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Archive for the ‘dawn to decadence’ Category

It has been abundantly obvious from day one that Ben Bernanke has no understanding of “liquidity” — whatsoever.

Only 2 months (?) after Bernanke helicoptered $122 billion to AIG, AIG has come cap in hand to Uncle Sam with a down face and a confession: “The money’s all gone.” AIG supposedly wants $200 billion in new money.

AIG in talks with Fed over new bail-out

By Francesco Guerrera in New York

Published: November 8 2008 02:00 | Last updated: November 8 2008 02:00

AIG is asking the US government for a new bail-out less than two months after the Federal Reserve came to the rescue of the stricken insurer with an $85bn loan, according to people close to the situation.

AIG’s executives were last night locked in negotiations with the authorities over a plan that could involve a debt-for-equity swap and the government’s purchase of troubled mortgage-backed securities from the insurer.

People close to the talks said the discussions were on-going and might still collapse, but added that AIG was pressing for a decision before it reports third-quarter results on Monday.

AIG’s board is due to meet on Sunday to approve the results and discuss any new government plan, they added.

The moves come amid growing fears AIG might soon use up the $85bn cash infusion it received from the Fed in September, as well as an additional $37.5bn loan aimed at stemming a cash drain from the insurer’s securities lending unit.

AIG has drawn down more than $81bn of the combined $122.5bn facility. The company’s efforts to begin repaying it before the 2010 deadline have been hampered by its difficulties in selling assets amid the global financial turmoil.

AIG executives have complained to government officials that the interest rate on the initial loan – 8.5 per cent over the London Interbank Borrowing Rate – is crippling the company.

They compared the loan’s terms with the 5 per cent interest rate paid by the banks that recently sold preferred shares to the government.

One of AIG’s proposals to the Fed is to swap the loan, which gave the authorities an 80 per cent stake in the company, for preferred shares or a mixture of debt and equity.

Such a structure would reduce the interest rate to be paid by AIG and possibly the overall amount it has to repay. An extension in the term of the loan from the current two years to five years is also possible, according to people close to the situation.

The renegotiation of the loan could be accompanied by the government’s purchase of billions of dollars in mortgage-backed securities whose steep fall in value has been draining AIG cash reserves.

AIG is also proposing the government buy the bonds underlying its troubled portfolio of credit default swaps in exchange for the roughly $30bn in collateral the company holds against the assets.

Losses on the mortgage-backed assets, which were acquired by AIG with the proceeds of its securities lending programme, and the CDSs caused the company’s collapse.

Since the government rescue, they have continued to haunt AIG, which is required to put up extra capital every time the value of these assets falls. AIG and the Fed declined to comment.

Red staters get a lot of sh*t from their coastal cousins for being stupid. I will say one thing in red staters’ defense, though: it truly takes a blue coast, blue-blood stupidity to concoct such dangerous national policy as Bernanke’s.

It’s the kind of stupidity that only an Ivy League education can buy.

What is Bernanke going to do when he issues $2 trillion in Treasuries next year, and nobody buys?

All the people who thought they got a great deal when Pepsi priced its last bond at 7.5% are going to feel pretty damn stupid 12 months from now. Either that, or AAA corporates will have lower yields than Treasuries.

At the primary dealer desks, there is no net Asian sovereign demand for US sovereigns anymore.

Right now, Uncle Sam is printing the money and planning to float Treasuries “soon.” I am not exaggerating. It is the dirty secret that every FX macro desk at every major institution knows: the Treasury is printing now and issuing later.

In the ivory towers at Treasury and the Fed, “printed” money will be converted to Treasuries soon, because the Fed and Treasury (okay, just the Fed) think that there is an “irrational” “liquidity crisis”, which will abate any day now.

It won’t abate. It will get worse: all bond yields are based on Treasury yields. Treasury yields are definitely going up in the next year. All other yields (corporates … munis … ) will go up too.

That will be the real “credit crisis.” We are just mostly through the second act.

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Thomas Palley, Open Society Institute pontificator emeritus cum DC-cocktail laude, mocks himself best when he’s most honest. As do most political people.

Defending the Bernanke Fed

Filed under: U.S. Policy, Uncategorized — Administrator @ 6:37 am

Federal Reserve Chairman Ben Bernanke has recently been on the receiving end of significant criticism for recent monetary policy. One critique can be labeled the American conservative critique, and is associated with the Wall Street Journal. The other can be termed the European critique, and is associated with prominent European Economist and Financial Times contributor, Willem Buiter.

Brought up on the intellectual ideas of Milton Friedman, American conservatives view inflation as the greatest economic threat and believe control of inflation should be the Fed’s primary job. In their eyes the Bernanke Fed has dangerously ignored emerging inflation dangers, and that policy failure risks a return to the disruptive stagflation of the 1970s.

Both argue the Fed has engaged in excessive monetary easing, cutting interest rates too much and ignoring the perils of inflation. Their criticisms raise core questions about the conduct of policy that warrant a response.

At least he didn’t call us “liquidationists.” Generous.

Rather than cutting interest rates as steeply as the Fed has, American conservatives maintain the proper way to address the financial crisis triggered by the deflating house price bubble is to re-capitalize the financial system.

Correct.

