Tuesday, October 07, 2008

Fed to Compound Credit Problem

The Federal Reserve today announced that it would purchase US Commercial Paper in an attempt to ease the credit crunch impacting corporations throughout the US. (Bloomberg: Fed to Purchase U.S. Commercial Paper to Ease Crunch.) According to Bloomberg, "The Fed's new unit will buy three-month dollar-denominated commercial paper at a spread over the three-month overnight- indexed swap rate." In addition, the nation's central bank will double its cash auctions to banks, raising the amount auctioned to as much as $900 Billion.

Does this remind anyone of a famous quote from Thomas Jefferson? "The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered."

There is little doubt that we are facing perhaps the worst economic crisis since the Great Depression. For the moment, one might argue that the post-Watergate crisis that saw double-digit inflation and double-digit unemployment was worse than what we face today, and if today's crisis were in its final hours I would agree. Unfortunately, we face the dawn of this crisis, not its sunset. If improperly handled, this crisis will yield another Great Depression.

The current spotlight is on sub-prime mortgages, and financial institutions lending significant sums to people that can ill-afford those loans, all on the prospect of being able to sell this bad paper for profit or at worst being able to foreclose on property increasing in value. Truth be told, though, the sub-prime issue is only the tip of the iceberg. The collapse of the housing market did result in the sub-prime issue starting a financial avalanche, but this issue was stacked way atop many other more subtle problems that may well drive us into another Depression.

First and foremost, we are seeing a steady decline in the US job market. The alarm was first raised in 2004 when the AFL/CIO warned that the number of jobs sent overseas had doubled in the past year. In January of this year, the Peterson Institute for International Economics warned that as many as 20 million US jobs out of a 140 million job pool were at risk of off-shoring. That's over 14% of the jobs in the US that are at risk. While our unemployment numbers rise (6.1% as of September 2008), the Consumer Confidence Index continues to barely tread water. Over 25% of the people believe the job market will worsen in the next quarter. That means that 25% of the people are concerned about job security, and based on the Peterson numbers, rightfully so.

Next in line we have rising inflation. The increased cost of food and fuel is crippling most low to middle income homes. Lest we forget, that accounts for close to 95% of the American public. Why is the mortgage foreclosure rate so high? Quite simply, it's because the average American family has had their net income squeezed through rising fuel, home heating or cooling costs, and skyrocketing food costs. That money had to come from someplace, and in too many cases it came from the mortgage bill. This economic crisis will not end as long as the average family cannot afford to pay their basic bills.

This leads us to the topic of debt. The average American credit card-holder is in debt to the tune of $8000, so that's $16,000 per family on average. Tack onto that a mortgage and an auto loan, and it's not hard to see where most of America's income is going. As inflation rose, the number of bills being paid by credit card also grew. Now this credit-card crisis has yet to materialize in the banking industry, but rest assured this crisis will hit home over the next 4-6 months. Credit cards are unsecured loans. As consumers begin to default on those cards, banks will be forced to take write-downs. Who will come to the rescue? You guessed it - the American taxpayer. We've already done it twice, first with the $700 Billion white elephant that just cleared Congress and now by the Federal Reserve's unilateral (and most likely unconstitutional) decision to purchase corporate debt.

If you read that Bloomberg article linked at the top of this post, I'd recommend paying close attention to this one sentence: "Fed officials in a conference call with reporters didn't say how much commercial paper, which hundreds of companies use to finance payrolls and meet other cash needs, it plans to purchase."

Let's ignore the fact that the Fed has no clue how much commercial paper they will purchase. That fact alone bothers me since it's pretty much a blank check being written by the Fed. What bothers me more, though, is that "hundreds of companies use (commercial paper) to finance payrolls and meet other cash needs..." Clearly, the concept of out-of-control debt is not limited to the individual or the family. Companies need to borrow money just to meet their payroll requirements. This issue of debt is rampant throughout our economy. So rampant, that the Fed now feels obliged to offer a unilateral bailout to corporations by purchasing their debt.

