Tuesday 30 September 2008

Errata in Michael Moore’s polemic against the Emergency Economic Stabilisation Act

Michael Moore provides five criticism of the $ 700 billion Emergency Economic Stabilisation Act of 2008. It is strange, to say the least, that these reasons are chosen, given that there is so much evidence in the Act to the contrary.

I also wonder at his contention that “Of course, sane people know that nobody "lost" anything yesterday..” Is Mr. Moore not aware of that there are at least 60 million US holders of Individual Retirement Accounts and 401(k) plans which are heavily invested in stock market equities? Is he not aware that a significant share of pension assets held by CALPERS, various state and university endowment and other funds is in the stock market? Is it such a light thing to wipe off $ 1.2 trillion in value?

But let’s leave philosophy aside and get to the facts of his argument. Moore claims that:

1. The bailout bill had NO enforcement provisions for the so-called oversight group that was going to monitor Wall Street's spending of the $700 billion;

2. It had NO penalties, fines or imprisonment for any executive who might steal any of the people's money;

3. It did NOTHING to force banks and lenders to rewrite people's mortgages to avoid foreclosures -- this bill would not have stopped ONE foreclosure!;

4. It had NO teeth anywhere in the entire piece of legislation, using words like "suggested" when referring to the government being paid back for the bailout;

5. Over 200 economists wrote to Congress and said this bill might actually WORSEN the "financial crisis" and cause even MORE of a meltdown.

On the first four points, he is wrong:

1. Enforcement
The Act has sufficient enforcement oversight mechanisms, including the following:

a. The Financial Stability Oversight Board is established, comprising the Chairman of the Federal Reserve, the Secretary of the Treasury, the Director of the Federal Home Finance Agency, the Chairman of the Securities and Exchange Commission and the Secretary of the Department of Housing and Urban Development.

b. The Secretary of Treasury is required to report every 60 days, and for every tranche of $ 50 billion spent.

c. All transactions are to be reported within 48 hours.

d. The Secretary is authorised to draw down only $ 350 billion in the first tranche.

e. The Comptroller General is required to report every 60 days, implement an annual audit and develop monitoring mechanisms.

f. An Office of the Special Inspector General for the Troubled Asset Relief Programme is established to further inspect and monitor TARP’s actions.

g. A Congressional Oversight Panel is also established to monitor TARP every 30 days.

h. The Act enables the FDIC to take enforcement action “against any person or institution where the banking agency has not acted, and requires cooperation with the FBI and other law enforcement agencies.

i. The Government Accounting Office (GAO) is given space and oversight capacity within the facilities of the Department of Treasury to monitor the Act. This is in line with SEC regulatory practise.

Section 104 gives the Oversight Board the specific responsibility to “report[e] any suspected fraud, misrepresentation, or malfeasance to the Special Inspector General for the Troubled Assets Relief Program or the Attorney General of the United States, consistent with section 535(b) of title 28, United States Code.” The Board is also responsible for appointing a credit review committee for the specific purpose of evaluating the purchase authority and the assets acquired through the exercise of such authority.

This is fully in line with US government law, and operates in the same way that Congress provides an oversight function of Federal Government spending. It is simply not true that there are no enforcement provisions.

2. Penalties
The Oversight Board is able to take criminal action against executives who improperly profit from TARP. Note that Moore uses the term “steals”: if this is the case, the issue will be handled by the Attorney General or the FBI, as per US law.

Section 101 (e) requires the Secretary to take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset.

Section 111 restricts executive pay, in particular the use of Golden Parachutes, as a further means of enrichment.

3. Foreclosures
The argument that there are no specific provisions to minimise foreclosures is absolutely untrue:

Section 110: “For mortgages and mortgage-backed securities acquired through TARP, the Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs. Allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures. Requires the Secretary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present value to the taxpayer.”

Section 110 “Requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency, the FDIC, and the Federal Reserve to develop plans to minimize foreclosures. Requires federal entities to work with servicers to encourage loan modifications, considering net present value to the taxpayer.”

Section 124. “Strengthens the Hope for Homeowners program to increase eligibility and improve the tools available to prevent foreclosures.”

4. No Teeth
This is absurd. The language of the Act is filled with specific provisions, using languages like “requires,” “audits,” “must implement,” etc.

Furthermore, Mr. Moore ignores the provision of Section 134, which “Requires that in 5 years, the President submit to the Congress a proposal that recoups from the financial industry any projected losses to the taxpayer.”

This means that any losses incurred from lower asset prices will be refunded by the financial industry, most probably through a special tax.

I’m not going to respond to his fifth comment, except to say that (a) there will be inevitable policy disagreements with policy initiatives of this sort, and (b) recommendations on alternatives – such as direct injections of capitalisation into the banking system or nationalisation following the Swedish model are impossible in the current business climate and culture of this country.

To conclude: I’m rather surprised Michael Moore is this far off base. I can only presume that he didn’t read the plan, or is not aware of how the division of powers between the executive, judicial and legislative branches of the US government work. The alternative is that there is some bizarre political motivation to his writing, which given the current state of financial markets, is absolutely inappropriate.

The upside of $ 700 billion – and what you should be worried about

The decision of the US House of Representatives to vote against the Emergency Economic Stabilisation Plan caught me mildly by surprise. I wonder if those representatives voting against the plan have really understood what it’s about. I’ve long since given up hope that Michael Moore has.

The $ 700 billion rescue package is not a “bailout” of Wall Street banks, as widely recounted. The US Government is getting assets for its money. By purchasing mortgage-backed securities, the government is receiving the title deed to houses, and/or the homeowner cash flow that pays for them. This is a hard asset, albeit a discounted one at the current moment.

We know that the problem with these securities is that they bundle mortgages of varying value and payment condition. For instance, consider a $ 150 million mortgage-backed security comprising 1,000 mortgages with an average value of $ 150,000 each. Of these mortgages:

· perhaps 17-25% are non-performing mortgages which have been or are in the foreclosure process

· perhaps a further 13-17% have delayed payments

The remainder are functioning mortgages, providing a steady, predictable income stream.

This is what the US government will be getting: either a future income stream, or a future asset value, because it is purchasing mortgages, i.e. title deeds to houses. It’s not just giving money for free to investment banks, as some commentators apparently believe.

Now, why is this a particular problem for banks? Because of three reasons:

(a) The main reason is that by law, commercial banks need a Tier 1 and Tier 2 capital ratio of 8%. That means that for every $ 100 they’ve lent, they need $ 8 in actual assets or cash reserves. Mortgages (and mortgage securities) have been used as part of this capital, but with the fall in housing prices and the write-down in property values, they are a declining asset. The problem, however, is not so much making up the difference of capitalisation, it’s that in an environment where panic dominates in the markets, one bank will not lend to another, IPOs don’t take place, and in general all assets are under question.

(b) The second, equally important reason is that if lending does not re-start, it’s not just banks which will be affected, but ordinary people and “real economy”: businesses looking for a car loan, working capital, or any other financial transaction.

