A Fib Here, a Scandal There - New York Times

A Fib Here, a Scandal There - New York Times

September 18, 2005
A Fib Here, a Scandal There
WHAT you don't know about your hedge fund manager, it turns out, can really hurt you.

That's one lesson from the debacle at the Bayou Group, a hedge fund firm run by Samuel Israel III, that, federal prosecutors say, defrauded investors of $300 million. While Mr. Israel told investors that he had trading in his blood - he came from a family that had built a big commodities firm that flourished during much of the last century - and trumpeted his string of triumphs at firms large and small, the truth is somewhat different.

Résumé inflation, of course, is nothing new. But it can be hazardous when practiced by those in the money business. And particularly so in the wild, wild west of the hedge fund world.

It can also be a terrifically effective warning sign. After all, a money manager who thinks nothing of rewriting his career history might be equally happy to cut other corners. (Mr. Israel has not returned phone calls seeking comment.)

A comparison of Mr. Israel's curriculum vitae in the Bayou Group's sales materials and the one, known as a C.R.D., that is on file with securities regulators, shows some interesting discrepancies.

According to both, Mr. Israel - Sammy to his friends - began his Wall Street career in 1982 at Frederic J. Graber & Company, a small but respected institutional firm. His timing was propitious: he sat down at the trading desk there in January 1982, when the Dow Jones industrial average hovered around 850. Mr. Israel may not have known it, but the greatest bull market in history was about to commence.

He was at Graber for six years in all, the longest he stayed in one place during his 23 years in the investment arena. (That does not count his eight years running Bayou, which was based in Stamford, Conn.)

But he apparently did not make much progress at Graber. According to two salesmen at larger brokerage firms who dealt with him there, he never rose above the level of order-taker.

For the next five years, according to his C.R.D., Mr. Israel ricocheted around Wall Street, working at start-ups or small firms. Only one of the five jobs that he held in this period shows up in Bayou's sales materials.

For example, Mr. Israel's C.R.D. states that he left Graber at the end of 1988 to join Midwood Securities Inc., a start-up brokerage firm where he remained for about nine months. Terry L. March, chief executive of Midwood Securities, was there at the time. He remembered Mr. Israel, but said his performance at the firm was unremarkable.

The next move for Mr. Israel was to Gerard Klauer Mattison & Company, an institutional brokerage firm, in November 1989. He traded New York Stock Exchange shares there but left the following May.

Mr. Israel left Gerard Klauer in May 1990, joining Gruntal & Company, which was later bought by Ryan Beck & Company. He cleared out of Gruntal 10 months later.

It was about this time, Bayou's marketing documents say, that Mr. Israel met Daniel Marino, who became Bayou's chief financial officer.

As Bayou was nearing collapse, Mr. Marino wrote a suicide note. He never acted on it, and authorities recovered it last month. In that six-page letter, he described how the hedge fund had collapsed after years of unsuccessfully trying to recoup hidden losses.

Mr. Israel and Mr. Marino met at a small investment firm in New York called HMR Investors, where Mr. Israel, the documents say, was responsible for short-term trading. Mr. Marino, a former accountant, was HMR's chief financial officer.

But the stint at HMR, which coincides with his work at Gerard Klauer Mattison, doesn't appear in the career history that Mr. Israel provided to regulators.

So he was moonlighting.

In any case, in April 1991, Mr. Israel joined JGM Management, a hedge fund run by James Marquez, formerly a trader at Soros Asset Management and Steinhardt Management, two giants of the hedge fund industry.

After a year at JGM, Mr. Israel was on the move again, his C.R.D. said. Concorde Asset Management in Purchase, N.Y., near where he lived, was his next stop. That enterprise lasted six months.

In January 1993, Mr. Israel got his big break: a job at Omega Advisors, a huge hedge fund run by Leon Cooperman.

Prospective Bayou investors were told that Mr. Israel stayed at Omega for four years and rose to the position of "head trader" at the firm. "Mr. Israel was responsible for all equity and financial futures executions," the sales materials stated, "as well as sharing responsibility for hedging the portfolio through the use of futures and options."

But an Omega official said that Mr. Israel's position at Omega was an administrative one, not a high-level trading job. And Mr. Israel's C.R.D. has him at Omega for only 18 months, not four years.

Details, details.

In June 1995, Mr. Israel hit the road again, leaving Omega to start Bayou, according to his C.R.D. Investors were told, however, that his fund didn't open until 1997.

The reason for this discrepancy is not clear. But according to several investors, Mr. Israel opened Bayou for business in 1996. While the fund's performance started out well, it soon went sour, these investors said.

Losses are tough to own up to. And if Mr. Marino's note and federal prosecutors' contentions are true, Mr. Israel has had problems facing them for a long, long time.

Clues to a Hedge Fund's Collapse - New York Times

Clues to a Hedge Fund's Collapse - New York Times

September 17, 2005
Clues to a Hedge Fund's Collapse
By GRETCHEN MORGENSON

This article was reported by Gretchen Morgenson, Jenny Anderson, Geraldine Fabrikant and Riva D. Atlas and written by Ms. Morgenson.

"If there is a hell I will be there for eternity."

So reads a passage in the six-page "suicide note and confession" written by Daniel E. Marino, chief financial officer of the Bayou Group, a hedge fund firm in Stamford, Conn., that was accused by federal prosecutors on Sept. 1 of conducting a $300 million fraud. The note, whose contents were confirmed by two officials who have seen it, answers in sometimes gripping detail the questions that have consumed Bayou's investors since the fund's problems exploded into view one month ago.

Mr. Marino never followed through on his suicide threat, but the letter was recovered by local authorities last month. Of course, his account of years of deceit at Bayou is only one side of the story and some of the details remain unconfirmed, but prosecutors and law enforcement officials appear to be treating his letter as a crucial road map in their investigation. Indeed, the civil suit filed by the United States attorney against Bayou this month closely tracks the letter's details.

Mr. Marino's narrative starts on the last trading day of December 1998, more than three years after Bayou was founded by Samuel Israel III, a scion of a commodity-trading family that is well known to Wall Street. On that final day of a tumultuous year in the markets - three months earlier, another hedge fund known as Long-Term Capital Management had nearly collapsed, causing widespread disruption in the financial world - Mr. Israel called two of his colleagues into a conference room.

All three men knew the situation was dire at Bayou - the funds' losses had vastly overwhelmed their gains for more than two years. Something had to be done, and fast.

The solution, devised by Mr. Israel and a lieutenant, James Marquez, was simple: produce a fake audit of the funds' performance and try to make up the losses next year.

In the end, of course, the plan failed. The losses compounded and the results Bayou reported to its investors - several years of market-beating returns - were consistently false.

So far, Bayou investors hoping to understand what happened to their money have been in the dark about what went on at the fund. But Mr. Marino's letter, along with an examination of Bayou's financial documents and interviews with many of Mr. Israel's friends and former colleagues fill in the missing pieces of the funds' startling collapse.

Because almost everything that Bayou executives told investors over the years now appears to be false, it is perhaps not surprising that people who have known Mr. Israel for years say that the image he projected to his clients was more about what he hoped to be than what he actually was.

For example, although he told his investors he was a third-generation trader, coming as he did from a family of successful commodities traders dating back to the 1890's, for much of his career on Wall Street he remained a low-level order taker who bounced from one obscure firm to another.

And while Mr. Israel came off as a spirited, affable prankster to outsiders, to close associates he could be demeaning and threatening, even to the point of wielding a gun at Mr. Marino in 2002 when he refused to follow Mr. Israel's orders, according to Mr. Marino's letter.

"What is interesting about this is it was not just a lie, it was a very good and elaborate lie," said John C. Siegesmund III, a Colorado investor who put $250,000 into one of the Bayou Funds in 2003.

It is believed that Mr. Israel, 47, remains where he has been since the scandal broke: holed up in the 1920's-era stone mansion in Mount Kisco, N.Y., that he rents for $32,000 a month from Donald J. Trump. He has not returned numerous calls requesting interviews. His lawyer did not return phone calls.

If Mr. Israel is indeed in Mount Kisco, he is not far from the elegant home on the grounds of the Westchester Country Club where he grew up. The house backed onto the third hole of the golf club's so-called south course, according to a friend of many years, who said, "Sammy started out living large."

But if Mr. Israel hoped that his foray into hedge fund management would burnish his venerable family's reputation for savvy and successful securities trading, he appears to have failed spectacularly.

In the slick and sometimes swashbuckling world of hedge funds, Mr. Israel and Mr. Marino, 46, were an odd but perfect pair. Mr. Israel, the product of Southern money and Tulane University merriment, boasted of his days among Wall Street's best while charming people as a wisecracker with a passion and edge for the markets.

Mr. Marino, an accountant with a severe hearing problem and a lisp, bore neither pedigree nor power. In the mid-1980's, as he pursued his career in accounting, he lived with his mother in Staten Island, drove a leased maroon Maxima and worked for a second-tier accounting firm, according to one person who worked with him.

Mr. Marino has not returned phone calls seeking comment. Andrew B. Bowman, a lawyer in Westport, Conn., who represents Mr. Marino, declined to comment about the letter or what took place at the fund.

A lawyer for Mr. Marquez, Stan Twardy of Day Berry & Howard, said: "Our communications on this topic are with the U.S. attorney's office only. To ensure the record is accurate, I will confirm that James Marquez has had no involvement in Bayou for years."

But for wealthy investors looking to dabble in the glamorous and promising world of hedge funds, Bayou's top two men offered an ideal balance: a big ego to make money and an accountant to keep it clean.


'If anyone got near anything, I would browbeat them away.'

According to Mr. Marino's letter, none of Bayou's lower-level employees knew about the charade that began in 1998. Certainly both Mr. Israel and Mr. Marino knew that if Bayou's investors got wind of the funds' losses they would flee. And any hopes Mr. Israel may have had of adding his name to the list of savvy traders in his family would have been dashed.