So what has the government done to date about this crisis? They've increased debt and they've attempted to make it easier to obtain more debt. In case you've missed it, there's increased talk of yet another interest rate cut to stimulate borrowing. If debt is at the heart of the economic crisis, how are we supposed to believe that increasing debt is going to cure it? Has it not occurred to anyone that the solution is to decrease debt, not increase it?

What was that Jefferson said? "If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered."

Amazing foresight, wouldn't you say?


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Sunday, September 28, 2008

Election 2008 - Health Care Issue - Obama Version

The second article in our series of 2008 campaign issues focuses on the Health Care plan proposed by Senator Barack Obama. Details of his plan may be read on the official Barack Obama campaign website.
The Barack Obama Plan


Senator Obama's health care plan emphasizes from the start two points that are at the center of concern for anyone studying a more comprehensive health care solution. Taken directly from his campaign website, the Senator states:

"Under the plan, if you like your current health insurance, nothing changes, except your costs will go down by as much as $2,500 per year.

If you don’t like your health insurance, or you don’t have health insurance, you will have a choice of new, affordable health insurance options."


On the surface that sounds excellent. All of us with insurance would love to see a reduction in costs, while those without insurance are very much in need of some form of affordable coverage. Now, the word "affordable" is very much up for debate since many of those without insurance today can't afford their present bills, let alone anything added on for health care. But for the moment, let's take the statement as written and at face value.

Since the Senator took the time to itemize each of the key points in his plan, I will repeat them hear and comment on each of them. The points I'm listing are directly off his website.

Require insurance companies to cover pre-existing conditions so all Americans regardless of their health status or history can get comprehensive benefits at fair and stable premiums.

Most company sponsored health care plans do have a pre-existing waiver built in during the annual open enrollment period. As we age, this becomes a necessity, and it's good to see some recognition of this requirement built into a health plan. Mandating it, however, will result in an increase in insurance premiums. Once insurance companies are forced to accept pre-existing conditions by default, the natural response will be to raise the cost for everyone.

Create a new Small Business Health Tax Credit to help small businesses provide affordable health insurance to their employees.

This point is necessary if we're going to require small businesses to provide health insurance benefits, assuming they are sharing in the cost of that insurance. Small businesses are at the heart of local economies, but all too often they exist on a shoe-string budget, surviving from month to month. A mandate from the government that forces a significant increase in their expenses must come with some government protection in the form of tax credits. I fully support this point in the Obama plan.

Lower costs for businesses by covering a portion of the catastrophic health costs they pay in return for lower premiums for employees.

The biggest challenge to our current health care system lies in the inability to provide long-term catastrophic insurance. A single major illness can easily wipe out an entire family's savings and destroy their economic future, and that is for a family that has good health care coverage. It does not take long for coverage to be exhausted in the event of serious long-term illnesses that require extensive care. So I agree in principle with the basis for this point in the Obama plan. Where I find myself skeptical is in the cost. Moving a portion of this burden from the corporation (and individual) to the government does make sense on the surface, but before I fully jump on board I want to see more details around the cost. This one could come with a huge price tag.

Prevent insurers from overcharging doctors for their malpractice insurance and invest in proven strategies to reduce preventable medical errors.

No argument here, although caps on malpractice lawsuits have stumbled in Congress anytime they are proposed. There is no doubt that doctors must be protected from the frivolous lawsuit. What is a misconception, however, is the idea that malpractice insurance accounts for a significant portion of our health care costs. It doesn't. In any case, I support the concept behind this point, regardless of its ability to reduce health care costs.

Make employer contributions more fair by requiring large employers that do not offer coverage or make a meaningful contribution to the cost of quality health coverage for their employees to contribute a percentage of payroll toward the costs of their employees health care.

Some states do have laws requiring any employer with 10 or more employees to offer some form of heath insurance. Enforcing this type of requirement is certainly the right approach. The best solution to the health care issue is not socializing the health care system. Rather, the best solution lies in ensuring that anyone that wants a job can find a job, and requiring those employers to provide health care options to their employees.

