicare, Medicaid, workers compensation, HMOs and even private health-insurance firms that follow Medicare rates, rely on cost reports submitted by providers. This cost data is then pushed through mathematical models and additional data generated by government, such as inflation and regional-labor-cost modifiers, to unilaterally (or in agreement with lobbyists and industry groups) determine what the prices for services should be.

But it is theoretically and practically impossible for a bureaucrat — no matter how accurate the cost data, how well intentioned and how sophisticated his computer program — to come up with the correct and just price. The just price of a health service can only be determined by the voluntary exchange of a patient with his hospital, physician, and pharmacist. The relationship between the patient and his private provider has been corrupted by the intrusion of government and its intermediaries (HMOs, for example) to such an extent that we can no longer speak of a relationship that can produce meaningful pricing information.

Given the level of technological advance and capital investment in healthcare of the past 40 years, one would expect quality to increase and prices to come down relative to other goods and services. This is true of other capital-intensive industries like consumer electronics and air travel. But in healthcare we have the opposite phenomenon: higher prices and, at best, equal or slightly improved quality in some locations or, at worst, lower quality in other locations, particularly government owned institutions. And too few consider that perhaps government participation is to blame.

Obama suggests that Medicare and Medicaid are responsible for the cost spiral because they pay for quantity rather than quality, because they do not differentiate between services that make people healthier and those that do not, because they pay for services that are not needed, etc. But he is stating the obvious. Government bureaucrats, physicians, patients, and hospitals have known that for as long as these federal programs have existed. In fact, these reimbursement mechanisms have been modified over the years to attempt to resolve these very deficiencies in the same way that Soviet and Cuban planners attempted to cure the weaknesses of their resource-allocation formulas.

Contrary to Obama's suggestion that knowledge of clinical effectiveness and cost effectiveness can be obtained and disseminated, there is no rational way to evaluate cost effectiveness outside of the free market. Central health planners cannot compare and recommend the best option between two different combinations of drugs, hospitals, and physicians to treat a particular ailment. It is not just a matter of figuring out which combination offers better outcomes and lower costs. In fact, the bureaucrat actually needs prices to make that comparison! This is also why Obama's ideas on payment reform to change how Medicare pays providers, and knowledge reform to investigate which treatments are most cost effective will never work and will increase costs and reduce quality. We have explored this argument in detail here.

Obama also proposes to reduce the cost of health care by upgrading medical records from paper to electronic. While the benefits of health information technology (HIT) are undeniable, the industry is nowhere near the level of development required to have a material impact in productivity and quality of care. It is truly in its infancy. We have different manufacturers with different systems, and different silos of solutions to particular problems even within the same manufacturer — silos that at best communicate clumsily with each other and at worst make the physician's access to meaningful timely clinical information a nightmare.

Billions of dollars have already been invested in HIT. Some systems have worked, while others have not. Billions more will need to be allocated until the best systems are adopted. But the idea that somehow a government agency with no shareholders at risk will help us better coordinate the allocation of capital and the experimentation necessary to develop these solutions is laughable, especially when one of its agents, the Department of Veterans Affairs, in all likelihood has the record for the most expensive failed HIT experiment to date, the $467 million computer system at its Bay Pines hospital in Florida.

The true drive behind government's interest in electronic medical records is the desire to acquire as much clinical and cost information as possible to further control care delivery and health resources. But this is a futile effort as we have seen above. In addition, the effort runs counter to the logical problem that computer systems at millions of local provider-patient levels are capable of generating more data than can be processed expeditiously and meaningfully by a central control agency and its computer system. Any information produced by this central planner will be erroneous and old by the time it is used to guide central bureaucratic decision making.

Obama's plan also includes a reform of our private health-insurance market. He would like, first, to make health insurance mandatory for all Americans, second, to offer an affordable public option, and third, to eliminate the ability of insurance companies to "cherry-pick" which services to cover and which to deny. These changes, he believes, will reduce cost shifting — the practice that providers use to subsidize charity, bad debt, and unprofitable government programs by charging more to insurance companies and private payers and patients — and will spread the risks of the insurance company to healthy individuals, thereby reducing the costs to everyone.

