Thinking about Gaza.

This post is about what I think Israel's goals should be for this offensive against Gaza: What should Israel be trying to accomplish. The short answer is the removal of the Hamas government, the destruction of Hamas as an organization, and a very significant reduction in the amount of capability of people inside Gaza to hit Israel with rockets or in any other fashion.

As all of you already know, Israel is 3-days into a significant series of air strikes against Gaza, that have already apparently killed approximately 300 people and wrought some destruction.

As I write this, the New York Times lead story on-line is headlined, "Israeli troops mass along border; Arab anger rises." Well, Arab anger always rises when Israel defends itself. If rockets are launched against Israel, not so much. If Saddam launches Scuds against Israel without Israel having done anything to Iraq, that is cheered in the Arab world (and was in fact cheered at the time both by Palestinians in the West Bank and Gaza and, disgracefully, by well more than a few Israeli Arabs (who are citizens of Israel)).

With that sidelight out of the way, where should Israel go from here?

An article that my friend Andrew sent me,

http://www.tnr.com/politics/story.html?id=b80c860d-dca8-4d79-9cc4-05d91b6d4721

got me to thinking: What should Israel's goals be as it prosecutes this significant offensive against Gaza?

My short answer is that Israel should continue its military occupation in Gaza until each of the following conditions are met: (1) the eviction of the Hamas regime in Gaza, and its replacement by Fatah (the Party founded by Yasser Arafat, currently headed by Mahmoud Abbas, that is in power in the West Bank), (2) that Fatah be required to act to stamp out Hamas and its imitators once and for all on pain of its being replaced by leaders of Israel's choosing, (3) the capture or killing of Hamas' leaders; (4) leaving behind any military and security infrastructure needed to ensure that the rocket threat poses by Hamas does not reemerge; and (5) the permanent occupation of a narrow strip along the Egyptian border, to prevent the smuggling of weapons, including but not limited to rockets, into Gaza. No civilian settlers for heaven's sake! If I could be convinced that this is simply unworkable, that the Israeli soldiers there would simply be easy prey for Hamas or other groups, and you can't just leave them sitting there for decades, I would be open to alternative security arrangements that would reasonably ensure that the flow of weaponry into Gaza turns into a mere trickle.

These are, make no mistake, ambitious goals. They will require Israeli blood, many Palestinian civilian deaths, entangle Israel in Gaza politics, reliance on an unreliable Fatah "ally," and will only reduce and not eliminate the threat. But it is the best series of goals that I believe is achievable for Israel at any reasonable cost. There are problems, including one serious problem, with the goals I have set forth, as I will discuss below,.

Is Israel going to go anywhere near this far? I doubt it, but there is room for debate. Any attempt to predict Israeli behavior has to begin with the Lebanon War of 2006. Then, you will recall, Israel engaged in a weeks' long series of air-strikes designed in part, as I remember one Israeli saying, to show that "the bossman has gone crazy." Well, designed in part to reestablish Israeli deterrence. Israel had more or less accepted small military actions against it for quite some time and had had enough. Anyway, at the time Prime Minister Olmert talked very tough, saying that the goals were to "destroy" Hezzbullah, or to destroy it as a military threat. Andrew and I were thrilled to hear about Israel seeming to act decisively to defend itself for the first time in many years, and we were thrilled. Alas, Israel then declared peace with precisely none of its objectives satisfied, with Hezzbullah having fired well more than 10,000 rockets into Israel and having emerged victorious in the eyes of everyone in the region.

This shadow, in some ways similar to how Americans look at Vietnam, looms over the current operation in Gaza. Once again, we have air strikes against a well armed ragtag military group that fires rockets into Israel. When I say well armed, they are, for a group of militants, as opposed to a modern army. Make no mistake, the Israelis have a small but very real modern military and could, if it wished, crush Hamas, and leave total devastation in its wake, and suffer relatively few casualties while doing so. This would require a level of death and destruction that Israel is simply unwilling to consider. I don't want to leave the impression that by saying "well armed" that means they are in any way shape or form comparable to Israel.

Some in Israel have talked about resuming deterrence. Let the Palestinians and others in the region fear Israel, and then they will stop attacking it. This is most unlikely to work. Whatever the flaws of the Palestinians may be they, and their leaders, are tough and determined. Despite facing down a modern military, with aircraft, precision guided bombs, tanks and satellites, they fire rockets into their massively superior opponent and talk openly of its destruction. Hardships are simply blamed on Israel, or the US. Hamas is particularly tough, courageous and determined. The idea that a massive show of force, capture of some of its leaders, destruction of buildings and infrastructure and killing of a few hundred civilians is going to change the behavior of those that run Hamas is ludicrous. Time and again, Palestinian leaders have shown their basic inability to be deterred by that level of force which Israel is willing to dish out. Would they be deterred in the future by the kind of much more significant operation that I outline? Israel's never tried it, so I don't know for sure, but my best guess is no, they would not. I am in no way relying on deterrence.

In the meantime, the Bush administration has talked about Hamas being at fault (fine) and calling on it to "renew the ceasefire." I don't want a ceasefire with Hamas, while it (a) fails to recognize Israel; (b) Remains committed to the destruction of Israel; and (c) arms towards doing harm to Israel, including but not limited to acquiring rockets with a longer range into Israel, and, of course, using those rockets. I might support allowing Hamas to stay in power if it:

1) Agrees to a coalition with Fatah and to turn over all military assets;
2) Recognizes Israel; and
3) Publicly and irrevocably commits to working towards a 2-state solution.

I do not believe that Hamas can possibly accept these terms, it is meant as a poison pill they can't possibly accept. In reality I do not support any sort of resumption of a truce with Hamas. They represent an intolerable threat to Israel, which could grow in time into a mortal threat. Israel's citizens having to live under the constant threat of rocket attack is simply unacceptable. Hamas could possibly ensure a few months of quiet (possibly) but the resumption of the threat of living under rocket attack would then resume at Hamas' leisure. This is intolerable.