Establish a National Health Insurance Exchange with a range of private insurance options as well as a new public plan based on benefits available to members of Congress that will allow individuals and small businesses to buy affordable health coverage.

Read this one carefully. I believe the gut reaction of most conservatives will be to scream "socialism" when this point is raised, however if you read it carefully it's nothing of the sort. What Obama is proposing sounds more like a national pooled plan that allows individuals and small businesses to take advantage of the bulk purchasing power already available to large corporations. This concept actually makes a lot of sense, and may be the best solution offered to reduced the cost to individuals or small businesses. It's that loss of bulk buying power that cripples the ability of the individual to obtain affordable health care on their own.

Ensure everyone who needs it will receive a tax credit for their premiums.

As they say, the devil is in the details and this talking point lacks any at all. It's hard to comment on the viability of an option that does not define need, does not define the amount of a tax credit, and fails to account for the funding of that tax credit. This talking point is political campaign fluff, pure and simple.

Lower drug costs by allowing the importation of safe medicines from other developed countries, increasing the use of generic drugs in public programs and taking on drug companies that block cheaper generic medicines from the market

While I'm grateful to see the adjective "developed" used in this context, I oppose the importation of drugs from other countries. The reason, though, may surprise you. A great deal of drug research is done in the United States. We Americans pay a very high premium for that research. Drugs that are imported from other countries are the result of that research, but the cost is not being shared across the board. Rather than allow the importation of cheap drugs - many created as the result of American research - we should require the cost of that research to be passed on to the drugs we export. Our own pharmaceutical companies are not passing that burden on to overseas buyers, so we end up paying an artificially high cost. That's the part that must be corrected, and importing drugs is not the answer.

Require hospitals to collect and report health care cost and quality data.

This is just sound business practice. If hospitals aren't doing that today, then the first question should be "why aren't they?"

Reduce the costs of catastrophic illnesses for employers and their employees.

This sounds great, but without details it's just political campaign fluff. Cost reduction is not something you can mandate, so let's see some details on how it will happen.

Reform the insurance market to increase competition by taking on anti-competitive activity that drives up prices without improving quality of care.

This is another point that sounds very good, but is sorely lacking in details. Before signing up for this one, I'd like to see how the Senator plans to reform the insurance market. Without those details, this one also falls into the campaign fluff category

So now comes the multi-billion dollar question. How will the Obama plan pay for itself? Straight off the website he says:

"Barack Obama will pay for his $50 - $65 billion health care reform effort by rolling back the Bush tax cuts for Americans earning more than $250,000 per year and retaining the estate tax at its 2009 level."

What will pay for it is a tax increase for those making more that $250,000 per year. Now, the question you have to ask yourself is this. What impact will be felt by the lower and middle classes if we increase the tax burden on the wealthiest Americans? In my view, a tax increase at the high end will result in more American jobs being shipped to India and China, lower wage increases (that already trail inflation by 50%), more layoffs, and higher prices for goods and services. Increasing taxes on corporations and the folks that run them is not the solution.

In summary, there are some very solid points in the Barack Obama plan. Overall, I think the plan is a good starting point for discussion. I do not like the method of paying for it, preferring instead that we reduce other areas of the budget to compensate for this increase. On the whole, however, in comparing this plan with the one offered by Senator McCain, I believe the Obama plan will increase the number of people currently insured. I don't believe it will reduce cost - in fact, I believe it will increase cost - but in the long run some form of insurance will reach more Americans.

Saturday, September 27, 2008

Election 2008 - Health Care Issue - McCain Version

Over the course of the next week, we'll attempt to examine each of the major issues facing the two Presidential Candidates. Major topics will include Health Care, Foreign Policy, Taxes, and Energy Policy. The first topic we'll examine is Health Care.

