Archive for July, 2010|Monthly archive page

‘ACROSS EUROPE, GLIMMERS OF OPTIMISM EMERGE, ‘ by Neil Shah & Mark Gongloss in the W.S.J.

In Uncategorized on July 30, 2010 at 15:32

Across Europe, glimmers of optimism emerge


Things are finally going Europe’s way.

In recent weeks, after months of crisis and questions, a number of market indicators have turned positive. Riskier sovereign debt has rallied, credit-default insurance costs are at two-month lows and the euro is flirting with an 11-week high against the dollar.

Ebbing fear in Europe has helped bring relief to other markets around the world, including U.S. stocks. But there are also signs of lingering market unease and little hope that the long-term problems dogging Europe have been solved, suggesting the welcome market reprieve may be temporary.

Most important, tensions have eased in the battered government-bond market, even as the European Central Bank withdraws its emergency support program of buying troubled euro-zone public debt. Investors, increasingly confident that European policy makers have forestalled a sovereign-debt default, at least in the short term, have taken up some of the buying slack from the ECB.

As a result, the borrowing costs of deeply indebted euro members like Spain, Portugal, Ireland and Greece have fallen significantly relative to Germany recently, making it easier for them to refinance their debt burdens. In recent weeks, the difference between the yield on Spanish bonds and relatively safe German debt has shrunk to its lowest levels since mid-May, while spreads for Portugal and Ireland have also narrowed.

Several factors are driving the improvement in European financial markets, including the nearly $1 trillion bailout announced in May, a string of well-received sovereign-bond auctions, hints of economic recovery and the recently concluded bank stress tests.

Few observers are ready to call an end to Europe’s debt troubles, however. Credit-stress indicators are still higher than normal, and many banks are still relying on the ECB for funding. A measure of European interbank borrowing costs, the three-month Euro Interbank Offered Rate, or Euribor, rose to 0.893% on Tuesday, its highest level in nearly a year. That is a sign that some banks may still be wary about lending to their counterparts.

The recent strength in some European economic indicators isn’t yet broad-based or persistent enough to declare a trend. The fiscal austerity plans of governments throughout the region could put a damper on growth for months. And if those austerity measures shrink retirement, health and other government benefits, they raise the chances of political backlash and more risks to growth.

“We suspect that concerns will resurface before too long as the economic pain brought about by fiscal tightening causes some countries to question whether they should stay within the European Monetary Union,” wrote John Higgins, senior market economist at Capitol Economics in London, in a note.

Troubled sovereign borrowers have short-term debts that will need to be refinanced in the years to come, after the bailout package expires.

Investors may be relieved that the recent stress tests of European banks didn’t produce many failing grades. But the tests’ limited scope and arguably tame stress levels have many investors concerned that they left uncovered hidden risks in the banking system.

As a result, Europe’s financial markets may be merely enjoying a predictable, and temporary, lull following the turmoil of spring and early summer.

“We can stop worrying about Europe now, but we will be revisiting this problem a year from now and two years from now,” said Guy LeBas, chief fixed-income strategist at Janney Capital Markets.

For now, rallies in the credit-default swaps market—where investors buy protection against debt defaults—have brought insurance costs back down to mid-May levels. In the past month, Spain’s credit-insurance costs have fallen 34%, while costs for Greece and Ireland are down 31% and 25%, according to data provider Markit.

The uptick in optimism is striking given that the European Central Bank has nearly halted its purchases of public debt in the past week, having bought roughly €60 billion ($78 billion) of bonds since it began in May, indicating Europe’s bond market may be starting to stand on its own feet.

Also, Europe’s economy is showing signs of improvement. On Friday, the U.K. government reported that Britain’s economy grew faster last quarter than it has in more than four years. German data have also been stronger than expected.

And countries on the periphery of the euro-zone have raised billions of euros of new funding in the capital markets recently without trouble. Last week, Spain borrowed nearly €6 billion by selling Treasury bills, paying a lower interest rate than a month earlier. Ireland is finished with over 80% of its refinancing needs for the year. Portugal will sell new debt on Wednesday.

With the crisis fading, the euro has clawed its way back to $1.30 against the dollar after falling below $1.19 in early June. Stock markets are back in the black, with the pan-European Stoxx 600 Index up 1.6% this year. Greece’s benchmark ASE index finished Tuesday 4.1% higher.

Ross Pamphilon, head of portfolio management at European Credit Management in London, said European assets could even benefit over the longer-term as euro zone countries move more quickly than the U.S. to tackle their deep fiscal problems. He is buying European corporate bonds, especially riskier bonds issued by European banks.

“Sooner or later, the focus may actually shift to the U.S.,” he said



In Uncategorized on July 29, 2010 at 18:43

Fed Member’s Deflation Warning Hints at Policy Shift


Published: July 29, 2010

WASHINGTON — A subtle but significant shift appears to be occurring within the Federal Reserve over the course of monetary policy, amid increasing signs that the economic recovery is weakening.

On Thursday, James Bullard, the president of the Federal Reserve Bank of St. Louis, warned that the Fed’s current policies were putting the American economy at risk of becoming “enmeshed in a Japanese-style deflationary outcome within the next several years.”

The warning by Mr. Bullard, who is a voting member of the Fed committee that determines interest rates, comes days after Ben S. Bernanke, the Fed chairman, said the central bank was prepared to do more to stimulate the economy if needed, though it had no immediate plans to do so.

Mr. Bullard had been viewed as a centrist, and associated with the camp that sees inflation, the Fed’s historic enemy, as a greater threat than deflation.

But with inflation now very low, about half of the Fed’s unofficial target of 2 percent, and with the European debt crisis having roiled the markets, even self-described inflation “hawks” like Mr. Bullard have gotten worried that growth has slowed so much that the economy is at risk of a dangerous cycle of falling prices and wages.

Among those seen as “doves,” sympathetic to the view that the damage from long-term unemployment and the threat of deflation are among the greatest challenges facing the economy, are three other Fed bank presidents: Eric S. Rosengren of Boston, Janet L. Yellen of San Francisco and William C. Dudley of New York.

The increased attention on the doves comes as the Fed’s board of governors is shifting.

President Obama has nominated Ms. Yellen to be vice chairwoman of the Fed. The Senate Banking Committee voted 17 to 6 on Wednesday to confirm her, though the top Republican on the panel, Senator Richard C. Shelby of Alabama, voted no, saying he believed Ms. Yellen had an “inflationary bias.”

Mr. Obama’s two other nominees, Peter A. Diamond and Sarah Bloom Raskin, who like Ms. Yellen are on track to be confirmed by the Senate, have also expressed serious concerns about unemployment.

Whether the Fed should take new and untested actions to support the economy is certain to be the top agenda item when the Federal Open Market Committee, which sets monetary policy, meets on Aug. 10. The committee includes the Fed’s board of governors, along with the president of the New York Fed and a rotating group of the other bank presidents.

Mr. Bullard, in an conference call with reporters on Thursday, said he was not calling right away for the Fed to drop its position that interest rates would remain exceptionally low for “an extended period,” or to resume buying long-term Treasury securities to stimulate the economy.

But both steps, he said, should be taken if any new “negative shocks” roil the economy.

“This is very significant,” Laurence H. Meyer, a former Fed governor, said of Mr. Bullard’s new position. “He has been one of the most hawkish members, but he is now calling for the Fed to ease aggressively. There seems to be no question he wants to do it sooner rather than later, and relatively forcefully.”

Until now, Mr. Rosengren of the Boston Fed, had been perhaps the most outspoken Fed official to raise the prospect of the economy getting mired in a deflationary cycle.

“While I am not anticipating we will be in a deflationary period, it’s a risk that I do take seriously, and we should continue to monitor what’s happening with prices,” Mr. Rosengren said in an interview. “A heightened risk of deflation is something that we should react to.”

That view is not universally held, however.

“I think the fear of deflation in and of itself is probably overblown, from my perspective,” Charles I. Plosser, president of the Philadelphia Fed, said last week in an interview. He said that inflation expectations were “well-anchored” and noted that $1 trillion in bank reserves are sitting at the Fed. “It’s hard to imagine with that much money sitting around, you would have a prolonged period of deflation,” he said.

Richard W. Fisher, president of the Dallas Fed, said in an interview this week: “Reasonable people can argue that there’s a risk of deflation, but we haven’t seen it in the numbers yet.”

These two regional bank presidents, along with Thomas M. Hoenig of the Kansas City Fed, are associated with the “hawkish” camp within the Fed whose focus is continued vigilance on inflation.

Starting in 2007, the Fed lowered the benchmark short-term interest rate all the way to zero and pumped some $2 trillion into the economy with an array of emergency loans and purchases of government debts and mortgage bonds.

Those purchases were phased out in March, but there is now talk within the Fed of resuming them. Doing so would further enlarge the central bank’s balance sheet, which has more than doubled, to $2.3 trillion.

To buy all those assets, the Fed essentially printed money — the $1 trillion in reserves. If the reserves were withdrawn and loaned out too quickly, that could trigger a rapid increase in the supply of money in the economy.

But right now there seems to be little threat of that happening. Bank lending has continued to contract. Big companies are in essence sitting on piles of cash, while many small businesses complain that getting a bank loan has gotten much tougher.

“The inconceivable is becoming increasingly conceivable,” Mr. Rosengren said. “As a result, I think it has become clear that just the creation of reserves, in and of themselves, isn’t going to become inflationary and shouldn’t affect inflation expectations, unless you see a banking system that is growing rapidly and starting to increase lending.”

He added: “At that point, we should start contracting both monetary and fiscal policy, and I would welcome when that occurs. But we’re not at that point right now.”

Inflation expectations can be as an important as inflation itself. Since May 2008, the Fed has been saying it would keep interest rates “exceptionally low” for “extended period.” The markets have over time interpreted that phrase to mean that the Fed is likely keep the benchmark federal funds rate at its current level — a target of zero to 0.25 percent — through 2011.

