Iran: “US voters want policy change”

As noted here time and again, Iran has nothing to lose by waiting out the end of George Bush’s term.

May 29, 2008 | 1944 GMT

Iranian Foreign Minister Manouchehr Mottaki said May 29 that Iran thinks U.S. voters want to change the foreign policies of President George W. Bush, and he said that the present U.S. presidential campaigns make that clear, The Associated Press reported. Mottaki, who would not endorse a candidate, said that foreign policy would play an important part in the election of the next U.S. president.

Iran could not have had a better March-May. A rumored Israeli Gaza offensive, against Iran’s proxy Hamas, failed to materialize. Hezbollah, staked by Iran, was forced to go all-in in Lebanon, won, and has returned to a defensive crouch.

Mottaki’s announcement is a signal to Ahmadinejad’s domestic foes that Iraq is worth waiting for for a little while longer. He happens to be right.

US econo-political analysis is divided into two camps. The “mainstream” camp sees US growth figures as credible, and takes at face value the idea that the US, by sheer economic vitality, has avoided a recession. This school views US inflation as temporary. It views 10/90 “right track/wrong track” numbers as merely a dubious poll, a product of stampeding pessimism, spawned by the media’s sensationalizing of US malaise. This group has faith in government and banking institutions, and little faith in consumers’ ability to assess or predict their own behavior. Curiously, this group is also disproportionately Republican and “free-market.” It does not see much potential for an economic- or inflation-driven political upheaval in November 2008.

The “cynics,” e.g., Bill Gross, Mish Shedlock, and John Williams, trust consumers’ perceptions over the government’s. Cynics argue that consumers are telling the truth when they say how pessimistic they are, and trace the dissonance between official and consumer perceptions to vagaries of BLS unemployment and inflation accounting–a story flogged to death here, and much more persuasively on other sites.

The cynics see much higher potential for political upheaval in November 2008.

Apparently, so does Iran.

Bush Administration policy vis-a-vis Iran/Iraq usually means dialing up tensions over Iranian nukes and weapons supplies into Iraq, bringing up aircraft carriers, launching large operations against Iran’s Mehdi Army Iraqi proxy, slapping sanctions on Iranian banks, using its own militias to incinerate strategic people inside Iran, etc.

After Hezbollah routed the US alliance in Lebanon (followed by an abrupt end to the US/Iraqi crackdown on Sadr in Baghdad) one would assume that the Bush Administration policy of “we’d like to talk, but we’re happy to pull the trigger too” attitude has lost credibility. Iran is quietly leveraging its gains by edging the US out of Iraq:

May 29, 2008 1419 GMT
Senior Iraqi official Sa’ad Javad Qandil told Alalam television May 29 that a draft of an agreement to extend U.S. troops in Iraq beyond 2008 was problematic, especially any condition that would allow the U.S. to establish a military base there.

Predictably, Qandil is a member of the Islamic Supreme Council of Iraq, Teheran’s “mainstream” Iraq proxy (the Mehdi Army is, most of the time, its militant proxy). Hezbollah’s unanswered victory in Lebanon has ramifications across the entire region, not so much in the eyes of Americans as in the eyes of Arabs who were reminded, once again, that the personal bonds between Ahmadinejad and militia leaders can result in very quick and decisive action when Teheran’s interest are threatened.

Anyway, Iran hasn’t been deterred by US tough talk in the past, and there’s less reason than ever to think that louder tough talk will change Iran’s behavior at all. Lebanon has changed the game.

I would repeat my “sh*t or get off the pot” mantra about the US and Iran, but the US has backed down one too many times. I’m beginning to believe we should throw the Saudis the keys as soon as possible, to hedge against a probably adverse US election outcome while it’s still possible.

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Symbolic surgical airstrike on Iran in the works?