Mr. Israel knew only too well how quickly investors could turn on him. In the very early days of Bayou, investors had defected at the first sign of losses. A former hedge fund trader who spoke on the condition that he remain unidentified said that in mid-1996 he invested $150,000 in Bayou. But at the end of the year, he said he asked for his money back because the fund had fallen about 14 percent.

Mr. Israel had a tendency not to communicate bad news, this person recalled. "At first I got letters all the time, and the fund was up, and then I got no letters for a while and suddenly, the fund was down," the former investor said. "That was when I took the money out."

The 1998 attempt to recoup trading losses at Bayou was to involve two steps, according to the plan outlined in Mr. Marino's letter. First, Mr. Israel would raise fresh funds from investors and trade his way to outsized gains on that money. In addition, the commissions generated by the Bayou funds' trades - almost always executed by Bayou Securities, the brokerage firm owned by Mr. Israel - would be credited back to the funds to help offset the losses. Because Mr. Israel was known for his rapid-fire trading, the commissions would be high, Mr. Marino's letter said.

But hiding a mountain of past losses from investors also meant that the fund's auditor had to be replaced. A new accounting firm - Richmond-Fairfield - was created to oversee the fake bookkeeping, prosecutors contend. Mr. Marino was the firm's principal.

The plan, as described by Mr. Marino, certainly helps explain some of the unusual aspects of the Bayou Funds. For example, Mr. Israel did not charge his investors the traditional hedge fund management fees of 1 percent to 2 percent of assets. Instead he restricted his pay to 20 percent of the funds' gains. In addition, the minimum investment Mr. Israel required of his clients - $250,000 - was much smaller than is typical among hedge funds.

Since Mr. Israel needed to attract more money to get out of the hole he was in, lower management fees and smaller minimum investments certainly could not hurt the funds' appeal to new investors. Indeed, some investors who bought into the funds in 2003 said that both were factors in their choice of Mr. Israel as a fund manager.

With the plan in place, Bayou officials reported its 1998 performance to investors: a gain of 17.55 percent. December was an especially good month, fund officials said, showing a profit of 3.14 percent.

Other aspects of Mr. Israel's career history and Bayou's operations were changed to enhance appearances or gloss over troubles. For example, while documents given to prospective investors in 2003 said that Mr. Israel started Bayou Funds in 1997, some early investors said the fund opened in 1996. It turned in a poor performance, however, possibly driving Mr. Israel to edit 1996 entirely from the Bayou record books.

Clearly, Mr. Israel's claim to have been a "born trader" was another fiction. According to Emanuel Gerard, for whom he worked briefly in 1990 at Gerard Klauer Mattison, Mr. Israel turned in better performances in down markets than up. Mr. Gerard said he invested a small amount of money in Bayou as a sort of hedge against a market fall, but that he redeemed his investment last year.

As Mr. Israel set out to start Bayou in the mid-1990's, according to two of his former investors and longtime friends, he collaborated with Stanley P. Patrick, a quantitative stock trader, to develop a computerized trading strategy. In 1990, Mr. Patrick had been charged with trading on inside information provided by Eben P. Smith, a broker at Jeffer Management, an investment firm that was defunct by that time.

The government asserted that Mr. Smith had received information from a former lawyer at Skadden Arps Slate Meagher & Flom. Mr. Patrick pleaded guilty to the charges and was barred from the securities industry in 1994. After Mr. Israel and Mr. Patrick created the trading strategy, the two men went their separate ways. Mr. Patrick could not be reached for comment.

Another early investor was Martin Payson, the former vice chairman at Time Warner, who recalled in an interview last week that he knew and admired the Israel family. Mr. Payson had been on the board of Tulane University for 13 years and knew Mr. Israel's father. He said that he took the younger Mr. Israel to dinner in Manhattan and liked him. "I don't think we even talked much about the fund," he said.

Mr. Payson said that he viewed the fund as an offset to the market. He did not redeem his investment; he said he had no idea there were problems and felt betrayed.

Tremont Capital Management, a well-respected funds manager, invested in Bayou around 2000, according to people briefed on the investment, although it redeemed its investments around two years later.

With clients like these, Mr. Israel became better known. Bayou's assets really started to grow in 2001 and 2002 when consulting firms and funds started recommending Bayou to their clients.

And in 2002, John Mauldin, president of Millennium Wave Investments, an investment adviser in Arlington, Tex., wrote an admiring profile of Mr. Israel and his trading technique. Another consultant that recommended Bayou to its clients was the Hennessee Group of New York.

Investors liked Mr. Israel's constant communications, via e-mail, about the markets and the progress of their investments. He was down to earth, not arrogant. He spoke plainly and didn't seem to fall for Wall Street fads.

"As we've written so many times, the new age stocks continue to ascend," Mr. Israel wrote to investors in January 2000, just before the Nasdaq peaked. "It is our job to stand ever at the ready to identify any cracks in the armor and to act when this mania ends."

But one aspect of Mr. Israel's operations did raise some concern among investors: The fact that his brokerage firm, Bayou Securities, executed all the hedge fund's trades put him in a position to profit at the expense of his fund clients.

Shrewdly, Bayou's marketing materials tackled the potential for conflicts in the arrangement head-on. Although the goal of the setup was to reduce trading costs, the materials acknowledge that it could lead to higher costs and greater profits for Mr. Israel.

By confronting the potential problem directly, Mr. Israel disarmed many critics. And to some investors, any concern about the conflict was more than offset by the fact that the brokerage firm was registered with securities regulators, and subject to routine and surprise examinations.

In any case, the money flowed in and both Mr. Israel and Mr. Marino began living well off the seeming success of the hedge fund. Gone was Mr. Marino's beat-up Maxima and Staten Island address. In October 2003, he bought a six-bedroom colonial-style home in Westport for $2.9 million, paying mostly cash. Soon he was driving a Bentley.

That same year, in the midst of divorce proceedings, Mr. Israel moved into the Mount Kisco estate built for H. J. Heinz, the ketchup magnate.

'The end was near.'


Although Bayou's falsified returns looked great - market-beating gains of 26 percent in 1999, almost 20 percent in 2000 and 7 percent in 2001 - some of the consultants who had recommended the funds to their clients were becoming wary about aspects of its operations.

By 2002, for example, Tremont withdrew its funds after noticing a sizable gap between returns on Bayou's offshore funds and its domestic portfolio, according to several people briefed on the investment. When Tremont asked officials at Bayou about the discrepancy, these people said they were told that Bayou had shifted profitable trades made in its United States funds to the offshore portfolios, in an attempt to increase the offshore funds' performance and attract more assets.

Mr. Mauldin said he advised his clients to exit the funds in the summer of 2004. He declined to say why he changed his mind on Mr. Israel. Some consultants, however, including the Hennessee Group, kept their clients in the Bayou Funds until the end.

Mr. Israel and Mr. Marino could not have been pleased to see these redemptions roll in. After all, withdrawals were not part of the plan.

The stress associated with the redemptions may be reflected in income statements and other financial documents filed by Bayou Securities.

For a brokerage firm to conduct business with clients, securities regulators require that it have a certain amount of capital on hand. In March 2004, Bayou Securities had a net capital position of $5.9 million, and had borrowed 9 percent of that amount, its filings said.

By December 2004, however, the firm's net capital had declined to $259,731 and at the end of March it had fallen to $164,237. At that point, Bayou Securities' borrowings represented 161 percent of its capital. The firm showed a loss of $325,912.

Even as Bayou Securities' financial position was teetering, the documents show that it paid for limousine services ($5,000 a month), restaurant meals ($4,000 a month), the lease of a private jet ($100,000) and even the services of a counterespionage consultant ($20,000).

Some of the largest amounts that were withdrawn from Bayou Securities paid for consulting and professional fees. Such payments had typically approached $60,000 a month. But in March they jumped to $431,000; by the end of June 2005, Bayou Securities had paid out $1.1 million in consulting fees.

One investment firm that received a lot of money from Bayou was Eqyty Research and Management, a money management firm in Boston. From July 2003 to March 2005, Eqyty Research received $700,000 from Bayou Securities.

Jeffrey D. Fotta, a co-founder of Eqyty Research, said that the payments were for research on stocks. He said that he was unaware of any wrongdoing at Bayou and that as recently as May, his firm was recommending trades to the fund.

Legal fees, understandably, were also rising for Bayou. Over the course of three weeks in June of this year, a lawyer named Jan Morton Heger received $461,000 in payments from Bayou Securities, according to the financial statements. Mr. Heger had not shown up in documents from previous periods. He did not respond to an e-mail message requesting comment and a telephone number for him was out of service.

'I am sorry for the people I hurt.'

One of the most compelling mysteries about the Bayou mess is why Mr. Israel decided to close the funds in July, effectively blowing the whistle on himself. Once again, Mr. Marino's letter provides a credible explanation.

With so many investors fleeing Bayou, the situation had grown increasingly grave.

On Dec. 4, 2004, the fund's board met and adopted a resolution to allow Bayou's president, Mr. Israel, to hold $100 million in his own name to invest. That board consisted of Mr. Israel and his No. 2, Mr. Marino. The move appears to have been the beginnings of a last-ditch effort to recoup years of Bayou's losses.

In March, Mr. Israel entered into an agreement with Lewis Malouf, a managing director of Bayou as well as a principal of Charles Financial, according to court documents, to invest the $100 million in bank instruments that would supposedly yield $7.1 billion over 10 years. The money was given to Karl Johnson, who was going to invest the money for Mr. Malouf. Neither Mr. Malouf nor Mr. Johnson returned calls seeking comment.

But Arizona regulators seized the funds in May, suspecting that the money was related to a different fraud; they knew nothing about Bayou or Mr. Israel. Then, Mr. Israel's lawyers, in cooperation with Mr. Johnson, sued to quash the seizure on the basis that Arizona had no right to the money. In the process, Mr. Israel's lawyers provided account documents proving the money was his.

When Arizona kept the money, Mr. Israel and Mr. Marino must have known that the end was near.