But in his article, Mr. Bullard warns: “Promising to remain at zero for a long time is a double-edged sword.”

Mr. Bullard said that inflation expectations had fallen from about 2 percent earlier this year to about 1.4 percent now, as judged by one measure, five-year Treasury inflation-protected securities.

The outcome could be an “unintended steady state” like Japan’s slow-growth economy. “The U.S. is closer to a Japan-style outcome today than at any time in recent history,” he wrote.

Along with changing the “extended period” language and resuming asset purchases, the Fed could lower the interest it pays on excess reserves — the reserves the banks hold with the Fed in excess of what they are required to — from its current rate of 0.25 percent. It could also reinvest the cash it receives when the mortgages underlying its securities are prepaid.

Mr. Bernanke, in testimony to Congress last week, raised both of those possibilities. But he has been cautious about appearing to endorse any particular approach.

For all the talk of new asset purchases, Mr. Meyer warned that there were diminishing returns — a concern that is held by several of the governors in the Fed’s headquarters.

“A new round of asset purchases would have a smaller effect than the first round,” he said. “If the F.O.M.C. returns to asset purchases, to have a meaningful effect, they would have to purchase at least $2 trillion, doubling the balance sheet.”

‘WHO COOKED THE PLANET?,’ by Paul Krugman in the N. Y. Times.

In Uncategorized on July 26, 2010 at 15:28


Who Cooked the Planet?


Published: July 25, 2010

Never say that the gods lack a sense of humor. I bet they’re still chuckling on Olympus over the decision to make the first half of 2010 — the year in which all hope of action to limit climate change died — the hottest such stretch on record.

Of course, you can’t infer trends in global temperatures from one year’s experience. But ignoring that fact has long been one of the favorite tricks of climate-change deniers: they point to an unusually warm year in the past, and say “See, the planet has been cooling, not warming, since 1998!” Actually, 2005, not 1998, was the warmest year to date — but the point is that the record-breaking temperatures we’re currently experiencing have made a nonsense argument even more nonsensical; at this point it doesn’t work even on its own terms.

But will any of the deniers say “O.K., I guess I was wrong,” and support climate action? No. And the planet will continue to cook.

So why didn’t climate-change legislation get through the Senate? Let’s talk first about what didn’t cause the failure, because there have been many attempts to blame the wrong people.

First of all, we didn’t fail to act because of legitimate doubts about the science. Every piece of valid evidence — long-term temperature averages that smooth out year-to-year fluctuations, Arctic sea ice volume, melting of glaciers, the ratio of record highs to record lows — points to a continuing, and quite possibly accelerating, rise in global temperatures.

Nor is this evidence tainted by scientific misbehavior. You’ve probably heard about the accusations leveled against climate researchers — allegations of fabricated data, the supposedly damning e-mail messages of “Climategate,” and so on. What you may not have heard, because it has received much less publicity, is that every one of these supposed scandals was eventually unmasked as a fraud concocted by opponents of climate action, then bought into by many in the news media. You don’t believe such things can happen? Think Shirley Sherrod.

Did reasonable concerns about the economic impact of climate legislation block action? No. It has always been funny, in a gallows humor sort of way, to watch conservatives who laud the limitless power and flexibility of markets turn around and insist that the economy would collapse if we were to put a price on carbon. All serious estimates suggest that we could phase in limits on greenhouse gas emissions with at most a small impact on the economy’s growth rate.

So it wasn’t the science, the scientists, or the economics that killed action on climate change. What was it?

The answer is, the usual suspects: greed and cowardice.

If you want to understand opposition to climate action, follow the money. The economy as a whole wouldn’t be significantly hurt if we put a price on carbon, but certain industries — above all, the coal and oil industries — would. And those industries have mounted a huge disinformation campaign to protect their bottom lines.

Look at the scientists who question the consensus on climate change; look at the organizations pushing fake scandals; look at the think tanks claiming that any effort to limit emissions would cripple the economy. Again and again, you’ll find that they’re on the receiving end of a pipeline of funding that starts with big energy companies, like Exxon Mobil, which has spent tens of millions of dollars promoting climate-change denial, or Koch Industries, which has been sponsoring anti-environmental organizations for two decades.

Or look at the politicians who have been most vociferously opposed to climate action. Where do they get much of their campaign money? You already know the answer.

By itself, however, greed wouldn’t have triumphed. It needed the aid of cowardice — above all, the cowardice of politicians who know how big a threat global warming poses, who supported action in the past, but who deserted their posts at the crucial moment.

There are a number of such climate cowards, but let me single out one in particular: Senator John McCain.

There was a time when Mr. McCain was considered a friend of the environment. Back in 2003 he burnished his maverick image by co-sponsoring legislation that would have created a cap-and-trade system for greenhouse gas emissions. He reaffirmed support for such a system during his presidential campaign, and things might look very different now if he had continued to back climate action once his opponent was in the White House. But he didn’t — and it’s hard to see his switch as anything other than the act of a man willing to sacrifice his principles, and humanity’s future, for the sake of a few years added to his political career.

Alas, Mr. McCain wasn’t alone; and there will be no climate bill. Greed, aided by cowardice, has triumphed. And the whole world will pay the price.


In Uncategorized on July 26, 2010 at 03:51

Inside the Fog of War: Reports From the Ground in Afghanistan

Published: July 25, 2010

This article was written and reported by C. J. Chivers, Carlotta Gall, Andrew W. Lehren, Mark Mazzetti, Jane Perlez, and Eric Schmitt, with contributions from Jacob Harris and Alan McLean.

A six-year archive of classified military documents made public on Sunday offers an unvarnished, ground-level picture of the war in Afghanistan that is in many respects more grim than the official portrayal.

The secret documents, released on the Internet by an organization called WikiLeaks, are a daily diary of an American-led force often starved for resources and attention as it struggled against an insurgency that grew larger, better coordinated and more deadly each year.

The New York Times, the British newspaper The Guardian and the German magazine Der Spiegel were given access to the voluminous records several weeks ago on the condition that they not report on the material before Sunday.

The documents — some 92,000 reports spanning parts of two administrations from January 2004 through December 2009 — illustrate in mosaic detail why, after the United States has spent almost $300 billion on the war in Afghanistan, the Taliban are stronger than at any time since 2001.

As the new American commander in Afghanistan, Gen. David H. Petraeus, tries to reverse the lagging war effort, the documents sketch a war hamstrung by an Afghan government, police force and army of questionable loyalty and competence, and by a Pakistani military that appears at best uncooperative and at worst to work from the shadows as an unspoken ally of the very insurgent forces the American-led coalition is trying to defeat.

The material comes to light as Congress and the public grow increasingly skeptical of the deepening involvement in Afghanistan and its chances for success as next year’s deadline to begin withdrawing troops looms.

The archive is a vivid reminder that the Afghan conflict until recently was a second-class war, with money, troops and attention lavished on Iraq while soldiers and Marines lamented that the Afghans they were training were not being paid.

The reports — usually spare summaries but sometimes detailed narratives — shed light on some elements of the war that have been largely hidden from the public eye:

• The Taliban have used portable heat-seeking missiles against allied aircraft, a fact that has not been publicly disclosed by the military. This type of weapon helped the Afghan mujahedeen defeat the Soviet occupation in the 1980s.

• Secret commando units like Task Force 373 — a classified group of Army and Navy special operatives — work from a “capture/kill list” of about 70 top insurgent commanders. These missions, which have been stepped up under the Obama administration, claim notable successes, but have sometimes gone wrong, killing civilians and stoking Afghan resentment.

• The military employs more and more drone aircraft to survey the battlefield and strike targets in Afghanistan, although their performance is less impressive than officially portrayed. Some crash or collide, forcing American troops to undertake risky retrieval missions before the Taliban can claim the drone’s weaponry.

• The Central Intelligence Agency has expanded paramilitary operations inside Afghanistan. The units launch ambushes, order airstrikes and conduct night raids. From 2001 to 2008, the C.I.A. paid the budget of Afghanistan’s spy agency and ran it as a virtual subsidiary.

Over all, the documents do not contradict official accounts of the war. But in some cases the documents show that the American military made misleading public statements — attributing the downing of a helicopter to conventional weapons instead of heat-seeking missiles or giving Afghans credit for missions carried out by Special Operations commandos.

White House officials vigorously denied that the Obama administration had presented a misleading portrait of the war in Afghanistan.

“On Dec. 1, 2009, President Obama announced a new strategy with a substantial increase in resources for Afghanistan, and increased focus on Al Qaeda and Taliban safe-havens in Pakistan, precisely because of the grave situation that had developed over several years,” said Gen. James L. Jones, White House national security adviser, in a statement released Sunday.

“We know that serious challenges lie ahead, but if Afghanistan is permitted to slide backwards, we will again face a threat from violent extremist groups like Al Qaeda who will have more space to plot and train,” the statement said.

General Jones also condemned the decision by WikiLeaks to make the documents public, saying that “the disclosure of classified information by individuals and organizations which could put the lives of Americans and our partners at risk, and threaten our national security.”

“WikiLeaks made no effort to contact us about these documents – the United States government learned from news organizations that these documents would be posted,” General Jones said.

The archive is clearly an incomplete record of the war. It is missing many references to seminal events and does not include more highly classified information. The documents also do not cover events in 2010, when the influx of more troops into Afghanistan began and a new counterinsurgency strategy took hold.

They suggest that the military’s internal assessments of the prospects for winning over the Afghan public, especially in the early days, were often optimistic, even naïve.

There are fleeting — even taunting — reminders of how the war began in the occasional references to the elusive Osama bin Laden. In some reports he is said to be attending meetings in Quetta, Pakistan. His money man is said to be flying from Iran to North Korea to buy weapons. Mr. bin Laden has supposedly ordered a suicide attack against the Afghan president, Hamid Karzai. These reports all seem secondhand at best.