This explains the efforts of Treasury Secretary Paulson to reach out to foreign investors in places like Abu Dhabi. The logic is that foreign investors are sitting on mountains of liquidity, and they can therefore re-capitalize the system without recourse to lower interest rates that supposedly risk a return of ‘70’s style inflation.

“Supposedly.

The European critique of the Fed is slightly different, and is that the Fed has gone about responding to the financial crisis in the wrong way. The European view is that the crisis constitutes a massive liquidity crisis, and as such the Fed should have responded by making liquidity available without lowering rates. That is the course European Central Bank has taken, holding the line on its policy interest rate but making massive quantities of liquidity available to Euro zone banks.

In other words, the Buiter critique advocates one set of interest rates for banks, and a very different one for individuals, without regard to respective credit risk. Presumably, there would be no arbitrage between these two bifurcated markets. Presumably, liquidity provisions to other banks–“inflation by other means”–would both 1) save the banks, and 2) not institutionalize higher prices on the tabs of the people who didn’t take the stupid risks.

Never made much sense to me either. [I used to like Buiter because he was the only person who trashed Bernanke way back in the day. Unfortunately his “lender of last resort” bailout loophole was an unforgivable leap of illogic, and while formally very different from the Bank of Japan’s disastrous early-1990’s bailout, was functionally indistinguishable.]

According to the European critique the Fed should have done the same. Thus, the Fed’s new Term Securities Lending Facility that makes liquidity available to investment banks was the right move. However, there was no need for the accompanying sharp interest rate reductions given the inflation outlook. By lowering rates, the European view asserts the Fed has raised the risks of a return of significantly higher persistent inflation. Additionally, lowering rates in the current setting has damaged the Fed’s anti-inflation credibility and aggravated moral hazard in investing practices.

The problem with the American conservative critique is that inflation today is not what it used to be.

It’s different this time.

1970s inflation was rooted in a price – wage spiral in which price increases were matched by nominal wage increases. However, that spiral mechanism no longer exists because workers lack the power to protect themselves. The combination of globalization, the erosion of job security, and the evisceration of unions means that workers are unable to force matching wage increases.

DC establishment liberal: “Inflation is okay now, because workers have to eat all costs themselves.” As if workers will just sit back and take this? As if they can’t read these internet posts, which presume weakness, ignorance and stupidity on the part of American workers?

The problem with the European critique is it over-looks the scale of the demand shock the U.S. economy has received. Moreover, that demand shock is on-going. Falling house prices and the souring of hundreds of billions of dollars of mortgages has caused the financial crisis. However, in addition, falling house prices have wiped out hundreds of billions of household wealth. That in turn is weakening demand as consumer spending slows in response to lower household wealth.

Different. This. Time.

Countering this negative demand shock is the principal rationale for the Fed’s decision to lower interest rates. Whereas Europe has been impacted by the financial crisis, it has not experienced an equivalent demand shock. That explains the difference in policy responses between the Fed and the European Central Bank, and it explains why the European critique is off mark.

The bottom line is that current criticism of the Bernanke Fed is unjustified. Whereas the Fed was slow to respond to the crisis as it began unfolding in the summer of 2007, it has now caught up and the stance of policy seems right. Liquidity has been made available to the financial system. Low interest rates are countering the demand shock. And the Fed has signaled its awareness of inflationary dangers by speaking to the problem of exchange rates and indicating it may hold off from further rate cuts. The only failing is that is that the Fed has not been imaginative or daring enough in its engagement with financial regulatory reform.

Copyright Thomas I. Palley

The bottom line is, DC policy emerati are profoundly ignorant, sycophantic, and irresponsible people.

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“With Bold Steps, Fed Chief Quiets Some Criticism”:

[…]

“It has been a really head-spinning range of unprecedented and bold actions,” said Charles W. Calomiris, professor of finance and economics at Columbia Business School, referring to the Fed’s lending activities. “That is exactly as it should be. But I’m not saying that it’s without some cost and without some risk.”

[As yours truly noted back in November, Charles Calomiris wrote a verbose and obtuse article for VoxEU which proclaimed that there was no credit crisis — a restatement of his August claim that there was no credit crisis. I guess that makes him almost as good a forecaster as Bernanke is. ]

Timothy F. Geithner, president of the Federal Reserve Bank of New York, and a close Bernanke ally, defines the Fed chief’s “doctrine” as the overpowering use of monetary policies and lending to avert an economic collapse. “Ben has, in very consequential ways, altered the framework for how central banks operate in crises,” he said. “Some will criticize it and some will praise it, and it will certainly be examined for decades.”

Mr. Bernanke’s actions have transformed his image as a self-effacing former economics professor.

“I am tempted to think of him as somewhat Buddha-like,” said Richard W. Fisher, president of the Dallas Federal Reserve Bank. “He’s developed a serenity based on a growing understanding of the hardball ways the system actually works. You can see that it’s no longer an academic or theoretical exercise for him.”

Did he just say “Buddha-like”?

Within the Bush administration, Mr. Bernanke’s willingness to work with Democrats in Congress on measures to prevent mortgage foreclosures has stirred unease. “The fact that he, an appointee of George Bush, has come very close to advocating — though he hasn’t quite advocated it — a piece of legislation that George Bush threatened to veto is an illustration of his willingness to put his head on the chopping block,” said Alan S. Blinder, a professor of economics at Princeton and friend of the Fed chief.