On July 27, Mr. Israel notified investors that he was closing the Bayou funds to spend more time with his family. Investors would receive their funds in mid-August, he said. They never did. Mr. Israel's communications stopped.

According to prosecutors, that $100 million in Arizona is believed to be the last remaining property of Bayou investors.

How United States Intervention Against Venezuela Works

How United States Intervention Against Venezuela Works - Empire? - Global Policy Forum

Summary, CIA Electoral Interventions, and Nicaragua as a Model for Venezuela
By Philip Agee
Venezuelanalysis
September 6, 2005
It is no secret that the government of the United States is carrying out a program of operations in favor of the Venezuelan political opposition to remove President Hugo Chávez Frías and the coalition of parties that supports him from power. The budget for this program, initiated by the administration of Bill Clinton and intensified under George W. Bush, has risen from some $2 million in 2001 to $9 million in 2005, and it disguises itself as activities to “promote democracy,” “resolve conflicts,” and “strengthen civic life.” It consists of providing money, training, counsel and direction to an extensive network of political parties, NGO’s, mass media, unions, and businessmen, all determined to end the bolivarian revolutionary process. The program has clear short, medium, and long-term goals, and adapts easily to changes in the fluid Venezuelan political process.

The program of political intervention in Venezuela is one more of various in the world principally directed by the Department of State (DS), the Agency for International Development (AID), the Central Intelligence Agency (CIA), and the National Endowment for Democracy (NED) along with its four associated foundations. These are the International Republican Institute (IRI) of the Republican Party; the National Democratic Institute (NDI) of the Democratic Party; the Center for International Private Enterprise (CIPE) of the US Chamber of Commerce; and the American Center for International Labor Solidarity (ACILS) of the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO), the main US national union confederation. In addition, the program has the support of an international network of affiliated organizations.

The various organizations carry out their operations through AID officials at the U.S. Embassy in Caracas and through three “private” offices in Caracas under the Embassy’s control: the IRI (established in 2000), the NDI (2001), and a contractor of AID, a U.S. consulting firm called Development Alternatives, Inc. (DAI) (2002). These three offices develop operations with dozens of Venezuelan beneficiaries to which they contribute money originating from the State Department, AID, NED, and, although no proof is yet available, most probably the CIA. The operations of the first three are detailed extensively in hundreds of official documents acquired by U.S. journalist Jeremy Bigwood through demands under the Freedom of Information Act, a law that requires the declassification and release of government documents, although many are censured when released.

Venezuelan associates of the U.S. intervention programs participated in the unsuccessful coup against President Chavez in April 2002, in the petroleum lockout/strike of December 2002 to February 2003, and in the recall referendum of August 2004. Having failed in their three first attempts, the U.S. agencies mentioned above are currently planning and organizing for the Venezuelan national elections of 2005 and 2006. This analysis seeks to show how this program functions and the danger it represents.

A. Some Historical Precedents

The U.S. intervention in the Venezuelan electoral process is nothing more than the continuation of a practice that began with the establishment of the CIA in 1947. In October of that year, just a month after President Truman signed the law establishing the Agency, he ordered the CIA to begin operations in Italy to prevent a victory of the Communist Party of Italy (PCI) in the elections planned for April 1948. These would be the first national elections since the end of World War II, and the communists, who had wide prestige due to their role in the resistance to fascism, were perceived in Washington as a real threat to U.S. control of the country. In alliance with the Vatican, the CIA organized multiple secret operations to discredit the PCI and to support the Christian Democratic Party. Press reports indicate that Truman transferred $10 million to the CIA for this intervention, a lot of money for the time. The result was as desired—the Christian Democrats won easily.

The practice of secret electoral operations by the CIA continued, and became a category of routine covert operations, along with the penetration and manipulation of political parties; unions; student and youth organizations; cultural, professional and intellectual societies; women’s and religious organizations; and the communications media. The reach of these operations was global, and practically all organizations of civil society were targets depending on the political situation of the moment. The 1976 House of Representatives investigation of the CIA’s history revealed electoral interventions had been the most frequent category of CIA covert actions. From the beginning of covert actions, the CIA was plagued by the perennial difficulty faced by their beneficiaries to justify or conceal the funds the Agency gave them. To resolve this problem in part, the CIA established relations with cooperating U.S. foundations through which it channelled funds to foreign recipients. It also created a network of its own foundations that sometimes were nothing more than paper entities managed by lawyers on contract with the Agency.

In February 1967 a large portion of the CIA’s covert financing system collapsed when the U.S. press revealed the names of foundations used and of many of the subsidized foreign organizations. Two months after this scandal Congressman Dante Fascell of Miami, well known for his links with the CIA and the Cuban exile community, proposed in Congress the establishment of a private foundation to openly finance foreign private organizations that until then had been financed secretly by the CIA. But at that time Fascell’s proposal failed to win support, and the CIA continued as the arm of the government responsible for covert actions like those that provoked the 1973 military coup in Chile.

Then, beginning in 1975 with the defeat of the United States in Vietnam, coupled with the investigations of the CIA that took place that year in both houses of Congress, resulting in constant scandals culminating with Watergate, a new school of thought among high level American foreign policy makers emerged. During the administration of Jimmy Carter (1977-1981) general agreement developed in the foreign policy establishment that the repressive dictatorships supported by the United States around the world (Philippines, Iran, the Southern Cone of South America, Central America, etc.) were not the best solutions to maintaining the long-term interests of the country. These interests fundamentally were free access to primary resources, labor, and worldwide markets especially those of the so-called Third World. This new concept favoring democracy over authoritarian regimes came to be known as the Democracy Project. In 1979 the American Political Foundation (APF) was established with both government and private financing, and with the participation of both political parties as well as business and union sectors. Its purpose was to determine how the United States could better protect its foreign interests through freely elected civilian governments based on the U.S. federal system or the European parliamentary model.

The APF began studies and investigations under the direction of a high-ranking CIA official assigned to the National Security Council. Its conclusions after two years’ work were to adopt something similar to the practice of the Federal Republic of Germany in which the Liberal, Social Democratic and Christian Democratic parties each had private foundations that were financed by the federal government. These foundations supported political parties and other organizations abroad that shared their political persuasions. The APF recommendations were broadly accepted, and in November 1983 Congress approved a law that established the National Endowment for Democracy awarding it $14 million for fiscal year 1984.

This new foundation, NED, was put under the control of the State Department, and it would channel its funds, approved annually by Congress, through four other associated foundations set up for this purpose: the International Republican Institute (IRI) of the Republican Party; the National Democratic Institute (NDI) of the Democratic Party; the Center for International Private Enterprise (CIPE) of U.S. Chamber of Commerce; and the American Center for International Labor Solidarity (ACILS) of the AFL-CIO. Dante Fascell, the Miami Congressman who since 1967 had never ceased to promote this program, was named to the NED’s first Board of Directors. The NED and its associated foundations were conceived as a mechanism to channel funds toward political parties and other foreign civil society institutions that favored U.S. interests, above all the neo-liberal agenda of privatization, deregulation, control of unions, reduction of social services, elimination of tariffs, and free access to markets. The entire mechanism was, and is, nothing more than an instrument of U.S. government foreign policy. Nevertheless the NED and its associated foundations have always tried to maintain the false impression that their operations are private, and in fact NED has the legal status of an NGO.

The U.S. Agency for International Development (AID), and the CIA as well, also fully participate in this program “to promote democracy.” In 1984, the first year of NED operations, AID established a bureau called the Office of Democratic Initiatives (ODI), which in 1994 was renamed the Office of Transition Iniciatives (OTI), with the function, apart and in addition to NED, of channeling funds to civil society and electoral processes in other countries. Most likely the first officials of OTI were CIA electoral and civil society operations specialists who were integrated into AID. Something similar had happened in the early 1960’s when the Office of Public Safety was established in AID to support and train foreign police officers. Officials of the CIA who had been working for years in police assistance programs, under the internal CIA code name of DTBAIL, simply transferred their cover to the new AID office in order to expand these programs as “technical assistance.” AID established “Public Safety” offices in many foreign countries and trained tens of thousands of police officers who became some of the worst abusers of human rights around the world.

Since the 1980’s ODI/OTI has financed projects directly through the four foundations associated with NED, and in recent years OTI has channeled much more money to them than has NED. These two funding sources, OTI and NED, have also channeled funds through an extensive network of U.S. foundations, consulting, and public relations firms. Such mechanisms help the final beneficiaries conceal their financing by the U.S. government that nevertheless maintains complete control over the use of its funds. Additionally the CIA can provide funds secretly to those “openly” provided by NED and OTI, for example in the form of supplementary salaries to assure the loyalty and discipline of foreign project leaders. Likewise, certain projects are financed only in part by NED and OTI and require that the beneficiaries seek additional funds. The CIA can provide these funds as if they were from individuals, businesses, or other private institutions.

Both AID and NED insist that they are prohibited from financing foreign political parties directly, and thus they cynically maintain that their activities are not partisan but dedicated to the “strengthening of civil society.” Nevertheless their programs always support the political forces that favor U.S. interests and work against those opposed. In doing so they have no difficulty giving financial and other support to politial parties via their networks of civil associations, consulting firms and foundations.

B. Nicaragua: the First Operation of the New “Project Democracy”

One of the first priorities of U.S. foreign policy during the decade of the 1980s was to remove the Sandinista National Liberation Front (FSLN) from power in Nicaragua. The intervention took two fundamental approaches. One route was the paramilitary guerrilla force known as the “contras” that was organized, supplied, and directed first by the CIA and later by the Oliver North network based in the White House and National Security Council. The other route was electoral with operations organized by the CIA, AID, and NED with its four associated foundations. For NED Nicaragua would be the first test of its ability to channel funds and direct the development of a political opposition movement that could triumph at the polls. (This history can be found thoroughly detailed in A Faustian Bargain: U.S. Intervention in the Nicaraguan Elections by William I. Robinson, Westview Press, Boulder, Colorado, 1992.)