(c) The third reason is that the more banks go out of business, the greater the turbulence in the derivatives market. More on this later.

In my opinion, the US government has a strong chance of fully recovering the full $ 700 billion in securities purchases. Why? Because the housing market will eventually recover, perhaps in 18-48 months (depending on the area). Don’t forget that the US population is growing, and that recessions have tended to be short-lived in recent decades.

As the property market recovers, the government will be able to sell off the mortgages or the assets (houses) they finance. This has happened a number of times before, both with real estate as well as other asset classes, and there is no reason it will not happen with this situation.

There are definitely flaws with the current plan. Given the Bush Administration’s propensity for favouring special interests, the main open question is one of value: what value will the government buy at, and what value will it sell at. Congressional, bipartisan oversight was supposed to address this, but in my opinion this oversight often does not work in practice – as current events show us.

Now, what should the average investor (and citizen) really be worried about? This crisis has cast at least three philosophical assumptions under grave doubt:

1. Assumption # 1: Equity Investments and Retirement
The sacred cow of US politics has been the end of the defined-benefit pension and the rise of retirement assets invested in equities. The 401(k) is the typical expression of this, but there are any number of others. We should make no mistake in underestimating the gravity of this problem. Some 79 million American baby boomers are set to retire in the next 30 years. Some estimates of unfunded pension and healthcare liabilities exceed $ 200 trillion, or over 13 times US GDP.

We cannot expect a financial system in which large-scale risk of the type posed by sub-prime mortgages and highly-leveraged hedge fund trading offers enough security for a pension system based on equity investments. If this is the case, a key Republican (and Democratic) platform is rendered logically inconsistent. In turn, this means two options:

(a) Either an entirely new set of safeguards needs to be built into the system to assure that pension assets cannot be used to leverage derivatives, equities and real estate trading, or

(b) We need to build up Social Security, Medicare and Medicaid, so that they are capable of serving as the “pension of first resort” (and healthcare plan) for the growing cohort of American retirees. This will require a massive fund injection, which the US government does not currently have.

In any case, we need to stop the hypocrisy that privatising Social Security will solve the problem – recent events this past decade indicate that it won’t.

2. Assumption # 2: Self-Regulation
The principle of a self-regulating system is self-restraint. Unfortunately, this can no longer be considered natural given the large amounts of money chasing bonus opportunities for bankers and other traders. Consider that:

(a) There is someevidence to suggest that many senior investment executives or credit risk managers do not fully understand the quantitative models being deployed by the under-30 rocket scientists they employ.

(b) The fact that there is no central derivatives register makes counterparty risk impossible to quantify.

(c) Leverage ratios of between 10 - 50 are common in a number of trades and strategies. The fact that investment banks are prime brokers to hedge funds provides an immediate conflict of interest between (a) lending, and (b) risk assessment.

(d) The extensive use of Special Investment Vehicles and other off-balance sheet mechanisms makes credit rating difficult to evaluate. Given the high speed of most market trading, credit rating would have to be implemented every 2-3 hours to be accurate: this is clearly impossible.

Given that greed is a human characteristic as old as the human race, it is highly likely that the equities market, i.e. the Stock Exchange, needs to be “decoupled” from the professional investment market. This may sound like a paradox, but remember that the fundamental purpose of a corporate stock market listing is to gain capital in the form of outside shareholders. This should be a transparent, well-regulated process, particularly after the Sarbanes-Oxley Act.

What we may need to do is create a separate system of regulating and managing hedge funds, investment banks, equity funds, traders and everyone else trading primary shares for profit. Don’t forget, it’s the speculative trading side of operations that has caused nearly all the major stock market crashes in recent history, from the 1987 Savings and Loan collapse to the 1997-1998 emerging market defaults to the 2001 dot com crash to the current sub-prime collapse.

None of these crashes has anything to do with the “real economy.” In the real economy, the share valuation of the company reflects assumptions about its future cash flow and profits, as well as an evaluation of sectoral and global competitiveness. Acceptable financial ratios and indicators exist which, together with international accounting standards and financial reporting, provide a transparent basis on which investors can make decisions. In no case to short-selling or SIVs or leverage ratios of 50 or more contribute to the long-term, sustainable growth of the economy.

Similarly, the real estate / property development sector can equally be analysed from the perspective of investment valuation and risk, either at the individual or corporate level. This is not a terribly difficult process: the question is why sub-prime and Alt-A mortgages were offered (or purchased in CDOs) in the first place by institutions who should have known better. The answer is quite simple, and that brings us back to greed.

The problem is that the amounts of money in the system are simply astronomical, and many people are dining at the table: bankers, quants, politicians, realtors, foreign investors, pension fund officers – everyone. As long as the financial sector remains a main source of campaign contributions to the Democratic and Republican parties and candidates, don’t expect to see substantial change. Sarbox was supposed to deal with issues like off-balance sheet entities after Enron: now they’re back, under a different name. Can anyone explain why?

Assumption # 3: $ 700 billion is sufficient for the total debt workout
It’s not. The mess left behind by sub-prime and Alt-A mortgages is only the tip of the iceberg. Don’t forget: the total [sliding] value of US mortgages is about $ 11 trillion. Sub-prime and Alt-A in total are estimated at perhaps $ 1.2 – 1.5 trillion. Not all sub-prime and Alt-A mortgages are underwater. The financial sector has already written down at least $ 650 billion related to sub-prime loans. So the end is in sight.

The problem is not the loans themselves, but hedge fund strategies based on the loans. Quite simply:

· Sub-prime/Alt-A loan write-downs reduce bank capitalisation;

· Banks cannot get more capital; their stock market valuation falls;

· Other highly leveraged or highly valued companies start to decline (e.g Apple, Dell, General Electric, General Motors);

· Hedge fund strategies on the one hand accelerate the decline by betting against a stock (shorting it); other funds suffer because their models may not have taken such rapid falls in value.

Result? Financial chaos. With highly leveraged bets going wrong, a hedge fund with $ 7 billion under management and a 10-1 leverage ratio that makes the wrong bet and loses, doesn’t risk only the $ 7 billion in asset value, but $ 70 billion in leverage. Given that total derivate contracts are estimated at $ 62 trillion, you get an indication of the magnitude of the problem (US GDP, by contrast, is $ 14 trillion).

While $ 700 billion should be adequate for the mortgage crisis, it does not cover the remaining constellation of trades, derivatives and debt out in the market. But unless we address the mortgage issue, we can’t get to the issue of settling the other debt – we merely exacerbate it.

As Geena Davis said in “The Fly,” “Be afraid. Be very afraid.” These problems have been apparent for a long time now, but so far we have allowed ourselves to be seduced by ephemera – a rising stock market, houses that are ATM machines, high executive compensation packages, and generous campaign contributions. Yet we are living in a time of unparalleled demographic, technological and economic change.