What are the main problems with the set of goals I have outlined? The biggest problem by far is the assumption that Fatah can somehow be forced to stamp out any future threat posed by Palestinian militants. Since the beginning of the peace process of the 1990s, a constant source of tension between Israel and Fatah has been the attempts (or lack thereof) by Fatah to disarm Palestinian militants/prevent their emergence in the first place. Arafat at times actually did crack down on the militants (in part because they were a threat to his power, wealth and life), but mostly let them alone because (a) he wasn't always strong enough to crush them; and (b) they served his ends in a negotiation with Israel; they represented the leverage he had-- suicide bombers and other attacks on Israel.

What if Fatah "promises" to stamp out the remnants of Hamas, and not to let it reemerge. Then, time goes by, and, mysteriously, new militant groups form, new groups are lobbing rockets at Israel, and Fatah says, "gee, we're sorry. Where did they come from?" This is, to say the least, a likely series of events. I have not fully worked out how Israel would deal with this eventuality, in part because there just isn't a good answer. Or at least I haven't worked one out. Caroline Glick, of the Jerusalem Post, constantly reinforces the point that Fatah cannot be trusted. She has not set forth an answer of how to deal with this problem either. The Palestinians represent an enormously difficult series of security problems for Israel to deal with. But short of simply killing them all, which Israel has not and should not consider (we did not carpet bomb Fallujah during the worst of the Iraqi Sunni insurgency, even though that would have killed hundreds or thousands of militants and arguably saved many American and Iraqi lives), Israel has to make a series of choices vis-a-vis the Palestinians. And rocket attacks, or even the fear of them, is to me on the side of unacceptable. Israel should pay any price, bear any burden, inflict any harm necessary to avoid the risk of rocket attacks.

The fall of the Japanese markets

The Nikkei 225 Index, Japan's defining stock market index, very much analogous to the Dow Jones Industrial Average that you see every day in the news, closed today at 8,747, up a tiny fraction. By coincidence, the Nikkei is extremely close in raw numbers to the Dow Jones, which closed on Friday at 8,515.

Why on earth am I telling you this? Because on December 29, 1989, the Nikkei closed at its all time closing high of high of 38,916!! Thus 19 years after the Japanese market hit its all time high, it is down 77.5% from its high!

http://en.wikipedia.org/wiki/Nikkei_225

http://finance.yahoo.com/echarts?s=%5En225

Its incredible how far the Japanese market has fallen from its peak. It fell throughout much of the 1990s, and has been cut in half again in this decade.

I was 19 in 1989, when the Nikkei closed at its high, and I well remember all the talk about how the Japanese model was superior, how the Japanese would own America (Japanese individuals and companies went on a hugely publicized shopping spree in the US, buying movie studios, theme parks, buildings and businesses. Most of these were sold in the 1990s at absolutely titanic losses).

This history of Japan bears remembering whenever anyone wants to assume anything about our future.

Elie Wiesel Foundation Loses Everything to Madoff

http://www.newsmax.com/insidecover/wiesel_losses_madoff/2008/12/24/165157.html?s=al&promo_code=7656-1

The Elie Wiesel Foundation For Humanity lost "substantially all" of its modest $15.2 million assets to the Bernie Madoff pyramid scheme. I know I'm supposed to be very angry at Madoff (and I am, furious-- he obviously should never be a free man again, and he makes me hope/wish there is a hell) and very sympathetic to the charity and those that it helps that now may have to do without (and I am), but I'm also pretty ticked at the imbecile(s) who put all of their money into one person's hands. Why on earth would you do that? Now look, its a small charity, so I don't expect them to spread their money to 8 different people. And there's only so much due diligence that a small charity can do. But 3 different people? So if one's a crook you have 2/3 of your money?

Am I being too harsh here? This isn't the United Way losing billions, or anything remotely like that. Still, didn't your momma teach you never to put all your eggs into one basket?

Clinton: 22.5 million jobs created; Bush 3.7 million.

Under 8 years of Clinton: 22.5 million!

Under 8 years of Bush: 3.7 million!

Under Bush BEFORE the recession began 4.6 million.

This doesn't count December and January, which will subtract at least 500,000 from the already paltry Bush totals.

There are many caveats, to be sure. After the very strong job creation record under Clinton even a successful Bush presidency would have created many fewer. But not nearly this many fewer.

Folks, we all know failure when we see it. But sometimes in life numbers have the power to just boggle the mind. Sometimes numbers crystallize things for you.

I wanted to share a statement made in a recent column by Caroline Glick, in the Jerusalem Post.

She is a right-winger, dead set against a Palestinian state or any giveback of land by Israel in the West Bank (she was also against the Gaza pullout) because she is of the opinion that the Palestinians would simply use any new land or especially a new state as a launching point from which to increase their capacity to attack Israel and kill Israelis. She sometimes is a bit, well, frothing at the mouth about these things, and, I think, has not fully thought through where Israel's settlement policy has taken it.

She also called on the Olmert government to resign before the Lebanon War was even over, and was as furious at Olmert's conduct of the war as I was (which is very furious indeed).

Anyway, she recently summed up why I am against a resumption of peace talks with the Palestinians far better than I have or could. In a just world, the following words would be remembered for the ages as a perfect summary of our times:

"But Fatah (the main Palestinian governing party, once headed by Arafat, now headed by Abbas) is a dead horse. Even if it were to sign a peace deal with Israel - and really meant to keep it - the deal would be a dead letter because the Palestinian people themselves want neither peace with Israel nor Fatah."

http://www.jpost.com/servlet/Satellite?cid=1228728255154&pagename=JPost%2FJPArticle%2FShowFull

She is lock down right. It pains me to write this, because I want to believe in what's best in people. And many Palestinians DO want some form of peace. But not the people with the guns, and not a huge majority of the people, who could try and shout down the people with the guns (at least in some parts of the world). And I've hated Israeli occupation and settlement policies for 25 years. But not only are serious talks with Abbas profoundly unwise for precisely the reasons stated by Caroline Glick, but its difficult for me to see how that changes in coming years.

My friends (to borrow a phrase from a defeated presidential candidate) the middle east is much more likely to end up in conflagration in the next 5-10 years than a global peace settlement. Israel has to line up for its share of the blame, but the Palestinians have painted themselves into such a corner at this point that even if Israel wanted to adopt my policies (give back all the damn land, pull out all the settlers and be done with it), the Palestinians wouldn't be in any position to accept it and become tolerable neighbors.