One reason Mr. Bernanke is sticking his neck out is that he believes the broader economy’s recovery depends on the housing sector, which remains in a serious slump. Plenty of new evidence surfaced on Tuesday that this year’s spring home-buying season will be dismal, with one report showing that prices fell 14.1 percent in March from a year earlier and another that new-home sales are down 42 percent over the last year.

Among Democrats, Mr. Bernanke, a Republican, had previously been criticized by such party luminaries as the two former Clinton administration Treasury secretaries, Robert E. Rubin and Lawrence E. Summers, who worried that he was downplaying the dangers of a recession. But that view has changed.

“I think in the last few months they’ve handled themselves very sure-footedly,” Mr. Rubin said of the Fed. Many Democrats in Congress agree.

“They say that crisis makes the man,” said Senator Charles E. Schumer, Democrat of New York and the chairman of the Joint Economic Committee. “He’s made believers out of people who were just not sure about him before.”

To lessen the chances of a financial collapse, Mr. Bernanke engineered the takeover of one investment bank, Bear Stearns, and tossed credit lifelines to others with exotic new lending facilities — the Fed now has seven such lending windows, some of them for investment banks as well as commercial banks.

He also allowed the Fed to accept assets of debatable value — mortgage-backed securities, car loans and credit card debt — as collateral for some Fed loans. For the first time ever, he installed Fed regulators inside investment banks to inspect their books.

Much to the dismay of conservative economists, Mr. Bernanke has also presided over an extraordinarily aggressive series of interest rate cuts, lowering the fed funds rate seven times, to 2 percent from 5.75 percent, since last September, though it has signaled a pause in further rate-cutting barring a further crisis. …

Bernanke and Paulson are the worst thing that’s happened to capitalism since Arthur Burns and Richard Nixon. Carter would have been awful, but conditions were so bad by 1979 that he had to authorize significant deregulation and capital gains tax cuts (from 35% to 28%, from memory) kicking and screaming.

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MZM (NSA) v USD value v commercial lending

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During a somewhat heated argument with some Jewish friends over Israel’s recent backstabbing of the US, a national security hobbyist recommended the following article as a defense of recent Israeli policy. Phrases which jumped out at me are highlighted in bold.

Hizbollah’s Increased Strength: Risks and Opportunities for Israel, INSS Insight No. 57, May 26, 2008
Shalom, Zaki

One tangible aftermath of the Second Lebanon War and the agreement that concluded it is an increase in Hizbollah’s strength. [… …]

Since the end of the Second Lebanon War, Hizbollah has succeeded in rehabilitating its forces to a great extent. According to various reports, Hizbollah today has tens of thousands of missiles, some of them long range, and is capable of inflicting very serious damaged deep into Israel. Thus, the risks involved in Hizbollah taking control of Lebanon are quite apparent. Less apparent are the pluses that may emerge from this process.

[Hezbollah didn’t “rehabilitate” anything. Its victory in 2006 did not even require a full Hezbollah mobilization. 10,000 IDF soldiers were defeated by 3,000 Hezbollah fighters. At most 184 Hezbollah fighters were killed in the war — much less than the “at least 450” bandied about by Israeli propaganda.]

[…]

… For many years Lebanon has been ruled by moderate, pro-West leaders. This leadership views Hizbollah as a bitter and hostile rival, and it too is interested in clipping the organization’s wings. At the same time, Lebanese leaders are afraid of a confrontation, and in practice allow Hizbollah to operate against Israel in a “bloodletting” effort, while stressing their inability to restrain the organization. When Israel responds against Lebanon, the Lebanese leadership uses its good relations with Western countries, in particular the United States and the moderate Arab countries, to exert pressure on Israel not to harm it.

This phenomenon was evidenced in prominent fashion on July 12, 2006. In a Cabinet discussion held after the serious consequences of that day’s Hizbollah operation became clear, then-Chief of Staff Dan Halutz proposed attacking infrastructure installations in Lebanon, including electric plants, oil refineries, and water sources. His suggestion was supported by a number of ministers. However, the senior political echelon, and in particular the prime minister, defense minister, and minister of foreign affairs, vetoed the idea. The reason: unequivocal clarifications received by Israel that very same day from senior levels in the American administration and the British government to the effect that Israel must refrain from damaging Lebanese targets [1] because this might undermine the stability of the pro-Western government headed by Fouad Siniora. Consequently, the proposal was shelved.

We lack adequate tools to assess whether that proposal, if implemented, would have generated an essentially different outcome from the events of July-August 2006. Nonetheless, it is clear that an American-British veto of this option stemmed from the fact that the official government in Lebanon was pro-Western and enjoyed the support of the United States. The fact that Israel was not able to exercise the option to attack Lebanon represents a significant constraint on Israel’s freedom to maneuver.