The fundamentals of the US economy and the political system that regulates it need to change if it is to compete in this new world. I’m sorry to belabour the obvious, but I haven’t yet seen a commitment or indication from either Presidential candidate that they understand these changes and have a plan to address them. Plans like health care, withdrawing from Iraq or investing in solar power are all interesting, but in many ways these are policies that address symptoms, not root causes.

Unfortunately, with the system of legislative development, lobbying and campaign finance being what it is, I do not anticipate major changes in US foreign or domestic policy that will bring about the conditions needed for long-term success. Maybe the system will muddle through and heal itself. In my opinion, however, the chances of this decline increase with each year that educational achievement falls and complexity and national debt rise. These are clear and evident symptoms of a lasting decline, and unfortunately I don’t see a plan to reverse them.

Saturday 27 September 2008

Οι αρχαίοι ακόμη δουλέυουν για μας

I usually fly to work, and as a result spend a lot of time listening to taxi drivers, coming or going to an airport: Athens, Larnaka, Kiev, Donetsk, Moscow, Paris … This isn’t something I’m particularly proud of, but it does make for some interesting commentary. Last night, returning from Athens International Airport after midnight and a really tough trip, the driver said something that stuck in my mind.

We were talking about what had changed in the week since I left Athens, and this of course branched into a philosophical discussion of Greece, its politicians and its problems. He said something which I can’t forget:

Οι αρχαίοι ακόμη δουλέυουν για μας. “The ancients are still working for us.”

He meant all those great figures that made Greece: Themistocles, Pericles, Leonidas, Phidias, Callikrates, Herodotus, Homer. Why else does the story of Leonidas’ stand at Thermopylae still resonate today? Why do millions visit the Parthenon and Delphi every year? Why do doctors take the Hippocratic Oath? Why do we still read Socrates or run the marathon race?

Unfortunately, much of what we have created since then pales in significance, meaning and endurance. I very much doubt that any modern TV series or political speech will last as long as the words of Demosthenes, Sophocles or Pericles. Our natural landscape is desolated by fire and drought when it is not blighted by garbage and ill-planned urbanisation. Our politicians are figures of inspiration only for those craven few who seek public sector employment or government contracts, and neither their fame nor their utility last.

My own philosophy is that we should do as much as we can to leave this place a better one than we found it. We all have personal responsibility for how we live: how we dispose of our garbage, how we drive, how we communicate, what we consume, and how we educate our children.

I also believe that as inheritors of this civilisation, we should be working twice as hard, even more, to honour all those who have gotten us to this point. For me this is above all a profoundly personal commitment. It’s why I choose to live and work here, though all my work is based outside Greece, and could easily be run from an offshore location at much lower cost. It’s also why I try to live my life in line with a few invariable principles of honesty, objectivity, self-reflection and consideration for others.

To sit and wait in the hope that this crumbling edifice of the public sector will actually do anything is futile. Our institutions, political customs, and laws are anachronistic, and do more to ruin public life than help it to flourish. If we want to change anything, we need to start with how we live our own lives, and find those few areas where collective action by well-informed citizens and friends of Greece can lead to a real change.

Back from Rubezhnoye

I returned last last night after a gruelling 13-hour trip back from the corrugated packaging factory in Rubezhnoye, Ukraine where I was working all week. It’s a client we’ve worked with since 2002, and this time my colleague and I were reviewing the implementation of a EUR 151 million business plan, and helping out with a large procurement contract.

Rubezhnoye is a small industrial town located about 150 km NE of Donetsk, near the Ukrainian-Russian border in Lugansk Oblast. It’s not like other cities in Ukraine, where you can find WiFi, western cafes and restaurants, and all the comforts of home. There is no internet, except for a highly overloaded satellite uplink which serves the 50-odd managers in the plant. Accessing any kind of news is impossible, and walking down to the newsstand to buy the Financial Time or Herald Tribune is an option which simply doesn’t exist.

So, after a week without news, I returned to Athens to find – NOTHING HAD CHANGED! Republicans still squabbling with Democrats about the $ 700 billion credit bailout, Obama still sniping away at McCain, who was sniping back: the only news was about whether they would be sniping at each other from the same room, since there was some doubt as to whether the first debate would take place. How anyone can take the two US Presidential candidates seriously on the financial crisis when they’ve taken massive campaign contributions from investment banks and Fannie Mae is beyond me.

In Greece, the Vatopedi scandal, involving an illegal land claim by the Vatopedi Monastery, followed by an even more illegal land swap, was still smouldering. Unfortunately, it looked as though ultimately no one was responsible. I have the feeling that the media in this country are already looking for the next big issue.

In Ukraine, there was some news, but again nothing really new. The Orange coalition had collapsed the week before. My estimate is that Iulia Timoshenko and Viktor Yanukovich will form a caretaker government until sometime next May or September, when conditions will be ripe for an election. Everyone party is scurrying around to raise cash to finance this election. The Gazprom gas price hike looms over everyone, yet nobody knows exactly what will happen – except that most likely, some Ukrainian politicians (and Gazprom) will make money, and Ukrainian citizens and companies will pay for it.

In short, it’s business as usual. Crooked government in the US, Greece and Ukraine. Dishonest or inept politicians across the political spectrum. The intersection of money-rich campaign donors (and even monasteries!) bribing politicians, so they in turn can make yet more money. A depressing state of affairs.

Yet in Rubezhnoye, the real economy continues at speed. A new packaging plant and paper machine are being built that will increase output, creating new jobs and enabling Ukraine to produce new packaging materials, supporting the movement of goods and economic growth. My client pays its taxes, pays its workers competitive salaries, and contributes to the environment: over 80% of packaging material is wastepaper, gathered from recycling points across Ukraine and Russia. Starbucks and Pizza Hut and WiFi may be missing, but life goes on without them, and pretty well, I would say. If only someone could do something about these politicians….

Thursday 18 September 2008

A response to Brendan

Hi Brendan!

Thanks for your comment. I always enjoy receiving your feedback. Here's a partial response to the issues you have raised.

1. Obama’s Health Care Promises
I unfortunately don't believe the Obama Administration will be able to finance its health care plan. At present, Medicare and Medicaid are already creating serious spending problems, as I'm sure you know, even though they are highly flawed systems (in terms of staggered deductibles and lack of government-mandated prices). Although a partial reform of either system would no doubt improve effectiveness, the growing demographic trend of senior citizens and the impending retirement of the baby boomer generation means that there will be a major funding problem in the "paygo" system in the next 25-30 years. Unless, of course, the US admits greater numbers of legal immigrants, increases payroll taxes, increases the minimum wage, or transfers tax income from other revenue sources to pay for these programmes.

Extending public healthcare to the majority of younger and middle aged citizens excerbates the problem, and requires at least three conditions to be successful:

(a) Very high start-up and ramp-up funding commitments, which currently neither the US federal nor state governments have the means to finance given its perilous public debt.