Its a very sad situation for all concerned, and likely to grow sadder and sadder as Iran arms.

This post is designed to explain precisely why an absolutely titanic government stimulus package is necessary, and where the economy should and will go in the next 5 years. I don't mean to be predicting, I mean to explain instead. Predicting is more fun (especially when I'm successful, as with the elections) but in the end far less useful).

I. Definition of GDP

First some background. The GDP, or gross domestic product, is the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.

http://www.investorwords.com/2153/GDP.html

http://en.wikipedia.org/wiki/Gross_domestic_product

Knowing what makes up GDP is really important if you want to understand how to get it growing again, so take a minute to really understand the component parts.

1. Consumer spending (sometimes called consumption)- you buy it and use it-- food, a tv, sneakers, whatever.

2. Investment: Education. Housing. Railways. Ports. Something that is not consumed, but is instead used for future production of goods and services. Obviously there can be gray area. A computer is both.

Importantly, both non-residential investment (such as factories) and residential investment (new houses) combine to make up Investment. Residential housing is a key part of investment. This has dropped off the cliff, as you might imagine. Off the cliff.

3. Government spending. As I understand it, if the government buys it it comes under this category, period.

4. Exports - Imports. The value goods exported, minus the value of imports. I will not discuss trade at all in this post, because it is very difficult to control and predict.

II. Consumer Spending is in the Tank, and Likely to Remain There For a While

Now let's see where these categories of spending are these days. Consumer spending has plummeted. You may not be able to see that quite now as you finish up your Christmas shopping, but it has. Retailers are going bust, the car companies are obviously in a world of hurt, and US domestic sales of automobiles have dropped further than at any time since World War II. Big discounts are available on electronics, clothes, etc. Basically, consumers are afraid for their jobs/homes, or have lost them. When you're really concerned about losing your job, the Plasma screen TV or new dress can wait.

This is most most unlikely to reverse itself anytime soon. American consumers are famous shoppers. After 9-11 retail sales REALLY plummeted, as people were both riveted to the tvs and nervous. But a few weeks later it rebounded sharply. Bush literally urged us to go shopping. Small, small man.

Anyway, there are two excellent reasons to think that consumer spending won't rebound sharply anytime soon, which I boldly predict it will not.

First, Americans understand that the economy is truly awful. Most of the readers of this blog are highly educated people born and raised in the northeast. I am very confident that people like us badly underestimate the shock that people not like us feel when a Lehman Bros. goes under, or a Citigroup needs dozens of billions in cash and hundreds of billions in loan guarantees to stay afloat, and, especially, when GM is driven to the wall, and needs money by the end of the year to avoid bankruptcy. These things, by themselves, could be enough to badly depress or shut down economic growth. Couple that with the fact that the local Target closed, local businesses are cutting back and your boss tells you that the company needs to save money, and presto, you have a recession mindset. Multiply that by the entire nation, and you have probably the worst recession since 1945. The absolutely frantic government response has in some ways exacerbated this problem. The frequent statements by Bernanke and Paulson earlier this year that the crisis was contained proved most ill-founded. To their credit, they're not saying that anymore. But people that watch the news remember. It seeps in. Of course, the response is still necessary, as I've said in posts before.

Second and more important, is where are people going to get the $$ to spend? From 2002-2007, a key source of money that people used to shop was from appreciating home values (and stock portfolio values). As people were wealthier on paper they spent more and, importantly, borrowed more and saved much less. Home equity loans and credit card receivables went up sharply, and people spent like drunken sailors (as did the government).

Well, the stock market has crashed and the housing market has tanked, so these temporary boosts to wealth will be out of action for a while. Incomes aren't rising fast (obviously). So ladies and gentlemen, its really simple. With incomes down, and insecurity and debt up, those with jobs are saving more and spending less. Those without jobs or having lost their house are spending way less. Presto-- consumer spending is down.

And even though it may not go down radically from here, it is really hard to see a sharp rebound. The stock market could go up quickly, who knows, but the housing market really can't. There's just too many houses on foreclosure and unsold inventory for housing to rebound much until at a bare minimum mid to late 2009, and probably not until at least Spring 2010 at a guess.

Having said all this, I refer back to my post on Friday, December 05, where I pointed out that there is already a lot of "stimulus" in the pipeline, including lower oil prices, lower interest rates which are causing a lot of refinancing, and all of the money that the fed and the treasury has been throwing around. So there's more uncertainty than usual right about now, because there are such extreme headwinds and tailwinds at the same time.

Referring back to the beginning of this post then, GDP is consumer spending + investment + government spending (I'm leaving exports - exports out of this post, because it is very difficult for the government or anyone else to control exports). If consumer spending is unlikely to rebound strongly (to say the least) anytime soon, and investment is as well (residential housing is a big part of investment) you simply have to have government spending grow, or there is no way the economy will in the near future. Government spending (deficit spending) is the only game in town.

III. The Attempt to Stimulate Consumer Spending in 2008 Largely Failed, and its Failure was Both Predictable and Predicted

Earlier in 2008, the rebate checks were mailed out. This is an attempt to increase consumer spending by increasing the deficit and simply putting more money in people's pockets. It worked to an extent, but only so much, both because it was much too small to have a serious impact and, more importantly, because scared consumers tended to save the money and not spend it. All of this was predicted by many mainstream economists.

Savings is good too, for a myriad of reasons, but these reasons are mostly long term. In the short term, spending is far, far better than saving.

IV. The Federal Government Can, Should, and Will Increase Government Spending to Stimulate the Economy

Don't let anyone tell you, as some conservatives are, that government cannot stimulate the economy by running larger deficits and spending the money on bridges, roads, ports, health care, etc. It most certainly can. This is Keynesian economics 101, and is not controversial among serious economists. Now the government can't increase the size of the economy this way over the long term but in the short term it absolutely can, should and will. Team Obama has leaked this week that the economy is in much worse shape than they thought, and have not acted to quash speculation that the upcoming stimulus package will be bigger than anyone thought a few weeks ago, north of $700 billion over two years, with a trillion dollars over the 2 years being considered not out of the question. This is such a good idea that I am at a loss for words. It could be the difference between unemployment topping out at say 8.5-9%, or at 11-13%. It could mean the difference between a decent job and homelessness for millions of Americans. Its a hugely good idea as I've said in several posts before and will in several posts in the future.