These insurance reforms ideas are flawed. They are based on the assumption that health insurance companies can charge premiums to a pool of policyholders, predict and pay for a large loss triggered by an event outside the control of the policyholder, and make a profit. But sickness combines risks that are uncontrollable with risks that are indeed controllable by the policyholder (eating, exercise, preventative habits, and adherence to treatment plans, for example) and the provider (selection of diagnostic tests, specialists and hospitals, for example). As a result, insurance companies are left with tools of rationing via higher premiums, deductibles, copayments and utilization controls placed on providers, which have a tendency to create nonrandom groups of policyholders and providers. Health insurance companies are more instruments of income redistribution than risk managers, and they are left with only one option: to charge healthy individuals enough to subsidize sick individuals. Eventually, when the impact of the redistribution on individuals is high enough, many either opt out or are priced out of the market, creating the 50 million uninsured individuals.[1]

Obama explicitly states that he wants to force the redistribution of income from healthy to unhealthy individuals but with the illogical belief that somehow this scheme will reduce the costs to everyone. But we have seen that even if the size of the risk pool is extended to the whole population of the United States by mandating every American to have health insurance and hence fixing the size and selection of the risk pool to the whole population, this does not address the fundamental flaw of mixing controllable with uncontrollable risks. Any sensible insurance reform should separate these risks and only cover uncontrollable risks, allow individual underwriting (the practice of insurance companies assessing each individual's pricing and eligibility) move away from community rating (the practice of offering the same price to large groups of individuals regardless of each individual's age, sex, health status, and risk level) so that healthy people pay lower premiums and sick people pay higher premiums, exactly the current model for life insurance. In other words, we should allow and encourage "cherry-picking," not ban it.

The logical tendency of Obama's insurance reforms, despite his explicit denial, will be an inexorable movement towards a single-payer system as his reforms will not control costs or utilization, and the only alternative left will be to enhance the control of the plan via explicit rationing, by a bureaucrat, of the care delivered. The central authority must then decide which health services are provided and which denied, who should receive them and who should not, when they should be given, all in addition to its current function of attempting to determine prices. Such a centralized system must logically retrograde into chaos because pricing signals to patients, doctors, and hospitals will be so distorted that they cannot guide resource allocation.

Obama concludes his speech by stating,

we're a nation that cares for its citizens. We look out for one another. That's what makes us the United States of America. We need to get this done.

Besides the obvious demagoguery to justify accelerating further control of healthcare by the federal government, we should ask ourselves how we have devolved from a collection of independent states founded by a war of secession from a central government power into one nation with a powerful central state. The justification for independence from the rule of King George III that these states gave was based on the doctrine of natural human rights,

that all men are created equally free & independent, & have certain inherent natural Rights, of which they cannot, by any Compact, deprive or divest their posterity; among which are the Enjoyment of Life & Liberty, with the Means of acquiring & possessing property, & pursuing & obtaining Happiness & Safety.

These words are from the original draft written by George Mason for the Virginia Declaration of Rights. Nowhere in this document or in successive drafts by Mason and Thomas Jefferson do we read words that could lead the reader to conclude that the federal government ought to care for its citizens or that we ought to look out for one another or that a central government ought to violate our individual natural rights to freedom, independence, and property to achieve the absurdity of mandatory equal access, equal price, equal quantity, and equal quality of health care for all.

Sen. Graham Asks For Last Word on "Wise Latina"

A Prescription for the Goose…

The Coburn amendment would force members of Congress to use ObamaCare.

Senator Tom Coburn is a physician who until recently still went home to Oklahoma to deliver babies. He believes Congress should weigh the dangers of a nationalized health system much more seriously than it has. In the tradition of someone using a 2x4 to win the attention of a mule, yesterday he successfully pressed the Senate Health Committee to approve his idea of requiring Members of Congress themselves to enroll in whatever "public plan" is passed to compete with private insurance companies.

Tom Coburn

"Let's demonstrate leadership -- and confidence in the system -- by requiring that every member of Congress go into it," Mr. Coburn told his colleagues as they were marking up the health care proposal championed by Senator Ted Kennedy. His idea wasn't exactly greeted warmly by many public plan supporters. Senator Jeff Bingaman, a New Mexico Democrat, responded: "I don't know why we should require ourselves to participate in a plan that no one else needs to participate in. This bill goes to great lengths to show that the choice is there for everybody."