The Times of London is known to be the sieve of choice for neoconservative news leaks. Given all the concentration of firepower in the Persian Gulf recently, as well as the crackdowns on al-Sadr, and the fact that Bush wants to scare Iran off to some extent before he leaves office, some kind of surgical airstrike on Iran would make sense.

From The Sunday Times

May 4, 2008

United States is drawing up plans to strike on Iranian insurgency camp

President George W Bush is known to be determined that he should not hand over what he sees as “the Iran problem” to his successor. A limited attack on a training camp may give an impression of tough action, while at the same time being something that both Gates and the US commander in Iraq, General David Petraeus, could accept.

The US military is drawing up plans for a “surgical strike” against an insurgent training camp inside Iran if Republican Guards continue with attempts to destabilise Iraq, western intelligence sources said last week. One source said the Americans were growing increasingly angry at the involvement of the Guards’ special-operations Quds force inside Iraq, training Shi’ite militias and smuggling weapons into the country.

Despite a belligerent stance by Vice-President Dick Cheney, the administration has put plans for an attack on Iran’s nuclear facilities on the back burner since Robert Gates replaced Donald Rumsfeld as defence secretary in 2006, the sources said.

However, US commanders are increasingly concerned by Iranian interference in Iraq and are determined that recent successes by joint Iraqi and US forces in the southern port city of Basra should not be reversed by the Quds Force.

“If the situation in Basra goes back to what it was like before, America is likely to blame Iran and carry out a surgical strike on a militant training camp across the border in Khuzestan,” said one source, referring to a frontier province.

They acknowledged Iran was unlikely to cease involvement in Iraq and that, however limited a US attack might be, the fighting could escalate.

Although American defence chiefs are firmly opposed to any attack on Iranian nuclear facilities, they believe a raid on one of the camps training Shi’ite militiamen would deliver a powerful message to Tehran.

British officials believe the US military tends to overestimate the effect of the Iranian involvement in Iraq.

But they say there is little doubt that the Revolutionary Guard exercises significant influence over splinter groups of the radical cleric Moqtada al-Sadr’s Mahdi Army, who were the main targets of recent operations in Basra.

The CBS television network reported last week that plans were being drawn up for an attack on Iran, citing an officer who blamed the “increasingly hostile role” Iran was playing in Iraq.

The American news reports were unclear about the precise target of such an action and referred to Iran’s nuclear facilities as the likely objective.

According to the intelligence sources there will not be an attack on Iran’s nuclear capacity. “The Pentagon is not keen on that at all. If an attack happens it will be on a training camp to send a clear message to Iran not to interfere.”

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Shades of Zahedan

Today marks the first mass explosion in an Iranian metropolitan area in over a year:

At least eight people have been killed and more than 50 wounded in an explosion in the southern Iranian city of Shiraz, Iranian media reports say.

The blast occurred in a mosque in the city either during or after evening prayers, the reports said.

Iran’s Fars news agency was quoted as saying that the explosion was caused by a bomb. It said at least three of the wounded were seriously hurt.

There was no immediate claim of responsibility for the blast

Fars said the death toll was expected to climb.

Where have we seen this before?

(AP) Police and insurgents clashed after a bombing in southeastern Iran late Friday near the site where an explosion killed 11 members of the elite Revolutionary Guards this week, Iranian news agencies reported. “Minutes ago, the sound of a bomb explosion was heard in one of Zahedan’s streets,” the state-run news agency IRNA said, without giving more details. The semiofficial Fars news agency said clashes broke out between Iranian police and armed insurgents after the explosion.

Fars quoted the governor of Zahedan, Hasan Ali Nouri, as saying the blast was a “sound bomb explosion”_ a device that creates a loud boom but that usually does not cause casualties.

Nouri said there was gunfire heard but that it was late at night and that police had cordoned off the area.

On Wednesday, a car bomb blew up a bus carrying Revolutionary Guards, killing 11, in Zahedan, capital of Sistan-Baluchestan province, which sits on the border with Pakistan.