(b) An assumption that the economics of the system work only if employees and insured foresake private sector health insurance, and are content to trade off higher taxes (probably on payroll) in exchange for lower direct insurance costs. In my experience with mandatory public health insurance, most insured are unhappy with the necessity for high mandatory contributions, while they often take out supplemental insurance to cover the gaps in the public system. The US income tax system is already very fragmented and uncompetitive, and the sum total of US taxes (federal and state) are very high. Who is actually going to pay for public healthcare?

(c) A different demographic situation quite unlike the one the United States currently finds itself in. Please look at most objective studies on Social Security, Medicare and Medicaid funding projections, and offset these against the rise of US federal and state debt, and particularly unfunded pension liabilities which may amount to more than $ 200 trillion according to some studies. (The US GDP is currently about $ 14 trillion).

I can do some back-of-the-envelop figures if you will, but not this week (my schedule is really busy at the moment). In the same spirit, however, I would ask you to provide me with one example of a public healthcare system that has been developed in a US state, which has been within budget over the first four years of operation.

No public healthcare initiative that I know of, starting from an equivalent situation to that in which the US finds itself, has ever stayed within its public budget. Launching such a system given the current Federal budget situation and the demographic situation in the next 4-8 years will be financially unsustainable and lead to massive debt which cannot be offset by a reduction in the spending on the Iraq war.

If you like, let's revisit this conversation four years from now and see how the public medical insurance situation in the United States has changed. With your permission, I won’t get into analysing the range of other promises made by either candidate, unless you specifically want me to.

2. Foreign Policy
I believe that no major changes in US foreign policy will be made that will contribute to a fundamental solution to most of the current critical challenges we face, let alone emerging challenges. This is regardless of which candidate is elected in November.

Let's take just four critical issues, and leave issues like Guantanamo Bay aside: Guantanamo Bay is a problem solely determined by US decision-making; real foreign policy problems are not - other actors have a say. It is also not of any material importance: lives will not be saved by closing or relocating Guantanamo, which could not be saved by incarcerating prisoners elsewhere. Such a decision is a uniquely American one to make. It is a distraction, although obviously an unwelcome and unconstitutional one.

There is no long-term US strategy for victory in Afghanistan. There is no vision for what a stable, successful Afghanistan might look like, or how it would interact with its neighbours. There is no understanding of how long this might take (in my opinion, it will take at least one generation, or at least 20 years) or cost. There is no comprehensive, detailed or realistic analysis of the drivers, barriers and scenarios for such a vision, or a strategy for achieving it. If you have seen one, I would be very happy to read it.

Take just one factor: there cannot be victory in Aghanistan without a totally different political, economic and social situation in Pakistan. What solutions for helping Pakistan have you heard from the two candidates? The debate used to be about whether President Musharaf was an effective US ally or not, and currently its whether the US should carry out unilateral attacks within the Tribal Areas or not.

This is symptomatic of an extremely superficial approach: attacks on the Tribal Areas are not going to solve the core problem of Al Quaeda's or the Taleban's fundamental attractiveness as a social-political-religious force. If anything, it will increase that attractiveness, building the Taleban's identity as a movement capable of defeating Pakistani and US military forces.

Take another factor: there is abundant evidence to suggest that one main elements motivating the Taleban has been Pakistan's enmity with India. This has led the ISI to support the Taleban as a "fifth column", a potential source of jihadists against Indian troops in Kashmir.

How many times have you heard either the McCain or Obama campaigns mention Kashmir? What is US official policy on Kashmir? Are the tools chosen by the US government for working with the Pakistani and Indian governments at all conducive to regional stability and solving the Kashmiri problem? How would you address the disparity in the US approval for (and funding of) the Indian nuclear programme, and its official disproval of the Pakistani nuclear programme?

Contrary to popular opinion, I consider it highly unlikely that the US will implement a full withdrawal from Iraq. I fail to see the strategic motive for doing so, particularly given the costs and sacrifices of the past seven years. Please consider:

(a) A full withdrawal from Iraq would prompt an almost certain Iranian takeover of parts of the country, and the collapse/secession of others. This amounts of a vast strategic setback to the United States and its allies, since Iranian presence in the oil-rich, Shia heartland can hardly be beneficial. Should this happen, Iran’s influence over Hezbollah, Hamas and Syria will increase, and new targets for Iranian-backed instability will be created.

(b) A US strategic presence will probably be assured by a long-term force profile of about 35-40,000 troops, spread between Iraq’s territory and neighbouring states. This is subject, of course, to having an Iraqi government that makes the right decisions, which currently cannot be assumed.

(c) Although combat operations will gradually decrease, the key approach in the short term will almost certainly be military. Should Obama fully withdraw from Iraq, and should Iraq collapse, the Democratic party will lose all credibility in the area of foreign policy, perhaps similar to the debacle of the failed Special Forces mission outside Tehran during the Carter administration. The damage to US vital interests will be profound.

The military issue notwithstanding, I ask again: what is the US vision for a stable, successful Iraq? Are there any countries in the Middle East where such a vision is present in reality? What will be the long-term costs of our engagement in Iraq, and what impact will these have on other policy areas. If you have any signs that the Obama or McCain campaigns are thinking seriously about Iraq besides the political issue of military withdrawal, I would appreciate your input.

The major challenge of the incoming administration will be dealing with Iran’s nuclear ambition, which can only be addressed in the context of its broader place in the political, religious and economic framework in the Middle East and SE Asia. This issue cannot be solved militarily, and it certainly cannot be solved through the wishful, short-term thinking currently espoused by successive US administrations, as well as the two campaigns. Please consider only the following factors:

(a) Iran has a history of nearly 3,000 years of Persian culture and history, over which is overlain a more recent history of the Islamic faith and its subset, the Shia interpretation of that faith. This is not going to go away anytime soon, but will remain a powerful motivator for national(istic) political mobilisation, identity-building and engagement.

(b) The history of the last 60 years is, if anything, fuel on the fire in terms of nationalism. The US support for the Shah, the 1953 CIA-led coup d’etat against a democratically-elected government, the rise of Khomeini, the Iran-Iraq war, during which Iranians were killed en-masse by US-provided weapons, including chemical weapons. These events, real and re-imagined, are equally not going to disappear because of a UN or IAEA resolution on nuclear weapons. They are, if anything, a powerful reason why Iran should develop nuclear weapons, in the eyes of a certain part of the population.

(c) Given this past history, and given the US’s overwhelming support for Israel and its undeclared nuclear force, it is the utmost hypocrisy for the US to press for an end to the Iranian nuclear programme. Sad, but true. This is not to say I am in favour of Iran developing nuclear weapons: this thought fills me with horror. But the vapid declarations of successive US administrations, apparently marching in lock-step with the Israeli government and various lobby groups, is not a recipe for success.

(d) Iran is one of the most populous countries in the region, and with its present demographic growth rates will continue into the near future. Its major challenge will remain how to trade off religious extremism and economic growth. Its major political challenge is how to break its encirclement by US military power (Iraq, Afghanistan and the Persian Gulf) to exercise its growing “great power” status/aspiration.