Not unexpectedly, both Senator McCain and Senator Obama offer strikingly different options for health care as part of their 2008 campaign platforms. While nobody on either side of the aisle would dispute that something must be done about the health care situation in the US, finding a viable solution that does not compound the existing problems appears quite elusive. In this first of two articles, I'll review the John McCain Plan and will follow with the Barak Obama plan in a second article.

The John McCain Plan


Details of this plan are found on the official John McCain Campaign website.

Currently, most people employed full time by companies with 10 or more employees enjoy some form of health care as part of their employment benefits. Most of those plans include a pre-tax contribution by the employee and a contribution (on average up to 5 times what the employee pays) by the company. That contribution is not considered income and is therefore not a tax burden imparted to the employee.

The heart of the John McCain plan would change that. Under his proposal, the employee contribution would be made after taxes are deducted, and the employer's portion would be taxable income assigned to the employee. On average, the cost of health care in the US is approximately $12,000 for a family of 4 or $4,400 for an individual. (National Coalition on Health Care.) So under the McCain plan, employees choosing a family plan would see their gross income increase by $12,000 or an individual would see gross income increase by $4,400.

To offset this, what McCain proposes is a $2500 direct refundable tax credit for individuals and $5000 for married couples. He envisions a plan whereby the individual would be able to choose their own health provider, either using the one sponsored by the company or choosing one on their own, with the tax credit being paid directly to the provider. Any surplus in the credit would be deposited into a Health Savings Account.

What this portion of the plan fails to consider is that the only viable option for the employee is the plan offered by the employer. An individual simply cannot obtain the same level of coverage at the same price by purchasing a plan on their own. The corporation has the advantage of purchasing a large pooled plan and invariably receives a better rate than any individual could obtain on their own. To purchase a non-corporate sponsored plan, an individual is going to end up paying $4,400 or more minus the $2500 credit, or at least $1900 out of pocket. That is compared to a national average today of about $880.

It's even worse for the family of four. As stated above, the average cost is $12,000 of which the individual typically pays 20%. So today, the individual has a pre-tax expense of about $2400. Under the McCain plan, that individual (purchasing a plan on their own) would end up paying $7000 and would lose the pre-tax benefits of the current system. That doesn't sound like much of a bargain to me.

Sticking with the employer sponsored plans, the employee may come out slightly ahead based on their tax bracket. For instance, for a family of four in the 15% tax bracket, there would be a potential savings of about $800. The individual may see a savings of about $900. Keep in mind, however, that the surplus goes into a Health Savings Plan, so you only really get to use that surplus if you have a major medical issue in that calendar year. It's a "use it or lose it" savings plan, so it does not add to the discretionary income of the individual or family.

What the McCain plan assumes is that there will be greater competition between the health care providers, thus lowering the costs of health care in general. Unfortunately, the assumption is fundamentally flawed. The deck is already stacked in favor of the corporate sponsored plan, so the individually purchased plans will be minimal at best. What is driving the cost right now is the overall cost of prescription drugs, routine tests, and hospital visits. Competition - or lack of competition - on the part of the providers is not a factor, so attempting to increase that competition will have no positive impact.

In point of fact, the competition between providers already exists today at the corporate level. Each year, corporations review their health care options and attempt to negotiate the lowest cost from a variety of providers. Despite that, we still see significant yearly increases in the cost of health care. This year alone, the rising cost was approximately double the current rate of inflation. So clearly, the driving force is something other than competition between providers.

The second portion of the McCain plan is to attempt to cover, at the state level, those individuals that are unable to obtain insurance. This portion of the plan calls for the federal government to work with states to establish "Guaranteed Access Plans" with "reasonable limits on premiums" and "assistance for Americans below a certain income level."

Not surprisingly, this portion of the plan is a bit vague on the details. The vast majority of people that fall into the the category that would warrant a GAP plan are those with extremely low income levels. Well, at that income level, there is absolutely no discretionary income left after paying just the most basic of bills. All too often, these individuals are floating month to month with at least one bill overdue. For these individuals, no premium is at a "reasonable limit". Given the choice of paying the rent or paying for health care, health care will lose.