A Sunni Muslim militant group called Jundallah, or God’s Brigade, which has been blamed for past attacks on Iranian troops, has claimed responsibility for the Wednesday bombing.

Iran has accused the United States of backing militants to destabilize the country. Tensions between Tehran and Washington are growing over allegations of Iranian involvement in attacks on U.S. troops in Iraq, and over Iran’s nuclear activities.

Fars said the Friday explosion was at a school in Zahedan.

“The insurgents began shooting at people after the explosion. Clashes are continuing between police and the armed insurgents. Police have cordoned off the area,” the Fars agency said.

IRNA quoted an unnamed “responsible official” late Friday as saying that one of those arrested on charges of involvement in Wednesday’s bombing, identified as Nasrollah Shanbe Zehi, has confessed that the attacks were part of alleged U.S. plans to provoke ethnic and religious violence in Iran.

The confessions by Zehi helped police detain an unspecified number of Jundallah members and confiscate weapons and documents from the group in a raid Thursday in Zahedan, IRNA also said.

A majority of Iran’s population are Shiite Muslims but minority Sunnis live in southeastern Iran.

Friday’s blast came just hours after the funeral of the 11 Revolutionary Guardsmen in the capital.

Iran’s state-run television showed footage of Zahedan residents marching in the streets with the coffins of the killed Guardsmen. The crowd chanted, “death to hypocrites,” in a reference to the insurgents.

The blasts are a sharp flare-up of violence, but the remote southeast corner of Iran, near Pakistan and Afghanistan, has long been plagued by lawlessness. The area is a key crossing point for opium from Afghanistan and often sees clashes between police and drug gangs.

Jundallah, which is believed by some to have links to al-Qaida, has waged a low-level insurgency in the area and is led by Abdulmalak Rigi, a member of Iran’s ethnic Baluchi minority, a community that is Sunni Muslim and also can be found in Pakistan and Afghanistan. Rigi has said his group is fighting for the rights of impoverished Sunnis under Iran’s Shiite government.

Fars said that Rigi appeared on a station run by an opposition group known as the People’s Mujahedeen, which is based in Iraq, minutes before Friday’s explosion. The People’s Mujahedeen has long sought to overthrow the Iranian government by force.

Iranian officials have often raised concerns that Washington could incite members of Iran’s many ethnic and religious minorities against the Shiite-led government in Tehran.

Iran has faced several ethnic and religious insurgencies that have carried out occasionally deadly attacks in recent years _ though none have amounted to a serious threat to the government.

In December, Jundallah claimed responsibility for kidnapping seven Iranian soldiers in the Zahedan region, threatening to kll them unless group members were freed from Iranian prisons. The seven were released a month later, apparently after negotiations through tribal mediators.

In March 2006, gunmen dressed as security forces killed 21 people on a highway outside Zahedan in an attack authorities blamed on “rebels,” though Jundallah was never specifically named.

=====================

US funds terror groups to sow chaos in Iran

By William Lowther in Washington DC and Colin Freeman, Sunday Telegraph

Last Updated: 12:30am GMT 25/02/2007

America is secretly funding militant ethnic separatist groups in Iran in an attempt to pile pressure on the Islamic regime to give up its nuclear programme.

In a move that reflects Washington’s growing concern with the failure of diplomatic initiatives, CIA officials are understood to be helping opposition militias among the numerous ethnic minority groups clustered in Iran’s border regions.

The operations are controversial because they involve dealing with movements that resort to terrorist methods in pursuit of their grievances against the Iranian regime.

In the past year there has been a wave of unrest in ethnic minority border areas of Iran, with bombing and assassination campaigns against soldiers and government officials.

Such incidents have been carried out by the Kurds in the west, the Azeris in the north-west, the Ahwazi Arabs in the south-west, and the Baluchis in the south-east. Non-Persians make up nearly 40 per cent of Iran’s 69 million population, with around 16 million Azeris, seven million Kurds, five million Ahwazis and one million Baluchis. Most Baluchis live over the border in Pakistan. …

What else was going on in Iraq/Iran in February of 2007?