V. Where will the Economy Go From Here?

Now its prediction time. Where will the economy go from here. Or, put another way, where will growth come from when the economy does recover?

Now that I think of it, this belonged in my last post, when I predicted that the recovery will begin on June 19, 2009. LOL.

At the very end of the day, the only way the standard of living of a nation grows is through productivity. That is, you can grow GDP by putting more people to work (for example, granting women and minorities the right to compete on equal terms for jobs, which is good economics as well as morally right), running a budget deficit, or doing myriad other things, but these things by and large do not, in the long run, increase per capita GDP. The only thing that does that is productivity. Basically, allowing Labor to work more efficiently, or allowing the interaction of labor and capital to work more efficiently.

How to increase productivity in the long run has been the subject of entire books and is beyond what I can contribute. To increase GDP, which I'll happily settle for, you need increases in (exports - imports), consumer spending (which is 2/3 of the economy, and I've discussed at length), investment or government spending. Increasing government spending is an excellent short term solution, and a poor long term solution, as taxes need to be raised to pay for this spending, and that will short circuit consumer spending. The key, in my opinion, is investment. We've had about enough residential housing for now, and that's a huge part of investment. So increased investment isn't easy!

So one wonders where growth will come from in the medium run. It would appear that after 2010 more growth than usual will have to come from investment than usual, and less from government spending (which will have skyrocketed from an already high base). People and businesses need money to invest, and that money, by definition, is either borrowed or comes from savings.

It is a central tenant in economics that government borrowing plus private investment = private savings plus foreign investment. So private investment and private savings are closely related. If you're going to build a railroad, or bridge, or new factory, or the like, the money for the investment must come from somewhere. That somewhere is generally either savings or borrowed, either from the government (to build a school) or abroad (A new Toyota factory funded by the parent company perhaps). So to increase investment you (as a practical matter) need to increase savings. Which can often decrease consumer spending-- private citizens savings = their income minus their consumption, minus THEIR investment. Anyway, raising savings (which in the US have been abysmal for years) has been a big issue in the US for years and the savings rate has only declined. So raising investment is going to be tricky.

It may well be that government spending will have to be elevated longer than I had thought. If I'm right, and consumer spending is slow to recover, the only things left are trade, government spending and investment. Can't raise investment without (a) raising savings; or (b) going into more debt. And one thing I'm certain the United States has about now is too much debt. Too much credit card debt, too much mortgage debt, too much government debt (at the moment). So I'm not for a strategy that relies upon increasing debt.

I am arguing for a government investment program that is real, and sustained, even after the stimulus package I have long advocated has run its course. By investment program I mean spending which can benefit economic growth later on, like schools, mass transit and other infrastructure, and possibly alternative sources of energy. Health care is also an excellent place to begin this investment. It is sorely needed (50 million or so people are uninsured, and that number is sure to rise in the steep recession we are in), government can do it (Medicare works), and it can be continued long after the recession is over. Whether it raises long term economic growth, however, is trickier. It might, but not as clearly as a much needed rail link.

Other areas for long term increases in government spending that are useful for the economy need to be considered. And taxes will need to be increased to pay for this spending (obviously diminishing any stimulative effect!) But as of now, and my mind isn't fixed on this, I don't see any other way forward. For the last 25 years, growth in the economy has been fueled primarily by increases in debt. The national debt has absolutely skyrocketed, mortgage debt has soared, consumer debt has soared, business debt has increased somewhat. A strategy for growth that allows for growth alongside a decrease in debt is now needed. And that will likely require more investment, by both the private sector and state and local governments.

I endorse Likud in the Israeli elections which will occur in February 2009.

I have to start by saying that as of now I am against any serious long-term negotiations with the Palestinians over the borders of a Palestinian state or any other long term issue. I take this position because the Palestinians are so badly split, between Hamas, which does not recognize Israel at all, runs Gaza, and has quite a bit of support, and Fatah (once Arafat's movement) which is "led" by Abbas, "runs" the West Bank, and has almost no real support among the Palestinian people as I understand it.

I never ever thought I'd live to endorse Likud in an election. They have always stood, and still stand for everything I hate about Israeli foreign policy. Likud was founded by a merger of several Israeli right wing parties, and was effectively run by Menachem Begin who for me is the most hated figure in Israeli political history. Begin was the mastermind of Israel's crazy settlement policies, by which Israeli citizens were dropped, hither and fro, into lands captured by Israel in the 1967 war. Begin conceived these policies in order to ensure that Israel could never give the West Bank back to the Palestinians (or anyone else). That was the stated position behind the creation of the settlements, at the time. That so many American Jews mindlessly repeat, "the settlements are necessary for security" is simply not thinking things through. Begin did, and that's where his views led first Likud, and later Israel, though he had tons of help in growing the numbers of settlers.

I have hated the Israeli settlement policies since I was 13. So how on earth can I endorse my hated political enemy? Well, Israeli politics is a mess.

The ruling Kadima party of Olmert (a party originally led by Ariel Sharon, which broke away from the right-wing Likud party) has, imho, done a terrible job for Israel's security. I just can't forgive these bozos for the 2006 Lebanon war fiasco. You'll recall that: (a) Israel essentially declared war on Hezbullah in Lebanon; (b) announced a series of (perfectly reasonable and appropriate) goals for the war; and (c) declared peace with literally none of these goals accomplished.

Olmert, the Prime Minister throughout this fiasco, clung to his job like grim death. He has been investigated for corruption for quite a while, and in September Israeli police recommended that criminal charges be brought against him.