But Mr. Coburn disagreed, saying his reading of the 1,000-page health care bill convinced him that everyone would end up being forced into the public plan as private insurance carriers were squeezed out of the market by mandates and regulations. Therefore, if Congress decides a government-run health plan is good enough for the American people, it should be willing to put itself under its care umbrella.

By a 12 to 11 margin, the Senate Health Committee agreed. Senator Chris Dodd, the committee's acting chairman, and Senator Kennedy were absent from the committee but sent in proxy votes in favor. Maryland Senator Barbara Mikulski was the only other Democrat to back the measure. Every Republican save for New Hampshire's Judd Gregg voted in favor of the Coburn mandate.

Obviously, many members of Congress -- who are used to a generous and flexible set of health benefits -- have no intention of letting the Coburn mandate become law. They will undoubtedly try to strip it from the bill at some point, in a conference committee between the two houses if necessary. But for now it is embedded in the bill and any overt attempt to remove it would be met with howls of public outrage.

--John Fund

Indonesia Is a Model Muslim Democracy

Last week's election caps a decade of success.

PAUL WOLFOWITZ

It's rare when any political leader wins a 60% mandate in a free and fair election, which is why commentary on last week's Indonesian election has focused on the personal success of President Susilo Bambang Yudhoyono.

However, Indonesia's success in building democratic institutions in just 10 years is equally remarkable. It is yet another demonstration of the appeal of free institutions, in this case to people with East Asian value systems and in a country with the largest Muslim population in the world.

Ten years ago it wasn't hard to find skeptics about the democratic experiment in Indonesia. The financial collapse that brought about President Suharto's resignation in 1998 pushed more than a quarter of the country's population below the official poverty line. East Timor's violent separation from Indonesia severely damaged the country's international reputation and threatened the breakup of the entire country.

Radical Islamist movements were also gaining strength and causing bloody clashes with Christians in Eastern Indonesia. Then came the Sept. 11, 2001, terrorist attacks on America and an al Qaeda threat in Indonesia, including a bombing in Bali in October 2002.

Against that background, it seems hard to believe how well Indonesia is doing today. Per capita incomes are more than double what they were when I arrived there as U.S. ambassador 25 years ago. Since 2000, Indonesia's economy has grown at an average of more than 4% a year. Last year the rate was 6%.

The country has made strides in other areas as well. The war in Aceh has ended. Secessionist sentiment elsewhere in the country has largely disappeared, thanks in part to a transition to democracy. And the Indonesian police have recorded substantial successes against terrorism.

Above all, Indonesia's political process has displayed a remarkable degree of maturity. Three consecutive free and fair presidential elections is one mark of that. Voters have also shown an impressive degree of common sense. For example, when President Yudhoyono was criticized because his wife often appears in public without a head covering, or jilbab, voters shrugged off the criticism.

No single explanation can account for the progress of such a complex country over the course of the last decade. Mr. Yudhoyono's leadership deserves a great deal of credit, as does the country's tradition of tolerance and respect for women. Indonesia's first two democratically elected presidents were Abdurrahman Wahid, a devout Muslim leader and proponent of religious tolerance, and Megawati Sukarnoputri, a passionate spokeswoman for democracy. Neither presidency was very successful, but the values each embodied were influential.

So too were a variety of civil society groups that thrived despite restrictions from the Suharto regime. Indonesia's press was financially independent and competitive, so the country had the basis for a free media as soon as censorship restrictions were lifted. Many of the country's leaders were also educated in democratic countries. Mr. Yudhoyono is a graduate of the U.S. Army's Command and Staff College.

But we can't be complacent about Indonesia's future. The problems facing the country are enormous, poverty first among them. Corruption remains a deterrent to foreign investment. Islamic fundamentalism poses a threat. The authorities have shown a disturbing passivity in the face of attacks on churches and mosques of certain minority sects. Many Indonesians are fearful that government restrictions on pornography and proselytizing will be used by extremists to restrict free expression.

On the positive side, recent elections showed that there has been a decline in the influence of overtly Islamist parties.