Iran rejects claims of equipping Iraqi Shiite extremists

Updated 2/12/2007 10:54 AM ET

By Jim Michaels, USA TODAY

BAGHDAD — Iranian officials today rejected claims they were arming Shiite extremists in Iraq with armor-piercing roadside bombs, a day after the U.S. military said those bombs have killed 170 American and coalition troops in Iraq.

LATEST: Dozens killed in Baghdad blasts on anniversary of Shiite mosque attack

U.S. military officials, who declined requests to be identified, said Sunday that shipments of weapons and ammunition to Iraq’s Shiite militias were being directed at the highest levels of the Iranian government.

Iran on Monday rejected the accusations. “Such accusations cannot be relied upon or be presented as evidence. The United States has a long history in fabricating evidence. Such charges are unacceptable,” Foreign Ministry spokesman Mohammad Ali Hosseini told reporters.

In a briefing, U.S. officials showed reporters part of a device they described as a sophisticated roadside bomb, along with mortar shells and rocket-propelled grenades they said were made in Iran. Later, one of the officials, an intelligence analyst, said it would be impossible to find a “smoking gun” conclusively proving Iranian government involvement.

FROM THE U.S. MILITARY: Pictures, descriptions of Iranian support to insurgents (PDF)

Sunday’s briefing by the three military officials was the most detailed attempt to show that Iran supports militants in Iraq. It followed similar remarks Friday by U.S. Defense Secretary Robert Gates.

Gates said serial numbers and markings found on explosives provide “pretty good” evidence that Iran is supplying either weapons or expertise to extremists in Iraq.

U.S. and coalition forces have not captured any Iranian agents in possession of the armor-piercing roadside bombs. The U.S. officials at the briefing said Iraqis are usually used to transport the explosives from Iran.

The Mahdi Army militia is among the Shiite extremist groups that have obtained the powerful bombs. The Mahdi Army is aligned with anti-American cleric Muqtada al-Sadr, whose political organization is part of Prime Minister Nouri al-Maliki’s government. …

February 2007 also marked the beginning of a secular shift upwards in oil prices, from a 2004-06 average of about $58/barrel, to a peak of $86 per barrel (using December 2007 dollars) by November of 2007, when the publication of the National Intelligence Estimate blunted what the oil market perceived was an inexorable march to US-Iranian war.

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Unraveling Iraq: Mehdi Army seizes de-facto control of Kut, Amara, Nasiriya, Diwaniya, Hilla, Sadr City …

Right on cue …. via the Financial Times:

US aids Iraq security forces with air strikes

By By Steve Negus, Iraq correspondent, and Demetri Sevastopulo in Washington

Published: March 28 2008 18:20 | Last updated: March 28 2008 18:20

President George W. Bush on Friday called the Iraqi government offensive in Basra a “defining moment” as violence continued to spread across the country and US troops were forced to send reinforcements to help Iraqi security forces.

“I would say this is a defining moment in the history of a free Iraq,” Mr Bush said. “This happens to be one of the provinces where the Iraqis are in the lead…and this is a good test for them.”

Nouri al-Maliki, the Iraqi prime minister, has stressed that the operation is primarily targeting ”lawless gangs” in the southern port city of Basra, but fighting has spread to other cities, with members of the Madhi Army, a group of Shia militants loyal to the cleric Moqtada al-Sadr, staging solidarity attacks.

Militias on Friday appeared to have seized control of the centre of the southern provincial capital of Nasiriya, while heavy fighting has also been reported in the towns of Kut, Amara, Diwaniya, and Hilla and in the Baghdad suburb of Sadr City. Militants in Baghdad have also kept up a heavy barrage of rockets and mortars at the heavily fortified Green Zone.