Should Hizbollah in fact take control of Lebanon, Israel’s options of maneuvering vis-à-vis Hizbollah are significantly increased. It will become clear to all sides that no international element will get involved to protect Hizbollah from Israeli attacks. Obviously, this does not mean that Israel would necessarily attack Lebanon’s infrastructure should Hizbollah cast down the gauntlet. Beyond international constraints, the Israeli leadership also has to contend with a set of legal and normative, value-based constraints and restrictions that would make it very difficult indeed for Israel to take steps against civilian infrastructure.[2] This has become clear in Israel’s refraining from damaging the electrical and fuel infrastructures of the Gaza Strip under Hamas control. At the same time, there is no doubt that Hizbollah’s taking control of Lebanon would expand Israel’s ability to maneuver vis-à-vis Lebanon in case of another armed conflict, at least from the international perspective.

From Israel’s own perspective, Hizbollah is first and foremost a body representing a military threat against Israel. However, Hizbollah is also a powerful body with economic and financial assets, and an organization with far-reaching political ambitions. Therefore, in any military confrontation with Israel, if Hizbollah holds the reins of leadership it would conclude that there is nothing stopping Israel from severely damaging its assets. The very awareness of this fact, i.e., that there would not be anyone trying to delimit Israel’s scope of action in terms of damaging Lebanon, may cause it to refrain from a confrontation with Israel.

Beyond this, one may speculate that Hizbollah’s taking control of Lebanon will bring about a new awareness on the part of various international elements of the “Iranian threat.” To date, the concerns of the international community regarding Iran have focused on its intention to develop nuclear capabilities. Hizbollah’s taking control of Lebanon would bring the danger inherent in Iran into sharper relief, not only regarding the nuclear question but also vis-à-vis the stability of other pro-Western regimes in the region, chief among them Saudi Arabia, Egypt, and the Gulf states. Such a development might very well match the interests of the State of Israel.

[1] Not only is this immaterial (for reasons which I will soon explain), but it’s also an audacious exaggeration.

Very few people know the exact phrasing of the back-channel US request/ demand/ recommendation/ “directive” on the scope of Israel’s operations. [Since when was Israel a shackled vassal to US/UK politics?] One would think that collateral damage to Lebanon was of secondary importance to winning the war.

More importantly, however, Lebanon 2006 was an Israeli tactical, strategic, intellectual and logistical catastrophe, from top to bottom. Had Hezbollah’s military bandwidth been stretched by the conflict, a Western “veto” of strikes on Hezbollah assets such as power generators, etc., could have borne culpability.

However, Hezbollah’s capabilities were not remotely stretched. Hezbollah didn’t even call up its own reserves!

The US Army has at least one detailed dissection of Israel’s Second Lebanon War, by Matt Matthews of the US Army Combined Arms Center. It could be that politics could have obscured the mention of retrospectively adverse US “directives” in an Army study. That isn’t consistent with Army practice, but I will concede it for the sake of argument.

[2] is long-hand for, “We base our policy on what others think of us, not on what we believe best for our country; and anyway, our culture just doesn’t let us win wars anymore.” “One may speculate” that Israel has completely lost its martial vigor as well as touch with reality. But Nasrallah’s and Ahmadinejad’s vindication is no matter of speculation.

Without further ado, here’s a representative US Army assessment of Lebanon 2006:

[p. 25-26]

… Brigadier General Shimon Naveh’s Systemic Operational Design (SOD) was a tool intended to help IDF commanders plan their campaigns. Naveh founded the IDF’s Operational Theory Research Institute (OTRI) in 1995. After years of work by Naveh and other intellectuals within the OTRI, SOD attempted to provide commanders with the aptitude necessary “to think critically, systemically and methodologically about 25 war fighting.” The design focused “on the concept of the ‘enemy’ and provides operational commanders with tools to conceptualize both their enemies and themselves for the purpose of designing suitable campaigns,” wrote a former OTRI member.38

Canadian Army officer L. Craig Dalton, who interviewed Naveh in 2006, described SOD as an “intellectual exercise that draws on the creative vision, experience, intuition, and judgment of commanders to provide a framework for the development of detailed operational plans.”39 For this new design, Naveh drew heavily on terminology from “post modern French philosophy, literary theory, architecture and psychology.” An IDF general explained SOD in the following way:

This space that you look at, this room that you look at, is nothing but your interpretation of it. Now, you can stretch the boundaries of your interpretation, but not in an unlimited fashion, after all, it must be bound by physics, as it contains buildings and alleys. The question is, how do you interpret the alley? Do you interpret the alley as a place, like every architect and every town planner does, to walk through, or do you interpret the alley as a place forbidden to walk through? This depends only on interpretation. We interpreted the alley as a place forbidden to walk through, and the window as a place forbidden to look through, because a weapon awaits us in the alley, and a booby trap awaits us behind the doors. This is because the enemy interprets space in a traditional, classical manner, and I do not want to obey this interpretation and fall into his trap. Not only do I not want to fall into his traps, I want to surprise him! This is the essence of war. I need to win. I need to emerge from an unexpected place. . . . This is why we opted for the methodology of moving through walls. . . . Like a worm that eats its way forward, emerging at points and then disappearing.40

For the IDF, the major problem with SOD was the new terminology and methodology. Not every officer in the IDF had the time or the inclination to study postmodern French philosophy. It was questionable whether the majority of IDF officers would grasp a design that Naveh proclaimed was “not intended for ordinary mortals.”41 Many IDF officers thought the entire program elitist, while others could not understand why the old system of simple orders and terminology was being replaced by a design that few could understand.42

After several alterations and revisions, the new IDF doctrine was endorsed and signed by the new Chief of the IDF General Staff, Lieutenant-General Dan Halutz, in April 2006. Halutz was the fi rst IAF officer ever appointed Chief of the IDF General Staff. On the first page of the document, Halutz wrote, “Familiarity with and use of the concept of operation are the key to our success in warfare, in which the only option available is victory. Therefore, the commanding offi cers of the IDF must understand, assimilate and implement what is written there when they call their forces into action and prepare them for their goal.”43 It is possible that not even Halutz understood the new doctrine he endorsed and signed. Naveh explained that the “core of this document is the theory of SOD.”