It must also be noted that the GAP plans being proposed by Senator McCain are at the state level, not national. This sounds very much like another program mandated by Washington but without any federal funding to back it up. Placing that burden on the states all but insures higher state or local taxes, especially in states with depressed economies or low income levels.

What it all boils down to is my belief that the plan as proposed is neither viable nor beneficial to the average American. I believe this plan will do nothing to reduce the cost of health care, will increase the tax burden on the individual at the state level, and will result in even less people covered by some form of health insurance. I can't support this plan as written.

Sunday, September 21, 2008

Financial Bailout Legislation

Perhaps it is time to be reminded of the lyrics of a popular Buffalo Springfield song. "It's time we stop, hey what's that sound, everybody look what's goin down." As to what's "goin down", I'm not referring to the stock market.

Here is a link to the legislation being reviewed in Congress for a $700 Billion bailout in the current credit crisis: (Wall Street Journal: Financial Bailout Package.)

I first want to draw your attention to Section 8 which reads, "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

So the Secretary of the Treasury is not accountable either to the courts or to any other administrative agency in the handling of $700 Billion. Am I the only one that has a problem with this? So, what limits do we place on him in the legislation, then? Clearly, Congress must have some protection built in for the taxpayer, right?

Well, then, let's take a look at Section 7: "For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure."

Wait a second, what was that last sentence again? "Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure."

Am I just too cynical in my old age, or does that pretty much grant the Secretary Carte Blanche in using the proceeds from the sale of any of these securities for such administrative expenses as oh, say, salaries or any other perk you can imagine without court or other agency review? I'd say the Treasury Department just struck the mother lode on this one.

For the record, I totally oppose any bailout package that does not contain the following:
  • Clear, well-defined oversight by one or more agencies external to the Treasury Department.
  • Clear, well-defined criteria regarding the situations in which any federal funds may be used.
  • Provisions stating that the sales of any securities purchased by these funds must be used to off-set the establishment of the fund. In other words, the funds must be used to pay back the tax payer.
  • A clear set of restrictions placed on the Banking, Brokerage, and Insurance industries designed to prevent a future financial melt-down of this magnitude.
That last point is the key. While I've heard endless talk about bailing out corporations on the verge of failure, I've heard no talk at all about preventing this from ever happening again. We must be mindful that those safeguards were in place prior to the mid-1990s, and they must be reinstated. Those safeguards must include:
  • Prohibitions on the combined ownership of banks, insurance companies, and brokerages by the same corporations or holding companies. Each industry must be insulated from the other.
  • Federal requirements regarding the ability of a borrower to pay back a loan. Clearly, leaving it up to the banks as we've been doing for just over a decade is not working. The elimination of federal requirements resulted in a surge in the price of housing as well as a surge in foreclosures and other credit defaults. The requirements must be tightened again, they must be imposed at the federal level, and they must be strict.
  • Restrictions against interstate ownership of banks and holding companies. We must return to the pre-1990s restrictions against banks operating across state or regional lines. This means that a break-up of the largest banks in the nation is an absolute requirement. It was the elimination of this restriction that allowed this current crisis to be global in nature as opposed to being restricted to small pockets of the nation. Just as the government required the break-up of Standard Oil and AT&T, so too must we require the breakup of the large interstate financial institutions.
It is not enough that we simply bailout the companies that are currently drowning. Tossing them a lifeline is one thing. Before reeling in that lifeline, though, we must first implement the measures that will prevent them from ever getting out of control again. In the meantime, scrutinize very closely what is being proposed and what is being done on the federal level to bail these corporations out.

"It's time we stop, hey what's that sound, everybody look what's goin down."

Sunday, December 16, 2007

US - NATO Regroup on Afghan War

Concerns about the state of affairs in Afghanistan have prompted the US and NATO to regroup and reconsider how that war is being prosecuted. The Kabul government is in serious danger of failing, thanks to a resurgence of Taliban and al Qaeda influence in the region, bolstered by intense opium production and drug trafficking. (International Herald Tribune: White House and NATO set thorough review of Afghan mission.)