He did not run for the leadership of the Kadima party, and that position was won by Tzipi Livni, Israel's hapless Foreign Minister. Livni reminds me a lot of Condi Rice. Theoretically capable, but mindlessly followed brainless leaders through brain-dead foreign policies for years and years. At least Condi had the good sense not to run for President to continue these brain dead policies. I wouldn't vote for Condi for dog catcher, and I think more of her than I do of Livni. Livni is a sad, sad woman who views Israel not as it is, or rather not as one might see it, but as she wishes it were. Not unlike Condi and Iraq, or Israel-Palestine, or many other foreign policy matters. Livni, from what I know of her, has no business running a community bank, let alone a country. She has repeatedly defended the Lebanon war fiasco, and has advocated final status talks with the Palestinians, which makes no sense given that Hamas, which denies Israel's right to exist, controls the West Bank. Either of these policy positions are so bad, so stupid, so counter to Israel's vital national security interests, that they disqualify her from serious office. But holding both of these positions is heroically incompetent and idiotic. She must go.

As if one needed another reason to despise Kadima, there is always that controversial prisoner trade made earlier this year. I ripped Olmert & Co. a new one in my post of July 16, 2008. I have nothing to add to that post, so I refer you to it for details on the awful exchange of a live murderer and other goodies for the bodies of two Israeli soldiers killed in Hezzbullah captivity.

So supporting Kadima is out, if I can find an even vaguely reasonable alternative (no Andrew, the "tooth fairy" won't do). I note that I supported Sharon for Prime Minister when he ran, so despondent and disgusted was I by the behavior of the Palestinians, and so little was I interested in a resumption of peace talks just then. I was reasonably happy with Sharon's leadership (more words I never dreamt I'd think, let alone write), and was comfortable with supporting his protoge, Olmert. Well, I was ignorant. I'm knowledgeable about American national politics. Israeli not so much, except in very broad outline.

Anyway, Olmert took Israel out for a spin, and in my view he dinged up the car really good. I suppose he didn't wreck it, but he ran it into a tree, blew out 2 or 3 tires, did thousands of dollars of damage in body work, destroyed the clutch, and never bothered to change the oil, damaging the engine mildly. So I'm not giving the car back to him! Livni was his passenger, and is convincingly promising to drive and care for the car in precisely the same way he did, negotiating with the Palestinians when Hamas runs Gaza and Abbas has very very little power and no influence. So I am certainly not lending her the car! I wouldn't give her a picture of the car.

Normally I would look to Labor. Labor is the mainstream party of the Israeli left, and a natural home for people like me who want to make a final peace deal with the Palestinians and Israel's other neighbors, and is willing to give up land/settlements to do it.

And I would consider Labor if I heard sensible things from Ehud Barak, its leader. Barak, you'll recall, was Labor's leader when the talks which got hot and heavy between Clinton and Yassar Arafat were ongoing. He pulled Israeli troops out of southern Lebanon, a move which I strongly supported. Alas, Barak promised that Olmert's troubles would not derail talks with the Palestinians. Talks which he wants a second chance as Prime Minister to see through. Well, that's fine Ehud, really, but who are you going to talk to? Abbas? He has about as much sway over the Palestinian people as the Bum who slept at 57th street and Lexington avenue last night. He couldn't make a deal stick among Fatah supporters! Let alone his blood enemy, Hamas. If the talks don't include Hamas, I don't support them. And since Hamas doesn't recognize Israel, that becomes rather difficult. I would much rather Israel talk to Hamas now, without preconditions, than engage in serious, endgame negotiations with Fatah. Better to talk to people who you know hate your very existance but could possibly make a deal stick if they struck one than to people who have resigned themselves to your existance, but could not make a deal stick. (I think Israel should adopt my plans for a final proposal and simply unilaterally implement them, but that's for another post another day).

In addition, the Israeli left has apparently splintered into various sub-parties. I have not troubled myself to learn about this.

So I look to Likud. Its head, Netanyahu, (Bibi) is a too-slick used car salesman type. He's obviously competent, however, which is more than I can say for Livni. And he's against negotiations with the Palestinians at this time, which is more than I can say for Barak and Labor.

So unless and until I hear reasonable things from Barak, I am, very reluctantly, with nose pinched firmly shut, supporting Likud in the upcoming Israeli elections.

Choices like these make a choice between McCain and Obama seem like a wellspring of fantastic options.

Federal Reserve to cut rates this week

The Fed is meeting this week to set short term interest rates. They will cut interest rates by half of a point, to .5%, from 1%. I support this cut.

Several months ago, I worried about the fed running out of room to cut rates, that is running out of bullets. Given that the economy is in a very deep recession (see my previous post) financial markets are still very deeply troubled (I have heard that the markets are pricing in a huge record number of defaults by investment grade companies, and an absurd 75% default rate in junk bonds (even a depression lasting 3 years probably wouldn't result in that bad of a default rate)) I'm not worried about holding ammunition in reserve anymore.

A better argument against a big interest rate cut now is that it won't do any good now, while credit markets are frozen, but might do some good in the future, when credit markets have again reopened. And there is merit in this argument. But a better argument is that low, or even zero short term interest rates, allow banks to cheaply build up their balance sheet by borrowing at short term rates, from other banks, and lending out money risk free to Uncle Sam. Even though long term rates are also very low, they are not zero, or 1%. Instead, the 10-year treasury bond is at 2.52 as of now. Borrowing short and lending long is what banks do in general, and allowing them to profit sharply from doing so is good policy right about now.

There is open talk of the fed simply cutting short term rates to zero (literally free money). My guess is they'll only cut to .50 %, but the difference is really only one in degree.

Blagojevich tries to sell an appointment to the Senate

As you have all likely heard, Illinois Governor Rod Blagojevich, already publicly under federal investigation, was arrested and charged with trying to personally profit from his right to appoint the successor to Barack Obama as Senator from Illinois.

Given that he and everyone else knew he was being investigated, that he would say what he is alleged to have said on phone calls he absolutely knew may have been tapped, is just insane. It shows how disconnected from common sense people can become. I hope they throw the book at him.

Still, an argument can be made that this is no big deal. As Andrew said, is this sort of corruption really godawful? If he and Rahm Emanuel had agreed that in exchange for his nominating who Obama wanted to fill the seat the Obama administration would push for 25 new schools and hospitals in Illinois, that would be perfectly legal. Normal, ordinary political horsetrading. But if the Governor seeks a $500,000 a year job for himself, its bribery. I note that $500,000 a year is a whole lot less, to say the least, than 25 new schools and hospitals would cost! Yet the one is normal politics and the other is the worst form of bribery, suitcases of cash in essence. Is one really that much morally worse than the other? More harmful to the Republic? A serious argument could be made, but I don't feel like making it now.