[p. 37]

Halutz convinced Olmert and Peretz that Israel should strike back against Hezbollah and the Lebanese central government with a substantial air campaign. The plan was not designed to directly or fully crush Hezbollah’s capabilities but to produce “effects” that would force Hezbollah out of southern Lebanon and cause them to disarm.14 Halutz proposed an immense air strike against “symbolic” Lebanese targets and Hezbollah’s military resources. The plan also called for targeted strikes against Hezbollah’s military and political leadership. “His idea,” Naveh stated, “was that . . . we hit all these targets [and] Hezbollah will collapse as a military organization. No one really believed that the Lebanese government was in position to really pressure Hezbollah. The idea was that Hezbollah would give up and then everybody would go home happy. Again, the idea was to change something in the equation; to change the conditions by forcing them to become political and abandon the military option.”15 Hezbollah, however, had prepared for an effects-based campaign, and the Lebanese government was too weak and incapable of challenging Hezbollah. There was simply no lever to pull that would cause Hezbollah to crumple.16

While some Israeli politicians and IDF officers were skeptical of Halutz’s campaign plan, he failed to effectively address or present their doubts to Olmert and Peretz. The Winograd Report maintains Halutz did not reveal substantial deficiencies in the ground forces that may well thwart the success of their mission. Furthermore, he did not adequately address the fact that the military’s own assessment indicated ground operations would most likely be warranted.17

The stage was now set to reveal to the world what one Israeli writer described as “a witches brew of high tech fantasies and basic unpreparedness.”18 …

[p. 45]

… A general on Hulutz’s staff told a reporter on 22 July that “The goal is not necessarily to eliminate every Hezbollah rocket. What we must do is disrupt the military logic of Hezbollah. I would say that this is still not a matter of days away.” Many ground commanders were stunned by the remark and questioned the true aims of the war.10

On the same day the IDF reserve forces were called to duty, Israel was forced to request an emergency resupply of precision-guided missiles from the United States. In 10 days, the IAF had used up most of its high-tech munitions, and yet, this huge expenditure of weaponry did little to change Hezbollah’s “military logic” or its fighting capability. Mossad was already gathering information to leak to the press on 28 July, indicating “Hezbollah had not suffered a significant degradation in its military capabilities, and that the organization might be able to carry on the conflict for several months.”11

… Hezbollah Secretary- Undeterred by the failure of the air campaign and stiff Hezbollah resistance, Halutz and his staff continued efforts to secure a “consciousness of victory” and to deliver to Hezbollah a “cognitive perception of defeat.” …General Nasrallah had delivered his well-known victory speech in Bint Jbeil after the 2000 Israeli withdrawal from Lebanon. Halutz asserted that capturing the town would prove symbolic and “create a spectacle of victory.” This “spectacle of victory” was undoubtedly designed to effect the cognitive perception of Hezbollah. In the end, however, the battle for Bint Jbeil would have a great deal more effect on the Israeli public’s perception of the IDF’s professionalism and judgment.13 …

… Halutz ordered Adams to “conquer Bint Jbeil” with just one battalion. Adam was infuriated and quickly reminded his commander that “the casbah [old quarter] of Bint Jbail alone contained more than 5,000 houses. And you want me to send in one battalion?” …

[p. 50]

By 5 August, the IDF had approximately 10,000 soldiers in southern Lebanon. In three weeks of war, the ground forces managed to penetrate no farther than four miles. Remarkably, the border zone remained unsecured, as were the towns of Maroun al Ras and Bint Jbeil.34 Yet, the entire Hezbollah force south of the Litani consisted of only 3,000 fighters. Unlike the IDF, Hezbollah did not call on its sizable reserve forces and chose to fight the entire war south of the Litani with its original force of 3,000 men.35 For Israel and the IDF, there was still no “spectacle of victory” or any sign of Hezbollah’s impending defeat. …

… Knowing full well that the war would be over in days and the old border reestablished, Olmert and Peretz made the decision to expand the 52 war effort by ordering their divisions north to the Litani. It was perhaps one of the most bizarre episodes of the war. While the reasoning for the offensive maneuver remains clouded, the move was clearly not designed to annihilate Hezbollah. Ron Tira was certain that “at no point was an order given to systemically and comprehensively deal with the rockets or Hezbollah.”40 It would appear that the IDF was still following Halutz’s “raid” strategy, albeit this time with divisions instead of battalions and brigades.41 Senior IDF officers would later state that the operation was designed as a “Battle of Awareness against Hizbollah.” Others thought the operation was designed as “a kind of show designed to demonstrate to Hizbollah who is the Boss.”42

I’m guessing that my long-term readers have been driven to nausea from my endless ruminations on Lebanon. However, this will go a long way to explaining future US policy shifts away from Israel.

