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Preview: RealClearPolitics - Articles - David Ignatius

RealClearPolitics - Articles - David Ignatius

Last Build Date: Fri, 10 Apr 2009 00:20:00 -0600

Copyright: Copyright 2009

A Short Fuse in Pakistan

Fri, 10 Apr 2009 00:20:00 -0600

A hint of Pakistan's troubles came soon after Holbrooke and Mullen arrived here Monday night. Anne Patterson, the highly regarded U.S. ambassador, had assembled some of the nation's political elite to welcome the visiting Americans. During a question-and-answer session, a shouting match erupted between a prominent backer of President Asif Ali Zardari and a supporter of dissident Supreme Court Chief Justice Iftikhar Mohammed Chaudhry. The dispute, reported later in the Pakistani press, was a snapshot of a country so busy quarreling that it is failing to solve its problems.

The next morning brought fresh evidence of the dangers facing Pakistan. Holbrooke and Mullen met a group of young tribal leaders who had traveled, at great personal risk, from Waziristan and other frontier areas. Some were dressed in the colorful turbans of the frontier; others in Western clothes. If Taliban leaders back home knew they were meeting with Obama's special envoy and the chairman of the Joint Chiefs of Staff, they could be killed.

"We are all Taliban," one young man said -- meaning that people in his region support the cause, if not the terrorist tactics. He explained that the insurgency is spreading in Pakistan, not because of proselytizing by leaders such as Baitullah Mehsud but because of popular anger. For every militant killed by a U.S. Predator drone, he says, 10 more will join the insurgent cause.

"You can't come see the people because they hate you," he warned. Listening to them speaking through a translator, you realize that "drone attack" has become a vernacular phrase in Urdu.

In truth, I heard more clarity from the young tribesmen than from the elite at the embassy reception. The young men advised that America should channel its aid through the tribal chiefs, known as maliks, rather than the corrupt Pakistani government. It should help train the Frontier Corps, a rough-hewn tribal constabulary, rather than rely on Pakistani army troops who are seen as outsiders. To curb the militant Islamic madrassahs, the U.S. should help improve the abysmal public schools in the region.

Later that day, Zardari met us at his palace overlooking the city. He was convincing when he discussed the legacy of his late wife, Benazir Bhutto, who was killed in December 2007 by what he called the "cancer" of Muslim terrorism. But on some major security and intelligence issues, he claimed no knowledge or sought to shift blame to others, and the overall impression was of an accidental president who still has an uncertain grasp on power.

Zardari did offer an intriguing proposal for what to do about the Predator drones. "We would appreciate it if the technology was transferred," he said, so that the Predators could become "our hammer against the (terrorist) menace. Then we could justify it." U.S. officials said later that Zardari's comment could offer a step forward.

As so often in pro-American countries on the brink, part of the problem here is the gap between what officials say in private and what they can admit openly. Pakistani leaders know the Predator attacks help combat the Taliban in remote Waziristan, but they don't want to seem like American lackeys. So they protest in public the very strategy they have privately endorsed. One way or another, that gap has to be closed.

If there's a positive sign in all this chaos, it's that the Pakistani army isn't intervening to clean up the mess. Gen. Ashfaq Kiyani, the army chief of staff, has been telling the feuding politicians to get their act together. But he seems to understand that the route to stability isn't another army coup, but in making this unruly democracy work before it's too late.

Listening in Kabul

Tue, 07 Apr 2009 00:20:30 -0600

So it went over two days here, as the American officials took the Obama administration's new Afghanistan policy on the road to Kabul. The centerpiece of the plan, announced late last month, is 4,000 more U.S. troops to train the Afghan army and police. In addition to briefing the tribal elders, the two met with delegations of dissident politicians, women parliamentarians, agricultural experts and Muslim religious leaders from a council known as the ulema.

To each group, Holbrooke and Mullen repeated the same message: The United States isn't supporting or opposing any candidate in August's presidential election; it is spending billions to train Afghanistan's army and police so that U.S. and coalition forces can leave sooner; and it is seeking dialogue with some of the adversaries America is now fighting on the battlefield.

It was a bravura diplomatic show, and it seemed to have the desired effect. "This is exactly what we've been waiting for," said Hanif Atmar, Afghanistan's minister of the interior. He described the Obama policy as "Afghanization" of the war, and he predicted that most of his countrymen would "wholeheartedly support" it. President Hamid Karzai, who rated little more time with the American visitors than did the ulema, may not have been so enthusiastic, given America's neutrality in the election.

Some common messages emerged: Many Afghans specifically blamed Pakistan and its intelligence service, known as the ISI, for funding the Taliban insurgency; they criticized the corruption of the Karzai government; and they lauded Holbrooke's pet project for sharply boosting aid to Afghanistan's agricultural sector.

The Afghanistan visit was an unusual exercise in strategic listening for a superpower that during the Bush years treated communications strategy as a problem of talking more loudly. It was especially interesting to see Holbrooke in listening mode. "Give us advice on reconciliation with the Taliban," he implored the religious leaders. "What other suggestions do you have?" he asked the tribal chiefs.

The upbeat tour was deceptive, in a way, in its suggestion that Afghanistan's problems can be fixed by more open talk. An illustration of how hard it will be to turn the war around comes in a security map displayed in Atmar's office. Districts where the insurgency poses a high threat are colored in red; those that are enemy controlled are black. There is an arc of nearly unbroken red and black across the southern half of the country, where more than half the population lives.

Across town, in the U.S. military commanders' conference room, the headline on a PowerPoint slide reads: "The Glass Is Half-Full!" Maybe so, but there's a summer of heavy fighting ahead, and Obama's war may get worse before it gets better.

Watching Holbrooke make nice with the Afghans, the headline that occurred to me was: "Ramrod Meets Quagmire." A diplomat who began his foreign-service career in Saigon was here searching for a pathway to avoid another Vietnam.