The reports portray a resilient, canny insurgency that has bled American forces through a war of small cuts. The insurgents set the war’s pace, usually fighting on ground of their own choosing and then slipping away.

Sabotage and trickery have been weapons every bit as potent as small arms, mortars or suicide bombers. So has Taliban intimidation of Afghan officials and civilians — applied with pinpoint pressure through threats, charm, violence, money, religious fervor and populist appeals.


Intelligence Summary: Officer Threatened

An Afghan National Army brigade commander working in southern Afghanistan received a phone call from a Taliban mullah named Ezat, one brief report said. “Mullah Ezat told the ANA CDR to surrender and offered him $100,000(US) to quit working for the Afghan Army,” the report said. “Ezat also stated that he knows where the ANA CDR is from and knows his family.” Read the Document »


Intelligence Summary: Taliban Recruiter

A Taliban commander, Mullah Juma Khan, delivered a eulogy at the funeral of a slain insurgent. He played on the crowd’s emotions, according to the report: “Juma cried while telling the people an unnamed woman and her baby were killed while the woman was nursing the baby.” Finally he made his pitch: “Juma then told the people they needed to be angry at CF [Coalition Force] and ANSF [Afghan National Security Forces] for causing this tragedy” and “invited everyone who wants to fight to join the fighters who traveled with him.” Read the Document »

The insurgents use a network of spies, double agents, collaborators and informers — anything to undercut coalition forces and the effort to build a credible and effective Afghan government capable of delivering security and services.

The reports repeatedly describe instances when the insurgents have been seen wearing government uniforms, and other times when they have roamed the country or appeared for battle in the very Ford Ranger pickup trucks that the United States had provided the Afghan Army and police force.

NOV. 20, 2006 | KABUL

Incident Report: Insurgent Subterfuge

After capturing four pickup trucks from the Afghan National Army, the Taliban took them to Kabul to be used in suicide bombings. “They intend to use the pick-up trucks to target ANA compounds, ISAF and GOA convoys, as well as ranking GOA and ISAF officials,” said a report, referring to coalition forces and the government of Afghanistan. “The four trucks were also accompanied by an unknown quantity of ANA uniforms to facilitate carrying out the attacks.” Read the Document »

The Taliban’s use of heat-seeking missiles has not been publicly disclosed — indeed, the military has issued statements that these internal records contradict.

In the form known as a Stinger, such weapons were provided to a previous generation of Afghan insurgents by the United States, and helped drive out the Soviets. The reports suggest that the Taliban’s use of these missiles has been neither common nor especially effective; usually the missiles missed.


Incident Report: Downed Helicopter

An American CH-47 transport helicopter was struck by what witnesses described as a portable heat-seeking surface-to-air missile after taking off from a landing zone.

The helicopter, the initial report said, “was engaged and struck with a Missile … shortly after crossing over the Helmand River. The missile struck the aircraft in the left engine. The impact of the missile projected the aft end of the aircraft up as it burst into flames followed immediately by a nose dive into the crash site with no survivors.”

The crash killed seven soldiers: five Americans, a Briton and a Canadian.

Multiple witnesses saw a smoke trail behind the missile as it rushed toward the helicopter. The smoke trail was an important indicator. Rocket-propelled grenades do not leave them. Heat-seeking missiles do. The crew of other helicopters reported the downing as a surface-to-air missile strike. But that was not what a NATO spokesman told Reuters.

“Clearly, there were enemy fighters in the area,” said the spokesman, Maj. John Thomas. “It’s not impossible for small-arms fire to bring down a helicopter.”

The reports paint a disheartening picture of the Afghan police and soldiers at the center of the American exit strategy.

The Pentagon is spending billions to train the Afghan forces to secure the country. But the police have proved to be an especially risky investment and are often described as distrusted, even loathed, by Afghan civilians. The reports recount episodes of police brutality, corruption petty and large, extortion and kidnapping. Some police officers defect to the Taliban. Others are accused of collaborating with insurgents, arms smugglers and highway bandits. Afghan police officers defect with trucks or weapons, items captured during successful ambushes or raids.


Investigation Report: Extortion by the Police

This report captured the circular and frustrating effort by an American investigator to stop Afghan police officers at a checkpoint from extorting payments from motorists. After a line of drivers described how they were pressed to pay bribes, the American investigator and the local police detained the accused checkpoint police officers.

“While waiting,” the investigator wrote, “I asked the seven patrolmen we detained to sit and relax while we sorted through a problem without ever mentioning why they were being detained. Three of the patrolmen responded by saying that they had only taken money from the truck drivers to buy fuel for their generator.”

Two days later when the American followed up, he was told by police officers that the case had been dropped because the witness reports had all been lost. Read the Document »

One report documented the detention of a military base worker trying to leave the base with GPS units hidden under his clothes and taped to his leg. Another described the case of a police chief in Zurmat, in Paktia Province, who was accused of falsely reporting that his officers had been in a firefight so he could receive thousands of rounds of new ammunition, which he sold in a bazaar.

Coalition trainers report that episodes of cruelty by the Afghan police undermine the effort to build a credible security force to take over when the allies leave.


Incident Report: Brutal Police Chief

This report began with an account of Afghan soldiers and police officers harassing and beating local civilians for refusing to cooperate in a search. It then related the story of a district police commander who forced himself on a 16-year-old girl. When a civilian complained, the report continued, “The district commander ordered his bodyguard to open fire on the AC [Afghan civilian]. The bodyguard refused, at which time the district commander shot [the bodyguard] in front of the AC.”

Rivalries and friction between the largest Afghan security services — the police and the army — are evident in a number of reports. Sometimes the tensions erupted in outright clashes, as was recorded in the following report from last December that was described as an “enemy action.” The “enemy” in this case was the Afghan National Security Force.


Incident Report: Police and Army Rivalry

A car accident turned deadly when an argument broke out between the police and the Afghan National Army. “The argument escalated and ANA & ANP started to shoot at each other,” a report said.

An Afghan soldier and three Afghan police officers were wounded in the shootout. One civilian was killed and six others were wounded by gunfire. Read the Document »

One sign of the weakness of the police is that in places they have been replaced by tribal warlords who are charged — informally but surely — with providing the security the government cannot. Often the warlords operate above the law.


Incident Report: Illegal Checkpoint

A private security convoy, ferrying fuel from Kandahar to Oruzgan, was stopped by what was thought to be 100 insurgents armed with assault rifles and PK machine guns, a report said.

It turned out the convoy had been halted by “the local Chief of Police,” who was “demanding $2000-$3000 per truck” as a kind of toll. The chief, said the report, from NATO headquarters in Southern Afghanistan, “states he needs the money to run his operation.”

The chief was not actually a police chief. He was Matiullah Khan, a warlord and an American-backed ally of President Karzai who was arguably Oruzgan’s most powerful man. He had a contract, the Ministry of Interior said, to protect the road so NATO’s supply convoys could drive on it, but he had apparently decided to extort money from the convoys himself.

Late in the day, Mr. Matiullah, after many interventions, changed his mind. The report said that friendly forces “report that the COMPASS convoy is moving again and did not pay the fee required.”

The documents show how the best intentions of Americans to help rebuild Afghanistan through provincial reconstruction teams ran up against a bewildering array of problems — from corruption to cultural misunderstandings — as they tried to win over the public by helping repair dams and bridges, build schools and train local authorities.

A series of reports from 2005 to 2008 chart the frustrations of one of the first such teams, assigned to Gardez, in Paktia Province.


Civil Affairs Report: Orphanage Opens

An American civil affairs officer could barely contain her enthusiasm as she spoke at a ribbon-cutting ceremony for a new orphanage, built with money from the American military.

The officer said a friend had given her a leather jacket to present to “someone special,” the report noted. She chose the orphanage’s director. “The commander stated that she could think of no one more deserving then someone who cared for orphans,” it said.

The civil affairs team handed out blankets, coats, scarves and toys. The governor even gave money from his own pocket. “All speeches were very positive,” the report concluded. Read the Document »


Civil Affairs Report: Not Many Orphans

The team dropped by to check on the orphanage. “We found very few orphans living there and could not find most of the HA [humanitarian assistance] we had given them,” the report noted.

The team raised the issue with the governor of Paktia, who said he was also concerned and suspected that the money he had donated had not reached the children. He visited the orphanage himself. Only 30 children were there; the director had claimed to have 102. Read the Document »


Civil Affairs Report: An Empty Orphanage

Nearly a year after the opening of the orphanage, the Americans returned for a visit. “There are currently no orphans at the facility due to the Holiday. (Note: orphans are defined as having no father, but may still have mother and a family structure that will have them home for holidays.)” Read the Document »


District Report: Lack of Resources

As the Taliban insurgency strengthened, the lack of a government presence in the more remote districts — and the government’s inability to provide security or resources even to its own officials — is evident in the reports.

An official from Dand Wa Patan, a small sliver of a district along the border with Pakistan, so urgently wanted to talk to the members of the American team that he traveled three and a half hours by taxi — he had no car — to meet them.

“He explained that the enemy had changed their tactics in the area and were no longer fighting from the mountains, no longer sending rockets toward his compound and other areas,” the report noted. “He stated that the enemy focus was on direct action and that his family was a primary target.”

Ten days earlier the Taliban crept up to the wall of his family compound and blew up one of the security towers, the report said. His son lost his legs in the explosion.

He pleaded for more police officers, weapons and ammunition. He also wanted a car so he could drive around the district he was supposed to oversee.

But the Americans’ situation was not much better. For months the reports show how a third — or even a half — of the team’s vehicles were out of service, awaiting spare parts.