Iraqi security forces admitted on Friday that they were having difficulties subduing radical Shia militants. The death toll in the four days of fighting since Mr Maliki launched operation “Sawlat al-Fursan”, or Charge of the Knights, is unclear, but appears to have risen at least above 200.

While Mr Bush said the Iraqis were taking the lead in the operation, coalition forces were required to provide reinforcements on Friday, including air strikes at militants in Basra and Baghdad.

”We supposed that this operation would be a normal operation, but we were surprised by this resistance and have been obliged to change our plans and our tactics,” Abd al-Qader Jassim, the Iraqi defence minister, was quoted as saying by Reuters.

Stephen Biddle, an Iraq expert and former adviser to General David Petraeus, the US commander in Iraq, said the situation in Basra was “very serious”. He said the US was not clear whether Mr Maliki was targeting rogue elements of the Madhi army or taking on the mainstream faction of the umbrella group loyal to Moqtada al-Sadr, the radical Shia cleric.

Mr Biddle said another possibility was that Mr Maliki was taking the opportunity to crack down on political opponents ahead of provincial elections later this year. That would be the most dangerous scenario, he added, since it could jeopardise the ceasefires by the Madhi army loyal to Moqtada al-Sadr, the radical Shia cleric, and also by Sunni “local concerned citizens”.

Mr Maliki’s office on Friday said Basra residents had until April 8 to hand over heavy arms in return for cash bounties. The deadline is separate from an earlier ultimatum announced on Wednesday which gave gunmen 72 hours to surrender their weapons.

Iraq experts expressed concern that Mr Maliki had not co-ordinated the operation closely with the coalition, which some said could jeopardise its success. Mr Bush said he was unaware what trigged the timing of the offensive.

“I haven’t spoken to the prime minister since he’s made his decision, but I suspect that he would say, ”Look, the citizens down there just got sick and tired of this kind of behaviour,” said Mr Bush.

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Pentagon “weighs top Iraq general as Nato chief” ?

This is State’s “diplomatic surge,” I guess. The Iranians hate Petraeus, because Petraeus doesn’t want to give them Iraq on a silver platter. So, we should pack him off to the bureaucratic backwater that is NATO? WTF?

By Michael R. Gordon and Eric Schmitt

The Pentagon is considering General David H. Petraeus for the top NATO command later this year, a move that would give the general, the top American commander in Iraq, a high-level post during the next administration but that has raised concerns about the practice of rotating war commanders.

A senior Pentagon official said that it was weighing “a next assignment for Petraeus” and that the NATO post was a possibility. “He deserves one and that has also always been a highly prestigious position,” the official said. “So he is a candidate for that job, but there have been no final decisions and nothing on the timing.”

The question of General Petraeus’s future comes as the Pentagon is looking at changing several top-level assignments this year. President Bush has been an enthusiastic supporter of General Petraeus, whom he has credited with overseeing a troop increase and counterinsurgency plan credited with reducing the sectarian violence in Iraq, and some officials say the president would want to keep General Petraeus in Iraq as long as possible.

In one approach under discussion, General Petraeus would be nominated and confirmed for the NATO post before the end of September, when Congress is expected to break for the presidential election. He might stay in Iraq for some time after that before moving to the alliance’s headquarters in Brussels, but would take his post before a new president takes office.

If General Petraeus is shifted from the post as top Iraq commander, two leading candidates to replace him are Lt. Gen. Stanley A. McChrystal, who is running the classified Special Operations activities in Iraq, and Lt. Gen. Peter W. Chiarelli, a former second-ranking commander in Iraq and Defense Secretary Robert M. Gates’s senior military assistant.

By this fall, General Petraeus would have served 19 months in command in Iraq and would have accumulated more than 47 months of service in Iraq in three tours there since 2003. In the NATO job, General Petraeus would play a major role in shaping the cold-war-era alliance’s identity, in coping with an increasingly assertive Russia and in overseeing the allied-led mission in Afghanistan.