The terrorism, human tragedy, and economic damage in Nicaragua caused by the contras are well known. Nonetheless, the contras were defeated on the battlefield. (In addition to Robinson, op.cit., see Holly Sklar, Washington’s War on Niaragua, South End Press, Boston, 1988.) During eight years of struggle (1980-1987) the contras could not take and hold any Nicaraguan village or municipality. But as a result of the disasterous effects in the entire region of this war and of those in Guatemala and El Salvador, in 1987 the Central American presidents agreed to a package of compromises called the Esquipulas Agreements in order to achieve peace. These agreements sought to transform the military conflicts into civic-political struggles, and they created an opening for a massive U.S. intervention in the Nicaraguan electoral process that resulted in the defeat of the Sandinista Front in 1990.

Already the CIA had intervened in the Nicaraguan elections of 1984 when they organized the presidential candidacy of opposition leader Arturo Cruz. At the time the Agency was paying Cruz a salary of $6000 a month. But his candidacy was false because the plan was for him to run and then renounce his candidacy just before the elections, alleging that the Sandinistas had rigged the electoral process in its favor. Various parties nevertheless participated, and the Sandinista Front captured 67% of the vote. For the 1990 elections the United States tried new techniques based on decades of CIA experience in electoral processes. The new electoral intervention began in earnest after the Esquipulas Agreements in 1987, and consisted of developing three principal mechanisms: 1) A coalition of the main opposition parties backing the same candidates for the presidency and other positions; 2) A political front of parties, unions, business organizations, and civil associations; and 3) A civic society of national scope to promote electoral participation and monitor elections, supposedly non-partisan but in reality anti-Sandinista. Below we will see that the United States at present is applying this same formula in Venezuela in preparation for the 2005 and 2006 elections in that country.

Practically since the Sandinista triumph over Somoza in July 1979, the opposition, including the newspaper La Prensa, had received secret funds from the Carter Administration through the CIA. The core of this opposition was the Superior Council of Private Enterprise (Consejo Superior de la Empresa Privada, COSEP), a group of right-wing businessmen, financiers and landowners. In 1981 the Reagan Administration offered COSEP $1 million in AID funds to establish and fortify the Nicaraguan Democratic Coordinator (Coordinadora Democrática Nicaragüense, CDN), which, in addition to COSEP, would include four conservative parties and two union groups affiliated with AFL-CIO programs. The CDN would be the vehicle for the aborted 1984 presidential campaign of Arturo Cruz, and for the maintanence of the political opposition until the elections of 1990. This political-propaganda program, parallel to the terrorism and the economic destruction of the contras, was facilitated by $14 million in funds from the CIA in 1983 and at least $10 million annually from the CIA, AID, and NED (beginning in 1984, its first year of operations) until 1988 when the electoral campaign began.

The most difficult task for the interventionist troika of the CIA, NED and AID was to unify the political opposition. In this process NED played a key role acting through its associated foundations: NDI (the Democratic Party), IRI (the Republican Party), and ACILS (the AFL-CIO foundation), and it used as its main instrument the CDN. NDI and IRI established an office in Managua to direct their operations. Always using money as the main incentive, NDI, IRI and ACILS managed to establish unified anti-Sandinista women’s, youth, and labor union fronts by 1988. In July of the following year, only 6 months before the elections, they were able at last to achieve a political coalition of 14 of the more than 20 opposition parties. The front was called the National Opposition Union (Unión Nacional Opositora—UNO). A month after its formation UNO named Violeta Chamorro as its presidential candidate. Chamorro, owner of the CIA-funded opposition newspaper La Prensa, had in fact already been pre-selected by the Bush administration as itscandidate.

The third necessary political mechanism, after the CDN and UNO, was a broad civic front, supposedly non-partisan but totally anti-Sandinista, to encourage people to register to vote and to assure the highest possible voter participation on election day. Another task for this front would be to monitor the registration and electoral processes, especially on election day, in order to assure a clean and transparent election. Again the CDN played the key role. In August 1989, a month after the formation of UNO and after more than one year of organizing activities, Vía Cívica was launched as an organization for “education” in civic duties; to assure extensive voting; to monitor voting conditions on election day; to denounce any indication of fraud; and to conduct surveys and vote counts parallel to the official counts of the Supreme Electoral Counsel. The activists of Vía Cívica were paid volunteers, and their member organizations included the women’s, youth, and worker’s associations that the CDN had established for this purpose.

To achieve all these objectives, NED in 1987 brought a U.S. consulting firm, the Delphi International Group, to Nicaragua. NED had employed this firm for political tasks in Latin America since 1984, and in Nicaragua Delphi provided organizers and propagandists, becoming the major recipient of NED funds while it carried out key tasks in the utilization of the CDN to form youth and women’s fronts, Vía Cívica and the UNO political coalition. Delphi was without a doubt the principal U.S. actor in these operations, and it was additionally in charge of UNO electoral publicity through La Prensa and various radio and television stations. To complement and support activities carried out in Nicaraguan, the State Department, AID, CIA and NED in 1988 established operations centers in Miami, Caracas and San José. These served mainly to channel funds toward beneficiaries in Nicaragua and for meetings outside the country. Carlos Andrés Pérez, who began his second presidency in Venezuela in February 1989, facilitated these operations through two foundations in Caracas under his control. In San José NED had already established in 1984 the Center for Democratic Consultation (Centro para la Asesoría Democrática, CAD) to promote civic movements throughout Central America, but in 1987 Nicaragua became its main focus. CAD channeled funds and publicity materials to Managua and organized training courses for opposition activists. For the pre-electoral campaign, beginning in 1988, CAD became the main rearguard base to assure logistics and communications among the different opposition organizations.

When the electoral campaign began in autumn of 1989, the new Bush administration assigned $9 million to NED to support UNO and associated groups. These funds resulted from a strange pact negotiated by former president Jimmy Carter with the Sandinista leadership in which the United States would be permitted to “openly” finance the opposition through NED, but 50% of the funds would have to go to the Supreme Electoral Counsel to finance the elections. In return, the United States promised not to intervene with additional secret funds from the CIA. The CIA secretly violated this commitment immediately, but distribution of the “open” funds by NED to UNO proceeded. The total amount that the United States invested in the Nicaraguan electoral campaign of 1989-90 has never officially been revealed, but has been estimated at more than $20 million.

When the elections took place in February 1990, Nicaragua already had suffered 10 years of terrorist war and enormous economic devastation. The United States had imposed an economic embargo in 1985 to worsen the situation, and in breach of the Esquipulas Agreements, that included a ceasefire, the contras were not demobilized. They remained intact and constantly threatened the return of war. During the electoral campaign the contras carried out constant armed propaganda actions to remind the population of its presence. The threat of more war, the economic ruin that affected the great majority of the population, and the promise from the United States of a large amount of reconstruction aid for a UNO government—all these factors took their toll at the moment of voting. UNO won with 54% of the vote over the Sandinista Front’s 42%.

It is impossible to speculate with certainty what would have been the results of these elections had it not been for the massive intervention by the United States. Nevertheless it cannot be denied that the intervention had an important impact, above all in the formation of the UNO coalition and in the concentration of opposition activists in Vía Cívica. Neither can the importance of the major role played by the consulting firm Delphi International Group be underestimated. What is certain is that the combined operations of NED, AID and the CIA, as well as the network of private U.S. contractors, were seen in Washington as a great success. It was a formula that would be repeated in future foreign electoral interventions, including Nicaragua again to assure that the Sandinista Front did not return to power. In fact, a month after the elections the Bush Administration asked Congress to approve $300 million in support for Nicaragua that included $5 million for AID, along with NED, to sustain for future use the organizations utilized in the 1990 electoral campaign. Next, we will see how this formula is now being applied in Venezuela.

USATODAY.com - Average family health policy nears $11,000

USATODAY.com - Average family health policy nears $11,000

By Julie Appleby, USA TODAY
The average cost for a family health insurance policy topped $10,000 for the first time this year, although premium costs rose at their slowest rate since 2000, a closely watched survey of employers released Wednesday shows.
Conducted annually by the non-partisan Kaiser Family Foundation, the survey highlights a growing concern: Rising health care costs are pricing more consumers and employers out of coverage.

The Kaiser survey found three out of five employers (60%) offered coverage, down from 69% five years earlier, with most losses in small companies. Among employers with 200 or more workers, 98% offer health coverage.

Growth in health insurance costs outpaced inflation and wage growth.

Proposed solutions include high-deductible policies, disease-management programs for chronic illnesses and more use of computer technology to streamline medical records. (Special report: Healthcare crunch: How American pay their medical bills)

"All these could have some impact at the margin, but I don't expect any to have a dramatic impact on the rate of increase overall," says Drew Altman, president of the Kaiser foundation.

The Kaiser study showed premiums paid by employers increased an average of 9.2% in 2005, less than the 11.2% rise in 2004, and the lowest since 2000, when they rose 8.2%.

This year, the average annual premium for family coverage hit $10,880, with employers paying an average of 74% of that cost and workers paying the rest. Workers this year paid on average $2,713 toward family coverage, or $1,094 more than they paid five years ago, the survey found.

Helen Darling, head of the National Business Group on Health in Washington, says those numbers may be low.

"The average we see is more like $12,000 per family," says Darling, who says the USA needs a multipronged approach to dealing with rising costs. Fighting obesity, improving patient safety and investing in technology are just three areas to attack, she says.

"We have to understand this is unaffordable and affecting everyone," she says. "We have to work together."

Starbucks Chairman Howard Schultz, speaking at a health costs roundtable sponsored by cable channel CNBC, called on companies to offer health insurance, saying it's a "moral obligation."

Earlier, he told Washington state congressional representatives Starbucks will spend more on health insurance for employees this year than on coffee, according to the Associated Press.

"It's completely non-sustainable," he said, even for companies such as his that "want to do the right thing."