(e) The demographic trends may present the most hope for a future political engagement, and “normalisation”, of Iranian society. The aspirations of the young are very different from the religious-military elites currently in power. Any change in Iran will be a change in the political role of the overwhelmingly younger population, who are concerned with the same issues young people everywhere are: developing their own identity, finding a job and self-respect, experiencing new cultures and influences. Policy tools towards the young and female populations, who are currently excluded from power, should be developed: university exchanges, cultural exchanges, employment opportunities, education, etc. A generational change in perceptions, history and political interaction is required. A bombing campaign will disenfranchise these groups further, and consolidate the current regime’s force through incendiary nationalism.

(f) Iran’s continuing support for Hezbollah and Hamas, and its ability to partner with secular regimes who are both harmful (e.g. Syria) and helpful (e.g. Turkey) to US policy is set to continue. A bombing campaign against Iran will only accelerate this support, since Iran will act in increasingly hostile, covert means.

There needs to be a comprehensive engagement with Iran in order to solve the problem. At this stage, I would argue that the nuclear issue is a non-issue: we have no means of solving the nuclear issue unless we solve the long-term motivating factors which have led Iran to seek nuclear weapons in the first place. The nuclear programme is now a matter of national pride, a last defence against “the Great Satan”, and a potent demonstration of Iranian science and competence.

Does current US policy do anything to solve this issue, besides view the problem through the seductive prism of a military solution? What options do the McCain and Obama campaigns provide, besides blanket statements about Iran’s nuclear weapons?

I’ve left this subject for last. US policy towards Israel remains the single greatest barrier to achieving diplomatic normalcy in relations with the large majority of countries in the Middle East. Israel’s continuing settlement policy, its overwhelming military dominance and willingness to use it in populated areas, the power of its lobbyists in Washington, its treatment of Palestinians and its recent incursion into Lebanon are a barrier to any kind of lasting solution.

The US willingness to back Israel at all costs, even when Israel takes steps that abrogate previous agreements, will cost the US much more in blood, treasure and credibility than we can currently imagine. “What goes around comes around”, I’m afraid to say, and as long as we support policies which are so manifestly detrimental to fundamental human rights and well-being, we should not be surprised when even more dangerous terrorist attacks are unleashed against us.

US foreign policy needs to be re-balanced:

(a) The Arab countries are far greater in importance and population than Israel. A realist foreign policy should focus on developing comprehensive relations with the Arab states, and not only through the prism of weapons sales and oil deals.

(b) US policy towards Israel should be steered away from military assistance towards other forms of assistance. The knee-jerk response of a large annual arms deal needs to be re-thought.

(c) If the US is to be engaged in the peace process, it needs to be a consistently fair partner. The elections in Gaza, for instance, were fully backed by the US: Hamas was elected. When the “Road Map” is repeatedly violated by Israeli settlements, the wall-building and military incursions, Israel needs to be brought to task and there need to be real counter-measures.

(d) A lot more has to be done to support the Palestinian side, either to the elected government or, if necessary, to ordinary people. There are plenty of Palestinians living in the US and Americans of Palestinian descent who would be ideal for this task, and who would be glad to help. Unless the ordinary people “disconnect” from Hamas’ social welfare network, political dominance will pass into the hands of the extremists. What would be the impact on US relations if for every $ 10 given to Israel, $ 10 in non-military aid were given to Palestinian causes?

Until now, both the Obama and McCain campaigns have engaged in the same reflexive bowing and scraping to the AIPAC lobby. There is no new thinking there, no real approach to a comprehensive solution. US foreign policy has been a total failure in this area, and one of the main enablers of the 9/11 attacks and the rise of Al Quaeda. Given the rapid advances in technology and inter-connectedness, we should not be at all surprised if future attacks against the US and our allies are launched, in part motived by the Israeli occupation of Palestine.

Please don’t mistake this statement as anti-Israeli, or anti-Semitic. I fully support Israel’s “right to exist”, and I fully support the Jewish religion’s right to free worship. I am against acts of terrorism and violence, against any target, and I am against religious and political extremism in any form.

I look at this issue objectively, and dispassionately: all sides have made grave mistakes in the history of the creation and growth of Israel: Western countries, Arab states, Israelis, Palestinians, the Soviet bloc. If you look at the history of the Jewish and Palestinian peoples in the last 125 years, you would conclude that there are few more shameful episodes in human history.

Yet the answer today is not more of the same, but a fundamentally new approach to solving the problem. This will not be easy, and I certainly don’t have the solution. But unless we approach things differently, you and I will be having the same discussion four years from now. Which I would welcome, of course, but I do wish we could be discussing more positive developments in human achievement!

To come back to your original question: Yes, Barack Obama has engaged in sit-down discussions and speeches and policy documents, as has John McCain. But these are far from offering a comprehensive solution to a series of very intractable problems. The US administration – as the two candidates – are focussing on symptoms, not root causes. They are seduced by the myth of US military power as offering a basic solution to problems which have been, in large part, caused by US military power (or assistance), or a heavy-handed US approach to international law and basic tenets of international law and human rights.

Look at the record of US involvement in Iran, Iraq, Afghanistan and Israel/Palestine, and you will see a record of coups d’etat, invasions, overt and covert military assistance, support for “friendly” dictators, support for torture, a preponderance of military assistance, and a range of other behaviours which are questionable, if not shameful.

The American people are apparently not aware of this record, although there are abundant sources from respectable US and international sources for them to find out, if they were truly interested. Things have been done in their name which, if they were done in Peoria or San Fransisco or Santa Fe, would have been inconceivable.

I fail to see how US foreign policy will solve problems if it is conducted against the fundamental values enshrined in our constitution, our national law or international law. We are inflicting our policies on people who have the same basic human motivations and needs that we do.

In a global society, how much longer do you think this can last without serious repercussions? Are we still living in the 1950s, when people had no alternative sources of information, no means of travel, and traditional political elites and family structures dominated? Of course not. We live in a fragmented, constantly-changing, inter-connected world, where everyone has access to the Internet, satellite TV and Western Union, and where the main battle tends to be one for attention rather than territory.

In this milieu, what we see from the US Presidential candidates is the same vapid, empty superficiality and stupidity that has been practised in the last 50 years. Sound bites are not a substitute for an objective, rational look at the facts, and rational solutions. I'm very much afraid that I do not see much cause for hope in “Change we can believe in” – just more empty promises.

This is the reason why although I am voting for Barack Obama in November, I have little hope that things will fundamentally change in the next four years. There is nothing in the record of US foreign policy in the last 25-30 years which gives me any great hope for the future. As demographic trends drive fundamental changes in the US and global economy and society in the next 25-30 years, I must confess I grow even more pessimistic, which is what led me to make the statement you have objected to:

"Neither party offers a comprehensive policy platform that addresses both economic competitiveness (education, tax reform, manufacturing, energy efficiency, legal reform, public sector reform) and social competitiveness (education, health care, environment) in any convincing way.