And Afghanistan isn't even the biggest worry for Holbrooke and Mullen. What scares them more is the Taliban insurgency in neighboring Pakistan, where they landed late Monday night on the next stop on the policy road show. As one of the wizened Afghan tribal elders admonished: "Fix the ISI and you will solve the problem."

Raising the Middle East Curtain

Sun, 05 Apr 2009 00:00:00 -0600

If you're looking for a historical analogy for this scale of diplomacy, think of the Congress of Vienna of 1815. That gathering produced a new security architecture for a Europe that had been violently destabilized by revolutionary France -- in something like the way the Middle East has been upset by the 1979 Iranian revolution. A young Henry Kissinger made his name at Harvard with his 1954 doctoral dissertation on the diplomacy that framed the Congress of Vienna. It was published in 1957 as "A World Restored," and it makes useful reading now, as we contemplate the Obama diplomatic maneuvers. Of special interest is this quotation from Count Klemens von Metternich, the Austrian chancellor who orchestrated the diplomacy, and who was Kissinger's intellectual role model. It goes to the question of how and when to start the diplomatic drama: "(Policy) is like a play in many acts," Metternich wrote, "which unfolds inevitably once the curtain is raised. To declare then that the performance will not take place is an absurdity. The play will go on, either by means of the actors ... or by means of the spectators who mount the stage. ... Intelligent people never consider this the essence of the problem, however. For them it lies in the decision whether the curtain is to be raised at all. ... " Obama chose to give a gaudy public preview of his diplomacy with the televised "Nowruz" greeting to Iran's leaders last month on the occasion of the Persian new year. It brought a quick public rebuff from Iran's supreme leader, Ali Khamenei, who said Iran was looking for a change in American behavior, not kind words. Some veteran diplomats think Obama would have been wiser to make a quieter opening -- say, a presidential letter to the Iranian leader, delivered by a senior emissary. That would have given Iran time to respond carefully, in private, rather than backing them into a corner with the video. The Obama administration has proceeded more cautiously with Syria. The issues were explored early this year by an Arab intermediary trusted by both sides. Through this channel, the Americans signaled their desire to talk about Syria's role in Iraq, joint Syrian-American action against jihadists, and the future of Lebanon, including the role of Hezbollah. The emissary signaled that the U.S. couldn't discuss return of the Golan Heights, which is a matter for Israel, or the international tribunal to investigate the murder of former Lebanese Prime Minister Rafiq al-Hariri, which is under U.N. jurisdiction. The preliminary discussions were followed by a visit to Damascus by two experienced U.S. diplomats, Jeffrey Feltman and Daniel Shapiro. They explored a range of issues, but in a cautious and preliminary way. Both the United States and Syria are still testing each other's intentions; they want to see what's on offer, and at what price. Those are the right questions to ask before the curtain goes up. Arabs and Israelis are equally nervous about Obama's opening to Iran. Both fear that in his eagerness for Iranian help in stabilizing Iraq and Afghanistan, Obama will sell them out. Israel's new prime minister, Binyamin Netanyahu, put down his marker on Iran last week in a tough interview with The Atlantic: Either you stop the Iranian nuclear problem, or we will. The Saudis, Egyptians and other Sunni Arab countries have been sending Obama a similar message. "We don't want a war with Iran," says one Saudi source. "But we are asking whether a U.S.-Iranian understanding will recognize our interests, or will it be at our expense?" The Saudis hope that if Obama's charm offensive toward Iran fails, it will be followed by tough action. "He's building a case against Iran," predicts the Saudi source. Obama's speech in Turkey on Monday will signal the administration's desire for negotiations in the region. But the new president shouldn't raise the curtain until he has a little better idea what will happen on stage. [...]

Rolling Out Obamanomics

Thu, 02 Apr 2009 00:00:00 -0600

"Things have been out of balance for the last decade," Axelrod said. "We want to restore that sense of balance, that we're all in this together. We're not doing this right if we have a small group of people who are benefiting while most aren't. The president wants to create a prosperity that is broadly held.

"We talk about 'the new foundation,'" he continued. "You can build a lovely house, but if it's built on a soft foundation, it's going to collapse. The foundation to us is energy, health care and education."

That's why Obama has been so reluctant to give up these policy reforms, even as critics chide him for trying to do too much. The new programs are the reward for all the pain the country is experiencing -- the insurance policy for future prosperity.

Axelrod explains the link this way: "The president's main focus is developing an economy that is not rooted in the bubble and bust, not rooted in an overheated housing market or maxed-out credit cards. He sees a future where we're a leader in energy technology, where we once again have the best-educated work force in the world, where health care costs are not on a disastrous trajectory."

What Axelrod described represents a different economic approach from Obama's recent predecessors. And it should reassure a world that is worried about American leadership. This White House is speaking an economic language that Europe and Asia understand -- more regulation, more government intervention, a more generous safety net -- without abandoning America's commitment to free markets.

"We walked into a triage unit," Axelrod says. He argues because of Obama's efforts during the frantic first 60 days, people "are beginning to believe in the country again." A Washington Post poll this week seems to bear him out, with a tripling since December of the number of Americans who think the country is heading in the right direction.

If you're looking for a more conceptual phrase than "new foundation," you could describe Obama's approach as "post-globalization," or "post-liberalism."

When Americans spoke of "globalization," they meant that U.S. ideas about free markets and capital flows were becoming universal. But in Europe and Asia, you sometimes heard a different term. People spoke of the U.S.-led system as "liberalism," and that wasn't a compliment. They were anxious about a process of globalization that was sweeping away traditional rules and cultural values. In the name of efficiency, this liberalism seemed to put their way of life on the knife-edge of the market.