The INSS is presumably a respected and connected part of the Israeli nonprofit think-tank apparatus. While Dan “Derrida” Halutz may have been thrown on his sword, the intellectual arrogance exemplified by Halutz continues to rule Israeli strategy in Halutz’s stead. Not only that, but Israeli commentators (beyond this one) have the chutzpah to blame the United States for such dereliction!

In other news, Sayyid Hassan Nasrallah today gave his blessing to “all the resistance fighters in Iraq.” Including, presumably, al Qaeda.

Here’s to Israel.

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via

Sunday night, May 11, the Israeli army was poised to strike Hizballah. The Shiite militia was winding up its takeover of West Beirut and battling pro-government forces in the North. When he opened the regular cabinet meeting Sunday, May 11, prime minister Ehud Olmert had already received the go-ahead from Washington for a military strike to halt the Hizballah advance. The message said that President George W. Bush would not call off his visit to Israel to attend its 60th anniversary celebrations and would arrive as planned Wednesday, May 14 – even if the Israeli army was still fighting in Lebanon and Hizballah struck back against Tel Aviv and Ben-Gurion airport.

American intelligence estimated that Hizballah was capable of retaliating against northern Israel at the rate of 600 missiles a day.

Olmert, defense minister Ehud Barak and foreign minister Tzipi Lvini, the only ministers in the picture, decided not to intervene in Lebanon’s civil conflict. Iran’s surrogate army consequently waltzed unchecked to its second victory in two years over the United States and Israel.

DEBKAfile’s US and military sources disclose the arguments Washington marshaled to persuade Israel to go ahead: Hizballah, after its electronic trackers had learned from the Israel army’s communication and telephone networks that not a single troop or tank was on the move, took the calculated risk of transferring more than 5,000 armed men from the South to secure the capture of West Beirut.

This presented a rare moment to take Hizballah by surprise, Washington maintained. The plan outlined in Washington was for the Israeli Air force to bombard Hizballah’s positions in the South, the West and southern Beirut. This would give the pro-government Christian, Sunni and Druze forces the opening for a counter-attack. Israeli tanks would simultaneously drive into the South and head towards Beirut in two columns.

1. The western column would take the Tyre-Sidon-Damour-Beirut coastal highway.

2. The eastern column would press north through Nabatiya, Jezzine, Ain Zchalta and Alei.

Sunday night, Olmert called Lebanese prime minister Fouad Siniora and his allies, the Sunni majority leader Saad Hariri, head of the mainline Druze party Walid Jumblatt and Christian Phalanges chief Samir Geagea and informed them there would be no Israeli strike against Hizballah. Jerusalem would not come to their aid.

According to American sources, the pro-Western front in Beirut collapsed then and there, leaving Hizballah a free path to victory. The recriminations from Washington sharpened day by day and peaked with President Bush’s arrival in Israel.

Our sources report that, behind the protestations of undying American friendship and camaraderie shown in public by the US president, prime minister and Shimon Peres, Bush and his senior aides bitterly reprimanded Israel for its passivity in taking up the military challenge and crushing an avowed enemy in Lebanon.

While the president was busy with ceremonies and speeches, secretary of state Condoleezza Rice and national security adviser Stephen Hadley took Israeli officials to task. Hadley in particular bluntly blamed Israel for the downfall of the pro-Western government bloc in Beirut and its surrender to the pro-Iranian, Pro-Syrian Hizballah. If Israeli forces had struck Hizballah gunmen wile on the move, he said, Hassan Nasrallah would not have seized Beirut and brought the pro-government militias to their knees.

One US official said straight out to Olmert and Barak: For two years, you didn’t raise a finger when Hizballah took delivery of quantities of weapons, including missiles, from Iran and Syria. You did not interfere with Hizballah’s military buildup in southern Lebanon then or its capture of Beirut now.

IDF generals who were present at these conversations reported they have never seen American officials so angry or outspoken. Israel’s original blunder, they said, was its intelligence misreading of Hizballah’s first belligerent moves on May 4. At that point, Israel’s government military heads decided not to interfere, after judging those moves to be unthreatening.

The Americans similarly criticizes Israel for letting Hamas get away with its daily rocket and missile attacks on Israel civilians year after year. A blow to Hizballah would have deterred Hamas from exercising blackmail tactics for a ceasefire. In Sharm el-Sheikh Sunday, May 18, President Bush called on Middle East countries to confront Hamas and isolate terror-sponsors Iran and Syria.

Familiar fecklessness, indeed. We now know what the “miscalculation” was — the pro-Western Lebanese banked on Israel to back them up. But no: Olmert has an election to win. If Lebanese Sunni and Druze, and American soldiers in Iraq, need to die because because Jewish boys are just too precious… well, that’s the problem of the goyim, not the Jews, right? This will not be forgotten.

At least Rice doesn’t have her head as deep in the sand as I thought.

Either Israel knifed us–big time–or the Israeli government’s corrosive dereliction, entitlement mentality , and serial incompetence have infected the core of their intelligence apparatus.