Cholera in Zimbabwe

Hundreds of people have died in the recent (entirely preventable) outbreak of cholera in Zimbabwe.

http://en.wikipedia.org/wiki/2008_Zimbabwean_cholera_outbreak

Cholera is spread by a bacteria through eating contaminated food or water. Due to the unstable political situation, Zimbabwe's previously tolerable (for a poor country) supply of safe water has gone downhill. The outbreak has now spread to towns in Botswana, Mozambique, South Africa and Zambia. Proving yet again that a badly unstable neighbor on your doorstep is just not a hot idea.

The Zimbabwe government has taken turns denying the outbreak and blaming it on a "calculated, racist, terrorist attack on Zimbabwe by the unrepentant former colonial power (the UK), which has enlisted support from its American and Western allies so that they can invade the country."

Yeah, that's it. Gordon Brown, PM Britain, has infected the Zimbabwe water supply with Cholera to make it easier for the UK to invade and re-subjugate the people of Zimbabwe. This is typical of the government there. Absolutely typical.

Mugabe has to rank as one of the most disappointing leaders in the last 50 years. He spent 11 years in prison for advocating for a free Zimbabwe as a colony it was known as Rhodesia and had white minority rule similar in very broad outline to the apartheid government in South Africa. After his release from prison he joined a rebel movement which ended in universal suffrage, and left him a hero in the eyes of many, and not just locally.

He took power in 1980. For many years he was widely regarded around the world as a fine leader by African standards. Infant mortality and young child mortality plummeted, immunization increased radically, child malnutrition fell, literacy boomed, the economy soared, education improved. In short, he appeared to be doing many of the right things for precisely the right reasons. There were certainly blips in this good story. He was intolerant of dissent and would kill to enforce that. He is violently anti-homosexual, and has used the courts to enforce that from time to time. Still, taking his record as a whole he was one of the best, if not the best of the revolutionary leaders. (I think of Mandela as a prisoner of conscience, not a revolutionary leader).

Then, starting in the mid 1990s, Mugabe moved, step-by-step, into the monster he is today. I remember I met an African woman, Nigerian I believe, at a law conference in the late 1990s. At a break I got talking to her and the topic turned to Mugabe. I was railing against his latest outrages (nothing compared to what was coming in this decade) and I remember she ended the conversation by walking away from me saying in an exasperated and angry voice, "Mugabe's not a monster." Well, she was basically correct when she said it, but in time I got much the better of the argument.

In recent years he has resorted to mass violence and mass use of food as a weapon, to maintain his iron grip on the country. As a result, Zimbabwe, once a clear post-colonial success, has gone to hell in a handbasket. It has suffered a mass inflation, gigantic food shortages, many thousands of arrests and government sponsored murders, and many other markers of a badly failed state. Mugabe apparently lost his bid for reelection, but ignored the results and imprisoned, on and off, the leaders of the opposition. He is now in the process (unsurprisingly) of shredding a power sharing agreement.

What a bitter disappointment from a man who obviously once cared deeply about the people of his country. Maybe in the fullness of time we'll learn that he has Syphilis, which has been rumored for years. That certainly wouldn't excuse any of his military and other supporters and sycophants.

What a parting gift to the world it would be for Bush to take him out before he turns over power. Mugabe IS a monster, and needs to be killed. He's in his 80s, but probably has 10 years left in him to misrule Zimbabwe and infect it and its neighbors. He must go.

June 17th, 2009.

Everyone wants to know when the economy will turn around. The answer is June 17th. Ok, obviously I can't be nearly that precise, but I expect that sometime next Summer the recession will end and growth will resume. As compared to the conventional wisdom, I am actually being quite optimistic.

Previous recessions since WWII lasted 8, 8, 16, 6, 16, 11, 10, 8, 10, 11, and 8 months (measured from the time of the peak of the economic cycle through the trough, the top through the bottom).
This works out to an average of 10.1 months per recession. That is, the average recession since World War II lasted for 10.1 months.

According to the pertinent body, the Business Cycle Dating Committee of the National Bureau of Economic Research, this recession began in December 2007. The main reason for this determination is that the economy lost jobs each month this year (even before the financial crisis really got going). So if this recession lasts for an average amount of time, it would be over by now, or would end any day now.

This recession, however, is clearly destined to be much worse than an average recession. There's just no doubt about that. So in considering how long it will last, I'm simply throwing out the shallow recessions and considering only the severe recessions.

The two most severe recessions since World War II, working backwards, were the 16 month recession that ended November 1982 (SKY HIGH interest rates, Rust Belt, Reagan deeply unpopular), and the 16 month recession from November 1973 to March 1975 (Inflation, high oil prices, Watergate, just not a real good time to be us).

The shorter recessions, like the one from March 2001 through November 2001, encompassing and exacerbated by 9-11 and the one following Saddam's invasion of Kuwait in 1990, were relatively shallow. I think its a metaphysical certainty that this one will be vastly worse than the most recent two shallow recessions, because of the various aspects of the financial crisis, and the huge credit crunch which has resulted.

So this is a severe recession (I hope, the alternative is much more likely to be a second great depression than a shallow recession). Since the last two bad recessions lasted 16 months, it seems reasonable to begin my analysis by assuming that this one will last about 16 months, give or take. There are, as always, things which make this time different. More on that below.

Based on the determination by the powers that be, mentioned above, that the current recession began in January 2008, if this recession is like the last two severe recessions, this recession could well end sometime around or shortly after May of this year, which would be 16 months after the recession began.

That's the (relatively) good news.

The bad news is that this scenario is in many ways much too optimistic. Although the economy was in recession earlier in 2008, it was just barely so. Job losses were fairly small until about September of this year. Major business restructuring did not begin until about September. The tax rebates helped mitigate the recession earlier on, thus delaying the onset of business job slashing. So the adjustments that are usually made even fairly early on in a recession were not made.

But fear not. In November, the economy lost the huge number of 533,000 jobs, following a loss of 403,000 in September and 320,000 in October. Now that's job loss. Everyone expects a loss of 500,000 to 600,000 jobs in December. (These numbers are seasonally adjusted, meaning that you consider what has happened in Decembers past, which usually have an increase in jobs for the holiday season).