This suspicion of Anglo-Saxon economic liberalism cut across the usual political boundaries. Right-wing industrialists disliked it, but so did left-wing labor unions. Chinese communists felt threatened, but so did Green Party activists in Germany. Facing this voracious economic machine, the rest of the world was basically conservative. People liked things the way they were; they didn't want their lives turned upside down by the free market.

The critique of American liberalism underlies the London summit. It's shared by a diverse group that includes French President Nicolas Sarkozy, German Chancellor Angela Merkel, Chinese Prime Minister Wen Jiabao and Russian President Dmitry Medvedev. None of them wants America to abdicate its position as global leader; they know there's no alternative. But they do want America to get its house in order -- to stop lecturing other people and fix the problems that created the financial crisis.

The G-20 summiteers should find Obama and his vision of a new foundation reassuring. This president is in the repair business. He's smart, solid, practical -- to the point of occasionally being boring. He understands that America made a mess, and he's trying his best to clean it up.

Why Cheney Was Wrong

Sun, 29 Mar 2009 00:00:00 -0600

A more useful response would have been to say that America isn't less safe because Obama hasn't changed anti-terrorism policies as much as Cheney's broadside implied. In fact, the administration's new policies on interrogation and detention reflect a careful effort to balance law and national security -- and are a return to pre-Bush administration standards rather than some new left-wing experiment. To understand the Obama policies, you have to read carefully the executive orders that were issued by the White House on Jan. 22. They ordered the closure within a year of the Guantanamo Bay detention facility, instructed the CIA to shut its secret detention facilities, and banned any interrogation techniques not authorized by the Army Field Manual. With those decisive moves, Obama rejected the Bush administration's legal approach to terrorists as "unlawful enemy combatants," to whom U.S. and international law didn't apply. "It was offensive to the United States and our values that we should have dark holes where people could be made to disappear," explains Jeffrey Smith, a former CIA general counsel who was part of the informal group that advised Obama and White House Counsel Gregory Craig on the new policies. But to get a get full picture of the Obama approach, you have to read the fine print of the executive orders -- and also what they didn't say. First, Obama hasn't banned the process known as "extraordinary rendition." This technique has been used by U.S. intelligence and law enforcement agencies for more than 30 years to seize people overseas, either unilaterally or with permission of the host country, and take them somewhere else for interrogation and possible judicial action. That authority hasn't changed, nor has the CIA's ability to work with foreign intelligence services that are interrogating terrorist suspects. The executive orders propose a new task force that will "study and evaluate the practices of transferring individuals to other nations" to ensure that such transfers don't send prisoners to countries where they would "face torture." Although the CIA secret detention facilities are being closed, the order notes that this doesn't refer to "facilities used only to hold people on a short-term, transitory basis." The order doesn't define "short-term" or "transitory." "Rendition is still permitted," said Leon Panetta, the new CIA director, in a Feb. 25 meeting with reporters. "If we render someone, we are obviously going to seek assurances from that country that their human rights are protected and that they are not mistreated." The CIA hasn't had any rendition cases since Obama took office; but when opportunities arise they will be cleared with the White House on a case-by-case basis. In drafting the new policy on interrogation, Obama and his advisers recognized that there could be extraordinary situations -- say, a suspect with information about nuclear terrorism -- where the president could decide to waive the executive order banning harsh techniques. "Everybody understands that if the nation faces a severe threat, the president can do what's needed to protect us. But he has to explain it. The problem with Bush was doing it all in secret, which leads to abuse," argues Smith. Perhaps that will reassure Cheney about the nation's safety: The Obama team agrees with Supreme Court Justice Robert Jackson that "the Constitution isn't a suicide pact," and it understands that there are extreme situations where the rules on interrogation might have to be stretched. But it doesn't want to make the Bush mistake of opening the door to lawless actions. Explains Smith: "It's a big mistake to base your position on the idea that we have rules, but if need be, they'll be broken. That's a formula for abuse. On issues like this, you have to have a 'bright line' standard, so that U.S. government personnel all over the world know what the rules are."[...]

A Tax Break Fuels Middle East Friction

Thu, 26 Mar 2009 00:00:00 -0600

But critics of Israeli settlements question why American taxpayers are supporting indirectly, through the exempt contributions, a process that the government condemns. A search of IRS records identified 28 U.S. charitable groups that made a total of $33.4 million in tax-exempt contributions to settlements and related organizations between 2004 and 2007. "This is an issue that has not gotten the attention it deserves," said Ori Nir, a spokesman for Americans for Peace Now, a lobbying group that opposes settlements. "I don't know how many people, including in the U.S. government, realize the extent of private American funding to settlements. ... Every dollar that goes to settlements makes Middle East peace that much harder to reach." The Obama administration had an early confrontation over settlements when Secretary of State Hillary Clinton visited Israel early this month. She criticized Israeli demolitions of Palestinian homes in a largely Arab area of Jerusalem known as Silwan, just below the walls of the Old City. "Clearly this kind of activity is unhelpful," she said. Jerusalem Mayor Nir Barkat responded that Clinton was mistaken, and that the Palestinian houses had been built illegally. One of the Israeli organizations that has led the way in developing this area of East Jerusalem is called Ir David, or City of David. Like other pro-settlement groups, it has an active fundraising effort in the United States. According to Form 990s filed with the IRS, Friends of Ir David raised $8.7 million in 2004, $1.2 million in 2005 and $2.7 million in 2006. The group's primary tax-exempt purpose, according to the IRS filings, is: "To create a charitable fund to provide financial aid & other reasonable assistance to benefit the Jewish people of the Old City of Jerusalem. To teach about the history and archeology of the biblical city of Jerusalem. To offer aid & assistance for education, housing & the rehabilitation of distressed properties." A senior Jordanian official argued in an interview this week that Israeli pro-settlement groups such as Ir David are seeking to transform the demographic character of East Jerusalem so that a two-state solution, with Jerusalem shared by Israeli and Palestinian governments, will be impossible. Hebron is another controversial area where settlements have received substantial tax-exempt gifts from America. According to IRS records, the Hebron Fund donated $860,637 in 2005 and $967,954 in 2006 for "social and educational well being"; the fund's online mission statement makes clear this is for Israeli settlers inside the city. The Hebron settlement of Kiryat Arba received $730,000 in 2006 from a group called American Friends of Yeshiva High School of Kiryat Arba. Often the U.S. charities will specify that their gifts are going to charities in Israel, even though the recipients are in the West Bank, which the U.S. regards as occupied territory. American Friends of the College of Judea and Samaria, for example, said its donations were "to provide for the expansion and furtherance of the needs of educational institutions in Israel," even though the college is in the settlement of Ariel. Similarly, other filings speak of gifts to "Elon Moreh, Israel," "Gush Etzion, Israel," "Karnei Shomron, Israel," "Efrat, Israel," and "Bat Ayin, Israel," even though those settlements are all in the West Bank. A 2005 report by the Congressional Research Service stated: "The United States stipulates that U.S. aid funds cannot be used in the occupied territories." The issue came to a head during a 1992 dispute over the uses of U.S. loan guarantees. A Jan. 25, 1992, story in The New York Times said that Secretary of State James A. Baker had cautioned Israel's ambassador "that the administration was not going to underwrite Israeli policies that fundamentally contradict its own principles and long-stated policies." U.S.-Isra[...]