Neither party, or candidate, offers a credible plan for funding their many promises.

Neither party addresses the paradigm shift in economic, political, demographic, social and technological trends that have been occurring since 1990, and will dominate the next 25-30 years. "

Please, convince me I am wrong. I would like nothing better, believe me!



Tuesday 9 September 2008

Bingo: the McCain / Palin Bounce

As predicted, the McCain / Palin ticket have benefited from a bounce in the polls. CNN reports that McCain and Obama are tied, at 48% each, according to a CNN/Opinion Research Corp poll released on Monday afternoon.

A USA Today/Gallup poll taken over the weekend shows a 4% lead for McCain over Obama, with a 50% of respondents favouring McCain versus 46% for Obama.

Will this last? Apparently only a limited number of Hillary Clinton’s supporters have decided to back Obama, while the Republicans themselves are only just starting to get organised. It’s probably too early to tell: I anticipate the polls will swing closer towards a tie as we progress towards October. It’s going to be a hard race, and will most likely be decided by get-out-the-vote on Election Day.

This may come as a shock to most Democratic supports, who can’t imagine why their candidate isn’t further ahead in the polls. Nothing should be taken for granted at this stage.

Some other things to keep track of:

· David Frum’s superlative article Times entitled “The Vanishing Republican Voter” appeared in the September 5th New York Time. This article explores the links between rising inequality and political orientation in the United States. If you read one article this week, it should be this one.

· The Republican Base is back. As predicted, Palin’s selection has changed the game for the GOP. Alec MacGillis covers the new energy injected into one core constituency of the Republican party in a perceptive article, “For the Republican Base, Palin Pick Is Energizing” in Monday’s Washington Post.

I’ve been slightly mystified by the Democratic reaction to the Palin pick. Pundits, bloggers and others are making the mistake of analysing this choice rationally, i.e. in terms of performance. Don’t. Sarah Palin’s value is as a symbol of achievement, an inspiration, rather than a statement of the achievements themselves. She is dynamite, and her nomination alongside John McCain has changed the game and may–if the Republican base catches up–win the election.

Sunday 7 September 2008

Stranger, spare a thought for Afghanistan

The FT’s Editorial Comment on Afghanistan ("Afghan Harvest," August 27th, 2008) paints a grim, succinct picture of the role of economic development and security in that country, and why the struggle for security may fail.

In a nutshell, conditions in Afghanistan are deteriorating. The Taliban and its sponsors have taken a page from classic insurgency strategy, and are interdicting convoys carrying fuel, food and humanitarian aid from Kabul to the south. The recent attack on French paratroopers 40 miles from Kabul is another indication of their ability to strike at will throughout the country. If this reminds anyone of the Viet Cong strategy in Vietnam, it should be no surprise.

Afghanistan is a country of some 38 million people, 80% of whom are Sunni, and divided into over 30 major ethnic groups, of which the Pashtun and Tadjik are estimated as the largest. The terrain is extremely rugged, and transport links are vital to assuring basic economic activity. It is one of the poorest countries in the world, and among the least developed on the UNDP's Human Development Index , when it is ranked at all.

In this environment, it should come as no surprise that the conditions for insurgency are flourishing. The Taliban has maintained its fundamental attractiveness as a political, social and religious force among a significant segment of the Afghan population, particularly in the Pashtun-dominated south-east of the country, bordering Pakistan. The actions of the US-led NATO alliance appear to be fanning the flames of the insurgency, either through brutal air assaults which lead to high “collateral damage” among civilians, or due to the humiliating way in which most military patrols interact with civilians.

For a review of the latter, just turn on CNN and watch how the average military patrol speaks with, frisks and detains Afghans. In a culture where possession of firearms is not only a necessity, but a cultural heritage, the fact that someone can be arrested apparently for possessing a firearm is slightly absurd. Beyond this, the fact that these people are searched, at gunpoint, in full view of other males and occasionally females, must go against every cultural and social tenet in the book. In other words, it’s a major humiliation, in a country where wars have been started for less.

There is no easy solution to this specific problem, and I don’t raise it with an alternative solution in mind. The key to defeating an insurgency is security, which would allow the conditions for economic growth, political engagement and social modernisation. Although the Afghanistan Compact provides a well-thought, well-intentioned strategic framework for doing so, it’s clear that the implementation of this framework is not sufficiently resourced.

Consider that the Afghanistan Compact provides for three key pillars of activity:

1. Security
2. Governance, Rule of Law and Human Rights
3. Economic and Social Development

In this post, I will focus primarily on the first pillar, security, since without it the remaining two pillars will be impossible to achieve. This is also an issue of prime importance, since it affects decisions made in the current US Presidential election, as well as long-term issues in international security.

In the last 2 years, the Taliban have regrouped and taken the fight to major population centres outside the south-west of the country. They are interdicting the major transport axes to and from Kabul, and are mounting attacks against major military bases and within Kabul itself. In 2007, for instance, the Taliban launched a suicide bombing attack outside Bagram air base during Vice President Cheney’s visit. The number of US and ISAF casualties in Afghanistan has been rising, and US casualties are surfacing as a sound bite in US political coverage.

There are a number of root causes to government's inability to control security:

Insufficient Troops
There are not enough ISAF or Afghan boots on the ground to provide security and defeat the insurgency. ISAF reports a total of 52,700 troops, including National Support Elements. According to the Congressional Research Service (report available from the Federation of American Scientists), the US has a total of 48,250 troops deployed in-country as of June 1, 2008, of which about 60% are tasked to ISAF, with the remainder of Operation Enduring Freedom.

Assuming that 52,700 ISAF troops are joined by the 40% of US troops in OEF (19,300 troops), then there are a total of 72,000 western troops in-country. Of these, a number of German, French and other troops contributing to ISAF are stationed in the north of Afghanistan, and are not deployable to conflict regions. To this, we can add the 46,000 troops of the Afghan National Army forces, but these are widely acknowledged to be insufficient for independent command.

An Unknown Enemy
We can only define a number of troops as “insufficient” if we know the nature and deployment of the enemy they are confronting. Here, unfortunately, we are operating in the dark. The Taliban enjoys apparently unlimited ability to deploy its forces, either from its strongholds across the border in Pakistan, or from its bases within Afghan territory. According to a 2007 article in the New York Times, there are approximately 10,000 Taliban insurgents, of which 2,000 – 3,000 are committed, motivated fighters. The Senlis Council estimated that the Taliban controlled approximately 54% of Afghanistan’s territory in November 2007. The Taliban’s leadership is widely reported to be based in Pakistan, which itself appears to be undergoing a rapid melt-down of national government authority, at least in the Tribal Areas.

Regional Enemies and Safe Havens
Afghanistan’s neighbours, primarily Iran and Pakistan, can hardly be considered friendly states. US security services have accused Iran of supporting the Taliban, particularly through provision of weapons and expertise. Although these charges have not been sufficiently proven, the fact that Iran is following an active strategy against US interests in Iraq and the Persian Gulf indicates that its role could easily change: Iran holds the initiative on the border, not the Afghan government.