The U.S. has an enormous stake in Indonesia. It provides stability for the whole of Southeast Asia, a region of more than half a billion people. It is an example for other aspiring democracies. And if it continues to make progress on religious tolerance, it can point the way for other majority Muslim countries.

Indonesians have achieved this success largely on their own. But having chosen a path of freedom, democracy, and religious tolerance, they would like to see that recognized. Secretary of State Hillary Clinton did that on her visit in February. When Mr. Obama visits in November he will receive a hero's welcome. He should use that to speak forcefully on behalf of the great majority of Indonesians who believe in tolerance and equality for all the country's citizens.

Mr. Wolfowitz, a visiting scholar at the American Enterprise Institute, has served as deputy U.S. secretary of defense and U.S. ambassador to Indonesia.

Signs of Capitalist Life

Regulators exercised restraint this week, while investors showed a willingness to exercise their own judgments about risks.

That lethargic patient known as the American capital market showed signs of life this week. Washington's decision to put away the defibrillator paddles and let nature take its course at CIT Group means that, finally, Beltway physicians have done no more harm. More good news came from Credit Suisse, which sold mortgage-backed securities with no government guarantees and no opinions from the credit-ratings agencies.

That's right, someone has managed to finance mortgages without putting taxpayers at risk. Just as encouraging, it turns out that investors really can analyze bonds not rated by the government-anointed geniuses at Standard & Poor's, Moody's and Fitch. We'll get to the caveats in a moment, but first let's savor that Washington is willing to consider a new course of treatment that includes the freedom to fail, while Wall Street is showing that markets can solve the problem of opaque securities.

Regarding CIT, if that lender is too big too fail, then everyone is. On the Forbes list of the world's 2000 largest public companies, CIT settles in at 1,195, just behind a German construction company called Bilfinger Berger. Taxpayers should salute FDIC Chairman Sheila Bair, who has refused to buy the argument from Treasury that America faced another systemic threat in CIT.

As for Credit Suisse's government-free offering of mortgage-backed securities, the underlying loans had only recently been liberated from political control. CS bought the mortgages for just under $1 billion from a unit of AIG before bundling them and selling slices to institutional investors.

Our guess is that without a credit rating as an excuse to avoid due diligence, investors demanded oceans of data on the underlying loans. This is as it should be, and banks are now working on ways to give investors the individual-borrower data that the likes of Moody's never verified. Technology will be a part of the solution, allowing issuers to tag and investors to extract any information they seek on household assets, FICO scores or debt-to-income ratios. What will not help markets to recover is for regulations at the SEC and Federal Reserve to continue to favor the same credit-ratings agencies that were calling Lehman Brothers "investment grade" just before it hurtled into bankruptcy.

Which brings us to the caveats. The Credit Suisse deal looks like a green shoot, but it's important to remember how small $1 billion is in a market still dominated by taxpayer-backed financing. Even as Fannie Mae and Freddie Mac have become eligible for up to $200 billion each in taxpayer bailouts, their market share and that of the Federal Housing Administration has only increased. The nearby table shows that government-free mortgage securities now comprise a tiny slice of the market. Fan and Fred, now operating as explicit wards of the state with a mandate to keep Americans in their homes, will likely be the most expensive of all the federal bailout recipients, or at least contenders for the title against Chrysler and GM.

As for reforming the government policy that resulted in AAA-rated but highly risky investments, progress is slow. Apparently unaware of the credit meltdown, SEC Commissioner Luis Aguilar still refers to the use of government-selected credit-rating agencies as an "important safeguard" in the management of mutual funds.

Still, this was a good week for America's markets, if not for Congress (see above). Regulators exercised admirable restraint, while investors showed a willingness to take risks and exercise their own judgments about these risks.

The Grassley Test

An Iowa Republican may decide the fate of ObamaCare.

• By KIMBERLEY A. STRASSEL

Forget Max Baucus, Henry Waxman and Rahm Emanuel. If there's one guy who may hold the whole health-care world in his hands, it's Sen. Chuck Grassley. That ought to have President Barack Obama worried.

The Iowan has for months served as GOP point man on ObamaCare. He has an unusually tight relationship with his Democratic counterpart, Finance Committee Chairman Max Baucus. And he vowed early on that if there was a deal to be found, he'd find it.