While the Taliban and al Qaeda were routed within months after the 9/11 attacks, the leadership and the bulk of their militants went underground. For the most part, they were neither killed nor taken prisoner, although al Qaeda leadership was decimated. Over time, however, both have reestablished a foothold in Afghanistan and in the lawless mountainous region in Pakistan. In the past year, the Taliban has made some major inroads in retaking pockets of Afghanistan.

The new tact being taken by the US and NATO appears to center around better international coordination in the military effort. Color me cynical, but one would think that lesson was learned over a millennium ago. I'm not sure why the concept of troop coordination has suddenly come up now. Additionally, the US is pressing NATO to supply more troops since US forces are occupied elsewhere and there simply aren't any US troops to spare for Afghanistan.

There's the second lesson we need to relearn, myself included. During the build-up leading to the Iraq War, I was as gung-ho as the other 70% of the nation supporting the invasion. I fully supported the need to invade Iraq, and - based on Iraq's non-compliance with UN Resolution 1441 - believed then and still believe that the use of force was justified. What I neglected to take into consideration then, and what none of our military commanders seemed to consider is the prospect of fighting a two-front war. Neither did any of us consider that both wars would quickly degrade into a battle against insurgencies, something that our conventional force is ill-equipped to fight.

The US and NATO were fully equipped to take on both Iraq and the Taliban in Afghanistan simultaneously. In fact, there really is no conventional force on the planet that can stand up to the US and NATO in open combat. Unfortunately, neither the US nor NATO are equipped to battle insurgents in two separate theaters for an extended period of time, and that's what we're doing now. The economic drain alone is devastating, and time is on the side of the insurgents.

So this begs the question, where do we go from here? When we look at the two theaters currently in play, what strategies do we employ to turn the current debacle into victory? Well, first and foremost, I think it necessary to choose our front. We cannot continue to battle in both theaters. We're losing ground in Afghanistan, and the gains we're making in Iraq are coming too slowly.

Perhaps the best course of action is to turn Afghanistan entirely over to NATO and focus our attention on finishing the job in Iraq. Simply walking away from Iraq right now makes no sense at all given the gains that we've made. The economic drain in Iraq has also hit Iran, and that's having a rather interesting positive effect on US and Iranian relations. Iran has even proposed discussing the terrorist groups in Iraq and finding ways to quell the violence there. It's actually in their best interests to do so now, too, since they can no longer afford to finance the insurgency. (Reuters: Iran says to discuss Iraq "terrorist groups" with U.S..)

Ultimately, we need to learn, or should I say "relearn", the lessons from the last 6 years. We can't afford to start a second campaign before the first campaign is won. We also need to relearn what President Bush (41) taught us in the first Gulf War. Before going into combat, know what your objective is, how you're going to meet that objective, and most importantly, how you are going to get out when it's done. We failed to do that in both Afghanistan and Iraq and we're paying the price today.

Saturday, December 15, 2007

Bush Seeks to Control JAGs

The White House has floated a proposed regulation that would require consultation with politically appointed Pentagon lawyers before the promotion of any member of the Judge Advocate General (JAG) Corp. This would effectively eliminate the independence and impartiality of the 4000 military lawyers comprising JAG by forcing them to adhere to a political agenda. (International Herald Tribune: Bush seeks to limit military lawyers' independence.)

Technically, as members of the military the individual members of JAG report through the chain of command to the President. In practice, however, JAG enjoys a tremendous amount of independence; an independence that caught the attention of the White House when military lawyers started to question the legality of certain interrogation methods or the detention of enemy combatants under the Geneva Convention.

Should the proposal be adopted, that independence would be lost. Those officers that did not adhere to the political doctrine would find themselves ineligible for promotion and their careers effectively crippled. The devastating side effect would be a similar crippling of the legitimacy and credibility of the military court system.