The New York Times recently reported a meeting between the CIA and the new Pakistani Prime Minister, Yousaf Raza Gilani, about the ISI’s support for the Taliban attack on the Indian Embassy in Kabul. It’s also clear that although Pakistan has been trying to impose central government control on the so-called Tribal Areas, it has been failing. The government has lost any number of military engagements in the region, and the Pakistani Taliban has shown that it is up to the task of defeating government forces on its own territory. Whatever the case, the fact that both Iran and Pakistan are, de facto or de jure, hostile towards the United States (in the former case) and of Afghanistan (in the latter) indicates that the Taliban insurgency has a safe haven from which to plan and launch attacks in the country.

Perhaps the final element in the security situation is the cultivation of the opium poppy, which provides not only a high value crop for Afghan farmers, but finances the Taliban. Although recent reports indicate that the opium harvest is declining, with poppy cultivation down 19% over 2007, the laws of supply and demand mean that the Taliban will, if anything, gain income as prices rise in response to diminished supply. In the absence of foreign sponsors, the cultivation, processing and trafficking of opium provides a constant and reliable source of income, which until now neither ISAF, nor the UN, the Afghan government nor Operational Enduring Freedom have managed to shut down. Indeed, opium production is fuelling government corruption, with many reports questioning President Hamid Karzai’s inability to stop the trade.

The scale of the root causes of the security issue cannot be underestimated, and are complex. To define the Taliban as a group of ignorant Islamic fanatics is to confuse the issue, rather than to illuminate it. The Taliban’s religious and political philosophy, no matter how much we may disagree with it, is profoundly rooted in regional culture, history and current events. To “win hearts and minds” will be extremely difficult in the current situation, far more difficult than in Iraq, which can build on successive generations of secularism under Saddam Hussein and prior rulers.

Into this maelstrom, both US Presidential candidates, as well as President George W. Bush, have resolved to send more troops. Barack Obama has mentioned two combat brigades – about 7,000 troops – to Afghanistan. John McCain wants to send three additional brigades. President George W. Bush has announced plans to increase the troop commitment to Afghanistan as well, although this is contingent on the draw-down following the surge in Iraq.

Additional forces are welcome: there is no doubt about this. Yet this will certainly not be enough: a generation of international assistance for the second and third pillars of the Afghanistan Compact will be needed.

I wonder as well if the political dimensions of the Afghan conflict are being properly addressed, or even though about. The US-led troop presence of Afghanistan has now nearly completed 7 years since the original invasion in October 2001, following the Al Qaeda attack on the World Trade Centre on September 11th. As recounted in this article, the Taliban insurgency has gained ground in recent years. This leads me to raise a series of questions, particularly since I’m tired of hearing the bromide that “Afghanistan is too important to fail”:

1. How do we define success or failure?
2. What scenarios exist for success or failure in Afghanistan?
3. What drivers and barriers exist to success (and failure)?
4. What price is appropriate for assuring that Afghanistan succeeds?
5. Are we prepared to pay this price?

This is a highly complex subject, and requires extensive further reporting. But for the time being, if anyone is interested in this subject, I invite you to check the websites of the two candidates – Barack Obama and John McCain, and consider whether this is receiving anything near the attention is should be. The Obama campaign doesn’t even have a page on Afghanistan (although it does have pages on Iran and Iraq); John McCain’s campaign also lacks a page on Afghanistan, although it has issued a press release.

As with many other issues in this Presidential Campaign, we are hearing promises with something approaching blithe indifference to conditions on the ground, root causes and likely approaches needed to bring about a solution. I would not be surprised if four years from today, in September 2012, we are hearing the very same promises from two different candidates.

Friday 5 September 2008

Another Great Speech

Wow! I didn’t know he had it in him – honestly. John McCain just gave a great acceptance speech at the Republican National Convention. Although visibly uncomfortable at the beginning, he really hit his stride in his invocation of his captivity in the Vietnam war and how it changed him. Emotional, compelling: an eloquent testimony as to why John McCain is qualified to lead the United States of America.

As a result of the Republican Convention, I expect a bump in the polls, restoring the Republican “lag” to the Democratic campaign by about 2-3%, statistically insignificant given the problems with polling technology and sample selection. We may even see a Republican lead. Polls will no longer be as reliable as they have been in the past: much will depend on voter mobilisation, the ease of voting on Election Day, and the next two months of the campaign.

I’ve now spent some time observing the two conventions, and have just a few comments on the process:

a. The Republicans are relying on the heart: stirring images, patriotism, idealism. They ask us to forget the miserable record of the last 7.5 years of Republican administration. They focus on John McCain’s track record – his CV – and ask us to believe in this as an indication of future success, ignoring the rather poor policy recommendations on the McCain website. There is simply not enough detail, and not enough background on how to pay for things. This approach is effective: my impression is that the average citizen, and average family, wants to feel comfortable with the leader, and rely on them to sort out the problems. (Factors such as failed housing investments and high credit card debt are a good indication of the “average voter’s” economic and financial understanding, regrettably.)

b. The Democrats are relying on the head, the brain. They offer clear policies pitched to improve the lives of the majority of citizens. They are relying on an image of correcting past mistakes – even though they have controlled Congress since 2006, and have voted for many decisions before that. They focus on Barack Obama’s track record as one of a new reformer, even though his CV, objectively speaking, is essentially one of academia and legislation, not executive action, or business. This approach is currently effective among younger, college-educated, affluent voters. It remains to be seen whether it will be effective among the large majority of voters, who are of high school education, who have family incomes below $ 50,000 per year, and have far less social sophistication than the candidate.

In my opinion, neither the Iraq war nor “Foreign Policy” are major issues at the moment, but wedge issues, or issues affecting certain interest groups and affiliations who have largely already made up their minds. How different things are from 2006: America is now “winning” in Iraq, and the issue has faded from public consciousness, and public debate. There remains a total absence of real foreign policy strategy from both parties (not to mention the government) for dealing with global, regional and bilateral issues over the next 4 years. But this is par for the course in the last 20-25 years.

Neither party offers a comprehensive policy platform that addresses both economic competitiveness (education, tax reform, manufacturing, energy efficiency, legal reform, public sector reform) and social competitiveness (education, health care, environment) in any convincing way.

Neither party, or candidate, offers a credible plan for funding their many promises.

Neither party addresses the paradigm shift in economic, political, demographic, social and technological trends that have been occurring since 1990, and will dominate the next 25-30 years.

As a result, they are basically offering Band-Aids in an Intensive Care Unit: some Band-Aids are blue, some are red.

What are the risks? These are legend. On the Republican side:

• I have doubts as to whether John McCain’s health will let him see out the campaign, let alone his term if he is elected. He appears increasingly frail. While the “wise grandfather” role suits him well, his public appeal is limited by his age.