Civil Affairs Report: Local Corruption

For a while the civil affairs team worked closely with the provincial governor, described as “very charismatic.” Yet both he and the team are hampered by corrupt, negligent and antagonistic officials.

The provincial chief of police is described in one report as “the axel of corruption.”

“He makes every effort to openly and blatantly take money from the ANP troopers and the officers,” one sympathetic officer told the Americans.

Other officers are more clever. One forged rosters, to collect pay for imaginary police officers. A second set up illegal checkpoints to collects tolls around Gardez. Still another stole food and uniforms, leaving his soldiers underfed and ill equipped for the winter.

The governor, meanwhile, was all but trapped. Such animosity developed between him and a senior security official that the governor could not leave his office for weeks at a time, fearing for his life. Finally, the corrupt officials were replaced. But it took months.


Civil Affairs Report: The Cost of Corruption

Their meetings with Afghan district officials gave the American civil affairs officers unique insights into local opinions. Sometimes, the Afghan officials were brutally honest in their assessments.

In one case, provincial council officials visited the Americans at their base in Gardez to report threats — the Taliban had tossed a grenade into their office compound and were prowling the hills. Then the officials began a tirade.

“The people of Afghanistan keep loosing their trust in the government because of the high amount of corrupted government officials,” the report quoted them as saying. “The general view of the Afghans is that the current government is worst than the Taliban.”

“The corrupted government officials are a new concept brought to Afghanistan by the AMERICANS,” the oldest member of the group told the civil affairs team.

In conclusion, the civil affairs officer who wrote the report warned, “The people will support the Anti-Coalition forces and the security condition will degenerate.” He recommended a public information program to educate Afghans about democracy. Read the Document »

The reports also evoke the rivalries and tensions that swirl within the presidential palace between President Karzai’s circle and the warlords.

OCT. 16, 2006 | KABUL

Intelligence Summary: Political Intrigue

In a short but heated meeting at the presidential palace, the Kabul police chief, Brig. Gen. Mir Amanullah Gozar, angrily refuted accusations made publicly by Jamil Karzai that he was corrupt and lacked professional experience. The report of the meeting identified Jamil Karzai as the president’s brother; he is in fact a cousin.

General Gozar “said that if Jamil were not the president’s Brother he would kidnap, torture, and kill him,” the report said. He added that he was aware of plans by the American-led coalition to remove him from his post.

He threatened the president, saying that if he were replaced he would reveal “allegations about Karzai having been a drug trader and supporter of the Pakistan-led insurgency in Afghanistan,” presumably a reference to Mr. Karzai’s former links with the Taliban.

Incident by incident, the reports resemble a police blotter of the myriad ways Afghan civilians were killed — not just in airstrikes but in ones and twos — in shootings on the roads or in the villages, in misunderstandings or in a cross-fire, or in chaotic moments when Afghan drivers ventured too close to convoys and checkpoints.

The dead, the reports repeatedly indicate, were not suicide bombers or insurgents, and many of the cases were not reported to the public at the time. The toll of the war — reflected in mounting civilian casualties — left the Americans seeking cooperation and support from an Afghan population that grew steadily more exhausted, resentful, fearful and alienated.

From the war’s outset, airstrikes that killed civilians in large numbers seized international attention, including the aerial bombardment of a convoy on its way to attend President Karzai’s inauguration in 2001. An airstrike in Azizabad, in western Afghanistan, killed as many as 92 people in August 2008. In May 2009, another strike killed 147 Afghan civilians.


Incident Report: Mistaken Airstrike

This report, filed about the activities of a Joint Terminal Attack Controller team, which is responsible for communication from the ground and guiding pilots during surveillance missions and airstrikes, offers a glimpse into one of the bloodiest mistakes in 2009.

It began with a report from the police command saying that “2X FUEL TRUCKS WERE STOLEN BY UNK NUMBER OF INS” and that the insurgents planned to cross the Kunduz River with their prizes. It was nighttime, and the river crossing was not illuminated. Soon, the report noted, the “JTAC OBSERVED KDZ RIVER AND REPORTED THAT IT DISCOVERED THE TRUCKS AS WELL AS UP TO 70 INS” at “THE FORD ON THE RIVER. THE TRUCKS WERE STUCK IN THE MUD.” How the JTAC team was observing the trucks was not clear, but many aircraft have infrared video cameras that can send a live feed to a computer monitor on the ground.

According to the report, a German commander of the provincial reconstruction team “LINKED UP WITH JTAC AND, AFTER ENSURING THAT NO CIVILIANS WERE IN THE VICINITY,” he “AUTHORIZED AN AIRSTRIKE.” An F-15 then dropped two 500-pound guided bombs. The initial report said that “56X INS KIA [insurgents killed in action] (CONFIRMED) AND 14X INS FLEEING IN NE DIRECTION. THE 2X FUEL TRUCKS WERE ALSO DESTROYED.”

The initial report was wrong. The trucks had been abandoned, and a crowd of civilians milled around them, removing fuel. How the commander and the JTAC had ensured “that no civilians were in the area,” as the report said, was not explained.

The first sign of the mistake documented in the initial report appeared the next day, when another report said that at “0900 hrs International Media reported that US airstrike had killed 60 civilians in Kunduz. The media are reporting that Taliban did steal the trucks and had invited civilians in the area to take fuel.” Read the Document »

The reports show that the smaller incidents were just as insidious and alienating, turning Afghans who had once welcomed Americans as liberators against the war.


Incident Report: Checkpoint Danger

Afghan police officers shot a local driver who tried to speed through their checkpoint on a country road in Ghazni Province south of Kabul. The police had set up a temporary checkpoint on the highway just outside the main town in the district of Ab Band.

“A car approached the check point at a high rate of speed,” the report said. All the police officers fled the checkpoint except one. As the car passed the checkpoint it knocked down the lone policeman. He fired at the vehicle, apparently thinking that it was a suicide car bomber.

“The driver of the vehicle was killed,” the report said. “No IED [improved explosive device] was found and vehicle was destroyed.”

The police officer was detained in the provincial capital, Ghazni, and questioned. He was then released. The American mentoring the police concluded in his assessment that the policeman’s use of force was appropriate. Rather than acknowledging the public hostility such episodes often engender, the report found a benefit: it suggested that the shooting would make Afghans take greater care at checkpoints in the future.

“Effects on the populace clearly identify the importance of stopping at checkpoints,” the report concluded. Read the Document »


Incident Report: A Deaf Man Is Shot

Members of a C.I.A. paramilitary unit moved into the village of Malekshay in Paktika Province close to the border with Pakistan when they saw an Afghan running away at the sight of their convoy, one report recounted. Members of the unit shot him in the ankle, and medics treated him at the scene. The unit had followed military procedure — first shouting at the man, then firing warning shots and only after that shooting to wound, the report said.

Yet elders in the village told the unit that the man, Shum Khan, was deaf and mute and that he had fled from the convoy out of nervousness. Mr. Khan was “unable to hear the warnings or warning shots. Ran out of fear and confusion,” the report concludes. The unit handed over supplies in compensation. Read the Document »

The reports reveal several instances of allied forces accidentally firing on one another or on Afghan forces in the fog of war, often with tragic consequences.


Incident Report: Friendly Fire

A British Army convoy driving at night in southern Afghanistan suddenly came under small-arms fire. One of the British trucks rolled over. The British troops split into two groups, pulled back from the clash and called in airstrikes from American A-10 attack planes. After several confusing minutes, commanders realized that the Afghan police had attacked the British troops, mistaking them for Taliban fighters. One Afghan police officer was killed and 12 others were wounded.

The shifting tactics of the Americans can be seen as well in the reports, as the war strategy veered from freely using force to trying to minimize civilian casualties. But as the documents make clear, each approach has its frustrations for the American effort.

Strict new rules of engagement, imposed in 2009, minimized the use of airstrikes after some had killed civilians and turned Afghans against the war. But the rules also prompted anger from American troops and their families. The troops felt that their lives were not sufficiently valued because they had to justify every request for air or artillery support, making it easier for the Taliban to fight.


Incident Report: Barrage

In the days when field commanders had a freer hand, an infantry company commander observed an Afghan with a two-way radio who was monitoring the company’s activities. Warning of “IMMINENT THREAT,” the commander said he would “destroy” the man and his equipment — in other words, kill him. A short while later, a 155-millimeter artillery piece at a forward operating base in the nearby Pech Valley began firing high-explosive rounds — 24 in all.


Incident Report: Escalation of Force

As the rules tightened, the reports picked up a tone that at times seemed lawyerly. Many make reference, even in pitched fights, to troops using weapons in accordance with “ROE Card A” — which guides actions of self-defense rather than attacks or offensive acts. This report described an Apache helicopter firing warning shots after coming under fire. Its reaction was described as “an escalation of force.”

The helicopter pilots reported that insurgents “engaged with SAF [surface-to-air fire]”and that “INTEL suggested they were going to be fired upon again during their extraction.”

The helicopters “fired 40x 30mm warning shots to deter any further engagement.”

The report included the information that now is common to incident reports in which Western forces fire. “The terrain was considered rurally open and there were no CIV PID IVO [civilians positively identified in the vicinity of ] the target within reasonable certainty. There was no damage to infrastructure. BDA [battle damage assessment] recording conducted by AH-64 Gun Tape. No follow up required. The next higher command was consulted. The enemy engaged presented, in the opinion of the ground forces, an imminent threat. Engagement is under ROE Card A. Higher HQ have been informed.” Read the Document »

The reports show in previously unknown detail the omnipresence of drones in Afghanistan, the Air Force’s missile-toting Predators and Reapers that hunt militants. The military’s use of drones in Afghanistan has rapidly expanded in the past few years; the United States Air Force now flies about 20 Predator and Reaper aircraft a day — nearly twice as many as a year ago — over vast stretches of hostile Afghan territory. Allies like Britain and Germany fly their own fleets.