Upbeat Down Under

Sun, 22 Mar 2009 00:00:00 -0600

Rudd's second encouraging sign, linked to the first, is the growing role of China in maintaining global economic stability. Chinese leaders will attend the summit and presumably endorse its collective response to the crisis. Beijing also wants a larger role in a revitalized International Monetary Fund. The details are still being discussed, but China is expected to contribute more of the IMF's capital and to have a bigger say in the fund's management.

The third upbeat observation from Down Under is that the United States is back as a leader of the network of global institutions. Where George Bush was a reluctant participant in last October's G-20 meeting, the Obama administration has been an enthusiastic player -- supporting plans for new global financial regulation and backing a doubling of IMF resources to $500 billion.

"What's been a breath of fresh air has been the return of U.S. global leadership on the financial crisis," says Rudd. He notes that America's embrace of the G-20 "was noticed by people around the world."

I hope Rudd is right in the picture he draws of China, the United States and the rest working together to coordinate a global response to the crisis. An alternative to this collective action is a repetition of the protectionist policies that many nations adopted during the 1930s, when they tried to save themselves at the expense of their neighbors -- and made everyone worse off.

Rudd's views about China are worth examining in detail, because he is that rare politician who is actually an expert Sinologist. He speaks fluent Mandarin and served a tour in the Australian embassy in Beijing, and he's one of the smartest China-watchers I've met anywhere. His expertise is a resource Obama should tap this week in analyzing intentions.

The Chinese are on "the sharp end of the crisis," says Rudd, as declining exports lead to a sharp drop in growth and rising unemployment. Like most governments, the Chinese worry about the political and social effects of having so many people out of work. But Beijing has dealt with economic downturns before, and Rudd argues that, so far, "China's leadership has handled this crisis confidently."

Despite the opaqueness of Chinese economic statistics, Rudd believes that Beijing's announced economic stimulus program is for real, and that there's also a sizable undeclared effort, through easier lending to Chinese companies. Because of these recovery efforts, Rudd said, it's possible that China will emerge from the global slowdown earlier than other major economies.

Rudd said the recent comment by Premier Wen Jiabao that he was "definitely a little worried" about China's huge holdings of U.S. Treasury bills reflects a larger political discussion in Beijing. "In China, there has been a debate about the causes of the global financial crisis ... and where some of its national investments have gone wrong." Concern about U.S. mismanagement was pointedly expressed by Vice Premier Wang Qishan last December when he said: "The teachers have much explaining to do."

But Rudd argued that despite recent reversals, China still sees its future prosperity within the U.S.-led global capitalist system. "China is always engaged in a strategic plan rather than a tactical one, and China's strategy is to secure its interests by deepened global engagement," the Australian leader said. The crisis hasn't changed that strategy.

The London summit will test whether the global consensus Rudd describes is more than skin-deep. There's still a wide gap between American views (more stimulus!) and European (more regulation!), and many of China's policies remain a mystery. But as Rudd says, it's at least modestly reassuring that the G-20 will be the forum, China will be a player and America will be back in a leadership role.