In any event, if you assume 500,000 jobs lost in December, that would make 1.7 million from October through December, a huge number, and likely a reasonable percentage of the total number of jobs which will end up being lost in this recession.

It took a while, but everyone has finally realized that we are in a deep recession. This much is a very good thing, as it enables businesses like auto companies, Investment Banks, and others in trouble to realize that they are and begin necessary downsizing. We are, I hope, a decent chunk of the way through that process. But more remains, not least the possibility of a chaotic Chapter 11 bankruptcy filing for GM and Chrysler, which would be so significant as to possibly throw off my timetable. We will see in the coming days and weeks if the Bush Treasury department intervenes to save them pending the new congress and administration. My guess is that they will, but you never know.

Of course I have already gone too long in this post without mentioning the credit crunch. Recessions often come complete with banking/financial crises. The S&L problems began in the early 1980s recession, and lingered almost into the early 90s recession, which had banking troubles all its own. The Great Depression, obviously, had hugely severe banking troubles. And this time around, banks are just not doing much lending about now. This is real bad, and will prevent economic recovery until banks begin lending more normally.

Business and credit conditions are probably both worse now than at any time since World War II. That's really bad and really, really scary. And it does portend a significantly longer recession than average. When you couple that with the fact that this recession started off very mildly, and only became severe about September 15th, when Lehman collapsed, you would conclude that the economy will contract all of next year. (Which it might).

There is, however, a significant upside in all of this gloom and doom. that is the completely unprecedented effort by the Federal Government to mitigate the effects of the recession. Fiscal stimulus has been incredibly lame thus far, with the rebate checks being most of it. But on the monetary policy side, the federal reserve has been extremely aggressive, cutting interest rates far and fast, injecting huge amounts of money into the financial system, buying commercial paper from businesses (essentially loaning many billions of dollars to private business), creating a Term Asset-Backed Securities Loan facility to support the issuance of asset-backed securities collateralized by student loans, auto loans and credit card loans, and much more.

Similarly, the Treasury Department has been hyperactive, as everyone knows, with the huge $700 billion appropriated for financial rescues and myriad other uses. Paulson has spent darn near $350 billion of that money and has asked Congress for permission to begin tapping the remaining $350 billion. GM and Chrysler may be the next beneficiaries of Treasury Department largess.

Although the Treasury's actions aren't classic economic stimulus per se, they will have much the same effect eventually, as they represent pumping huge amounts of government money into the financial system which will, I predict, enable a thaw in the credit freeze beginning relatively soon.

In essence, the economy is in a tug of war between the worst conditions since World War II on the one hand and by far the most vigorous government response on the other.

There is actually additional stimulus to the economy already in place. This includes: (1) the huge drop in oil prices, from a high of $150 or so to the current $45 or so. That's significant if the oil price roughly holds going forward. I would be very surprised if oil shot back up past say $70 or so in the next year, very surprised. (If I had to predict I would predict it stays fairly close to where it is now) So if oil holds nearish to the $45 level, that would amount to an approximately $300 billion per year tax cut as against the much more expensive oil earlier this year; (2) the new money which will be put in homeowners' pockets as a result of the coming refinancing boom. Interest rates have plummeted on mortgages. Even given the housing market's moribund state, and the credit crunch, many homeowners will successfully refinance.

Finally, and most significantly, Team Obama has been talking an awful lot about a very substantial fiscal stimulus which he has said he wants on his desk within the first week that he takes office! The new Congress is sworn in and starts work on January 6th. Given that Obama has a decent chunk of his team in place already, it is likely that this will be the new congress' first significant item, and conceivably Obama could have the new piece of legislation waiting for him on his desk following his inauguration speech.

There has been much speculation on the size of the upcoming stimulus package, which will be crucial in determining how much power it has to shorten/end the recession and, more importantly, to strengthen what could easily be a lackluster recovery. Obama has said that he intends the "single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s." These are encouraging words indeed with regard to the size of the upcoming stimulus package (which, I note, I have called for for many, many months!)

Speculation has been that this package would be $500-$600 billion for two years, an amount I would have considered too large 9 months ago, but I now consider somewhat too small. Still, assuming they close the deal at $500 billion over two years, that would definitely help. The GDP is now about $14.5 trillion. $250 billion per year is just under 2% of GDP. Not enough to turn an economy shrinking at 5% per year (as it is right now) into growth, but enough to give a good shove in the right direction.

Also remember that it will take time to get the spending going. The spending probably won't be at full force for about 9 months. So at the beginning of 2009 it will have little impact, but at the end of 2009 its impact will probably be more than 2% of GDP, and in 2010 will almost certainly be. So this stimulus package will really do some good by the middle-end of next year.

We have a bad housing bubble, which is another complicating factor. Traditionally, housing is a key factor in leading the country out of a recession, because lower interest rates make housing more affordable. That obviously won't work this time, not anytime soon, because there is a huge oversupply of housing relative to the demand which exists absent a belief that housing prices can only go up. So even with current mortgage rates near 45 year lows I don't expect housing to rebound anytime soon.

In conclusion, the current terrible conditions coupled with the extreme mildness of the recession in the first 6-8 months, the credit crunch, and the housing market's truly parlous state call for a long deep recession. The huge amount of governmental corrective action already taken, coupled with the Obama stimulus to come, call for a shorter, but still deep recession. I predict that these forces roughly cancel each other out, and we have a deep recession, but that it ends more quickly than the experts predict, sometime about June 2009.

Taking a truly wild guess, I'd guess that 4th quarter GDP declines about 5.5%, First quarter 2009, ending March 31, 2009, declines about 3%, 2nd quarter 2009, ending June 30, 2009, declines about 3%, and 3rd quarter 2009, ending September 30, 2009, grows about 2%.

Sadly, if the recession is as short as I predict, I do think the recovery will be tepid, rather than the strong rebounds the economy used to have long ago, when factory workers were rehired when orders increased. This time around, companies will be very slow to take on new workers. Wall Street will not be growing anytime soon. Manufacturing could continue to shed workers, it wouldn't surprise me. So I predict a slow and halting recovery, which will feel much like a recession to many workers. Which is why I think the planned Obama Stimulus is significantly too small. A much larger stimulus would take out insurance against a flaccid recovery.