The incident reports chronicle the wide variety of missions these aircraft carry out: taking photographs, scooping up electronic transmissions, relaying images of running battles to field headquarters, attacking militants with bombs and missiles. And they also reveal the extent that armed drones are being used to support American Special Operations missions.

Documents in the Afghan archive capture the strange nature of the drone war in Afghanistan: missile-firing robots killing shovel-wielding insurgents, a remote-controlled war against a low-tech but resilient insurgency.


Incident Report: Predator Attack

Early one winter evening in southern Afghanistan, an Air Force Predator drone spotted a group of insurgents suspected of planting roadside bombs along a roadway less than two miles from Forward Operating Base Hutal, an American outpost.

Unlike the drones the C.I.A. operated covertly across the border in Pakistan, this aircraft was one of nearly a dozen military drones patrolling vast stretches of hostile Afghan territory on any given day.

Within minutes after identifying the militants, the Predator unleashed a Hellfire missile, all but evaporating one of the figures digging in the dark.

When ground troops reached the crater caused by the missile, costing $60,000, all that was left was a shovel and a crowbar. Read the Document »


Incident Report: A Lost Drone

Flying over southern Afghanistan on a combat mission, one of the Air Force’s premier armed drones, a Reaper, went rogue.

Equipped with advanced radar and sophisticated cameras, as well as Hellfire missiles and 500-pound bombs, the Reaper had lost its satellite link to a pilot who was remotely steering the drone from a base in the United States.

Again and again, the pilot struggled to regain control of the drone. Again and again, no response. The reports reveal that the military in Afghanistan lost many of the tiny five-pound surveillance drones with names like Raven and Desert Hawk that troops tossed out like model airplanes to peer around the next hill. But they had never before lost one of the Reapers, with its 66-foot wingspan.

As a last resort, commanders ordered an Air Force F-15E Strike Eagle fighter jet to shoot down the $13 million aircraft before it soared unguided into neighboring Tajikistan.

Ground controllers picked an unpopulated area over northern Afghanistan and the jet fired a Sidewinder missile, destroying the Reaper’s turbo-prop engine. Suddenly, the satellite link was restored, but it was too late to salvage the flight. At 5:30 a.m., controllers steered it into a remote mountainside for a final fiery landing. Read the Document »

As the Afghanistan war took priority under the Obama administration, more Special Operations forces were shifted from Iraq to conduct secret missions. The C.I.A.’s own paramilitary operations inside Afghanistan grew in tandem — as did the agency’s close collaboration with Afghanistan’s own spy agency.

Usually, such teams conducted night operations aimed at top Taliban commanders and militants on the “capture/kill” list. While individual commandos have displayed great courage, the missions can end in calamity as well as success. The expanding special operations have stoked particular resentment among Afghans — for their lack of coordination with local forces, the civilian casualties they frequently inflicted and the lack of accountability.


INCIDENT REPORT: Botched Night Raid

Shortly after five American rockets destroyed a compound in Paktika Province, helicopter-borne commandos from Task Force 373 — a classified Special Operations unit of Army Delta Force operatives and members of the Navy Seals — arrived to finish the job.

The mission was to capture or kill Abu Laith al-Libi, a top commander for Al Qaeda, who was believed to be hiding at the scene of the strike.

But Mr. Libi was not there. Instead, the Special Operations troops found a group of men suspected of being militants and their children. Seven of the children had been killed by the rocket attack.

Some of the men tried to flee the Americans, and six were quickly killed by encircling helicopters. After the rest were taken as detainees, the commandos found one child still alive in the rubble, and performed CPR for 20 minutes.

Word of the attack spread a wave of anger across the region, forcing the local governor to meet with village elders to defuse the situation.

American military officials drew up a list of “talking points” for the governor, pointing out that the target had been a senior Qaeda commander, that there had been no indications that women and children would be present and that a nearby mosque had not been damaged.

After the meeting, the governor reported that local residents were in shock, but that he had “pressed the Talking Points.” He even “added a few of his own that followed in line with our current story.”

The attack was caused by the “presence of hoodlums,” the governor told the people. It was a tragedy that children had been killed, he said, but “it could have been prevented had the people exposed the presence of insurgents in the area.”

He promised that the families would be compensated for their loss.

Mr. Libi was killed the following year by a C.I.A. drone strike. Read the Document »


Incident Report: A Raging Firefight

As they scrambled up the rocks toward a cluster of mud compounds perched high over the remote Shok Valley, a small group of American Green Berets and Afghan troops, known as Task Force Bushmaster, were confronted with a hail of gunfire from inside the insurgent stronghold.

They were there to capture senior members of the Hezb-e-Islami Gulbuddin militant group, part of a mission that the military had dubbed Operation Commando Wrath.

But what they soon discovered on that remote, snowy hilltop was that they were vastly outnumbered by a militant force of hundreds of fighters. Reinforcements were hours away.

A firefight raged for nearly seven hours, with sniper fire pinning down the Green Berets on a 60-foot rock ledge for much of that time.

Casualties mounted. By midmorning, nearly half of the Americans were wounded, but the militants directed their gunfire on the arriving medevac helicopters, preventing them from landing.

“TF Bushmaster reports they are combat ineffective and request reinforcement at this time.”

For a time, radio contact was lost.

Air Force jets arrived at the scene and began pummeling the compounds with 2,000-pound bombs, but the militants continued to advance down the mountain toward the pinned-down group.

The task force reported that there were “ 50-100 insurgents moving to reinforce against Bushmaster elements from the SW.”

Carrying wounded Americans shot in the pelvis, arm and legs — as well as two dead Afghans — the group made its way down toward the valley floor. Eventually, the helicopters were able to arrive to evacuate the dead and wounded.

Ten members of the Green Berets would receive Silver Stars for their actions during the battle, the highest number given to Special Forces soldiers for a single battle since the Vietnam War. By Army estimates, 150 to 200 militants were killed in the battle. Read the Document »


Meeting Report: A Plea for Help

Toward the end of a long meeting with top American military commanders, during which he delivered a briefing about the security situation in eastern Afghanistan, corruption in the government and Pakistan’s fecklessness in hunting down militants, Afghanistan’s top spy laid out his problem.

Amrullah Saleh, then director of the National Directorate of Security, told the Americans that the C.I.A. would no longer be handling his spy service’s budget. For years, the C.I.A. had essentially run the N.D.S. as a subsidiary, but by 2009 the Afghan government was preparing to take charge of the agency’s budget.

Mr. Saleh estimated that with the C.I.A. no longer bankrolling the Afghan spies, he could be facing a budget cut of 30 percent.

So he made a request. With the budget squeeze coming, Mr. Saleh asked the Americans for any AK-47s and ammunition they could spare.

If they had any spare boots, he would also take those, he said. Read the Document »

‘FEELING GLOOMY? MAYBE IT’S TIME TO BUY,’ in the Sunday Times, by Paul J. Lim from Money Magazine. GREAT READ!!!!!!!!

In Uncategorized on July 25, 2010 at 17:43


Feeling Gloomy? Maybe It’s Time to Buy


Published: July 24, 2010

BEFORE a market sell-off can reverse course, investor sentiment must plummet — not soar. That may sound counterintuitive, but the accepted wisdom on Wall Street is that it’s only after investors give up on stocks that prices can start to climb again.

The question is, have investors reached that point?

After a market peak on April 23, the Standard & Poor’s 500-stock index slumped as much as 16 percent, a slide classified as a correction but not a bear market, which is typically defined as a decline of 20 percent or more. After last week’s gains, the index was 9 percent below its April peak.

Yet market strategists note that recent surveys of investor sentiment point to an unusually swift eruption of bearishness ever since fears of another economic downturn started pressuring stock prices in late April. On July 14, the Investors Intelligence adviser sentiment survey — a widely followed gauge of the opinions of more than 100 independent investment newsletters — found that for the first time since April 2009, there were more bears than bulls among newsletter advisers. The July 21 survey showed equal numbers of bears and bulls.

A similar study, released on July 8 by the American Association of Individual Investors, found that the percentage of individuals who classified themselves as bearish had jumped to more than 57 percent, up from 42 percent in the previous week.

Though this figure sank back to 45 percent last week, the July 8 reading represented the highest degrees of pessimism among investors since March 2009.

“Given how awful the situation actually was early last year, it is amazing that sentiment is as negative now as it was back then,” said Edward Yardeni, president of Yardeni Research.

But is bearishness such a bad thing? Actually, no.

James B. Stack, editor of the InvesTech Market Analyst newsletter, based in Whitefish, Mont., pointed out that the July 8 study showed that the ratio of bears to bulls was greater than 2.7 to 1.

Historically, when the bear-to-bull ratio has risen above this level, the Dow Jones industrial average has posted gains of 5.4 percent and 11.4 percent, respectively, after three and six months, he noted in a recent report. To be sure, not all sentiment gauges are signaling that investors are throwing in the towel on stocks.

For example, in late 2008, at the height of the financial panic, the Chicago Board Options Exchange Volatility Index, or VIX — which measures investor expectations for market volatility — rose to a record level of more than 80. But it is far from such heights today. In fact, it is now at 23, after a climb to 45 in late May.

And while investors in 401(k) retirement plans have signaled skittishness by reducing their equity allocations, their risk aversion isn’t close to where it was when the market bottomed in March 2009. Still, many market strategists regard the market mood as being at extreme lows.

Perhaps what’s most surprising isn’t that stocks have climbed in periods of pessimism. Rather, it’s worth noting the types of stocks that have thrived.

BRIAN G. BELSKI, chief investment strategist at Oppenheimer, studied how various sectors of the market have performed in glum times over the past 20 years. Looking at the investor association’s survey and using a different ratio — that of bulls to bears — he found that 12 months after that ratio declines a certain point below the historical average, the markets tend to take on a split personality.