Associated Press

Iowa Senator Charles Grassley

That determination gave Republicans heartburn. Conservatives saw Mr. Obama's sweeping health ambitions, and saw no good coming from the Grassley-Baucus powwow. Fresh in their minds was Mr. Grassley's past work to expand the State Children's Health Insurance Program, which the left marked as its first big step toward greater government health care.

Mr. Baucus knows that most major sustainable legislative achievements -- from the Reagan tax cuts to welfare reform -- have had bipartisan support. Getting Mr. Grassley's imprimatur meant getting moderate Republicans, maybe even a sizable chunk of the GOP. It meant shoring up nervous Dems. It meant a health reform that might last.

It also meant listening to Mr. Grassley. Committed as he's been to getting legislation, the Iowan has been clear on what he considers nonnegotiable. The White House and liberal Democrats have cavalierly ignored these parameters, vexing him greatly in the process. There are growing signs the Republican may exit the table. He won't have walked away; he'll have been shoved.

Mr. Grassley took President Obama at his word that the goal of this exercise was to lower costs and insure more Americans. But from the start he rejected the idea that this could be accomplished by government squeezing out the private market. At a White House health-care event in March, the Republican publicly warned that a government-run health insurance program -- the public option -- was an "unfair competitor" and a no-go.

In the spirit of compromise, he instead gravitated toward North Dakota Democrat Kent Conrad's proposal to set up a nonprofit cooperative to compete with private insurers. Savvy to stealth Democratic attempts to turn it into a de facto public option, he nonetheless issued ground rules about seeding it with government money and putting taxpayers on the hook if it fails. He wants no part of a "health-care Fannie Mae."

Along the way, Mr. Grassley delineated one other big requirement: Any bill had to be paid for from within the existing health-care system. No deficit spending. No Obama income tax hikes. An up-and-coming Tweeter, he reiterated his point Sunday, in response to House Ways and Means Chairman Charlie Rangel's proposed tax increases. "Chr Rangel wealthy 1pc make 27pc of total income pay 40pc of income tax U hv 5pc health care surtax How hi taxes go to satisfy u?Let's talk." Twitter shorthand aside, this is pretty clear.

Left to their camaraderie, Messrs. Baucus and Grassley might hammer this out. But Senate liberals, who never wanted compromise, are forcing Mr. Baucus to choose between their bread and Mr. Grassley's butter. The downward spiral began when Majority Leader Harry Reid, channeling the president, put the kibosh on Baucus-Grassley plans to pay for reform by taxing existing health benefits. The only quick and dirty way to fill the resulting $320 billion hole is with an income tax hike, which presumably loses Mr. Grassley. New York Sen. Chuck Schumer, senior member of the leadership and Finance Committee, is meanwhile making it his personal mission to develop precisely the sort of co-op that Mr. Grassley will detest.

The White House has unwisely needled the key Republican. Mr. Grassley takes his bipartisanship seriously and likes to note that he and Mr. Baucus craft proposals jointly, starting with a blank sheet of paper. On a recent Sunday talk show Obama adviser David Axelrod nonetheless feted a rival Senate bill, to which Chris Dodd had belatedly tacked a few minor Republican amendments, as bipartisan. The comment drew an unusually sharp Grassley rebuke that "Republicans are not going to be hoodwinked." Mr. Axelrod's ensuing boast that the White House is prepared to do this with Democratic votes alone has further tempted the Iowan to let them try.

The administration's rigid demand that Congress vote on bills before the August recess has now brought the issue to a breaking point. Mr. Grassley has condemned the artificial deadline, but Mr. Baucus is under pressure to produce. Should the Democrat put out a bill or schedule a hearing before settling with his counterpart, Mr. Grassley is likely to stop trying.

In anticipation, the White House has stepped up its Republican wooing (this week summoning Maine's Susan Collins, Alaska's Lisa Murkowski, Tennessee's Bob Corker and Georgia's Saxby Chambliss). Yet what Mr. Grassley can give, he can arguably take away. The sight of the Republican most committed to getting a deal being dissed by the White House and a maniacal Senate leadership will dissuade further GOP compromise. Combined with the Congressional Budget Office's terrifying analyses of how much this will cost, and its pronouncement yesterday that none of the existing Democratic bills will cut federal health costs, a Grassley defection could even cost Mr. Obama Democrats.