General Petraeus, 55, has been criticized by Democratic lawmakers opposed to Mr. Bush’s decision to send additional combat forces to Iraq. A NATO post would give him additional command experience in an important but less politically contentious region, potentially positioning him as a strong candidate in a few years to serve as chairman of the Joint Chiefs of Staff, several military officials said. They and some others who discussed the potential appointment declined to be identified because they were speaking about an internal personnel matter.

Some experts, however, say General Petraeus’s departure would jeopardize American efforts in Iraq, especially since the No. 2 officer in Iraq, Lt. Gen. Raymond T. Odierno, is scheduled to complete his tour and leave Iraq in mid-February.

General Petraeus “should stay at least through this year,” said Anthony Cordesman, a military specialist at the Center for Strategic and International Studies. “We really need military continuity in command during this period in which we can find out whether we can transition from tactical victory to some form of political accommodation.

“We have in Petraeus and Crocker the first effective civil-military partners we have had in this war,” Mr. Cordesman added, referring to Ryan C. Crocker, the United States ambassador in Baghdad. Gen. George W. Casey Jr., General Petraeus’s predecessor, served nearly three years in the top Iraq job before becoming Army chief of staff.

There has been speculation that General Petraeus’s next post might be as head of the Central Command, which has responsibility for the Middle East region. That would enable him to continue to influence events in Iraq while overseeing the military operation in Afghanistan and developing a strategy to deal with Iran. The Central Command post is currently held by Adm. William J. Fallon. Admiral Fallon, through a spokesman, denied that he intended to retire from the military in the next several months.

General Petraeus, through a spokesman, declined to comment on a possible NATO assignment. Geoff Morrell, the senior Defense Department spokesman, said no decision had been made.

“Trying to guess General Petraeus’s next assignment is the most popular parlor game in the Pentagon these days,” Mr. Morrell said. “Where and when the general goes next is up to Secretary Gates and President Bush, and they have not yet decided those matters. However, they very much appreciate his outstanding leadership in Iraq and believe he has much more to contribute to our nation’s defense whenever his current assignment comes to an end.”

General Petraeus’s last post in Europe was as a senior officer for the NATO force in Bosnia, where he served a tour in 2001 and 2002. “He did a great job for me as a one-star in Bosnia,” said Gen. Joseph W. Ralston, who served as NATO commander at the time and has since retired. “He would have the credibility to keep Afghanistan focused for NATO.”

This is ridiculous. There is no reason to kick out the first successful general on the basis of bureaucratic procedure. Something else is up.

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What’s so bad about deflation?

As the usual suspects chorus with irresponsibly politicized Republicans and intellectually invincible academics on the urgent consensus in favor of monetary stimulus — the Fed Funds market probabilities for the Fed’s January 30 decision stand as follows:

Probability of 50bp cut in the Fed funds rate: 42 percent

Probability of 75bp cut in the Fed funds rate: 40 percent

Probability of 100bp cut in the funds rate: 17 percent

(Probability of 25bp cut in the funds rate: 1 percent)

On Friday afternoon, there was a truly nightmarish rumor ricocheting around: that Ambac was securing some kind of government bailout of the bond insurance industry. After Ambac’s 52 percent Thursday plunge, it was up 20 percent throughout most of Friday, but at the end, it nosedived, presumably smothering the bailout rumor.

If the government will step in and bail the financial sector out–ok, I take that back because it already has thrown hundreds of billions at the mortgage brokers and the banks off-balance-sheet, at the expense of the US dollar–then the monoline sector is the obvious weak link in the dam. Buffett has already started his own monoline, Berkshire Assurance, but he will not make any big moves until at least one of the monolines actually files for bankruptcy and unleashes the final round of (credit-deflationary) chaos onto the financial system. That will mean tens of billions more writedowns for institutions all over the country (especially if Buffett waits until MBIA blows up, as well as Ambac).