Road Map for Afghanistan

Thu, 19 Mar 2009 00:15:00 -0600

Now President Obama is in the final stages of his strategy review for Afghanistan and Pakistan. And Kilcullen, meanwhile, has just published a book that distills the advice he has been offering to the White House (Bush and Obama, both) and to Gen. David Petraeus, the Centcom commander. The book, "The Accidental Guerrilla," offers the clearest road map I've seen for moving ahead in Afghanistan. Obama's policy choices for Afghanistan are usually presented in stark terms: Either he authorizes a major new escalation, well beyond the 17,000 additional troops he has already approved; or he scales back the mission to a narrower counterterrorism effort, aimed at preventing al-Qaeda from mounting attacks. Kilcullen argues that either of these extreme options would be a mistake. "It would be the height of folly to commit to a large-scale escalation now," at a time when the political climate in both Afghanistan and neighboring Pakistan is so uncertain. We should use the extra 17,000 troops to stabilize the situation but delay the big decision about escalation until after Afghanistan's presidential election in August. Kilcullen understands the mix of political and military factors that drives the wars in Iraq and Afghanistan. And although he made his name as the strategist of Petraeus' troop surge, Kilcullen is actually quite cautious about using military power to combat Islamic militants. He argues in the book that Bush's 2003 invasion of Iraq was "an extremely serious strategic error," and that the U.S. "should avoid such interventions wherever possible, simply because the costs are so high and the benefits so doubtful." But once we're in, there's no easy exit. The problem in these small wars is that U.S. military power creates a backlash that fuels even more violence. This conundrum is expressed in Kilcullen's title, "The Accidental Guerrilla." Most of the people we ended up fighting in Iraq and Afghanistan didn't start with any major grievance against the United States. They were drawn into the fight almost by accident, as they reacted to American efforts to destroy al-Qaeda and other Muslim foes. Kilcullen offers a four-stage model to explain the radicalization of the typical Taliban supporter in Afghanistan. The process begins with "infection," as al-Qaeda establishes a presence; next comes "contagion," as al-Qaeda uses its safe haven to mount attacks; then follows "intervention" by the U.S. to destroy al-Qaeda's sanctuary and its Taliban protectors; and that produces "rejection," as the local population allies with al-Qaeda and the Taliban against the foreign invaders. For America, it's a costly and self-defeating exercise -- which is precisely what al-Qaeda intends. Kilcullen quotes a haunting 2004 statement by Osama bin Laden: "All we have to do is send two mujahedeen to the furthest point east to raise a cloth on which is written al-Qaeda, in order to make the (U.S.) generals race there to cause America to suffer human, economic and political losses ... so we are continuing this policy of bleeding America to the point of bankruptcy." Kilcullen argues that the Obama administration can gradually stabilize Afghanistan using the same combination of political and military power that Petraeus used in Iraq. The right strategy is to remove the "accidental" combatants from the battlefield -- by negotiating with them, buying them off, sharing power with them or just ignoring them. At the same time, the U.S. must ruthlessly pursue its deadly adversaries in al-Qaeda, and separate them from the Afghan population. Above all, Obama must avoid creating a backlash in neighboring Pakistan by heavy-handed U.S. military intervention there. Obama inherits a messy war in Afghanistan. Kilcullen's advice, as I read him, consists of three "don'ts." Don't do it again; don't make it worse by overescala[...]

Back to the Bubble?

Sun, 15 Mar 2009 00:30:00 -0600

The basic imbalance was that the United States consumed far more than it produced. America financed this excess consumption by borrowing money from China and the other rising nations of Asia whose export-led economies were generating huge savings. Both sides became addicted to the flows of trade and capital: America loved gorging on cheap foreign imports; the foreigners loved the rapid growth that came from shoveling goods into the insatiable U.S. market.

It was a global bubble: The tsunami of foreign capital to the U.S. helped keep interest rates low, fueling the housing boom. Investors took ever-greater risks in a globalized economy in which flows of billions of dollars were just so many dots on a computer screen. This system, congenial but inherently unstable, came to be known as Bretton Woods II.

The danger now, as economic activity slows around the globe, is that the G-20 leaders will seek recovery in a new version of the old, unbalanced system. That is, the nations of Europe and Asia will look to America, with its massive multitrillion-dollar stimulus and rescue programs, to rev up the world's sputtering engine. America, massively in debt, will go back to its role as import glutton, and the rest of the world will go back to selling us products. And then we're back to where we started.

As the G-20 meeting nears, Washington wisely has been pushing for a coordinated global stimulus, to avoid the imbalances of the past. But the European nations are far less comfortable with deficit spending than Americans are. And the Chinese resist a stronger yuan that would make their exports more expensive. Last week, the grumpy finance minister of Luxembourg complained: "Recent American appeals insisting that the Europeans make an additional budgetary effort to combat the effects of the crisis were not to our liking." Oh yeah? Well then, get ready for a replay of the old American-led boom-and-bust cycle.

As a G-20 prep exercise, let's recall some economic history. The modern financial structure was created in 1944 at a conference in Bretton Woods, New Hampshire. It was a tightly disciplined framework: Countries would maintain fixed exchange rates; if they got into difficulty, the new International Monetary Fund would provide transitional financial help. Buttressing the system was the U.S. dollar, which could be converted into gold at a fixed rate.

The Bretton Woods system gradually lost its backbone. The U.S. dropped the gold standard in 1971 and allowed the value of the dollar to "float" in international currency markets. Other major economies gradually moved to flexible exchange rates, too. The IMF was still around for crisis lending, but the real action for emerging economies was in the massive flows of private investment.

Then came Bretton Woods II and its unstated formula for mutual financial dependency. America would provide the market; the rest of the world would sell the goods. We overspent; they oversaved. Countries that wanted to maintain artificially low exchange rates, such as China, were allowed to do so. The system couldn't last, and it didn't.

When the G-20 gathers on April 2, the leaders will discuss new financial regulation, which will make everyone feel better (although the problem now is getting bankers to take risks, rather than limit them). Perhaps the meeting will also endorse a new global clearinghouse for complex derivatives deals, so these financial killers don't pile up on the balance sheets of companies such as AIG.

But the G-20 will duck the real issue if its members don't address the financial imbalances that created this disaster. World prosperity in the future requires a coordinated global stimulus now -- not a lopsided effort by the United States.