WSJ.com - U.S. Shares Data With China, India To Build Iran Case

WSJ.com - U.S. Shares Data With China, India To Build Iran Case

By CARLA ANNE ROBBINS
Staff Reporter of THE WALL STREET JOURNAL
September 14, 2005; Page A3

WASHINGTON -- As the U.S. and Europe prepare to face off with Iran at the United Nations, the Bush administration dispatched intelligence experts to China and India last week to brief them on Tehran's alleged efforts to develop a missile capable of delivering a nuclear warhead.

The decision to share the highly classified intelligence is a measure of the resistance the U.S. is meeting as it pushes, along with the Europeans, for Iran's nuclear activities to be referred to the U.N. Security Council.

Even after Tehran resumed some sensitive nuclear activities last month and ended negotiations with the Europeans, the U.S. and its allies face a challenge persuading China, Russia and other key nations that the situation is grave enough -- or Iran's weapons program advanced enough -- for international reprisals.

The failure to find weapons of mass destruction in Iraq has damaged U.S. credibility, making it even harder to press the case against Iran.

The missile intelligence, which U.S. officials acquired covertly last year, documents Iran's efforts from 2001 to 2003 to adapt its Shahab-3 missile to deliver a "black box" that experts at U.S. nuclear-weapons laboratories believe almost certainly is a nuclear warhead. The data, which include tens of thousands of pages of Farsi-language computer files, diagrams and missile test results, don't include a nuclear-warhead design. But according to several officials who have been briefed on the intelligence, the specifications for size, shape, weight and detonation don't vary and make no sense for conventional weapons.

The U.S. has already shared the intelligence with Britain, which supported the Iraq war, and with France and Germany, which opposed it, as well as top officials at the International Atomic Energy Agency. Intelligence officials in all three European countries have been impressed with the depth and apparent authenticity of the finding, according to European officials.

The U.S. has also offered to brief Russia on the missile data and may share the findings with other countries in coming days, officials said.

The confrontation with Iran will be a central topic at this week's U.N. summit in New York and at next week's IAEA board meeting in Vienna. Iran's new hard-line President Mahmoud Ahmadinejad is expected to try to deflect Western pressure when he speaks to the U.N. today and later in the week. U.S. and European officials said he might call for wider negotiations -- possibly bringing in China, Russia and India -- after failing to persuade Europe and the U.S. that his country's nuclear program is solely for generating power.

President Bush speaks to the world body today . Officials last night were discussing what, if anything, he would say about Iran at a meeting that is focused on alleviating poverty and U.N. overhauls. Mindful of the ill will created by the Iraq war, the U.S. has left much of the public lobbying until now to the Europeans.

Recognizing the pivotal role China and Russia will play as veto-wielding members of the Security Council, Mr. Bush said he planned to "speak candidly about Iran" in private meetings with Chinese President Hu Jintao and Russian President Vladimir Putin. "It is very important for the world to understand that Iran with nuclear weapons will be incredibly destabilizing," he said. After Mr. Bush's meeting with the Chinese leader last night, White House Asia expert Michael Green told reporters that Mr. Hu told the President that he would press Iran to live up to its IAEA obligations but didn't commit to supporting a Security Council referral. (See related article on page A8.)

In recent days, Russia and India, among others, have said publicly that they would oppose a Security Council referral.

Iran insists that it has a right to pursue a peaceful nuclear program -- an argument that resonates around the world, especially when backed by Iran's considerable oil wealth. Mr. Bush yesterday acknowledged that right but said constraints need to be imposed to ensure that Iran also doesn't "gain the expertise" to produce nuclear weapons.

U.N. nuclear monitors have repeatedly cited Tehran for concealing and lying about its nuclear efforts. But without solid proof of a weapons program, many members of the IAEA board have resisted a showdown. Some are fearful that a referral could be a first step toward a military confrontation. Other countries have more mercantilist interests, which Iran has deftly played upon. With energy-hungry China and India, in particular, Tehran has emphasized its oil supply; with Moscow its willingness to buy nuclear technology,

In August, Iran restarted its uranium conversion plant, an important first step toward the production of enriched uranium either for nuclear fuel or a nuclear weapon. While the Europeans repeatedly warned Tehran that such a move would provoke a swift referral to the Security Council, neither they nor the Americans have been able to win over a large block of the IAEA's 35-member board, which usually acts on consensus.

U.S. officials said yesterday that it is too early to rate their chances for a referral next week and that much will depend on how conciliatory or confrontational the Iranian leader chooses to be during his meetings in New York.

Some U.S. officials have begun arguing that a simple majority of the board would be enough to go ahead, and that those votes are there. In recent days, the U.S. has come down especially hard on the Indians -- who have status among the nonaligned -- warning that a White House offer to sell it civilian technology could be scuttled if the U.S. Congress believes New Delhi is too supportive of Iran.

But without the support of Beijing and Moscow a referral would likely stall once it got to the U.N.

In a conversation with Secretary of State Condoleezza Rice earlier this week, IAEA Director General Mohamed ElBaradei suggested the U.S. and Europe might seek a resolution that gives Iran a few more weeks to suspend uranium conversion and provide more access to agency monitors or face a referral.

Trade deficit narrows; oil imports surge

Trade deficit narrows; oil imports surge

AP Economics Writer

Trade deficit narrows; oil imports surge

SEP. 13 9:03 A.M. ET The U.S. trade deficit declined slightly in July even though oil imports climbed to an all-time high, while soaring energy costs fueled a spike in inflation at the wholesale level.

The Commerce Department reported that the July trade gap fell by 2.6 percent to $57.9 billion from an imbalance of $59.5 billion in June, the second highest deficit on record, and the politically sensitive deficit with China also set a record.

Analysts believe the July improvement will be short-lived -- given that oil prices continued to soar in August, reflecting the impact of Hurricane Katrina on oil production in the Gulf of Mexico.

In other economic news, inflation at the wholesale level rose by 0.6 percent in August after an even bigger 1 percent gain in July. Both months reflected a surge in energy prices.
Energy costs at the wholesale level were up 3.7 percent in August following an even bigger 4.4 percent July rise. However, inflation outside of energy remained well contained last month. So-called core inflation, excluding energy and food, was frozen in August, the best showing in nearly two years.

Helping to keep inflation moderate, food costs at the wholesale level dropped for a fifth month in a row while prices of new passenger cars decreased by 1.3 percent, the biggest drop in 13 months.

So far this year, the country's trade deficit is running at an annual rate of $693.1 billion, far ahead of last year's record imbalance of $617.6 billion. Economists believe the deficit will worsen even more in 2006 as soaring oil prices continue to transfer more U.S. dollars into the hands of foreigners.

Critics blame the soaring deficit on Bush administration trade policies, contending that the administration has not been tough enough in attacking unfair trade practices in China and other countries and has pursued an agenda of striking free trade deals with other nations that expose American workers to increased competition from low wage countries.

The deficit with China increased by 0.3 percent to an all-time high of $17.7 billion and is running at an annual rate 29 percent above the same period last year, when the deficit hit $162 billion. That was the largest imbalance ever recorded with any country.

The improvement in the overall July deficit reflected a 1 percent increase in U.S. exports of goods and services, which rose to an all-time high of $106.2 billion as U.S. sales of computer chips, civilian aircraft and American-made cars all increased.

Total imports fell by 0.7 percent to $164.2 billion as declines in demand for foreign aircraft, computers and industrial machinery offset the big jump in oil imports.

Imports of oil jumped by 21.3 percent to a record of $20.7 billion in July. The increase reflected an increase in volume and price with the average price per barrel of crude oil imported in July hitting a record $49.03.

With oil prices soaring above $68 per barrel briefly in August, analysts believe that America's foreign oil bill will surpass the July record, adding further pressure on the overall deficit.

The huge deficits have become a political headache for the administration, which in recent months has toughened its approach to China in an effort to ward-off protectionist trade legislation which is gaining momentum in Congress.

The administration has re-imposed quotas on various categories of clothing and textile imports from China and is negotiating with the Chinese for comprehensive limits on a broad array of Chinese imports to protect U.S. manufacturers who have been battered by a flood of Chinese imports since global quotas were lifted on Jan. 1.

However, congressional critics contend this is not enough. They want to impose across-the-board tariffs of 27.5 percent on Chinese goods coming into the United States to penalize the country for a currency regime that American manufacturers contend undervalues the Chinese yuan by as much as 40 percent, making Chinese products cheaper in relation to American goods.

China did announce a small revaluation of the yuan of 2.1 percent this summer but has not allowed the yuan to rise further in value.

America's deficit with the 25-nation European Union hit a record of $11.2 billion in July with the deficit with Canada rose to $6.2 billion.

Warnings over US debt: What lessons for the Euro area?

Newropeans Magazine - Warnings over US debt: What lessons for the Euro area?

the U.S. economy benefits from seigniorage, the difference between the face value of money and the cost to produce it.

To become a real international currency, the euro needs to gain some market shares over other currencies as a medium of exchange (oil transactions in euros?), unit of account, and reserves (official and private portfolios), which has already started. But since there is no magic in economics, what is the hidden cost? A European monetary policy tighter nowadays than the U.S. one. Does it seem familiar?


Written by Thierry Warin
Monday, 12 September 2005
Experts warn that heavy U.S. debt threatens the American economy. Figures are sometimes used in misleading ways, and policymakers often look more like Cassandra than Zadig.


As for the public debt, let’s use the OECD’s “general government gross financial liabilities” as a percentage of nominal GDP for comparisons across countries. After a drop to 58.3% in 2000, the U.S. debt rose again to 63.4% in 2004, and up to a forecast of 70% in 2006. In the meantime, the Euro area debt was steady around 77% for the same period, and is expected to decrease.

In terms of public deficit, the OECD figures display a rise in the U.S.: from 3.8% of GDP in 2002, 4.6% in 2003, 4.3% in 2004, and an expected 3.9% in 2006. The Euro area was at 1.8% in 2002, 2.5% in 2003, 2.8% in 2004, and the expected deficit is 2.7% for 2006. While 2.9% of GDP in the Euro area goes to the reimbursement of the debt, this figure is 1.8% of GDP in the U.S.. As a consequence of the debt, the part of fiscal policy used to help the economy adjust to economic shocks is alienated by debt interest payments. There is, thus, a legitimate fear that the U.S. debt will catch-up to the Euro figures. Let’s focus on the U.S. here to try to understand the experts’ warnings.