At that point the game theory for the financial elites gets very interesting. Once Ambac dies, will MBIA be able to secure heavy hedge-fund or SWF financing at the height of the panic? Will it die and subsequently trigger a massive government intervention? Or will Bernanke et al. just let MBIA die and let capitalism solve its own problem? Buffett wants to dive in at the height of panic, but if the federal government gets too panicky and pre-empts him, he loses. The current crowd has been choking the credit markets with new paper for the past six months, and has exhibited pure panic.

At the same time Buffett knows that there are very few people alive with his combination of knowledge of the monoline sector, his real AAA credit rating, and his pile of ready cash. So a lot of potentially flush speculators would be extremely leery of jumping into the business before Buffett does. The previous iteration of bulls who rode into Citigroup and the monolines in November are bankrupt or horribly burned.

If we did not have so much panic-driven bureaucratic power to deal with — the Treasury, the Fed, Congress, and the White House, in that order — the markets would be operating much more efficiently. There would be no chance of a government bailout, so the monolines would have thrown in the towel in November. Banks’ credit portfolios wouldn’t have the Fed’s paper crutch to lean on, so they would have fire-sold their credit portfolios to the Buffetts and Citadels who had waited out the most frenzied chapter of the bull market for the opportunity.

Instead of focusing on actual economic activity, we must parse every grammatical construct of our born-again-inflationist high priests to see how and if they will continue to thwart market efficiency, by printing more forms of paper to “erase” old debts and subsidize bad habits.

Undergirding all this policy machinery is a pernicious “establishment consensus” that deflation is some kind of terror that must be stopped at all costs.

Sure, “deflation is bad,” in a vacuum. But what are the alternatives to deflation? Deflation means a massive slowdown in consumer spending. Which, in a vacuum, “is bad.” But we’re not in a vacuum. American borrowing has reached absolutely unprecedented levels. Deflation is the market’s cure for a low aggregate savings rate. It forces debts to be fire-sold in the near term, and in the longer term, it brings down formerly inflated asset prices into the reach of more people. Deflation is a price phenomenon as well as a debt and wage phenomenon, remember…

More inflationist decisions by institutional elites now mean more deflation later.

It is one thing for the government to intervene in financial markets to offset an exogenous shock, such as 9/11. There is no rationale for the government’s intervening against an endogenous financial shock.

Deflation is a short-term consumption killer, but a long-term shot in the arm for the savings rate. It’s not “evil.” Saying “Inflation is bad” is like saying, “Vomiting is bad.” Vomiting is unpleasant, but if you have had too much to drink, vomiting is very good for you.

Unfortunately, commanding-height institutions have a way of never admitting they’re wrong. If history is any guide, the “credit crunches” will continue, with sporadic Fed helicopter-scrambling to temporarily “calm credit fears,” until the dreaded wage-price spiral kicks in to overcompensate for five years’ soaring energy, food, healthcare, and education prices which the Fed has willfully ignored.

Why is anyone surprised that Americans don’t save, when government’s pain-averse, inflationistic ideology is what it is?

Right now, we have credit deflation occurring alongside consumer price and commodity inflation. The Fed is entirely focused on the former, but popular inflation expectations are moored to the latter. The Fed has “greater” priorities than price stability or dollar credibility.

Market manipulations can work if they’re very short-lived. I have seen just a few with my own eyes. But long-run attempts at market manipulation always fail.

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Philosophical problems with any “stimulus”

The financial information spectrum, from the utterly uninformed (Yahoo! financial ‘news’) to the well informed (i-banking institutional research and premium financial consultancies) are all lasering in on the nature of the Bush-Bernanke “stimulus package.” Bush, as usual, threw out the biggest number ($140 billion) because, well, when it comes to the federal budget Bush really likes big numbers. Or something.