Oh, yeah–it also shows whom Bush was really referring to in his “appeasement” speech last week. Definitely not Obama, probably not Carter, absolutely Olmert.

I guess the Israeli media is too stupid and/or sycophantic to point out that “inconvenient truth.” A democracy at face value only, indeed.

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The credit crisis has separated true libertarians from phony libertarians, and separated true liberals from phony liberals.

The phony liberals have inadvertently mocked themselves throughout the entire credit crisis, manning the barricades to defend the greatest act of socialism for the rich in US history. Ditto for supposed “libertarians,” eg Robert Rubin, Bruce Kovner, and the vast majority of institutional Wall Street which found itself drowning in its own quagmire, and changed their tune faster than you can say “WTF.”

Anyway, here’s the link.

The editorial in question is by Robert J. Shiller, who is a professor of economics and finance and famous analyst of speculative bubbles. A specialist in behavioral economics, in the application of psychology to understanding financial markets. A co-founder of Case Shiller Weiss, that house price index we talk about a lot. His editorial, “The Scars of Losing a Home,” speaks not of lofty academic economic concepts but of human sympathy, of things that are “really important.” With references from famous academic psychologists. I haven’t taken this kind of a tiger by the tail since I went after Austan Goolsbee last year.

Yes, it was only a year ago that the distinguished Dr. Goolsbee wrote this on the same editorial page:

And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.

When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.

For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.

I actually think Goolsbee’s piece was the high-water-mark of the “subprime helps the poor” talking point. You certainly don’t hear much about that these days. Less than two months after Dr. Goolsbee’s earnest op-ed, we got an interview in the very same NYT with one Bill Dallas, CEO of the famously defunct Ownit Mortgage, effusively testifying to his own burning desire to help out the unfortunate in a way that finally put paid to the respectability of that line (“‘I am passionate about the normal person owning a home,’ said Mr. Dallas, who is also chairman of the Fox Sports Grill restaurant chain and manages the business interests of the Olsen twins. ‘I think owning a home solves all their problems.'”) Plus by now we’ve got some numbers on the 2007 mortgage vintage, the one that Dr. Goolsbee was afraid wasn’t going to ever materialize if we tightened up lending standards too much. A year ago we were looking at a 13% subprime ARM delinquency rate. Per Moody’s (no link) the Q4 07 subprime ARM delinquencies were running 20.02%. And that is not, you know, “just” another 7%. By now, those delinquent borrowers in Goolsbee’s 13% have probably mostly been foreclosed upon and are off the books. The 20% or so who are now delinquent were either part of the 87% that Goolsbee thought were “successful homeowners” last year, or else they’re those lucky duckies who bought homes after the publication date of Goolsbee’s plea that we not tighten standards too much.

Of course Shiller wasn’t exactly spending his time a year ago defending the subprime mortgage industry on the grounds that it put poor and minority people into ever-so-humble homes with balloons attached. I seem to recall him mostly arguing that homebuyers were engaged in a speculative mania. In a June 2007 interview:

Well, human thinking is built around stories, and the story that has sustained the housing boom is that homes are like stocks. Buy one anywhere and it’ll go up. It’s the easiest way to get rich.

At the time, that kind of statement struck some of us, at least, as not possibly the entire story either, but in any event a useful corrective to the saccharine silliness of the “Ownership Society” and Bill Dallas solving everyone’s problems by letting them put Roots in a Community (for only five points in YSP).

So I hope I can be just a tad startled by the New Shiller:

Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.

MAYBE that’s why President Bush’s “Ownership Society” theme had such resonance in his 2004 re-election campaign. People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.

So it’s no longer irrational exuberance or plain old speculating; it’s now an instinctive affirmation of some eternal verity of the human psyche? The ultimate patriotism: the definition of self so tied up in ownership of a slice of the motherland that to rent becomes not only psychologically dangerous–these people without selves can’t be up to anything good–but politically dangerous as well? Is it possible that Shiller can mean what he is writing here?

If you just scanned the first few paragraphs of Shiller’s op-ed you might come away with the impression of a sincere but somewhat hackneyed plea for us all to have a bit of sympathy for the foreclosed among us, foreclosure not in anyone’s experience being a walk in the park. Fair enough. It being Sunday in America, I suspect millions of us are being treated to exhortations to take a kinder view of the unfortunate than we often do; we need those exhortations; we are often lacking in sympathy. Hands up all who disagree.

But you keep reading and you find Shiller trying to explain the “trauma” of foreclosure. And that’s where this really gets weird:

Now, let’s take the other perspective — and examine some arguments against the stern view. They have to do with the psychological effects of strict enforcement of a mortgage contract, and economists and people in business may need to be reminded of them. After all, too much attention to abstract economic statistics just might make us overlook what is really important.

First, we have to consider that we cannot squarely place the blame for the current mortgage mess on the homeowner. It seems to be shared among mortgage brokers, mortgage originators, appraisers, regulatory agencies, securities ratings agencies, the chairman of the Federal Reserve and the president of the United States (who did not issue any warnings, but instead has consistently extolled the virtues of homeownership).

Because homeowners facing foreclosure must bear the brunt of the pain, they naturally feel indignation when all of these other parties continue to lead comfortable, even affluent lives. Trying to enforce mortgage contracts may thus have a perverse effect: instead of teaching homeowners that they should respect the contracts they sign, it may incline them to take a cynical view of the whole mess.