Despite Crisis, It's Still Politics as Usual

Thu, 12 Mar 2009 00:00:00 -0600

We're still in the Neville Chamberlain phase when it comes to the economic crisis. The government is talking about sacrifice and solutions, but it hasn't yet made the tough decisions that will put the economy back together. Economist David Smick had it right in The Washington Post this week when he said the administration had a three-pronged strategy: delay, delay and delay. The administration announces a rescue package but doesn't deliver details; it promises budget discipline but saves the hard decisions for later. One reason this season feels so political is that Obama has stacked his administration with politicians and ex-government officials. You might think that with the greatest financial crisis of his lifetime, the president would want a few business leaders with experience managing large organizations in crisis. But no. Here's the un-businesslike Obama Cabinet: At Treasury, a former government official; at State, a former senator; at Commerce, a former governor; at Defense, a former government official and university president; at Energy, a former professor; at Homeland Security, a former governor; at Health and Human Services, a former governor; at the White House as chief of staff, a former congressman; at the White House as economic czar, a former university president and government official. All fine people, no doubt. But as thin on business experience as a Hyde Park book club. Maybe Obama sees business executives as too tainted by the financial crisis to be useful, or confirmable. The closest he comes is Paul Volcker's Economic Recovery Advisory Board -- which includes Jeffrey Immelt, chief executive of GE; Jim Owens, chief executive of Caterpillar; and venture capitalist John Doerr. The culture of immobilism starts on Capitol Hill. These people are still working a four-day week, taking Fridays off so they can run home and tell constituents how diligent they are. They may talk about a crisis, but they don't act like it's real. Republicans and Democrats are sticking to party-line votes on many key issues. The Democrats were egregious in packing the stimulus bill with pet projects that won't stimulate much except campaign contributions, and in sticking with earmarks -- a symbolic outrage that Obama promised during the campaign he would eliminate. But the Republicans have been even worse in their strategy of opposing recovery plans, which has given a legislative face to Rush Limbaugh's "I hope he fails." The legislative pettifoggery was captured by a New York Times headline this week: "Obama's Budget Faces Challenge By Party Barons; Panel Chairmen Oppose a Tax Plan but Want to Reduce Debt." This nonsense has to stop, folks. The party's over. What will happen if Obama's efforts fail? That's the question that really worries me when I remember my history. During the 1930s, European politicians failed to solve the economic crisis through normal democratic means. So the public turned elsewhere. People became so angry with bankers and business tycoons, and with the bickering parliamentarians, that they turned to authoritarian leaders who promised national action -- in the form of fascism. That nightmare scenario may seem far off today. But there's an ugly mood developing, as people start looking for villains to blame for the economic mess. Obama administration officials are understandably nervous about taking a leap in the dark -- imposing emergency financial measures that could mean bankruptcy and nationalization for big automakers and giant banks. I hope they will find more creative, market-oriented approaches that break up the giants rather than patch them together under government ownership. But the phony war has to end. The public is demanding action, and if this set of politicians doesn't provide it, t[...]

Talk With Iran? Then Move Fast

Sun, 08 Mar 2009 00:25:00 -0600

And what about rhetoric? Does Iran really imagine that it can engage the United States when its supreme leader, Ayatollah Ali Khamenei, said last week that Barack Obama was following the "crooked ways" of his predecessor and that Israel was a "cancerous tumor." That's a recipe for stopping dialogue rather than starting it. Given the reports of intense debate in Iran over how to deal with America, maybe that's what Khamenei intended. Despite inflammatory Iranian rhetoric and Syrian foot-dragging, the administration still favors contacts. Secretary of State Hillary Clinton's invitation last week to Iran to join talks on Afghanistan is the latest signal. But as they review Iran and Syria policy, administration officials are focusing on several key issues that will shape how the engagement process proceeds. Let's start with Iran. The first challenge is what might be called the "two clocks" problem. Administration officials want a slow clock, in the sense that they favor a careful process of sustained, direct dialogue. But they also realize that a fast clock is ticking on the Iranian nuclear program, and that by next year the Iranians could have enough fuel to make a bomb. Efraim Halevy, a former chief of Mossad, the Israeli spy service, highlighted this problem in a recent e-mail to me. "The strategy of engagement will succeed only if the Iranians realize they do not have all the time in the world to negotiate." He argued that the U.S. should "limit the dialogue to a very few months." A senior Israeli official made the same argument in an interview last week: "If you want to engage, do it now, with a date certain." The Obama team doesn't want a time limit on talks, but officials believe Iran should move on its own to ease time pressure. "If they would like to have a more leisurely process, they need to take some steps that stop the clock," says a senior official. The administration hasn't decided yet what those steps should be, but they might begin with the International Atomic Energy Agency demands that Iran provide more transparency and allow new inspections of its nuclear program. Beyond the two-clocks problem, there's the larger issue of deciding on a bargaining position on the nuclear question. A few years ago, the U.S. and Israel hoped they could stop the program before the Iranians mastered fuel enrichment, but in the last few months that effort appears to have failed. A fallback position would be to demand that the Iranians not cross the bomb-making threshold, and that they allow inspectors to verify that enrichment remains at the low levels consistent with a civil nuclear program. According to one Israeli official, this threshold option has support from one faction in Tehran that includes Ali Akbar Velayati, a former foreign minister and now a senior adviser to Khamenei. But the official said the Israelis oppose this approach, arguing instead for a rollback of Iranian technology. The Syrian track is less complicated, but it has the same phasing issue. Syrian President Bashar al-Assad wants a firm assurance that Israel will return the Golan Heights before he moves to direct negotiations. The U.S. and Israel want a firm assurance that Syria will moderate its support for Hamas and Hezbollah before the Golan card is played. Each side is waiting for a show of the other's good faith. Obama sent two emissaries last week to talk with Assad, so that process is beginning. The strategic rationale for the Syria track is that it may help separate Damascus from Tehran, but the senior U.S. official cautioned that this issue "is not the starting point" for U.S. talks, and that a break with Tehran can happen "over time, as Syria sees the benefits of contact with the West." These diplomatic subtleties a[...]