Why is the rising debt an issue for the U.S. economy? The reasons are at least threefold.
First, U.S. households cannot and do not want to save, hindering the chances to sustain the debt. Back in the 1950s, a generation of Americans saved around 8% of their income. This level moved to 7% during the 1980s, plummeted to 1.8% in 2004, and has moved close to zero in the latest estimate from the Bureau of Economic Analysis. Meanwhile, household debt represents 18% of disposable income (credit card debt alone averages $7,200 per household). Second, the U.S. has twin deficits - trade and public finance - a situation that has to be fixed. The biggest trade deficit in 2004 is with China at $162 billion (U.S. Department of Commerce), partly for exchange rate reasons (an exchange rate situation that effects Europe too); the deficit with Europe (EU15) is the next largest at $105 billion. But the U.S. economy relies more on European trade than Chinese: European exports to the U.S. in 2004 amount to $273 billion ($196 billion for China).
Third, the future seems to be gloomy: the cost of the nation’s three biggest entitlement programs (Social Security, Medicare, and Medicaid) inflates as the population grows and ages. Other things remaining constant, this will increase the public deficit as well as the public debt, leading to higher interest rates, lower investments, etc.

Has the U.S. administration some room to maneuver? The “general government total outlays” measured by the OECD is lower in the U.S. than in the Euro area: 36% of GDP and 48.6% respectively. In other words, although U.S. public spending is lower than in the Euro area, the debt is almost similar. The U.S. administration cannot spend more without further increasing the deficit as well as the debt. An alternative would be to raise taxes. One can see some room to maneuver with “general government total tax and non-tax receipts” (measured by the OECD) of 31.7% of GDP in the U.S., versus 45.8% in Euro area. Yet, households are already heavily indebted, and a rise in taxes would force them to reduce their consumption and lead to a fall in demand. Ultimately, the expected U.S. GDP of 3.6% in 2005 would steadily decrease. Notwithstanding expensive oil, this is why experts believe the debt will eventually strike the American economy.

Can we see some blue sky? Indeed, the U.S. administration can always finance the rise in debt by bonds instead of taxes. But aside from the different temporal effects, the fiscal multipliers, and the rise in interest rates, it may do something quite new to the US economy: reduce the reputation of the dollar.

With the dollar being, by far, the first international currency in the world, whatever the definition is (unit of account, medium of exchange, and reserve currency), the U.S. economy benefits from seigniorage, the difference between the face value of money and the cost to produce it. For a top-rated international currency, an expansionary monetary policy will create seigniorage with fewer inflationary pressures than a low-rated international currency. In this respect, the dollar benefits from a high reputation under the current U.S. macroeconomic conditions. The evidence is that the official reserves (excluding gold) are as low as roughly $65bn for the U.S.; world champion, Japan’s official reserves represent $832.9bn, China is next with $711bn, and the Euro area is around $200bn. Since the amount of reserves indicates a country's ability to pay international obligations, market pessimism about the U.S. debt could lead to a fall in the dollar’s reputation on international markets. This would not only reduce the ability of the U.S. administration to issue bonds to finance the rising debt, but would also reduce U.S. seigniorage, which would have to be compensated by either… new bonds or a rise in taxes. Thus, the room to maneuver seems very thin.

What are the lessons for the Euro area? It does not seem to be in much better shape than the U.S. economy. To differentiate between the US economy though, it is often said that the room to maneuver in the Euro area may come from the fact that European households are less indebted than their U.S. counterparts. The big lesson from the U.S. situation is that aside financing a part of its growth by foreign (official and private) involvement, it also relies on the benefits (direct and indirect) provided by having an international currency. Nevertheless, and although the Euro area policymakers do not seem to see it, the big hope for the Euro area rests on the international future of the euro. By gaining credibility on the international markets, the euro could bring some seigniorage to the Euro area as well as allow the Euro area to use some of its official reserves. This would provide some fresh air to Euro area fiscal policies. To become a real international currency, the euro needs to gain some market shares over other currencies as a medium of exchange (oil transactions in euros?), unit of account, and reserves (official and private portfolios), which has already started. But since there is no magic in economics, what is the hidden cost? A European monetary policy tighter nowadays than the U.S. one. Does it seem familiar?


Thierry Warin
Minda de Gunzburg CES, Harvard University
Department of Economics, Middlebury College (United States of America)

Britain could soon be Europe's sick man again - Germany biggest world exporter

Telegraph | Opinion | Britain could soon be Europe's sick man again

By Ambrose Evans-Pritchard
(Filed: 05/09/2005)

Barely noticed, Germany has overtaken America to become the world's biggest single exporter, shipping the hardware that powers the rising economies of Asia and eastern Europe. Its trade surplus is now greater than that of China, Japan and India combined, reaching a staggering 16.8 billion euros in June alone. The profits made by German companies are running at over 33 per cent of national income, the highest in 40 years.






Eyeing a bargain, the world's canniest are already piling into German assets for the great Teutonic rebound. George Soros and fellow hedge funders are snapping up distressed banks. Britain's Terra Firma has bought 150,000 workers' flats in the rust-bowl around Essen, hoping to catch the new craze for home ownership.

Foreigners poured £47 billion into German equities in May and June alone, says the Bundesbank. Yes, there are 4.8 million unemployed. There were still three million unemployed well after Britain had pulled out of its 1970s nosedive. Jobs are the last of the lagging indicators.

Deutschland AG has knuckled down. Now it is up to the German state. In two weeks, Germans are likely to close the book on seven years of half-measures - though half is better than none - by the Social Democrat Gerhard Schröder. Berlin will fall to Angela Merkel, the shy physicist who grew up under Communism as the daughter of a Lutheran pastor, a "non-person", learning young how to question the system. Those who assumed she would play safe are having to think again.

Her putative finance minister, Paul Kirchoff, wants a 25 per cent flat tax and calls for the abolition of 90,000 tax rules. "We will smash down the tax barriers, break the cycle of resignation. I'll be there myself on hand with a big sledge-hammer. We want to give the citizens back their freedom and let them decide for themselves what they want to do with their incomes," he said last month. For good measure, he wrote the landmark 1993 ruling on the Maastricht Treaty as a top constitutional judge, defying the primacy of EU law in the most piercing assertion of national sovereignty ever issued by the supreme court of an EU state.

Change is afoot. Gordon Brown might pause next time he goes to Brussels to lecture fellow ministers on their failures. Germany, Holland, Denmark, Sweden, Austria, Belgium and Spain - not to mention the flat-tax fire-breathers Poland, Slovakia and the Baltics - have all starved the public sector over the past decade, while Britain swells ever fatter. Our state will take 45 per cent of GDP by 2006, against 46 per cent for Germany, on OECD data. It does not take much extrapolation to see that Britain could soon be Europe's sick man again, gasping and choking with the worst of the big-government sclerotics.

Indeed, with France. Give them their due, the French are still defending the citadel defiantly. The state sector remains 54 per cent of GDP. Jacques Chirac, leading his nation ever deeper into reactionary folly, is drawing up lists of strategic sectors to be defended against capitalist predators - EU rules be damned. His latest prime minister, Dominique de Villepin, hagiographer of Napoleon, has taken to ruling France by decree. And what is he doing with this riskily grasped power, beyond charging about with near maniacal energy and exhorting les citoyens to work harder? He wants to spend a further £7 billion on big works. The French remain attached to their modèle sociale, he said. It cannot be touched. How long will it be before the ruling class summons the courage to tell France that this sacred model is bust?

It was fitting that a French judge this month should have ordered Nestlé to reopen a factory in Marseilles, closed in June after losing money for eight years. The 427 workers had been given a year's notice. Nestlé complied with every clause of the Byzantine labour laws. Not good enough. The judge nailed Nestlé for plotting "delocalisation" to cheaper plants abroad. Like the Second Empire, before the Prussian defeat at Sedan, France seems rigidly set in its ways. Its cuisine has become formulaic - unhealthy and too slow, suited to public servants on a 35-hour working week - while its red wines have been left behind by high-tech vintners of the New World.

It is hard to see how the EU's Franco-German axis can survive as the two wheels begin to spin apart. German unit labour costs in manufacturing have fallen by 4.4 per cent over the past year alone. Each year for a decade, the country has clawed back competitiveness with higher productivity against other euro-zone economies. The single currency, which so punished Germany at first, will soon work to its advantage - with ominous effects. Its firms are already sweeping southern Europe like conquering Goths. A senior economist at the European Commission told me that German success would ultimately break the euro itself, starting with the ejection of Italy. But France may not be spared either.

I am not sure that Britain's debate on Europe has quite caught up with fast-moving events on the ground. We love to hate the Franco-German axis, but it did deliver the stabilising compromises that held the EU's north and south together. The task of holding Europe together may now fall to Britain, since no other EU state can possibly do it. Or Britain could opt for the entirely different strategy of Anglo-German condominium, creating a fresh EU axis, this time run on free-trading, pro-American lines - and let the Latin chips fall where they may. Unwise perhaps, but very tempting.

Christopher Hitchens' last battle

Salon.com News | Christopher Hitchens' last battle

The British hawk gives 10 reasons why Americans should be proud of the Iraq war. He goes 0 for 10.

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By Juan Cole



Sept. 3, 2005 | Bush administration foot-dragging and ineptitude in handling the aftermath of Hurricane Katrina in New Orleans has profoundly demoralized his supporters on the right. The hawkish intellectuals who gathered around George W. Bush to support his "War on Terror" once used language that suggested his machine-like omnicompetence. The Afghanistan War was to be "Operation Infinite Justice" until it was pointed out that Allah was the only one in that part of the world generally permitted to use that kind of language. The images of civilians abandoned to their fates and unchecked looting from New Orleans, however, reminded everyone of Bush's disastrous policies in Iraq, and suggested a pattern of criminal incompetence.