Mr. Grassley goes his own way, and he may yet irk Republicans. But so far he's serving as a good litmus test of how committed the Democratic majority is to working with the other side.

Obama Needs to 'Reset' His Presidency

The president we have is very different from the man who campaigned for the office in 2008.

TED VAN DYK

Time out, Mr. President.

As we approach the August congressional recess, it's clear that our economic distress is deeper than we thought, and thus your health-care and energy initiatives are in danger of stalling out. You could use a reset button for domestic policy.

Let's take it from the top.

Your presidential campaign was superb. You restored hope to millions -- including me -- who had been demoralized by the political polarization that characterized the presidencies of Bill Clinton and George W. Bush. You talked about reaching across party and ideological lines to get the public's business done. Your biography was appealing, and for those of us who entered politics motivated by the civil-rights struggle, your candidacy represented an important culmination.

David Klein

You displayed an intellect and sense of cool that made us think you would weigh decisions carefully and view advisers' proposals with skepticism.

The first warning signals for me came with your acceptance speech at the Democratic National Convention. In it, you stressed domestic initiatives that clearly were nonstarters in the already shrinking economy.

I had greater concern when you staffed your administration and White House with a large number of Clinton administration retreads who had learned their trade in the never-ending-campaign culture of the Clinton years. Some appeared to represent what you had pledged to eradicate in the capital.

Many of the missteps that have followed flowed, in part, from your reliance on these Clinton holdovers. Your chief of staff, Rahm Emanuel, defined your early strategy by stating that the financial and economic crises presented an "opportunity" to jam through unrelated legislation. To many of us, the remark was cynical and wrong-headed.

The crises did not represent an opportunity. They presented an obligation to do one thing: Return our financial system and our economy to good health.

Since January, your advisers have compared your situation to those of Presidents Franklin D. Roosevelt and Lyndon Johnson after their landslide victories in 1932 and 1964. In fact, your situation is quite different. Most centrally, FDR's and LBJ's victories and congressional majorities were far larger than yours. Thus their mandates were stronger.

FDR's first months in office were devoted entirely to financial and economic recovery. His big domestic initiative, Social Security, was not enacted until 1935. LBJ pushed an ambitious Great Society agenda into law in 1965. But the U.S. economy was growing robustly in 1965. Johnson referred to it as "an endless cornucopia" which would generate tax revenues to pay for the Great Society. When he learned in mid-1967 that the projected federal budget deficit was $28 billion -- almost twice the amount projected six months earlier -- he went to Congress to push for tax increases in order to prevent Vietnam War and Great Society spending from creating unacceptable deficits.

Your staff recently has compared your strategy in pushing health-care and energy initiatives to the way Johnson pushed his Great Society legislation. That's not a fair comparison. Johnson's initiatives were framed in the White House by his administration. But at every stage, congressional leaders of both political parties and financial, business, labor and other private-sector leaders were consulted. Johnson wanted to assure that his legislation was substantively sound and could get consensus support in the Congress and the country.

Your strategy, by contrast, has been to advocate forcefully for health-care and energy reform but to leave the details to Democratic congressional committee chairs. You did the same thing with your initial $787 billion stimulus package. Now, you're stuck with a plan that provides little stimulus until 2010. A president should never cede control of his main agenda to others.

This tactic has already had negative consequences. Frightened by the prospective costs of your health-care and energy plans -- not to mention the bailouts of the financial and auto industries -- independent voters who supported you in 2008 are falling away. FDR and LBJ, only two years after their 1932 and 1964 victories, saw their parties lose congressional seats even though their personal popularity remained stable. The party out of power traditionally gains seats in off-year elections, and 2010 is unlikely to be an exception.

What adjustments should be made?

- Cut back both your proposals and expectations. You made promises about jobs that would be "created and saved" by the stimulus package. Those promises have not held up. You continue to engage in hyperbole by claiming that your health-care and energy plans will save tax dollars. Congressional Budget Office analysis indicates otherwise.