Let's Give FDR a Rest for Awhile

Thu, 05 Mar 2009 00:00:00 -0600

Even AIG knows it's too big. "AIG's conglomerate structure is too complicated, unwieldy and opaque," said Edward Liddy, the company's new chief executive, who came in last fall to try to clean up the wreckage. The tragedy is that this was clear a few years ago, and nobody did anything about it. A former regulator remembers that AIG's transactions were so tangled and incomprehensible that it couldn't close its books on time -- and yet nobody thought to call a halt. Treasury and Federal Reserve officials have continued to operate on the assumption that in finance, bigger is better -- and safer. The argument for these huge, diversified financial institutions has been that in pooling different kinds of risks, they would increase the overall stability. That rationale helped created the monstrosity called Citigroup. It was like the argument for securitization of subprime mortgages -- put enough of them together and the danger of default would be less. That didn't work out too well. And yet the authorities have continued to act as if greater size will provide greater stability. That was the rationale for pushing a healthy Bank of America to acquire a sick Merrill Lynch last fall. A better response to Merrill's sickness would have been to leach out the toxic assets and then encourage an orderly breakup of the brokerage firm; it was too big already. A case study for today's regulators is President Theodore Roosevelt's response to the financial shenanigans of 1902, when the railroad barons tried to combine the Great Northern and Northern Pacific lines into a huge holding company called Northern Securities Co. Roosevelt wanted to file an antitrust suit to stop the deal. The financiers threatened that the lawsuit would cause a panic on Wall Street, to which TR's attorney general, Philander G. Knox, memorably replied: "There is no stock ticker at the Department of Justice." When Roosevelt ignored the threats and moved to file the trust-busting suit, he received a hasty visit from J. Pierpont Morgan, the reigning financial titan. "If we have done anything wrong, send your man to my man and they can fix it up," offered Morgan. TR responded unflinchingly, "That can't be done." Sad to say, but since this crisis began last year, Treasury and Fed officials have been rushing to "send your man to my man" and fix things up in hastily concocted weekend deals. The big financial trusts of our day have been threatening the regulators with ruin, and the regulators have been caving. They don't want another Lehman Brothers. But the authorities should have explored whether, as an alternative to failure, they could dismantle the giants into smaller, more manageable parts that could work their way to solvency. Historian Walter Lord, in his 1960 book "The Good Years," wrote of Morgan and the other plutocrats: "These men were not naturally callous. They had no evil intent. But they had lost touch. The vastness of the operations, the complexity of their corporate structures kept them from their employees and the people they served." That's a perfect description of the executives at Citigroup, AIG and the other behemoths that brought the financial crisis down on our heads. The Obama team has been lauded for emulating Franklin Roosevelt's bold response to the Great Depression of the 1930s. And as calls grow for nationalization of Citi and other giant banks, they may be tempted to go where even FDR feared to tread. But financial giantism -- private or public -- isn't the answer. The challenge is how to reconstruct our broken financial system. Let's give Franklin a rest for a while, and ponder Teddy's progressive philosophy: When it comes to finance, small really is beautiful. [...]

We Saw the Crisis Coming

Sun, 01 Mar 2009 00:00:00 -0600

Yet the authorities did too little in the early years, when they could have had some effect. And once the full force of the crisis hit, officials became caught in a reactive cycle of incrementalism -- with each intervention setting up the next one. We have been dragged into the future by the weight of past mistakes, rather than charting a new course. This failure is especially clear in the case of three prominent people who are shaping the response to the crisis now: They saw the dangers building but failed to take decisive action -- for fear that a new financial architecture would frighten the markets. The three who saw it coming are Robert Rubin, the treasury secretary during the Clinton administration; Lawrence Summers, Rubin's successor at Treasury and Barack Obama's chief economic adviser; and Timothy Geithner, who served under Rubin and Summers, then headed the New York Federal Reserve and now runs Treasury. I admire all three, whom I got to know when I was the Post's business editor during the mid-1990s. I am looking backward here not to point fingers, but to argue for breaking the cycle of reactive mistakes. First, Rubin: During the boom years of the 1990s, he was deeply worried about the risk of systemic failure in the financial markets. He was especially nervous about derivatives, the exotic financial instruments that were being created willy-nilly on Wall Street. Rubin hadn't run Goldman Sachs that way, and he feared the new crowd was taking risks they didn't understand. In the event of a crisis, would the window of transactions be wide enough to maintain orderly markets? Or would liquidity simply disappear? Rubin pinpointed all the right issues. And yet when pressed in interviews about a new financial architecture to reduce these systemic risks, he would shy away like a skittish colt. Famously, he balked at the recommendation of Brooksley Born to regulate derivatives at the Commodities Futures Trading Commission. Summers and Geithner had similar worries about systemic risk, and the same phobia about frightening the markets. Their skill was in crisis management -- the Mexican peso crisis in 1994, the Asian financial crisis in 1997, the Russian default and Long-Term Capital Management collapse in 1998. They were deft in nudging the markets away from meltdown, and that reinforced their confidence that ad hoc policies, negotiated privately with Wall Street leaders, were better than clunky regulatory regimes. The paradox is that many reforms of those years have actually made things worse, by building in pro-cyclical forces that accentuate the downturn. This was true with the so-called "Basel II" capital standards. By requiring banks to maintain high reserves during crises, it forced them to sell assets into a falling market, compounding the downward pressure. Other reforms had similar unintended consequences. The mark-to-market rules adopted by the accounting profession had the perverse effect of forcing banks to write down their portfolios daily as the market for securitized assets collapsed. These "marks" were often imaginary, since there was no real market. But banks had to take huge write-offs anyway, accelerating the death spiral. Summers and Geithner now have a unique chance -- the best chance in a century -- to put the casino economy on a sounder footing. They don't have to worry as much about spooking the markets, which are already so traumatized they barely register a pulse. They can break with ad hoc policies. The Obama team should build around what works, rather than shoring up the status quo: That means encouraging smaller, nimbler banks -- rescue Citigroup, if we must, but then break it up. It means putti[...]