Blockbuster (un)employment report

As you have probably all heard, the government released a blockbuster "jobs" report today, announcing that 533,000 jobs were lost in November, 1.3 million have been lost in the last 3 months, following revisions which made really bad figures worse. The 3-month total was the third-highest three-month job loss total since WWII.

The real surprise to me is that job losses aren't at an all time record. We recently learned that a recession began in December 2007. Given that we've been in recession for almost a year and the financial crisis which heavily intensified beginning in September, I'm surprised these aren't the worst months of job loss on record. Perhaps those months are soon coming.

" According to a report by outsourcing agency Challenger, Gray & Christmas, planned job cut announcements by U.S. employers soared to 181,671 last month, the second-highest total on record."

http://money.cnn.com/2008/12/05/news/economy/jobs_november/index.htm?postversion=2008120510

So what have we here? Nearly historic 3 months of job losses, many more certainly coming. Unemployment rate is at 6.7%, but that will surely climb significantly.

As bad as these numbers are, they could (and perhaps will become) significantly worse. In a coming post I'll write about when I think the recession will end. Sooner than you think, probably around July/August of 2009.

GM gets serious

Well, I ripped Ford a new one in my earlier post, and I don't apologize. Ford should have gone further than it judged necessary, just to make crystal clear to wavering lawmakers that it was serious. GM IS serious, and apparently will run out of money by the end of the year if it doesn't receive a big infusion, quickly. GM, in contrast to Ford, which came to Congress with nothing, promised deep cuts, the elimination of divisions, namely Saturn (ouch, a good small car), Saab, Hummer (what, no political tin ear?) and Pontiac. GM said it would cut more than 20% of its remaining jobs, shut nine factories, seek to renegotiate the terms of its $66 billion in debt and push to reopen talks with the UAW to cut its labor costs.

http://www.nytimes.com/2008/12/03/business/03auto.html?_r=1&th&emc=th

Now that's more like it!!

Ford has nothing. Zip. Nada.

Today, December 2, was the deadline for the automakers formerly known as the big 3 (the Desperate 3?) to develop a bailout proposal.

http://news.yahoo.com/s/nm/20081120/bs_nm/us_autos_bailout

Well, today's the big day. According to the New York Times, Ford, "wanted access to $9 billion in loans but that it could survive and become profitable in three years without the money unless the current recession 'is longer and deeper than we now anticipate.'

http://www.nytimes.com/2008/12/03/business/03auto.html?_r=1&hp

And what turnaround plan did Ford announce in exchange for its request for $9 billion in loans? The current CEO would be willing to work for $1 a year and they will sell their corporate jets. Additional specific cost cutting measures included promises of . . . promises of . . . crickets. Nothing at all.

I'm flabbergasted. And totally appalled.

First, that Ford wants the money but thinks it can survive without it is rich. If it wants an additional $9 billion in loans, it is nervous, and rightfully so. Even if it might survive without these loans, GM is in a much more precarious position, and as Ford admitted, a GM failure could cripple Ford as well if suppliers went under. Specifically, in the Times article, Ford stated, "It is in our own self-interest, as well as the nation’s, to seek support for the industry at a time of great peril to this important manufacturing sector of our economy.”

So whether it "needs" the $9 billion in loans or not (and I'm sure it does), Ford wants money for the industry. Big money.

And its turnaround "plan" that it puts forth in exchange? The 2 items mentioned, sell the corporate jets and the CEO gets no money, are so unbelievably bare it isn't funny! First, the CEO needs to go, as does the rest of top management. But forgetting that for a moment, CEO pay $1, fine. Sell jets, fine. That should have consumed, literally, the first 30 seconds of the first meeting on the subject. After that, well, talk to the unions, eliminate brands, ask Congress for legislative relief so dealerships can be cut, cut production of gas guzzlers, ask for specified funds for hybrid or electric cars, additional tax rebates for high MPG cars and electric/hybrid cars. You know, a PLAN to actually return Ford to a profitable status, where it could pay the money back to the government, hopefully with a profit on the equity stake Ford proposed the government take in exchange for the highly risky loans.

None of that was proposed by Ford. None of it at all. Even though it would be an empty threat, if I were Harry and/or Nancy, I'd publicly threaten to hold them in contempt of Congress if they didn't come up with a real plan. I'd graciously extend the deadline to Sunday evening.

Here's what Ford did say, from the above-mentioned article:

Ford said that, as a result of its turnaround plan, it believes its core North American auto operations will be break-even or profitable in 2011 on a pre-tax basis. The company had previously set a goal of returning those operations to profitability next year but dropped that target in May without giving a new one.

Ford also said it expects industry-wide sales of 12.5 million vehicles in 2009, 14.5 million vehicles in 2010 and 15.5 million vehicles in 2011. By way of comparison, U.S. auto sales averaged close to 17 million a year from 1998 through 2006.

The company made commitments to speed up the introduction of hybrid and electric vehicles, and added that it believes the consumer shift away from light trucks towards more fuel efficient vehicles is permanent.

And Ford pledged to reverse the decades-long trend of losing money on the production of small cars in the United States. The company said it would increase the production of smaller vehicles such as the Ford Focus to more than 1 million a year and reduce the complexity of the car's parts in order to reduce costs.

So let's see. Ford's turnaround "plan" is that the American market will recover partway back to the good old days of 1998-2006, it will speed up the introduction of hybrid and electric vehicles and lose less money on small cars. It will make small cars better and cheaper. Well that's reassuring. And a clear, specific bold plan.

Or not. The market recovery is a wish. It may very well come true, but a wish or a hope is not a plan. Speeding up electric/hybrid vehicles? Fine. Would like details, but fine, that actually does bear a passing resemblance to something that would be in a plan. And making small cars better? Forgive me, but the American auto makers have failed spectacularly here for 2 generations, literally. I wouldn't bet $9 on it, let alone $9 billion. That just barely qualifies as a wish, and certainly does not qualify as part of a plan.

This is the arrogance/denial these people are living in. I sure as heck hope GM does better.