It's time to re-examine these initiatives. Could your health plan be scaled back to catastrophic coverage for all -- badly needed by most families, but quite affordable if deductibles are set at the right levels? Should the Rube Goldbergian cap-and-trade proposals be replaced with a simple carbon tax, with proceeds to be allocated to alternative-fuels development?

The evolving health and cap-and-trade bills are loaded with costly provisions designed to gain support from congressional leaders and special-interest constituencies. In short, they have become an expensive mess. This legislation will not clear Congress by the August recess, as you have requested, and could be stalled for the remainder of 2009. Settle for incremental change: Do not press Democratic legislators to vote for something they fear will destroy them in 2010.

- Talk less and pick your spots.You are outdoing even Johnson and Mr. Clinton with your daily speeches in the capital and around the country.

Applause and adulation are gratifying. But the more you talk, the less weight your words will hold. Let voters see you at your desk, conferring with serious people about serious matters. When you do choose to talk, people will understand that it's important and they should listen.

- Conform your 2009 politics to your 2008 statements. During your campaign, you called for bipartisanship and bridge-building. You promised to reduce the influence of single-issue and single-interest groups in the policy process. Yet, in your public statements, you keep using President Bush as a scapegoat.

You have ceded content of your principal proposals to Democratic congressional leaders who in large part have yielded to special-interest constituencies and excluded Republican leaders from policy formulation. This certainly was the case with the stimulus plan. It has been the case with health and energy legislation, with the notable exception of Sen. Max Baucus's attempt in the Senate Finance Committee to develop genuinely bipartisan legislation.

You have an enormous reservoir of goodwill among Americans of all persuasions. They want you to succeed. Level with them and trim your proposals to what is practical in the current environment.

You had things right in 2008. Take a timeout. Get back to yourself. Make a fresh start.

Mr. Van Dyk was Vice President Hubert Humphrey's assistant in the Johnson White House and active in national Democratic politics over 40 years. He is the author of "Heroes, Hacks and Fools," (University of Washington Press, 2008).

Europe's Week Ahead: Telecom Operators

China Poses Little Risk For The Dollar

Investors Weigh Earnings

Stocks held steady Friday morning amid profit reports from a trio of blue-chip companies that all beat Wall Street's expectations, the latest installment in an earnings season that has been pleasantly surprising overall.

Major indexes were little changed. The Dow Jones Industrial Average slipped 11 points, or 0.1%, at 8723.15, its losses capped by a 3.2% rise in IBM after it reported a second-quarter profit that rose 12% from a year ago.

Market Data Center >

• Most Actives | Gainers | Losers
• New Highs and Lows | Money Flows
• Intraday Futures | Currencies

Other Dow stocks were mixed after reporting declines in their bottom lines that were nevertheless not as dire as analysts' feared. General Electric fell 4.8% after reporting a 47% drop in quarterly profit. Bank of America was down 0.2% after saying that its second-quarter income fell 5.5% due to higher merger charges and continued credit woes.

The market has risen in every full trading session so far this week – a streak that seems to have given way to a bout of fatigue in Friday's early action. However, traders are also settling expiring options bets, which may lead to increased volatility as the closing bell nears.

Other indexes were modestly lower. The technology-focused Nasdaq Composite Index was off 0.3%, hurt by a 3.5% decline in Internet-search giant Google, which reported profits late Thursday that topped forecasts. However, the company's revenue growth was meager due to the overall fall in spending on online advertising.

The S&P 500 slipped 0.3%, led by declines of around 1% each in its industrial and utilities categories. However, the financial sector was flat, helped in part by a 1% rise in Citigroup. The banking giant reported second-quarter revenue of $29.97 billion and a profit of 49 cents per share on a gain from the sale of Smith Barney.

Among stocks to watch, Mattel climbed 4.5% after topping analyst forecasts.

The economic calendar for the U.S. on Friday is thin. Housing starts increased 3.6% in June to a seasonally adjusted 582,000 annual rate compared to the prior month, the Commerce Department said Friday.

In Europe, shares advanced, putting markets on track for a fifth straight session of gains as major U.S. companies continued to beat earnings expectations.

Asia stocks rose, but gains were tentative ahead of the weekend.