We need to modify mortgage contracts to keep homeowners from becoming cynical? That’s somehow more respectable an idea than the one saying we should throw them out on the street to “teach them a lesson”? If Shiller is serious that all those other parties are “to blame,” then why isn’t the obvious solution to throw them out on the street? There seems to be an assumption here that nothing can be done to punish those who are “really” to blame, so we’re left managing the psyches of those who can be punished. And that’s not cynical?

This the point at which Shiller dredges up the most stunningly unfortunate quote from William effing James (1890) to define the “fundamental” psychology of homeownership:

Homeownership is fundamental part of a sense of belonging to a country. The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”

Now, that’s breath-taking. Horses. Yachts. His wife and his children. Ancestors. The whole late-Victorian wealthy male WASP defining the “Self” (with a capital!) as the wealthy male WASP surveying his extensive possessions, an oddly-assorted list that ranks the family and friends somewhere after the clothes and the house. (Yes, James did that on purpose.) The kind of sentiment that was a caricature of the late-Victorian male even in 1890. And Shiller drags this out in aid of generating sympathy for homeowners? Really? You couldn’t find some psychological insight about the emotional relationship of people to their homes that doesn’t speak the language of the male ego surveying his domain, sizing himself up against all the other males to see where he ranks?

(James on the psychological effect of losing one’s property: ” . . . although it is true that a part of our depression at the loss of possessions is due to our feeling that we must now go without certain goods that we expected the possessions to bring in their train, yet in every case there remains, over and above this, a sense of the shrinkage of our personality, a partial conversion of ourselves to nothingness, which is a psychological phenomenon by itself. We are all at once assimilated to the tramps and poor devils whom we so despise, and at the same time removed farther than ever away from the happy sons of earth who lord it over land and sea and men in the full-blown lustihood that wealth and power can give, and before whom, stiffen ourselves as we will by appealing to anti-snobbish first principles, we cannot escape an emotion, open or sneaking, of respect and dread.”)

I’m actually, you know, in favor of some sympathy for homeowners, but one thing that does get in the way of that for a lot of us is, well, the rather disgusting shallowness that a lot of them displayed on the way up. There is this whole part of our culture that has sprung into being since 1890 that takes a rather severe view of conspicuous consumption, unbridled materialism, and totally self-defeating use of debt to buy McMansions, if not yachts. We were treated to a fair amount of that kind of thing in the last few years. In fact, we had Dr. Shiller explaining to us last year that a lot of folks just wanted to get rich, quick, in real estate.

It is undeniably true, I assert, that not everyone was a speculatin’ spend-thrift maxing out the HELOCs to buy more toys, and that part of our problem today with public opinion is that we extend our (quite proper) disgust for these latter-day Yuppies to the entire class “homeowner.” But it is surely an odd way to engage our sympathies for the non-speculator class to speak of it in Jamesian terms as the man whose self is defined by his Stuff, and whose psychological pain is felt most acutely when he recognizes that he is now just like the riff-raff.

It’s worse than odd–it’s downright reactionary–to then go on to that evocation of homeownership as good citizenship and good citizenship as “feel[ing] at one with [the] country.” This puts a rather sinister light on Shiller’s earlier insistence that we need to make sure people don’t get too “cynical.”

I see that Yves at naked capitalism was just as disgusted by Shiller as I am:

Now admittedly, this is not a validated instrument, but a widely used stress scoring test puts loss of spouse as 100 and divorce at 73. Foreclosure is 30, below sex difficulties (39), pregnancy (40), or personal injury (53). Change in residence is 20.

Note that if we as a society were worried about psychological damage, being fired (47) is far worse than foreclosure (30), and if it leads to a change in financial status (38) and/or change to a different line of work (36) those are separate, additive stress factors. Yet policy-makers have no qualms about advocating more open trade even though it produces industry restructurings that produce unemployment that does more psychological damage than foreclosures. As a society, we’ll pursue efficiency that first cost blue collar jobs, and now that we’ve gotten inured to that, white collar ones as well (although Alan Blinder draws the line there).

But efficiency arguments don’t apply to housing since we are sentimental about it. And it’s that sentimentality that bears examination, since it engendered policies that helped produce this mess.

I would only add that we are about five years too far into a war that has not made a majority of us “feel at one with that country.” I think of another really important policy change we could be pursuing right now to shore up everyone’s psychological estrangement from their patriotic self-satisfaction. But “efficiency arguments” don’t apply to wars, either.

My fellow bleeding heart liberals like Goolsbee found themselves defending the subprime industry in the name of increasing minority homeownership. Now we’re treated to the spectacle of Shiller arguing for homeowner bailout legislation in the same terms that Bush used to defend the “Ownership Society.” Housing policy, I gather, makes strange bedfellows. It certainly makes strange editorials.

Shiller’s unwitting self-parody embodies the principle at the heart of the TAF and every other tentacle of the Wall Street bailout. Far more than “economist statistics which can cause us to lose sight of what’s really important,” what’s REALLY important is protection of those Selves which include “lands and horses, and yacht and bank account.”

You can *not* make this stuff up.

Pardon my French, but our economy is being run by f*cking idiots.

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