These bellicose intellectuals--a band of Wilsonian idealists, cutthroat imperial capitalists, Trotskyites bereft of a cause, and neo-patriots traumatized by Sept. 11 are now increasingly divided and full of mutual recriminations. Among them all, the combative British essayist Christopher Hitchens continues most forcefully to uphold the case for the war, most recently in a piece for the Weekly Standard.


In contrast, this week Francis Fukuyama, long since upbraided by History for his Hegelian fantasies concerning the end of History, openly castigated the Iraq war as an unfortunate detour in the War on Terror, in an opinion piece in the New York Times. Hitchens, fighting a rear-guard battle against public disillusionment with the war, suggested 10 reasons why Americans should be proud of the Iraq war. His essay appeared the week after George W. Bush launched his own public relations crusade for "staying the course" in the face of the media attention given to Cindy Sheehan, the mother of a U.S. soldier killed in the war. (Hitchens dismisses her campaign as "the sob-sister tripe pumped out by the Cindy Sheehan circus and its surrogates.") The campaign was a dud, derailed by dithering in Baghdad over a never-finished constitution and continued mayhem and U.S. deaths. Bush's alarmed handlers are looking at polling numbers on his performance as president and on his handling of Iraq that are heading so far south that they'll soon be embedded in the wilting Antarctic ice shelf.










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It is sad to see Hitchens reduced to publishing in the Weekly Standard, intellectually the weakest of the right-wing propaganda fronts for the new class of billionaires created by the excesses of corporate consolidation in recent decades (it is owned by Australian media mogul Rupert Murdoch). It is even sadder to see this grotesque, almost baroque, essay carom from one extravagant argument to another, miring itself in a series of gross fallacies and elementary errors in logic. I have read Hitchens for decades and usually admire his acute wit, his command of detail, his polemical gifts, and his contrarian sense of ethics, even when we disagree. He must surely know, however, that his argument for the Iraq misadventure is growing weaker every day, since he clearly does not any longer care to defend it rigorously.

The essay begins by arguing that cowardice and short-sightedness dominated the 1990s, during which democratic leaders declined to react, or reacted too late, to the dictators, genocides and failed states that emerged with the end of the Cold War. Rwanda, Serbia, Kosovo and Afghanistan stand in this view as monuments of shame. Once the West finally shed its cynical isolationism with the interventions in Bosnia and Kosovo, and once the dangers of inaction had been demonstrated by Sept. 11, Hitchens argues, it was natural and proper for the United States and the United Kingdom to fix their sights on Iraq.

Hitchens lays out the familiar charges against the Baath regime in Iraq. It had invaded neighboring countries, committed genocide, given refuge to terrorists, and contravened the provisions of the Non-Proliferation Treaty. Hitchens' argument succeeds only by confusing the situation in Iraq in the 1980s with that in 2003. He mysteriously neglects to note that the Baath regime had in fact given up its weapons of mass destruction in the 1990s, in perhaps the most thorough-going and successful U.N.-led disarmament in modern history. At the time of the 2003 war Iraq was neither in contravention of U.N. resolutions on disarmament nor of the Non-Proliferation Treaty.

A further problem is that the same charges could be made against other states. For example, Israel has launched several wars of aggression, gave refuge to terrorists of the Jewish Defense League, defied a whole raft of U.N. resolutions, and thumbed its nose at the Non-Proliferation Treaty far more successfully than Saddam, producing hundreds of nuclear warheads where Iraq never produced a single bomb. Of course Israel cannot be compared to Saddam's Iraq in the numbers of persons killed by its wars and repression, but if the issue is crimes against international law, then the numbers are surely less important than the fact of an infraction.

Hitchens is, moreover, highly selective in his outrage. He is not disturbed by the brutal, scorched-earth tactics of the Russians in Chechnya or the heavy-handedness of India in Kashmir. The deaths of 3 million Congolese pass without mention. The terrorist threat posed by the Tamil Tigers and the weakened state in Sri Lanka does not attract his attention. Many more dangerous situations existed in the world than the one in Iraq, which turns out not to have been dangerous at all.

Hitchens castigates Iraq as having been both a rogue and a failed state, and offers this self-contradictory depiction as a legitimate cause for war. If we translate this Orwellian concept, it transpires that a warrant is being offered to superpowers to invade other countries at will, since all possible targets clearly will either be fairly strong states (rogues) or weak ones (failed).

The argument is most dishonest in leaping from alleging crimes to lauding unilateral action to punish them, outside any framework of international legality. The U.N. Security Council declined to authorize a war against Iraq. Iraq had not attacked the United States or the United Kingdom. Iraq had no nuclear weapons program and no unconventional military capabilities, and it posed no threat to anyone except its own people in 2003. Hitchens collects anecdotes about centrifuge plans and centrifuge parts being kept by Baath figures after the nuclear program was dismantled, as though a few buried rotting blueprints and rusting parts were something more than pitiful testaments to a decisively defeated dream. In essence, Hitchens is arguing for the legitimacy of a sort of hyperpower vigilantism, in which the sitting president of the United States decides which regimes may continue to exist, virtually by himself. The U.S. Congress did not even have the moral fortitude to declare war. The U.N. charter forbids wars of aggression, and, indeed, forbids all wars not clearly defensive that are not explicitly authorized by the Security Council. The Security Council may be, as Hitchens implies, corrupt and yellow-bellied, but it represents most of humankind, while Bush did not even represent a majority of Americans.

After his general argument, Hitchens turns to his 10 specific reasons why the war on Iraq should be celebrated. Hitchens' first point is that Bush has overthrown Talibanism and Baathism, and has exposed "suggestive" links between the two, who he says had formed a "Hitler-Stalin pact." His attempt to tie these ideologies together is absurd, but he goes through the motions because he wants to hide the Iraq disaster under the U.S. achievements in Afghanistan -- which he overstates. In fact, the secular Arab nationalist Baath state had nothing whatsoever to do with any radical Islamist movements, including Talibanism. Talibanism is a variant of the Deobandi school of revivalist Sunnism deriving from British colonial India. The link Hitchens suggests is the Jordanian terrorist Ahmad Fadil al-Khala'ilah, known as Abu Musab al-Zarqawi, who went off as a teenager in 1989 to fight the Soviets in Afghanistan, but arrived only in time to wave goodbye to them. He later had a vigorous rivalry with Osama bin Laden and refused to share resources with him. It is not clear what his relationship was to "Talibanism"; he appears to be a radical "Salafi" in the Jordanian Sunni revivalist tradition.

Hitchens writes that Zarqawi "moved from Afghanistan to Iraq before the coalition intervention." In fact, Zarqawi moved to Iraqi Kurdistan, over which the Baath Party had no control after the United States imposed the no-fly zone. Hitchens wants to use Zarqawi's ties in Kurdistan with the tiny Ansar al-Islam terrorist group, which he asserts Saddam supported to fight his Kurdish enemies, to prove that there was some kind of connection between Saddam and al-Qaida. But the allegation that Saddam supported Ansar has never been proved. In any case, Zarqawi was not even in Iraq before 9/11, so his presence there can't be used to prove that Saddam was involved in 9/11. Hitchens also claims (who knows if it is true) that Zarqawi recently renamed his group "al-Qaida in Mesopotamia." But that is no proof of a link between Talibanism and Baathism. This fallacy is known as anachronism: Later events do not cause earlier ones.


The truth is, Bush squandered his victory over the Taliban by failing to follow through at the crucial moment, and by diverting needed military resources into a disastrous second front in Iraq. He allowed bin Laden and his key associate, the Egyptian Ayman al-Zawahiri, to escape, probably into the lawless mountain regions on the Pakistani border, from where they put out videotapes encouraging the later bombings in Sharm El Sheikh and London. He diverted the resources that could have been used to put war-torn Afghanistan back on its feet instead to a costly imbroglio on the Tigris. After the successes in fighting narcotics trafficking in the 1990s, nearly half of Afghanistan's gross domestic product now derives from the poppy trade, which shows up as heroin in Europe and raises the specter of Colombian-style narco-terrorism. Remaining Taliban are adapting to Afghanistan the techniques of roadside bombings and shaped charges honed by the guerrillas in Iraq, with whom they appear to have established tenuous links. Politicians with ties to the Taliban are likely to do well in the Pashtun regions in the forthcoming parliamentary elections.










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Hitchens next lists as an achievement of the Iraq war the "capitulation" of Moammar Gadhafi's Libya over its weapons of mass destruction programs. But Hitchens offers no proof whatsoever that Libya's overture had anything at all to do with the Iraq war. Rather, it is quite clear that Libya is a case where the European and U.S. economic sanctions placed on the country to punish it for its terrorist activities actually worked as designed. (European sanctions had already been lifted, in return for a change in Libyan behavior, in 1999. U.S. sanctions had not.) Moreover, al-Qaida leader Anas al-Libi had Gadhafi in his sights. Gadhafi, influenced by North African Sufism and millenarianism, is no fundamentalist. He saw an opportunity to end the U.S. sanctions, which were harming Libya's economic development, and to form a common front against radical Islamism. All he had to do was give up his rather insignificant "weapons of mass destruction" programs.

Hitchens does not do us the favor of admitting that the tiny country of Libya, despite its past involvement in serious acts of terrorism, was not exactly a dire menace to Western civilization. Gadhafi no longer needed the chemical weapons he is alleged to have used in the Chad war, since it had wound down. His nuclear ambitions had never advanced from the drawing board. So he made a small concession and received huge rewards. There is no reason at all to believe that without the Iraq war this breakthrough, years in the making, would have been forestalled. This fallacy is known as "post hoc ergo propter hoc," that is, "afterward, therefore because of." Not every event that occurs after another is caused by its predecessor.

Hitchens is correct in asserting that the Libyan breakthrough led to the unmasking of the A.Q. Khan network, which illegally transferred nuclear technological know-how from Pakistan to Iran, North Korea and Libya. But since the breakthrough itself was not a consequence of the Iraq war, the unmasking cannot be credited to the war.