On the one hand, a couple of traditionally defensive areas of the market — health care and consumer staples companies, which aren’t terribly dependent on a strong economy — have traditionally done well 12 months after extreme pessimism sets in.

But two economically cyclical sectors of the market — specifically, technology, and consumer discretionary l stocks — have actually done better. Tech stocks in the S.& P. 500, for instance, have historically been up more than 14 percent one year after market pessimism has sunk to extreme lows.

Since market volatility began to soar in late April, the defensive areas of the market have lost the least. But if history is a guide, market bearishness may be telling investors not to just bet on stocks, but to broaden their strategy by investing in economically sensitive shares as well.

Paul J. Lim is a senior editor at Money magazine. E-mail:

‘SOME THOUGHTS ON DEFLATION, ‘ by John Mauldin at Frontline and Outside the

In Uncategorized on July 24, 2010 at 22:48

The debate over whether we are in for inflation or deflation was alive and well at the Agora Symposium in Vancouver this this week. It seems that not everyone is ready to join the deflation-first, then-inflation camp I am currently resident in. So in this week’s letter we look at some of the causes of deflation, the elements of deflation, if you will, and see if they are in ascendancy. For equity investors, this is an important question because, historically, periods of deflation have not been kind to stock markets. Let’s come at this week’s letter from the side, and see if we can sneak up on some answers.

Even on the road (and maybe especially on the road, as I get more free time on airplanes) I keep up with my rather large reading habit. This week, the theme in various publications was the lack of available credit for small businesses, with plenty of anecdotal evidence. This goes along with the surveys by the National Federation of Independent Businesses, which continue to show a difficult credit market.

Businesses are being forced to scramble for needed investments, generally having to make do with cash flow and working out of profits. This is an interesting quandary for government policy makers, as 75% of the “rich” that will see the Bush tax cuts go away are small businesses.

There was a great graphic (that I now cannot find) showing that all net new jobs of the past two decades have come from small businesses and start-ups. And yet as of now, when structural employment is over 10% (if you count those who were considered to be in the work force just a few months ago), we want to reduce the availability of revenues to the very people we want to be hiring new workers, and who are cash-starved as it is.

It is not just that taxes will go from 35% to just under 40%. It is the increase in Medicare taxes coming down the pike, too. We are taking money from private hands, where it has the potential to increase productivity, and putting it into government hands, where it will do nothing for growth of the economy. There is no multiplier for government spending. And tax increases reduce potential GDP by a multiplier of at least 1 and maybe 3, depending on which study you want to cite.

I understand that taxes have to go up. I get it. But we would be better off having a discussion of where we want to tax dollars to come from before we risk hurting an economy that will barely be growing at 2% in the 4th quarter, and may be well below that. It is the increase in taxes that has me concerned about a double-dip recession.

That being said, the announcement by several prominent Democratic senators that they think we should extend the Bush tax cuts is significant. As I said a few weeks ago, we should not experience a double-dip recession absent policy mistakes. A slow-growth world, yes. But an actual double dip is rare.

If Congress were to extend the Bush tax cuts for at least a year, until the presidential commission on taxes is done with its work and THEN have the debate, it would make me far more optimistic. And it would be quite bullish for stocks, I think. Businesses would know how to plan, at least, for a year, and the economy would be given more time to actually recover.  I am not ready to channel my inner Larry Kudlow, but from what we see this summer it would make me more optimistic and reduce the chances of a double-dip recession significantly.

Some Thoughts on Deflation

Inflation in the US is now just below 1%, whether you look at the CPI, the Cleveland Fed’s measure, or the Dallas Trimmed Mean CPI. The Fed’s favorite, the PCE, is also approaching 1%. The Dallas numbers are a little behind, but they are at all-time lows.

The classic definition of deflation is an economic environment that is characterized by inadequate or deficient aggregate demand. Prices in general fall, and normal economic relationships start to fall apart.

The Super-Trend Puzzle

I am a big fan of puzzles of all kinds, especially picture puzzles. I love to figure out how the pieces fit together and watch the picture emerge, and have spent many an enjoyable hour at the table struggling to find the missing piece that helps make sense of the pattern.

Perhaps that explains my fascination with economics and investing, as there are no greater puzzles (except possibly the great theological conundrums, or the mind of a woman, about which I have only a few clues).

The great problem with the economic puzzles is that the shapes of the pieces can and will change as they rub against one another. One often finds that fitting two pieces together changes the way they meld with the other pieces you thought were already nailed down, which may of course change the pieces with which they are adjoined; and suddenly your neat economic picture no longer looks anything like the real world.

(Which is why all of the mathematical models make assumptions about variables that allow the models to work, except that what they end up showing is not related to the real world, which is not composed of static variables.)

There are two types of major economic puzzle pieces. The first are those pieces that represent trends that are inexorable:  they will not themselves change, or if they do it will be slowly; but they will force every puzzle piece that touches them to shift, due to the force of their power. Demographic shifts or technology improvements over the long run are examples of this type of puzzle piece.

The second type is what I think of as “balancing trends,” or trends that are not inevitable but which, if they come about, will have significant implications. If you place that piece into the puzzle, it too changes the shape of all the pieces of the puzzle around it. And in the economic super-trend puzzle, it can change the shape of other pieces in ways that are not clear.

Deflation is in the latter category. I have often said that when you become a Federal Reserve Bank governor, you are taken into a back room and are given a DNA transplant that makes you viscerally and at all times opposed to deflation. Deflation is a major economic game changer. You can argue, as Gary Shilling does, that there is a good kind of deflation, where rising productivity and other such good things produces a general fall in prices, such as we had in the late 19th century. And as we have experienced that in the world of technology, where we view it as normal that the price of a computer will fall, even as its quality rises over time.

But that is not the kind of deflation we face today. We face the deflation of the Depression era, and central bankers of the world are united in opposition. As Paul McCulley quipped to me this spring, when I asked him if he was concerned about inflation, with all the stimulus and printing of money we were facing, “John,” he said, “you better hope they can cause some inflation.” And he is right. If we don’t have a problem with inflation in the future, we are going to have far worse problems to deal with.

Saint Milton Friedman taught us that inflation is always and everywhere a monetary phenomenon. That is, if the central bank prints too much money, inflation will ensue. And that is true, up to a point. A central bank, by printing too much money, can bring about inflation and destroy a currency, all things being equal. But that is the tricky part of that equation, because not all things are equal. The pieces of the puzzle can change shape. When the elements of deflation combine in the right order, the central bank can print a boatload of money without bringing about inflation. And we may now be watching that combination come about.

The Elements of Deflation

Just as every school child knows that water is formed by the two elements of hydrogen and oxygen in a very simple combination we all know as H2O, so deflation has its own elements of composition. Let’s look at some of them (in no particular order).

First, there is excess production capacity. It is hard to have pricing power when your competition also has more capacity than he wants, so he prices his product as low as he can to make a profit, but also to get the sale. The world is awash in excess capacity now. Eventually we either grow the economy to utilize that capacity or it will be taken offline through bankruptcy, a reduction in capacity (as when businesses lay off employees), or businesses simply exiting their industries.

I could load the rest of the letter with charts showing how low world capacity utilization is, but let’s just take one graph, from the US. Notice that capacity utilization is roughly in an area that we associate with the bottom of past recessions (with one exception).

Deflation is also associated with massive wealth destruction. The credit crisis certainly provided that element. Home prices have dropped in many nations all over the world, with some exceptions, like Canada and Australia. Trillions of dollars of “wealth” has evaporated, no longer available for use. Likewise, the bear market in equities in the developed world has wiped out trillions of dollars in valuation, resulting in rising savings rates as consumers, especially those close to a wanted retirement, try to repair their leaking balance sheets.

And while increased saving is good for an individual, it calls into play Keynes’ Paradox of Thrift. That is, while it is good for one person to save, when everyone does it, it decreases consumer spending. And decreased consumer spending (or decreased final demand, in economic terms) means less pricing power for companies and is yet another element of deflation.

Yet another element of deflation is the massive deleveraging that comes with a major credit crisis. Not only are consumers and businesses reducing their debt, banks are reducing their lending. Bank losses (at the last count I saw) are over $2 trillion and rising.

As an aside, the European bank stress tests were a joke. They assumed no sovereign debt default. Evidently the thought of Greece not paying its debt is just not in the realm of their thinking. There were other deficiencies as well, but that is the most glaring. European banks are still a concern unless the ECB goes ahead and buys all that sovereign debt from the banks, getting it off their balance sheets.

When the money supply is falling in tandem with a slowing velocity of money, that brings up serious deflationary issues. I have dealt with that in recent months, so I won’t bring it up again, but it is a significant element of deflation. And it is not just the US. Global real broad money growth is close to zero. Deflationary pressures are the norm in the developed world (except for Britain, where inflation is the issue).

Falling home prices and a weak housing market are one more element of deflation. This is happening not just in the US, but also much of Europe is suffering a real estate crisis. Japan has seen its real estate market fall almost 90% in some cities, and that is part of the reason they have had 20 years with no job growth, and that the nominal GDP is where it was 17 years ago.

In the short run, reducing government spending (in the US at local, state, and federal levels) is deflationary in the short run. Martin Wolfe, in the Financial Times, wrote the following last week (arguing that that the move to “fiscal austerity” is ill-advised):

“We can see two huge threats in front of us. The first is the failure to recognize the strength of the deflationary pressures …  The danger that premature fiscal and monetary tightening will end up tipping the world economy back into recession is not small, even if the largest emerging countries should be well able to protect themselves. The second threat is failure to secure the medium-term structural shifts in fiscal positions, in management of the financial sector and in export-dependency, that are needed if a sustained and healthy global recovery is to occur.”