Said Major General Thomas Romig (RET), "(It) would certainly have a chilling effect on the JAGs' advice to commanders. The implication is clear: without approval the officer will not be promoted." Romig served as the US Army's top JAG from 2001 to 2005.

At the heart of the dispute is the President's position that the White House has the authority to bypass the Geneva Convention. Enforcing that position is Presidential appointee William Haynes, the Pentagon's top council. It is Haynes that involves himself in disputes with any JAG lawyers that dispute that claim. Under the new proposal, Haynes would be in a position to deny promotions to any JAG officer that disagreed with his (or the President's) political agenda. Those are very dangerous implications for the independence of the military court.

It can certainly be argued that the military court system and the JAG lawyers that service the military should follow the president's lead and adhere to the presidents policy. That's an argument fraught with danger, however. With regards to the Geneva Convention, a series of treaties lawfully ratified by the US Senate, the White House does not have the authority to circumvent or ignore the provisions of the treaty. Part of the provisions in the Fourth Geneva Convention call for a military tribunal to establish the legal status of prisoners held as a result of conflict. It is therefore imperative that the legal branch of the military maintain credibility in the eyes of both the US public and the world.

Using the military in any fashion to circumvent US law or ratified treaties is a most dangerous path. It's a path perilously close to that followed in a number of third-world regimes where the person in power is the one that controls the military. That is a path I would much prefer to see us avoid. The President has a responsibility to enforce the law and the treaties we sign, not find ways to circumvent them.

There's a very popular misconception with regards to the President as Commander in Chief of the armed forces. That title does not grant the President unconditional control over the military. Rather, use of the military and the ability to go to war is reserved for Congress. Granted, that's been usurped since 1945 - the last time Congress issued a declaration of war - however the Constitution is quite clear on the matter. Likewise, funding for the military, and the authorization to even have a military is granted to Congress, not the President. It was quite clear that the founding fathers intended the military to be in the hands of the people, not the President.

What is clear with regards to this JAG proposal is that Congress must keep close watch over the developments. This is not a reporting structure that should ever make its way into practice. Congress, with its oversight authority, must ensure that our military courts remain impartial. The only way to do that is to keep JAG out of the hands of political appointees.

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200,000 Turn Out To Support Hamas

An estimated 200,000 people gathered in Gaza to celebrate the 20th anniversary of the founding of Hamas, the terrorist organization that gained control of the region six months ago. (New York Times: Gazans Show Allegiance for Hamas.) The terrorist group was created by Sheik Ahmed Yassin, and the Hamas charter written in 1988 still calls for the destruction of Israel and its replacement with a Palestinian Islamic State. The region Hamas seeks to control is comprised of Israel, the West Bank, and Gaza.

The rally, intended to demonstrate public support for the terrorist group, also shows why a peace accord between Israel and the various Palestinian groups is simply not possible. Hamas gained control in the Palestinian government through free elections and is still extremely popular in the region due in no small part to their anti-Israeli agenda. The slogan displayed in Central Gaza City read, "We will not recognize Israel" but Hamas actually seeks much more. They seek, as previously stated, the complete destruction of Israel.

The same sentiment is prevalent in other nations throughout the Middle East. Saudi Arabia won't even refer to Israel by name, referring only to "that Zionist entity." At the recent Middle East summit hosted by the United States, Saudi Arabia only agreed to attend after stating emphatically that they will not publicly shake hands with any Israeli official. Iran's President, Mahmoud Ahmadinejad, has openly called for the destruction of Israel on many occasions.

As long as there are regional anti-Israeli terrorist groups that have the full backing of nations such as Iran and Syria peace in the region is not possible. This is especially the case when those same terrorist groups also enjoy wide public support as is true with both Hamas and Hezbollah.

For some unfortunate reason, brokering a peace between Israel and the Palestinian Authority has become a bell weather issue in American politics. Every administration since Carter has sought to broker a peace in the region and all of them have come up empty. Perhaps now is the time to rethink the entire concept. Hedging our political bets on peace in a region that has had none for the last 3000 years is folly at best.