• The lack of detail on the McCain website is extremely worrying. Many platforms are heavily ideological in nature, yet suitable Orwellian. For instance, the “Workplace Flexibility” promise could be construed to mean fewer job protections for employees. There is absolutely no way the “spending” promises can be paid for by the tax plan. Nonetheless, the section on tax competitiveness for companies and entrepreneurs is compelling: the US has lost tax competitiveness relative to its competitors in the past 10-15 years.

• Is he evangelical enough? Will the “religious right” rally around to provide the same turnout as they did in 2004?

• Is his campaign working? On multiple measures, from fund-raising to local organisation to use of the Internet, the McCain campaign appears to be trailing the Obama campaign. To some extent, this margin can be compensated for by negative campaigning, but a lot will depend on Voting Day turn-out. The Obama campaign has been extremely well-run, and is adding new voter registrations at an impressive rate.

• The Republican star may be on the wane. The last 8 years, including the corruption, the scandals and the mismanagement, have created a tremendous burden to overcome. Together with the current economic downturn – which may or may not be measured in economic statistics useful to the “average worker” – will extract a price.

On the Democratic side:

• Although Obama is a compelling candidate to certain voter groups, he tends to over-reach and come across as arrogant in some contexts. In others, he cannot give a simple answer to a complex question. For me, this is natural; for a US Presidential Candidate, this is anathema. The sound bite rules on Main Street.

• The lack of experience, the intellectual background and the issue of racial identity provide a powerful reason among many voters to mistrust Obama, to project their own stereotypes and fears on him.

• The policy background is much clearer and more specific, but it would take a miracle to pay for everything. The ambitious nature of some reforms, such as healthcare, will absorb tremendous energy and financial resources. Implementation will also depend on a clean sweep, assuring Democratic control of the legislative and executive branches of government.

• Proposed solutions for international military engagements are not convincing. A withdrawal from Iraq will certainly not happen according to the campaign promise of a full withdrawal within 16 months. I estimate that at least 40,000 US troops will maintain a permanent presence in Iraq or its immediate vicinity (Turkey, Kuwait) to maintain as much stability as possible. To leave Iraq to its fate, which almost certainly means Iranian domination, would be a foreign policy blunder to disastrous proportions. The idea of stabilising Afghanistan by stationing 2 US combat brigades will, regrettably, not be enough either: a far higher engagement will be needed.

• The Democratic party appears united, but is in fact heavily divided. Unlike the Republican party, which only includes 3-4 coherent ideological interest groups, the Democratic party is trying to do far too many things at the same time. This is leading to promises that can never be fulfilled. The campaign is fuelled by outrage expressed over internet-based fora, usually by people with no real experience or understanding of what they are supporting (and how it links to other issues), focussing on a single issue. The Democratic ideological firmament comprises many stars in a single sky, each one claiming to be the sun and the source of all truth. This is not a recipe for success. Obama’s main challenge upon taking power will be to assure party unity and prioritise those major and minor issues that can be solved. Can this be achieved in the current cacophony? How long will the honeymoon last before the various components of the Democratic party base splinter and turn sour? Can the skills learned in a political campaign translate into executive effectiveness? It’s a long shot, in my opinion.

I’ve read a number of posts postulating the threat of an assassination of Barack Obama, some claiming that this is a certainty. My feeling (and hope) is that his Secret Service detail is capable of protecting him, but certainly this is a risk. Another threat is his background, which may contain surprises ranging not only from campaign finance, personal housing loans, or drug use, but other factors as well. The full story is probably yet to be heard, and there is already enough to “Swift Boat” his campaign.

Despite these risks, my bet is on Barack Obama winning the election by a 2-3% margin of the electoral vote, and a slightly higher margin of the popular vote. I believe he will run a disciplined campaign and prevail over the negative attacks which are sure to increase. Everything will depend on ground operations in the 72 hours preceding Election Day, and the day itself. He understands this, and his campaign is based on it.

However, I would not at all be surprised if John McCain wins the election. He still has time to put a strong ground operation in place and fine-tune his message to the different interest groups. His tax plan will probably gain major funding for the Republican party. If he can get the right team on board and run the right campaign, he has a very strong chance to win.

And, we may have an “October surprise” which will swing things McCain’s way. Such an event may include

- An Iranian or Iranian-affiliated attack on US forces in the Persian Gulf (including Iraq or Bahrain, or possibly Afghanistan), with a robust US response probably involving a heavy aerial bombing campaign.

- Another Al Quaeda attack on US soil, or probably on US interests in Europe, North Africa, the Horn of Africa or the Middle East and Near East. This will probably result in minor casualties – perhaps on the order of 150-200 fatalities – but would be enough to rally popular opinion behind a very hawkish candidate.

- The collapse of Pakistan, necessitating US intervention to secure Pakistan’s nuclear arsenal.

- Major power actions, such as renewed Russian or Chinese actions in Central Asia or the Near East.

Of these four possibilities, I regard the first two as more likely, and having a greater impact, than the second two.

And now look at the bright side: two excellent campaigns, ideological coherent to specific supporter groups, with compelling candidates, fighting for the Presidency. The next two months promise to be extremely interesting, but how happy I am that this process occurs every four years, and not sooner.

McCain Picks a Winner

I feel John McCain picked a winner in Sarah Palin as his Vice Presidential Candidate. She has a compelling resume and an easily-packaged track record, despite the many inconsistencies between her words and her approach. Her experience in general economic development is affected by the fact that Alaska’s economy is totally different from the remaining 49 states: it runs a large budget surplus due to energy production. And of course there is “TrooperGate” and a range of other issues and voting positions.

Yet on stage in St. Paul on September 3rd, she made an excellent impression, in a speech rich in political theatre. She came across as full of common sense and quiet achievement. She appears to be an ordinary person who has done extraordinary things, without the benefit of coat-tails or the establishment. I believe this aspect of her track record, and her character – I have no reason not to. She started out by joining the PTA, and the rest is history, as they say.

To attack her for her inconsistencies or lack of foreign policy experience will backfire and is in any case inappropriate. Is this election really about foreign policy in the eyes of the average voter? I'd say that's a highly doubtful proposition - and always has been, except in the most superficial of terms. She certainly has more executive experience than Barack Obama, and resonates more strongly with Main Street. She is a strong Vice Presidential candidate, and if John McCain were a little younger, would be perfect.

In picking Sarah Palin, John McCain has reversed the tenor of the campaign and seized the initiative. This is excellent political work, particularly given the multitude of problems against which he is running: the economic fall-out of the credit crunch, the war in Iraq, the unpopularity of President George W. Bush, and the superior campaigning of the Obama campaign. The first day of the Republican convention opened in what appeared to be disarray, with less-than-spectacular results, with the uncertainty of cancellation due to Gustav’s landfall. Yet what a difference 2 days makes.

On Wednesday night, Sarah Palin restored momentum to the Republican campaign, rallied the troops, and made a very compelling case for herself and her party. I'm impressed.