Finally, high and chronic unemployment is deflationary. It reduces final demand as people simply don’t have the money to buy things.

Deflation that comes from increased productivity is desirable. In the late 1800’s the US went through an almost 30-year period of deflation that saw massive improvements in agriculture (the McCormick reaper, etc.) and the ability of producers to get their products to markets through railroads. In fact, too many railroads were built and a number of the companies that built them collapsed. Just as we experienced with the fiber-optic cable build-out, there was soon too much railroad capacity, and freight prices fell. That was bad for the shareholders but good for consumers. It was a time of great economic growth.

But deflation that comes from a lack of pricing power and lower final demand is not good. It hurts the incomes of both employer and employee, and discourages entrepreneurs from increasing their production capacity, and thus employment.

That is why it will be important to watch the CPI numbers even more closely in the coming months. The trend, as noted above, is for lower inflation. If that continues, the Fed will act. I did a summary of Bernanke’s 2002 speech on deflation a few weeks ago. For those who didn’t read it, here is the link.

If the US gets into outright deflation, I expect the Fed to react by increasing their assets and by outright monetization, buying treasuries from insurance and other companies, as putting more money into banks when they are not lending does not seem to be helpful as far as deflation is concerned. More mortgages? Corporate debt? Moving out the yield curve? All are options the Fed will consider. We need to be paying attention.

One final thought before I hit the send button. Recessions are by definition deflationary. One of the things we learned from This Time is Different by Rogoff and Reinhart is that economies are more fragile and volatile and that recessions are more frequent after a credit crisis. Further, spending cuts are better than tax increases at improving the health of an economy after a credit crisis.

I think we can take it as a given that there is another recession in front of the US. That is the natural order of things. But it would be better to have that inevitable recession as far into the future as possible, and preferably with a little inflationary cushion and some room for active policy responses. A recession next year would be problematic, if not catastrophic. Rates are as low as they can go. Higher deficits are not in the cards. Yet unemployment would shoot up and tax collections go down at all levels of government.

That is why I worry so much about taking the Bush tax cuts away when the economy is weak. Now, maybe those who argue that tax increases don’t matter are right. They have their academic studies. But the preponderance of work suggests their studies are flawed and at worst are guilty of data mining (looking for data that supports your already-developed conclusions.)

Professor Michael Boskin wrote today in the Wall Street Journal:

“The president does not say that economists agree that the high future taxes to finance the stimulus will hurt the economy. (The University of Chicago’s Harald Uhlig estimates $3.40 of lost output for every dollar of government spending.) Either the president is not being told of serious alternative viewpoints, or serious viewpoints are defined as only those that support his position. In either case, he is being ill-served by his staff.”

As noted at the beginning of this letter, I find it very encouraging that there is a movement among Democrats to think about at least postponing the demise of the Bush tax cuts until the economy is in better shape. Those who advocate letting them lapse are in effect operating on our economic body without benefit of anesthesia. If they are wrong, the consequences will be most severe.

We need to think any tax increase through very thoroughly.


In Uncategorized on July 23, 2010 at 19:34

Daniel Schorr, Journalist, Dies at 93


Published: July 23, 2010

Daniel Schorr, whose aggressive reporting over 70 years as a respected broadcast and print journalist brought him into conflict with censors, the Nixon administration and network superiors, died Friday in Washington. He was 93.

His death was announced by National Public Radio, where he had been a commentator for two decades. A spokeswoman, Anna Christopher, said he died at a Washington hospital after a short illness. He lived in Washington.

Mr. Schorr, a protégé of Edward R. Murrow at CBS News, initially made his mark at CBS as a foreign correspondent, most notably in the Soviet Union. He opened the network’s Moscow bureau in 1955 and became well enough acquainted with the Soviet leader Nikita S. Khrushchev — whom he called “the most fascinating person I ever met” — to secure for “Face the Nation” the first television interview for which Khrushchev ever sat. (He had never even done one for Soviet television.) At the end of 1957 Mr. Schorr went home for the holidays and was denied readmission to the Soviet Union.

His 23-year career at CBS was cut short in 1976 when, in what Mr. Schorr later called “the most tumultuous experience of my career,” he obtained a copy of a suppressed House of Representatives committee report on highly dubious activities by the Central Intelligence Agency.

He showed a draft on television and discussed its contents, but when neither of CBS’s book subsidiaries was willing to publish the document, produced by the House Select Committee on Intelligence under Otis G. Pike, a New York Democrat, Mr. Schorr provided it — anonymously, he vainly hoped — to The Village Voice.

This led to threats requiring police protection, to investigations by the Federal Bureau of Investigation and Congress, and to Mr. Schorr’s being relieved of reporting duty. Although editorial and public opinion subsequently swung in his favor and Mr. Schorr, who came to be seen as a beleaguered reporter defending a principle, became a popular speaker on the lecture circuit, what he called his “love-hate affair” with CBS News was ended.

A quarter-century later he mused: “Washed away by one controversial leak too many? Undone by a reporting style that proved indigestible to a network worried about affiliates and regulations? Unable to adapt myself to corporate tugs on the reins? Unwilling to exempt my own network from my investigative reporting?” His conclusion: “All of that, I guess.”

(Interviewed in 2008, Mr. Schorr still refused to identify his source for the Pike committee report.)

At 60, with no thought of retirement, Mr. Schorr endured a brief and disappointing stint as a journalism professor at the University of California, Berkeley — he found the students most interested in his celebrity — and became a freelance lecturer and writer. The Des Moines Register and Tribune engaged him to write a column, but it was apparently not provocative enough, and after two years the paper’s syndicate did not renew his contract.

Then, after he narrated some public television specials and offered twice-a-week commentaries for the Independent Television News Association, an executive of the association introduced him in 1979 to Ted Turner, the swashbuckling Southerner who was in the process of creating CNN, the first cable news network.

The two met in a hotel penthouse in Las Vegas, and after a brief discussion Mr. Schorr became the fledgling network’s first employee. He turned down a vice presidency, the position of Washington bureau chief and stock options in favor of the role of senior news analyst.

Mr. Schorr insisted on an agreement, which he drafted in the lobby after consulting his business agent and lawyer, to which Mr. Turner scrawled his signature with scarcely a glance, stating that “no demand will be made upon him that would compromise his professional ethics and responsibilities.”

The venture, initially on a shoestring, nevertheless took off, and the unlikely duo got along well, overcoming a disagreement that developed in 1981 when Mr. Turner, in an on-air editorial that ran several times, asked viewers to write Congress urging that violent movies be banned. (Mr. Schorr shared Mr. Turner’s aversion to violent entertainment but objected to his call for a ban.)

Mr. Turner defended Mr. Schorr when Senator Barry Goldwater, the Arizona Republican, whom Mr. Schorr had once offended while at CBS, wanted him fired. Goldwater had held a grudge since Mr. Schorr reported on the enthusiasm of right-wing Germans for him as he secured the 1964 presidential nomination and noted that a planned postconvention Goldwater trip mainly involved time at an American military recreation center in Berchtesgaden, site of a favorite Hitler retreat.

Eventually, however, Mr. Schorr and Mr. Turner fell out over a CNN plan to team John Connally, the former Texas governor and Nixon Treasury secretary, with Mr. Schorr as commentators at the 1984 Republican National Convention in Dallas.

It was improper, Mr. Schorr said, to mix a politician with a journalist, and he invoked for the first time the 1979 agreement allowing him to veto assignments. The network asked him to drop that right in early 1985, and when he refused, he was told to take leave until his contract expired that May. Shortly thereafter he joined NPR as a commentator, a position he held until his death.

Born in the Bronx on Aug. 31, 1916, to parents who emigrated from what is now Belarus, Daniel Louis Schorr had an unhappy childhood. In his memoir, “Staying Tuned” (Pocket Books, 2001), he said that in writing the book he had come to realize that “being poor, fat, Jewish, fatherless” had made him feel like an outsider, and that he had “achieved identity through my stories.”


‘ADDICTED TO BUSH,’ by Paul Krugman in the N. Y. Times.

In Uncategorized on July 23, 2010 at 16:17


Addicted to Bush


Published: July 22, 2010

For a couple of years, it was the love that dared not speak his name. In 2008, Republican candidates hardly ever mentioned the president still sitting in the White House. After the election, the G.O.P. did its best to shout down all talk about how we got into the mess we’re in, insisting that we needed to look forward, not back. And many in the news media played along, acting as if it was somehow uncouth for Democrats even to mention the Bush era and its legacy.

The truth, however, is that the only problem Republicans ever had with George W. Bush was his low approval rating. They always loved his policies and his governing style — and they want them back. In recent weeks, G.O.P. leaders have come out for a complete return to the Bush agenda, including tax breaks for the rich and financial deregulation. They’ve even resurrected the plan to cut future Social Security benefits.

But they have a problem: how can they embrace President Bush’s policies, given his record? After all, Mr. Bush’s two signature initiatives were tax cuts and the invasion of Iraq; both, in the eyes of the public, were abject failures. Tax cuts never yielded the promised prosperity, but along with other policies — especially the unfunded war in Iraq — they converted a budget surplus into a persistent deficit. Meanwhile, the W.M.D. we invaded Iraq to eliminate turned out not to exist, and by 2008 a majority of the public believed not just that the invasion was a mistake but that the Bush administration deliberately misled the nation into war. What’s a Republican to do?

You know the answer. There’s now a concerted effort under way to rehabilitate Mr. Bush’s image on at least three fronts: the economy, the deficit and the war.

On the economy: Last week Mitch McConnell, the Senate minority leader, declared that “there’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy.” So now the word is that the Bush-era economy was characterized by “vibrancy.”

I guess it depends on the meaning of the word “vibrant.” The actual record of the Bush years was (i) two and half years of declining employment, followed by (ii) four and a half years of modest job growth, at a pace significantly below the eight-year average under Bill Clinton, followed by (iii) a year of economic catastrophe. In 2007, at the height of the “Bush boom,” such as it was, median household income, adjusted for inflation, was still lower than it had been in 2000.