It's time to walk away from the process. There are fundamental issues between even the rational elements in Israel and the Palestinians that will prohibit any long-term peace. When you factor in the radical elements of Hamas, Hezbollah, and some of the more extreme elements in Israel, it quickly becomes obvious that no treaty will ever work. At least, not so long as those elements exist.

There comes a time when you must recognize that the only solution is to allow two diametrically opposed groups to fight it out. When it comes to Israel and the Palestinians we've reached that point. It's time for us to step out of the ring and allow them to hold the no-holds-barred match that has been simmering since the late 1960s. Whichever side emerges victorious is the one we'll recognize and deal with. At this point, however, I'm no longer willing to waste good American tax dollars trying to broker a peace that isn't possible. Let's step aside, let them fight it out, and the treat with the winner. This one is no longer worth our attention.

Friday, December 14, 2007

CPI Report Confirms Rising Inflation

The economic reports released today are pretty hard to ignore, and no political spin imaginable can downplay the inflationary numbers consumers experienced in November. The Consumer Price Index (CPI) was up 0.8% in November and now stands at 4.3% yearly. Core CPI (which excludes food and energy costs) was up 0.3% in November and is 2.3% yearly. (International Herald Tribune: New figures show prices rising on both side of Atlantic.)

The yearly numbers only tell part of the story, however. The CPI in August was only 2% yearly. Energy costs in the fourth quarter soared, however, with oil hitting $100 per barrel and actual gas prices at the pump topping $3.00 per gallon with no sign of backing down. In just one quarter, the rate of inflation effectively doubled.

The housing and credit problems have placed FOMC (Federal Open Markets Commission) in a rather difficult bind. In the last quarter, FOMC has clearly adopted a policy aimed at calming credit fears and softening the blow to the nation's largest banks. This policy has manifested in several interest rate cuts, the most recent of which came on December 11th. Unfortunately, that policy is diametrically opposed to combating inflation. An increase in interest rates is required for inflationary control, and it does not appear that FOMC is prepared to do that anytime soon.

One must wonder if we have forgotten the lessons of the late 1970s and early '80s. Have we forgotten the "misery index" popularized in the Reagan - Carter Presidential campaign in 1980? Lest we forget, the nation was faced with double-digit inflation and double-digit unemployment; something virtually all economist thought was all but impossible to achieve. We could be headed in that direction again, for the economic situation is frighteningly similar.

Today we have numerous economists predicting an economic slow-down leading to recession. A recession always implies lay-offs, leading to higher unemployment. At the same time, we have a brewing banking crisis lead by the housing market collapse (also seen in the late 1970s) and the imminent collapse of the credit card industry. These pressures are preventing the Fed from implementing measures to control inflation. At the current rate of inflationary growth, double-digit inflation could be less than a year away.

The real question is which way FOMC should lean. Should the monetary policy be geared at easing the credit crisis or easing inflation? Either path could easily lead to a recession. It would appear that FOMC is concerned that controlling inflation would be the faster route to that recession since it is automatically designed to slow economic growth. A rise in interest rates coupled with the credit collapse could be enough to move growth into the negative column. But allowing inflation to spiral out of control could force the same thing. When consumers no longer have enough discretionary cash to make major purchases, the economy essentially grinds to a halt. We're either at or past that breaking point right now.

At the very least, FOMC needs to adopt a policy that halts further interest rate cuts. There will be a short-term hit on the stock market, especially considering the disappointment investors displayed over a 25 basis point cut on Tuesday. Holding firm on rates would not help lenders reeling from the housing and credit crisis, but it will at least not exacerbate inflationary pressures already fueled by the price of energy. It may buy enough time to allow a controlled increase in interest rates in an attempt to get inflation back on the short leash.

What FOMC cannot do is continue down the self-destructive path that has brought us to this point. The next couple of years look pretty grim from an economic viewpoint. We really don't need FOMC to reenact the economic debacle of the late 1970s. I remember it well enough from the first time around. I'm pretty sure we can all live without the sequel.