On Iran, an Apostle of Patience

Thu, 26 Feb 2009 00:00:00 -0600

Hamilton cautioned against expecting any quick breakthroughs. He recommended a patient process of engagement that would be analogous to long-term diplomacy with the Soviet Union. "Those of us who favor dialogue with the Iranians have to be clear that success will not come quickly," he said. "You'll have to have direct, sustained engagement over a long period of time." Administration officials echo this need for a careful, low-key approach to Iran. The administration has begun an interagency strategic review of Iran policy (they love "reviews," this Obama team). Until this is done, says a White House official, "it's premature to talk about talks, or pre-talks, or emissaries." (Point taken. I wrote recently that former national security advisers Brent Scowcroft and Zbigniew Brzezinski would be good emissaries, if talks ripened. Add Hamilton to that list.) The starting points for U.S.-Iran discussions, Hamilton said, would be to "state our respect for the Iranian people, renounce regime change as an instrument of U.S. policy, seek opportunities for a range of dialogue across a range of issues, and acknowledge Iran's security concerns and its right to civilian nuclear power." He said Obama has already signaled he wants such a conversation, without preconditions. Asked how contacts might begin, Hamilton said the first step might be a back channel, "secret discussions by someone authorized by the president." These initial private talks could set the agenda, and assure the Iranians that the U.S. wants to discuss an array of issues -- and not just Afghanistan or Iraq or nuclear weapons. "You don't start by Obama calling (President Mahmoud) Ahmadinejad or the supreme leader (Ayatollah Ali Khamenei)," Hamilton said. "You have to work toward an agenda, and that means contacts have to begin at a lower level." A European who speaks regularly with the Iranian government said that Tehran, too, wants to take its time. He said Iran seeks a broad discussion, not just selected items. This official recommended a "preparatory, confidential meeting to say what are the modalities, agendas, procedures, confidence-building measures." Hamilton has a special perspective. In addition to 34 years in Congress and his role as co-chair of the Iraq Study Group, he's the only American who has actually had a successful mediation with Iran's supreme leader. After Haleh Esfandiari of the Wilson Center was arrested in Tehran in May 2007, Hamilton sent a careful letter, couched largely in religious terms, to Khamenei. The leader responded positively, and Esfandiari was released from prison. The administration official who oversees the Iran file is William Burns, the undersecretary of state for political affairs. Although Dennis Ross will take a broad strategic look at the region in his new post of State Department adviser, senior officials stress that Burns is the address for Iran policy. Administration officials don't want to talk about "carrots and sticks," a favorite Bush formulation that the Iranians disliked. But Obama has the same task of balancing positive and negative elements: The administration wants talks, but if Iran continues to reject Security Council demands for controls on its nuclear program, Obama will seek much tougher sanctions. Obama is working hard to woo Russia as an ally in the diplomatic dance with Iran. When Burns visited Moscow two weeks ago, he brought the message that if Russian pressure can convince Iran to give up nuclear weapons, that could remove the rationale for U.S. missile defense installations in Eastern Europe. The Russians were "intrigued," but noncommittal, according to one official. Hamilton sums u[...]

A Three-Pronged Bet on 'AFPAK'

Sun, 22 Feb 2009 00:20:00 -0600

Obama and his special adviser for the region, Richard Holbrooke, want to put their own stamp on policy. They inherited three reviews on Afghanistan: one by Lt. Gen. Doug Lute that was commissioned by the Bush administration; a second by Adm. Mike Mullen, chairman of the Joint Chiefs of Staff; and a third by Gen. David Petraeus, the Centcom commander who oversees the region. Obama promptly ordered up a fourth assessment -- a review of the reviews, if you will. The baseline is the idea that Afghanistan and Pakistan are two theaters in the same war, combating the Taliban and al-Qaeda extremists that are operating in both countries. Hence, AFPAK. Overseeing this meta-review is Bruce Riedel, a former senior analyst at the CIA who's on loan for 60 days from the Brookings Institution. As part of the review, top military and intelligence officials from Afghanistan and Pakistan are visiting Washington this week. "We agree that there is one front, from Kabul to Calcutta," a senior Pakistani official told me. But what that will mean in practice is far from clear. U.S. officials were flummoxed by Pakistan's announcement last week that it had negotiated a truce with Islamic rebels in the Swat Valley region. Pakistani officials portray the deal, which would impose Islamic sharia law in the area, as a way to placate tribal leaders and pry them loose from Taliban militants. But American officials are skeptical. They say that while 100,000 Pakistani troops are now deployed in the northwest, the war is going badly. "Even with all that manpower, they're not making much progress," says one key official. Washington fears that Pakistan may want to fold its hand in Swat, to avoid morale problems in an army that would rather be confronting India in the east than Muslim militants in the northwest. A similar stand-down took place several years ago in Waziristan, where Gen. Pervez Musharraf agreed to a truce rather than continue a failing campaign. Today in Waziristan, the only real threats to Taliban and al-Qaeda fighters come from U.S. Predator drones overhead. Asked about the Swat truce, Mullen said in a telephone interview: "It's too soon to tell, but the history is not encouraging. It's not good if it's a repeat of what happened before." Pakistani officials say the government of President Asif Zardari is ready to fight the Muslim militants, if America provides the tools and training for counterinsurgency. On the Pakistani "wish list" are attack helicopters, night-vision equipment, light artillery for the mountainous border regions, jamming equipment to stop Taliban radio broadcasts, and other high-tech gear. The Americans would like to teach counterinsurgency tactics to a Pakistani army organized to fight a traditional war against India. Here again, Zardari's government says it is ready. The Pakistanis say they already have authorized 70 U.S. special forces advisers to train the Frontier Corps constabulary in the tribal areas along the border -- and that they are willing to approve three times that number. They even talk of secret training camps in America, to reduce the U.S. footprint in Pakistan. The Obama team's broad goal for AFPAK is a three-way strategic engagement to fight a common enemy. This means billions in economic aid for a collapsing Pakistani economy; it means a new focus on fighting corruption in Afghanistan; and it may mean distancing the U.S. from President Hamid Karzai in advance of Afghanistan's presidential elections in August. (Complicating the situation is the fact that Karzai's legal mandate may expire in May.) Will the new strategy require more U.S. troops than the 17,000[...]