Bush outlines $140bn stimulus package

By Krishna Guha and Jeremy Grant in Washington

Published: January 18 2008 18:24 | Last updated: January 18 2008 19:01

President George W. Bush on Friday outlined a $140bn fiscal stimulus plan involving temporary tax relief for both consumers and companies in a bid to keep the US economy out of recession.

The administration said his plan would create or safeguard half a million jobs at risk from the economic downturn.

Mr Bush’s comments cap a week of growing bipartisan calls for the government to step in to boost demand amid fears that the brutal housing slump is starting to take its toll on jobs and consumer spending.

It comes at the end for a dismal week for Wall Street, which saw huge writedowns announced by Citigroup, Merrill Lynch and JPMorgan Chase. The S&P 500 index was down 5.3 per cent on the week in midday trading, heading for its worst week for more than five years.

Mr Bush said: “I believe there is enough broad consensus that we can come up with a package that can be approved with bipartisan support” and implemented quickly.

He said that a fiscal stimulus would “provide a shot in the arm to keep a fundamentally strong economy healthy”.

The president said that the package must be “big enough to make a difference in an economy as large and dynamic as ours – which means it should be about one per cent of gross domestic product”.

He said it should be “built on broad-based tax relief” and “not the kind of spending projects that would have little immediate impact on our economy”. Mr Bush insisted that it should include “tax incentives for American businesses” as well as “direct and rapid income tax relief for the American people”.

Members of Congress said the Bush administration had been floating the idea of tax rebates worth $800 for individuals and $1,600 for families. However, the president did not offer any detail on Friday.

Hank Paulson, Treasury secretary, said “the president intentionally put out guidelines, broad principles, because we are looking to be collaborative, working with Congress.”

Mr Paulson – who spent much of the past fortnight consulting members of Congress – said there were “broad areas of agreement” on a fiscal package.

Whatever the final number is, it will probably be a smorgasbord of pork-barrel garbage, combined with temporary “rebates” which will effectively offload a minuscule slice of American consumer debt onto Uncle Sam’s balance sheet. (One-off rebates such as the 2001 Bush tax-cut rebates tend to have negligible impact on consumer spending; more often the rebates are used to pay off older debts.)

It almost certainly will not include any kind of capital-gains tax cut, or rendering permanent of the 2003 dividend/capital gains cut. You would think that Ben Bernanke, our nation’s highest-ranking born-again asset price inflationist, would be driving the bandwagon of tax-code tweaks to keep asset prices inflated. Unfortunately, Bernanke is a (poor) politician; he knows the Democrats don’t want to hear more tax cut endorsements, so he won’t give them one. He has already stated “no preference” between a paleo-Keynesian spending orgy or a neo-Keynesian tax-cut orgy.

It all adds up to the same thing: inflation.

The nominal federal deficit will probably clock in under $200 billion for FY2008. Of course, that doesn’t include the $380 billion in outstanding discount notes from the FHLB — a large percentage of which have almost certainly curdled — or the printing-press-backed debt issuance from the Federal Reserve’s TAF, which I believe stands at $60 billion.

After today’s crapped-out rally, I think it would be safest to wait until the monoline dead sharks (MBIA, Ambac, FGIC et al) float up to the surface before wading back into equities. Should be in the next two weeks, according to RBS (h/t FT Alphaville):

From a rating perspective, in the absence of a bail-out, we see the agencies as more likely to downgrade than not, and once the first downgrade has gone through (likely Fitch with respect to SCA next week), it will become much easier for the other agencies to follow suit with other monolines. We now expect the future for the monolines to play out as follows. Fitch will likely downgrade SCA next week, and FGIC and Ambac the following week – assuming it sticks to its own six week deadline. Moody’s will follow in due course with downgrades to Ambac, MBIA, FGIC and SCA, and S&P will downgrade FGIC. The damage the downgrades of other agencies will do to these monolines is likely to prompt the others to downgrade as well. In theory, these downgrades will be to the double-A category, based on the comments of the agencies so far.

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