Having committed the fallacies of anachronism and questionable cause, Hitchens now goes on to some other points that I think are too trite to spend much time on. He says that the Iraq war helped to identify a quasi-criminal network within the United Nations elite, referring to the oil-for-food scandal. But surely we did not need to send 140,000 young Americans to war in Iraq in order to carry out some basic investigations with regard to United Nations officials resident in New York? This fallacy is known as a lack of proportionality.

He then goes on to suggest that the Iraq war had caused President Jacques Chirac of France and Chancellor Gerhard Schröder of Germany to admit that nothing will alter their "neutralism." He suggests that their current alleged insouciance with regard to Iran is of a piece with this neutralism. This argument contains an ad hominem fallacy, since it seems to suggest that their political stances simply derive from their being craven men. Hitchens neglects to address the obvious rejoinder that the Bush administration failed to make a convincing case to them that Iraq posed an imminent danger to Europe or the United States. It might also be that no convincing case has been made about Iran as yet, either.

Hitchens then argues that the ability to certify Iraq as truly disarmed, rather than having to accept the representations of a "psychopathic autocrat," is a benefit of the Iraq war. Yet the American public spends over $30 billion a year on our intelligence agencies. Why should it have to be necessary to launch a costly and possibly disastrous war in order to find out something that a few spies should have been able to tell us? Moreover, if Hitchens were not so contemptuous of the U.N. weapons inspectors, he might acknowledge that they could have answered this question themselves from February 2003, if only Bush had given them the time to perform their mission, which he asked the U.N. Security Council to authorize. The Central Intelligence Agency gave them a list of more than 600 suspect sites. Satellite photos of many of these sites showed "suspicious" activity, but it turned out that they were mostly just being looted, something easily certified when they were visited and found stripped. The U.N. inspectors had cleared some 100 of those before Bush pulled them out and just went to war.

The weapons inspectors were all along far more professional and far more capable than anyone gave them credit for. It was they who had dismantled Iraq's nuclear weapons program after the Gulf War. We did not need a war to discover whether Iraq was truly disarmed. Hitchens has here attempted to turn Bush's enormous blunder, of invading Iraq on suspicion of nonexistent weapons of mass destruction, into a virtue. "Well," he says with a smirk, "now we know for sure, don't we?" This fallacy is called the "false dilemma," since Hitchens has left out the possibility of our knowing with fair certainty -- by methods other than warfare -- that Iraq was disarmed.

The seventh benefit of the Iraq war, Hitchens says, are the "immense gains" made by the Kurds. But the Kurds had already made their gains, under the U.S. no-fly zone. Since the war, their situation has arguably worsened. They are faced with finding a way to reintegrate themselves with Baghdad, a process clearly painful for them (they keep threatening to secede at the drop of a turban). Their oil pipelines have been sabotaged, and they have been subjected to a wave of assassinations, kidnappings and bombings. And the petroleum city of Kirkuk, which they desperately covet, is still inhabited by Turkmens and Arabs who do not intend to go quietly. Turkey has threatened to invade to protect the Turkmens. Kurdistan is now a powder keg. These are not immense gains.

Hitchens then rehearses the argument, loudly made in conservative circles a few months ago, that the Iraq war encouraged democratic and civil society movements in Egypt, Syria and Lebanon. He argues that Lebanon, in particular, has "regained a version of its autonomy." As I argued in greater detail in March, the argument that Bush's Iraq war has spread democracy in the Middle East is extremely weak. Let us look at his examples one at a time.


Hitchens has not shown that the Iraq war has encouraged democratic and civil society movements in Egypt. Bush's war did encourage 100,000 Muslim Brothers to come out to protest it, and it therefore reinvigorated the fortunes of political Islam in Egypt. The Mubarak government, however, refuses to recognize the Brotherhood as a legitimate political party, despite its popularity. Democratic and civil society movements in Egypt are of old standing, and they did not need an American imperial boot print in Iraq to jump-start them. Hosni Mubarak has agreed to allow a small number of officially recognized parties to field candidates against him in the presidential elections, but this change is window-dressing. Does Hitchens seriously believe Mubarak will lose?










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As for Syria, it has not changed much. The Syrians had to leave Lebanon in part because their heavy-handedness had decisively alienated the Lebanese, including Sunni allies. In addition, the Saudis, who in the past have helped to fund the Syrian troop presence, withdrew their support for it.

The major change in Lebanon is that in the wake of the Syrian withdrawal of 14,000 troops, the Shiite fundamentalist Hezbollah Party and its militia seem to be filling in the security vacuum. These developments in Lebanon had almost nothing to do with Iraq. Lebanon has been having parliamentary elections since the 1940s (there were even some in the French colonial period). This entire argument is simply a form of the post hoc ergo propter hoc fallacy, which seems plausible to Americans only because they know so little about Egypt, Syria and Lebanon and the preexisting trajectories of those countries' political development.

Hitchens' last points are the most gruesome and heinous. As number 9, he argues that "thousands" of "Bin Ladenist" infiltrators into Iraq have been killed. The studies done of the Muslim volunteers who have gone to Iraq indicate that the vast majority of them had never been involved in terrorism before. They went because they were angered by the U.S. military occupation, as they see it, of a Muslim country. So Bush's Iraq is not a flytrap bringing in already-existing al-Qaida operatives. It is actively creating terrorists out of perfectly normal young men who otherwise would be leading a humdrum existence. This argument is a form of begging the question, since it assumes facts not in evidence in order to force a foregone conclusion.

There are, by the way, probably not very many foreign fighters in Iraq. Only 6 percent of the fighters captured by the United States at Fallujah were foreigners. At that rate, if estimates of 20,000 guerrilla fighters are accurate, there would be about 1,200 foreigners. It is also probably not the case that the United States has killed all that many of them, though hundreds have died as suicide bombers, helping kill thousands of Iraqis and hundreds of U.S. troops. That the argument is heinous was recognized by one Iraqi observer, who asked Bush to please find some other country to which to attract terrorists and kill them, since rather a lot of innocent Iraqis were getting killed in the cross-fire.

Finally, Hitchens argues that a benefit of the war is the "training and hardening" of many thousands of American servicemen and women, which he says will be of use in "future combat." Large numbers of the servicemen and women in Iraq are in the National Guard or the Reserves, and very large numbers are not going to renew their service when they finally get out of Iraq, so their war experience is unlikely to do anyone much good later on. Many will suffer severe trauma, psychological problems and alcoholism as a result of horrific wartime experiences. Some number will end up on the street begging. Thousands of U.S. troops have been "hardened" right into wheelchairs, with lost limbs, faces blown away, and little prospect of productive lives. We had a right to ask them to sacrifice themselves to defend our country against aggression. We did not have a right to ask them to give their bloody forearms, tattered eyeballs, shattered tibias, oozing brain mass, and crushed pelvises to achieve the petty foreign-policy aims that Hitchens lists in his article, even if the Iraq war had accomplished most of those aims, which it has not.

Christopher Hitchens has produced not a coherent picture of positive achievements clearly flowing from Bush's Iraq war but rather a farrago of innuendo, logical fallacies, begged questions, anachronisms, false dilemmas and questionable causes. Nor has he in any balanced manner addressed the negative foreign-policy consequences of the war. These include the diversion of resources from the fight against al-Qaida to Iraq, the neglect of Afghanistan (itself a basket case and a proven threat to global security), the strengthening of the Iranian position when the Shiite religious parties came to power in the Jan. 30 elections, the deep alienation of much of the Muslim world, the dangers to the world economy inherent in a destabilization of the Oil Gulf, and the rendering of the American colossus as faintly ridiculous, given the false representations that the Bush administration made about the danger Iraq posed to Europe and the United States.

Even the ability of the U.S. Embassy in Tashkent plausibly to lecture Uzbek strongman Islam Karimov about his use of torture has been effectively removed after revelations of U.S. torture at Abu Ghraib. Hitchens says that the U.S. practices at Abu Ghraib were much better than those of Saddam. But when you are reduced to defending yourself by pointing to your superiority over a genocidal psychopath, then you are suffering from severely low self-esteem and should enter a 12-step recovery program rather than invade other countries.

The Iraq war, like all foreign-policy quagmires, is a conundrum, not an unalloyed propaganda victory for any "side." There was a case to be made for removing Saddam Hussein, on the basis of the Genocide Convention. But that case required a U.N. Security Council resolution. As it was, the war was illegal, and I turned against it the moment the Bush administration tossed aside the United Nations, in March 2003. As undertaken, it contravened the United Nations charter. Worse than being merely illegal, it was impractical. It lacked the kind of international support that George H.W. Bush assembled for the Gulf War in 1990-91, and which would have been critical to its success.

Still, the war itself was short and need not have been a total disaster. It did after all accomplish the overthrow of one of the most odious dictators of the 20th century, a mass murderer. But the manner in which the Bush administration trumped up the casus belli was profoundly dishonest, and few good things follow from a dishonest policy. The subsequent period of American hegemony in Iraq has been a disaster, beset with ignorance, arrogance, cupidity, double-dealing and shadiness, not to mention a massive civilian death toll, vindictive military policies, and a sheer incompetence that dwarfs all the previous foreign-policy misadventures of the United States during the past 220 years.

It is not that no good has been done. Enormous good has been done, by devoted troops on the ground helping build community centers or restore schools, by campaign workers helping build a democratic ethos, by medical workers carrying out immunizations, by savvy commanders who have taken on and killed the serial murderers who call themselves by such names as "Monotheism and Holy War" or "The Army of Muhammad." The good that has been done, however, has been fatally poisoned by bad policy. The best-case scenario for Iraq is now to limp along as Lebanon did in the 1980s, in a desultory and shadowy set of revolving civil wars. Iraq may eventually emerge, as Lebanon did, from this medium-term instability. It is certainly the case that the sooner U.S. ground troops are out of that country, the sooner its recovery can begin.