But the Bush apologists hope that you won’t remember all that. And they also have a theory, which I’ve been hearing more and more — namely, that President Obama, though not yet in office or even elected, caused the 2008 slump. You see, people were worried in advance about his future policies, and that’s what caused the economy to tank. Seriously.

On the deficit: Republicans are now claiming that the Bush administration was actually a paragon of fiscal responsibility, and that the deficit is Mr. Obama’s fault. “The last year of the Bush administration,” said Mr. McConnell recently, “the deficit as a percentage of gross domestic product was 3.2 percent, well within the range of what most economists think is manageable. A year and a half later, it’s almost 10 percent.”

But that 3.2 percent figure, it turns out, is for fiscal 2008 — which wasn’t the last year of the Bush administration, because it ended in September of 2008. In other words, it ended just as the failure of Lehman Brothers — on Mr. Bush’s watch — was triggering a broad financial and economic collapse. This collapse caused the deficit to soar: By the first quarter of 2009 — with only a trickle of stimulus funds flowing — federal borrowing had already reached almost 9 percent of G.D.P. To some of us, this says that the economic crisis that began under Mr. Bush is responsible for the great bulk of our current deficit. But the Republican Party is having none of it.

Finally, on the war: For most Americans, the whole debate about the war is old if painful news — but not for those obsessed with refurbishing the Bush image. Karl Rove now claims that his biggest mistake was letting Democrats get away with the “shameful” claim that the Bush administration hyped the case for invading Iraq. Let the whitewashing begin!

Again, Republicans aren’t trying to rescue George W. Bush’s reputation for sentimental reasons; they’re trying to clear the way for a return to Bush policies. And this carries a message for anyone hoping that the next time Republicans are in power, they’ll behave differently. If you believe that they’ve learned something — say, about fiscal prudence or the importance of effective regulation — you’re kidding yourself. You might as well face it: they’re addicted to Bush.

‘PLASTIC SURGERY. ‘ by Irwin Kellner at MarketWatch via

In Uncategorized on July 22, 2010 at 16:41

PORT WASHINGTON, N.Y. (MarketWatch) — Consumers are pruning their debts so quickly, you would think that they must be cutting their credit cards in two.

Chalk up another reason to expect a double-dip. People are not only borrowing less, they are actually paying off some of their debts.

According to the Federal Reserve, total household credit outstanding has declined for seven quarters in a row. Such a prolonged period of debt reduction is virtually unparalleled in the postwar era.

Since the end of the Second World War, the usual thing was for consumer credit to rise. In the 1940s, debt would rise about as fast as household incomes, leveling off at around 50% of annual earnings.

Starting in the 1950s, with the introduction of credit cards, household debt began to rise faster than incomes. They passed 100% of annual incomes in the 1980s and peaked at close to 135% a couple of years ago.

But the recession that began at the end of 2007 did a number on employment and incomes. At the same time, the financial meltdown of 2008 caused the banks to cut back on loans of all types, but especially those made to consumers.

As a consequence, consumers began to borrow less and credit outstanding began to fall. At the same time, people began to rebuild their savings accounts, which they had virtually emptied during the bubble years.

This de-leveraging has begun to take its toll on consumer spending. In the most recent two months, retail sales declined after rising (tepidly) during the previous seven months.

As they buy less, retailers are forced to reduce selling prices and run special sales in order to move merchandise. The more prices fall, the more discounts people demand; they tend to hold off buying until they believe that tags have reached rock-bottom.

Those who deny that we are headed for (or are in) a double-dip believe that the contraction of household debt over the past two years has reached a level that has made people comfortable enough to go out and spend.

Since retail sales make up one-half of consumers’ spending, and thus, one-third of the gross domestic product, it would be difficult for the economy to expand in the absence of a rise in these outlays.

But these optimists overlook the fact that besides hurting from the drop in employment, most households are also suffering from a decline in their wealth because of the drop in prices of homes and their investments.

In addition, debt-to-incomes levels remain historically high. They may have to fall for another year or more before people feel comfortable enough to resume their regular visits to the mall.

This leaves business with lots of unsold goods that must be whittled down. The process of doing this will hurt prospects for growth, just as rebuilding depleted stocks caused the economy to pull out of its power dive a year ago.

One way or another, people (and businesses) have reached a new stage — one that virtually ensures a double-dip. They are hunkering down and are likely to drag the economy with them for some time to come.


In Uncategorized on July 21, 2010 at 23:45


Choice, Referendum and the Midterm Elections


Published: July 21, 2010

WASHINGTON — So is it a choice, or is it a referendum? According to strategists in both parties and an army of Washington commentators, this is the operative question in November’s Congressional elections.

Democrats, of course, are hoping they can make voters see the elections as a choice between two parties — one that offers a workable agenda and one that clings to discredited ideas. The argument here goes something like this: “Look, we get that the last 18 months haven’t exactly been a day at Disneyland, but seriously, do you really want to put those guys in charge again?”

Republicans, meanwhile, keep talking about the elections as an up-or-down vote on President Obama and the Democratic Congress — which, if polls can be believed, is about as popular as head lice.

It’s hard to blame Republicans for adopting this strategy, given its simplicity, but in terms of governing the country after you win, the notion of a straight referendum may come with significant risk. To understand why, it’s worth thinking about how Democrats got into this predicament in the first place.

Four year ago, it was a Republican president, George W. Bush, and his party’s leaders in Congress who found themselves burdened by an unpopular war, a weakening economy and allegations of corruption. The Republicans’ most trusted strategist, Karl Rove, repeatedly made the case that voters in 2006 faced a choice between dueling ideologies, rather than a vote of confidence on Republican rule.

Democrats, however — among them Rahm Emanuel, then the congressman in charge of Democratic House campaigns — framed the race primarily as a national referendum on the governing party and its president. They got their wish.

Now, of course, in one of those classic Washington turnabouts, it is Mr. Rove and his brethren who routinely frame the midterm elections as a national referendum on the Democratic agenda. Republicans offered a vivid, if less-than-subtle preview of this strategy during a special election for a Pennsylvania House seat in the spring, when they unleashed several advertisements that barely mentioned the Democratic candidate and eventual winner, Mark Critz. Instead, the ads featured House Speaker Nancy Pelosi, who to conservatives embodies all the excesses of the liberal status quo. In one, a 50-foot Pelosi lumbered Frankenstein-like through the helpless countryside.

This week, the Republican Senate nominee in Missouri, Roy Blunt, started showing an ad that concludes with a promise that he will “work for Missouri, not Barack Obama.”

And now it is Mr. Emanuel, the White House chief of staff, who tells anyone who will listen that elections are about choosing between divergent paths. In fact, the White House is trying to frame November in the public mind as a choice not simply between two parties and their agendas, but between two presidents and their eras.

Since the Republicans have, at the moment, no obvious elected leader, Democrats have tried to insert Mr. Bush into the role, implying that a Republican victory in November would somehow unravel the space-time continuum and land us all back in the dark days of steroid hearings and Janet Jackson’s wardrobe malfunction, a time of marauding Wall Street traders and “with-us-or-against-us” foreign policy. In a stunt this week, for instance, Democrats in Washington challenged more than a dozen Republican Senate candidates to name “two policy differences with former President Bush.” No one took them up on it.

An important question in all this is why Democrats should have to fear a referendum at all. After all, Mr. Obama inherited a perilous economy from his predecessor, and his party has passed a series of consequential laws, including a long-sought overhaul of health care and new regulations for Wall Street and credit cards. And yet all indications are that voters in much of the country — and particularly independent voters — remain furious with Democratic incumbents.

There are several trendy explanations for this “paradox,” as commentators have taken to calling it. Conservatives posit that the problem is ideological — that laws enacted by Congress have simply been too liberal for the voters. The president’s allies, meanwhile, suggest that voters are blaming the party in power for a stubbornly sluggish economy. It’s hard for Democrats to argue, for instance, that a $787 billion stimulus package saved or created some three million jobs when voters in some states are still reeling from double-digit unemployment.

It’s just as likely, though, that much of the dissatisfaction with the governing party can be traced back to this whole choice-versus-referendum conundrum. Back in 2006, when Democrats were trying to figure out how to run against the Republican majorities, there was argument inside the party about whether they needed to offer some competing framework of ideas for the nation, or whether the more prudent course was to simply ask for a vote of no confidence on the party in power and leave it at that.

The consensus, in the end, was that there was no point in muddying a nice, clean referendum with a lot of controversial notions of governance. So Democrats issued a pamphlet with gauzy notions of “broad prosperity” and health care for all, but almost nothing by way of specific policies or the costs involved. This campaign-by-referendum worked so well that Democrats barely altered the formula in 2008, when Mr. Obama and his party’s Congressional candidates ran, successfully, under the vague banner of “change.”

The problem with this strategy was that “change” meant wildly different things to different people, and neither of these elections amounted to a mandate for any discernible set of choices. The stimulus bill and the health care law may or may not have been good policy, but the sheer scope and cost of those agenda items seemed to jolt a lot of the independent voters who had conditionally supported Mr. Obama. Having failed to establish a rationale for such expansive measures during the campaign, Democrats were easily caricatured by their adversaries as a bunch of 1970s liberals who would spend money wherever they could.

The relevant lesson here, perhaps, is that the choice-versus-referendum question is also a trade-off, on some level, between short-term and long-term considerations. As Democrats proved in 2006 and in 2008, the path of least resistance is to seek a referendum on the current leadership, which chronically anxious voters seem inclined to jettison every few election cycles.

But as Republicans may find out if they win in November, a successful referendum only helps you gain power. Gaining the trust of voters is something different altogether.